Estomo vs. Civil Service Commission

A government contractor cannot recover payment for extra works on the basis of letter requests alone where no prior approval was obtained from the contracting agency, and the principle of quantum meruit does not apply where the contractor proceeded with additional works over the repeated objections of the government agency. Retention money withheld from progress payments must be released upon final acceptance of the works, and where a separate deduction for deficiencies already protects the government's interest, further retention of the retention money constitutes unjust enrichment.

Estomo, doing business as Domingo F. Estomo Trading & Construction, was awarded a government infrastructure contract by CSC Region X for the complete construction of the third floor of the CSC-X building. The contract was governed by Presidential Decree No. 1594 and its 1992 Implementing Rules and Regulations, which prescribe the policies, guidelines, and rules for government infrastructure contracts, including progress payments, retention money, advance payments, and change or extra work orders. The dispute arose from disagreements over the amount owed for the original contract balance, the cost of extra works, and the propriety of various deductions made by the CSC.

On April 29, 1997, CSC Region X Director IV Vivencio N. Muego, Jr. sent a Notice/Letter of Award to Engr. Domingo F. Estomo of Domingo F. Estomo Trading & Construction, awarding the contract for complete construction of the third floor of the CSC-X building in the amount of P1,475,789.07, to be completed within seven days from receipt. On May 6, 1997, the parties executed a Contract for Works, which expressly incorporated the Implementing Rules and Regulations of P.D. No. 1594. Pursuant to a Notice to Commence Work, the project commenced on May 8, 1997, with a target completion date of October 5, 1997.

On May 14, 1997, the CSC made an advance payment to Estomo in the amount of P221,368.35, equivalent to 15% of the total contract price, as allowed under the 1992 IRR of P.D. No. 1594. Progress payments were thereafter made on a staggered basis: P251,808.46 on July 14, 1997 (Voucher No. 2977003), P287,474.41 on August 15, 1997 (Voucher No. 2978001), and P372,824.63 on September 26, 1997 (Voucher No. 2979014). These net amounts were computed after deductions for retention money, recoupment of the cash advance, and withholding taxes.

Beginning in early July 1997, Estomo wrote several letters to CSC Region X requesting or suggesting extra works needed for the project, including additional wall partitions, aluminum swing doors, a septic tank, roofings, toilet concrete slabs, kitchen cabinets, endwall roof flashing, and baseboard walling. The letters contained phrases such as "Your immediate action on this matter is highly appreciated," "For your comments and concurrence," and "Please advise the undersigned," indicating that the requests were subject to CSC approval. On September 5, 1997, Estomo claimed that all extra works amounted to P206,008.66. By November 24, 1997, the claimed amount for extra works had increased to P261,963.82, reflecting additional items such as acoustic board, fixed glass windows, steel awning windows, CHD walling, and painting of wood partitions. Certain extra works were denied by Estomo due to financial constraints, including a pebble finish at the front wall, a fire escape, and an additional 400 amperes main breaker.

On November 28, 1997, the CSC issued Resolution No. 97-1101, approving extra works and change order in the total amount of P144,735.98 — substantially less than the P261,963.82 claimed by Estomo. The CSC building was inaugurated on October 6, 1997. On January 15, 1998, the CSC directed Estomo to rectify deficiencies discovered by the City Engineering Office (CEO) inspectorate team within 15 days, advising that the Certificate of Final Completion would be issued only after rectification. The CSC valued the deficiencies at P82,000.00. On January 24, 1998, Estomo sent a final demand letter for P604,278.60, representing the balance from the Contract for Works and the extra works.

