City of Quezon vs. Lexber Incorporated

A contract involving the expenditure of public funds entered into by a city mayor without prior appropriation by the city council is not void ab initio where the mayor acted pursuant to specific statutory authority under Section 84 of P.D. 1445, which allows disbursement of public funds "in pursuance of an appropriation law or other specific statutory authority," and where the applicable Local Government Code (B.P. Blg. 337) did not require prior sanggunian authorization for the mayor's representation of the city in business transactions.

Petitioner City of Quezon and respondent Lexber Incorporated were parties to a Tri-Partite Memorandum of Agreement dated August 27, 1990, together with the then Municipality of Antipolo, whereby a 26,010 square meter parcel of land in Antipolo was to be used as a garbage dumping site for a five-year period commencing January 1991 to December 1995. The agreement designated Lexber as the exclusive supplier of manpower, heavy equipment, and engineering services for the dumpsite, with a right of first refusal for contracting such services. The statutory framework governing the transaction included Presidential Decree No. 1445 (Auditing Code of the Philippines), Batas Pambansa Blg. 337 (Local Government Code of 1983), Executive Order No. 392 (constituting the Metropolitan Manila Authority), and the Charter of Quezon City (Commonwealth Act No. 502).

On August 27, 1990, a Tri-Partite Memorandum of Agreement was drawn between petitioner City of Quezon, represented by then Mayor Brigido R. Simon, Jr., respondent Lexber, Inc., and the then Municipality of Antipolo, whereby a 26,010 square meter parcel of land located in Antipolo was to be used as a garbage dumping site by petitioner and other Metro Manila cities or municipalities authorized by the latter, for a 5-year period commencing in January 1991 to December 1995. Part of the agreement was that the landowner, represented by respondent Lexber, shall be hired as the exclusive supplier of manpower, heavy equipment and engineering services for the dumpsite and shall also have the right of first refusal for contracting such services.

This led to the drawing of the first negotiated contract between petitioner, represented by Mayor Simon, and respondent Lexber on September 10, 1990, whereby the latter was engaged to construct the necessary infrastructure at the dumpsite, designated as the Quezon City Sanitary Landfill, for the contract price of P4,381,069.00. Construction of said infrastructure was completed by respondent Lexber on November 25, 1991, and the contract price agreed upon was accordingly paid to it by petitioner. Meanwhile, on November 8, 1990, a second negotiated contract was entered into by respondent Lexber with petitioner, again represented by Mayor Simon, whereby it was agreed that respondent Lexber shall provide maintenance services in the form of manpower, equipment and engineering operations for the dumpsite for the contract price of P1,536,796.00 monthly. It was further agreed that petitioner shall pay respondent Lexber a reduced fee of fifty percent (50%) of the monthly contract price, or P768,493.00, in the event petitioner fails to dump the agreed volume of 54,000 cubic meters of garbage for any given month. On December 11, 1991, respondent was notified by petitioner, through the City Engineer, Alfredo Macapugay, Project Manager, Rene Lazaro and Mayor Simon to commence maintenance and dumping operations at the site starting on December 15, 1991.

Respondent Lexber alleged that petitioner immediately commenced dumping garbage on the landfill site continuously from December 1991 until May 1992. Thereafter, petitioner ceased to dump garbage on the said site for reasons not made known to respondent Lexber. Consequently, even while the dumpsite remained unused, respondent Lexber claimed it was entitled to payment for its services as stipulated in the second negotiated contract. On December 12, 1992, respondent's counsel sent a demand letter to petitioner demanding the payment of at least 50% of its service fee under the said contract, in the total amount of P9,989,174.00. In view of the idle state of the dumpsite for more than a year, respondent also sought a clarification from petitioner regarding its intention on the dumpsite project, considering the waste of equipment and manpower in the meantime, as well as its loss of opportunity for the property.

