Banaag vs. Encarnacion

A lease of public real estate executed by a belligerent occupant's de facto government is valid only for the duration of the occupation and terminates upon liberation, the occupant being merely a usufructuary whose authority — and all contracts made in that capacity — cease when occupation ends. Where the leased property belongs to municipalities rather than the hostile state, the occupant's authority to administer it is even more restricted, and the restored de jure government may cancel the lease upon demand.

Santiago Banaag, a resident of Taal, Batangas, was granted an exclusive five-year fishery concession over the Pansipit River — the outlet of Taal Lake straddling the municipalities of Taal and Lemery — by the Bureau of Forestry and Fishery on June 3, 1943, during the Japanese occupation. The concession was issued pursuant to Executive Order No. 127, promulgated on January 23, 1943, by the Philippines Executive Commission, a de facto government of the second kind established by the Japanese forces of occupation and recognized as such in Co Kim Cham vs. Valdez. The fisheries in question belonged to the municipalities of Taal and Lemery, not to the national government. After the liberation of Batangas, the municipalities demanded the return of the fisheries, precipitating a dispute over whether the occupation-era lease remained binding on the restored Commonwealth government.

Santiago Banaag, a resident of Taal, Batangas, was granted on June 3, 1943, the exclusive privilege of erecting one fish corral ("baklad") in the Pansipit River, the outlet of Taal Lake, situated in the municipalities of Taal and Lemery, Batangas. The lease was executed by Florencio Tamesis, Director of Forestry and Fishery, pursuant to sections 1 and 4 of Executive Order No. 127, promulgated on January 23, 1943, by the Philippines Executive Commission — a de facto government of the second kind established by the Japanese forces of occupation and recognized as such by the Supreme Court in Co Kim Cham vs. Valdez. The lease was for a term of five years, from July 1, 1943, to June 30, 1948, and carried an annual rental of ₱8,501, which Banaag had bid highest at a public auction conducted on May 29, 1943, and paid on June 3, 1943. Banaag posted a real estate bond in the amount of ₱8,501 with sureties, took possession of the fisheries in June 1943, and incurred expenses of approximately ₱10,000 for the construction of corrals and acquisition of fishing equipment. He continued in peaceful possession from that time onward.

Upon the adjudication and concession of the fisheries, a dispute arose between Banaag and the respondents as to the validity and construction of the deed of lease. The respondents — Vicente Singson Encarnacion, as Secretary of Agriculture and Commerce, and the municipalities of Taal and Lemery — contended that the deed of lease was doubtful and not enforceable. On August 17, 1945, after the liberation of Batangas, the mayors of Taal and Lemery required Banaag to return possession of the Pansipit fisheries to the municipalities. Banaag refused, maintaining that the lease should remain valid for the full five-year term stipulated therein.

Banaag thereafter filed a petition for declaratory judgment under Rule 66, seeking to uphold the validity of the lease for its entire term. The case was submitted for decision on December 19, 1945, upon stipulated facts. The trial court, on February 11, 1946, declared the deed of lease valid and legitimate for all legal purposes. The respondents appealed. On June 21, 1948, Banaag sought a preliminary injunction to prevent the municipalities from taking over the fisheries on July 1, 1948, when the lease term expired; the Supreme Court denied this by resolution of June 23, 1948. The municipalities of Taal and Lemery had adopted a resolution to take over the fisheries upon the expiration of the lease period.

• De Facto Government Obligations: Petitioner contended that the Executive Commission during the Japanese occupation was a de facto government and that, under certain limitations, obligations assumed by it in behalf of the country would in general be respected by the de jure government when restored. The lease should therefore be declared valid for the whole five-year period stipulated, from July 1, 1943, to June 30, 1948.
• Scope of "Real Estate" Under the Hague Convention: Petitioner attempted to advance the theory that the words "real estate" in Article 55 of the Hague Conventions of 1907 do not include all and every species of real property, though he failed to specify what should be excluded or to state that fisheries were among those excluded.

