DOMINGO GONZALO, Petitioner,
JOHN TARNATE, JR., Respondent.
G.R. No. 160600 January 15, 2014
PONENTE: Bersamin, J.
TOPIC: Void or inexistent contract
After the DPWH had awarded on July 22, 1997 the contract for the improvement of the Sadsadan-Maba-ay Section of the Mountain Province-Benguet Road to his company, Gonzalo Construction, petitioner Gonzalo subcontracted to respondent 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.
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 was the rent for Tarnate’s 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. 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 During the processing of the documents for the retention fee, however, Tarnate learned that Gonzalo had unilaterally rescinded the deed of assignment by means of an affidavit of cancellation of deed of assignment dated April 19, 1999 filed in the DPWH on April 22, 1999; and that the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.
Tarnate demanded the payment of the retention fee from Gonzalo, but to no avail.
Whether or not the subcontract and deed of assignment are void contracts.
YES. The Court held that the subcontract agreement and deed of assignment between Gonzalo and Tarnate are void for being contrary to law. However, even though both parties are in pare delicto the Court allowed Tarnate to recover his retention fee, as an exception, due to unjust enrichment.
Contract is void
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. 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.
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.
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. 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.”
Rigid application of in pare delicto in void contracts; exception
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.
Nonetheless, the application of the doctrine of in pari delicto is not always rigid. An accepted exception arises when its application contravenes well-established public policy.
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. 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.