City of Baguio vs. National Waterworks and Sewerage Authority

A municipal corporation's waterworks system is patrimonial property owned in its proprietary capacity and is fully protected by constitutional provisions against taking without just compensation; a statute mandating its transfer to another government agency without providing for effective payment of just compensation is unconstitutional.

The City of Baguio is a municipal corporation organized under its Charter, maintaining the Baguio Waterworks System under a certificate of public convenience, financed by its own funds, the Baguio general fund, and advances from the national government. The National Waterworks and Sewerage Authority (NAWASA) is a public corporation created by Republic Act No. 1383 for the purpose of consolidating and centralizing all waterworks, sewerage, and drainage systems in the Philippines under one control and supervision. Section 8 of Republic Act No. 1383 dissolved the Metropolitan Water District and directed the transfer of all existing government-owned waterworks and sewerage systems to NAWASA, with the net book value of such properties to be received by NAWASA in payment for an equal value of NAWASA assets. The dispute arose from the City of Baguio's contention that this statutory transfer scheme operated to deprive it of its waterworks system without just compensation and without due process of law.

The City of Baguio, a municipal corporation organized under its Charter, maintains and operates the Baguio Waterworks System under a certificate of public convenience. The system is financed by the city's own funds, the Baguio general fund, and advances from the national government. As of December 31, 1955, the assets of the system were reported at ₱1,408,795.98. The system supplies only the City of Baguio, its inhabitants, and transient visitors. Under the city's Charter, employees of the city receive one-fifth (1/5) of a cubic meter of water free for every one peso of their total annual salary as part of their compensation, while employees of the national government do not receive this privilege. In consideration of the national government's exemption from taxation on its extensive real estate holdings within the city limits, the Charter provides for a permanent and continuing appropriation from the national Treasury equal to fifty percent of the city's expenses, exclusive of inter-department charges.

On June 18, 1955, Republic Act No. 1383 was approved, creating the National Waterworks and Sewerage Authority (NAWASA) as a public corporation for the purpose of consolidating and centralizing all waterworks, sewerage, and drainage systems in the Philippines under one control, direction, and general supervision. Section 8 of the Act dissolved the Metropolitan Water District and directed the transfer of all existing government-owned waterworks and sewerage systems to NAWASA, with the net book value of such properties to be received by NAWASA in payment for an equal value of NAWASA assets. On September 19, 1955, the President issued Executive Order No. 127 outlining the procedure for the transfer of government-owned waterworks and sewerage systems to NAWASA, setting a time limit of ninety days from the date of the order. On March 15, 1956, NAWASA issued Office Memorandum No. 7 prescribing preparatory steps for the transfer, including provisions that provincial, city, and municipal boards ceased to have control and supervision over waterworks systems upon NAWASA's formal organization.

On April 25, 1956, before any actual physical turn-over of the Baguio Waterworks System had been made, the City of Baguio filed a complaint for declaratory relief in the Court of First Instance of Baguio, contending that Republic Act No. 1383 does not include the Baguio Waterworks System within its purview, and that assuming it does, the Act is unconstitutional for depriving the city of ownership, control, and operation of the system without compensation and without due process of law. NAWASA moved to dismiss, arguing that the Act was a valid exercise of police power or, alternatively, of eminent domain, and that the waterworks system was public property over which the Legislature had control. The motion was denied, and after the parties submitted a stipulation of facts and written memoranda, the trial court rendered judgment on November 5, 1956, holding that the Baguio Waterworks System falls within the category of private property under the Constitution and may not be expropriated without just compensation, and that Section 8 of Republic Act No. 1383 is unconstitutional for failing to provide just compensation. NAWASA's motion for reconsideration was denied, prompting the present appeal.

• Propriety of Declaratory Relief: Whether the City of Baguio's action for declaratory relief is proper, given NAWASA's contention that there has already been a breach of Republic Act No. 1383.
• Nature of the Statutory Power: Whether Republic Act No. 1383 constitutes an exercise of police power rather than the power of eminent domain.
• Constitutionality of the Expropriation: Whether Republic Act No. 1383, assuming it involves the exercise of eminent domain, violates the Constitution for failing to provide for effective payment of just compensation.

