D.M. CONSUNJI, INCORPORATED, PETITIONER, VS. THE COMMISSION ON AUDIT, RESPONDENT.

This petition seeks to set aside the decision of the Commission on
Audit which denied the appeal of the petitioner from the Notice of Audit
Disallowance No. FA-001 issued by the Corporate Auditor of the Metropolitan
Waterworks and Sewerage System (MWSS) in connection with the petitioner’s
Contract for Pump Lift Station and Rehabilitation:  Tondo Pump Station
(Contract No. PS-1) with the MWSS.  The Corporate Auditor ruled that the
petitioner had received a price escalation overpayment in the amount of P3,900,605.45 and demanded reimbursement from the petitioner.

In March 1981, the MWSS advertised in metropolitan newspapers on
several dates an invitation for the public bidding of the contract known as
“Contract for Pump/Lift Stations and Rehabilitation:  Tondo Pump
Station” or “Contract No. PS-1.” The
project was partly financed through a loan from the Asian Development Bank.

On May 27, 1981,
the international competitive bidding for the contract was held.  The bidders were A.L. Sarmiento,
Erectors, Inc., and petitioner D.M. Consunji,
Inc.  The bids were evaluated in accordance
with the Implementing Rules and Regulations of Presidential Decree No.
1594.  The lowest bid was submitted by
A.L. Sarmiento. 
After some clarifications on the bid price; however, MWSS found that
A.L. Sarmiento had not complied with the conditions
of the call for bid and was not entitled to the award of the contract.

The contract was then awarded to Erectors, Inc., the second
lowest bidder.  The contract was
finalized and submitted to the Office of the President for approval.  However, while the contract was awaiting
Presidential approval, Erectors, Inc. withdrew therefrom.

In a letter dated August
9, 1982, Oscar I. Ilustre, the then
General Manager of the MWSS offered the contract to the petitioner, to wit:

“9 August 1982

D.M. CONSUNJI, INC,

1881 Pres. Quirino
Ave.
Ext.

Pandacan, Metro Manila

SUBJECT:  Contract No. PS-1

Tondo Sewage Pump Station Construction

Sirs:

This refers to the
bidding on subject contract held on 27
May 1981 wherein you are one of the bidders.  We have been unsuccessful in entering into
contract with bidders which submitted lower bids.  Pursuant to P.D. 1594, we are, therefore,
inquiring if you can perform the works called for in subject contract at a base
contract amount of P68,394,000.  If not, then the project will be rebid.

In your response,
please consider four items relative to the contract price.  First, the two prime cost items (11-5 and
I-1a) shall be converted to regular pay items at prices determined by you;
second, escalation provisions of the contract documents shall remain in effect
from the date of bidding and to be applied to the base contract amount; third,
Annex No. 1 revising the contract documents, shall be incorporated in subject
contract; and fourth, qualified commitment procedures of the Asian Development
Bank for financing imported materials and equipment shall be availed of.

We request that you
review the subject contract based on the above and categorically state whether
or not you are in position to accept contract for the base amount
specified.  If we do not hear from you positively within fourteen (14) days from
receipt of this letter, we will proceed to rebid the
contract.” (Rollo, p. 56; Annex “E”)

The petitioner accepted the MWSS offer subject to certain
modifications which MWSS accepted.

On October 1, 1982,
the MWSS Board of Trustees adopted Resolution No. 132-82 awarding the contract
to the petitioner, the pertinent portion of which reads:

“RESOLVED, that the award of a negotiated contract to D.M.
CONSUNJI for the construction of Contract No. PS-1, is hereby approved in the
amount of P71,943,000.00 only in lieu of P73,945,000.00
as originally recommended, it being understood that the original contract time
shall remain at 912 calendar
days from date of issuance of Notice to Proceed, but without prejudice however
to the application of the bonus provision for early completion, as provided for
in P.D. 1594; as amended and provided that there is no contract time suspension
or extension during the effectivity of the
contract.” (Rollo, p. 57; Annex “F”)

On October 5, 1982,
MWSS and the petitioner entered into a letter-agreement (Annex “G”,
Petition) awarding the contract to the latter.

On December 14, 1982,
the parties executed the Contract for Pump/Lift Stations Rehabilitation:  Tondo Pump Station
(Contract No. PS-1).  On the same date the contract was submitted
for Presidential approval.

