Case Summary (G.R. No. 151373-74)
Key Dates and Procedural Posture
Owner‑Consultant Agreements executed in October 1996; Agreements amended December 10, 1996. Private respondents filed their CIAC petition (Case No. 31‑98) on September 21, 1998. Sole Arbitrator rendered award March 30, 1999. Court of Appeals affirmed the arbitrator’s decision by consolidated decision dated June 28, 2000. Petition for review to the Supreme Court filed under Rule 45; Supreme Court decision reversing the Court of Appeals issued (decision date referenced in prompt).
Applicable Law and Governing Standards
Primary constitutional and statutory framework applied: 1987 Constitution (including the public‑funds principles cited in Art. VI, Sec. 29 and Art. IX‑D, Sec. 2), Presidential Decree No. 1445 (Auditing Code of the Philippines), Executive Order No. 292 (Administrative Code of 1987), Government Accounting and Auditing (GAA) Manual (Sec. 525 governing professional fees), Letter of Instructions (LOI) No. 968, COA circulars, and Executive Order No. 1008 (Construction Industry Arbitration Law) as establishing CIAC jurisdiction.
Factual Background — Contracts, Scope and Compensation
DOH entered into three substantially identical Owner‑Consultant Agreements with private respondents for architectural & engineering (A&E) design and construction supervision for three hospital projects. Original agreed consultancy fee was 7.5% of the project fund allocation (6% A&E, 1.5% full‑time construction supervision). The Agreements were witnessed by the hospitals’ chief accountants and approved by the Secretary of Health, but did not contain certificates of availability of funds issued by the proper accounting officials.
Amendment and Performance
On December 10, 1996, DOH amended the Agreements to delete “full‑time construction supervision” and replace it with “periodic visits,” thereby reducing the agreed fee to 6% of the project contract cost and specifying a payment schedule tied to stages of construction. Private respondents submitted Contract/Bid Documents and A&E design plans which DOH accepted; DOH recommended payment in accordance with the Agreements but later withheld payment, citing alleged deficiencies in respondents’ performance. Respondents demanded payment administratively and ultimately filed for arbitration under Article 12 and EO 1008.
Arbitration and Award
The CIAC appointed a Sole Arbitrator who, after hearings, found in favor of private respondents and awarded P3,492,713 for A&E services performed and accepted by DOH, with interest at 6% per annum from the award date until finality and 12% thereafter. Claims for escalation and attorney’s fees were denied.
Appellate Proceedings and Issues Raised by DOH
DOH questioned CIAC jurisdiction, alleged grave abuse of discretion by the Sole Arbitrator, and contested the monetary award’s basis. The Court of Appeals initially dismissed the DOH petition as tardy, later reinstated and consolidated related petitions, and ultimately affirmed the Sole Arbitrator’s decision. DOH elevated the matter to the Supreme Court asserting (a) prematurity for failure to obtain Secretary of Health’s decision under Article 12; (b) State immunity; and (c) that respondents were entitled only to fees based on actual contract cost or quantum meruit and not to the amount awarded.
New Argument and Procedural Considerations
On appeal to the Supreme Court, DOH, for the first time, argued that the Agreements were void ab initio for lack of the required certification of availability of funds and therefore fees could not be computed as percentages of project allocations. The Court observed that the absence of earlier invocation of that defect ordinarily constitutes a waiver; however, because public funds and constitutional prescriptions concerning their disbursement are implicated, the Court considered the fundamental legality of the Agreements despite the newness of the argument.
Legal Analysis — Requirement of Certification and Effect on Contracts
The Supreme Court analyzed controlling provisions: P.D. 1445 requires an appropriation and a certification by the proper accounting official (attached to the contract) that funds are available; EO 292 reiterates that no funds shall be disbursed without certification of availability by the chief accountant; the GAA Manual (Sec. 525) mandates that professional fees for A&E services be stipulated in fixed peso amounts rather than as percentages of project cost. The Court held that the formalities are conditions sine qua non for contracts charging public funds, and failure to comply renders government contracts void. The signatures of chief accountants as contract witnesses did not substitute for the required certification; LOI No. 968, being administrative, could not override statutory requirements.
