Source: http://lawlibrary.chanrobles.com/index.php?option=com_content&view=article&id=82591:gr-160600-2014&catid=1579&Itemid=566
Timestamp: 2019-04-19 23:05:44+00:00

Document:
G.R. No. 160600, January 15, 2014 - DOMINGO GONZALO, Petitioner, v. JOHN TARNATE, JR., Respondent.
DOMINGO GONZALO, Petitioner, v. JOHN TARNATE, JR., Respondent.
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.
5. To pay the cost of this suit.
Gonzalo appealed to the Court of Appeals (CA).
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 P233,256.13 to his account had unjustly enriched Gonzalo; and ruled, accordingly, that Gonzalo should reimburse Tarnate in that amount because the latter’s 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.
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.
We deny the petition for review, but we delete the grant of moral damages, attorney’s fees and litigation expenses.
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.
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.
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 CA’s 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.
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 Tarnate’s favor. Consequently, the RTC and the CA properly adjudged Gonzalo liable to pay Tarnate the equivalent amount of the 10% retention fee (i.e., P233,526.13).
Gonzalo sought to justify his refusal to turn over the P233,526.13 to Tarnate by insisting that he (Gonzalo) had a debt of P200,000.00 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 Gonzalo’s 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, attorney’s 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 P233,526.13. Not to afford this relief will make a travesty of the justice to which Tarnate was entitled for having suffered too long from Gonzalo’s unjust enrichment.
WHEREFORE, we AFFIRM the decision promulgated on February 18, 2003, but DELETE the awards of moral damages, attorney’s fees and litigation expenses; IMPOSE legal interest of 6% per annum on the principal oLP233,526.13 reckoned from September 13, 1999; and DIRECT the petitioner to pay the costs of suit.
Associate Justice MARTIN S. VILLARAMA, JR.
Pursuant to Section 13, Article VIII of the Constitution, I certify that the conclusions in the above Decision had been reached in consultation before the case was assigned to the writer of the opinion of the Court's Division.
9 Rollo, pp. 16-34; penned by Associate Justice Remedios A. Salazar-Fernando, and concurred in by Associate Justice Ruben T. Reyes (later Presiding Justice and a Member of the Court, but already retired) and Associate Justice Edgardo F. Sundiam (retired/deceased).
13 Nool v. Court of Appeals, G.R. No. 116635, July 24, 1997, 276 SCRA 149, 157.
15 TSN, July 24, 2000, pp. 23-24.
17 Rellosa v. Gaw Chee Hun, 93 Phil. 827, 831 (1953).
18 Pajuyo v. Court of Appeals, G.R. No. 146364, June 3, 2004, 430 SCRA 492, 515.
19 Avon Cosmetics, Incorporated v. Luna, G.R. No. 153674, December 20, 2006, 511 SCRA 376, 393-394.
20 G.R. No. 156364, September 3, 2007, 532 SCRA 74.
22 TSN, August 28, 2000, pp. 44, 64, 70, and 71.
25 Hulst v. PR Builders, Inc., supra note 20, at 94-95; Menchavez v. Teves, Jr., G.R. No. 153201, January 26, 2005, 449 SCRA 380, 398-399.

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