De Castro vs. Commission on Audit

COA's power to disallow is strictly limited to expenditures that are illegal, irregular, unnecessary, excessive, extravagant, or unconscionable; it cannot nullify completed government contracts where public benefit has been realized (applying quantum meruit), nor can it impose administrative penalties or fines disguised as disallowances, though it may initiate appropriate administrative, civil, or criminal actions before the proper bodies.

The Municipality of Bulan, Sorsogon enacted Ordinance No. 004, Series of 2003, authorizing a P50 million bond flotation to fund the construction of the Bulan Integrated Bus Terminal (BIBT) and a new Municipal Slaughterhouse. The Sangguniang Bayan authorized the Municipal Mayor to conduct public biddings. In October 2006, the Municipal Government awarded the BIBT contract to S.R. Baldon Construction & Supply for P32,984,700.00 and the Slaughterhouse contract to Steven Construction & Supply for P4,991,800.00. Following project completion and payment, the COA Regional Cluster Director ordered a special audit, resulting in multiple Notices of Disallowance assessing liability for unaccomplished work, overpricing, liquidated damages for delays, and declaring the contracts null and void for failure to post procurement opportunities in the Philippine Government Procurement System (PhilGEPS).

• The Procurement and Contracts: On June 30, 2003, the Sangguniang Bayan of Bulan, Sorsogon enacted Ordinance No. 004, Series of 2003, authorizing a P50 million bond flotation to fund the Bulan Integrated Bus Terminal (BIBT) and Municipal Slaughterhouse projects. Section 8 authorized the Municipal Mayor to conduct public biddings. In October 2006, the Municipal Government conducted public biddings and awarded the design and construction of the BIBT to S.R. Baldon Construction & Supply for P32,984,700.00, and the construction of the Slaughterhouse to Steven Construction & Supply for P4,991,800.00.
• The Special Audit and Notices of Disallowance: Following payment of the projects, the COA Regional Cluster Director issued Office Order No. 2008-06-07 on June 23, 2008, directing a special audit. The audit resulted in six Notices of Disallowance dated August 18 and October 9, 2009:
  • ND No. 2008-06-27-001-101 (2009): P196,526.13 for unaccomplished deficiency (0.58%) due to installation of a 25kva instead of 50kva transformer.
  • ND No. 2008-06-27-002-101 (2009): P4,368,046.58 representing 16.79% overprice net of 10% tolerable allowance based on COA's own cost estimates showing the contract price exceeded COA estimates by 26.79%.
  • ND No. 2008-06-27-003-101 (2009): P2,638,776.00 for liquidated damages for 80 days delay in BIBT completion, allegedly caused by a work suspension order issued by Mayor De Castro from July 2 to September 10, 2007 due to refinancing agreement negotiations.
  • ND No. 2008-06-27-004-101 (2009): P169,721.20 for liquidated damages for 34 days delay in Slaughterhouse completion based on inconsistent certifications by the Municipal Engineer.
  • ND Nos. 2008-06-27-005-101 and 006-101 (2009): P37,976,500.00 declaring the contracts null and void for failure to post procurement opportunities in the PhilGEPS website in violation of Section 8-IRR-A of RA No. 9184.
  • Appeals and Automatic Review: Petitioners appealed to the COA Regional Office No. V, which partially lifted some disallowances but modified others. The COA Proper affirmed with modifications: (1) sustained liquidated damages of P145,770.60 against the contractor for delay in transformer installation; (2) lifted the overpricing disallowance (P2,509,485.57) but sustained the overestimation disallowance (P1,857,875.33) against BAC Chairman Dennis H. Dino and Municipal Engineer Toby C. Gonzales, Jr.; (3) set aside the lifting of the P2,638,776.00 liquidated damages for the 80-day delay, holding Mayor De Castro liable; (4) set aside the lifting of the P169,721.00 disallowance for the 34-day delay, holding Municipal Engineer Gonzales liable for misfeasance; and (5) affirmed the lifting of the nullity disallowances (P37,976,500) but pronounced petitioners administratively liable for PhilGEPS violations.

