G.R. No.

195247 June 29, 2015

ANASTACIO TINGALAN, substituted by his heirs, namely: ROMEO L.

TINGALAN, ELPEDIO L. TINGALAN, JOHNNY L. TINGALAN and LAURETA
T. DELA CERNA, Petitioners,
vs.
SPOUSES RONALDO and WINONA MELLIZA, Respondents.

DECISION

VILLARAMA, JR., J.:

At bar is a petition for review on certiorari of the Decision1 and

Resolution2 of the Court of Appeals (CA) in CA-G.R. CV No. 01874-MIN
dated June 23, 2010 and January 12, 2011, respectively, which affirmed
in toto the Decision3 of the Regional Trial Court (RTC), Branch 10,
Malaybalay City, in Civil Case No. 3120-01 dated December 8, 2008. The
trial court ordered the cancellation of Original Certificate of Title (OCT)
No. P-8757 of petitioner Anastacio Tingalan (Anastacio), its
corresponding tax declaration and the transfer of title of the tax
declaration under the name of respondent-spouses Ronaldo and
Winona Melliza.

The original owner in fee simple of the subject property was petitioner
Anastacio4 - a member of the Bukidnon Tribe. His ownership is
evidenced by OCT No. P-8757 Free Patent No. (X-4) 2195 and Tax
Declaration No. 13-021-5522 over a five-hectare5 property located in
Dalwangan, Malaybalay City, Bukidnon. The free patent was issued
under his name on October 4, 1976.

In a Deed of Absolute Sale (Deed) dated March 28, 1977, petitioner

Anastacio sold the subject property to respondent-spouses. Since then,
respondent-spouses have been in actual, exclusive, peaceful,
uninterrupted and adverse possession of the subject property. The
Owner's Duplicate Certificate of Title and Tax Declaration were also
issued under the names of respondent-spouses who paid for the
transfer and real property taxes pertaining to the property in question.

Around 23 years later, or on June 7, 2000, one Elena Tunanan (Elena)

filed an adverse claim over the subject property. Petitioner Anastacio
countered and demanded that respondent-spouses vacate the property,
but the latter refused claiming ownership over the same as supported
by the Deed executed between them and petitioner Anastacio on March
28, 1977. Petitioner Anastacio then filed a complaint before the Office
of the Barangay Captain but the summons were unheeded by
respondent-spouses.
On October 22, 2001, Anastacio filed Civil Case No. 3120-01 with the
court a quo for Quieting of Title and Recovery of Possession against
respondent-spouses and Elena. In the complaint, petitioner Anastacio
claimed that he remains to be the owner of the subject property as his
title under OCT No. P-8757 has never been cancelled and that the sale
was null and void since the Deed was executed within the five-year
prohibitory period under the Public Land Act, as amended. The Deed
was also written in the English language which, allegedly, he could
neither speak nor understand. He further averred that being a member
of a cultural minority, the Deed should have been approved by the
Chairman of the Commission on National Integration under Sections
120 and 124 of Republic Act No. 3872,6as amended.

Respondent-spouses countered that in view of the Deed dated March

28, 1977, the Owner's Duplicate Certificate of Title and Tax Declaration
were issued under their names and they have been in actual, exclusive
and uninterrupted possession of the subject property since the
execution of the Deed. They further posited the following allegations:
that the Certificate to File Action was legally flawed because petitioner
Anastacio did not pay the docket fees; that the petition was defective
because it did not indicate the assessed value of the subject property
which is important in the determination of the jurisdiction of the trial
court; and, that the action was barred by prescription. To counter
respondent-spouses' assertion, petitioners maintained that
notwithstanding the delivery of the title to and transfer of possession
over the subject property to respondent-spouses, these circumstances
could not have validated the sale because the Deed was executed
within the five-year prohibitory period under the Public Land Act, as
amended, making it void ab initio.

On December 8, 2008, the trial court dismissed the case for lack of
cause of action and ordered the Register of Deeds to cancel OCT No. P-
8757 and the corresponding tax declaration over the subject property,
viz.:

WHEREFORE, premises considered and finding preponderance of

evidence in favor of the respondents, the court orders dismissal of this
Complaint for lack of cause of action. To order the Register of Deeds for
the cancellation of OCT P-8757 and its Tax Declaration transferring its
name to respondents Renaldo Melliza, to pay 30,000 for attorney's
fees and (P]10,000 as litigation expenses. To pay the cost.

