Heirs of Mendoza vs. Department of Public Works and Highways

Mere entry by the State or its unincorporated agency into a contract does not automatically waive immunity from suit; implied waiver attaches only when the contract is entered into in a proprietary or private capacity, not when involving governmental or sovereign functions. Forfeiture of government construction contracts is justified under Presidential Decree No. 1870 and Department Order No. 102, series of 1988, where the contractor incurs negative slippage exceeding 15%, constituting "terminal stage" breach warranting termination or take-over by administration.

Diosdado M. Mendoza, doing business as D' Superior Builders, entered into contracts with the Department of Public Works and Highways (DPWH) for the construction of road projects under the Highland Agriculture Development Project (HADP) in Benguet. Mendoza won the public bidding for Package VI (construction of a 15-kilometer road and engineers' quarters) and Package IX (construction of 15-kilometer barangay roads). The DPWH engaged United Technologies, Inc. (UTI) as project consultant. Mendoza received the Notice to Proceed for Package VI on March 2, 1989. During implementation, Mendoza encountered alleged right-of-way problems affecting the initial portion of the project, while the DPWH cited Mendoza's failure to mobilize required equipment and personnel, resulting in progressive negative slippage that ultimately reached 31.852%.

• The Contracts: Diosdado M. Mendoza, doing business as D' Superior Builders, won the public bidding for Package VI (construction of a 15-kilometer road and engineers' quarters in Benguet, bid price ₱16,176,878.58) and Package IX (construction of 15-kilometer barangay roads, bid price ₱10,527,192.14) under the Highland Agriculture Development Project (HADP). The DPWH hired United Technologies, Inc. (UTI) as consultant for both packages, with Pedro Templo as President and Rodante Samonte as Project Manager.
• Notice to Proceed and Alleged Right-of-Way Issues: Mendoza received the Notice to Proceed for Package VI on March 2, 1989. He alleged that pre-construction surveys revealed the entire 15-kilometer stretch lacked right-of-way, violating Ministry Order No. 65. He claimed the issue was resolved only on November 29, 1989, when affected landowners allowed passage at Mendoza's risk.
• DPWH's Allegations of Delay and Negative Slippage: The DPWH and UTI alleged that Mendoza failed to commence work within the required 10 days from receipt of the Notice to Proceed. Records showed progressive negative slippage: 7.648% (May 25, 1989), 11.743% (June 25, 1989), 16.32% (July 25, 1989), 21.109% (September 25, 1989), 27.970% (October 25, 1989), and 31.852% (November 1989). UTI issued first, second, and final warnings at the 7.648%, 11.743%, and 16.32% slippage marks, respectively.
• Failure to Mobilize: UTI noted that as of June 21, 1989, Mendoza had mobilized only one bulldozer and one loader at the jobsite, far below the 47 units required under the contract. Provincial officials visiting the site on July 14, 1989, observed only 100 linear meters of road constructed, no work activity, and equipment under repair. The bulldozer broke down after three days of work.
• Termination and Forfeiture: On November 20, 1989, the Sangguniang Panlalawigan of Benguet passed Resolution No. 1176 recommending termination of the Package VI contract. The DPWH subsequently forfeited the Package VI contract and did not award Package IX to Mendoza, effectively canceling both contracts. Mendoza was also blacklisted for one year.
• Certification on Right-of-Way: Gregorio Abalos, owner of the private road at the project starting point, issued a certification stating he never disallowed passage of Superior Builders' vehicles and equipment, and that right-of-way was never a problem.
• Judicial Proceedings: Mendoza filed a civil action for specific performance and damages with prayer for preliminary injunction on August 2, 1990, obtaining a temporary restraining order. The RTC ruled in his favor on October 29, 2001, finding the termination arbitrary and the right-of-way issue excused the delay. The Court of Appeals reversed on June 20, 2012, finding the forfeiture justified and recognizing state immunity. Mendoza died on April 25, 2005, and was substituted by his heirs (petitioners).

