Case Digest: Menchavez, et al., vs. Teves, Jr., G.R. No. 153201, January 26, 2005

 Torts and Damages

Panganiban, J.


Facts:

  • On February 28, 1986, a "Contract of Lease" was executed between the Menchavez family (lessors) and Florentino Teves Jr. (lessee) for a 10-hectare fishpond in Tabuelan, Cebu.

    • The lease term was set for five years with an annual payment of ₱40,000, renewable at the option of the lessors.

    • The lessors guaranteed peaceful enjoyment of the leased property for the entire contract duration and that the land was free from encumbrances.

  • On June 2, 1988, sheriffs demolished the fishpond dikes constructed by Teves, and delivered possession to other parties.

  • Teves filed a complaint for damages against the lessors, claiming they violated the lease terms.

    • Teves sought compensation for consequential damages, unearned income, and reimbursement of rental payments.

    • Teves alleged that the lessors withheld the fact that the Menchavez spouses had been ordered in a prior civil case (Civil Case No. 510-T, Eufracia Colongan and Paulino Pamplona v. Juan Menchavez, Sr. and Sevillana S. Menchavez) to remove dikes illegally constructed on the same property.

  • The lessors filed a third-party complaint against agents of Eufracia Colongan and Paulino Pamplona.


RTC: Ruled that the lease contract was void.

  • The lease involved a fishpond on public land, which under Presidential Decree No. 704, should only be leased by qualified individuals or entities.

  • The RTC ruled the lease contract null and void because the land in question belonged to the state, not the Menchavez family.

  • The principle of nemo dat quod non habet (you cannot give what you do not own) applied, as the Menchavez family could not lease land they did not own.

  • The RTC ruled that both parties were at fault (in pari delicto), and neither could claim rights from the invalid lease.

  • Teves knowingly assumed the risks of leasing the land despite being fully aware that Menchavez family lacked ownership, invoking volenti non fit injuria (he who voluntarily takes a risk cannot claim damages).



CA: Disagreed with the RTC, ruling that Teves was not in pari delicto and was unaware of the lessors' lack of ownership. 

  • The CA awarded Teves actual damages of ₱128,074.40 and liquidated damages of ₱50,000.


Issue:

Whether the respondent and petitioners are in pari delicto. YES


Held:

Were the Parties in Pari Delicto?


The Court shall discuss the two issues simultaneously.


In Pari Delicto Rule on Void Contracts


The parties do not dispute the finding of the trial and the appellate courts that the Contract of Lease was void. Indeed, the RTC correctly held that it was the State, not petitioners, that owned the fishpond. The 1987 Constitution specifically declares that all lands of the public domain, waters, fisheries and other natural resources belong to the State. Included here are fishponds, which may not be alienated but only leased. Possession thereof, no matter how long, cannot ripen into ownership. 


Being merely applicants for the lease of the fishponds, petitioners had no transferable right over them. And even if the State were to grant their application, the law expressly disallowed sublease of the fishponds to respondent. Void are all contracts in which the cause, object or purpose is contrary to law, public order or public policy.


A void contract is equivalent to nothing; it produces no civil effect. It does not create, modify or extinguish a juridical relation. Parties to a void agreement cannot expect the aid of the law; the courts leave them as they are, because they are deemed in pari delicto or "in equal fault."


To this rule, however, there are exceptions that permit the return of that which may have been given under a void contract. One of the exceptions is found in Article 1412 of the Civil Code, which states:


"Art. 1412. If the act in which the unlawful or forbidden cause consists does not constitute a criminal offense, the following rules shall be observed:


"(1) When the fault is on the part of both contracting parties, neither may recover what he has given by virtue of the contract, or demand the performance of the other’s undertaking;


"(2) When only one of the contracting parties is at fault, he cannot recover what he has given by reason of the contract, or ask for the fulfillment of what has been promised him. The other, who is not at fault, may demand the return of what he has given without any obligation to comply with his promise."


On this premise, respondent contends that he can recover from petitioners, because he is an innocent party to the Contract of Lease. Petitioners allegedly induced him to enter into it through serious misrepresentation. 