On April 3, 1983,
after Presidential approval of the contract, the petitioner commenced work on
the project.

On August 26, 1985,
37 days ahead of October 2, 1985,
the contract expiry date, the petitioner completed the project.  MWSS fielded its personnel as of September 7, 1985 to assist in the
operation of the station, took over the power costs and has since then been
using the said facility.

As a result of the early completion of the project, the
petitioner claimed from MWSS an “incentive bonus” pursuant to Article
V (Completion Time:  Liquidated Damages
[Incentive Bonus]) of Contract No. PS-1 which was paid by the
MWSS.

Pursuant to the escalation clause of the contract, the MWSS also
paid the petitioner a price escalation of P24,883,439.71.

Upon review of the payments of the price escalation, however, the
Corporate Auditor of MWSS, State Auditor IV Lucite C. Sanchez, disallowed the
amount of P3,900,605.45 representing alleged
overpayment.  Thus, in her March 7, 1988 Notice of Audit
Disallowance No. FA-001 (Annex C, Petition), Sanchez informed Administrator
Luis Sison of the disallowance based on the following
findings:

“As based on the attached computations prepared by the
undersigned, it appeared that the allowable escalation as of August, 1985 for
work accomplished by the contractor is only P20,982,834.25
and not P24,883,439.71 which was paid to the contractor.

The discrepancy between the price escalation
computed is fundamentally in the reckoning date for the Allowable Escalation
Rate.  Reckoning date for price
escalation should be October 1, 1982
as stated in the contract and not May, 1981 which was used in the computation
of price escalation that was paid to
the contractor.  Letter of the then
General Manager of MWSS to the former
President of the Philippines
also shows that the original contract amount of P71,943,000.00 already includes
escalation from the date of bidding to September 30, 1982 and therefore
escalation shall begin at October 1, 1982.

In view hereof, the
contractor is overpaid by P3,900,605.45.  Attached are all the computations prepared by
the undersigned.” (Rollo, p. 37; Annex
“C”)

MWSS then advised the petitioner of the Notice of Audit
Disallowance and demanded reimbursement of the P3,900,605.45
alleged overpayment.

The petitioner, however, in its reply-letter opined that there
was no escalation overpayment on the ground that:

x x
x              x
x x                 x x x

“x x
x Since the escalation from date of bidding on 27 May
1981 to 30 September 1982 has already been included in the contract amount, the
additional price escalation for the duration of the contract should be reckoned
from October 1, 1982.  However, the
Allowable Escalation Rate (AER) should be reckoned from the month of bidding,
which is May 1981 as provided for in the COA Circular 267 as amended.

Using May 1981 as the
reckoning date for computing the AER, the price escalation paid to the
contractor are within the allowable limits as shown in
Annex B.” (Rollo; p. 66; Annex
“K”)

The MWSS Corporate Auditor insisted that there was overpayment of price
escalation.  Hence, the MWSS reiterated
its demand upon the petitioner for reimbursement of the amount of P3,900,605.45.

On October 12, 1988,
the petitioner filed an appeal with the Commission on Audit (COA) reiterating
its stand that it had not been overpaid. 
The petitioner stated that:

“1.  The ‘AER’ should be
reckoned from May 1981, the bidding date because the contract is a bidded contract and not a negotiated contract.

2.   The ‘actual price, escalation’ itself should
be and was in fact reckoned from October 1982 because the escalation from May
1981 to September 1982 was incorporated in the base contract price.

3.   By using May 1981 as the reckoning date for
the AER, the actual price escalation paid falls within the 30% limit and there
is no need for Presidential approval.” (Rollo,
p. 12)

On August 18, 1989,
the COA issued a decision dismissing the petitioner’s appeal on the ground that
Contract No:  PS-1 is not a bidded contract but a negotiated contract.  The COA stated:

x x
x              x
x x                 x x x

“Upon a thorough evaluation of these papers, it appears clear
that MWSS had to secure authority from the Presidential Executive Committee to
negotiate with your company before approving the award thereto of
subject ‘negotiated contract’ pursuant to Resolution No. 132-82 adopted by the
MWSS Board of Trustees on October 1, 1982. 
Markworthy also is the fact that your firm was
actually the highest bidder,
and that the other two lowest bidders (A.L. Sarmiento
and Erectors, Inc.) failed to get the award. 
In the face of these actualities, this Commission cannot now surmise how
subject contract with your firm can be considered as the result of a public
bidding.  Besides, it is significant to
note that the contract price finally agreed upon after negotiation is not the bid
price offered by your firm, thereby indubitably demonstrating that subject
contract is not a bidded one.