Ruling on Agreements’ Validity and Consequences
The Supreme Court concluded that the three Owner‑Consultant Agreements were null and void ab initio for failure to comply with statutory and administrative requirements (no certificate of availability of funds) and for contravening the GAA Manual’s prohibition against percentage‑based professional fees. The Court emphasized that these were not illegality per se but statutory prohibitions that render contracts void from inception.
Remedy — Quantum Meruit and Equitable Recovery
Despite the Contracts’ nullity, the Court applied equitable principles to prevent unjust enrichment by the State. Relying on precedent allowing payment on a quantum meruit basis where the government has accepted benefits (e.g., Eslao; Royal Trust), the Court held that private respondents were entitled to reasonable compensation for services actually performed and accepted by DOH (excluding periodic‑visit su
...continue readingCase Syllabus (G.R. No. 151373-74)
Case Citation, Court and Panel
- Reported as 511 Phil. 654, Third Division, G.R. Nos. 151373-74, decided November 17, 2005.
- Petition for review on certiorari under Rule 45 from consolidated Court of Appeals decision of June 28, 2000 which affirmed the Sole Arbitrator of the Construction Industry Arbitration Commission (CIAC) in CIAC Case No. 31-98 (Sole Arbitrator: Atty. Custodio O. Parlade).
- Decision authored by Justice Carpio-Morales; Justices Corona and Garcia concur; Justice Panganiban recused (former law partner of the Sole Arbitrator); Justice Sandoval-Gutierrez on leave.
Parties and Nature of Case
- Petitioner: Department of Health (DOH).
- Private respondents/claimants: C.V. Canchela & Associates, Architects (CVCAA), in association with MCS Engineers Co., and A.O. Mansueto IV a Electrical Engineering Services.
- Other respondent named: Luis Alina, Sheriff IV, RTC, Manila (involved in execution proceedings).
- Relief sought by private respondents: payment of professional/consultancy fees (A & E fees), escalation costs, attorney’s fees and costs of arbitration; arising from three Owner-Consultant Agreements for hospital infrastructure projects.
Underlying Agreements — Parties, Dates, Scope
- Petitioner DOH entered into three Owner-Consultant Agreements with private respondents covering infrastructure projects:
- Baguio General Hospital and Medical Center (Baguio Project) — Agreement dated October 7, 1996, signed by Dr. Jesus del Prado.
- Batangas Regional Hospital (Batangas Project) — Agreement dated October 8, 1996, signed by Dr. Vicente Gahol.
- Corazon L. Montelibano Memorial Regional Hospital, Bacolod City (Bacolod Project) — Agreement dated October 7, 1996, signed by Dr. Lourdes Espina.
- Agreements contained almost identical language.
- Required deliverables by private respondents: detailed architectural and engineering design plans; technical specifications and detailed cost estimates; preparation of bid documents and requirements; construction supervision until completion, hand-over and issuance of final certificate.
- Work divided into architectural & engineering (A & E) services and construction supervision (CS).
Fee Structure in the Agreements and Initial Payments
- Original provision: consultancy/professional fees would be 7.5% of the project fund allocation, broken down into A & E services (6%) and full-time construction supervision (1.5%).
- Specific agreed amounts (as 7.5% of project fund allocations):
- Baguio: P1,444,875.00 (7.5% of P19,265,000.00).
- Batangas: P1,318,020.00 (7.5% of P17,575,000.00).
- Bacolod: P890,549.00 (7.5% of P11,875,000.00).
- Agreements were witnessed by the hospitals’ chief accountants and approved by the Secretary of Health, but corresponding certificates of availability of funds were not issued.
DOH Acceptance of Contract Documents and Subsequent Amendment
- Through Architect Ma. Rebecca M. PeAafiel, DOH sent letters (all dated October 15, 1996) to the respective chiefs of hospitals confirming acceptance of private respondents’ complete Contract or Bid Documents (A & E Design Plans, Technical Specifications, Detailed Cost Estimates) and recommended payment of 7.5% as consultancy fees as per Agreements.
- Letters advised that full-time construction supervision would commence upon issuance of Notices to Proceed to winning contractors.
- On December 10, 1996, DOH amended each Agreement deleting "full-time construction supervision" and replacing it with "periodic visits" (text provided defining periodic visits and consultant’s reporting duties).