Petitioner, this time acting through Mayor Ismael A. Mathay, Jr. who succeeded Mayor Simon in the interim, denied any liability under the contract on the ground that the same was invalid and unenforceable. According to Mayor Mathay, the subject contract was signed only by Mayor Simon and had neither the approval nor ratification of the City Council, and it lacked the required budget appropriation. Thus, a complaint for Breach of Contract, Specific Performance or Rescission of Contract and Damages was filed by respondent Lexber against petitioner on February 21, 1994 before the Regional Trial Court of Quezon City. Respondent Lexber averred that because petitioner stopped dumping garbage on the dumpsite after May 1992, Lexber's equipment and personnel were idle to its damage and prejudice. Respondent prayed that petitioner be ordered to comply with its obligations under the subject contract or, in the alternative, that the said contract be rescinded and petitioner be ordered to pay damages.

The trial court ruled that while there may not have been prior authority or appropriation to enter into and implement the second negotiated contract, the project denominated as "Quezon City Landfill Disposal System" was duly supported by a Certificate of Availability of Funds dated April 4, 1991 signed by the Quezon City Auditor, Reynaldo P. Ventura, and Treasurer, Montano L. Diaz, certifying that funds had been duly appropriated and allotted under Advice of Allotment No. 1 and 2 dated March 31, 1991 in the total amount of P2,620,169.00 and P11,783,399.00 covering the contract entered into with Lexber, Inc. The trial court found that the appropriated amounts of P1,700,000.00, P2,641,922.00, and P40,000.00 totaled P4,381,922.00, which was P853.00 more than the contract price of the first negotiated contract, showing sufficient appropriation to cover at least three months of operations. The records also revealed that petitioner issued Disbursement Vouchers of various amounts covering the period between March 1, 1992 to April 30, 1992 for services rendered by the Mud Regal Group, Incorporated to haul garbage to the sanitary landfill, which vouchers were passed in audit and duly approved and paid by petitioner. While corresponding vouchers were prepared by petitioner to pay respondent Lexber for work accomplished in the maintenance of the sanitary landfill for the period spanning December 1991 to June 1992, these were never processed and approved for payment since action thereon was overtaken by the change in leadership of the city government.

• Nullity of Contract for Violation of P.D. 1445: Petitioner argued that the second negotiated contract of November 8, 1990 is null and void ab initio, notwithstanding that the execution thereof was in violation of Sections 85, 86 and 87 of the Auditing Code of the Philippines (PD 1445) and LOI 968, which mandatorily require prior appropriation and certification of fund availability before entering into contracts involving expenditure of public funds.

• Lack of Prior City Council Approval: Petitioner argued that the said Negotiated Contract of November 8, 1990 required the prior approval of the City Council, notwithstanding the fact that the said contract would require the expenditure of public funds in the amount of P18,817,920.00 for one-year dumping operation, or the total amount of P94,089,600.00 for five years, and that it is the City Council that is vested by the Local Government Code (BP Blg. 337) with the power to appropriate city funds to cover expenses of the City Government.

• Erroneous Finding of Dumping and Payment: Petitioner argued that the Court of Appeals erred in holding that petitioner started to dump garbage at the dumpsite and paid for such service, despite the fact that respondent's evidence proved otherwise, and that the Court of Appeals failed to cite any specific evidence to support said conclusions of fact.

• No Ratification of Void Contract: Petitioner argued that the Court of Appeals erred in holding that the said Negotiated Contract of November 8, 1990 was ratified by the petitioner by the aforesaid initial dumping of garbage and payment of services, overlooking the elementary doctrine that a void contract cannot be ratified.

• Misapplication of Law: Petitioner argued that the Court of Appeals wrongly applied an Executive Order and administrative resolution as the applicable law to govern the aforesaid contract, notwithstanding that the Auditing Code of the Philippines (PD 1445) and the Local Government Code (BP 337) then had not been repealed by any legislative enactment, nor could the said executive issuances repeal them.

• Government Not Estopped: Petitioner argued that the Court of Appeals erred in holding that the equities of the case should lean in favor of the respondent and thus failed to apply the doctrine that Government is not estopped to question the illegal acts of its officials.

• Wrong Case Applied: Petitioner argued that the Court of Appeals wrongly applied the Imus case, not the Osmeña case, to the present case.

