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Paras; March 9, 1987
Public nature – The Certificate of Public Convenience, Certificate of Public Convenience and Necessity, Prior Operator Rule

Short Version: Nale bought a motorcycle from Teja Marketing/Jaucian. In the LTC records, Nale, in order to use the motorcycle for public transport, attached the motorcycle to Jaucian’s transportation franchise since Nale had no franchise of his own. When Teja Marketing’s demands on Nale for the outstanding balance failed, it instituted a collection case against Na le. Nale’s defense against the non-payment was that Jaucian failed to register the motorcycle to the LTC, in contravention of their agreement. City Court and CFI ruled against Nale. IAC reversed, on the ground of in pari delicto. SC held that both parties are in pari delicto and were thus not entitled to relief. The parties’ use of the kabit system was illegal and abused the certificate of public convenience granted by the government. Though the system is not expressly punished as criminal, it is contrary to public policy; thus, void. Having entered into an illegal contract, neither can seek relief from the courts, and each must bear the consequences of his acts. Facts:  Pedro Nale bought from Teja Marketing a motorcycle with complete accessories and a sidecar.  A chattel mortgage was constituted in favor of Teja Marketing as a security for the payment of the balance of the purchase price.  Nale failed to pay the motorcycle after Teja Marketing’s demands.  The records of the Land Transportation Commission show that the motorcycle sold to Nale was first mortgaged to Teja Marketing by Angel Jaucian, though Teja Marketing and Angel Jaucian are one and the same. o It was made to appear that way because Nale had no transportation franchise of his own and he had to attach the motorcycle unit to Jaucian’s transportation franchise in order to use the unit for the public transport.  The agreement also of the parties here was for Jaucian to undertake the yearly registration of the motorcycle with the Land Transportation Commission. o Jaucian failed to register the motorcycle on that year on the ground that Nale failed to comply with some requirements such as the payment of the insurance premiums and the bringing of the motorcycle to the LTC for stenciling. o Jaucian said that Nale was hiding the motorcycle from him to avoid payment.  The vehicle was also mortgaged to the Rural Bank of Camaligan, as all motorcycles purchased from Jaucian on credit was rediscounted with the bank.  Nale did not dispute the sale and outstanding balance of P1,700; but contends that because of the failure of Jaucian to comply with his obligation to register the motorcycle, Nale suffered damages when he failed to claim any insurance indemnity for the more than 2 times that the motorcycle figured in accidents aside from the loss of the daily income of P15.00 as boundary fee when the motorcycle was impounded by the LTC for not being registered.  Teja Marketing filed an action for "Sum of Money with Damages" against Nale.  The City Court rendered judgment in favor of Teja Marketing, dismissing the counterclaim, and ordered Nale to pay Teja Marketing.  On appeal to the CFI Camarines Sur, the decision was affirmed in toto.  Upon Nale’s petition for review, the Intermediate Appellate Court set aside the decision on the basis of doctrine of "pari delicto," and accordingly, dismissed the complaint of Teja Marketing, as well as the counterclaim of Nale; without pronouncements as to costs.  Hence, the petition for review was filed by Teja Marketing and/or Angel Jaucian. Issue: Whether or not the parties are entitled to relief. NO, for both are in pari delicto.  Nale’s purchase of the motorcycle for operation as a trimobile to be used under the transportation franchise of Jaucian, pursuant to what is commonly known as the "kabit system," without the prior approval of the Board of Transportation (formerly the Public Service Commission), was an illegal transaction. o It involved the fictitious registration of the motor vehicle in the name of Jaucian so that Nale may traffic with the privileges of Jaucian’s franchise, or certificate of public convenience, to operate a tricycle service. o Kabit system: A person who has been granted a certificate of public convenience allows another person who owns motor vehicles to operate under such franchise for a fee. The parties being in pari delicto, neither of them may bring an action against the other to enforce their illegal contract [Art. 1412 (a), Civil Code]. A certificate of public convenience is a special privilege conferred by the government. Abuse of this privilege by the grantees thereof cannot be countenanced.

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neither can seek relief from the courts. the following rules shall be observed: 1. IAC) Dispositive: Petition dismissed for lack of merit. Having entered into an illegal contract. the kabit system is invariably recognized as being contrary to public policy and. If the act in which the unlawful or forbidden cause consists does not constitute a criminal offense. void and inexistent under Article 1409 of the Civil Code. Upon this premise it would be error to accord the parties relief from their predicament. The mere lapse of time cannot give efficacy to contracts that are null and void. the performance of the other's undertaking. and each must bear the consequences of his acts. Ex pacto illicito non oritur actio (No action arises out of illicit bargain) is the time-honored maxim that must be applied in the case at bar. When the fault is on the part of both contracting parties. Although not outrightly penalized as a criminal offense. or demand. It provides: Art. (Lita Enterprises vs. Article 1412 of the Civil Code denies them such aid.   The "kabit system" has been Identified as one of the root causes of the prevalence of graft and corruption in the government transportation offices. . but will leave both where it finds then. It is a fundamental principle that the court will not aid either party to enforce an illegal contract.   The defect of in existence of a contract is permanent and cannot be cured by ratification or by prescription. therefore. neither may recover that he has given by virtue of the contract. Decision of the IAC affirmed. 1412.