Estomo remained unpaid and filed before the RTC a Complaint for Specific Performance, Sum of Money plus Damages. The CSC admitted the extra works but denied their completion, averred that no turnover had transpired, and maintained willingness to pay P82,000.00 upon completion of deficiencies and submission of required documents. The CSC also filed a counterclaim for P2,500,000.00 for uncompleted work, P1,000,000.00 exemplary damages, and liquidated damages equivalent to 15% of the total contract price. On March 7, 2001, the CSC tendered payment in court by way of escrow deposit in the amount of P217,174.46, computed as the net balance of the Contract for Works and approved extra works after deductions for tax, recoupment fee, retention fee, and deficiencies. The RTC eventually released this amount to Estomo. The RTC, in its Decision dated August 8, 2013, found the remaining balance due to Estomo at P387,104.14, representing the difference between his total claim of P604,278.60 and the P217,174.46 already released. The CA reversed, declaring the CSC's obligation extinguished upon release of the escrow deposit and holding that Estomo had no right to the additional amount as it would constitute unjust enrichment.

• Deductions on the Contract for Works: Estomo argued that the contract price of P1,475,789.07 only covers the item, description, quantity, unit cost, and total cost of the materials used, and that the retention fee and other deductions were made by the CSC unilaterally and without basis.
• Claim for Extra Works: Estomo claimed P261,963.82 for the extra works based on the principle of quantum meruit, invoking his letters dated July 7, 1997 through November 24, 1997 as basis for the amounts demanded.
• Release of Retention Money: Estomo prayed for the release of the retention money, arguing that the project was substantially completed and the government had already benefited from the works.
• Entitlement to Remaining Balance: Estomo asserted entitlement to the balance of P387,102.58 plus legal interest, attorney's fees, and damages, contending that the CSC's obligation was not extinguished by the release of the escrow deposit alone.

• Amount of Extra Works: The CSC argued that the total amount of extra works and change order is only P144,735.98, not P261,963.82, as evidenced by CSC Resolution No. 97-1101 dated November 28, 1997.
• Deductions and Obligation Extinguishment: The CSC maintained that Estomo may only claim P371,411.20 from the Contract for Works after deductions for VAT, recoupment fee, retention money, and deficiencies, and that the release of P217,174.16 fulfilled the CSC's obligation, absolving it from further liability.
• Liquidated Damages: The CSC claimed liquidated damages in the amount of P217,174.16 in view of Estomo's failure to complete the Contract for Works and extra works on time.
• Tax Withholding: The CSC contended that Estomo conveniently excluded the withholding tax in the computation of the amount he received.

• Question of Fact: Whether the case involves a question of fact, beyond the office of a Petition for Review on Certiorari under Rule 45 of the Rules of Court.
• Validity of Deductions: Whether the deductions on the Contract for Works — retention money, recoupment, and withholding taxes — are valid.
• Extra Works and Quantum Meruit: Whether Estomo is entitled to his claim for payment for extra works in the amount of P261,963.82.
• Release of Retention Money: Whether the retention money shall be released in favor of Estomo.

• Question of Fact: Yes, review is proper. The exception applies because the CA's findings were contrary to those of the RTC, warranting a re-examination of the evidence on record.
• Validity of Deductions: Yes, the deductions are valid, with the exception of the retention money deducted from the escrow deposit, which was improper because more than 50% of the value of works had already been completed. The CSC correctly deducted retention money from progress payments until 50% completion, correctly recouped the advance payment, and correctly withheld taxes, though the VAT computation on the July 14, 1997 progress payment contained an error.
• Extra Works and Quantum Meruit: No. Estomo is entitled only to P144,735.98 for the approved extra works. The principle of quantum meruit does not apply because Estomo proceeded with the extra works without CSC approval and over its repeated objections.
• Release of Retention Money: Yes. The retention money must be released, subject to 6% VAT adjustments for underpayments in the CSC's earlier tax computations, because the P82,000.00 deduction for deficiencies already serves the same protective purpose as the retention money.

• Question of Fact: As a rule, issues dealing with the sufficiency of evidence and relative weight accorded to it by lower courts cannot be raised in a Petition for Review on Certiorari under Rule 45, which is confined to questions of law. However, the Court has recognized exceptions, including when the findings of the CA are contrary to those of the trial court. Here, the CA reversed the RTC's findings on the total cost of extra works, the propriety of deductions, and the remaining balance due. A careful re-examination of the evidence was therefore necessary to determine whether the RTC or the CA properly appreciated the relevant facts.