• Specific Statutory Authority: Respondent Lexber asserted that the subject contract was entered into by Mayor Simon in behalf of the Quezon City government pursuant to specific statutory authority, more particularly the provisions of Executive Order No. 392, which empowered the Metropolitan Manila Authority to have jurisdiction over the delivery of basic urban services requiring coordination, including sanitation and waste management, and the pertinent resolutions of the MMA and MMC authorizing the management of garbage collection and disposal.

• Applicability of Imus Case: Respondent relied on the ruling in Imus Electric Company vs. Municipality of Imus, wherein the Supreme Court treated a contract as valid and required the defendant municipality to comply with its obligation despite the absence of prior approved appropriation at the time of the execution of the contract, on the ground that the obligation is not payable until the performance of the services contracted.

• Validity of the Contract: Whether the second negotiated contract of November 8, 1990 is null and void ab initio for failure to comply with the mandatory requirements of Sections 85, 86 and 87 of Presidential Decree No. 1445 and Section 177(b) of Batas Pambansa Blg. 337 requiring prior appropriation and certification of fund availability.

• Ratification: Whether the facts and evidence support the Court of Appeals' conclusion that, notwithstanding the lack of appropriation, subsequent acts of the petitioner constituted a ratification of the subject negotiated contract.

• Applicable Jurisprudence: Whether the Court of Appeals gravely erred in holding that the Imus case, not the Osmeña case, is applicable to the instant controversy.

• Validity of the Contract: No. The second negotiated contract was not null and void ab initio. The contract was entered into by Mayor Brigido Simon, Jr. pursuant to law or specific statutory authority as required by P.D. 1445, specifically under Section 84 thereof which allows disbursement of public funds "in pursuance of an appropriation law or other specific statutory authority," and under B.P. Blg. 337 which empowered the city mayor to represent the city in its business transactions without prior sanggunian authorization.

• Ratification: Yes. There was constructive ratification on the part of petitioner. The records show that upon completion of the infrastructure, petitioner started to dump garbage in the premises, issued a Notice to Commence Work, and issued Disbursement Vouchers for services rendered to haul garbage to the sanitary landfill, which vouchers were passed in audit and duly approved and paid.

• Applicable Jurisprudence: No. The Imus case, not the Osmeña case, governs the controversy. The case at bar involved a contract for services still to be rendered which was payable on a monthly basis, just as in the Imus case, whereas the Osmeña case involved the construction of an abattoir entailing the payment in full of a fixed amount.

• Validity of the Contract: The Court reasoned that while Sections 85 and 86 of P.D. 1445 provide that contracts involving expenditure of public funds can be entered into only when there is an appropriation therefor and must be certified by the proper accounting official, the very same Presidential Decree No. 1445 does not provide that the absence of an appropriation law ipso facto makes a contract entered into by a local government unit null and void. Section 84 of the statute specifically provides that revenue funds shall not be paid out of any public treasury or depository except in pursuance of an appropriation law or other specific statutory authority. Thus, when a contract is entered into by a city mayor pursuant to specific statutory authority, the law allows the disbursement of funds from any public treasury or depository therefor. Furthermore, then Mayor Brigido Simon, Jr. did not enter into the subject contract without legal authority. The Local Government Code of 1983, or B.P. Blg. 337, which was then in force, specifically and exclusively empowered the city mayor to "represent the city in its business transactions, and sign all warrants drawn on the city treasury and all bonds, contracts and obligations of the city." Such power granted to the city mayor by B.P. Blg. 337 was not qualified nor restricted by any prior action or authority of the city council. The Court noted that while the subsequent Local Government Code of 1991 (R.A. No. 7160) provides that the mayor's representation must be "upon authority of the sangguniang panlungsod or pursuant to law or ordinance," there was no such qualification under the old code. The Court also found that Executive Order No. 392 and the pertinent resolutions of the MMA and MMC fully clothed Mayor Brigido Simon, Jr. with the authority to enter and sign the subject contract for and in behalf of the city government even without express authority from the City Council. The Court further held that LOI No. 968 does not apply to contracts executed by local chief executives since it was directed only to "Ministries and Heads/Chief Accountants of Ministry, Bureau, Office, Agency of the National Government, including State Universities and Colleges, and the Chairman, Commission on Audit," and Quezon City cannot be considered a ministry, bureau, office or agency of the national government.

