San Diego vs. Municipality of Naujan

An extension of term or reduction of rental of a municipal fishery lease originally awarded after public bidding is void without a new public bidding, because the bidding requirement limits the parties' power to alter vital terms and protects the public interest. The revoking resolution was thus valid, no constitutionally protected contract having been impaired.

Bartolome San Diego was the highest-bidder lessee of the exclusive fishery privilege over municipal waters of Naujan, Oriental Mindoro, while the Municipality of Naujan was the grantor-lessee acting through its municipal council and subject to provincial board approval. Section 2323 of the Revised Administrative Code governed such grants, requiring that the exclusive privilege of fishery or fish-breeding be let to the highest bidder in the same manner as a municipal ferry, market, or slaughterhouse.

Following a public bidding conducted by the Municipality of Naujan for the lease of its municipal waters, the municipal council passed Resolution 46, series of 1947, awarding the concession of the Butas River and Naujan Lake to the highest bidder, Bartolome San Diego. A contract was then entered into giving San Diego, for five years from January 1, 1948 to December 31, 1952, the exclusive privilege of erecting fish corrals along the Butas River from its junction with the San Agustin River up to Naujan Lake itself, for an annual rental of P26,300.00 or P131,500.00 for five years. Upon the lessee's petition, the council reduced the annual rental by 20% through Resolution 59, series of 1949.

On September 5, 1950, the lessee requested a five-year extension of the original lease period. After reiteration of the petition on the ground that the typhoon Wanda destroyed most of his fish corrals, the council on December 1, 1951 adopted Resolution 222, series of 1951, extending the lease for another five years beginning January 1, 1953, with the express condition that plaintiff would waive the privilege to seek reduction of rent based on the original contract. After approval by the Provincial Board of Oriental Mindoro, the parties executed the extension contract on December 23, 1951, confirmed by Resolution 229, series of 1951, of the outgoing council on December 29, 1951. Pursuant thereto, the lessee filed a P52,000.00 surety bond, reconstructed his fish corrals, and stocked Naujan Lake with bañgus fingerlings.

On January 2, 1952, the newly constituted municipal council adopted Resolution 3, series of 1952, revoking Resolution 222, and on the same date passed Resolution 11 revoking Resolution 229. The lessee sought reconsideration and recall of Resolution 3 on the ground, among others, that it violated the December 23, 1951 contract and was therefore contrary to Article III, section 1, clause 10 of the Constitution, but reconsideration was denied. Thereafter, on September 4, 1952, the lessee sued to annul Resolution 3 and to enjoin bidding to any other person for January 1, 1953 to December 31, 1957. The court below found the lease and its extension valid and voided Resolution 3, findings reversed on appeal after the record showed the reduction and extension had been granted without previous public bidding.

• Impairment of Contract: Plaintiff maintained that Resolution 3, series of 1952, violated the extension contract executed December 23, 1951 and was therefore contrary to Article III, section 1, clause 10 of the Constitution.
• Estoppel and Pari Delicto: Plaintiff contended, as sustained below, that the municipality was estopped from assailing the validity of the December 23, 1951 contract, and that the parties being in pari delicto should be left in the situation where found.

• Validity of Revocation and Illegality of Prior Acts: Defendant asserted the validity of Resolution 3, series of 1952, alleging by way of special defense that the resolutions authorizing the original lease contract, reducing rentals, and renewing the lease were null and void for not having been passed in accordance with law.
• Counterclaim for Rentals: Defendant counterclaimed for the amount representing the illegal 20% reduction of original rentals, plus P2,191.60 per month beginning December 1, 1952 until termination of the case.

• Public Bidding for Extension: Whether Resolution 222, series of 1951, and the contract extending the original five-year lease for another five years without competitive public bidding are valid.
• Public Bidding for Rental Reduction: Whether Resolution 59, series of 1949, reducing rentals by 20% without public bidding is valid.
• Impairment of Contract: Whether Resolution 3, series of 1952, revoking the extension impairs the obligation of contracts under Article III, section 1, clause 10 of the Constitution.
• Estoppel Against Municipality: Whether the municipality is estopped from assailing the extension contract after acceptance of benefits and performance by the lessee.
• Pari Delicto: Whether relief should be denied on the ground that the parties are in pari delicto.

• Public Bidding for Extension: No. The extension altered a vital and essential particular of a contract awarded after bidding and, granted without a new bidding, is null and void as contrary to law and public policy.
• Public Bidding for Rental Reduction: No. A 20% rental reduction is a substantial alteration creating a distinct lease, likewise void without the prescribed formality of public bidding.
• Impairment of Contract: No. The constitutional prohibition refers only to legally executed contracts, and no valid contract was abrogated because the extension was void and inexistent.
• Estoppel Against Municipality: No. Estoppel does not validate a municipal contract made without power or without compliance with prescribed mode, even after benefits accepted or sums expended.
• Pari Delicto: No. Courts may intervene at the suit of an equally guilty party where public policy requires, the public right outweighing equal guilt.