SO ORDERED.7

The trial court upheld the validity of the sale despite the Deed being
executed within the five-year prohibitory period because "the sale
executed by petitioner to the respondent is not the kind of violation as
contemplated in accordance of (sic) Sec[tion] 18 of [the] Public Land
Act" as the transfer was not yet completed by the issuance of a new
certificate of title under the name of respondent-spouses.8 On the issue
on the validity of the Deed due to petitioner Anastacio's alleged inability
to understand its stipulations which are written in English, the trial court
held that being a notarized document, the Deed enjoys the presumption
of regularity. The trial court also observed that Anastacio voluntarily
sold the subject property as evidenced by the Affidavit of Non-Tenancy
and the Certification/Receipt for the amount of Six Thousand Pesos
(6,000.00). It likewise did not give credence to petitioner Anastacio's
claim that his membership to a cultural minority required the approval
of the Deed from the Chairman of the Commission on National
Integration since he failed to present any proof or certification relative
to his tribal identity from the National Commission on Indigenous
Peoples. Finally, the trial court held that the failure of Anastacio to act
within a considerable length of time barred his action on the ground of
estoppel by laches.

On appeal, the CA affirmed the decision of the trial court in toto in its
assailed Decision dated June 23, 2010, viz.:

FOR THESE REASONS, the assailed Decision of the trial court is

AFFIRMED in toto. No costs. SO ORDERED.9

The appellate court held that the case was barred by laches due to the
24-year delay of petitioner Anastacio in filing the petition. The CA
considered such delay as unconscionable and prejudicial to the rights of
third persons who relied on his inaction as the original patentee of the
subject property, viz.:

After a careful analysis of the facts and circumstances of the case, as

borne out by the evidence, this Court finds the four elements
mentioned to be present in the case at bar. First, Anastacio sold the
land which was covered by a free patent title dated March 28, 1977 and
the sale was made knowingly in violation of the Public Land Act. Second,
from the date of the sale on March 28, 1977, Anastacio, the patentee
could have instituted the action to annul the sale and regain the
possession and ownership of the land. But notwithstanding the
invalidity of the sale, patentee Anastacio, who knew of the invalidity
and has had all the opportunity to institute an action for the annulment
of the sale as a matter of law, did not bother at all to file a suit to annul
the sale or to recover the land. Not until 24 years later. Third, the
Spouses Melliza who are the vendees never expected or believed that
Anastacio would bring an action to annul the sale and recover the land.
The fact that the vendees told Anastacio that he could repurchase his
property within the five (5)[-]year period from the execution of the
deed of sale but instead of repurchasing it, Anastacio gave the title to
the Spouses seven years after the execution of the deed of sale in 1977
and did not bother them since then and fourth, it would be unjust and
inequitable to still permit appellant to recover his property after that
long, unexplained inaction. The long period of time more or less 24
years from the execution of the sale, had allowed the Spouses to invest
considerable amount of money, time, and effort in developing and
transforming the questioned property into a beautiful orchard, aside
from the residential house, poultry, barn and other plantations made by
the Spouses.10

The heirs of Anastacio, as substitutes, moved for reconsideration of the

CA Decision on July 19, 2010. The appellate court denied the motion in
its Resolution dated January 12, 2011, viz.:

After due deliberation of the petitioners' motion for reconsideration,

this Court finds that the motion is without merit, as all issues and
arguments interposed by the petitioners' (sic) have been amply passed
upon in the Decision sought to be reconsidered. In the Court's
considered view, nothing more is left to be discussed, clarified or done
in the case. We perceive no just ground to warrant a review of Our
resolution. No overriding or special reason has been given as to why
petitioners' motion for reconsideration should be granted.11

Hence, this petition raising a lone assignment of error, viz.:

THE COURT OF APPEALS, WITH DUE RESPECT, MAY HAVE ERRED IN

HOLDING THAT EVEN IF THE DEED OF SALE WAS NOT VALID, APPELLANT
ANASTACIO TINGALAN AND HIS SUCCESSORS IN INTEREST, ARE NOW
BARRED BY LACHES FROM ASSERTING THEIR RIGHTS OVER THE SUBJECT
PROPERTY, AFTER FAILING TO EXERCISE THEIR RIGHTS FOR AN
UNREASONABLE LENGTH OF TIME.12

We grant the petition.

The contract of sale entered into between petitioner Anastacio and

respondent-spouses on March 28, 1977 is null and void from inception
for being contrary to law and public policy. As a void contract - it is
imprescriptible and not susceptible of ratification.