• Ratification: The Court held that since the subject contract was valid and binding, ratification of the subject contract was not necessary. Nevertheless, the Court found that there was constructive ratification on the part of petitioner. The records show that upon completion of the infrastructure and other facilities, petitioner, albeit still under the administration of Mayor Brigido Simon, Jr., started to dump garbage in the premises. On December 11, 1991, a Notice to Commence Work, implementing the contract for the maintenance of the sanitary landfill, starting December 15, 1991 to December 31, 1995, was issued by said Mayor, as recommended by Project Manager Rene R. Lazaro and City Engineer Alfredo Macapugay. The records also reveal that petitioner issued Disbursement Vouchers of various amounts covering the period between March 1, 1992 to April 30, 1992 for the services rendered by the Mud Regal Group, Incorporated to haul garbage to the sanitary landfill, which were passed in audit and duly approved and paid by petitioner. The Court concluded that petitioner dealt unfairly with respondent Lexber, and that by the mere pretext that the subject contract was not approved nor ratified by the city council, petitioner refused to perform its obligations under the subject contract. The Court emphasized that whether or not garbage was actually dumped is of no moment, for respondent Lexber's undertaking was to make available to petitioner the landfill site and to provide the manpower and machinery to maintain the facility.

• Applicable Jurisprudence: The Court distinguished the Osmeña case from the instant controversy. While in Osmeña the construction of an abattoir entailed the payment in full of a fixed amount, the case at bar involved a contract for services still to be rendered which was payable on a monthly basis, just as in the Imus case. In the Imus case, the Supreme Court did not declare the contract null and void ab initio for the reason that appropriation for the project can be made subsequent to the execution of the contract. The Court also noted that while petitioner would attack the subject contract for being fatally defective, the Commission on Audit did not declare the said contract as null and void, unlike in the Osmeña case where the questioned contract was declared invalid by the COA. The Court further observed that the contracts were admittedly negotiated contracts, but this fact was never raised by the petitioner before the trial court, Court of Appeals, and in the instant petition, and the question of the validity of the said contracts never hinged on the fact that there was no public bidding.

• Appropriation before entering into contract — Under Section 85 of P.D. 1445, no contract involving the expenditure of public funds shall be entered into unless there is an appropriation therefor, the unexpended balance of which, free of other obligations, is sufficient to cover the proposed expenditure. However, Section 84 of the same code provides that revenue funds shall not be paid out of any public treasury or depository except in pursuance of an appropriation law or other specific statutory authority. The Court applied this doctrine by holding that a contract entered into by a city mayor pursuant to specific statutory authority is valid even without prior appropriation, as the law itself allows disbursement of public funds in such circumstances.

• Statutory authority of the city mayor under B.P. Blg. 337 — Under the Local Government Code of 1983 (B.P. Blg. 337), the city mayor was specifically and exclusively empowered to "represent the city in its business transactions, and sign all warrants drawn on the city treasury and all bonds, contracts and obligations of the city," without qualification or restriction by any prior action or authority of the city council. The Court applied this doctrine by holding that Mayor Simon had the authority to enter into the subject contracts without prior sanggunian authorization, as the requirement of prior authority was imposed only later by R.A. No. 7160.

• Constructive ratification — A local government unit may be deemed to have constructively ratified a contract through its subsequent acts, such as availing of the services or facilities provided under the contract, issuing notices to commence work, and issuing and paying disbursement vouchers for services rendered. The Court applied this doctrine by finding that petitioner's actual use of the sanitary landfill, issuance of the Notice to Commence Work, and payment of disbursement vouchers for hauling services constituted constructive ratification of the second negotiated contract.

• Imus doctrine on contracts for services payable monthly — A contract for services still to be rendered which is payable on a monthly basis is not void ab initio for lack of prior appropriation, because appropriation for the project can be made subsequent to the execution of the contract, and the obligation is not payable until the performance of the services contracted. The Court applied this doctrine by distinguishing the Imus case from the Osmeña case, holding that the former governs contracts for continuing services payable periodically, while the latter governs contracts requiring payment in full of a fixed amount at the time of execution.

