G.R. No. 210936 - Cruz, Jr. vs. Commission on Audit

Case Summary (G.R. No. 210936)

Factual Background

The LRTA BAC awarded the repair/rewinding contract to TAN-CA International Inc./Yujin Machinery, Ltd. as the lowest bidder. Although the award contemplated repair work, the records showed that no formal service repair agreement was executed between the LRTA and the contractor for that purpose. Pursuant to the award, units of traction motor armature totaling twenty-three (23) were sent to South Korea for repair under a Letter of Credit.

After the contractor’s work proceeded, only thirteen (13) of the twenty-three (23) units were repaired and returned to Manila in February 2002. Of those thirteen units, three (3) were outright rejected by the LRTA Engineering Division, were sent back to Korea, and eventually returned to the LRTA in February 2003. The remaining ten (10) units were never returned to the LRTA. As to the financial aspect, out of the Letter of Credit total, US$58,800 had been paid to the contractor, while the remaining US$36,000 was cancelled upon request of the LRTA Finance Department.

Audit Findings and Notice of Disallowance

A post-audit was conducted by an auditor who issued Audit Observation Memorandum (AOM) No. 2003-001 dated 21 May 2003. The AOM recorded several material irregularities: there was no service repair agreement and/or contract executed between the LRTA and the contractor; the payment of US$58,800 was effected on 10 April 2002 without the necessary certification that the traction motor armatures passed the LRTA Engineering Division’s testing and acceptance requirements; the contractor failed to return waste materials as provided in the Terms of Reference (TOR); the recommendation of the LRTA Technical Evaluation Committee to conduct a site visit or ocular inspection of the contractor’s facilities before the award and/or during the repair undertaking was ignored; and as of the AOM date, the ten (10) unrepaired units were still with the contractor in Korea.

On 27 February 2008, the COA Legal and Adjudication Office issued Notice of Disallowance No. LRTA 2008-005 (2002) disallowing the payment of US$58,800. COA held several persons responsible, including Cruz (administrator and approving officer for the drawdown), Alonzo (Administrative Department manager), Alday (General Services Division manager), and others such as the Legal Division and BAC chairperson, the chief accountant, and even the contractor’s president.

COA enumerated the grounds for disallowance. These included lack of supporting documents in violation of Section 4(6) of P.D. No. 1445, failure of LRTA management to file legal action against the contractor for non-compliance with the TOR, failure to forfeit the performance bond despite delay and incomplete repair, failure of the contractor to complete the repair of all traction motor armatures, and payment for repair of thirteen units when only nine passed the one-year warranty period.

Petitioners’ Appeal to COA

Cruz, Alonzo, and Alday appealed to COA, seeking reversal of the ND. They argued that the payment was demanded and justified by circumstances: first, the thirteen units had allegedly been repaired and delivered to LRTA and had passed a five-month testing period; second, they claimed they were never aware that the units delivered had to pass the one-year warranty period before payment, and they stressed that such a precondition was unlikely to be accepted by legitimate contractors; and third, they asserted that refusing payment could have stopped train operations and caused greater losses to LRTA. They further claimed that because nine repaired units passed the one-year warranty period, payment was due and that LRTA would be unjustly enriched if payment were disallowed. They also claimed that the ND was issued only after re-examination of the AOM and that COA’s authority to open settled accounts was already barred under Section 52 of P.D. No. 1445 because the ND was issued almost five years after the settlement.

COA Decision and Denial of Motion for Reconsideration

COA, in Decision No. 2012-142 dated 13 September 2012, denied the appeal and affirmed ND No. LRTA 2008-005 (2002) disallowing US$58,800. COA directed LRTA management to exert utmost efforts to demand payment of liquidated damages for late delivery and to compel contractor compliance or to take appropriate legal action. COA further directed LRTA management to demand return of the ten traction motor armatures still in the contractor’s hands or payment of their money value.

