Title
Eslao vs. Commission on Audit
Case
G.R. No. 89745
Decision Date
Apr 8, 1991
PSU negotiated contracts with SJC Construction for building extensions without public bidding, citing urgency. COA disallowed payments, but SC ruled in favor of quantum meruit, citing good faith, substantial compliance, and public benefit.
contracts
university
contractor

Case Summary (G.R. No. 89745)

Factual Background

PSU, represented by petitioner, entered into a conditional contract with C.T. Serna Consultants on December 22, 1986 for the preparation of perspective and detailed plans, specifications, bill of materials and estimates, programs of work, and structural designs for an extension of the PSU Engineering Building at the Urdaneta campus. Serna had earlier designed the existing Engineering Building in the same campus. The cost estimates for the extension were pegged at P1,000,000.00, consistent with the agency estimate recommended by the DPWH Regional Office I. On December 26, 1986, Serna turned over the finished plans and specifications and bills of materials and estimates to PSU for submission to the DPWH Regional Office I, and PSU prepared the submission addressed to Jose P. Solano, Director of Region I.

PSU also prepared agency estimates and project program for the Ceramics Building at the Lingayen campus in the amount of P599,763.65, and the relevant documents and detailed estimates were prepared on December 26, 1986 or before the construction contract for the Ceramics Building extension was entered into with SJC Construction. The plans and details for both buildings were approved by the DPWH Regional Office on March 11, 1987. Funding was supported by an Advice of Allotment (No. TC2-1132-86-4-02) in the amount of P1.6M, released by the DBM on December 29, 1986.

Petitioner, concerned about time and the possibility that the appropriation would revert to general funds if not obligated before year-end, and also motivated by the university’s urgent need for classrooms, entered into the two separate contracts on December 29, 1986 with SJC Construction. Each project contract amount was lower than the corresponding appropriated amounts: P960,000.00 for the Engineering Building extension (below P1,000,000.00) and P582,000.00 for the Ceramics Building extension (below P600,000.00).

Procurement and Approvals

The Board of Regents of PSU approved the Engineering and Ceramics contracts through Resolution Nos. 12 and 12-A on February 16, 1987. Subsequently, the Secretary of Education, Culture and Sports, Lourdes R. Quisumbing, approved the contracts on December 2, 1987. Copies of the contracts were also forwarded to the Office of the Executive Secretary in Malacañang for approval by the Office of the President. The contractor followed up the papers, and petitioner believed that as of January 19, 1987, approval had been obtained from the Office of the Executive Secretary through Atty. Danilo T. Gardaya of the Presidential Legal Staff.

When verification revealed that there was no such person as Danilo T. Gardaya in the Office of the Presidential Legal Staff, the PSU resident auditor issued CSB No. 0727 on July 27, 1987, disallowing the payments of P552,900.00 for the Ceramics Building and P912,000.00 for the Engineering Building, totaling P1,464,900.00. The resident auditor based the disallowance on three grounds: (a) the contracts were entered into in violation of IB2.5.2 (now IB2.4.2) of the Implementing Rules of P.D. No. 1594; (b) the approval indicated on the face of the contracts by the Office of the Executive Secretary was not genuine; and (c) the contracts were entered into without the required engineering aspects as required in Section 2 of P.D. No. 1594.

On June 18, 1987, petitioner wrote the contractor advising him to hold construction in abeyance after petitioner learned from the Office of the Deputy Executive Secretary that the signature of Executive Secretary Joker Arroyo on the negotiated contract was not genuine. The COA Director for Region I, through a 2nd Indorsement dated September 3, 1987, concurred with the resident auditor’s opinion. Petitioner then appealed to COA.

COA, in a 10th Indorsement dated March 30, 1988, recommended denial of the appeal. COA later issued COA Decision No. 736, contained in an 11th Indorsement dated February 9, 1989, denying petitioner’s appeal and affirming the disallowances. Petitioner’s motion for reconsideration was denied by resolution dated August 2, 1989, prompting this petition.