• Termination Upon Liberation: Respondents maintained that the deed of lease, even if valid at its inception, could not bind the Government of the Philippines because it was not a party thereto, and because the Executive Commission was merely an instrumentality of the Japanese forces of occupation. As such, it must be regarded only as administrator and usufructuary of public buildings, real estate, forests, and agricultural works situated in the occupied country, and the lease should be deemed terminated with the establishment of the Commonwealth.
• Hague Convention and Usufructuary Rule: Respondents invoked Article 55, Section III of the Hague Conventions of 1907, the United States War Department Rules of Land Warfare (1934, No. 316) declaring that a lease or contract should not extend beyond the conclusion of the war, and Article 480 of the Civil Code providing that all contracts made by a usufructuary terminate at the expiration of the usufruct.
• Cancellation Clause: Respondents pointed to the express provision of the lease that the concession "may be suspended or cancelled at any time as the circumstances demand," arguing that the municipalities of Taal and Lemery, to which the fisheries belonged, had the authority to cancel the lease and had in fact demanded the return of the fisheries on August 17, 1945.

• Validity of Lease Under Hague Convention: Whether the lease of public fisheries executed by a belligerent occupant's de facto government remained valid after liberation, given Article 55 of the Hague Conventions of 1907 limiting the occupant to the status of administrator and usufructuary.
• Ownership of the Fisheries: Whether the fisheries in question, belonging to the municipalities of Taal and Lemery rather than the hostile state, could be the subject of a valid lease by the belligerent occupant.
• Cancellation Under Lease Terms: Whether the express cancellation clause in the lease — permitting suspension or cancellation "at any time as the circumstances demand" — was properly invoked by the municipalities' demand for return on August 17, 1945.

• Validity of Lease Under Hague Convention: No. The lease terminated upon liberation, the belligerent occupant being merely a usufructuary whose authority — and all contracts made in that capacity — cease when occupation ends, pursuant to Article 55 of the Hague Conventions of 1907 and Article 480 of the Civil Code.
• Ownership of the Fisheries: No. The fisheries belonged to the municipalities of Taal and Lemery, not to the hostile state; under Article 56 of the Hague Regulations, property of municipalities is to be treated as private property, and the occupant's authority to appropriate or lease such property is even more restricted than over state-owned property.
• Cancellation Under Lease Terms: Yes. The lease expressly provided that the concession "may be suspended or cancelled at any time as the circumstances demand," and the municipalities, as owners, demanded the return of the fisheries on August 17, 1945, effectively cancelling the lease from that date.

• Validity of Lease Under Hague Convention: Article 55, Section III of the Hague Conventions of 1907 provides that the occupying state shall be regarded only as administrator and usufructuary of public buildings, real estate, forests, and agricultural works belonging to the hostile state and situated in the occupied country, and must protect the capital of these properties and administer them according to the rules of usufruct. The United States War Department Rules of Land Warfare (1934, No. 316) further declare that a lease or contract should not extend beyond the conclusion of the war. Article 480 of the Civil Code provides that all contracts made by a usufructuary terminate at the expiration of the usufruct. The words "real estate" in Article 55 indisputably include the fisheries in question. Accordingly, once the Japanese armed forces — in whose representation the Executive Commission executed the lease — ceased to be administrator and usufructuary after liberation, the deed of lease became null and void.

• Ownership of the Fisheries: Although a belligerent occupant may appropriate the produce of public immovables belonging to the state, the occupant cannot, as stated by Oppenheim, appropriate the produce of property belonging to municipalities, or of property permanently set aside for religious, charitable, educational, artistic, or scientific purposes, since under Article 56 of the Hague Regulations such property is to be treated as private property. The Pansipit fisheries belonged to the municipalities of Taal and Lemery, further restricting the occupant's authority to lease them and reinforcing the conclusion that the lease could not survive the occupation.

• Cancellation Under Lease Terms: The deed of lease expressly provided that the concession "may be suspended or cancelled at any time as the circumstances demand." The authority of the municipalities of Taal and Lemery, as owners of the fisheries, to suspend or cancel the lease on behalf of the Philippine government was not questioned. Since the municipalities actually demanded the return of the administration and occupation of the fisheries on August 17, 1945, petitioner lost his right to continue administering and occupying the fisheries from that date.

• De Facto Government of the Second Kind — A civil government established by military forces of occupation over enemy territory, recognized as a de facto government whose acts, within certain limitations, may be respected by the restored de jure government. The Philippines Executive Commission, organized by Order No. 1 of the Commander of the Japanese Forces on January 23, 1942, was such a government. However, the recognition of its de facto character does not extend the validity of its contracts beyond the duration of occupation where those contracts involve property subject to the rules of usufruct under international law.

