Central Bank of the Philippines vs. Court of Appeals and Ablaza Construction & Finance Corporation

The Court held that a government-owned or controlled corporation’s acceptance of a construction bid, coupled with the bidder’s acceptance and the commencement of work with the corporation’s permission, perfects a binding contract even in the absence of a formal written instrument. The governing principle is that neither a subsequent executive policy of fiscal restraint nor the non-compliance with administrative certification requirements applicable only to the National Government may be invoked to impair the obligations of a perfected contract or to escape liability for breach.

In late 1965, the Central Bank of the Philippines initiated public bidding for the construction of several regional office buildings, including one in San Fernando, La Union. Ablaza Construction & Finance Corporation submitted a bid of P3,749,000.00 for the project, accompanied by a P275,000.00 cash bidder’s bond. The Monetary Board unanimously awarded the contract to Ablaza in December 1965, and the Bank formally notified Ablaza of the award via telegram and letter. Ablaza accepted the award, requested site access, and began preparatory and excavation work in January 1966 after receiving express permission. The Bank subsequently requested construction schedules, accepted a performance bond, and monitored the progress of the work, which reached approximately twenty percent completion. In May 1966, following a presidential directive on fiscal restraint, the Bank ordered Ablaza to suspend construction, proposed revising the project plans, and offered to reimburse expenses and return the bidder’s bond. Ablaza refused the settlement proposals and demanded execution of the formal contract or payment of damages, prompting the filing of the breach of contract action.

• The Central Bank of the Philippines issued invitations to bid for regional office constructions. Ablaza Construction & Finance Corporation submitted a bid of P3,749,000.00 for the San Fernando, La Union branch, accompanied by a P275,000.00 cash bidder’s bond.
• On December 7, 1965, the Monetary Board approved the award to Ablaza. The Bank notified Ablaza via telegram and formal letter on December 10, 1965. Ablaza accepted the award on December 15, 1965, and requested permission to enter the site for preliminary work.
• The Bank granted site access on January 4, 1966. Ablaza commenced clearing and excavation work. The Bank requested material delivery schedules in February 1966, which Ablaza promptly submitted. The Bank accepted a performance bond of P962,250.00 and monitored the progress of the work through meetings and site visits, acknowledging that excavation was approximately twenty percent complete.
• On May 20, 1966, citing a newly announced policy of fiscal restraint, the Bank’s representative directed Ablaza to suspend construction, announced reduced appropriations, and proposed new plans. The Bank offered to return the cash bond with interest, reimburse completed work, and negotiate a new contract at a lower price. Ablaza rejected the proposals.
• Ablaza demanded formal execution of the contract or payment of damages. The Bank denied liability, claiming an agreement to set aside prior arrangements had been reached. Out-of-court negotiations failed, leading to the civil action for breach of contract. The trial court found a perfected contract, held the Bank liable for breach, and awarded actual damages of P298,433.35, unrealized profits of P674,820.00 (18% of the contract price), and attorney’s fees. The Court of Appeals affirmed.

• Petitioner Central Bank maintained that no contract was perfected because the statutory requirement of an Auditor General’s certificate of fund availability under Section 607 of the Revised Administrative Code was not complied with, rendering any purported contract void under Section 608.
• Petitioner argued that the Instructions to Bidders explicitly provided that rights and obligations would only become effective upon formal execution of a written contract, and that the contractor’s commencement of work prior to signing was unauthorized and undertaken at its own risk.
• Petitioner contended that its withdrawal from the arrangement was justified by the presidential policy of fiscal restraint and economic retrenchment announced in late 1965, which mandated reduced government expenditures.

• Respondent Ablaza Construction & Finance Corporation argued that a perfected contract arose upon the Bank’s formal acceptance of its bid and its subsequent acceptance of the award, which created mutual obligations to formalize and execute the agreement.
• Respondent maintained that the Bank’s conduct—granting site access, requesting schedules, accepting the performance bond, and monitoring construction progress—demonstrated recognition of the contract’s validity and effectively waived the requirement for a formal written instrument.
• Respondent asserted that the Bank’s unilateral suspension of work constituted a breach of contract, entitling it to recover both actual expenses incurred and unrealized profits under Articles 2200 and 2201 of the Civil Code.

• Procedural Issues: Whether the defense based on non-compliance with Section 607 of the Revised Administrative Code may be raised for the first time on appeal when it was not pleaded in the trial court or raised in the appellate brief.
• Substantive Issues: Whether the absence of a formal written contract and the lack of an Auditor General’s certification preclude the perfection of the construction contract; whether a presidential policy of fiscal restraint justifies the unilateral suspension of a perfected contract; and whether the award of actual damages and unrealized profits is legally supported.

• Procedural: The Court ruled that the defense invoking Section 607 of the Revised Administrative Code cannot be sustained because it was raised belatedly on appeal. The petitioner failed to raise the issue in its pleadings or before the appellate court, and procedural rules prohibit the introduction of new defenses on appeal to prevent prejudice to the adverse party and to maintain the integrity of the issues framed below.
• Substantive: The Court held that a perfected contract existed between the parties upon the Bank’s acceptance of the bid and the contractor’s acceptance of the award. The Instructions to Bidders must be construed harmoniously to avoid lack of mutuality; the acceptance of a proposal binds both parties to proceed with formalization, and the Bank’s subsequent acts of permission, supervision, and bond acceptance constituted a waiver of the written contract requirement. The Court further ruled that the fiscal restraint policy cannot constitutionally impair the obligations of a perfected contract, as neither the Constitution nor the law permits the government to evade contractual liabilities through subsequent executive declarations. Accordingly, the Bank’s suspension of work constituted a breach, and the award of actual damages and lost profits (lucrum cessans) was sustained as proper compensation under the Civil Code, with attorney’s fees reduced to ten percent of the total recovery.