A Motion for Reconsideration was later denied in a Resolution dated 6 December 2013, received by petitioners on 5 February 2014.

Issues Raised in the Petition for Certiorari

Petitioners then filed the present petition on 10 February 2014, attributing grave abuse of discretion to COA. They contended, among others, that COA disallowed payment and held them liable even though: the release of payment was allegedly demanded and justified; the units passed the warranty period; and petitioners were allegedly not aware of whether the units failed to pass that period. They also argued that COA improperly treated the obligation as indivisible; that COA allegedly surreptitiously examined a settled account beyond the prescriptive period under Section 52 of P.D. No. 1445; and that Cruz, as final approving authority, should not be held liable because he allegedly relied only on subordinates.

Supreme Court’s Assessment: Proper Disallowance and Indivisibility of the Undertaking

The Court partially granted the petition. The Court found that the payment of US$58,800 was correctly disallowed. The Court reasoned that COA’s findings were based on irregularities already noted in the AOM No. 2003-001, yet petitioners did not properly address those issues, and the ND likewise enumerated irregularities that were again neglected. Thus, the Court held that COA correctly determined that petitioners had not provided a sufficient basis to lift the disallowance.

The Court examined petitioners’ defenses, including that the payment had been processed through a Letter of Credit, that payment corresponded to repair of thirteen units already delivered to LRTA, and that the units underwent repair and allegedly passed the five-month testing period. The Court also considered petitioners’ contention that the thirteen units did not have to pass the one-year warranty period before payment. The Court found these arguments unavailing as they were unfounded and unsubstantiated.

The Court also addressed petitioners’ insistence that the obligation was divisible and that they should only be liable for delivered units. Relying on the TOR and the bid documents, COA treated the undertaking as one work package: the repair of all twenty-three (23) units. The Court agreed that COA correctly concluded that the contractual undertaking was indivisible. The Court added that petitioners’ acceptance and payment for only the thirteen traction motors could not be used as a basis to escape liability because that acceptance and payment were themselves part of the irregularities disallowed by COA, especially absent the required testing, acceptance certifications and the other TOR compliance concerns.

No Surreptitious Examination of a Settled Account; Role of AOM and ND

Petitioners argued that COA violated Section 52 of P.D. No. 1445 because the ND was issued nearly five years after the settlement, beyond the three-year period. The Court rejected the argument. It explained that issuance of an AOM was only an initiatory step in the investigative audit process to determine propriety of disbursements. The Court stressed that the decisive point for finality was the allowance in audit or the issuance of a notice of disallowance, which becomes final and executory in the absence of an appeal. Where the ND is appealed, the Court held that the decision on appeal becomes final and executory.

In support, the Court relied on Corales v. Republic (G.R. No. 186613, 27 August 2013, 703 SCRA 623), emphasizing that the AOM is not conclusive and that comment/justification is still necessary before final action. The Court reiterated that there was no basis to treat the AOM as already triggering the “settled accounts” revision limitation.

Personal Liability of Cruz, Alonzo, and Alday; COA’s Dispositive Portion and Arias v. Sandiganbayan

Notwithstanding the sustaining of the disallowance itself, the Court found a meritorious point regarding petitioners’ personal liability. In Notice of Disallowance No. LRTA 2008-005 (2002), COA listed certain persons responsible for the disallowed amount, and Cruz and Alonzo were specifically identified as approving officer and conforme signatories for the drawdown of US$58,800. However, COA Decision No. 2012-142 was found to have failed to mention and specify the personal liability of the listed persons. The dispositive portion in COA’s decision addressed directions to LRTA management to compel performance or pursue legal

Case Syllabus (G.R. No. 210936)

Parties and Procedural Posture

Petitioners Teodoro B. Cruz, Jr. and Melchor M. Alonzo were former officials of the Light Rail Transit Authority (LRTA), while petitioner Wilfredo P. Alday was the then current General Services Division Manager.
Respondent was the Commission on Audit (COA).
Petitioners filed a Petition for Certiorari under Rule 64 of the Rules of Court to assail Decision No. 2012-142 and a Notice/Resolution issued by COA.
COA denied the appeal by Decision No. 2012-142, and COA subsequently denied petitioners’ Motion for Reconsideration by Resolution dated 6 December 2013.
The petition was anchored on alleged grave abuse of discretion by COA.
The Supreme Court partially granted the petition insofar as it held petitioners not personally liable, while affirming COA’s disallowance of the payment.

