G.R. No. 261207 - Topbest Printing Corporation vs. Sofia C. Gemora, et al.

Case Summary (G.R. No. 261207)

Factual Background: NPO’s Award to Topbest and the Equipment Lease Arrangement

On May 23, 2016, the NPO awarded Topbest a contract for the lease of Lot 2, described as one unit of 4 Stations Web/Continuous Form Machine with Collator, with a contract price of PHP 49,500,000.00. After the award, the NPO and Topbest entered into an Equipment Lease Agreement (ELA) on June 28, 2016 for the lease of one unit of the same equipment. The ELA contemplated that the leased machines would remain in “tip top running conditions” and would be manned or operated by NPO operators assigned at the lessor’s premises. It also specified a rental fee of PHP 49,500,000.00 and provided, in substance, that the lessee would pay after completion of job orders or work orders “on running basis,” with the rental fee to be computed on the value of output from the machine on running basis only. The ELA placed maintenance and repair expenses on the lessor.

In July 2017, the NPO issued an Invitation to Apply for Eligibility and to Submit Proposal for a joint venture in the Augmentation of Printing Capacity Phase I. Topbest submitted a proposal and received a Notice of Award dated September 13, 2017 for Lot 2 of the project. The NPO and Topbest were expected to execute a joint venture; however, Topbest admitted that the NPO used the same terms and conditions as in the earlier ELA, except that payments were implemented through what was shown in work orders as a “per-usage basis.”

Audit Observation and the Issuance of the Notice of Disallowance

On October 16, 2017, the NPO-Audit Team issued Audit Observation Memorandum No. 2017-001 (AOM) concerning printing operations. It alleged, among others, that subcontracting of printing of accountable forms in the guise of ELAs with private printers resulted in payments amounting to PHP 3.71 billion within the period August 9, 2011 to August 13, 2017, contrary to the GPPB guidelines.

The NPO responded that it could enter into joint venture agreements with private printers, asserting that it was a government instrumentality with corporate powers. The audit position matured into Notice of Disallowance dated January 22, 2019. The Notice of Disallowance disallowed transactions between the NPO and twelve private printers, including Topbest, for the period April to December 2017, in the total amount of PHP 499,376,515.60. It explained that the transactions were disallowed because the payments made to private printers under the alleged subcontracting were irregular and violated Section 4.6 of GPPB Resolution No. 05-2010, which states that the recognized government printer engaged by the procuring entity shall directly undertake the printing services and “cannot engage, subcontract, or assign any private printer to undertake the performance of the printing service.” It also stated that Topbest, as payee, was liable for the rental fee it received.

Topbest received the Notice of Disallowance on February 8, 2019. Under COA’s rules then in force, it had six months from receipt to file an appeal memorandum to Director Gemora.

Administrative Appeal and COA-NGAS Decision

On August 6, 2019, Topbest filed its Appeal Memorandum dated August 5, 2019 with Director Gemora. Topbest argued that it was denied due process because the Notice of Disallowance did not provide evidence supporting the audit findings. It further asserted that the Notice of Disallowance did not adequately establish a subcontracting agreement between Topbest and the NPO. Topbest maintained that its contractual arrangement was a valid lease contract, comparable to a bareboat or demise charter.

Director Gemora denied the appeal in COA-NGAS Decision. The COA-NGAS Decision emphasized that in administrative proceedings, due process does not require a trial-type hearing; it is enough that the party is notified of the charges and given an opportunity to defend. It found that Topbest was notified of the charges “as evidenced by its own allegation in its appeal.” It also found that before the Notice of Disallowance was issued, the Audit Team gathered evidence through voluminous transactions, records, and receipts, which originated from Topbest and the NPO.

As to the nature of the agreement, the COA-NGAS Decision affirmed the Notice of Disallowance’s characterization of the ELA as a subcontracting arrangement. It treated the ELA’s “output-based” rental fee language as inconsistent with the actual payment scheme observed by the parties. The COA-NGAS Decision found that payments were not merely computed on the value of output on running basis only. Instead, payment reflected a division of eighty five percent (85%) and fifteen percent (15%) between the private printers and the NPO. It relied on an identified Technical Evaluation Report dated May 11, 2012, which explained that the 15% represented the NPO’s profit and that the 85% did not represent rent alone but also included materials, maintenance, power, operators, and other production costs. On this basis, the COA-NGAS Decision concluded that the NPO effectively farmed out its job orders or work orders to private printers, and that the arrangement was a prohibited subcontracting of printing services.

The COA-NGAS Decision held Topbest liable as an active party. The dispositive portion denied Topbest’s appeal and affirmed the liability of PHP 6,039,057.54, based on the disallowed rental fees paid to Topbest for April to December 2017.

Choice of Remedy and Filing of the Petition Before the Supreme Court

The COA-NGAS Decision was received by Topbest on May 24, 2022. Instead of filing an appeal to the COA Commission Proper pursuant to Rule VII, Section 3 of the COA Rules of Procedure, Topbest filed a petition for certiorari before the Supreme Court on June 23, 2022.