The law is clear under Section 118 of the Public Land Act, as amended,
that unless made in favor of the government or any of its branches,
units or institutions, lands acquired under free patent or homestead
provisions shall not be subject to any form of encumbrance for a term
of five years from and after the date of issuance of the patent or grant,
viz.:
SEC. 118. Except in favor of the Government or any of its branches,
units, or institutions, or legally constituted banking corporations, lands
acquired under free patent or homestead provisions shall not be subject
to encumbrance or alienation from the date of the approval of the
application and for a term of five years from and after the date of
issuance of the patent or grant, nor shall they become liable to the
satisfaction of any debt contracted prior to the expiration of said period;
but the improvements or crops on the land may be mortgaged or
pledged to qualified persons, associations, or corporations.

No alienation, transfer, or conveyance of any homestead after five years

and before twenty-five years after issuance of title shall be valid without
the approval of the Secretary of Agriculture and Natural Resources,
which approval shall not be denied except on constitutional and legal
grounds.

Following Section 118, the subject land could not have been validly
alienated or encumbered on March 28, 1977 which was way within five
years from the date of the issuance of the free patent under the name
of petitioner Anastacio on October 4, 1976. The legal consequences of
such sale - clearly made within the prohibitory period - are stated under
Section 124 of the Public Land Act, as amended, viz.:

SEC. 124. Any acquisition, conveyance, alienation, transfer, or other

contract made or executed in violation of any of the provisions of
sections one hundred and eighteen, one hundred and twenty, one
hundred and twenty-one, one hundred and twenty-two, and one
hundred and twenty-three of this Act shall be unlawful and null and void
from its execution and shall produce the effect of annulling and
cancelling the grant, title, patent, or permit originally issued, recognized
or confirmed, actually or presumptively, and cause the reversion of the
property and its improvements to the State.13

The foregoing provision of law unambiguously classifies the subject

contract of sale executed on March 28, 1977 as unlawful and null and
void ab initio for being in violation of Section 118, i.e., entered into
within the five-year prohibitory period. This provision of law is clear and
explicit and a contract which purports to alienate, transfer, convey or
encumber any homestead within the prohibitory period is void from its
execution.14 The Court has held in a number of cases that such provision
of law is Mandatory15 with the purpose of promoting a specific public
policy to preserve and keep in the family of the patentee that portion of
the public land which the State has gratuitously given to them.16

The trial court, as affirmed by the appellate court, ruled that the subject
sale entered into between petitioner Anastacio and respondent-spouses
"is not the kind of violation as contemplated in accordance of (sic) Sec.
118 of [the] Public Land Act"17 due to the following clause contained in
the Deed, viz. :

"That this deed of sale is subject to the condition that vendee will ask
permission from [the] Sec. of Agriculture and Natural Resources for its
transfer x x x failure to do so, this contract will be binding Oct. 4, 1981 x
x x."18

In view of this clause in the Deed, both courts a quo construed the
contract as a conditional sale with the following legal effects, viz.:

As the Deed of Sale was considered conditional and there was no

complete conveyance or transfer that occurred, the five (5)-year
prohibitory period is not applicable in this instant case. The Deed of Sale
is but a preliminary step for the issuance of a new certificate of title
which is the final step to accomplish registration.

To effect the land sold, the presentation of the Deed of Sale and its
entry in the day book must be done with the surrender of the owner's
certificate of title. It is the Deed of Sale that is registered in respondent's
favor and the Transfer Certificate of Title subsequently obtained over
the property which has superior right thereon. x x x

In the instant case, such did not happen, with the name still intact of the
petitioner there was no complete transfer yet of the ownership or
conveyance hence the sale executed by petitioner to the respondent is
not the kind of violation as contemplated in accordance of (sic) Sec. 118
of [the] Public Land Act.19

We do not agree.

The subject property was clearly encumbered within the mandatory

five-year prohibitory period in flagrant violation of the Public Land Act,
as amended. The inclusion of the afore-quoted clause in the Deed did
not operate to effectively exclude the subject sale from the mandatory
prohibition. Petitioner Anastacio and respondent-spouses knew that the
sale of the subject land was prohibited by law in 1977, and the
conditional clause in the Deed was included in order to circumvent the
legal prohibition of the sale. Both parties knew that the "permission" of
the Secretary of Agriculture and Natural Resources could not have been
legally procured within the prohibitory period, and the expected failure
of herein respondent-spouses to get such permission would make the
contract binding on October 4, 1981 -or after the five-year prohibition.
Despite this condition, however, respondent-spouses occupied the
subject property immediately after the contract of sale was executed on
March 28, 1977 - exercising acts of ownership even during the
prohibitory period. This was admitted by one of the spouses in following
testimony as quoted in the assailed decision of the trial court, viz.:

Q - When this Deed of Sale was executed in 1977[,] you occupied the
property?

