G.R. No. 193897 - University of the East vs. Pepanio

Case Summary (G.R. No. 193897)

Petitioner, Respondent, and Procedural Posture

Petitioner (Mayor Tomas R. Osmena) sought relief from COA rulings that (1) a prior COA indorsement had declared void the abattoir contract and (2) the compromise payment and court judgment based on that contract could not be enforced against the City because the underlying contract was void, making the expenditure the personal liability of the officer who incurred it. HFCCI had sued the City for recovery of work value; the City, after COA’s initial voidance, entered a compromise in favor of HFCCI which the trial court approved and which was executed by garnishment. COA later indorsed that the contract and the compromise were void and personal liability attached to the responsible officer, and denied reconsideration, prompting the present petition.

Key Dates and Chronology

April 30, 1985: City Treasurer certified availability of P5,419,180 for the abattoir.
Contract executed for P8,368,920 (sum materially exceeding the certified funds).
March 13, 1986: Project suspended and contract sent to COA for review.
April 24, 1986: HFCCI claimed P2,142,964.29 as value of work done.
September 4, 1986: COA 2nd Indorsement declared the abattoir contract void.
May 21, 1987: HFCCI filed civil action for recovery.
December 15, 1988: City entered a court‑approved compromise paying P1,500,000 to HFCCI.
March 8, 1989: Execution and garnishment effected.
May 2, 1989 & January 23, 1991: COA issued further indorsements upholding voidness and denying reconsideration.

Applicable Law and Legal Standards

Primary constitutional and statutory bases relied upon by the Court: the COA’s constitutional power to examine, audit and settle public accounts (Art. IX, Sec. 2 of the 1987 Constitution); the Government Auditing Code (P.D. No. 1445), specifically Sec. 85 (no contract involving public funds without appropriation), Sec. 86 (requirement of certification by the proper accounting official as to availability of funds), Sec. 87 (contracts entered in violation are void), and Sec. 103 (personal liability of officers responsible for illegal expenditures). Rules on finality of COA decisions and appeal periods (P.D. 1445 and Administrative Code provisions) and civil law principle that compromises based on illegal antecedent claims are invalid (citing Art. 1422 Civil Code conceptually) were also applied.

Factual Foundation: Fund Certification and Contract Terms

The City Treasurer issued a certificate dated April 30, 1985 stating funds of P5,419,180 were available “for the construction of Cebu City Abattoir.” The contract ultimately executed with HFCCI fixed the total contract cost at P8,368,920 and provided for staggered installments, with only an initial installment expressly certified within the certified availability. The actual agreed contract sum thus exceeded the certified available appropriation by a substantial amount.

COA Determination That the Contract Was Void

COA’s 2nd Indorsement (Sept. 4, 1986) declared the abattoir contract void because the contract’s total cost significantly exceeded the funds certified as available and because the statutory safeguards of P.D. 1445 were not observed. The Court accepted COA’s reasoning: Sec. 85 of P.D. 1445 expressly requires an appropriation before entering contracts involving public funds, and Sec. 86 requires certification by the proper accounting officer that funds are available. Contracts contravening these requirements are void under Sec. 87. The Court emphasized the mandatory nature of the provision and the settled principle that fund availability is indispensable to government contractual liability.

Finality of the COA Ruling and Petitioner's Failure to Appeal

The Court noted that neither the petitioner nor HFCCI appealed the COA ruling within the applicable statutory period, so the COA decision became final and executory pursuant to the procedural provisions of P.D. 1445 and the Administrative Code. The petitioner nonetheless later relied on the COA adjudication in the City’s defense in the civil action, invoking that ruling as an affirmative defense; the Court held that a party who has invoked an adjudicative body’s jurisdiction and favorable rulings cannot later repudiate that jurisdiction to escape consequences, and that petitioner could not now assert lack of jurisdiction or gravely abuse discretion as a ground to invalidate the COA judgment.

Compromise Agreement and Trial Court Judgment

Despite COA’s prior declaration of voidness, the City, through Mayor Tomas Osmena, entered into a compromise agreement with HFCCI (approved by the trial court) for P1,500,000 as full settlement of HFCCI’s claim. Execution was had against City funds. COA subsequently reviewed the compromise and found it to be a derivative of the void contract.

COA’s Rationale That the Compromise Was Void and Ensuing Legal Effect

COA held that a compromise based on an antecedent claim that is unlawful or illegal is itself invalid for illegality and lack of consideration. Because the compromise was rooted in a contract that COA had already declared void and which had become final, the compromise could not give rise to a valid obligation of the City. The COA further observed that allowing the compromise to stand would circumvent constitutional and statutory safeguards and the specific remedy of appealing COA decisions to the Supreme Court within the prescribed period.

