Department of Health vs. C.V. Cancuela & Associates

Government contracts involving the expenditure of public funds entered into without the requisite certification of availability of funds from the proper accounting official are void ab initio, but the contracting party may recover the reasonable value of services actually rendered and accepted on the principle of quantum meruit, and the State's immunity from suit cannot bar such recovery where it would result in unjust enrichment.

The Department of Health (DOH), through the chiefs of three regional hospitals — Baguio General Hospital and Medical Center, Batangas Regional Hospital, and Corazon L. Montelibano Memorial Regional Hospital in Bacolod City — entered into Owner-Consultant Agreements with private respondents C.V. Cancuela & Associates, Architects (CVCAA), in association with MCS Engineers Co. and A.O. Mansueto IV – Electrical Engineering Services, for the preparation of detailed architectural and engineering design plans, technical specifications, cost estimates, bid documents, and construction supervision for infrastructure projects at each hospital. The Agreements were government contracts governed by the Auditing Code of the Philippines (P.D. 1445), the Administrative Code of 1987 (E.O. 292), and the Government Accounting and Auditing Manual, all of which impose specific formalities on contracts chargeable against public funds.

The Department of Health, through the chiefs of three regional hospitals, entered into three Owner-Consultant Agreements with private respondents C.V. Cancuela & Associates, Architects (CVCAA), in association with MCS Engineers Co. and A.O. Mansueto IV – Electrical Engineering Services. The first Agreement, dated October 7, 1996, was signed by Dr. Jesus del Prado, Chief of Hospital of the Baguio General Hospital and Medical Center; the second, dated October 8, 1996, by Dr. Vicente Gahol, Chief of Hospital of the Batangas Regional Hospital; and the third, dated October 7, 1996, by Dr. Lourdes Espina, Officer-in-Charge of the Bacolod Regional Hospital. The Agreements, which contained almost identical language, required private respondents to prepare detailed architectural and engineering design plans, technical specifications, detailed cost estimates, bid documents, and to provide construction supervision until completion and hand-over. Work was divided into architectural and engineering (A & E) services and construction supervision (CS). The Agreements stipulated that private respondents' professional fees would be 7.5% of the project fund allocation, broken down into 6% for A & E services and 1.5% for full-time construction supervision. Thus, for the Baguio Project, the fee was ₱1,444,875.00 (7.5% of ₱19,265,000.00); for the Batangas Project, ₱1,318,020.00 (7.5% of ₱17,575,000.00); and for the Bacolod Project, ₱890,549.00 (7.5% of ₱11,875,000.00). While the Agreements were witnessed by the respective chief accountants and approved by the Secretary of Health, no certificates of availability of funds were issued to cover the professional fees.

On October 15, 1996, petitioner's representative, Architect Ma. Rebecca M. Peñafiel, sent separate letters to the respective chiefs of hospitals confirming acceptance of private respondents' complete Contract or Bid Documents, including A & E Design Plans, Technical Specifications, and Detailed Cost Estimates for each project, and recommended payment of 7.5% of the project allocation as consultancy fees. The letters advised that full-time construction supervision would commence upon issuance of Notices to Proceed to the winning contractors. Before such notices could be issued, however, petitioner amended the three Agreements on December 10, 1996 by deleting "full-time construction supervision" from private respondents' scope of work and replacing it with "periodic visits." The amendments were likewise witnessed by the chief accountants and approved by the Secretary of Health, but again no certifications of availability of funds were issued. With full-time construction supervision excluded, the professional fee was correspondingly reduced from 7.5% of the project fund allocation to 6% of the project contract cost, payable in installments tied to milestones: 70% upon completion and submission of Contract Documents, adjustment to 80% upon 50% completion of construction, and the remaining balance upon completion and final acceptance. The payments were expressly made "subject to the usual accounting and auditing rules and regulations."

