METROPOLITAN WATERWORKS AND SEWERAGE SYSTEM, PETITIONER, VS. THE COURT OF APPEALS AND THE CITY OF DAGUPAN, RESPONDENTS.

Metropolitan Waterworks and Sewerage System versus City of Dagupan

The Case

This is a petition for review on certiorari brought by the Metropolitan Waterworks and Sewerage System, the successor of the National Waterworks and Sewerage Authority, against the City of Dagupan. The City sued to recover the ownership and possession of the Dagupan Waterworks System, and the Authority countered with a claim for reimbursement of the expenses it had spent on improvements. The case matters because it settles, in plain and memorable terms, the fate of a possessor in bad faith: he loses his useful improvements without any right to indemnity, and he may not remove them. It also quietly teaches a procedural lesson on who may properly be named as a respondent in an appeal by certiorari.

Procedural History

The City of Dagupan filed a complaint against the National Waterworks and Sewerage Authority before the then Court of First Instance of Pangasinan for recovery of ownership and possession of the Dagupan Waterworks System. The case was decided on a stipulation of facts. The trial court ruled for the City, found the Authority to be a possessor in bad faith, and denied its claim for reimbursement. The Authority appealed to the then Court of Appeals, assigning a single error: that the City should have been held liable for the amortization of the balance of the loan the Authority had secured for the improvement of the system. The appellate court affirmed the trial court. The Metropolitan Waterworks and Sewerage System, as successor in interest, then came to the Supreme Court by petition for review on certiorari, raising for the first time the question of whether it may remove the useful improvements.

Facts

The National Waterworks and Sewerage Authority took over and operated the Dagupan Waterworks System, relying on a law that vested in it the ownership, possession, and control of waterworks systems throughout the Philippines. The City of Dagupan disputed this and brought suit to recover the system.

During the litigation, and after the complaint had already been filed, the Authority introduced improvements on the system and later claimed reimbursement of 255,000 pesos for necessary and useful improvements. The trial court, on the stipulated facts, declared the City the lawful owner and held the Authority a possessor in bad faith, and so denied it any indemnity.

On appeal, the Court of Appeals affirmed, stressing that the useful expenses were made in utter bad faith because they were instituted after the complaint was filed and after several decisions had already declared unconstitutional the taking of the patrimonial waterworks systems of cities, municipalities, and provinces without just compensation. Before the Supreme Court, the successor entity shifted ground and asked, instead of reimbursement, for the right to remove the useful improvements.

Issues

• Whether or not a possessor in bad faith has the right to remove the useful improvements he introduced on the property of another.
• Whether or not the issue of removal of useful improvements, raised for the first time on appeal, may be entertained by the Court.

Applicable Provisions

Article 449 of the Civil Code provides:

He who builds, plants or sows in bad faith on the land of another, loses what is built, planted or sown without right to indemnity.

This is the core rule: the builder in bad faith loses his improvements outright, with no indemnity.

Article 546 of the Civil Code provides:

Necessary expenses shall be refunded to every possessor; but only the possessor in good faith may retain the thing until he has been reimbursed therefor. Useful expenses shall be refunded only to the possessor in good faith with the same right of retention, the person who has defeated him in the possession having the option of refunding the amount of the expenses or of paying the increase in value which the thing may have acquired by reason thereof.

This confines the refund of useful expenses, with the right of retention, to the possessor in good faith.

Article 547 of the Civil Code provides:

If the useful improvements can be removed without damage to the principal thing, the possessor in good faith may remove them, unless the person who recovers the possession exercises the option under paragraph 2 of the preceding article.

This grants the right of removal of useful improvements only to the possessor in good faith.

Article 549 of the Civil Code provides:

The possessor in bad faith may remove the improvements for pure luxury or mere pleasure, provided the thing suffers no injury thereby and the lawful possessor does not prefer to retain them by paying the value they may have at the time he enters into possession.

This is the only removal allowed a possessor in bad faith, and it is limited to improvements of pure luxury or mere pleasure, not useful ones.

Section 5 of Rule 10 of the Rules of Court provides:

When issues not raised by the pleadings are tried by express or implied consent of the parties, they shall be treated in all respects, as if they had been raised in the pleadings. Such amendment of the pleadings as may be necessary to cause them to conform to the evidence and to raise these issues may be made upon motion of any party at any time, even after judgment; but failure so to amend does not affect the result of the trial of these issues.

This governs whether the unpleaded issue of removal may be deemed joined by consent, which the Court answers in the negative because no evidence was ever taken on it.

Ruling

On the first issue, the Court held that the answer is clearly in the negative. A possessor in bad faith has no right to remove useful improvements. Under Article 449, he who builds in bad faith on the land of another loses what he built without right to indemnity. As a builder in bad faith, the Authority lost whatever useful improvements it had made. Under Article 546, only a possessor in good faith is refunded useful expenses with a right of retention; under Article 547, only a possessor in good faith may remove useful improvements where this can be done without damage to the principal thing and the one recovering possession does not opt to reimburse. The right of removal given a possessor in bad faith under Article 549 applies only to improvements for pure luxury or mere pleasure.

The Court also distinguished the authorities invoked. In Mindanao Academy versus Yap, what was allowed to be removed were equipment, books, furniture, and fixtures brought in by the party, which were outside the scope of the judgment; the new building could not be recovered in value because it was built after the action was filed. Carbonell versus Court of Appeals did not modify the Civil Code, because only four Members concurred in finding the possessors there in bad faith, so it established no precedent, and its equitable considerations are absent here.

On the second issue, the Court acknowledged that the procedural objection of the City is technically correct. The Authority should have pleaded its additional counterclaim in the alternative, for reimbursement or for removal. Its reliance on Section 5 of Rule 10 fails because that provision presupposes that evidence was introduced on the unpleaded issue without objection, and here no evidence at all was presented on removability, the case having been decided on a stipulation of facts. The Court nonetheless overlooked the procedural defect and ruled on the main issue.

Doctrine

A possessor in bad faith who builds, plants, or sows on the land of another loses what he built, planted, or sown, without any right to indemnity, under Article 449 of the Civil Code. The refund of useful expenses, with the right of retention, belongs only to the possessor in good faith under Article 546, and the removal of useful improvements belongs only to the possessor in good faith under Article 547. A possessor in bad faith may remove only improvements for pure luxury or mere pleasure, and only if the thing suffers no injury and the lawful possessor does not prefer to retain them by paying their value, under Article 549. An issue not raised in the pleadings is not deemed joined by implied consent under Section 5 of Rule 10 where no evidence was ever taken on it.

Disposition

The Court affirmed the decision of the appellate court, with costs against the petitioner, and the City of Dagupan kept the Dagupan Waterworks System free of any obligation to indemnify or to allow removal of the useful improvements.

Remember This

Memorize the line: a possessor in bad faith loses his useful improvements without right to indemnity and cannot remove them, for Article 549 permits removal only of improvements for pure luxury or mere pleasure. Examiners use this case to test the rights of a builder in bad faith under Articles 449, 546, 547, and 549, and to test the requisites of Section 5 of Rule 10 on issues tried by implied consent.