Title
Manila International Airport Authority vs. Commission on Audit
Case
G.R. No. 218388
Decision Date
Oct 15, 2019
The Supreme Court ruled that the Loan Agreement No. PH-136, an executive agreement under international law, governed payments for NAIA Terminal 2 consultancy services, rendering the NEDA 5% contingency ceiling inapplicable. COA’s disallowance was reversed, and MIAA officials were absolved of personal liability due to lack of bad faith.
loan agreement
exchange of notes
international law

Case Summary (G.R. No. 218388)

Factual Background

MIAA and the ADP-JAC Consortium entered into the Agreement for Consulting Services dated April 15, 1994 for the NAIA Terminal 2 Development Project. The consulting services were initially structured around 795 man-months and were expected to run for a total of 53 months, including post-construction services up to November 30, 1998.

The project experienced delays attributable to prolonged prequalification and bidding, delayed Department of Environment and Natural Resources approvals, contractor site possession, and numerous additional construction works. As a result, the original timeline and man-months were extended, and the total consulting duration increased from 53 months to 69 months, with an increase in man-months to 1,083.81. This extension was formalized through three Supplementary Agreements (SAs) executed by MIAA and the consortium. A further extension was later covered by a fourth SA executed on January 25, 2000, increasing the total duration to 77 months (up to November 30, 2000) and the man-months to 1,221.65.

On November 24, 1999, MIAA’s then Corporate Auditor issued Notice of Disallowance (ND) No. (FMT) 99-00-04 disallowing the remuneration cost for the agreement as excessive because it was 19.80% above COA’s estimated remuneration cost. MIAA requested reconsideration, invoking that the consultancy cost resulted from detailed negotiations and approvals by relevant government and financing entities, including reliance on Section 9.3 of the NEDA Guidelines regarding the ability to negate the contingency ceiling in certain cases involving financing partly or wholly with international financial institutions.

In the course of reconsideration, COA-technical services reversed its earlier position on excessive remuneration cost. However, COA still required validation of contingency-charged payments. After further evaluation and steps taken by MIAA’s corporate audit processes and COA technical services, part of the disallowed amount was lifted and settled.

On November 21, 2008, COA LAO-Corporate issued the assailed decision denying remaining disallowances under the 1999 ND and simultaneously issued ND No. (FMT) 2008-018 for additional disallowances. These actions maintained COA’s theory that, despite claimed low percentage contingency use relative to revised cost figures, the actual payments charged to contingency exceeded the five percent ceiling prescribed under Section 6.10 of the NEDA Guidelines.

COA Proceedings and the Contingency-Ceiling Dispute

MIAA sought reconsideration, and COA denied it. COA’s crucial rulings in sustaining the disallowances rested on two linked propositions. First, COA interpreted Section 9.3 of the NEDA Guidelines as an exemption applicable only to the selection of consultants and not extending to exemption from the five percent (5%) ceiling on contingency. Second, COA emphasized the mandatory language in Section 6.10 using “shall” and concluded that the contingency amount “shall not exceed 5% of the amount of the contract.”

COA further ruled that MIAA’s presentation of contingency usage as only a small fraction of revised cost was not fully factual because MIAA allegedly did not include portions of the costs of SAs 1 to 4 in its computation. COA also relied on the contractual arrangement where MIAA’s remuneration cost and reimbursement cost for the extensions were treated as part of the original cost of services rather than being treated as amounts charged against contingency as allegedly required by the NEDA framework.

COA thus computed that the aggregate amounts charged to contingency exceeded the prescribed ceiling, sustaining the disallowances and ordering additional disallowance beyond the portion previously disallowed.

Petitioner’s Grounds in the Supreme Court

MIAA anchored its Supreme Court petition on alleged grave abuse of discretion amounting to lack or excess of jurisdiction. It argued that COA gravely abused its discretion in sustaining COA LAO-Corporate’s decision and resolution.

The petitioner’s principal submissions were that the consulting services were financed by a loan agreement—Loan Agreement No. PH-136—executed by the Government of the Philippines and OECF under the Japan loan framework initiated by an Exchange of Notes. It invoked Abaya v. Ebdane (G.R. No. 167919, February 14, 2007, 515 SCRA 720) to characterize the loan agreement, executed in conjunction with an exchange of notes, as an executive agreement governed by international law. From that characterization, MIAA argued that the terms of the executive loan framework controlled the determination and charging of contingency-related payments, and that COA could not substitute the NEDA Guidelines’ ceiling in a manner that would negate the parties’ commitments.

