MARIO R. MELCHOR, PETITIONER, VS. COMMISSION ON AUDIT, RESPONDENT.

Is the petitioner personally liable for the amount paid for the construction
of a public school building on the ground that the infrastructure contract is
null and void for want of one signature?

The facts are uncontroverted.

On July 15, 1983, petitioner Mario R. Melchor,
in his capacity as Vocational School Administrator of Alangalang
Agro-Industrial School of Alangalang, Leyte, entered into a contract with Cebu
Diamond Construction (hereinafter referred to as contractor) for the
construction of Phase I of the Home Technology Building of said school for the price of
P488,000.  Pablo Narido,
chief accountant of the school, issued a certificate of availability of funds
to cover the construction cost.  Narido, however, failed to sign as a witness to the
contract, contrary to the requirement of Section 1 of
Letter of Instruction (LOI) No. 968.

The contract was approved by the then Minister of Education, Culture and Sports Onofre D. Corpuz.  The relevant parts of the contract are quoted
below:

“That for and in consideration of the sum of FOUR HUNDRED
EIGHTY EIGHT THOUSAND PESOS (P488,000.00), Philippine Currency, the CONTRACTOR,
at his own proper cost and expense willfully and faithfully perform all works,
and unless otherwise provided, furnish all labor, materials, equipment
necessary for the construction and
completion of Phase I of the Home Technology Building for
the Alangalang Agro-Industrial School at Alangalang, Leyte to be completed in accordance with the plans
and specifications and all terms,
conditions and instructions
contained in the general and special conditions of contract, as well as those
contained in the Notice to Bidders, Tenderers
or Advertisement, Instruction to Bidders/Tenderers,
Supplemental Specifications, Bond Articles, and other essential related documents, which are made and acknowledged as
Integral parts of  this
Agreement, by reference and/or Incorporation, including the permission of Administrative Order No.
81 of the President, dated
January 17, 1964, xxx” (Rollo, p. 25)

While the construction of
Phase I was under way, the contractor, in a letter dated November 8, 1983 addressed to Melchor, sought an additional charge of P73,000 equivalent to 15% of the stipulated amount due to an
increase in the cost of labor and construction materials.

In a letter dated November
17, 1983, the petitioner referred the contractor’s request for
additional charge to the Regional
Director, Ministry of Education, Culture and Sports (MECS).  The petitioner in said letter asked for approval of
the contractor’s additional charge, pointing out that such additional charge shall be taken from the 1984
non-infrastructure capital outlay and part of the 1984 maintenance and
operating expenses.  The petitioner, in a
second Indorsement dated November 22, 1983, requested the approval by the
COA Regional Director in Tacloban
City of the contractor’s request
for adjustment of the cost of the contract.

In  an Indorsement
dated November 17, 1983, Servillano C. Dela Cruz, Acting
Assistant Regional Director, MECS Regional Office No. VIII, Tacloban
City, approved the contractor’s request for additional charge subject, however,
to the availability of funds and the imprimatur of the Resident Auditor of the
School.  On its part,
the COA Regional Office No. VIII, Tacloban
City, through Regional Director, Sopronio Flores,
Jr., advanced the view that “the approval of the price escalation rests on
the Minister or head of the agency concerned. 
Our participation in this regard shall be on the post-audit of
transactions as emphasized under COA Circular No. 82-195.”

Meanwhile, the contractor, anticipating that it could not meet
the deadline for the project, requested a series of extensions which the petitioner granted.  However, on April 10, 1984, the contractor
gave up the project mainly to save itself
from further losses due to, among
other things, increased cost of construction
materials and labor.

At the time the contractor ceased working on the project, it had
accomplished only 61% of the
construction work valued at P344,430.88.  However, as of September 13, 1984, the contractor had been paid the total
amount of P515,305.60.  The
excess paid on the value of the 61% accomplishment costing approximately
P172,003.26
represented the extra work done by the contractor which was found necessary.

Consequently, the
petitioner wrote a letter dated September 19, 1984 to Ms. Gilda Ramos, COA Resident Auditor of the school, requesting
the latter to advise the former on ‘whether to pursue condoning the contract or
institute a legal action for breach of contract against the contractor.’ In
turn, Ms. Ramos referred the matter to COA Regional Director in Tacloban City, Cesar A. Damole,
who in a third Indorsement dated April 8, 1985,
directed Ms. Ramos to disallow
the payment of P515,305.60 in post-audit on the ground that the contract was
null and void for lack of signature of the chief accountant of the school as
witness to it, as required under Section 1 of LOI 968, for which reason the
petitioner was made personally liable for the amount paid to the contractor.