• "Revenue funds shall not be paid out of any public treasury or depository except in pursuance of an appropriation law or other specific statutory authority." — This quotation from Section 84 of P.D. 1445 is central to the Court's reasoning that an appropriation law is not the only authority upon which public funds shall be disbursed, and that contracts entered into pursuant to specific statutory authority are valid.

• "The Local Government Code of 1983, or B.P. Blg. 337, which was then in force, specifically and exclusively empowered the city mayor to 'represent the city in its business transactions, and sign all warrants drawn on the city treasury and all bonds, contracts and obligations of the city.' Such power granted to the city mayor by B.P. Blg. 337 was not qualified nor restricted by any prior action or authority of the city council." — This passage establishes the statutory basis for the Court's holding that Mayor Simon had authority to enter into the subject contracts without prior city council approval, distinguishing the old Local Government Code from the subsequent R.A. No. 7160.

• "It is true that the duration of the contract was fixed at ten (10) years, a period which was accepted by the municipality on the ground that only under the terms of the contract and the law, the municipality was not bound to make advanced payments and, consequently, there was no reason for it to appropriate funds for the said public service except for a period of one month or one year at most." — This quotation from the Imus case, as quoted by the Court, articulates the doctrine that contracts for services payable on a periodic basis do not require appropriation for the entire contract term, as the obligation is not payable until the services are rendered.

• Imus Electric Company vs. Municipality of Imus, 59 Phil. 823 (1934) — Controlling precedent. The Court applied this case to hold that a contract for services payable on a monthly basis is valid despite the absence of prior appropriation for the entire contract term, because the municipality is not bound to make advanced payments and appropriation can be made subsequent to the execution of the contract.

• Osmeña vs. Commission on Audit, 230 SCRA 585 (1994) — Distinguished. The Court held that this case does not apply because it involved a contract for the construction of an abattoir entailing the payment in full of a fixed amount, unlike the instant case which involved a contract for services still to be rendered payable on a monthly basis. Additionally, in Osmeña, the COA had declared the contract invalid, whereas in the instant case, the COA did not declare the subject contract null and void.

• Bisaya Land Transportation Co., Inc. vs. Sanchez, 153 SCRA 532, 541 (1987) — Cited in support of the conclusion that petitioner had actually ratified the subject contract through its acts of dumping garbage and paying for services.

• Barons Marketing Corp. vs. CA, 28 SCRA 96, 106 (1998) — Cited for the principle that obligations arising from contracts have the force of law between the contracting parties and each party is bound to fulfill what has been expressly stipulated therein.

• Allied Banking Corp. vs. CA, 284 SCRA 357, 364 (1998) — Cited by way of comparison (Cf.) for the principle that only respondent Lexber was bound by the contract while petitioner acted as if it were free therefrom.

• Section 84, Presidential Decree No. 1445 (Auditing Code of the Philippines) — Provides that revenue funds shall not be paid out of any public treasury or depository except in pursuance of an appropriation law or other specific statutory authority. The Court applied this provision to hold that public funds may be disbursed not only pursuant to an appropriation law, but also in pursuance of other specific statutory authority, such as the authority granted to the city mayor under B.P. Blg. 337 and E.O. No. 392.

• Section 85, Presidential Decree No. 1445 — Requires that no contract involving the expenditure of public funds shall be entered into unless there is an appropriation therefor, the unexpended balance of which, free of other obligations, is sufficient to cover the proposed expenditure. The Court interpreted this provision in light of Section 84, holding that the absence of an appropriation law does not ipso facto make a contract entered into by a local government unit null and void.

• Section 86, Presidential Decree No. 1445 — Requires that no contract involving the expenditure of public funds by any government agency shall be entered into or authorized unless the proper accounting official or the agency concerned shall have certified 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. The Court found that a Certificate of Availability of Funds dated April 4, 1991 was issued, showing sufficient appropriation to cover at least three months of operations.

• Section 87, Presidential Decree No. 1445 — Provides that any contract entered into contrary to the requirements of Sections 85 and 86 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. The Court held that this provision did not render the subject contract void because the contract was entered into pursuant to specific statutory authority.

