EPG Construction Co. vs. Vigilar

Factual Background

The project arose from a 1983 Memorandum of Agreement between the Ministry of Human Settlement, through BLISS Development Corporation, and the Ministry of Public Works and Highways for development of a housing site and construction of one hundred forty-five housing units on government property along the Manggahan Floodway in Pasig City. The Ministry of Public Works and Highways entered into individual written contracts with the petitioners covering approximately two-thirds of each housing unit. At the verbal request and with the assurance of then DPWH Undersecretary Aber Canlas that additional funds would be forthcoming, the petitioners-contractors undertook additional work to complete the housing units despite the absence of supplemental written contracts and formal appropriations. The petitioners received payment for work under the written contracts but left an unpaid balance of P5,918,315.63, which they attributed to the additional constructions.

Administrative and Audit Proceedings

On November 14, 1988, the petitioners-contractors sent a demand letter to the DPWH Secretary. DPWH Assistant Secretary for Legal Services Dominador Madamba recommended recognition of implied contracts for the additional work and advised payment based on quantum meruit, subject to COA review. The COA returned the claims to the DPWH on July 27, 1992, indicating that funds must be available before COA could act. DPWH Secretary Jose De Jesus requested the Secretary of Budget and Management to release funds on July 30, 1992. The DBM released P5,819,316.00 on December 20, 1994 under Advise of Allotment No. A4-1303-04-41-303. COA, invoking COA Circular No. 95-006, again returned the documents to the DPWH on December 27, 1995, reiterating that audit of the transaction would be after payment. Respondent DPWH Secretary Gregorio Vigilar denied the money claims by letter dated August 26, 1996.

Trial Court Proceedings

The petitioners-contractors filed a Petition for Mandamus in the Regional Trial Court of Quezon City, Branch 226, seeking an order compelling respondent to pay P5,819,316.00, moral and exemplary damages, and attorney’s fees. A pre-trial conference was held on February 18, 1997. The parties submitted memoranda and rejoinders. On November 7, 1997, the trial court dismissed the petition for mandamus in Civil Case No. Q-96-29243.

Issues Presented

The central legal questions were whether the additional constructions performed without supplemental written contracts and prior appropriation gave rise to an enforceable obligation against the government, whether such obligations were void under the Administrative Code of 1987 for lack of appropriation and a certificate of availability of funds, whether the petitioners-contractors could recover on the basis of quantum meruit, and whether the constitutional prohibition on suit against the State barred the petition.

Parties' Contentions

Respondent relied on Section 46 and Section 47, Chapter 7, Sub-Title B, Title I, Book V of the Administrative Code of 1987 to argue that appropriation and certification of available funds are conditions precedent to government contracts, and that failure to comply rendered the implied contracts void ab initio under Section 48. Respondent also invoked the constitutional doctrine that the State may not be sued without its consent, citing Section 3, Article XVI, 1987 Constitution and Section 10, Book I, Chapter 3, E.O. 292. The petitioners-contractors asserted that they acted in good faith at the verbal request and assurance of DPWH officials, that DPWH legal and auditing officers gave favorable recommendations or raised no objection, that the DBM had released funds, and that the housing units had been completed and placed under government control and public use, thus entitling them to compensation under quantum meruit.

Supreme Court's Ruling and Disposition

The Court granted the petition for certiorari. The RTC decision dated November 7, 1997 was reversed and set aside. The Court directed the Commission on Audit to determine, with dispatch, the total compensation due to the petitioners-contractors on a quantum meruit basis for the additional constructions and to allow payment upon completion of that determination. The Court ordered no costs.

Legal Basis and Reasoning

The Court agreed that the implied contracts for the additional constructions were void for failure to comply with the mandatory provisions of the Administrative Code and applicable auditing rules. The Court nonetheless applied the equitable doctrine of quantum meruit to permit recovery. The Court relied on precedent, including Eslao v. Commission on Audit, Royal Trust Construction v. Commission on Audit, and Melchor v. Commission on Audit, in which recovery on a quantum meruit basis was allowed where work performed served the public interest, where government officers had knowledge of and later acknowledged the work, and where strict insistence on formal requirements would produce injustice. The Court emphasized several circumstances supporting equitable relief in this case: good faith reliance by the petitioners-contractors on verbal assurances from a DPWH undersecretary; that the implied contracts concerned the completion phase of already existing housing units; favorable recommendation by the DPWH Assistant Secretary for Legal Services; absence of objection from the DPWH Auditor; the DBM release of funds under Advise of Allotment No. A4-1303-04-41-303; and the fact that the completed housing units have been under government control and have yielded public benefit for years. The Court found that