• Validity of Deductions: The Contract for Works, being a government infrastructure project, is governed by P.D. No. 1594 and its 1992 IRR. The 1992 IRR provides that progress payments are subject to 10% retention money based on the total amount due to the contractor prior to any deduction, and that no additional retention shall be made after 50% of the value of works is completed. The CSC correctly deducted 10% retention from the July 14 and August 15, 1997 progress payments, as the cumulative gross amount of P768,516.79 (52.075% of the contract price) had been paid by the second progress payment. No retention was deducted from the September 26, 1997 payment, consistent with the rule. The recoupment of the 15% advance payment (P221,368.35) was also proper, with P189,601.99 recouped from the three progress payments and the remaining P31,766.36 deducted from the escrow deposit. As for withholding taxes, the CSC applied a 6% VAT rate on the progress payments after deducting the 10% retention money. This was incorrect because "gross receipts" under Section 102 of the NIRC includes the total amount representing the contract price, and retention money is part of the contract price — merely set aside as security and eventually releasable. The CSC should have applied the 6% VAT rate to the gross amount without deducting retention money. This resulted in underpayments of P1,981.62 (July 14, 1997) and P2,431.33 (August 15, 1997). The practical remedy is to deduct the corresponding 6% VAT from the retention money due to Estomo. Regarding the escrow deposit made on March 7, 2001, the governing law is the 1997 NIRC, and the CSC correctly withheld 6% VAT under Section 114(c) and 1% creditable withholding tax under Section 2.57.2(E) of RR No. 02-98, totaling 7% of the gross amount of P371,431.20. However, the retention money of P14,471.60 deducted from the escrow deposit was improper because more than 50% of the value of works had already been paid, and the extra works pertained to the same project.

• Extra Works and Quantum Meruit: A change order or extra work order may be issued only for works necessary for the completion of the project and within the general scope of the contract. The 1992 IRR of P.D. No. 1594 explicitly provides that "under no circumstances shall a contractor proceed to commence work under any change order, extra work order or supplemental agreement unless it has been approved by the Secretary or his duly authorized representative," with exceptions only for emergencies or when time is of the essence. Estomo's letters requesting extra works were mere requests or suggestions, subject to CSC approval, as indicated by phrases such as "For your comments and concurrence." The approval came only on November 28, 1997 via CSC Resolution No. 97-1101, approving only P144,735.98. Estomo commenced the extra works without approval, assuming the risk of disapproval and non-payment. The principle of quantum meruit does not apply because, in cases where the Court granted relief on this basis, the knowledge and consent of the contracting agency were clearly established. In EPG Construction Co. vs. Vigilar, the contractor undertook additional construction pursuant to an implied contract with the agency, with no objection interposed. In Eslao vs. Commission on Audit, the work was impliedly authorized and expressly acknowledged by the agency. Here, Estomo proceeded over the repeated and vehement objections of the CSC, which objected because the additional works would exceed the total approved contract price. The circumstances warranting quantum meruit are absent.

• Release of Retention Money: Retention money is a form of security to ensure satisfactory work and schedule compliance, withheld to guarantee indemnity for uncorrected defects and third-party liabilities. The IRR of P.D. No. 1594 mandates release of the total retention money upon final acceptance of the works, free from any defect, as evidenced by the Certificate of Final Completion. The P82,000.00 deducted for deficiencies serves the same purpose as the retention money — securing the completion of defects discovered by the CEO. The CEO inspectorate team recommended completion/rectification prior to issuance of a Certificate of Final Completion, and the CSC directed Estomo to rectify within 15 days. Because the P82,000.00 deduction already protects the government's interest, further withholding of the retention money would sanction unjust enrichment. The CSC had been in possession of the project since 1997, and the documents requested from Estomo had been submitted and marked in evidence. The retention money due to Estomo is subject to 6% VAT adjustments for the underpayments in the July 14 and August 15, 1997 progress payments, yielding net retention of P34,348.01 and P38,090.72, respectively. The retention money of P14,472.00 from the escrow deposit must also be released. Estomo's claim for damages and attorney's fees was denied for lack of merit. Legal interest of 12% per annum applies from judicial demand on February 4, 1998 until June 30, 2013, and 6% per annum from July 1, 2013 until full satisfaction, pursuant to Nacar vs. Gallery Frames.

