G.R. No. 160600, January 15, 2014 DOMINGO GONZALO, Petitioner, v. JOHN TARNATE, JR., Respondent.

DECISION ERSAMIN, 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 ighways !DPW " had awarded on #uly $$, %&&' the contract for the improvement of the (adsadan)*aba)ay (ection of the *ountain Province)+enguet ,oad in the total amount of ' -%. &/0 00 to his company, 1on2alo 3onstruction, % petitioner Domingo 1on2alo !1on2alo" subcontracted to respondent #ohn Tarnate, #r. !Tarnate" on 4ctober %5, %&&', the supply of materials and labor for the project under the latter s business known as #6T Aggregates. Their agreement stipulated, among others, that Tarnate would pay to 1on2alo eight percent and four percent of the contract price, respectively, upon Tarnate s first and second billing in the project. $ 7n furtherance of their agreement, 1on2alo e8ecuted on April /, %&&& a deed of assignment whereby he, as the contractor, was assigning to Tarnate an amount e9uivalent to %-: of the total collection from the DPW for the project. This %-: retention fee !e9uivalent to P$00,5$/.%0" was the rent for Tarnate;s e9uipment that had been utili2ed in the project. 7n the deed of assignment, 1on2alo further authori2ed Tarnate to use the official receipt of 1on2alo 3onstruction in the processing of the documents relative to the collection of the %-: retention fee and in encashing the check to be issued by the DPW for that purpose.0 The deed of assignment was submitted to the DPW on April %5, %&&&. During the processing of the documents for the retention fee, however, Tarnate learned that 1on2alo had unilaterally rescinded the deed of assignment by means of an affidavit of cancellation of deed of assignment dated April %&, %&&& filed in the DPW on April $$, %&&&< . and that the disbursement voucher for the %-: retention fee had then been issued in the name of 1on2alo, and the retention fee released to him.5 Tarnate demanded the payment of the retention fee from 1on2alo, but to no avail. Thus, he brought this suit against 1on2alo on (eptember %0, %&&& in the ,egional Trial 3ourt !,T3" in *ountain Province to recover the retention fee of P$00,5$/.%0, moral and e8emplary damages for breach of contract, and attorney;s fees./ 7n his answer, 1on2alo 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 DPW , and that he had then revoked the deed of assignment. e 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 DPW < and that Tarnate, having been fully aware of the illegality and ineffectuality of the deed of assignment from the time of its e8ecution, 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.' ,uling of the ,T3 4n #anuary $/, $--%, the ,T3, opining that the deed of assignment was a valid and binding contract, and that 1on2alo must comply with his obligations under the deed of assignment, rendered judgment in favor of Tarnate as follows=