• Justification of Delay: Petitioners maintained that the negative slippages were attributable to the DPWH's failure to secure right-of-way over the first five kilometers of the project and delays in approving revisions to the building layout for the engineers' quarters, excusing Mendoza's failure to meet the construction schedule.
• Implied Waiver of Immunity: Petitioners argued that by entering into construction contracts with Mendoza, the DPWH divested itself of immunity from suit and assumed the character of an ordinary litigant, constituting implied waiver under the principle that "a state may not be sued without its consent" applies only where the State has not consented.
• Procedural Due Process: Petitioners claimed they were denied due process when the Court of Appeals re-raffled the case upon the original ponente's inhibition without notifying them, allegedly violating Section 2(b), Rule III of the Internal Rules of the Court of Appeals.

• Excessive Negative Slippage: Respondents countered that Superior Builders incurred negative slippage of 31.852%, more than double the 15% limit under Presidential Decree No. 1870 and Department Order No. 102, series of 1988, justifying termination and forfeiture under the "terminal stage" provision.
• Right-of-Way Not Excusable: Respondents argued that the right-of-way problem affected only the first 3.2 kilometers of the 15.5-kilometer project, and Mendoza could have proceeded with work on unaffected sections. They cited Abalos' certification that he never barred passage and noted that Mendoza was repeatedly instructed to work on sections without right-of-way conflicts but failed to mobilize sufficient resources.
• Governmental Function and Immunity: Respondents argued that the DPWH entered the contracts in the exercise of governmental, not proprietary, functions, as the projects involved public infrastructure. As an unincorporated agency without separate juridical personality performing governmental functions, the DPWH enjoys immunity from suit, and mere contract execution does not constitute implied waiver.
• Procedural Compliance: Respondents maintained that notification of re-raffling was not required under the Internal Rules of the Court of Appeals and that the inhibition order was duly attached to the rollo and paged in compliance with Section 4, Rule V thereof.

• Negative Slippage and Contract Forfeiture: Whether the Court of Appeals committed reversible error in ruling that the forfeiture of the contract for Package VI and the non-payment for materials, labor, and equipment rental were justified despite the alleged right-of-way problems.
• State Immunity from Suit: Whether the Court of Appeals committed reversible error in ruling that the DPWH has no juridical personality of its own and that Mendoza's action constituted a suit against the State without consent.

• Negative Slippage and Contract Forfeiture: The forfeiture was justified. Superior Builders' negative slippage reached 31.852%, far exceeding the 15% "terminal stage" limit under Presidential Decree No. 1870 and Department Order No. 102, series of 1988, which mandates termination or rescission. While a right-of-way problem existed for the first 3.2 kilometers, this did not prevent work on the remaining 12.3 kilometers. Mendoza failed to mobilize the required 47 units of equipment, deploying only one bulldozer and one loader, and failed to comply with UTI's repeated directives to submit catch-up programs and accelerate work. The Provincial Government of Benguet's Resolution No. 1176 recommending termination corroborated the DPWH's finding of breach.
• State Immunity from Suit: The suit was properly dismissed on the ground of state immunity. The DPWH is an unincorporated government agency without separate juridical personality performing governmental functions under Executive Order No. 124, series of 1987. The construction of public roads constitutes the exercise of sovereign governmental functions, not proprietary or business activities. Under Section 3, Article XVI of the 1987 Constitution and established jurisprudence, implied waiver of immunity attaches only when the State enters a contract in its proprietary capacity; no such waiver exists for governmental contracts. Statutory provisions waiving immunity are construed strictissimi juris.
• Procedural Due Process: Petitioners were not denied due process. Section 2(b), Rule III of the Internal Rules of the Court of Appeals does not require notification to parties upon re-raffling due to inhibition, and the action on the inhibition was properly attached to the rollo and paged pursuant to Section 4, Rule V.