• Public Bidding for Extension: Section 2323 of the Revised Administrative Code requires letting the exclusive fishery privilege to the highest bidder, to invite competition and guard against favoritism, fraud, and corruption. Due execution after bidding limits the parties' power to alter or amend without another bidding; otherwise the protection of open competition would disappear. Because the lease period is vital and essential, the five-year extension without bidding was held governed by Caltex (Phil.), Inc., et al. vs. Delgado Bros., Inc., et al. and Morse vs. Boston, and declared void, with greater force where no reservation of power to amend existed.
• Public Bidding for Rental Reduction: A reduction of rent payable is a substantial alteration making the agreement a distinct and different lease contract. Resolution 59, series of 1949, having been passed without public bidding, was therefore held subject to the same nullity as the extension.
• Impairment of Contract: While Resolution 3 apparently abrogated the extension contract, legally no contract was abrogated. The impairment clause protects only contracts legally executed, not void and inexistent agreements contrary to law and public policy.
• Estoppel Against Municipality: Acceptance of benefits, full performance, or large preparatory expenditures does not estop a municipal corporation to deny a contract it had no power to make or could make only under prescribed conditions or mode, since estoppel would permit indirectly what cannot be done directly and would cede or embarrass legislative or governmental powers.
• Pari Delicto: Although both parties participated in the void transaction, intervention was required by public policy because public biddings are held for public protection and best advantage through open competition. The guilt of the parties was not considered equal to the higher right of the public, the guilty plaintiff serving merely as the instrument by which the public is served.

• Public bidding as limitation on amendment — Due execution of a contract after public bidding limits the contracting parties from altering or amending it without another public bidding; otherwise the protection and best advantage secured to the public through open competition would disappear. Applied to void the five-year extension and the 20% rental reduction, both being material alterations granted without rebidding.
• Vital and essential particulars requiring rebidding — Statutes requiring public bidding apply to amendments of an already executed contract where the amendment alters the original in some vital and essential particular, such as the lease period. Applied to hold that extending the fishery lease term required a new bidding.
• Impairment covers only valid contracts — The constitutional prohibition against impairment refers only to contracts legally executed. Applied to reject the attack on Resolution 3 because the extension contract revoked was void and inexistent.
• No estoppel to validate ultra vires or procedurally defective municipal contracts — Estoppel cannot validate a municipal contract which the corporation had no power to make or could make only under prescribed conditions, limitations, or mode, even if benefits were accepted, performance rendered, or large sums expended. Applied to allow the municipality to assail the extension despite the bond, reconstruction, and stocking.
• Pari delicto exception for public policy — Even where parties are in pari delicto, a court may grant relief at the suit of one where public policy requires intervention, the public right outweighing equal guilt. Applied to grant the municipality relief despite mutual participation in the void bidding evasion.

• "Public biddings are held for the protection of the public, and to give the public the best possible advantages by means of open competition between the bidders. He who bids or offers the best terms is awarded the contract subject of the bid, and it is obvious that such protection and best possible advantages to the public will disappear if the parties to a contract executed after public bidding may alter or amend it without another previous public bidding." — States the ratio for requiring rebidding before any material alteration of a bid-awarded contract.
• ". . . the doctrine of estoppel cannot be applied as against a municipal corporation to validate a contract which it has no power to make or which it is authorized to make only under prescribed conditions, within prescribed limitations, or in a prescribed mode or manner, although the corporation has accepted the benefits thereof and the other party has fully performed his part of the agreement, or has expended large sums in preparation for performance." — Gives the canonical bar against estopping a municipality into an ultra vires or procedurally void contract.
• "although the parties are in pari delicto, yet the court may interfere and grant relief at the suit of one of them, where public policy requires its intervention, even though the result may be that a benefit will be derived by a plaintiff who is in equal guilt with defendant. But here the guilt of the parties is not considered as equal to the higher right of the public, and the guilty party to whom the relief is granted is simply the instrument by which the public is served." — Defines the public-policy exception permitting relief despite equal fault.

• Caltex (Phil.), Inc., et al. vs. Delgado Bros., Inc., et al., 96 Phil., 368 — Controlling precedent followed to declare void an amendment to a bid-awarded arrastre contract made without previous public bidding.
• Municipality of San Luis vs. Ventura, et al., 56 Phil., 329 — Cited for the rule that the exclusive fishery privilege must be let to the highest bidder like a municipal ferry, market, or slaughterhouse.
• Morse vs. Boston, 148 N.E. 813, 253 Mass. 247 — Persuasive authority followed for the rule that bidding statutes apply to amendments altering a prior compliant contract in a vital and essential particular.

• Section 2323, Revised Administrative Code — Requires that the exclusive privilege of fishery or right to conduct a fish-breeding ground be let to the highest bidder in the same manner as a municipal ferry, market, or slaughterhouse; applied to invalidate the extension and rental reduction granted without bidding.
• Article III, Section 1, Clause 10, Constitution — Prohibits impairment of the obligation of contracts; held inapplicable because the provision refers only to legally executed contracts, while the extension contract was void and inexistent.

Bengzon, Montemayor, Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L., Endencia, and Barrera, JJ., concurred in the February 29, 1960 decision; Paras, C.J., Bengzon, Montemayor, Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L., and Barrera, JJ., concurred in the April 18, 1960 Resolution.