DR. RUFINO O. ESLAO, IN HIS CAPACITY AS PRESIDENT OF PANGASINAN STATE UNIVERSITY, PETITIONER, VS. THE COMMISSION ON AUDIT,RESPONDENT.

Eslao versus Commission on Audit

The Case

This is a petition brought by Dr. Rufino O. Eslao, in his capacity as President of Pangasinan State University, against the Commission on Audit. The University entered into two negotiated construction contracts without public bidding, and the resident auditor disallowed the payments. The Commission on Audit affirmed the disallowance, and the University President came to the Supreme Court. The case matters because it is the leading authority on when the government may be made to pay a contractor on the basis of quantum meruit — the principle that a person should be paid the reasonable value of work done and accepted — even where the contract itself violated mandatory procurement rules.

Procedural History

The resident auditor of Pangasinan State University issued a notice of disallowance covering the payments for both buildings. The Director of the Commission on Audit Regional Office concurred. The University President appealed to the Commission on Audit en banc, which denied the appeal and affirmed the disallowances. His motion for reconsideration was likewise denied. He then filed this petition before the Supreme Court, questioning the Commission's ruling that there was a violation of law and that the disallowances should stand.

Facts

In December 1986, Pangasinan State University, through its President, engaged a consultant to prepare the plans, specifications, and estimates for an extension of its Engineering Building. The cost estimate was one million pesos, matching the estimate of the Department of Public Works and Highways Regional Office. The consultant delivered the finished documents, and the University prepared its submission to the Regional Office. For the completion and renovation of the Ceramics Building, the university engineer prepared agency estimates and a program of work. The detailed plans for both buildings were later approved by the Regional Office in March 1987.

An advice of allotment for one million six hundred thousand pesos covering both projects was released by the Department of Budget and Management on December 29, 1986. Fearing that the money would revert to the general fund if not obligated before the end of the year, and needing classrooms for a growing student population, the University President on that same day entered into two negotiated contracts with one contractor: nine hundred sixty thousand pesos for the Engineering Building and five hundred eighty-two thousand pesos for the Ceramics Building, both below the appropriated amounts. The Board of Regents approved the contracts in February 1987, and the Secretary of Education, Culture and Sports approved them in December 1987.

Copies of the contracts were sent to the Office of the Executive Secretary for the approval of the Office of the President, and the papers appeared to bear the approval of one Atty. Danilo T. Gardaya of the Presidential Legal Staff. Upon verification, no such person existed in that office. The resident auditor then disallowed the payments, totaling one million four hundred sixty-four thousand nine hundred pesos, on the ground that the contracts violated the Implementing Rules of the governing decree on government infrastructure projects, that the approval on the face of the contracts was not genuine, and that the required engineering aspects were lacking. When the University President learned that the signature of the Executive Secretary was not genuine, he promptly advised the contractor to hold the construction in abeyance.

Issues

• Whether or not the negotiated contracts were validly entered into under the exception in the governing decree allowing negotiated contracts where time is of the essence.
• Whether or not the disallowance of the payments by the Commission on Audit was proper.
• Whether or not the contractor may recover on the basis of quantum meruit despite the invalidity of the contracts.

Applicable Provisions

Section 4 of Presidential Decree Number 1594, as quoted in the decision, provides:

Projects may be undertaken by administration or force account or by negotiated contract only in exceptional cases where time is of the essence, or where there is a lack of qualified bidders or contractors, or where there is conclusive evidence that greater economy and efficiency would be achieved through this arrangement, and in accordance with provisions of laws and acts on the matter, subject to the approval of the Ministry of Public Works, Transportation and Communications, the Minister of Public Highways, or the Minister of Energy, as the case may be, if the project cost is less than One Million Pesos and of the President of the Philippines upon the recommendation of the Minister, if the cost is One Million Pesos or more.

This is the very exception the University President invoked to justify dispensing with public bidding.

Section 33 of Presidential Decree Number 1177, the Budget Reform Decree of 1977, provides:

Unexpended balances of appropriations authorized in the General Appropriations Act shall revert to the unappropriated surplus of the General Fund at the end of the fiscal year and shall not thereafter be available for expenditure except by subsequent legislative enactment: provided, that appropriations for capital outlays shall remain valid until fully spent or reverted: provided, further, that continuing appropriations for current operating expenditures may be specifically recommended and approved as such in support of projects whose effective implementation calls for multi-year expenditure commitments; provided, finally, that the President may authorize the use of savings realized by an agency during a given year, to meet non-recurring expenditures in a subsequent year.

This provision defeats the fear of reversion, because appropriations for capital outlays remain valid until fully spent or reverted.

Ruling

On the first issue, the Court held that the situation invoked by the University President does not fall under any of the conditions for a negotiated contract. Even assuming it did, the rules still require a canvass through sealed proposals from at least three qualified contractors, and this was not done. The Court found that the ruling of the Commission was not without cogent basis.

On the second issue, however, the Court noted that the amounts of the projects were less than one million pesos each, so only the approval of the Secretary of Education, Culture and Sports was required under the applicable circular, and that approval was secured. The Board of Regents also approved the contracts, and both contract costs were below the agency estimates. The Court found that the University President acted in good faith, and it expressly so held, emphasizing that when he learned of the irregularity he promptly suspended the work. The spurious documents were secured by the contractor, so bad faith could not be imputed to the petitioner.

On the third issue, the Court ruled that the contractor should be compensated on the basis of quantum meruit. The two projects were ninety-five percent complete and the buildings were already being used by the University. Quoting its earlier ruling in the Royal Trust case, the Court held:

In the interest of substantial justice and equity, the respondent Commission on Audit is directed to determine on a quantum meruit basis the total compensation due to the petitioner for the services rendered by it.

The Court reasoned that to deny payment for buildings almost fully completed and presently occupied by the University would allow the government to unjustly enrich itself at the expense of another. Justice and equity demand compensation on the basis of quantum meruit.

Doctrine

A negotiated contract is allowed only in the exceptional cases fixed by law and its implementing rules, and even then the required canvass of at least three qualified contractors must be observed. Failure to comply renders the contract invalid. Nevertheless, where the work has been completed and accepted and the government has benefited, the contractor may recover the reasonable value of the work on the basis of quantum meruit, lest the government be unjustly enriched. Good faith on the part of the public officer — shown here by prompt suspension of the work upon discovery of the irregularity — shields him from a finding of bad faith.

Disposition

The petition was granted; the decision and resolution of the Commission on Audit were reversed and set aside, and the Commission was directed to determine on a quantum meruit basis the total compensation due the contractor and to allow immediate payment.

Remember This

Memorize this line: an invalid negotiated contract does not bar recovery on quantum meruit where the government accepted the completed work and would otherwise be unjustly enriched. Examiners use this case to test the quantum meruit exception to the prohibition on payment of invalid contracts, and the good faith of the public officer who promptly suspends work upon discovering an irregularity.