A - Immediately after I gave the money, I occupied the property.

Q - When did you give the money?

A- 1977[.]

Q- When was the title given?

A - 6 or 7 years later because we did not live there. I live in Butuan.

Q - But you cultivated the property in 1977?

A- Yes[,] your [H]onor[.]

Q- And there was no disturbance from them?

A- No disturbance, nothing[.]

xxxx

(TSN pp. 24-26 4/3/08, Facturan)20

It is clear as day that during the period of the five-year prohibition, the
scheme devised by petitioner Anastacio and respondent-spouses had
resulted in practically depriving the grantees - herein petitioner
Anastacio and his heirs - that piece of land that the government had
gratuitously given to them, giving rise to a situation which is the exact
antithesis of the primordial aim of our free patent and homestead
provisions under the Public Land Act, as amended.

Our ruling in the case of Manzano, et al. v. Ocampo, et al.21 is both

pertinent and informative, viz.:

The law prohibiting any transfer or alienation of homestead land within

five years from the issuance of the patent does not distinguish between
executory and consummated sales; and it would hardly be in keeping
with the primordial aim of this prohibition to preserve and keep in the
family of the homesteader the piece of land that the state had
gratuitously given to them, to hold valid a homestead sale actually
perfected during the period of prohibition but with the execution of the
formal deed of conveyance and the delivery of possession of the land
sold to the buyer deferred until after the expiration of the prohibitory
period, purposely to circumvent the very law that prohibits and declares
invalid such transaction to protect the homesteader and his family. To
hold valid such arrangements would be to throw the door wide open to
all possible fraudulent subterfuges and schemes that persons interested
in land given to homesteaders may devise to circumvent and defeat the
legal provision prohibiting their alienation within five years from the
issuance of the homesteader's patent.

We, therefore, hold that the sale in question is illegal and void for
having been made within five years from the date of Manzano's patent,
in violation of section 118 of the Public Land Law. x x x22

A void contract produces no legal effect whatsoever in accordance with

the principle "quad nullum est nullum producit effectum."23 It could not
transfer title to the subject property and there could be no basis for the
issuance of a title from petitioner Anastacio's name to the names of
respondent-spouses. It is not susceptible of ratification and the action
for the declaration of its absolute nullity is imprescriptible.24 It was
therefore error for both courts a quo to rule that "[p]etitioner's failure
to act on such considerable time has already barred him by estoppel
and laches."25 We quote the pertinent portion of the appellate court's
assailed decision where it discussed its basis for ruling that !aches exists
in the case at bar:

x x x Appellees in their brief admitted that deceased appellant can

repurchase the property at the same price within the five (5)[-]year
period from the execution of the deed of sale.

x x x In the case at bar, Anastacio Tingalan, the original patentee could

have repurchased back (sic) his property or if not an action to recover
back his property but it did not.

Instead, appellant Anastacio waited for more than 24 years to institute

this case. It was only on October 22, 2001 or 24 years after that
petitioner-appellant initiated an action to recover his property wherein
the Spouses Melliza assumed that Anastacio Tingalan had already given
up his right to recover back the property within five (5) years from the
conveyance and being the owner, they cultivated and made
improvements to the subject property. Appellant Anastacio who was
not in possession of the property, asserted his claim 24 years after the
appellees were already in possession and acquired the subject property;
such delay is unconscionable and would prejudice the rights of third
parties who placed reliance on the inaction of Anastacio, the original
patentee.26

We disagree.

The subject contract of sale, being null and void from inception, did not
pass any rights over the property from petitioner Anastacio to
respondent-spouses. Since petitioner Anastacio never lost ownership
over the land in question, there was no need for him or his heirs to
repurchase the same from respondent-spouses. With nothing to
repurchase, laches could operate to bar petitioner and his heirs from
asserting their rights to the property.