W >,>?4,>, premises considered and as prayed for by the plaintiff, #ohn Tarnate, #r. in his 3omplaint for (um of *oney, +reach of 3ontract With Damages is hereby ,>6D>,>D in his favor and against the above)named defendant Domingo 1on2alo, the 3ourt now hereby orders as follows= %. Defendant Domingo 1on2alo to pay the Plaintiff, #ohn Tarnate, #r., the amount of TW4 @6D,>D T 7,TA T ,>> T 4@(A6D ?7B> @6D,>D TW>6TA (7C and %0D%-- P>(4( !P$00,5$/.%0" representing the rental of e9uipment< $. Defendant to pay Plaintiff the sum of T 7,TA T 4@(A6D !P0-,---.--" P>(4( by way of reasonable Attorney;s ?ees for having forcedDcompelled the plaintiff to litigate and engage the services of a lawyer in order to protect his interest and to enforce his right. The claim of the plaintiff for attorney;s fees in the amount of ?7?TA T 4@(A6D P>(4( !P5-,---.--" plus T ,>> T 4@(A6D P>(4( !P0,---.--" clearly appears to be unconscionable and therefore reduced to Thirty Thousand Pesos !P0-,---.--" as aforestated making the same to be reasonable< 0. Defendant to pay Plaintiff the sum of ?7?T>>6 T 4@(A6D P>(4( !P%5,---.--" by way of litigation e8penses< .. Defendant to pay Plaintiff the sum of TW>6TA T 4@(A6D P>(4( !P$-,---.--" for moral damages and for the breach of contract< and 5. To pay the cost of this suit. Award of e8emplary 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 Centre8 Automotive, 7nc. vs. 3ourt of Appeals, $&% (3,A //. E 1on2alo appealed to the 3ourt of Appeals !3A". Decision of the 3A 4n ?ebruary %E, $--0, the 3A affirmed the ,T3.& Although holding that the subcontract was an illegal agreement due to its object being specifically prohibited by (ection / of Presidential Decree 6o. %5&.< that 1on2alo and Tarnate were guilty of entering into the illegal contract in violation of (ection / of Presidential Decree 6o. %5&.< and that the deed of assignment, being a product of and dependent on the subcontract, was also illegal and unenforceable, the 3A did not apply the doctrine of in pari delicto, e8plaining that the doctrine applied only if the fault of one party was more or less e9uivalent to the fault of the other party. 7t found 1on2alo to be more guilty than Tarnate, whose guilt had been limited to the e8ecution of the two illegal contracts while 1on2alo had gone to the e8tent of violating the deed of assignment. 7t declared that the crediting of the %-: retention fee e9uivalent to P$00,$5/.%0 to his account had unjustly enriched 1on2alo< and ruled, accordingly, that 1on2alo should reimburse Tarnate in that amount because the latter;s e9uipment had been utili2ed in the project. @pon denial of his motion for reconsideration, %- 1on2alo has now come to the 3ourt to seek the review and reversal of the decision of the 3A. 7ssues 1on2alo contends that the 3A erred in affirming the ,T3 because= !%" both parties were in pari delicto< !$" the deed of assignment was void< and !0" there was no compliance with the arbitration clause in the subcontract.

1on2alo 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 e8ecuting the subcontract, the ,T3 and the 3A 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.%% ,uling We deny the petition for review, but we delete the grant of moral damages, attorney;s fees and litigation e8penses. There is no 9uestion that every contractor is prohibited from subcontracting with or assigning to another person any contract or project that he has with the DPW unless the DPW (ecretary has approved the subcontracting or assignment. This is pursuant to (ection / of Presidential Decree 6o. %5&., which provides= (ection /. Assignment and (ubcontract. F The contractor shall not assign, transfer, pledge, subcontract or make any other disposition of the contract or any part or interest therein e8cept with the approval of the *inister of Public Works, Transportation and 3ommunications, the *inister of Public ighways, or the *inister of >nergy, 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 1overnment nor shall it create any contractual relation between the subcontractor and the 1overnment. 1on2alo, who was the sole contractor of the project in 9uestion, 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 DPW (ecretary. 6ecessarily, the deed of assignment was also illegal, because it sprung from the subcontract. As aptly observed by the 3A= 8 8 8. The intention of the parties in e8ecuting the Deed of Assignment was merely to cover up the illegality of the sub)contract agreement. They knew for a fact that the DPW will not allow plaintiff) appellee to claim in his own name under the (ub)3ontract Agreement. 4bviously, without the (ub)3ontract Agreement there will be no Deed of Assignment to speak of. The illegality of the (ub)3ontract 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 e8pressly prohibited by law and thereafter e8ecute 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. %$ @nder Article %.-& !%" of the 3ivil 3ode, a contract whose cause, object or purpose is contrary to law is a void or ine8istent contract. As such, a void contract cannot produce a valid one. %0 To the same effect is Article %.$$ of the 3ivil 3ode, which declares that Ga contract, which is the direct result of a previous illegal contract, is also void and ine8istent.G We do not concur with the 3A;s finding that the guilt of Tarnate for violation of (ection / of Presidential Decree 6o. %5&. was lesser than that of 1on2alo, for, as the 3A itself observed, Tarnate had voluntarily entered into the agreements with 1on2alo. %. Tarnate also admitted that he did not participate in the bidding for the project because he knew that he was not authori2ed to contract with the DPW .%5 1iven that Tarnate was a businessman who had represented himself in the subcontract as Gbeing financially and organi2ationally sound and established, with the necessary personnel and e9uipment for the performance of the project,G %/ he justifiably presumed to be aware of the illegality of his agreements with 1on2alo. ?or these reasons, Tarnate was not less guilty than 1on2alo. According to Article %.%$ !%" of the 3ivil 3ode, 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

