Abanilla vs. Commission on Audit

The officers and employees of a local water district, being a government-owned or controlled corporation with an original charter, are covered by the Civil Service Law, and the terms and conditions of their employment are fixed by law, not through collective bargaining agreements. Consequently, benefits granted under a CBA concluded after the Davao City Water District ruling, in violation of existing laws and regulations applicable to government entities, are void and of no effect; however, employees who received such benefits in good faith need not refund them.

Metropolitan Cebu Water District (MCWD) is a local water district organized as a government-owned corporation with an original charter pursuant to Presidential Decree 198, or the Provincial Water Utilities Act of 1973. Because MCWD is a government-owned or controlled corporation with an original charter, its officers and employees are covered by the Civil Service Law under Section 6(1) of the Civil Service Law, which embraces all government-owned or controlled corporations with original charters. This statutory framework distinguishes government employment from private sector employment, where the terms and conditions of employment are settled through collective bargaining.

Metropolitan Cebu Water District (MCWD) is a local water district organized as a government-owned corporation with an original charter pursuant to Presidential Decree 198, the Provincial Water Utilities Act of 1973. Through its Board of Directors, MCWD issued several resolutions granting benefits and privileges to its personnel, including Dulce M. Abanilla, MCWD's General Manager: Board Resolution No. 054-83 dated May 23, 1983 granting hospitalization privileges; Board Resolution Nos. 091-83 and 0203-85 dated October 21, 1983 and November 20, 1985, respectively, allowing the monetization of leave credits; Board Resolution No. 0161-86 dated November 29, 1986 granting Christmas bonus; and Board Resolution No. 083-88 granting longevity allowance.

On January 1, 1989, MCWD and the Metropolitan Cebu Water District Employees Union executed a collective bargaining agreement (CBA) providing for the continuous grant to all regular rank and file employees of existing benefits, such as cash advances, thirteenth month pay, mid-year bonus, Christmas bonus, vacation and sick leave credits, hospitalization, medicare, uniform privileges, and water allowance. The parties renewed their CBA on January 1, 1992.

On November 13, 1995, an audit team headed by Bernardita T. Jabines of the COA Regional Office No. VII at Cebu City conducted an audit of the accounts and transactions of MCWD. Thereafter, the Regional Director of COA Regional Office No. VII sent MCWD several notices disallowing the amount of ₱12,221,120.86 representing hospitalization benefits, mid-year bonus, 13th month pay, Christmas bonus, and longevity pay. The disallowance covered various Notice of Disallowance Nos. 96-036, 96-050, 96-051, 96-055, 96-069, 96-073, and 96-074 for disallowed hospitalization privileges for 1995; Notice of Disallowance No. 96-025 for disallowed mid-year bonus for 1995; Notice of Disallowance Nos. 96-026, 96-068, and 96-075 for disallowed 13th month pay for 1995; Notice of Disallowance No. 96-081 for disallowed Christmas bonus; and Notice of Disallowance No. 96-075 for disallowed longevity pay.

Aggrieved, petitioner appealed to the COA at Quezon City, citing COA Memorandum Circular No. 002-94 providing that "all benefits provided under the duly existing CBAs entered into prior to March 12, 1992, the date of official entry of judgment of the Supreme Court ruling in Davao City Water District, et al. vs. CSC and COA, shall continue up to the respective expiry dates of the benefits or CBA whichever comes earlier." The COA denied the appeal, citing the Court's ruling in Davao City Water District vs. Civil Service Commission that a water district is a corporation created pursuant to a special law — P.D. No. 198, as amended — and as such, its officers and employees are covered by the Civil Service Law. The COA held that the CBA was concluded after the decision in the Davao case was promulgated, and any transaction concluded after that date in violation of existing laws and regulations applicable to government entities is void and of no effect. Petitioner's motion for reconsideration was denied, prompting the petition for certiorari before the Supreme Court.

• Grave Abuse of Discretion: Petitioner contended that respondent COA acted with grave abuse of discretion in disallowing the benefits and privileges granted to MCWD personnel.
• Non-Diminution of Benefits: Petitioner argued that the COA contravened the Labor Code provision on non-diminution of benefits, invoking the CBA as justification for the receipt by MCWD personnel of the benefits and privileges.

