G.R. No. 95398 - Melchor vs. Commission on Audit

On July 15, 1983, Mario R. Melchor, acting as Vocational School Administrator of Alangalang Agro-Industrial School in Alangalang, Leyte, entered into a contract with Cebu Diamond Construction for the construction of Phase I of the Home Technology Building at the school for the price of P488,000.
Prior to the contract execution, Pablo Narido, the chief accountant of the school, issued a Certificate of Availability of Funds to cover the construction cost. However, he did not sign the contract as a witness, contrary to the requirement under Section 1 of LOI No. 968.
The contract was subsequently approved by the then Minister of Education, Culture and Sports, Onofre D. Corpuz, and contained provisions incorporating various essential documents, including letters of instruction, administrative orders, and special conditions.

While the construction was underway, on November 8, 1983, the contractor sought an additional charge of P73,000 (approximately 15% of the original contract price) due to increased costs of labor and materials.
The petitioner, through a letter dated November 17, 1983, referred the contractor’s request for an additional charge to the Regional Director of the Ministry of Education, Culture and Sports, seeking approval for cost adjustments to be covered partly by subsequent appropriations.
Subsequent communications included a second indorsement on November 22, 1983, requesting the COA Regional Director in Tacloban City to approve the cost adjustment. An acting assistant regional director approved the additional charge subject to fund availability and the auditor’s imprimatur.

Extensions were granted by the petitioner as the contractor requested additional time, but on April 10, 1984, the contractor ceased work to avoid further losses. At that time, only 61% of the construction work (valued at P344,430.88) had been accomplished.
Despite partial completion, the contractor had been paid a total of P515,305.60, which included an extra payment of approximately P172,003.26 for additional work orders necessary to strengthen the building structure.
A discrepancy existed in the computation of amounts, but the correctness of the figures was not in dispute between the parties.

On April 8, 1985, the COA Regional Director directed the Resident Auditor, Ms. Gilda Ramos, to disallow the payment of P515,305.60 on the grounds that the contract was null and void due to the absence of the chief accountant’s signature as required by LOI 968.
The petitioner, by subsequent correspondence dated May 3, 1985, sought reconsideration, arguing:

The certificate issued by the chief accountant, which is an integral part of the contract under Section 86 of PD 1445, substantially complied with LOI 968.
His authority was not exceeded as the contract had the approval of the proper head of the agency.
The Resident Auditor did not initially object to the contract despite its defect.
He had complied with the requirements of PD 1445 (particularly Sections 85 and 86) governing government contracts.

After the petitioner’s appeals at both the COA Regional Office and COA Head Office were dismissed, the issue was escalated to the Supreme Court.

The central issue before the Court was whether petitioner Melchor should be held personally liable for the total amount paid to the contractor, especially given the contractual defect (lack of a witness signature by the chief accountant) versus the substantial compliance evidenced by the Certificate of Availability of Funds.

Is petitioner Melchor personally liable for the P515,305.60 paid to the contractor, considering that the infrastructure contract is alleged to be null and void for non-compliance (absence of the chief accountant’s signature as witness under LOI 968)?

Does the issuance of the Certificate of Availability of Funds, integral under Section 86 of PD 1445, effectively cure the defect arising from the chief accountant’s failure to sign the contract as a witness?

Should the extra payment of P172,003.26 made for additional work be strictly disallowed due to the absence of a supplemental agreement, or can it be validated on a quantum meruit basis?

How should LOI 968 and Sections 85 and 86 of PD 1445 be interpreted—literally or purposively—to prevent unjust outcomes in government contracting?