Key Factual Allegations

The LRTA awarded a contract for the repair/rewinding of 23 units of traction motor armature to TAN-CA International Inc./Yujin Machinery, Ltd. as the lowest bidder.
The contract award proceeded at US$94,800 or PhP4,876,322.40 at the conversion rate stated in the records.
The repair shipment was undertaken without a formal service repair agreement executed between LRTA and the contractor.
The 23 units of traction motor armature were sent to South Korea for repair under a Letter of Credit issued by the Land Bank of the Philippines.
Only 13 units were repaired and sent back to Manila in February 2002.
Of these 13 units, three were rejected outright by the LRTA Engineering Division and eventually returned to LRTA in February 2003.
The remaining 10 units were never returned to LRTA.
Of the Letter of Credit amount, US$58,800 was already paid to the contractor, while the remaining US$36,000 was cancelled at the request of LRTA’s Finance Department.
A post-audit produced Audit Observation Memorandum (AOM) No. 2003-001 dated 21 May 2003 detailing payment and performance irregularities.
On 27 February 2008, COA issued Notice of Disallowance No. LRTA 2008-005 (2002) disallowing the payment of US$58,800.

COA Disallowance Basis

COA found that no service repair agreement and/or contract had been executed between LRTA and the contractor.
COA found that the payment of US$58,800 was effected on 10 April 2002 without the necessary certification that the traction motor armatures passed required testing and acceptance by the LRTA Engineering Division.
COA also found that the contractor failed to return the waste materials as required in Item No. 2.22 of the Terms of Reference (TOR).
COA held that management ignored the recommendation of the LRTA Technical Evaluation Committee for a site visit or ocular inspection of the contractor’s facilities prior to award or during the undertaking.
COA observed that the 10 remaining units were still with the contractor in Korea as of the AOM date.
For the disallowed payment, COA held the following persons responsible: Atty. Teodoro B. Cruz, Jr., Atty. Melchor M. Alonzo, Mr. Wilfredo P. Alday, Atty. Aurora A. Salvana (manager, Legal Division and BAC chairperson), Ms. Evelyn L. Macalino (chief accountant), and Mr. Edgardo P. Castro, Jr. (president of TAN-CA International, Inc.).
COA listed the following grounds for disallowance: lack of supporting documents in violation of Section 4(6) of P.D. No. 1445; failure to file legal action against the contractor for TOR non-compliance; failure to forfeit the performance bond despite delay and incomplete repair; failure to complete repair of all traction motor armatures; and payment for 13 units when only nine passed the one-year warranty period.
COA directed LRTA management to exert utmost efforts to demand liquidated damages for late delivery and to compel compliance with the TOR, or to file appropriate legal action.
COA further directed LRTA management to demand the return of the 10 unrepaired traction motor armatures in the contractor’s hands or demand payment of their money value.

Petitioners’ Appeal Contentions

Petitioners argued that release of the US$58,800 payment was demanded and justified by attendant circumstances.
Petitioners asserted they were unaware that the units delivered had to pass the one-year warranty period before payment, and they argued that such a condition would be unacceptable to a legitimate contractor or bidder.
Petitioners claimed that train operations could have been stopped if payment was not made, which they asserted could have caused greater losses to LRTA.
Petitioners maintained that since the nine repaired units passed within the one-year warranty period, payment was proper and LRTA would unjustly enrich itself if it withheld payment.
Petitioners contended they learned about the alle