Following the declaration that the contract of sale over the subject
property is void for being in violation of Section 118 of the Public Land
Act, as amended, jurisprudence dictates that the subject land be
returned to the heirs of petitioner Anastacio. In the 1986 case of
Arsenal v. Intermediate Appellate Court,27 we ruled, viz.:

x x x in cases where the homestead has been the subject of void

conveyances, the law still regards the original owner as the rightful
owner subject to escheat proceedings by the State. In the Menil and
M[ajnzano cases earlier cited, this Court awarded the land back to the
original owner notwithstanding the fact that he was equally guilty with
the vendee in circumventing the law. This is so because this Court has
consistently held that ''the pari delicto doctrine may not be invoked in a
case of this kind since it would run counter to an avowed fundamental
policy of the State, that the forfeiture of a homestead is a matter
between the State and the grantee or his heirs, and that until the State
had taken steps to annul the grant and asserts title to the homestead
the purchaser is, as against the vendor or his heirs, no more entitled to
keep the land than any intruder." x x x

The Court made the same ruling on the issue of ownership in the earlier
cited case of Manzano in 1961, including a disposition that the buyer
therein is entitled to a reimbursement of the purchase price plus
interest, viz.:

x x x Being void from its inception, the approval thereof by the

Undersecretary of Agriculture and Natural Resources after the lapse of
five years from Manzano 's patent did not legalize the sale x x x. The
result is that the homestead in question must be returned to Manzano's
heirs, petitioners herein, who are, in turn, bound to restore to appellee
Ocampo the sum of 3,000.00 received by Manzano as the price thereof
x x x. The fruits of the land should equitably compensate the interest on
the price.28

Prior to Manzano, we made a similar ruling in the case of De las Santos

v. Roman Catholic Church of Midsayap29that "[ u ]pon annulment of the
sale, the purchaser's claim is reduced to the purchase price and its
interest."

We shall apply the same rule in the case at bar. However, since the trial
court ruled that petitioners were barred by laches in asserting any claim
to the subject property, it did not make a factual determination of the
total purchase price paid by respondent-spouses to petitioner Anastacio
which must be returned to the heirs of respondents, including interest
on such amount. The trial court also did not make a ruling on the
amount of interest to be paid by petitioners to respondent-spouses, and
if the fruits realized by respondent-spouses from their long possession
of the subject land since 1977 would "equitably compensate the
interest on the price."30 This Court is not a trier of facts and we remand
the instant case for the trial court to make a factual determination of
the aforesaid amounts.

WHEREFORE, IN VIEW OF THE FOREGOING, the Decision and Resolution

of the Court of Appeals dated June 23, 2010 and January 12, 2011,
respectively, in CA-G.R. CV No. 01874-MIN are REVERSED and SET
ASIDE. A new judgment is hereby entered:

1. Declaring NULL AND VOID the sale of the subject parcel of land
situated at Dalwangan, Malaybalay City covered by OCT No. P-8757 Free
Patent No. (X-4) 2195 with an area of five (5) hectares covered by Tax
Declaration No. 13-021-5522;

2. Ordering respondent-spouses, their heirs, assigns, or representatives,

to RESTORE the heirs of petitioner Anastacio actual and physical
possession of the subject property;

3. Ordering respondent-spouses, their heirs, assigns, or representatives,

to RETURN AND DELIVER to the heirs of petitioner Anastacio two
documents: Original Certificate of Title No. P-8757 and Tax Declaration
No. 13-021-5522; and,

4. REMANDING the instant case to the Regional Trial Court, Branch 10,
Malaybalay City, for a determination of the total amount to be returned
by petitioners to respondent-spouses consisting of the purchase price
and the interest due thereon, and if the fruits realized by respondent-
spouses from their long possession of the subject land since 1977 would
equitably compensate the interest on the price.

This new judgment is without prejudice to any appropriate action the

Government may take against petitioners as heirs of Anastacio Tingalan
pursuant to Section 124 of the Public Land Act, as amended.

No costs.

SO ORDERED.

G.R. No. 160600 January 15, 2014

DOMINGO GONZALO, Petitioner,
vs.
JOHN TARNATE, JR., Respondent.

DECISION

BERSAMIN, J.:

The doctrine of in pari delicto which stipulates that the guilty parties to
an illegal contract are not entitled to any relief, cannot prevent a
recovery if doing so violates the public policy against unjust enrichment.