Upon motion for reconsideration filed by the petitioner, COA issued
another decision dated July 24, 1990
dismissing the motion.

Hence, this petition.

The pivotal issue raised in the petition centers on whether
Contract No. PS-1 is a bidded contract or a
negotiated contract.  A corollary issue
is whether or not the petitioner was overpaid in the amount of P3,900,605.45 representing price escalation of the contract.

In the earlier case of Danville Maritime, Inc.
v. Commission on Audit (175 SCRA 701, 710 [1989]) we defined the role of COA in this wise:

x x
x              x
x x                 x x x

“x x x No
less than the Constitution has ordained that the COA shall have exclusive
authority to define the scope of its audit and examination, establish the
techniques and methods required therefore, and promulgate accounting and
auditing rules and regulations, including those for the prevention and
disallowance of irregular, unnecessary, excessive, extravagant, or
unconscionable expenditures, or use of government funds and properties.  (Art. IX, D. Sec. 2(2), 1987 Constitution of
the Philippines)

This constitutional mandate, however, does not confer absolute
discretion because the COA’s auditing procedures must
be within legal constraints.  In the instant case, there is no dispute that, Contract No.
PS-1 is governed by Presidential Decree No. 1594 which prescribes policies,
guidelines, rules and regulations for government infrastructure contracts.  Pursuant to Section 12 of P.D. 1594, the “Implementing Rules and Regulations
for Government Infrastructure Projects in Pursuance of P.D. 1594” were
promulgated in 1982.

Section 4 of P.D. 1594 states:

“Bidding. – Construction
projects shall generally be undertaken by contract after competitive public
bidding.  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 lack of qualified bidders or contractors, or where there is a
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 Ministry of Public Highways, or the
Minister of Energy, as the case may be, if the project cost is less than P1
Million, and, of the President of the Philippines, upon the recommendation of
the Minister, if the project cost is P1 Million or more.”

x x
x              x
x x                 x x x

The implementing rules provide:

“IB 2.5 AWARDING OF CONTRACT

IB 2.5.1 BY BID CONTRACT

1.  The lowest bid/tender should be accepted if
it has complied with all conditions in the call for bids/tenders.  Except as otherwise
provided by international agreements or commitments, no award of contract shall
be made to a bidder whose bid price is higher than the allowable government
estimate, (AGE).  The AGE is the
average of the AAE and the average of all responsive bids/tenders.  Neither shall any award be made to a bidder
whose bid price is less than seventy percent (70%) of the AGE.

x x
x              x
x x                 x x x

3.  In the event of refusal, inability or failure
of the lowest bidder/tenderer to make good his bid/tender by entering into
contract and to post his performance bond/security within the time provided therefor, the second lowest bidder/tenderer
shall be considered provided that his bid/tender is lower than the sum of the
price of lowest bidder/tenderer plus the amount of
the forfeited bid/tender bond or he reduces his bid/tender to this sum.  This
rule shall likewise apply to the third lowest complying bidder in case the
second lowest complying bidder shall refuse.

5.  If the bidders/tenderers are not willing to
reduce their bids/tenders described above, the
project may be advertised anew for bidding, however,
only one rebidding, based on the same set of conditions, may be allowed.  If after rebidding,
no bid/tender still comes within the bid/tender acceptable to the Government
the project may be recommended to the Head of office/agency/corporation
concerned for prosecution by administration or by negotiated contract in
accordance with existing laws, rules and regulations.  The Head of office/agency/corporation shall
endorse the same to the Minister for approval.” (Emphasis supplied)

Parenthetically, P.D.
1594 and its implementing rules are clear to the effect that infrastructure projects
are awarded in the order of priority as follows:  First, by public bidding and second by a
negotiated contract.  However, resort to
negotiated contract is only after a failure of public bidding.  Furthermore, the implementing rules are clear
as to when there is a failure of public bidding after which a negotiated contract may be availed
of.  Thus, if no bid is acceptable in
accordance with the implementing rules during the first bidding, the project
should again be advertised for a second
bidding and in the event the second bidding fails anew, a negotiated contract
may be undertaken.