On May 3, 1985, the
petitioner wrote a letter addressed to the Regional Director, COA
Regional Office No. VIII, Tacloban City, seeking
reconsideration of his directive to the Resident Auditor of the school to disallow the payment of P515,305.60 to the contractor. 
The petitioner sought reconsideration on the following grounds:  (a) the
Certificate of Availability
of Funds signed by the chief
accountant of the school, being an integral part of the contract, substantially complied with the requirement of LOI
968 that the signature of said accountant must be affixed as witness to the
contract; b) the petitioner did not exceed his authority because the contract
was approved by the head of the agency concerned; c) the Resident Auditor of
the school who had been furnished a copy of the contract did not object to the
contract because of that flaw; and d) the petitioner religiously complied with
the provisions of P.D. 1445 (otherwise known as ‘The Government Auditing Code of the Phils.’),
specifically, Sections 85 and 86 as to
the requirements in the execution of a government contract.

In a first Indorsement dated July 17,
1985, COA Regional Director of Tacloban City, Cesar
A. Damole, denied the petitioner’s motion for reconsideration. 
Immediately, petitioner Melchor
appealed to the COA Head Office which dismissed his appeal for lack of
merit.  The COA Head Office likewise
denied the petitioner’s requests for reconsideration.

Hence, this petition.

The sole issue for this Court’s consideration is whether or not
petitioner Melchor should be held personally liable
for the amount of P515,305.60 paid to the
contractor.  This P515,305.60
may be broken down into:

1.  P344,430.80
– representing 61% equivalent payment for the work done by the contractor
within the contract specifications, and

2.  P172,003.26
– representing payment for extra work orders, not included in the contract
specifications, which were incurred to make the building structure strong.

The amounts of P344,430.80 and P172,003.26, when added together, do not equal
P515,305.60.  The records do not explain
the reason for the discrepancy.  At any
rate, the contending parties do not question the correctness of these amounts.

Respondent COA maintains that the contract entered into by the
petitioner with Cebu Diamond Construction is null and
void since the chief accountant did not affix his signature to the contract, in violation of the requirements of LOI
968.

Section 1 of LOI 968, dated December 17, 1979, provides:

“1.  All contracts for capital projects and for the
supply of commodities and services, including equipment, maintenance contracts,
and other agreements requiring payments which are chargeable to agency current
operating or capital expenditure funds,
shall be signed by agency heads or other duly
authorized official only when there are available funds.  The Chief Accountant of the contracting
agency shall sign such contracts as witness and contracts without such witness
shall be considered as null and void.’

According to COA, since there was no compliance with the above
provision, then the amount of P344,430.80 should be
disallowed in post-audit and the petitioner should be personally liable for
said amount.

The petitioner reasons that the absence of the accountant’s signature
as witness to the contract should not militate against its validity.  He cites Section 86 of PD 1445, which states:

“Certificate Showing Appropriation to Meet Contract – xxx no
contract involving the expenditure of public funds by any government agency shall be entered into or
authorized unless the proper accounting official of the agency concerned shall
have certified to the officer entering into the obligation that funds have been
duly appropriated for the purpose and that the amount necessary to cover the
proposed contract for the current fiscal year is available for expenditure on
account thereof, subject to verification by the auditor
concerned.  The certificate, signed by
the proper accounting official and the auditor who verified it, shall be
attached to and become an integral part of the proposed contract, and
the sum so certified shall not thereafter be available for expenditure for any
other purpose until the obligation of the government agency concerned under the
contract is fully extinguished.”

Petitioner Melchor urges that the
issuance by the chief accountant
of a “Certificate of
Availability of Funds” compensates for the latter’s non-signing as a
contract witness since under Section 86 of PD 1445, the certificate is attached
to and becomes an integral part of the contract.  He argues that there was, in effect,
substantial compliance with the mandate of LOI 968.

Moreover, the petitioner contends that assuming arguendo that the contract is null and void,
he should still not be made personally accountable for the amount paid to the
contractor.  He cites this Court’s
resolution in Royal Trust Corporation v. Commission
on Audit, G. R. No. 84202, November 22, 1988.  In that case, despite the absence of a
specific covering appropriation as required under COA Resolution No. 86-58, the
contractor was allowed by the Court to be compensated on a quantum meruit basis.