During construction, various deficiencies in private respondents' performance were allegedly discovered but were not communicated to them. Petitioner withheld payment of the consultancy fees and did not return the documents, plans, specifications, and estimates submitted by private respondents. Despite written demands, petitioner continued to withhold payment. Private respondents appealed by letter dated August 29, 1997 to then Secretary of Health Carmencita C. Reodica, stating that the appeal was their ultimate administrative remedy before resorting to arbitration under E.O. 1008. Further letters followed, including one dated February 19, 1998 expressing intent to submit the dispute to the CIAC. When the demands remained unheeded, private respondents filed on September 21, 1998 with the CIAC their request for adjudication, docketed as CIAC Case No. 31-98. The Sole Arbitrator, Atty. Custodio O. Parlade, rendered a decision on March 30, 1999 awarding ₱3,492,713 for A & E services, with interest at 6% per annum from the date of award until finality and 12% per annum thereafter on the principal and accrued interest; the escalation claim was denied and no award was made for attorney's fees and costs. The Court of Appeals affirmed this decision in its consolidated ruling dated June 28, 2000, finding that the CIAC had jurisdiction and did not commit grave abuse of discretion.

• Prematurity of Claims: Petitioner asserted that private respondents' claims were premature because they failed to obtain the decision of the Secretary of Health prior to arbitration, which petitioner characterized as a mandatory requirement under Article 12 of the Agreements.
• State Immunity: Petitioner argued that the CIAC should have dismissed the petition on the ground that the State is immune from suit, the Agreements having been entered into pursuant to the State's sovereign and governmental power to promote the health and well-being of citizens.
• Basis and Amount of Monetary Award: Petitioner contended that private respondents were entitled only to the A & E services rendered in the amount of ₱2,749,960.40, representing 6% of the total cost of the project, taking into account the deletion of the construction supervision provision; and that no interest on the principal was due because petitioner did not incur any delay and the Agreements contained no express stipulation on interest.
• Nullity of Agreements (raised in Memorandum): Petitioner raised for the first time in its Memorandum before the Supreme Court the argument that the Agreements are void from the beginning for failure to include a certification of availability of funds, as required by existing law, and that consultancy fees therefore cannot be based on the project fund allocation but on the principle of quantum meruit.

• Proper Resort to Arbitration: Private respondents countered that, as correctly held by the Court of Appeals and the Sole Arbitrator, they did not fail in their duty to go through the mode of settling their claims for payment as stipulated in the Agreements.
• Factual and Legal Bases for Award: Private respondents maintained that the records clearly established the factual and legal bases for the award in their favor.

• Validity of the Agreements: Whether the Owner-Consultant Agreements are void ab initio for failure to secure the requisite certification of availability of funds under P.D. 1445 and E.O. 292.
• Stipulation of Professional Fees as Percentage: Whether the stipulation of professional fees as a percentage of project cost, rather than as fixed monetary amounts, contravenes Section 525 of the Government Accounting and Auditing Manual.
• State Immunity from Suit: Whether the State's immunity from suit bars private respondents' claim for compensation.
• Entitlement to Compensation on Quantum Meruit: Whether private respondents are entitled to compensation on a quantum meruit basis notwithstanding the nullity of the Agreements.

• Validity of the Agreements: Yes, the Agreements are void ab initio. The certification of availability of funds is a condition sine qua non to entering into any government contract involving public funds, and its absence renders the contract void under Sections 85, 86, and 87 of P.D. 1445 and Section 40 of E.O. 292.
• Stipulation of Professional Fees as Percentage: Yes, the percentage-based fee stipulation is invalid. Section 525 of the GAA Manual directs that fees for architectural, engineering design, and similar professional services shall be stipulated in fixed monetary or peso amounts instead of as a percentage of the project cost.
• State Immunity from Suit: No. The doctrine of State immunity cannot be invoked to perpetuate unjust enrichment, the government having received and accepted the benefits of the services rendered in good faith.
• Entitlement to Compensation on Quantum Meruit: Yes. Despite the nullity of the Agreements, the ends of substantial justice and equity require that private respondents be compensated on a quantum meruit basis for services actually performed and accepted.