• Civil Service Law Coverage: The Solicitor General maintained that the COA did not gravely abuse its discretion in denying petitioner's appeal, considering that the terms and conditions of employment, such as the entitlement of government personnel, like the affected MCWD employees, to privileges and benefits, are governed by the Civil Service Law, the General Appropriations Act, and applicable issuances of the Department of Budget and Management, not by the Labor Code.

• Validity of the CBA Benefits: Whether respondent COA acted with grave abuse of discretion in disallowing the benefits and privileges granted to MCWD personnel under the collective bargaining agreement.
• Applicability of the Labor Code: Whether the Labor Code provision on non-diminution of benefits applies to MCWD personnel, who are employees of a government-owned or controlled corporation with an original charter.
• Good Faith of Recipients: Whether the MCWD affected personnel who received the disallowed benefits and privileges should be required to refund them.

• Validity of the CBA Benefits: No. The disallowance was sustained because MCWD officers and employees are covered by the Civil Service Law, not the Labor Code, and the CBA was concluded after the Davao City Water District ruling, making it void and of no effect.
• Applicability of the Labor Code: No. The terms and conditions of employment in government employment are fixed by the legislature and administrative heads through statutes or administrative circulars, rules, and regulations, not through collective bargaining agreements.
• Good Faith of Recipients: Yes, the affected personnel need not refund the amounts. The MCWD affected personnel who received the benefits acted in good faith under the honest belief that the CBA authorized such payment.

• Validity of the CBA Benefits: In light of the Court's ruling in Davao City Water District that the officers and employees of a water district are covered by the Civil Service Law, petitioner's invocation of the CBA in justifying the receipt by MCWD personnel of benefits and privileges was utterly misplaced. The COA correctly held that the CBA was concluded after the Davao decision was promulgated, and any transaction concluded after that date in violation of existing laws and regulations applicable to government entities is void and of no effect, conferring no demandable right and creating no enforceable obligation.

• Applicability of the Labor Code: The Court cited Alliance of Government Workers vs. Minister of Labor and Employment, which held that in the unionized private sector, terms and conditions of employment are settled through collective bargaining, but in government employment, it is the legislature and, where properly given delegated power, the administrative heads of government which fix the terms and conditions of employment, effected through statutes or administrative circulars, rules, and regulations, not through collective bargaining agreements. Section 3 of the Civil Service Law provides that the terms and conditions of employment of all government employees, including those in government-owned or controlled corporations with original charters, shall be fixed by law, and only those terms not fixed by law may be the subject of negotiation between duly recognized employee's organizations and appropriate government authorities.

• Good Faith of Recipients: Citing Querubin vs. Regional Cluster Director, Legal and Adjudication Office, COA Regional Office VI and De Jesus vs. Commission on Audit, the Court held that where all parties acted in good faith, the refund of disallowed benefits cannot be countenanced. The MCWD affected personnel received the benefits in good faith under the honest belief that the CBA authorized such payment, and no indicia of bad faith could be detected under the attendant facts and circumstances.

• Coverage of the Civil Service Law — Under Section 6(1) of the Civil Service Law, the Civil Service embraces all branches, subdivisions, instrumentalities, and agencies of the Government, including government-owned or controlled corporations with original charters. A local water district organized pursuant to P.D. No. 198 is a government-owned or controlled corporation with an original charter, and therefore its officers and employees are covered by the Civil Service Law.

• Terms and Conditions of Government Employment — Under Section 3 of the Civil Service Law, the terms and conditions of employment of all government employees, including those in government-owned or controlled corporations with original charters, shall be fixed by law; only terms not fixed by law may be the subject of negotiation between duly recognized employee's organizations and appropriate government authorities. In government employment, it is the legislature and, where properly given delegated power, the administrative heads of government which fix the terms and conditions of employment, effected through statutes or administrative circulars, rules, and regulations, not through collective bargaining agreements.

• Good Faith in Receipt of Disallowed Benefits — Where parties acted in good faith under the honest belief that payment of benefits was authorized, no refund of disallowed amounts may be required. No indicia of bad faith must be detected under the attendant facts and circumstances; the officials disbursed the benefits in the honest belief that the amounts given were due to the recipients, and the recipients accepted them with gratitude, confident that they richly deserved such benefits.