Finding of In Pari Delicto: A Question of Fact


The issue of whether respondent was at fault or whether the parties were in pari delicto is a question of fact not normally taken up in a petition for review on certiorari under Rule 45 of the Rules of Court. The present case, however, falls under two recognized exceptions to this rule. This Court is compelled to review the facts, since the CA’s factual findings are (1) contrary to those of the trial court; and (2) premised on an absence of evidence, a presumption that is contradicted by the evidence on record.


Unquestionably, petitioners leased out a property that did not belong to them, one that they had no authority to sublease. The trial court correctly observed that petitioners still had a pending lease application with the State at the time they entered into the Contract with respondent.


Respondent, on the other hand, claims that petitioners misled him into executing the Contract. He insists that he relied on their assertions regarding their ownership of the property. His own evidence, however, rebuts his contention that he did not know that they lacked ownership. At the very least, he had notice of their doubtful ownership of the fishpond.


Respondent himself admitted that he was aware that the petitioners’ lease application for the fishpond had not yet been approved. Thus, he knowingly entered into the Contract with the risk that the application might be disapproved. Noteworthy is the fact that the existence of a fishpond lease application necessarily contradicts a claim of ownership. That respondent did not know of petitioners’ lack of ownership is therefore incredible.


The evidence of respondent himself shows that he negotiated the lease of the fishpond with both Juan Menchavez Sr. and Juan Menchavez Jr. in the office of his lawyer, Atty. Jorge Esparagoza. His counsel’s presence during the negotiations, prior to the parties’ meeting of minds, further debunks his claim of lack of knowledge. Lawyers are expected to know that fishponds belong to the State and are inalienable. It was reasonably expected of the counsel herein to advise his client regarding the matter of ownership.


Indeed, the evidence presented by respondent demonstrates the contradictory claims of petitioners regarding their alleged ownership of the fishpond. On the one hand, they claimed ownership and, on the other, they assured him that their fishpond lease application would be approved. This circumstance should have been sufficient to place him on notice. It should have compelled him to determine their right over the fishpond, including their right to lease it.


The Contract itself stated that the area was still covered by a fishpond application. Nonetheless, although petitioners declared in the Contract that they co-owned the property, their erroneous declaration should not be used against them. A cursory examination of the Contract suggests that it was drafted to favor the lessee. It can readily be presumed that it was he or his counsel who prepared it — a matter supported by petitioners’ evidence. The ambiguity should therefore be resolved against him, being the one who primarily caused it.


The CA erred in finding that petitioners had failed to prove actual knowledge of respondent of the ownership status of the property that had been leased to him. On the contrary, as the party alleging the fact, it was he who had the burden of proving – through a preponderance of evidence – that they misled him regarding the ownership of the fishpond. His evidence fails to support this contention. Instead, it reveals his fault in entering into a void Contract. As both parties are equally at fault, neither may recover against the other.


Liquidated Damages Not Proper


The CA erred in awarding liquidated damages, notwithstanding its finding that the Contract of Lease was void. Even if it was assumed that respondent was entitled to reimbursement as provided under paragraph 1 of Article 1412 of the Civil Code, the award of liquidated damages was contrary to established legal principles. 


Liquidated damages are those agreed upon by the parties to a contract, to be paid in case of a breach thereof. Liquidated damages are identical to penalty insofar as legal results are concerned. Intended to ensure the performance of the principal obligation, such damages are accessory and subsidiary obligations. In the present case, it was stipulated that the party responsible for the violation of the terms, conditions and warranties of the Contract would pay not less than ₱50,000 as liquidated damages. Since the principal obligation was void, there was no contract that could have been breached by petitioners; thus, the stipulation on liquidated damages was inexistent. The nullity of the principal obligation carried with it the nullity of the accessory obligation of liquidated damages.


As explained earlier, the applicable law in the present factual milieu is Article 1412 of the Civil Code. This law merely allows innocent parties to recover what they have given without any obligation to comply with their prestation. No damages may be recovered on the basis of a void contract; being nonexistent, the agreement produces no juridical tie between the parties involved. Since there is no contract, the injured party may only recover through other sources of obligations such as a law or a quasi-contract. A party recovering through these other sources of obligations may not claim liquidated damages, which is an obligation arising from a contract.


WHEREFORE, the Petition is GRANTED and the assailed Decision and Resolution SET ASIDE. The Decision of the trial court is hereby REINSTATED.


No pronouncement as to costs.


SO ORDERED.

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