Topbest argued that it had only until May 25, 2022, the day following its receipt, to file an appeal to the COA Commission Proper, because Rule VII, Section 3 ties the appeal period to the “time remaining” of the six-month period under Rule V. It asserted that the “plain, speedy, and adequate remedy” had become unavailable, and thus resort to Rule 64 in relation to Rule 65 was proper. Substantively, it reiterated that both the Notice of Disallowance and the COA-NGAS Decision were issued with grave abuse of discretion: it maintained that the Notice of Disallowance tendered no evidence and that the COA-NGAS Decision similarly failed to identify the evidence relied upon. It also disputed the conclusion that the ELA was subcontracting, invoking Article 1654 of the Civil Code on the lessor’s obligation to make necessary repairs and asserting that inclusion of maintenance and operating costs did not convert a lease into subcontracting. It further claimed lack of awareness of any violation committed by the NPO.

The Office of the Solicitor General (OSG), for the respondents, countered that Topbest failed to exhaust administrative remedies. It emphasized that Topbest should have appealed to the COA Commission Proper. While Topbest acknowledged that it still had one day to file the appeal, the respondents argued that it actually had two days and that Topbest caused its own predicament by filing its Appeal Memorandum too close to the end of the six-month period. The respondents also argued that certiorari under Rule 64/Rule 65 requires absence of appeal or any plain, speedy, and adequate remedy in the ordinary course, which was not the case. They further insisted that the COA’s findings were grounded in evidence and did not show the capricious, arbitrary, and despotic character required to establish grave abuse of discretion.

Issues Presented

The Court identified two core issues: first, whether Topbest availed of the correct remedy by filing a petition for certiorari instead of an appeal before the COA Commission Proper; and second, whether the respondents acted with grave abuse of discretion amounting to lack or excess of jurisdiction in issuing the COA-NGAS Decision and the Notice of Disallowance.

Ruling of the Court: Dismissal of the Petition and Affirmance of COA

The Court held that Topbest should have appealed to the COA Commission Proper and dismissed the Petition for certiorari for failure to satisfy the conditions for Rule 64 in relation to Rule 65. It also ruled that Topbest failed to establish grave abuse of discretion, and that the COA rulings were properly sustained and, by lapse of time and improper remedy, had attained finality.

Legal Basis and Reasoning: Correct Remedy and Administrative Exhaustion

The Court anchored its disposition on the COA’s internal remedial scheme. It explained that contesting notices of disallowance is governed by Rules IV, V, and VII of the COA Rules of Procedure. It cited the rule that a COA auditor’s decision becomes final upon expiration of six months from receipt unless an appeal is taken. It also noted that the appeal to the Director must be filed by filing an Appeal Memorandum within six months from receipt of the decision, and that the Director’s receipt of the Appeal Memorandum interrupts the running of the appeal period.

Applying these rules, the Court found it undisputed that Topbest received the Notice of Disallowance on February 8, 2019. It thus had until August 8, 2019 to file its Appeal Memorandum to the Director. Topbest filed only on August 6, 2019, leaving it with two days after the Director’s adverse decision to file an appeal to the COA Commission Proper. The Court held that Topbest admitted in the Petition and Reply that the six-month period had not yet lapsed at receipt of the COA-NGAS Decision, although it claimed that it only had one day. The Court rejected this claim by emphasizing that the period was based on the rules governing tolling and the “time remaining” provision.

The Court further ruled that Topbest’s justification that filing an appeal would be impossible did not excuse compliance with the rules. It stressed that the difficulties Topbest encountered were the consequence of its own choice to file th

Case Syllabus (G.R. No. 261207)

Topbest Printing Corporation (Topbest) filed a Petition for Certiorari under Rule 64 in relation to Rule 65 assailing COA Decision No. 2022-014 and Notice of Disallowance No. 19-001-207542-17 issued by the Commission on Audit (COA) National Government Audit Sector (NGAS) Cluster 1.
Sofia C. Gemora, as Director IV of the COA, and the other COA audit officials responsible for the issuance of the assailed issuances were sued in their capacity as respondents.
The COA issuances involved the disallowance of payments made by the National Printing Office (NPO) to private printers, including Topbest, for the period April to December 2017.

Contracting Background and Arrangement

On May 23, 2016, the NPO awarded Topbest a contract for the lease of Lot 2 consisting of one (1) unit-4 Stations Web/Continuous Form Machine with Collator with a contract price of PHP 49,500,000.00.
On June 28, 2016, the NPO and Topbest executed an Equipment Lease Agreement (ELA) for the machine described in the award.
The ELA required that the leased machines remain in tip top running conditions and be manned/operated by NPO operators assigned at the lessor’s premises.
The ELA set the rental fee for a one-year rental and stated that the rental fee shall be computed based on the value of the output from the machines on a running basis.
The ELA also placed maintenance, repair, and care expenses for the account of the lessor (Topbest) and required the lessor to ensure the machines remain fit for the contemplated purposes.