• Procedural Due Process and Delay: Petitioners argued that COA violated their right to speedy disposition by failing to resolve the case within the periods prescribed under the 2009 Revised Rules of Procedure of the COA (RRPC), and denied them due process by failing to individually resolve every argument in their Motion for Reconsideration, by not issuing amended Notices of Disallowance as directed, and by modifying grounds without new notice.
• Overestimation and Overpricing (ND No. 2008-06-27-002-101): Petitioners maintained that COA gravely abused discretion in relying on ACEL equipment rental rates adopted by DPWH but not published in the Office of the National Administrative Register (ONAR). They challenged the computation as questionable and argued that Mayor De Castro could not be held liable for overestimation under the Arias doctrine.
• Work Suspension and Liquidated Damages (ND No. 2008-06-27-003-101): Petitioners asserted that the work suspension order issued by Mayor De Castro was justified under the General Welfare Clause to protect municipal interests during refinancing negotiations, and that the delay was not attributable to the contractor, thus no liquidated damages should be imposed. They argued that assuming liability existed, it should fall on the contractor, not the Mayor.
• Misfeasance as Ground for Disallowance (ND No. 2008-06-27-004-101): Petitioners argued that misfeasance in giving inconsistent information is not a ground for disallowance of expenditure, and that COA improperly imposed an administrative penalty disguised as a disallowance.
• PhilGEPS Violations (ND Nos. 005 and 006): Petitioners contended that COA improperly assumed administrative disciplinary jurisdiction by pronouncing them administratively liable despite lifting the disallowances based on the completed status of the projects.

• Timeliness: Respondent argued the petition was filed beyond the 30-day reglementary period under Rule 64, and that the "fresh period rule" does not apply to Rule 65 petitions.
• Speedy Disposition and Due Process: Respondent countered that the delay was justified by the complexity and technical nature of the audit, and that the Notices of Disallowance sufficiently complied with due process by stating reasons and referencing supporting documents. They maintained that failure to discuss every argument does not violate due process.
• Liability for Overestimation: Respondent argued that the Mayor, as Head of Procuring Entity, and the BAC Chairman and Municipal Engineer were liable for overestimated quantities, and that the contractor was liable under unjust enrichment.
• Work Suspension: Respondent maintained that the work suspension order was not a valid ground under RA 9184 as it was not a fortuitous event, and that the Mayor should be liable for the liquidated damages as the suspension caused the delay.
• Administrative Liability: Respondent asserted that pronouncing administrative liability without imposing it as a disallowance was within their authority to initiate actions under Section 31 of the Government Auditing Rules and Regulations.

• Timeliness of Petition: Whether the petition for certiorari was filed within the reglementary period.
• Right to Speedy Disposition: Whether COA violated petitioners' constitutional right to speedy disposition of cases by resolving the appeals beyond the prescribed periods.
• Due Process in Audit Proceedings: Whether COA violated due process by (a) failing to issue amended NDs, (b) modifying grounds without new notice, (c) failing to cite specific laws violated in the NDs, and (d) failing to address every argument in the Motion for Reconsideration.
• Scope of COA Review: Whether COA may modify the grounds for disallowance on appeal beyond those relied upon by the auditor.
• Liability for Overestimation (ND No. 2008-06-27-002-101): Whether the disallowance for overestimated quantities should be sustained and who should be held liable.
• Liability for Project Delays (ND Nos. 003 and 004): Whether liquidated damages for project delays may be disallowed where the delay was caused by the procuring entity's work suspension or where evidence of delay is insufficient.
• Nature of Disallowance vs. Administrative Liability: Whether COA may impose liability for "misfeasance" as a disallowance and whether it may pronounce administrative liability while lifting disallowances.
• Effect of PhilGEPS Violations: Whether failure to post in PhilGEPS warrants nullity of completed contracts and disallowance of payments.