It follows from the law and the rules that the subject Contract
PS-1 No. 1 was a bidded contract.  The petitioner was one of the three bidders
in the initial bidding of the Contract for Pump/Lift Station and
Rehabilitation:  Tondo
Pump Station.  Although the petitioner was the highest
bidder, it got the contract
after the lowest bidder A.L. Sarmiento was
disqualified and the second lowest bidder Erectors, Inc. withdrew its contract
before it could be approved by the President. 
A suggestion from the Solicitor General that there was failure of the
first public bidding when the second lowest bidder withdrew its contract paving
the way for an award of a negotiated contract to the petitioner is without basis.

The then General Manager of MWSS
in its August 9, 1982 letter offering the contract to the petitioner
clearly indicates that such offer was in line with the public bidding.  Thus, the letter states:

“This refers to the bidding on subject contract held on 27 May 1981 wherein you are one of
the bidders.  We have been unsuccessful
in entering into contract with bidders which submitted lower bids.  Pursuant to P.D. 1594, we are, therefore,
inquiring if you can perform the works called for in subject contract at a base
contract amount of P68,394,000.  If not, then the project will be rebid.”
(Rollo, p. 56; Annex “E”; Emphasis
supplied)

x x
x              x
x x                 x x x

The negotiations on details that followed between the petitioner
and MWSS do not necessarily categorize the contract a negotiated one.  Section 3 of IB 2.5 under IB 2.5 quoted
earlier authorizes negotiations with the higher bidder when the lower bids turn
out to be unacceptable to the government.

The rules as regards awarding of contracts were adopted by the
COA in its Circular No. 86-264 which prescribes the general guidelines for the
divestment or disposal of assets of government-owned and/or controlled
corporations, and their subsidiaries, to wit:

4.1.4.

x x
x              x
x x                 x x x

b.  If
the first bidding fails, readvertise and conduct a
second bidding.

c.  If
the second bidding fails, a negotiated sale may be resorted to subject to the
approval of the Commission on Audit.”

In interpreting this procedure, we stated in the case of Danville
Maritime, Inc. v. Commission on Audit, supra:

“Under COA Circular No. 86-264 hereinabove reproduced, it is
provided that if the first bidding fails, a second bidding must be conducted
after advertising same.  It is only when
the second bidding fails that a negotiated sale may be undertaken.  x x
x.”

So we rule also applying the implementing rules of P.D. 1594 that
in the awards of infrastructure projects, a negotiated contract ensues only
after a failure of the first and second biddings and after properly advertising
the second bidding.

In the instant case, there is no evidence to show that a second
bidding was considered and advertised. 
In fact, no second bidding was conducted.  Accordingly, Contract No. PS-1 cannot be
treated as a negotiated contract.

Moreover, the MWSS itself acknowledged that Contract No. PS-1 is
a bidded contract. 
Thus, in a letter dated May 2,
1990 from MWSS Administrator
Luis V. Z. Sison addressed to Mr. Isidro A. Consunji, Executive Vice-President of the petitioner, Sison stated that “As far as this office is concerned,
and based on MWSS records, our interpretation of Contract No. PS-1 is that it
is a bidded contract.” (Annex “A”,
Reply)

As
regards the issue of price escalation, Article V of Contract No. PS-1 states:

“ESCALATION
CLAUSE

6.01 It is expressly
agreed by both parties that the provisions and guidelines for computation and
payment of price escalation on infrastructure contracts of the Implementing
Rules and Regulations of P.D. 1594, as amended and approved in 17 June 1982
shall be used as the basis for
computation of price escalation reckoned from 1 October 1982.” (Rollo, p. 48)

Considering our finding that Contract No.
PS-1 is a bidded contract, reckoning the date for
price escalation from October 1, 1982 as provided for in the contract at its face value and as interpreted by COA,
instead of May 27, 1981 which was the date of bidding would conflict with the
reckoning date for price escalation in government contracts as provided for
under the implementing rules and
regulations of P.D. 1594, as amended and COA Circular No. 267, to wit:

xxx                xxx                   xxx

“5.  Price escalation
shall be reckoned from the month of bidding of he project and shall be allowed
for every progress billing but not oftener than once every month.  When the contract has not been subject of
competitive bidding, price escalation shall be reckoned from the month agreed
upon in the contract and shall be granted for every progress billing but not
oftener than once a month.  In all cases,
price escalation shall apply only to the work done within the period for which
the price escalation was determined. 
(Item CI 11, IIR/PD 1594)

xxx                xxx                   xxx

A.  Computation for the
Escalation

The computation for the
escalation itself shall be reckoned from the date of bidding, for bidded contracts, or
the date agreed upon in the contract, for negotiated contracts.” (COA
Circular No. 267)