Supreme Court’s Analysis: Validity of Compromise and Enforceability

The Court agreed with COA that the trial court’s judgment predicated on the compromise could not ratify or validate an obligation that was void ab initio. A court judgment based on a compromise that has as its antecedent an invalid public contract does not convert an illegal obligation into a valid one insofar as public funds and municipal liability are concerned. Consequentl

Case Syllabus (G.R. No. 193897)

Procedural Posture and Decision

Supreme Court Second Division, G.R. No. 98355, March 2, 1994; decision penned by Justice Nocon.
Petition for relief filed by Hon. Tomas R. Osmena (petitioner) assailing Commission on Audit (COA) indorsements that declared void the City of Cebu's abattoir contract and ruled that the subsequent court-approved compromise was invalid and that the expenditure should be charged personally to the responsible officer.
Petition dismissed for lack of merit. Judgment: petition denied; the compromise and the payment based thereon are void and the amount is a personal liability of the officer who entered into the void contract. Narvasa, C.J., Padilla, Regalado, and Puno, JJ., concur.

Statement of Facts

In 1985, the City of Cebu decided to construct a modern abattoir.
City Treasurer Ricardo Pestano issued a certificate of availability of funds dated April 30, 1985 in the amount of P5,419,180.00 expressly "for the construction of Cebu City Abbatoir (sic)." (Annex "A" of the Complaint).
After public bidding, H. Franco Construction Company, Inc. (HFCCI) was awarded the contract for construction.
The contract signed by the City of Cebu through Mayor Ronald R. Duterte and HFCCI provided, inter alia:
- Contract cost: P8,368,920.00.
- City Treasurer certified availability of funds for the first installment in the amount of P2,092,230.00, payable upon certification of substantial completion by the City Engineer and concurrence of the Project Management Staff.
- City of Cebu would include in the 1986 budget the amount of P6,276,690.00 representing the second, third and final installment payments due to the contractor. (Annex "B" of the Complaint).
March 13, 1986: Sen. John H. Osmena, then Officer-in-Charge of the City of Cebu, ordered suspension of the project and review of the contract by COA and wrote HFCCI asking them to account for progress value.
April 24, 1986: HFCCI claimed P2,142,964.29 as the value of work accomplished.
HFCCI, unable to collect, filed a civil action dated May 21, 1987 against the City of Cebu for recovery of investment and damages (H. Franco Construction Company, Inc. v. City of Cebu, Civil Case No. CEB-5966).
In its answer dated June 5, 1987 the City admitted entering into the contract but alleged the contract was null and void as declared by COA in its 2nd Indorsement dated September 4, 1986; any amount due was pleaded to be the personal liability of the officer(s) who entered into the contract.

Subsequent Settlement and Execution

December 15, 1988: City of Cebu, through Mayor Tomas R. Osmena, entered into a compromise agreement approved by the trial court whereby, as full and final settlement, the City would pay HFCCI P1,500,000.00.
On March 3, 1989 the court issued an order; on March 8, 1989 the Provincial Deputy Sheriff, RTC Branch 5, Cebu City, was ordered to serve a writ of execution against the City of Cebu through Mayor Tomas R. Osmena.
Pursuant to the writ, P1,500,000.00 and P15,052.00 as lawful fees were garnished from the City's funds deposited in the Philippine National Bank (Original Record, pp. 177, 181-185).

COA Review and Indorsements

The trial court's judgment based on the compromise agreement was referred to COA's Regional Director who indorsed it to the Chairman of COA.
COA's 3rd Indorsement dated May 2, 1989 ruled:
- The abattoir contract had been declared void in COA's 2nd Indorsement dated September 4, 1986 and, since no appeal had been taken, that decision became final.
- A compromise based upon an antecedent claim that is "undisputedly and undoubtedly illegal" may be considered invalid on grounds of illegality as well as lack of consideration (citing Sec. 29, 15 Am. Jur 2d).
- The compromise entered into after COA had declared the contract void was a circumvention of the constitutional provision allowing an aggrieved party to appeal within 30 days to the Supreme Court (citing Sec. 2-2, Art. XII-D, 1973 Constitution; Sec. 7, Art. IX-A, 1987 Constitution).
- Under the circumstances, COA concurred with the view that the expenditure would be the personal liability of the officer directly responsible for its incurrence (citing Sec. 103, P.D. No. 1445).
Petitioner's request for reconsideration was denied in COA's 5th Indorsement dated January 23, 1991.

Petitioner’s Principal Contentions

The 2nd Indorsement dated September 4, 1986 of COA is null and void because it was made without, in excess of, or with grave abuse of jurisdiction.
COA’s decision never became final because it was made without, in excess of, or with grave abuse of discretion.
COA lacked authority to declare a contract already executed and fulfilled void; since the contract had been executed/performed, COA could not invalidate it; consequently, the 2nd Indorsement is a nullity and did not attain finality.

COA and Solicitor General’s Position (as quoted in the record)

COA’s authority: it has power, authority and duty to examine, audit and settle all