Antecedents

After the Department of Public Works and Highways (DPWH) had

awarded on July 22, 1997 the contract for the improvement of the
Sadsadan-Maba-ay Section of the Mountain Province-Benguet Road in
the total amount of 7 014 963 33 to his company, Gonzalo
Construction,1 petitioner Domingo Gonzalo (Gonzalo) subcontracted to
respondent John Tarnate, Jr. (Tarnate) on October 15, 1997, the supply
of materials and labor for the project under the latter s business known
as JNT Aggregates. Their agreement stipulated, among others, that
Tarnate would pay to Gonzalo eight percent and four percent of the
contract price, respectively, upon Tarnate s first and second billing in
the project.2

In furtherance of their agreement, Gonzalo executed on April 6, 1999 a

deed of assignment whereby he, as the contractor, was assigning to
Tarnate an amount equivalent to 10% of the total collection from the
DPWH for the project. This 10% retention fee (equivalent to
233,526.13) was the rent for Tarnates equipment that had been
utilized in the project. In the deed of assignment, Gonzalo further
authorized Tarnate to use the official receipt of Gonzalo Construction in
the processing of the documents relative to the collection of the 10%
retention fee and in encashing the check to be issued by the DPWH for
that purpose.3 The deed of assignment was submitted to the DPWH on
April 15, 1999. During the processing of the documents for the retention
fee, however, Tarnate learned that Gonzalo had unilaterally rescinded
the deed of assignment by means of an affidavit of cancellation of deed
of assignment dated April 19, 1999 filed in the DPWH on April 22,
1999;4 and that the disbursement voucher for the 10% retention fee
had then been issued in the name of Gonzalo, and the retention fee
released to him.5

Tarnate demanded the payment of the retention fee from Gonzalo, but
to no avail. Thus, he brought this suit against Gonzalo on September 13,
1999 in the Regional Trial Court (RTC) in Mountain Province to recover
the retention fee of 233,526.13, moral and exemplary damages for
breach of contract, and attorneys fees.6

In his answer, Gonzalo admitted the deed of assignment and the

authority given therein to Tarnate, but averred that the project had not
been fully implemented because of its cancellation by the DPWH, and
that he had then revoked the deed of assignment. He insisted that the
assignment could not stand independently due to its being a mere
product of the subcontract that had been based on his contract with the
DPWH; and that Tarnate, having been fully aware of the illegality and
ineffectuality of the deed of assignment from the time of its execution,
could not go to court with unclean hands to invoke any right based on
the invalid deed of assignment or on the product of such deed of
assignment.7

Ruling of the RTC

On January 26, 2001, the RTC, opining that the deed of assignment was
a valid and binding contract, and that Gonzalo must comply with his
obligations under the deed of assignment, rendered judgment in favor
of Tarnate as follows:

WHEREFORE, premises considered and as prayed for by the plaintiff,

John Tarnate, Jr. in his Complaint for Sum of Money, Breach of Contract
With Damages is hereby RENDERED in his favor and against the above-
named defendant Domingo Gonzalo, the Court now hereby orders as
follows:

1. Defendant Domingo Gonzalo to pay the Plaintiff, John Tarnate, Jr.,

the amount of TWO HUNDRED THIRTY THREE THOUSAND FIVE
HUNDRED TWENTY SIX and 13/100 PESOS (233,526.13) representing
the rental of equipment;

2. Defendant to pay Plaintiff the sum of THIRTY THOUSAND

(30,000.00) PESOS by way of reasonable Attorneys Fees for having
forced/compelled the plaintiff to litigate and engage the services of a
lawyer in order to protect his interest and to enforce his right. The claim
of the plaintiff for attorneys fees in the amount of FIFTY THOUSAND
PESOS (50,000.00) plus THREE THOUSAND PESOS (3,000.00) clearly
appears to be unconscionable and therefore reduced to Thirty
Thousand Pesos (30,000.00) as aforestated making the same to be
reasonable;

3. Defendant to pay Plaintiff the sum of FIFTEEN THOUSAND PESOS

(15,000.00) by way of litigation expenses;

4. Defendant to pay Plaintiff the sum of TWENTY THOUSAND PESOS

(20,000.00) for moral damages and for the breach of contract; and
5. To pay the cost of this suit.

Award of exemplary damages in the instant case is not warranted for

there is no showing that the defendant acted in a wanton, fraudulent,
reckless, oppressive or malevolent manner analogous to the case of
Xentrex Automotive, Inc. vs. Court of Appeals, 291 SCRA 66.8

Gonzalo appealed to the Court of Appeals (CA).

