G.R. No. 151373-74 - Department of Health vs. C.V. Canchela and Associates

The Department of Health (DOH) entered into three Owner-Consultant Agreements with C.V. Canchela & Associates, Architects (CVCAA) in association with MCS Engineers Co., and A.O. Mansueto IV, Electrical Engineering Services (collectively, private respondents).
The Agreements covered infrastructure projects for three hospitals: Baguio General Hospital and Medical Center, Batangas Regional Hospital, and Corazon L. Montelibano Memorial Regional Hospital in Bacolod City.
The Agreements, dated October 7-8, 1996, were signed by the respective chiefs or officers-in-charge of these hospitals and were similar in content.
The scope included preparation of detailed architectural and engineering design plans, technical specifications, cost estimates, preparation of bid documents, and construction supervision until completion.
The professional fees were initially set at 7.5% of the project fund allocation (6% for design services and 1.5% for full-time construction supervision).

On December 10, 1996, the DOH amended the Agreements to delete “full-time construction supervision” and replaced it with “periodic visits.”
Correspondingly, the professional fee was reduced from 7.5% to 6% of the project contract cost.
The payment schedule provided for payment of 70% upon submission of contract documents, 80% upon 50% completion of construction, and the balance upon final acceptance, all subject to usual accounting and auditing rules.
No certification of availability of funds was issued by the chief accountants despite their signatures as witnesses and approval by the Secretary of Health.

Various deficiencies in private respondents’ performance allegedly occurred but were not communicated to them.
DOH withheld payment of consultancy fees citing unsatisfactory performance and failure to rectify deficiencies. DOH also retained submitted documents and plans.
Private respondents sent several demand letters starting August 29, 1997, as a last administrative remedy before arbitration per Agreement terms.
On September 21, 1998, private respondents filed a claim for payment of fees, escalation costs, attorney’s fees, and arbitration costs before the Construction Industry Arbitration Commission (CIAC).

The sole arbitrator appointed rendered a decision on March 30, 1999, awarding private respondents P3,492,713 for architectural and engineering (A&E) services performed and accepted. Interest was awarded at 6% per annum from the award date until finality, and 12% thereafter; escalation and attorney’s fees were denied.
DOH questioned jurisdiction, alleged lack of factual and legal basis, and partiality of the arbitrator before the Court of Appeals (CA).
Initially, the CA dismissed the petition for review for being filed out of time but later reinstated it and consolidated it with an urgent petition challenging the issuance of the writ of execution for the arbitration award.
On June 28, 2000, the CA affirmed the arbitration award, ruling that CIAC had exclusive original jurisdiction and that the award was supported by evidence and proper interpretation of the Agreements.

DOH filed a petition for review on certiorari under Rule 45, raising issues of prematurity of claims, invalidity of the award, failure to secure prior administrative decision as mandatory under the Agreements, and the State’s sovereign immunity from suit.
For the first time during the Supreme Court proceedings, DOH raised the failure to obtain a certification of availability of funds by the chief accountants, arguing that the Agreements are void ab initio for non-compliance with pertinent accounting and auditing rules.
The Supreme Court took cognizance of this issue as involving public funds and substantial justice.

Whether the claims of private respondents were premature for lack of compliance with the mandatory administrative remedy under Article 12 of the Agreements.
Whether the CIAC had jurisdiction over the dispute and whether the arbitration award was valid and supported by evidence.
Whether the failure to secure certificates of availability of funds by DOH renders the Agreements null and void ab initio.
Whether private respondents are entitled to payment despite the nullity of the Agreements.
Whether the State can invoke sovereign immunity to avoid payment.
Whether interest on the awarded amount should be allowed.