• Section 171(2)(g), Batas Pambansa Blg. 337 (Local Government Code of 1983) — Empowered the city mayor to "represent the city in its business transactions, and sign all warrants drawn on the city treasury and all bonds, contracts and obligations of the city." The Court applied this provision to hold that Mayor Simon had authority to enter into the subject contracts without prior city council authorization.

• Section 177(b), Batas Pambansa Blg. 337 — Empowered the Sangguniang Panlungsod to "appropriate funds for expenses of the city government, and fix the salaries of its officers and employees according to law." The Court held that while the city council has the power to appropriate funds, the city mayor's power to enter into contracts was not qualified by any prior action or authority of the city council.

• Section 455(vi), Republic Act No. 7160 (Local Government Code of 1991) — Provides that the mayor's representation of the city in its business transactions must be "upon authority of the sangguniang panlungsod or pursuant to law or ordinance." The Court distinguished this provision as a subsequent requirement imposed long after the contracts had already been executed and implemented.

• Section 1, Executive Order No. 392 — Empowered the Metropolitan Manila Authority to "have jurisdiction over the delivery of basic urban services requiring coordination" in the Metropolitan area, including "sanitation and waste management." The Court applied this provision to hold that Mayor Simon was clothed with authority to enter into the subject contract even without express authority from the City Council.

• Section 9(f), Commonwealth Act No. 502 (Charter of Quezon City) — Provides that the mayor shall exercise general powers and duties, such as signing "all warrants drawn on the city treasurer and all bonds, contracts, and obligations of the city." The Court cited this provision to show that nothing in the city charter requires prior authorization by the city council before the City Mayor can enter into contracts.

• Section 12(a), Commonwealth Act No. 502 — Grants the City Council the power, by ordinance or resolution, "to make all appropriations for the expenses of the government of the city." The Court cited this provision to show the delineation of powers between the Mayor and the City Council.

• Section 12(m), Commonwealth Act No. 502 — Grants the City Council the power "to prohibit the throwing or depositing of offal, garbage, refuse, or other offensive matter in the same, and to provide for its collection and disposition." The Court cited this provision to show that while the powers of the Mayor and the City Council are clearly delineated, nothing requires prior authorization by the city council before the City Mayor can enter into contracts.

• Letter of Instruction No. 968 — Requires that all contracts for capital projects and for supply of commodities and services shall be signed by agency heads or other duly authorized official only when there are available funds, with the chief accountant of the contracting agency signing such contracts as witness. The Court held that this requirement does not apply to contracts executed by local chief executives since the LOI was directed only to national government agencies, and Quezon City cannot be considered a ministry, bureau, office or agency of the national government.

Davide, Jr., Puno, Kapunan, and Pardo, JJ., concurred in the decision.

• Justice Pardo — Dissented, arguing that the contracts in question were void. Justice Pardo maintained that: (1) the power of the city mayor of Quezon City under its charter to enter into contracts for basic services is hinged on an enabling ordinance, and under the charter, the power of the city mayor to enter into contracts is subject to the prior authorization of the city council by proper enactment of an ordinance; (2) under B.P. Blg. 337, the city mayor has no power to appropriate funds to support the contracts, and the power to provide for "depositing, leaving or throwing of garbage" is vested in the city council, as is the power to appropriate funds for expenses of the city government; (3) there was no certificate of availability of funds attached to and forming part of the contracts, and the certificate referred to by the trial court stated that there was "sufficient appropriation to cover at least for a period of three months," which is short of the required certification under P.D. No. 1445, Section 86; (4) neither may the alleged resolution of the Metropolitan Manila Authority be considered statutory authority for the mayor to enter into such contracts, as the MMA has no legislative power; (5) even as to form, the law requires such contracts to be signed and witnessed by the city treasurer, and neither the first nor the second negotiated contract was witnessed by the City Treasurer of Quezon City; and (6) the contracts were admittedly negotiated ones, and the law requires of such contracts a public bidding, which was dispensed with on the justification that "time is of the essence," a hackneyed excuse that has no legal basis and renders the contracts null and void. Justice Pardo voted to GRANT the petition and SET ASIDE the decision of the Court of Appeals and the trial court.