e9ual fault. The doctrine of in pari delicto is a universal doctrine that holds that no action arises, in e9uity 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.%' 6onetheless, the application of the doctrine of in pari delicto is not always rigid. An accepted e8ception arises when its application contravenes well)established public policy. %E 7n this jurisdiction, public policy has been defined as Gthat principle of the law which holds that no subject or citi2en can lawfully do that which has a tendency to be injurious to the public or against the public good.G %& @njust enrichment e8ists, according to ulst v. P, +uilders, 7nc., $- Gwhen 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, e9uity and good conscience.G The prevention of unjust enrichment is a recogni2ed public policy of the (tate, for Article $$ of the 3ivil 3ode e8plicitly provides that GHeIvery person who through an act of performance by another, or any other means, ac9uires or comes into possession of something at the e8pense of the latter without just or legal ground, shall return the same to him.G 7t is well to note that Article $$ Gis part of the chapter of the 3ivil 3ode on uman ,elations, 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.G$% There is no 9uestion that Tarnate provided the e9uipment, labor and materials for the project in compliance with his obligations under the subcontract and the deed of assignment< and that it was 1on2alo as the contractor who received the payment for his contract with the DPW as well as the %-: retention fee that should have been paid to Tarnate pursuant to the deed of assignment.$$3onsidering that 1on2alo refused despite demands to deliver to Tarnate the stipulated %-: retention fee that would have compensated the latter for the use of his e9uipment in the project, 1on2alo would be unjustly enriched at the e8pense of Tarnate if the latter was to be barred from recovering because of the rigid application of the doctrine of in pari delicto. The prevention of unjust enrichment called for the e8ception to apply in Tarnate;s favor. 3onse9uently, the ,T3 and the 3A properly adjudged 1on2alo liable to pay Tarnate the e9uivalent amount of the %-: retention fee !i.e., P$00,5$/.%0". 1on2alo sought to justify his refusal to turn over the P$00,5$/.%0 to Tarnate by insisting that he !1on2alo" had a debt of P$--,---.-- to 3ongressman Bictor Domingue2< that his payment of the %-: retention fee to Tarnate was conditioned on Tarnate paying that debt to 3ongressman Domingue2< and that he refused to give the %-: retention fee to Tarnate because Tarnate did not pay to 3ongressman Domingue2.$0 is justification was unpersuasive, however, because, firstly, 1on2alo presented no proof of the debt to 3ongressman Domingue2< secondly, he did not competently establish the agreement on the condition that supposedly bound Tarnate to pay to 3ongressman Domingue2<$. and, thirdly, burdening Tarnate with 1on2alo;s personal debt to 3ongressman Domingue2 to be paid first by Tarnate would constitute another case of unjust enrichment. The 3ourt regards the grant of moral damages, attorney;s fees and litigation e8penses to Tarnate to be inappropriate. We have ruled that no damages may be recovered under a void contract, which, being none8istent, produces no juridical tie between the parties involved. $5 7t is notable, too, that the ,T3 and the 3A did not spell out the sufficient factual and legal justifications for such damages to be granted. Jastly, the letter and spirit of Article $$ of the 3ivil 3ode command 1on2alo 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 /: per annum reckoned from (eptember %0, %&&&, the time of the judicial demand by Tarnate, is

imposed on the amount of P$00,5$/.%0. 6ot to afford this relief will make a travesty of the justice to which Tarnate was entitled for having suffered too long from 1on2alo;s unjust enrichment. W >,>?4,>, we A??7,* the decision promulgated on ?ebruary %E, $--0, but D>J>T> the awards of moral damages, attorney;s fees and litigation e8penses< 7*P4(> legal interest of /: per annum on the principal oJP$00,5$/.%0 reckoned from (eptember %0, %&&&< and D7,>3T the petitioner to pay the costs of suit. SO ORDERED. L"CAS #. ERSAMIN Associate Justice $E CONC"R! MARIA LO"RDES #. A. SERENO Chief Justice TERESITA J. LEONARDO%DE CASTRO Associate Justice MARTIN S. &ILLARAMA, JR. Associate Justice

IEN&ENIDO L. RE'ES Associate Justice CERTI(ICATION Pursuant to (ection %0, Article B777 of the 3onstitution, 7 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 3ourtKs Division. MARIA LO"RDES #. A. SERENO Chief Justice