• "In government employment, however, it is the legislature and, where properly given delegated power, the administrative heads of government which fix the terms and conditions of employment. And this is effected through statutes or administrative circulars, rules, and regulations, not through collective bargaining agreements." — This passage from Alliance of Government Workers vs. Minister of Labor and Employment, quoted by the Court, articulates the controlling principle that government employment terms are fixed by law, not by CBA, and is the ratio decidendi for sustaining the disallowance.

• "While we sustain the disallowance of the above benefits by respondent COA, however, we find that the MCWD affected personnel who received the above mentioned benefits and privileges acted in good faith under the honest belief that the CBA authorized such payment. Consequently, they need not refund them." — This passage states the Court's modification of the COA decision, exempting the affected personnel from refunding the disallowed benefits on the ground of good faith.

• "Considering, however, that all the parties here acted in good faith, we cannot countenance the refund of subject incentive benefits for the year 1992, which amounts the petitioners have already received. Indeed, no indicia of bad faith can be detected under the attendant facts and circumstances." — This passage from Querubin vs. Regional Cluster Director, quoted by the Court, establishes the good faith exception to the refund requirement for disallowed benefits.

• Davao City Water District vs. Civil Service Commission, G.R. No. 95237-38, September 13, 1991, 201 SCRA 593 — Controlling precedent holding that a water district is a corporation created pursuant to a special law, P.D. No. 198, as amended, and as such, its officers and employees are covered by the Civil Service Law. The Court relied on this ruling to sustain the COA's disallowance of the CBA benefits.

• Alliance of Government Workers vs. Minister of Labor and Employment, G.R. No. 60403, August 3, 1983, 124 SCRA 1 — Followed for the principle that in government employment, terms and conditions of employment are fixed by the legislature and administrative heads through statutes or administrative circulars, rules, and regulations, not through collective bargaining agreements.

• Querubin vs. Regional Cluster Director, Legal and Adjudication Office, COA Regional Office VI, G.R. No. 159299, July 7, 2004, 433 SCRA 769 — Followed for the good faith exception to the refund of disallowed benefits, holding that where parties acted in good faith, refund of disallowed incentive benefits cannot be countenanced.

• De Jesus vs. Commission on Audit, G.R. No. 149154, June 10, 2003, 403 SCRA 666 — Cited in Querubin and followed for the principle that recipients of disallowed allowances and bonuses who received them in good faith, without knowledge that payment was without legal basis, need not refund them.

• Section 3, Civil Service Law — Provides that the terms and conditions of employment of all government employees, including those in government-owned or controlled corporations with original charters, shall be fixed by law, and only terms not fixed by law may be the subject of negotiation between duly recognized employee's organizations and appropriate government authorities. Applied to hold that MCWD personnel's compensation package may not be the subject of a CBA.

• Section 6(1), Civil Service Law — Provides that the Civil Service embraces all branches, subdivisions, instrumentalities, and agencies of the Government, including government-owned or controlled corporations with original charters. Applied to hold that MCWD, as a government-owned corporation with an original charter, has officers and employees covered by the Civil Service Law.

• Presidential Decree 198, Provincial Water Utilities Act of 1973 — The statute pursuant to which MCWD was organized as a local water district and government-owned corporation with an original charter, establishing the basis for its coverage under the Civil Service Law.

• COA Memorandum Circular No. 002-94 — Cited by petitioner, providing that all benefits provided under duly existing CBAs entered into prior to March 12, 1992, the date of official entry of judgment of the Supreme Court ruling in Davao City Water District, et al. vs. CSC and COA, shall continue up to the respective expiry dates of the benefits or CBA, whichever comes earlier.

Hilario G. Davide, Jr., Reynato S. Puno, Leonardo A. Quisumbing, Antonio T. Carpio, Renato C. Corona, Romeo J. Callejo, Sr., Dante O. Tinga, Artemio V. Panganiban, Consuelo Ynares-Santiago, Ma. Alicia Austria-Martinez, Conchita Carpio Morales, Adolfo S. Azcuna, Minita Chico-Nazario, and Cancio C. Garcia.