• Retention Money in Government Infrastructure Contracts — Retention money is a form of security withheld by the government from progress payments due to the contractor to guarantee indemnity for uncorrected discovered defects and third-party liabilities. Under the 1992 IRR of P.D. No. 1594, progress payments are subject to 10% retention based on the total amount due to the contractor prior to any deduction, retained until 50% of the value of works is completed. If the work is satisfactorily done and on schedule after 50% completion, no additional retention shall be made. The total retention money is due for release upon final acceptance of the works, free from any defect, as evidenced by the Certificate of Final Completion. In this case, the Court ordered the release of retention money because the P82,000.00 deduction for deficiencies already served the same protective purpose, and further withholding would constitute unjust enrichment.

• Prior Approval of Extra Works in Government Contracts — Under the 1992 IRR of P.D. No. 1594, a contractor may not proceed with any change order, extra work order, or supplemental agreement unless it has been approved by the Secretary or his duly authorized representative. Exceptions exist only for emergencies or when time is of the essence. A contractor who commences extra works without prior approval assumes the risk of disapproval and non-payment. In this case, Estomo's letter requests were mere suggestions subject to CSC approval, and only P144,735.98 was eventually approved.

• Quantum Meruit in Government Contracts — The principle of quantum meruit may apply to compensate a contractor for services rendered to the government where the knowledge and consent of the contracting agency are clearly established and actual work and delivery of results are acknowledged. It does not apply where the contractor proceeds with additional works over the repeated objections of the government agency and without prior approval. In this case, quantum meruit was denied because Estomo acted without CSC approval and over its objections, unlike in EPG Construction Co. vs. Vigilar and Eslao vs. Commission on Audit, where the agencies' implied authorization or express acknowledgment was present.

• Withholding VAT on Government Infrastructure Payments — The government must withhold VAT at the rate of 6% on gross receipts for services rendered by contractors. "Gross receipts" includes the total amount representing the contract price, including retention money, which is merely set aside as security and eventually releasable. The VAT must be computed on the gross amount before deducting retention money. In this case, the CSC incorrectly computed VAT by first deducting the 10% retention money, resulting in underpayment, which the Court remedied by deducting the shortfall from the retention money due for release.

• "Under no circumstances shall a contractor proceed to commence work under any change order, extra work order or supplemental agreement unless it has been approved by the Secretary or his duly authorized representative." — This passage states the controlling rule on prior approval of extra works in government infrastructure contracts, which the Court applied to deny Estomo's claim for unapproved extra works.

• "Payments for extra works cannot be collected on the basis of letter requests and billings alone." — This formulation establishes that letter requests, without approved supporting forms, are insufficient to support a contractor's claim for extra works under P.D. No. 1594 and its IRR.

• "To the Court, the interest of the government is sufficiently protected with the deduction of deficiencies computed at P82,000.00. Also worthy to note is the fact that the CSC had been in possession of the project since 1997, while the documents requested from Estomo had since been submitted and marked in evidence before the RTC. To further withhold the retention money would sanction unjust enrichment in favor of the government, to the prejudice of Estomo." — This passage articulates the ratio for releasing the retention money: where a separate deduction for deficiencies already protects the government's interest, continued withholding of retention money constitutes unjust enrichment.

• "Retention money is merely deducted and set aside by the government as a form of deposit or security, which upon final acceptance of the works will eventually be released to the contractor. Accordingly, it was incorrect for the CSC to compute the VAT withheld on the basis of the progress payment after the 10% retention money was deducted." — This defines the proper tax base for withholding VAT on government contractor payments, clarifying that retention money forms part of gross receipts and must not be excluded from the VAT computation.