Decision of the CA

On February 18, 2003, the CA affirmed the RTC.9

Although holding that the subcontract was an illegal agreement due to

its object being specifically prohibited by Section 6 of Presidential
Decree No. 1594; that Gonzalo and Tarnate were guilty of entering into
the illegal contract in violation of Section 6 of Presidential Decree No.
1594; and that the deed of assignment, being a product of and
dependent on the subcontract, was also illegal and unenforceable, the
CA did not apply the doctrine of in pari delicto, explaining that the
doctrine applied only if the fault of one party was more or less
equivalent to the fault of the other party. It found Gonzalo to be more
guilty than Tarnate, whose guilt had been limited to the execution of
the two illegal contracts while Gonzalo had gone to the extent of
violating the deed of assignment. It declared that the crediting of the
10% retention fee equivalent to 233,256.13 to his account had unjustly
enriched Gonzalo; and ruled, accordingly, that Gonzalo should
reimburse Tarnate in that amount because the latters equipment had
been utilized in the project.

Upon denial of his motion for reconsideration,10 Gonzalo has now come
to the Court to seek the review and reversal of the decision of the CA.

Issues

Gonzalo contends that the CA erred in affirming the RTC because: (1)
both parties were in pari delicto; (2) the deed of assignment was void;
and (3) there was no compliance with the arbitration clause in the
subcontract.

Gonzalo submits in support of his contentions that the subcontract and

the deed of assignment, being specifically prohibited by law, had no
force and effect; that upon finding both him and Tarnate guilty of
violating the law for executing the subcontract, the RTC and the CA
should have applied the rule of in pari delicto, to the effect that the law
should not aid either party to enforce the illegal contract but should
leave them where it found them; and that it was erroneous to accord to
the parties relief from their predicament.11
Ruling

We deny the petition for review, but we delete the grant of moral
damages, attorneys fees and litigation expenses.

There is no question that every contractor is prohibited from

subcontracting with or assigning to another person any contract or
project that he has with the DPWH unless the DPWH Secretary has
approved the subcontracting or assignment. This is pursuant to Section
6 of Presidential Decree No. 1594, which provides:

Section 6. Assignment and Subcontract. The contractor shall not

assign, transfer, pledge, subcontract or make any other disposition of
the contract or any part or interest therein except with the approval of
the Minister of Public Works, Transportation and Communications, the
Minister of Public Highways, or the Minister of Energy, as the case may
be. Approval of the subcontract shall not relieve the main contractor
from any liability or obligation under his contract with the Government
nor shall it create any contractual relation between the subcontractor
and the Government.

Gonzalo, who was the sole contractor of the project in question,

subcontracted the implementation of the project to Tarnate in violation
of the statutory prohibition. Their subcontract was illegal, therefore,
because it did not bear the approval of the DPWH Secretary.
Necessarily, the deed of assignment was also illegal, because it sprung
from the subcontract. As aptly observed by the CA:

x x x. The intention of the parties in executing the Deed of Assignment

was merely to cover up the illegality of the sub-contract agreement.
They knew for a fact that the DPWH will not allow plaintiff-appellee to
claim in his own name under the Sub-Contract Agreement.

Obviously, without the Sub-Contract Agreement there will be no Deed

of Assignment to speak of. The illegality of the Sub-Contract Agreement
necessarily affects the Deed of Assignment because the rule is that an
illegal agreement cannot give birth to a valid contract. To rule otherwise
is to sanction the act of entering into transaction the object of which is
expressly prohibited by law and thereafter execute an apparently valid
contract to subterfuge the illegality. The legal proscription in such an
instance will be easily rendered nugatory and meaningless to the
prejudice of the general public.12

Under Article 1409 (1) of the Civil Code, a contract whose cause, object
or purpose is contrary to law is a void or inexistent contract. As such, a
void contract cannot produce a valid one.13 To the same effect is Article
1422 of the Civil Code, which declares that "a contract, which is the
direct result of a previous illegal contract, is also void and inexistent."

We do not concur with the CAs finding that the guilt of Tarnate for
violation of Section 6 of Presidential Decree No. 1594 was lesser than
that of Gonzalo, for, as the CA itself observed, Tarnate had voluntarily
entered into the agreements with Gonzalo.14 Tarnate also admitted that
he did not participate in the bidding for the project because he knew
that he was not authorized to contract with the DPWH.15 Given that
Tarnate was a businessman who had represented himself in the
subcontract as "being financially and organizationally sound and
established, with the necessary personnel and equipment for the
performance of the project,"16 he justifiably presumed to be aware of
the illegality of his agreements with Gonzalo. For these reasons, Tarnate
was not less guilty than Gonzalo.