• Validity of the Agreements: P.D. 1445 (the Auditing Code) provides that no contract involving the expenditure of public funds shall be entered into unless there is an appropriation therefor and unless the proper accounting official certifies that funds have been duly appropriated and are available for expenditure, with the certificate to be attached to and become an integral part of the proposed contract. Any contract entered into contrary to these requirements is void. E.O. 292 (the Administrative Code of 1987) similarly requires that no funds be disbursed without first securing the certification of the chief accountant or head of the accounting unit as to the availability of funds. The issuance of such certification is a condition sine qua non to entering into any contract or incurring any obligation chargeable against public funds. In the present case, the chief accountants of the respective hospitals did not issue the requisite certificates of availability of funds, although they signed the Agreements as instrumental witnesses. Their signatures as witnesses do not constitute substantial compliance with the explicit requirements of the Codes. As held in Melchor vs. Commission on Audit, the certification — not the accountant's signature as contract witness — is "the basic and more important validating document" and "the more reliable indicium of fund availability." Paragraph 2 of Letter of Instructions No. 968, which considers the chief accountant's signature as itself constituting a certification, must yield to the explicit provisions of the Auditing Code and the Administrative Code, an administrative issuance being subordinate to a statute. The Agreements are thus null and void from the very beginning. The illegality proceeds from an express declaration or prohibition by law (Article 1409(7) of the Civil Code), not from any intrinsic illegality, so the Agreements are not illegal per se and the party claiming thereunder may recover what had been paid or delivered under Article 1416 of the Civil Code.

• Stipulation of Professional Fees as Percentage: Section 525 of the Government Accounting and Auditing Manual provides that professional fees for architectural, engineering design, and similar professional services shall be stipulated in the contract in fixed monetary or peso amounts instead of as a percentage of the project cost, because percentage fees are inconsistent with the national goal of economy in fiscal operations — they motivate the architect or designer to design a project so as to maximize its cost. The Agreements' stipulation of 7.5% (later 6%) of the project fund allocation or project contract cost patently contravenes this provision. On top of the failure to issue certificates of availability of funds, the chiefs of hospital and chief accountants failed to heed the guidelines embodied in Section 525, with no explanation in the records for these lapses.

• State Immunity from Suit: To sustain the argument of State immunity would perpetuate a grave injustice on private respondents who performed their services in good faith and were given the run-around for over eight years, and would sanction unjust enrichment on the part of the State. Such conduct by petitioner and its officers derogates against the salutary policies enunciated in P.D. 1746 (creating the CIAP) and E.O. 1008 (the Construction Industry Arbitration Law), which promote a healthy partnership between the government and the private sector and encourage the optimum development and growth of the local construction industry. As held in EPG Construction Company vs. Vigilar, the Court cannot sanction an injustice so patent on its face and must shred the State's cloak of invincibility against suit where justice and equity demand that contractors be duly compensated on a quantum meruit basis for work done on public works projects.

• Entitlement to Compensation on Quantum Meruit: The nullity of the Agreements notwithstanding, the ends of substantial justice and equity are better served if payment is allowed on a quantum meruit basis, following the teachings in Eslao vs. Commission on Audit and Royal Trust Construction vs. Commission on Audit. In Eslao, the Court directed payment on quantum meruit despite the failure to undertake public bidding, holding that to deny payment for buildings almost fully completed and occupied would allow the government to unjustly enrich itself. In Royal Trust, the Court allowed payment on quantum meruit despite the absence of a written contract and a covering appropriation. The measure of recovery should relate to the reasonable value of the services performed, taking into account the standard of practice in the profession, the architectural and engineering skills of private respondents, and their professional expertise and standing. Compensation must, however, exclude services for "periodic visits" which the records irrefutably show were not rendered. The Court declined to declare the individual officers personally liable, deeming it highly unjust given that the government had already received and accepted the benefits of the services, though it noted en passant that it would be a non sequitur to let the officers go scot-free from their negligence. The COA was also found negligent for failing to call attention to defects in the contracts within five days from receipt, as required by COA Circular No. 76-34.