• Alburo vs. People, 792 Phil. 876 (2016) — Cited for the exception to the rule that factual issues cannot be raised in a Rule 45 petition, specifically when the CA's findings are contrary to those of the trial court. The Court applied this exception to justify a re-examination of the evidence on record.
• EPG Construction Co. vs. Vigilar, 407 Phil. 58 (2001) — Distinguished. In that case, the contractor was compensated based on quantum meruit because the contractor undertook additional construction pursuant to an implied contract with the government agency, with no objection from the agency. The Court distinguished it from Estomo's case, where the CSC repeatedly objected to the extra works.
• Eslao vs. Commission on Audit, 273 Phil. 97 (1991) — Distinguished. There, the work was impliedly authorized and expressly acknowledged by the Ministry of Public Works, which twice recommended favorable action on the contractor's request for payment. The Court found these circumstances wanting in Estomo's case.
• Royal Trust Construction vs. Commission on Audit, G.R. No. 84202, Nov. 23, 1988 — Cited within Eslao for the proposition that a contractor may be compensated on a quantum meruit basis despite the absence of a specific covering appropriation, where the work was impliedly authorized and acknowledged by the government agency.
• Nacar vs. Gallery Frames, 716 Phil. 267 (2013) — Followed for the applicable legal interest rates: 12% per annum from the time of judicial demand until June 30, 2013, and 6% per annum from July 1, 2013 until full satisfaction of the monetary award.

• Presidential Decree No. 1594 — Prescribes policies, guidelines, rules and regulations for government infrastructure contracts. The Contract for Works expressly incorporated P.D. No. 1594 and its IRR. The Court applied its provisions on progress payments, retention money, advance payments, and change or extra work orders to determine the validity of the CSC's deductions and Estomo's claims.
• 1992 IRR of P.D. No. 1594, Item III, CI 6 (Retention Money) — Provides that progress payments are subject to 10% retention based on the total amount due to the contractor prior to any deduction, retained until 50% of the value of works is completed. Applied to validate the CSC's retention deductions from the first two progress payments and to disallow the retention deduction from the escrow deposit.
• 1992 IRR of P.D. No. 1594, Item III, CI 4 (Advance Payment) — Allows the government to make advance payments of up to 15% of the total contract price, subject to recoupment from periodic progress billings. Applied to validate the recoupment deductions from progress payments and the escrow deposit.
• 1992 IRR of P.D. No. 1594, Item III, CI 3 (Conditions for Variation Orders) — Provides that under no circumstances shall a contractor proceed with any change order, extra work order, or supplemental agreement unless approved by the Secretary or his duly authorized representative, with exceptions for emergencies or when time is of the essence. Applied to deny Estomo's claim for unapproved extra works.
• Section 110(c), National Internal Revenue Code, as amended by R.A. No. 7716 and R.A. No. 8241 — Imposes on the government the duty to withhold VAT at 6% on gross receipts for services rendered by contractors. Applied to determine the correct VAT computation on progress payments made in 1997.
• Section 102, National Internal Revenue Code, as amended — Defines "gross receipts" as the total amount representing the contract price, including materials supplied and advanced payments, excluding VAT. Applied to hold that retention money forms part of gross receipts and must not be excluded from the VAT base.
• Section 114(c), 1997 NIRC — Governs the withholding of creditable VAT on government payments to contractors at 6% on gross receipts. Applied to validate the tax deduction from the escrow deposit made on March 7, 2001.
• Section 2.57.2(E), Revenue Regulation No. 02-98 — Provides that income payments to general building contractors are subject to 1% creditable withholding tax on gross payments. Applied together with the 6% VAT to validate the total 7% tax deduction from the escrow deposit.

Caguioa, Inting, Dimaampao, and Singh, JJ., concurred.