In effect, COA’s interpretation of the
provision in the contract would contravene the well-entrenched rule that
existing laws form part of a contract:

“Petitioner’s point is that if the Margin Law were applied, it
‘would have paid much more to have the continuing the benefit of reinsurance of
its risks than it has been required to do so by the reinsurance treaty in
question’ and that ‘the theoretical equality between the contracting parties x x x would be disturbed and one of
them placed at a distinct disadvantage in relation to the other.’

This pose at once loses potency on the face of the rule recognized
that existing laws form part of the contract ‘as the measure of the obligation
to perform them by the one party and the right acquired by the other.’ (1
Cooley’s Constitutional Limitations, 8th ed., p. 582) Stated otherwise, ‘[t]he
obligation does not inhere, and subsist in the contract itself, propio vigore, but
in the law applicable to the contract.’ (Ogden v. Saunders, 6
L. ed., pp. 606, 642 [Opinion of Mr. Justice
Trimble]).  (Phil. American Life
Ins. Co. v. Auditor General, 22 SCRA 135, 143) [1968] See also Maritime Company
of the Philippines
v. Reparations Commission, 40 SCRA 70 [1971]).

Accordingly, the COA committed grave error in reckoning the date
of price escalation on October 1, 1982
which was the date provided for in the contract.

The given date of October
1, 1982 provided for in the contract was satisfactorily explained
by the petitioner as follows:

“x x x
[T]he escalation of prices from 27 May
1981 (the bidding date) to September 1982 was already incorporated
into the contract.  Under the 5 October 1982 letter of the MWSS to
the Petitioner (Annex “G” of the Petition, and incorporated as an
integral part of the Contract), it was provided that:

Escalation

As requested, the base contract price from the 27 May 1981 will be brought to current, 30 September 1982, prices as follows:

Three
Million Five Hundred Forty      P 3,540,000.00

Thousand
Pesos

TOTAL                                  –           P71,943,000.00

(Underscoring
supplied)

Hence, the Contract gave 1
October 1982 as the
date for succeeding price escalations. 
But the fact remains that price escalation started from May 1981,
as in fact the escalation from May 1981 to September 1982 was incorporated into
the Contract.

It must be remembered that
the erroneous basis of the respondent’s decision is the reckoning of the
Allowable Escalation Rate from 1 October 1982 only. 
Clearly, respondent is in error since it cannot disregard the fact
that the price escalation started from May 1981, the date of bidding.  This is shown by par. 2 if the just quoted 5
October 1982 letter of the MWSS, Likewise, there is support in COA Circular No.
267 which says that the computation for escalation itself (not that the
Allowable Escalation Rate) ‘shall be reckoned from the date of bidding for bidded contracts.’ As mentioned, escalations from May 1981
to September 1982 were already incorporated into the Contract and Art. VI
thereof governed escalation from 1 October 1982 only. 
Since it was from 27 May
1981 that the
escalation was paid by incorporating it into the Contract, it
necessarily follows that the Allowable Escalation Rate should be reckoned from
the same date of 27 May 1981.  (Rollo, pp.
139-140)

Considering the above findings, we rule that the COA committed
grave abuse of discretion in requiring reimbursement in the amount of P3,900,605.45 representing price escalation of the contract from
the petitioners.

WHEREFORE, the instant petition is GRANTED.  The questioned decisions of
respondent Commission on Audit as well as the Notice of Audit Disallowance No.
FA-001 of the Corporate Auditor of the MWSS are hereby
REVERSED and SET ASIDE.  No costs.

SO ORDERED.

Fernan, C.J., Narvasa,
Melencio-Herrera, Cruz, Paras,
Feliciano, Gancayco, Padilla, Bidin,
Sarmiento, Griño-Aquino, Medialdea, Regalado, and Davide, Jr., JJ., concur.