• Usufructuary Status of Belligerent Occupant (Article 55, Hague Conventions of 1907) — The occupying state is regarded only as administrator and usufructuary of public buildings, real estate, forests, and agricultural works belonging to the hostile state. It must protect the capital of these properties and administer them according to the rules of usufruct. All contracts made by the occupant as usufructuary terminate upon the expiration of the usufruct — that is, upon the cessation of occupation. Leases and contracts executed by the occupant should not extend beyond the conclusion of the war.

• Municipal Property as Private Property Under Belligerent Occupation (Article 56, Hague Regulations) — Property belonging to municipalities, and property set aside for religious, charitable, educational, artistic, or scientific purposes, is to be treated as private property during belligerent occupation. The occupant may not appropriate the produce of such property, further limiting the occupant's authority to lease or administer it.

• "The occupying State shall be regarded only as administration and usufructuary of public building, real estate, forest, and agricultural works belonging to the hostile State, and situated in the occupied country. It must protect the capital of these properties and administer it according to the rules of usufructuary." — This is the Court's quotation of Article 55, Section III of the Hague Conventions of 1907, the controlling international law provision upon which the entire decision rests.

• "There cannot be any question that the words 'real estate' include said fisheries and, accordingly, the Japanese armed forces, in whose representation the Executive Commission and its agencies executed the deed of lease in question, had ceased, after liberation, to be the administrator and usufructuary of the fisheries in question and therefore, the deed of lease has to be regarded as null and void since then." — This passage states the ratio decidendi: the fisheries fall within "real estate" under Article 55, and the occupant's cessation upon liberation rendered the lease void.

• "The said deed of lease having expressly provided that the concession 'may suspended or cancelled at any time as the circumstances demand' — and no one question the authority of the municipality of Taal and Lemery, to which the Pansipit fisheries belong, to suspend or cancel the deed of lease in behalf of the Philippines Government and it appearing that said municipalities have actually demanded from petitioner the return of the administration and occupation of said fisheries since August 17, 1945, it is evident that petitioner lost since then his right to continue administering and occupying said fisheries." — This passage establishes the alternative ground for cancellation based on the lease's own terms and the municipalities' demand.

• Co Kim Cham vs. Valdez, 75 Phil. 371 — Recognized the Philippines Executive Commission as a de facto government of the second kind established by Japanese military forces of occupation. The Court relied on this case to establish the legal character of the Executive Commission that granted the lease, while distinguishing the scope of its authority over public property during occupation.

• Article 55, Section III, Hague Conventions of 1907 — Provides that the occupying state is regarded only as administrator and usufructuary of public buildings, real estate, forests, and agricultural works belonging to the hostile state. Applied as the primary basis for holding that the lease terminated upon liberation, the occupant's usufructuary authority having ceased.
• Article 56, Hague Regulations — Provides that property of municipalities and property set aside for religious, charitable, educational, artistic, or scientific purposes is to be treated as private property. Applied to reinforce that the fisheries, belonging to the municipalities of Taal and Lemery, were subject to even greater restrictions on the occupant's authority than state-owned property.
• Article 480, Civil Code — Provides that all contracts made by a usufructuary terminate at the expiration of the usufruct. Applied by analogy to confirm that the lease, executed in the occupant's capacity as usufructuary, could not survive beyond the occupation.
• Executive Order No. 127, Executive Commission (January 23, 1943) — The legal basis invoked by the Bureau of Forestry and Fishery for granting the lease. The Court found that whatever authority this order conferred was limited by the occupant's usufructuary status under international law.
• Rule 66, Rules of Court — Governed the petition for declaratory judgment filed by Banaag to determine the validity and construction of the deed of lease.
• Article III, Section 1, Philippine Constitution — Guarantees that no person shall be deprived of property without due process of law, nor denied equal protection of the laws. Referenced in the stipulated facts as part of petitioner's legal framework, though not the basis of the Court's ruling.

Moran, C.J., Feria, Pablo, Bengzon, Briones, Tuason, Montemayor, and Reyes, JJ., concurred. Paras, J., concurred in the result.