Under the circumstances of this case, the Court finds that the
contract executed by the petitioner and Cebu Diamond
Construction is enforceable and, therefore, the petitioner should not be made
to personally pay for the building already constructed.

LOl 968 and Sections 85 and 86 of PD
1445 implement and reinforce the constitutional mandate that “No money
shall be paid out of the Treasury except in pursuance of an appropriation made
by law” (Constitution, Article VI, Section
29 [1]).

Under Sections 85 and 86 of PD 1445, before a government agency
can enter into a contract involving expenditure of government funds there must
be an appropriation for such
expenditure and the proper accounting official must certify that funds have
been appropriated for the purpose.  Under
LOI 968, the chief accountant of the government agency, as the verifier of the
availability of funds, must sign such contracts as witness.  The uniform intent of these provisions is to
ensure that government contracts are signed only when supported by available
funds.

In the case before us, the chief accountant issued a certificate
of availability of funds but failed to sign the contract as witness.  But since Section 86 states that the
certificate shall be attached to and become an integral part of the proposed
contract, then the failure of the chief accountant to affix his signature to the
contract was somehow made up by his own certification which is the basic and
more important validating document.  The
contract moreover provided that “other essential related documents xxx are
made and acknowledged as integral parts of this agreement, by reference and/or
incorporation.” This is not to say that the heads of government offices or
institutions should not read carefully the fine print of official regulations
governing contracts.  However, under the
peculiar circumstances of this case, we agree with the petitioner’s view that
there was substantial compliance with the requirements of LOI 968 in the
execution of the contract.  He has not
been charged under some regulations governing negligence in not going over
auditing and accounting rules more carefully. 
But even assuming some kind of administrative responsibility for not
being more careful, he should not be made to pay for a school building already
constructed and serving an urgent need in his province.

It is a rule of statutory construction that the court may
consider the spirit and reason of a statute where a literal meaning would lead to absurdity, contradiction, injustice
or would defeat the clear purpose of the lawmakers.  (People v. Manantan,
5 SCRA 684 [1962]) For this Court to draw a narrow and stringent application of
LOI 968 would be to lose sight of the purpose behind its enactment.  The rationale for LOI 968, which is to ensure
that there are available funds to finance a proposed project, was already served by the chief accountant’s issuance of a certificate of fund availability.

Additionally, Section 2 of LOI 968 provides:

“2.  It shall be the responsibility of the Chief
Accountant to verify the availability of funds, as duly evidenced by programmed
appropriations released by the Ministry of Budget and received by the agency,
from which such contract shall be ultimately payable.  His signature shall be
considered as constituting a certification
to that effect;” (Underlining Supplied)

Since, under the above proviso, the accountant’s signature shall have the effect of a
certification, then it may be inferred that the accountant’s certification, not
his signature as a contract witness, is the more reliable indicium
of fund availability.

What further bolsters the contract’s validity is the fact that
the original contract for P488,000 and the 15% price
escalation of P73,000 bore the approval of the Minister of Education, Culture
and Sports as required by COA Circular No. 83-101-J (dated June 8, 1983) and the Implementing Rules of PD
1594.  Under COA Circular 83-101-J, the
Minister of Education, Culture and Sports has the authority to approve
infrastructure projects not exceeding P2 Million.  Under Section III, CI II of the Implementing
Rules of PD 1594, the Minister is empowered to approve contract price
escalation not exceeding 18% of the original contract price.

Moreover, under COA Circular No. 76-34 dated July 15, 1976, within 5 days from receipt of a
copy of the contract, the COA is required to call the attention of management
regarding defects or deficiencies of the contract and suggest such corrective
measures as are appropriate and
warranted to facilitate the processing of the claim upon presentation.  In this case, respondent COA does not deny
the petitioner’s claim that it was furnished copies of the contract, together
with supporting documents, a few days after approval thereof by the Minister of
Education, Culture and Sports.  If the
respondent had complied with this requirement, then the absence of the
accountant’s signature as a witness to the contract could have been remedied.  COA was also negligent.

No less compelling than the foregoing reasons is the undisputed
fact that the construction of the Home
Technology Building
had long been completed and that the building is now being utilized as part of
the Alangalang
Industrial School.  In People v. Purisima, 86 SCRA 542 (1978), we held that there
exists a valid presumption that undesirable consequences were never intended by
a legislative measure, and that a construction of which the statute is fairly
susceptible is favored, which will avoid all objectionable, mischievous,
indefensible, wrongful, evil and injurious consequences.  In the present case we consider it highly
inequitable to compel the petitioner, who had substantially complied with the
mandate of LOI 968, to shoulder the construction cost of the building when it
is not he, but the government, which is reaping benefits from it.