The Parties’ Contentions

Petitioner argued that the transaction was anchored on the statutory authority for negotiated contracts under Section 4 of P.D. No. 1594, which allowed negotiated contracts in exceptional cases, including where time was of the essence, or where there was a lack of qualified bidders, or where there was conclusive evidence of greater economy and efficiency through negotiated contract, subject to specified approvals depending on project cost. Petitioner maintained that due to the DBM release of the Advice of Allotment on December 29, 1986, two days before fiscal year-end, he acted in good faith under the belief that the university would lose the appropriation if it was not obligated by December 31, 1986.

Petitioner further submitted that the case fell within the exceptional situation of time being of the essence and that, contrary to COA’s view, the procurement exceptions to public bidding were not limited to emergencies involving loss of life or property and failures after bidding. Petitioner also contended that the engineering aspects required by law and the implementing rules were sufficiently addressed, as the constructions were presented as extensions of existing buildings. He relied on certifications by the university architect and engineer, and emphasized that planning and estimating documents had been prepared and submitted for approval.

As to the spurious signatures on the Executive Secretary approval, petitioner expressly disclaimed responsibility, and he argued that approval by the Office of the President was not necessary for the validity of the negotiated contracts because, given the project costs below P1 million each, only the approval of the Secretary of Education, Culture and Sports was required under COA Circular No. 83-101-J. Petitioner stated that this approval had indeed been secured. He also asserted that the Board of Regents had approved the contracts consistent with PSU’s authority under Section 3(i) of P.D. No. 1437.

In the alternative, petitioner invoked the principle of quantum meruit, maintaining that the buildings were already in existence and being used by the university, and that the government benefited from the work accomplished. He argued that disallowance would unjustly enrich the government.

Respondent COA opposed the petition and emphasized that mandatory procurement requirements under P.D. No. 1594 and its implementing rules were not complied with. COA pointed out that negotiated contracts were not justified because (i) the asserted urgency did not fall within Section 4 exceptions and (ii) even assuming it could, the procurement rules required a negotiated procurement through sealed canvass of at least three qualified contractors. COA also argued that petitioner did not secure the required prior approval of the heads of the agency to negotiate, and that the procurement was tainted by irregularities and bad faith due to spurious documents submitted for audit. Finally, COA argued that quantum meruit could not apply where there was a clear violation of law and where spurious documents were used.

COA also disputed petitioner’s premise that the allotment would revert to the general fund if not obligated within the year. COA cited P.D. No. 1177, particularly Section 33, and stressed that appropriations for capital outlays remain valid until fully spent or reverted.

Court’s Legal Assessment

The Court reviewed the record and found that petitioner failed to undertake public bidding as required by the pertinent rules and regulations for contracts of that nature. The Court considered petitioner’s explanation that time constraints and fear of losing allocations compelled the use of negotiated contracts. The Court held that the only exception contemplated that would justify a negotiated contract under Section 4 of P.D. No. 1594 and IB 10.4.2 was limited to the enumerated conditions in the law and implementing rules. The Court found that petitioner’s invoked situation did not fall within the enumerated conditions. Even on the assumption that the situation could be considered within an exception, the Court ruled that the rules still required a procurement by sealed canvass of at least three (3) qualified contractors, and petitioner did not comply with this requirement.

The Court also noted the submission of spurious documents, particularly the falsified approval of the contracts by then Executive Secretary Joker P. Arroyo. The Court clarified that although the spurious approval was admittedly secured by the contractor, petitioner could not be deemed to have acted in bad faith on that specific point given the circumstances narrated.

At the same time, the Court addressed approvals and authority in relation to project cost thresholds. Because the amounts of the projects were each less than P1 million, the Court held that only the approval of the Secretary of Education, Culture and Sports was required under COA Circular No. 83-101-J, and such approval had been obtained. The Court further found that petitioner had also obtained PSU Board of Regents approval through Resolution Nos. 12 and 12-A on February 16, 1987, consistent with PSU’s authority under Section 3(i) of P.D. No. 1437. The contract costs were also shown to be below the agency estimates.

The Court concluded that the totality of circumstances demonstrated petitioner’s good faith. It pointed to petitioner’s prompt suspension of work once he learned of the irregularity involving the Office of the President approval. The Court observed that the two projects were approximately 95% complete and that the buildings were already being used by the university.

Quantum Meruit and Unjust Enrichment

Although the Court recognized the procu

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