• Timeliness: The petition was filed out of time, but procedural rules were relaxed in light of prima facie merit, the OSG's partial manifestation indicating reversible errors, and the substantial justice involved.
• Speedy Disposition: No violation occurred; the delay was not inordinate given the complexity of six disallowances involving technical issues, and the right to speedy disposition is relative and flexible.
• Due Process: The NDs complied with due process requirements as they stated reasons and referenced supporting documents, affording petitioners opportunity to respond. COA is not required to issue amended NDs when the basis for liability is subsumed in the original notice, nor must it resolve every argument raised if not necessary for the decision.
• COA's Authority: COA is not restricted to the specific grounds cited by the auditor in the original Notice of Disallowance. In consonance with its general audit power under the Constitution, COA may modify the grounds for disallowance on appeal if the evidence supports a different basis for liability, provided the parties have been afforded due process.
• Overestimation Liability: The disallowance for overestimated quantities (P1,857,875.33) was sustained. However, only BAC Chairman Dennis H. Dino and Municipal Engineer Toby C. Gonzales, Jr. were held liable as they were directly responsible for budget preparation. Mayor De Castro was excluded under the Arias doctrine absent notice of suspicious circumstances. The contractor was not liable for unjust enrichment as no proof showed the overestimated materials were not used or diverted for personal gain.
• Liquidated Damages for Delays:
  • ND No. 2008-06-27-003-101: The disallowance of P2,638,776.00 for the 80-day delay was set aside. The liquidated damages clause under RA 9184 applies only to delays caused by the contractor, not to delays resulting from the procuring entity's work suspension order. Even assuming liability, the suspension was issued in good faith to protect municipal interests during refinancing negotiations, excusing the return under Part 2a of Madera v. COA.
  • ND No. 2008-06-27-004-101: The disallowance of P169,721.00 for the 34-day delay was lifted due to insufficiency of evidence; documentary evidence showed the Slaughterhouse was completed within the contract time. The imposition of liability on the Municipal Engineer for "misfeasance" constituted an administrative penalty disguised as a disallowance, which exceeds COA's authority.
  • PhilGEPS Violations: The disallowances declaring the contracts null and void (ND Nos. 005 and 006) were lifted for want of legal basis. Where projects are completed and public benefits realized, equitable considerations allow payment to contractors based on quantum meruit. However, COA may make preliminary findings of administrative liability for the purpose of initiating appropriate actions before the proper forum.

• Scope of COA's Disallowance Power: COA's authority to disallow is limited to expenditures that are illegal, irregular, unnecessary, excessive, extravagant, or unconscionable. It cannot use the disallowance mechanism to impose administrative penalties or fines for misfeasance; such authority is limited to initiating appropriate administrative, civil, or criminal actions before the proper bodies.
• Modification of Grounds on Appeal: COA is not restricted to the specific grounds cited by the auditor in the original Notice of Disallowance. In consonance with its general audit power under the Constitution, COA may modify the grounds for disallowance on appeal if the evidence supports a different basis for liability, provided the parties have been afforded due process.
• Personal Liability Under Section 103 of PD 1445: Personal liability for disallowed expenditures attaches only to officials or employees found directly responsible therefor. Under the Arias doctrine, heads of offices who approve transactions are not personally liable absent proof that they had notice of circumstances arousing suspicion that the transaction was excessive or irregular.
• Liquidated Damages Under RA 9184: Liquidated damages under the Government Procurement Reform Act are deterrents against delays caused by the contractor. Where delays are attributable to the procuring entity (e.g., through work suspension orders) or where time extensions are granted, the contractor cannot be held liable for liquidated damages.
• Unjust Enrichment in Government Contracts: For a contractor to be liable for unjust enrichment due to overestimation, it must be proven that the overestimated quantities were not utilized for the project or were diverted for personal gain; mere overestimation in the contract does not suffice.
• Effect of Non-Compliance with PhilGEPS: While mandatory compliance with PhilGEPS posting requirements is required under RA 9184, contracts already completed and where public benefit has been realized cannot be nullified through disallowance; instead, quantum meruit applies to validate payments, without prejudice to administrative liability of responsible officials.