- The Amendment was witnessed and signed by the hospitals’ chief accountants and approved by the Secretary of Health, but again no certifications of availability of funds were issued.
Adjusted Fee Scheme After Amendment and Payment Schedule
- Because full-time construction supervision was excluded, professional fees were reduced to 6% of the project contract cost, with payment schedule:
- 70% of the fee upon completion and submission of the Contract Documents, computed upon estimated project construction cost.
- Payment adjusted to 80% of the fee upon 50% completion of construction, computed upon Project Contract Cost.
- Remaining balance upon completion and final acceptance, computed on Project Contract Cost.
- Payments were stipulated to be "subject to the usual accounting and auditing rules and regulations."
Performance, Alleged Deficiencies, Withholding and Retention of Documents
- During construction, various deficiencies in private respondents’ performance were allegedly discovered; these deficiencies were not communicated to private respondents.
- Petitioner withheld payment of consultancy fees and did not return the submitted documents, plans, specifications and estimates.
- Private respondents made written demands for payment; payments were not made.
Administrative Remedies and Notices Pursuant to Agreement Article 12
- Private respondents appealed on August 29, 1997 to DOH Secretary Carmencita C. Reodica, stating appeal was their ultimate administrative remedy before arbitration under E.O. 1008.
- An undated demand letter to Secretary Reodica and chiefs of hospital expressed intent to resort to arbitration under Article 12 of the Agreements.
- On February 19, 1998 private respondents advised Secretary Reodica they would submit the dispute to CIAC.
- Private respondents filed on September 21, 1998 with CIAC a request for adjudication of claims for payment of professional fees, escalation costs, attorney’s fees and arbitration costs — docketed CIAC Case No. 31-98.
CIAC Proceedings and Sole Arbitrator
- CIAC appointed Sole Arbitrator Custodio O. Parlade from nominees to preside over arbitration.
- Petitioner’s Answer (January 21, 1999) alleged withholding was justified because:
- Hospitals were not satisfied with private respondents’ performance.
- Section 8.2 of the NEDA Board Approval Guidelines permits final payment withholding until Certificate of Completion indicating satisfactory performance is issued.
- Delay in implementation and payment was due to private respondents’ failure to rectify unsatisfactory work.
- Consultancy fees should be on per-project basis at 6% of project contract cost, and respondent maintained that "project contract cost" should be actual winning bid price.
- Parties stipulated Terms of Reference (dated January 11, 1999, later amended), including agreed facts and monetary positions:
- A & E services were completed and Contract Documents submitted on 15 October 1996.
- DOH accepted/approved Contract Documents with stated Project Fund Allocation (PFA) or Project Construction Cost (PCC) amounts for each project (Baguio, Batangas, Bacolod) with figures provided.
- Claimants contended entitlement to 6% A & E fees for each project in specified amounts; respondent DOH contended 6% must be based on actual contract cost (winning bidder).
- Identified issues: completion on time, satisfactory quality of work, definition of "project cost" (detailed estimate vs. actual contract cost), entitlement to interest for delayed payment, entitlement to escalation, entitlement to attorney’s fees and arbitration costs.
Sole Arbitrator Decision (March 30, 1999)
- Dispositive portion awarded claimants P3,492,713 for A & E services performed and completed and accepted by DOH.
- Interest: 6% per annum from date of award until decision becomes final; thereafter principal and accrued interest earn interest at 12% per annum.
- Claim for escalation denied.
- No award for attorney’s fees and costs.
- Filing details: CIAC Case No. 31-98 decision penned by Sole Arbitrator Custodio O. Parlade.
Petitioner’s Appeals and Procedural History in Court of Appeals
- Petitioner filed petition for review under Rule 43 to Court of Appeals (CA-G.R. No. 52538) raising grounds:
- CIAC lacked jurisdiction to hear Case No. 31-98.
- Sole Arbitrator committed grave abuse of discretion in awarding P3,492,713 and interest.
- Sole Arbitrator exceeded powers and was partial.
- By Resolution dated May 19, 1999, Court of Appeals dismissed petition as filed out of time.
- Sole Arbitrator on May 31,