The Court therefore rules that respondent COA erred in
disallowing in audit the amount of P 344, 430. 88.

With respect to the remaining P172,003.26
paid by the petitioner to the contractor for extra work done, the COA reasons
that the extra work done, being more than 25% of the escalated original
contract price, was null and void because no supplemental agreement was
executed.  The respondent cites the
implementing rules and regulations of PD 1594 which provide:

“5. A separate supplemental agreement may be entered
into for all change orders or extra work orders if the aggregate amount exceeds
25% of the escalated original contract price.” (III CI., paragraphs 5;) (Underlining supplied).

Under the facts of this case, we adjudge that respondent COA is
not without legal basis in disallowing the P172,003.26
payment for the extra work orders. 
However, since the word “may” was used in the Decree then the
requirement of a supplemental agreement under all circumstances may not always
be mandatory.  There is no need to go
into any possible exceptions because we find the rule applicable in this case.

Under COA Circular 83-101-J, supra, the Minister of Education,
Culture and Sports has the authority to approve extra work orders or other
variation orders not exceeding 50% of the original contract price or P1 Million
whichever is less.  In this case, there
is no showing that the extra work order was approved by the Minister.

Moreover, a variation order (which may take the form of a change
order, extra work order or supplemental agreement) is a contract by itself and
involves the expenditure of public funds to cover the cost of the work called
for thereunder. 
(Fernandez, A Treatise on Government Contracts under Philippine Law,
115-116 [1985]) As such, it is subject to the restrictions imposed by Sections
85 and 86 of PD 1445 and LOI 968.  COA
Circular No. 80-122, dated January 15,
1980, likewise ensures that an extra work order is approved only
when supported by available funds. 
Again, the petitioner has not presented proof of an appropriation to
cover the extra work order.

For a failure to show the approval by the proper authority and to
submit the corresponding appropriation, we declare the contract for extra works
null and void.

Section 87 of PD 1445 states:

“Any contract entered into contrary to the requirements of the
two immediately preceding sections shall be void, and the officer or
officers entering into the contract shall
be liable to the government or other
contracting party for any consequent damage
to the same extent as if the transaction
had been wholly between private parties.”
(Underlining supplied)

This does not mean, however, that the petitioner should be held
personally liable and automatically ordered to return to the government the
full amount of P172,003.26.

As previously discussed, it would be unjust to order the
petitioner to shoulder the expenditure when the government had already received
and accepted benefits from the utilization of the building.

In Royal Trust Construction v.
Commission on Audit, supra, cited by the
petitioner, the Court, in the interest of substantial justice and equity,
allowed payment to the contractor on a quantum meruit
basis despite the absence of a
written contract and a covering appropriation.

In a more recent case, Dr. Rufino
O. Eslao v. Commission on
Audit, G. R. No. 89745, April 8, 1991, the Court
directed payment to the contractor on a quantum meruit
basis despite the petitioner’s failure to undertake a public bidding.  In that case, the Court held that “to
deny payment to the contractor of the two buildings which are almost fully
completed and presently occupied by the university would be to allow the
government to unjustly enrich itself at the expense of another.”

Where payment is based on quantum meruit,
the amount of recovery would only be the reasonable value of the thing or
services rendered regardless of any agreement as to value.  (Tantuico, State
Audit Code of the Philippines Annotated, 471 [1982])

Although the two cases mentioned above contemplated a situation
where it is the contractor who is seeking recovery, we find that the principle
of payment by quantum meruit likewise applies to this
case where the contractor had already been paid and the government is seeking
reimbursement from the public official who heads the school.  If, after COA determines the value of the
extra works computed on the basis of quantum meruit,
it finds that the petitioner made an excess or improper payment for these extra
works, then petitioner Melchor shall be liable only
for such excess payment.

WHEREFORE, the petition is GRANTED.  The decision of the respondent COA
denominated as 11th Indorsement dated November 11,
1988 and its resolution dated July 31, 1990 are hereby REVERSED and SET
ASIDE.  Respondent COA is directed to
allow in post-audit the payment of P344,430.80.  Respondent COA is likewise directed to
determine on a quantum meruit basis
the value of the extra works done, and after such determination, to disallow in
post-audit the excess payment, if any, made by the petitioner to the
contractor.  The petitioner shall be
personally liable for any such excess payment.

SO ORDERED.

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