• Perfection of Contract upon Bid Acceptance — A contract is perfected when the offer is accepted by the offeree, creating a meeting of the minds that binds both parties to execute the formal agreement and perform their respective obligations. The Court applied this doctrine to hold that the Bank’s acceptance of the construction bid, followed by the contractor’s acceptance and commencement of work with permission, established a binding contract independent of the subsequent execution of a formal written instrument.
• Waiver of Formal Requirements by Conduct — A party may waive contractual formalities through unequivocal acts that demonstrate recognition of the agreement’s validity and a commitment to proceed with performance. The Court found that the Bank’s permission for site entry, requests for construction schedules, acceptance of the performance bond, and monitoring of work progress constituted a waiver of the written contract requirement under the Instructions to Bidders.
• Non-Impairment of Contracts — The constitutional prohibition against laws impairing the obligation of contracts extends to executive policies and administrative issuances that seek to relieve a party, including a government entity, from pre-existing contractual commitments. The Court ruled that the presidential fiscal restraint policy could not be invoked to unilaterally suspend a perfected contract, as doing so would violate the constitutional guarantee against impairment.
• Recovery of Unrealized Profits (Lucrum Cessans) — Damages for breach of contract encompass not only the actual loss suffered but also the profits the obligee failed to obtain, provided such profits are established with reasonable certainty. The Court applied this principle to sustain the award of eighteen percent of the contract price as compensatory damages for lost profits, noting that the percentage was reasonable and consistent with industry standards and expert testimony.

• "An agreement presupposes a meeting of minds and when that point is reached in the negotiations between two parties intending to enter into a contract, the purported contract is deemed perfected and none of them may thereafter disengage himself therefrom without being liable to the other in an action for specific performance." — The Court emphasized this principle to reject the Bank’s argument that the absence of a formal written instrument negated contractual liability, stressing that mutual acceptance of the bid perfected the agreement.
• "Even a government owned corporation may not under the guise of protecting the public interest unceremoniously disregard contractual commitments to the prejudice of the other party. Otherwise, the door would be wide open to abuses and anomalies more detrimental to public interest." — This passage underscores the Court’s refusal to allow the Bank to invoke fiscal restraint as a shield against breach, reinforcing that government entities remain bound by perfected contracts.
• "Indemnification for damages shall comprehend not only the value of the loss suffered, but also that of the profits which the obligee failed to obtain." — The Court invoked this Civil Code provision to justify the award of unrealized profits as a legitimate component of compensatory damages for breach of contract.

• Tan C. Tee & Co. vs. Wright — Cited by petitioner to argue that government contracts require an Auditor General’s certificate of fund availability before perfection. The Court distinguished the case, noting its inapplicability to autonomous corporations like the Central Bank and emphasizing that the defense was raised too late.
• Valencia vs. RFC — Followed to establish that the award of a contract constitutes acceptance of the bidder’s proposal, which perfects the contract upon notice, and that failure to sign the formal document does not negate the existence of a binding agreement.
• Arrieta vs. Naric — Cited as controlling precedent for the recovery of unrealized profits as damages when a government-owned corporation breaches a contract after accepting a bid, confirming that lost profits are compensable under the Civil Code.
• Cerrano vs. Tan Chuco — Relied upon to explain that prospective profits may be recovered as damages if they were foreseeable at the time of contracting and can be established with reasonable certainty, supporting the award of lost profits in this case.
• General Enterprises, Inc. vs. Lianga Bay Logging Co. Inc. — Applied to reinforce the principle that absolute certainty in the amount of lost profits is not required; reasonable estimation based on prior performance and industry standards suffices for recovery under Article 2200.
• Zobel vs. City of Manila — Referenced to support a restrictive construction of Section 607 of the Revised Administrative Code, demonstrating that the provision applies only to entities expressly enumerated therein and excludes autonomous or chartered bodies like the Central Bank.

• Section 607 & 608, Revised Administrative Code — Cited by petitioner to argue that the absence of an Auditor General’s certificate of fund availability voids the contract. The Court held these provisions inapplicable because the Central Bank is an autonomous corporate entity, not part of the “National Government” as defined by the Code.
• Article 1170, New Civil Code — Established the general rule that obligors who fail to comply with their obligations are liable for damages, forming the basis for the Bank’s liability for breach of contract.
• Article 2200, New Civil Code — Provided that indemnification for damages includes both actual loss and lost profits (lucrum cessans), supporting the award of unrealized profits to the contractor.
• Article 2201, New Civil Code — Specified that damages for breach include those that are natural, probable, and foreseeable consequences of the non-performance, justifying the calculation of lost profits based on industry standards and the contract price.
• Section 1(10), Article III, 1935 Constitution & Section 11, Article IV, 1973 Constitution — Invoked to affirm the constitutional prohibition against laws or executive acts that impair the obligation of contracts, barring the Bank from relying on fiscal restraint policies to evade contractual duties.
• Republic Act No. 265 (Central Bank Charter), Sections 1 & 4 — Referenced to establish the Central Bank’s status as an autonomous corporate entity with independent budgetary and contracting authority, exempting it from the fund certification requirements applicable to national government agencies.