• Propriety of Declaratory Relief: Yes. The action for declaratory relief is proper because no actual physical turn-over of the Baguio Waterworks System had been effected, and NAWASA itself admitted in its answer that no breach had occurred.
• Nature of the Statutory Power: No. Republic Act No. 1383 does not constitute a valid exercise of police power; it effects a real transfer of ownership of the waterworks to NAWASA, not merely a transfer of administration, and therefore falls under the power of eminent domain.
• Constitutionality of the Expropriation: Yes. Section 8 of Republic Act No. 1383 is unconstitutional insofar as it expropriates the Baguio Waterworks System without providing for an effective payment of just compensation, as required by Section 6, Article XIII and Section 1(2), Article III of the Constitution.

• Propriety of Declaratory Relief: NAWASA contended that the action was improper under Section 2 of Rule 66, which allows a statute to be construed before breach thereof. This contention was rejected because NAWASA's own answer, filed through the Solicitor General, expressly admitted that "there has been no breach of said law because no actual physical turn-over of the Baguio Waterworks System has so far been made." Republic Act No. 1383 provides that government-owned waterworks systems should be transferred to NAWASA at the earliest time possible, but unless administrative action actually carries out this provision, the transfer cannot be deemed effected. The most NAWASA did was to issue Office Memorandum No. 7 prescribing preparatory steps for transfer, but before any definite step could be taken to comply with the directive, the present action was instituted. NAWASA had also desisted from raising this point in the trial court proceedings, prompting the trial court to deem any objection waived. The requisites for declaratory relief were thus present.

• Nature of the Statutory Power: NAWASA argued that Republic Act No. 1383 is a valid exercise of police power, invoking the principle that Congress may transfer property from one public agency to another for administrative purposes without impairing vested rights, provided the property remains devoted to its original purpose and the citizens are not deprived of its enjoyment. This argument was rejected because the authorities cited by NAWASA involved transfers done merely for purposes of administration, with ownership and benefits retained by the original corporation. Republic Act No. 1383, by contrast, clearly intends a real transfer of ownership of the waterworks to NAWASA, not merely a transfer of administration. The Act does not confiscate or destroy property but directs that the waterworks be paid for with an equal value of NAWASA assets, which is characteristic of eminent domain, not police power. NAWASA also contended that the waterworks system is "public works for public service" under Article 424 of the New Civil Code and thus subject to legislative control. This was rejected because the Baguio Waterworks System is not like a public road, park, or street held in trust for the public; it is property owned by the city in its proprietary character. The weight of authority classes waterworks as private affairs of municipal corporations, and Philippine jurisprudence, citing Mendoza vs. De Leon, 33 Phil. 509, has recognized the waterworks system as patrimonial property of the city that established it. Being owned in a proprietary capacity, the waterworks cannot be taken away without observing the constitutional safeguards for the protection of private property.

• Constitutionality of the Expropriation: Section 6, Article XIII of the Constitution authorizes the State to transfer to public ownership utilities and other private enterprises upon payment of just compensation, and Section 1(2), Article III prohibits the taking of private property for public use without just compensation. While Republic Act No. 1383 attempts to observe this requirement by directing that the transfer be made upon payment of an equivalent value of NAWASA assets, nothing in the record shows that any such assets were actually transferred to the City of Baguio as compensation. Office Memorandum No. 7 contains no provision for payment. The assets of NAWASA referred to by the law are not specified, and although the Act empowers NAWASA to contract indebtedness and issue bonds, no such action was taken to comply with the commitment to compensate the city. As to when such action would be taken was unknown. Unless this aspect of the law is clarified and the city is given its due compensation, the city cannot be deprived of its property. The law, insofar as it expropriates the waterworks without providing for an effective payment of just compensation, violates the Constitution.

• Patrimonial Property of Municipal Corporations — A waterworks system maintained by a municipal corporation under its charter, financed by its own funds, and operated under a certificate of public convenience is patrimonial property owned by the city in its proprietary capacity, not public property held in trust for the public such as roads, parks, or streets. As patrimonial property, it enjoys the full protection of constitutional guarantees against taking without just compensation. The Court relied on Mendoza vs. De Leon, 33 Phil. 509, which had already recognized the waterworks system as patrimonial property of the city that established it, and on McQuillin's treatise on municipal corporations, which classes waterworks as private affairs of municipal corporations.