Joint Venture Bid and Notice of Award

On July 10, 2017, the NPO issued an Invitation to Apply for Eligibility and to Submit Proposal for a Joint Venture Undertaking for the project described as Printing Capacity Augmentation Phase I.
The invitation contemplated a joint provision of property, plant and equipment, including consumables and services for printing specialized/customized forms for existing NPO clients.
The bid materials allocated capital outlay and operating expense (except for certain costs) to the selected JV partner/s and contemplated that the revenue sharing arrangement would be set forth in subsequent instruction to private sector participants.
Topbest submitted its proposal and received a Notice of Award stating that Topbest was awarded Lot 2 of the printing capacity augmentation project phase I.
Topbest admitted that while a joint venture was supposed to be executed, the NPO used the same terms and conditions of the ELA, except that payment for the leased equipment was paid on a “per-usage basis” as shown in the work orders.

COA Audit Findings and Notice of Disallowance

In an audit observation memorandum dated October 16, 2017, the COA audit team flagged the arrangement as involving subcontracting of printing of accountable forms in the guise of an ELA.
The audit observation cited violation of Government Procurement Policy Board (GPPB) Resolution No. 05-2010 dated October 29, 2010.
The Notice of Disallowance dated January 22, 2019 disallowed transactions between the NPO and twelve (12) private printers, including Topbest, for April to December 2017, totaling PHP 499,376,515.60.
The Notice of Disallowance stated that the payments to private printers were irregular for violating Section 4.6 of GPPB Resolution No. 05-2010, which prohibited government printers from subcontracting or assigning private printers to perform printing services.
The Notice of Disallowance treated Topbest as liable as payee for the rental fee it received.
Topbest received the Notice of Disallowance on February 8, 2019.

Administrative Appeal to the COA

Under the COA 2009 Revised Rules of Procedure, Topbest had six (6) months from receipt of the Notice of Disallowance to file an appeal memorandum before Director Gemora.
Topbest filed its Appeal Memorandum on August 6, 2019, dated August 5, 2019.
In its appeal, Topbest alleged denial of due process because the Notice of Disallowance supposedly lacked evidence.
Topbest also challenged the characterization of the arrangement as subcontracting, insisting it was a lease contract akin to a bareboat or demise charter.
Director Gemora denied the appeal, holding that due process in administrative proceedings required notice of charges and an opportunity to defend, not a trial-type hearing.
Director Gemora found that the audit team had gathered evidence consisting of voluminous transactions, records, and receipts, sourced from the appellant and the NPO themselves.

COA-NGAS Decision’s Interpretation of the Arrangement

The COA-NGAS Decision affirmed the Notice of Disallowance’s finding that the arrangement was subcontracting.
The COA-NGAS Decision reasoned that although the ELA stated rentals would be computed on output value, the actual payment scheme was not merely rental but also included labor, raw materials, and revenue costs.
The Decision explained that payments followed an 85% and 15% division between the private printers and the NPO, respectively, of the total cost of the job orders/work orders.
The Decision referenced a Technical Evaluation Report dated May 11, 2012 to explain that the 15% represented the NPO’s profit and that the 85% covered not only rental but also materials, maintenance, power, operators, and related costs.
The COA-NGAS Decision concluded that the NPO farmed out its contracts to private printers such as Topbest at 85% of the job order/work order value, effectively subcontracting printing services in contravention of GPPB Resolution No. 05-2010.
The Decision further concluded that the NPO accepted contracts from its clients and then allowed private entities to perform obligations in exchange for 85% of the contract price, with the NPO retaining 15% as profit.
The dispositive portion denied Topbest’s appeal, affirmed Topbest’s liability for PHP 6,039,057.54, and upheld the Notice of Disallowance’s rental disallowance.

Procedural Misstep on Judicial Review

The COA-NGAS Decision was received by Topbest on May 24, 2022.
Instead of filing an appeal to the COA Commission Proper under Rule VII, Section 3 of the COA Rules of Procedure, Topbest filed a Rule 64 in relation to Rule 65 petition before the Court on June 23, 2022.
Topbest argued that its time to appeal before the COA Commission Proper was only one day and that thus there was “no longer any appeal, or any plain, speedy, and adequate remedy,” justifying certiorari.
The Court held that the proper remedy remained an appeal and that procedural deadlines were part of the COA’s specialized redress system.
The Court also held that Topbest failed to satisfy the threshold for a Rule 64 petition because an appeal to the COA Commission Proper was still a plain, speedy, and adequate remedy.

Exhaustion of Administrative Remedies

The Court applied the doctrine of exhaustion of administrative remedies as a cornerstone of the judicial system.
The Court explained that exhaustion allows administrative agencies, particularly the COA, to perform sp