According to Article 1412 (1) of the Civil Code, the guilty parties to an
illegal contract cannot recover from one another and are not entitled to
an affirmative relief because they are in pari delicto or in equal fault.
The doctrine of in pari delicto is a universal doctrine that holds that no
action arises, in equity or at law, from an illegal contract; no suit can be
maintained for its specific performance, or to recover the property
agreed to be sold or delivered, or the money agreed to be paid, or
damages for its violation; and where the parties are in pari delicto, no
affirmative relief of any kind will be given to one against the other.17

Nonetheless, the application of the doctrine of in pari delicto is not

always rigid.1wphi1 An accepted exception arises when its application
contravenes well-established public policy.18 In this jurisdiction, public
policy has been defined as "that principle of the law which holds that no
subject or citizen can lawfully do that which has a tendency to be
injurious to the public or against the public good."19

Unjust enrichment exists, according to Hulst v. PR Builders, Inc.,20 "when

a person unjustly retains a benefit at the loss of another, or when a
person retains money or property of another against the fundamental
principles of justice, equity and good conscience." The prevention of
unjust enrichment is a recognized public policy of the State, for Article
22 of the Civil Code explicitly provides that "[e]very person who through
an act of performance by another, or any other means, acquires or
comes into possession of something at the expense of the latter without
just or legal ground, shall return the same to him." It is well to note that
Article 22 "is part of the chapter of the Civil Code on Human Relations,
the provisions of which were formulated as basic principles to be
observed for the rightful relationship between human beings and for
the stability of the social order; designed to indicate certain norms that
spring from the fountain of good conscience; guides for human conduct
that should run as golden threads through society to the end that law
may approach its supreme ideal which is the sway and dominance of
justice."21

There is no question that Tarnate provided the equipment, labor and

materials for the project in compliance with his obligations under the
subcontract and the deed of assignment; and that it was Gonzalo as the
contractor who received the payment for his contract with the DPWH as
well as the 10% retention fee that should have been paid to Tarnate
pursuant to the deed of assignment.22 Considering that Gonzalo refused
despite demands to deliver to Tarnate the stipulated 10% retention fee
that would have compensated the latter for the use of his equipment in
the project, Gonzalo would be unjustly enriched at the expense of
Tarnate if the latter was to be barred from recovering because of the
rigid application of the doctrine of in pari delicto. The prevention of
unjust enrichment called for the exception to apply in Tarnates favor.
Consequently, the RTC and the CA properly adjudged Gonzalo liable to
pay Tarnate the equivalent amount of the 10% retention fee (i.e.,
233,526.13).

Gonzalo sought to justify his refusal to turn over the 233,526.13 to

Tarnate by insisting that he (Gonzalo) had a debt of 200,000.00 to
Congressman Victor Dominguez; that his payment of the 10% retention
fee to Tarnate was conditioned on Tarnate paying that debt to
Congressman Dominguez; and that he refused to give the 10% retention
fee to Tarnate because Tarnate did not pay to Congressman
Dominguez.23 His justification was unpersuasive, however, because,
firstly, Gonzalo presented no proof of the debt to Congressman
Dominguez; secondly, he did not competently establish the agreement
on the condition that supposedly bound Tarnate to pay to Congressman
Dominguez;24 and, thirdly, burdening Tarnate with Gonzalos personal
debt to Congressman Dominguez to be paid first by Tarnate would
constitute another case of unjust enrichment.

The Court regards the grant of moral damages, attorneys fees and
litigation expenses to Tarnate to be inappropriate. We have ruled that
no damages may be recovered under a void contract, which, being
nonexistent, produces no juridical tie between the parties involved.25 It
is notable, too, that the RTC and the CA did not spell out the sufficient
factual and legal justifications for such damages to be granted.

Lastly, the letter and spirit of Article 22 of the Civil Code command
Gonzalo to make a full reparation or compensation to Tarnate. The
illegality of their contract should not be allowed to deprive Tarnate from
being fully compensated through the imposition of legal interest.
Towards that end, interest of 6% per annum reckoned from September
13, 1999, the time of the judicial demand by Tarnate, is imposed on the
amount of 233,526.13. Not to afford this relief will make a travesty of
the justice to which Tarnate was entitled for having suffered too long
from Gonzalos unjust enrichment.

WHEREFORE, we AFFIRM the decision promulgated on February 18,

2003, but DELETE the awards of moral damages, attorneys fees and
litigation expenses; IMPOSE legal interest of 6% per annum on the
principal oL233,526.13 reckoned from September 13, 1999; and
DIRECT the petitioner to pay the costs of suit.

SO ORDERED.