• Certification of Availability of Funds as a Condition Sine Qua Non — Under P.D. 1445 (the Auditing Code) and E.O. 292 (the Administrative Code of 1987), no contract involving the expenditure of public funds shall be entered into unless the proper accounting official certifies that funds have been duly appropriated and are available for expenditure. The certificate must be attached to and become an integral part of the proposed contract. Any contract entered into contrary to these requirements is void. The certification — not the accountant's signature as a contract witness — is the basic and more important validating document and the more reliable indicium of fund availability. An administrative issuance (such as LOI No. 968) treating the accountant's signature as constituting the certification must yield to the explicit statutory provisions.

• Recovery on Quantum Meruit for Void Government Contracts — Where a government contract is void for failure to comply with statutory formalities but is not illegal per se — the illegality proceeding from an express prohibition designed for protection rather than from intrinsic illegality — the party claiming thereunder may recover what had been paid or delivered. The government cannot unjustly enrich itself by accepting and using the benefits of services rendered in good faith while refusing compensation on the ground of the contract's nullity. The measure of recovery is the reasonable value of the services performed, considering the standard of practice in the profession, the skills of the claimant, and professional expertise and standing.

• State Immunity Cannot Shield Unjust Enrichment — The doctrine of State immunity from suit cannot be invoked to perpetuate a grave injustice or to sanction unjust enrichment on the part of the State. Where the government has received and accepted the benefits of services rendered in good faith, the cloak of invincibility against suit must be shed to allow due compensation.

• Percentage-Based Professional Fees Prohibited — Section 525 of the Government Accounting and Auditing Manual directs that professional fees for architectural, engineering design, and similar professional services shall be stipulated in fixed monetary or peso amounts instead of as a percentage of the project cost, as percentage fees are inconsistent with the national goal of economy in fiscal operations.

• "The formalities expressly required by the Auditing Code of the Philippines and The Administrative Code of 1987 not having been complied with, the subject three Agreements are null and void from the very beginning. The signatures of the chief accountants as instrumental witnesses do not constitute substantial compliance with the explicit requirements of said Codes." — This passage states the ratio decidendi on the nullity of government contracts entered into without the requisite certification of availability of funds, distinguishing the accountant's signature as witness from the required certification.

• "The illegality of the subject Agreements proceeds, it bears emphasis, from an express declaration or prohibition by law, not from any intrinsic illegality. As such, the Agreements are not illegal per se and the party claiming thereunder may recover what had been paid or delivered." — This passage articulates the doctrinal basis for allowing recovery on quantum meruit despite the contract's nullity, grounding the ruling in Article 1409(7) and Article 1416 of the Civil Code.

• "To sustain the argument would not only perpetuate a grave injustice on private respondents who performed their services in good faith and were given the run-around for over eight years, but would sanction as well unjust enrichment on the part of the State." — This passage defines the limits of State immunity from suit in the context of government contracts where services have been accepted and benefits retained.

• "In the case at bar then, the nullity of the herein Agreements notwithstanding, the ends of substantial justice and equity will be better served if payment to private respondents for their consultancy services is allowed on a quantum meruit basis." — This passage crystallizes the equitable remedy applied to void government contracts where the government has received and accepted the benefits of performance.

• Melchor vs. Commission on Audit, 200 SCRA 704 (1991) — Followed. The Court relied on this case to hold that the certification of availability of funds, not the accountant's signature as a contract witness, is the basic and more important validating document and the more reliable indicium of fund availability.

• Eslao vs. Commission on Audit, 195 SCRA 730 (1991) — Followed. The Court applied its teaching that payment on quantum meruit may be directed despite the failure to undertake public bidding, to prevent unjust enrichment by the government.

• Royal Trust Construction vs. Commission on Audit, G.R. No. 84202, Resolution dated Nov. 22, 1988 — Followed. The Court applied its ruling allowing payment on quantum meruit despite the absence of a written contract and a covering appropriation.

• EPG Construction Company vs. Vigilar, 354 SCRA 566 (2001) — Followed. The Court cited this case for the proposition that the State's cloak of invincibility against suit must be shed where justice and equity demand compensation for construction done on public works projects on a quantum meruit basis.