• Distinction Between Police Power and Eminent Domain as Applied to Municipal Property — A statute that effects a real transfer of ownership of a municipal corporation's proprietary property to another government agency, with provision for payment of equivalent value, constitutes an exercise of the power of eminent domain, not police power. Police power applies where the transfer is merely for administrative purposes and ownership and benefits are retained by the original corporation. The right of the State as to the private property of a municipal corporation is a right of regulation, not a right of appropriation.

• Just Compensation in Expropriation of Municipal Property — A municipal corporation, in its private or proprietary capacity, is clothed with the capacities of a private corporation and may claim its rights and immunities even against the sovereign. Its private property cannot be taken except by the exercise of eminent domain with payment of full compensation. A statute mandating transfer of such property to another agency is unconstitutional if it fails to specify the assets to be paid or to provide an effective mechanism for payment of just compensation.

• "The Baguio Waterworks System is not like any public road, park, street or any other public property held in trust by a municipal corporation held for the benefit of the public but it is rather a property owned by appellee in its proprietary character." — This passage establishes the ratio decidendi on the nature of the waterworks system as patrimonial property, the foundational premise for the entire decision.

• "And being owned by the municipal corporation in a proprietary character, waterworks cannot be taken away without observing the safeguards set by our Constitution for the protection of private property." — This formulation links the proprietary character of the waterworks to the constitutional requirement of just compensation, articulating the doctrinal bridge between the property's nature and the expropriation's invalidity.

• "We are therefore persuaded to conclude that the law, insofar as it expropriates the waterworks in question without providing for an effective payment of just compensation, violates our Constitution." — This is the dispositive legal conclusion on the constitutionality issue, stating the holding in its most direct form.

• Mendoza vs. De Leon, 33 Phil. 509 — Controlling precedent followed by the Court for the proposition that a waterworks system is patrimonial property of the city that established it, reinforcing the classification of the Baguio Waterworks System as private property entitled to constitutional protection.
• Shrik vs. City of Lancaster, 313 Pa. 158, 169 Atl. 557 — Cited as supporting authority for the proposition that waterworks are classed as private affairs of municipal corporations, consistent with the weight of legislative authority on the subject.
• McQuillin, Municipal Corporation (2nd Ed., Vol. I, pp. 670-681; sec. 239, Vol. I) — Treatise authority cited for the principles that waterworks are private affairs of municipal corporations, that the private property of a municipal corporation is fully protected by constitutional provisions protecting private property, and that a municipality cannot be deprived of such property except by eminent domain with full compensation.
• 19 R.C.L. p. 698 — Cited for the principle that a municipal corporation, insofar as it exercises functions of a private corporation, is clothed with the capacities and immunities of a private corporation even against the sovereign.

• Section 6, Article XIII, 1935 Constitution — Authorizes the State to establish and operate industries and means of transportation and communication, and upon payment of just compensation, transfer to public ownership utilities and other private enterprises to be operated by the Government. Applied as the constitutional basis requiring just compensation for the transfer of the waterworks system to NAWASA.
• Section 1(2), Article III, 1935 Constitution — Provides that private property shall not be taken for public use without just compensation. Applied in conjunction with Section 6, Article XIII to hold that the City of Baguio's patrimonial property could not be taken without effective payment of just compensation.
• Section 8, Republic Act No. 1383 — Provides for the dissolution of the Metropolitan Water District and the transfer of all government-owned waterworks and sewerage systems to NAWASA, with the net book value of such properties to be received by NAWASA in payment for an equal value of NAWASA assets. Held unconstitutional for failing to provide for effective payment of just compensation.
• Section 1, Republic Act No. 1383 — Declares the creation and general purposes of NAWASA, including the consolidation and centralization of all waterworks, sewerage, and drainage systems under one control and supervision.
• Article 424, New Civil Code — Refers to "public works for public service." NAWASA invoked this provision to argue that the waterworks system is public property subject to legislative control; the Court rejected this characterization.
• Section 2, Rule 66 of the Rules of Court — Provides that a contract or statute may be construed before there has been a breach thereof. NAWASA invoked this to challenge the propriety of declaratory relief; the Court found no breach had occurred.

Paras, C.J., Bengzon, Padilla, Montemayor, Endencia, and Barrera, JJ., concurred. Concepcion, J., concurred in the result.