• State Immunity from Suit — Governmental vs. Proprietary Functions: The State's immunity from suit, anchored in Section 3, Article XVI of the 1987 Constitution, extends to unincorporated government agencies without separate juridical personality when performing governmental functions. Implied waiver of immunity arises only when the State enters into a contract in its proprietary or private capacity; contracts entered into in the exercise of sovereign or governmental functions do not operate as waivers. The test is whether the function is essentially governmental (pursuing a necessary function of government) or proprietary (essentially a business). Public road construction is a governmental function.
• Calibrated Actions for Negative Slippage: Under Department Order No. 102, series of 1988, implementing Presidential Decree No. 1870, government construction contracts are subject to calibrated actions based on percentage of negative slippage: (1) 5% ("Early Warning" Stage) — warning and catch-up program required; (2) 10% ("ICU" Stage) — second warning, detailed fortnightly action program, and closer supervision; (3) 15% ("Make-or-Break" Stage) — final warning, weekly physical targets, and contingency plans for termination; (4) Beyond 15% ("Terminal" Stage) — mandatory initiation of termination/rescission or take-over by administration. Discretion to terminate exists once slippage reaches 15% or more.
• Strict Construction of Waiver: Waiver of state immunity being in derogation of sovereignty, statutory provisions allowing suit against the State are construed strictissimi juris.

• "The general rule is that a state may not be sued, but it may be the subject of a suit if it consents to be sued, either expressly or impliedly. There is express consent when a law so provides, while there is implied consent when the State enters into a contract or it itself commences litigation."
• "However, it must be clarified that when a state enters into a contract, it does not automatically mean that it has waived its nonsuability. The State 'will be deemed to have impliedly waived its nonsuability [only] if it has entered into a contract in its proprietary or private capacity. [However,] when the contract involves its sovereign or governmental capacity[,] x x x no such waiver may be implied.' Statutory provisions waiving [s]tate immunity are construed in strictissimi juris. For, waiver of immunity is in derogation of sovereignty."
• "An unincorporated agency without any separate juridical personality of its own enjoys immunity from suit because it is invested with an inherent power of sovereignty. x x x. However, the need to distinguish between an unincorporated government agency performing governmental function and one performing proprietary functions has arisen. The immunity has been upheld in favor of the former because its function is governmental or incidental to such function; it has not been upheld in favor of the latter whose function was not in pursuit of a necessary function of government but was essentially a business."

• Air Transportation Office v. Ramos, G.R. No. 159402, February 23, 2011, 644 SCRA 36: Distinguished governmental from proprietary functions for purposes of state immunity; immunity upheld for agencies performing governmental functions, denied for those performing business/proprietary functions.
• Department of Health v. Philippine Pharmawealth, Inc., G.R. No. 182358, February 20, 2013, 691 SCRA 421: Reiterated that implied waiver of immunity exists only for proprietary contracts, not governmental contracts, and that waiver is construed strictissimi juris.
• Genaro R. Reyes Construction, Inc. v. Court of Appeals, G.R. No. 108718, July 14, 1994, 234 SCRA 116: Cited for the proposition that discretion to terminate exists when negative slippage reaches 15% or more.

• Section 3, Article XVI, 1987 Constitution: "The State may not be sued without its consent." — Basis for the doctrine of state immunity from suit.
• Presidential Decree No. 1870, series of 1983: Authorizes government take-over by administration of delayed infrastructure projects where contractor incurs 15% or more negative slippage.
• Department Order No. 102, series of 1988 (DPWH Circular): Prescribes calibrated actions for contracts with negative slippages, establishing the 5%, 10%, 15%, and beyond-15% stages with corresponding administrative actions.
• Executive Order No. 124, series of 1987, Section 5: Enumerates powers and functions of the Ministry (now DPWH), including planning, design, construction, and supervision of public works projects, establishing the governmental nature of road construction.

Arturo D. Brion, Mariano C. Del Castillo, Jose Portugal Perez, and Estela M. Perlas-Bernabe.