• Commissioner of Public Highways vs. San Diego, 31 SCRA 616 (1970) and Republic vs. Villasor, 54 SCRA 83 (1973) — Cited by petitioner for the proposition that government funds and properties may not be seized under writs of execution or garnishment to satisfy judgments; the Court did not sustain this argument in light of its ruling on quantum meruit and unjust enrichment.

• Conte et al. vs. COA, G.R. No. 116422, Nov. 4, 1996 — Cited for the doctrinal rule that in case of conflict between a statute and an administrative order, the former must prevail, supporting the conclusion that LOI No. 968 must yield to the Auditing Code and the Administrative Code.

• Section 85, P.D. 1445 (Auditing Code of the Philippines) — Provides that no contract involving the expenditure of public funds shall be entered into unless there is an appropriation therefor, the unexpanded balance of which is sufficient to cover the proposed expenditure. Applied to find that the Agreements lacked the requisite appropriation backing.

• Section 86, P.D. 1445 (Auditing Code of the Philippines) — Requires that the proper accounting official certify that funds have been duly appropriated and are available, with the certificate to be attached to and become an integral part of the proposed contract. Applied to hold that the absence of this certification rendered the Agreements void.

• Section 87, P.D. 1445 (Auditing Code of the Philippines) — Declares that 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. Applied as the express statutory basis for declaring the Agreements void ab initio.

• Section 40, Book VI, Chapter 5, E.O. 292 (Administrative Code of 1987) — Provides that no funds shall be disbursed and no expenditures or obligations chargeable against any authorized allotment shall be incurred without first securing the certification of the chief accountant or head of the accounting unit as to the availability of funds. Applied to reinforce the requirement of certification as a condition sine qua non.

• Section 48, Book V, Title 1, Sub-Title B, Chapter 7, E.O. 292 (Administrative Code of 1987) — Provides that any contract entered into contrary to the requirements of the preceding sections shall be void, and the entering officer shall be liable to the government or other contracting party for consequent damage. Applied to establish the liability of the officers who entered into the Agreements.

• Section 525, Government Accounting and Auditing (GAA) Manual — Directs that professional fees for architectural, engineering design, and similar professional services shall be stipulated in fixed monetary or peso amounts instead of as a percentage of the project cost. Applied to invalidate the percentage-based fee stipulation in the Agreements.

• Article 1409(7), Civil Code — Declares void those contracts expressly prohibited or declared void by law. Applied to classify the Agreements as inexistent and void from the beginning, the illegality proceeding from an express declaration or prohibition by law.

• Article 1416, Civil Code — Provides that when the agreement is not illegal per se but is merely prohibited, and the prohibition is designed for the protection of the plaintiff, he may recover what he has paid or delivered. Applied to allow private respondents to recover compensation despite the nullity of the Agreements.

• Article VI, Section 29(1), 1987 Constitution — States that no money shall be paid out of the Treasury except upon an appropriation made by law. Cited as the paramount public policy justifying relaxation of technical rules of procedure to inquire into the fundamental issue of nullity.

• Article IX(D), Section 2(2), 1987 Constitution — Authorizes the COA to prevent and disallow irregular, unnecessary, excessive, extravagant, or unconscionable expenditures or uses of public funds and properties. Cited to justify the inquiry into the nullity of the Agreements.

• COA Circular No. 76-34 — Directs the COA to call the attention of management, within five days from receipt of a copy of the contract, to any defects or deficiencies therein and to suggest corrective measures. Applied to find the COA negligent for failing to comply with this directive.

• Paragraph 2, Letter of Instructions No. 968 — Provides that the chief accountant's signature shall be considered as constituting a certification of fund availability. Held to yield to the explicit provisions of the Auditing Code and the Administrative Code, being an administrative issuance subordinate to statute.

• E.O. 1008 (Construction Industry Arbitration Law) — Establishes the CIAC's original and exclusive jurisdiction over construction industry disputes. Cited in connection with the promotion of healthy partnership between government and the private sector.

• P.D. 1746 (Creating the Construction Industry Authority of the Philippines) — Cited for its salutary policies promoting the growth and development of the construction industry and a healthy government-private sector partnership.

Panganiban (Chairman, on leave), Sandoval-Gutierrez, Corona, and Garcia — concurred.