MIAA also argued that international financial institutions normally apply a ten percent (10%) contingency, and that COA’s personal liability theory for liable officers was unsupported by articulated reasons demonstrating direct participation and malice or bad faith related to the disallowed transactions. It further asserted that the added works and expenditures were incurred in good faith and for legitimate purposes.

Issues

The essential issues in the petition were whether COA gravely abused its discretion in disallowing and sustaining additional disallowances based on the alleged excess of contingency-charged payments over the five percent ceiling under the NEDA Guidelines, and whether COA’s approach improperly disregarded the governing law and the parties’ intention embodied in the executive loan and related agreements.

The Supreme Court’s Ruling

The Court granted the petition for certiorari. It reversed and set aside COA Decision No. 2012-268 and COA’s Resolution dated January 26, 2015, which had sustained the disallowances in COA CP Case No. 2011-294.

Legal Basis and Reasoning

The Court began by acknowledging the general principle of deference to COA decisions, grounded both on separation of powers and COA’s expertise as guardian of public funds under the 1987 Constitution. It reiterated that courts may intervene only if COA acted without or in excess of jurisdiction, or with grave abuse of discretion.

Upon reviewing the records, the Court held that COA gravely abused its discretion in affirming and issuing the questioned notices of disallowance. The Court’s reasoning proceeded in steps.

First, the Court treated the case as involving six interrelated instruments, including: the Exchange of Notes dated August 16, 1993; the Loan Agreement No. PH-136; the Agreement for Consulting Services dated April 15, 1994; and the Supplemental Agreements Nos. 1 to 3 dated December 1995, June 1998, and September 1999, respectively, together with a later extension agreement noted in the record.

Second, the Court resolved the governing-law question in favor of MIAA. It held that under Abaya v. Ebdane, a loan agreement executed in conjunction with an exchange of notes is an executive agreement governed by international law. The Court found no justification to treat Loan Agreement No. PH-136 differently because the loan agreement’s preamble expressly referenced the August 16, 1993 Exchange of Notes concerning Japanese loans for Philippine economic development and stabilization. The Court therefore concluded that the loan agreement was an adjunct of the exchange of notes and should be treated as an executive agreement.

From this, the Court applied the doctrine of pacta sunt servanda, stating that international law must govern the implementation and construction of the loan agreement’s terms and the government’s obligations thereunder. The Court stressed that pacta sunt servanda is incorporated into the 1987 Constitution, particularly Article II, Section 2, which adopts generally accepted principles of international law as part of the law of the land.

Third, the Court extended the executive-law treatment to the consulting contract and its supplemental agreements. It held that the Agreement for Consulting Services was a mere accessory of the loan agreement and that supplemental agreements were likewise adjunct instruments. The Court relied on Land Bank of the Philippines v. Atlanta Industries, Inc. to explain that where project-based loan terms were incorporated into a related agreement, the accessory contract could not be treated as independent, because the accessory follows the principal.

Fourth, the Court rejected COA’s insistence that NEDA Guidelines applied because the contracting parties did not stipulate that international law would govern the contingency charging scheme. The Court held that no express stipulation was required for international law to apply when the contracts were executed in conjunction with executive agreements under the controlling Abaya line of cases, and that COA could not validly apply domestic NEDA rules to negate the parties’ commitments when the executive agreement framework governed.

Fifth, having decided that international-law principles controlled contractual implementation, the Court addressed whether COA properly disallowed amounts under the supplemental agreements by charging them to contingency and concluding that the five percent ceiling was exceeded. It held that COA’s approach contravened the parties’ intention and was contrary to pacta sunt servanda.

In reviewing the supplemental agreements, the Court noted how each SA revised estimated man-months and total cost of services, using the term “revised.” The Court reasoned that the parties, by entering into the supplemental agreements to modify the estimated man-months and total cost in light of project delays, intended that additional man-months agreed in the supplemental agreements be charged to the total cost of services, not to contingency. It distinguished between man-months and expenditures that exceeded what was finally agreed upon and unforeseen expenditures, which would properly be chargeable to

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