• "COA is not required to limit its review only to the grounds relied upon by a government agency's auditor with respect to disallowing certain disbursements of public funds. In consonance with its general audit power, respondent Commission on Audit is not merely legally permitted, but is also duty-bound to make its own assessment of the merits of the disallowed disbursement and not simply restrict itself to reviewing the validity of the ground relied upon by the auditor of the government agency concerned."
• "The power of COA to disallow expenditures proceeds from its duty to prevent irregular, unnecessary, excessive, or extravagant expenditures or uses of government funds or property, and those which are illegal and unconscionable. It stands to reason, therefore, that in the absence of these anomalous types of disbursements, there is no ground to warrant the disallowance of an expenditure."
• "The above-cited clause on liquidated damages is clear about its purpose and application: it is a deterrent against delays by the contractor, which result in a breach of the contract... if the delay is not the contractor's fault, the clause on liquidated damages is not triggered and no such damages are due."
• "Applying the Arias doctrine, the fact that petitioner De Castro was the final approving authority of the transactions in question and that the officers who processed the same were directly under her supervision, do not suffice to make her liable, in the absence of indication that she had notice of any circumstance that could have aroused her suspicion that what she was approving falls within the purview of an excessive transaction."

• Arias v. Sandiganbayan, 259 Phil. 794 (1989) — Established the doctrine that heads of offices are not personally liable for disallowed transactions absent notice of suspicious circumstances; applied to exclude Mayor De Castro from liability for overestimation.
• Madera v. Commission on Audit, G.R. No. 244128, September 8, 2020 — Cited for the Rules of Return: (1) if ND is set aside, no return is required; (2) approving officers acting in good faith are not civilly liable to return.
• The Law Firm of Laguesma Magsalin Consulta and Gastardo v. COA, 750 Phil. 258 (2015) — Cited for exceptions allowing relaxation of procedural rules (matters of life, liberty, honor, property; compelling circumstances; merits of the case; etc.).
• Maritime Industry Authority v. COA, 750 Phil. 288 (2015) — Cited for the principle that COA has the duty to make its own assessment of disallowed disbursements and is not limited to the auditor's grounds.
• Neypes v. Court of Appeals, 506 Phil. 613 (2005) — Distinguished; the fresh period rule does not apply to petitions for certiorari under Rule 64.

• Section 103, Presidential Decree No. 1445 (Government Auditing Code) — Defines personal liability for expenditures of government funds or uses of property in violation of law or regulations; limits liability to officials or employees directly responsible therefor.
• Section 8 and Item 9(1) of Annex E, Implementing Rules and Regulations (IRR-A) of Republic Act No. 9184 (Government Procurement Reform Act) — Mandates PhilGEPS posting and enumerates valid grounds for work suspension by the procuring entity (force majeure, fortuitous events, unsafe conditions, failure to correct bad conditions, or adjustment of plans).
• Item 8(1) of Annex E, IRR-A of RA No. 9184 — Provides for liquidated damages for delays caused by the contractor's refusal or failure to complete work within contract time.
• Section 16, Article III, 1987 Constitution — Guarantees the right to speedy disposition of cases before all judicial, quasi-judicial, and administrative bodies.
• Section 31, Volume I, Government Auditing Rules and Regulations — Authorizes COA to initiate criminal, civil, or administrative actions against government officers upon discovery of violations during audit.

Peralta, C.J., Perlas-Bernabe, Leonen, Caguioa, Gesmundo, Hernando, Carandang, Lazaro-Javier, Inting, Lopez, and Delos Santos, JJ.