Manila International Airport Authority vs. Commission on Audit

A loan agreement executed in conjunction with an exchange of notes between the Republic of the Philippines and a foreign government is an executive agreement governed by international law under the doctrine of pacta sunt servanda, and any accessory or supplemental agreement thereto is similarly governed, precluding application of domestic administrative guidelines such as the NEDA Guidelines' 5% contingency ceiling.

The Manila International Airport Authority (MIAA) is a government-owned and controlled corporation tasked with operating and managing the Ninoy Aquino International Airport. On August 16, 1993, the Governments of the Philippines and Japan executed an Exchange of Notes whereby Japan agreed to extend loans to promote Philippine economic development and stability. Pursuant to this Exchange of Notes, Loan Agreement No. PH-136 was executed between the Philippine Government and the Overseas Economic Cooperation Fund (OECF), the implementing agency for Japanese loan aid, to finance the NAIA Terminal 2 Development Project. The National Economic Development Authority (NEDA) Guidelines prescribe a ceiling of 5% of the contract amount for contingency payments in consulting services agreements, and the COA is vested under the 1987 Constitution with exclusive authority to disallow irregular, unnecessary, excessive, extravagant, or unconscionable expenditures of government funds.

The Manila International Airport Authority (MIAA) and the Aeroports de Paris-Japan Airport Consultants, Inc. Consortium (ADP-JAC Consortium) entered into an Agreement for Consulting Services on April 15, 1994, for the NAIA Terminal 2 Development Project. The agreement covered 795 man-months of consulting services, commencing on July 1, 1994, with an original total duration of 53 months including a 14-month post-construction services period up to November 30, 1998. The construction was originally estimated to take 26 months from August 1, 1995 to September 30, 1997, followed by a 12-month defect liability period. The project was financed by Loan Agreement No. PH-136, executed between the Government of the Philippines and the Overseas Economic Cooperation Fund (OECF), the implementing agency for Japanese loan aid, pursuant to an Exchange of Notes dated August 16, 1993 between the Governments of the Philippines and Japan. The original Agreement for Consulting Services stipulated a ceiling amount of ¥1,181,337,300 and P107,342,906, comprising ¥1,041,677,750 and P64,305,350 as Total Cost of Services, and ¥107,394,300 and P6,430,535 set aside for Contingencies. Section 2.04 of the Agreement provided that remuneration for additional man-months under supplemental agreements would be chargeable against Contingencies, while Section 4.05 required that costs charged to Contingency be approved by MIAA and concurred by OECF prior to being incurred. Notably, Section 7.01 stipulated that the governing law of the Agreement would be the laws of the Republic of the Philippines.

Due to delays in the prequalification, bidding, and awarding stages, the parties executed Supplemental Agreement No. 1 in December 1995, revising the total man-months to 807.99 and adjusting the Total Cost of Services to ¥1,078,526,050 and P66,332,765, with Contingency set at ¥70,546,000 and P4,403,120. Additional delays ensued from the belated issuance by the Department of Environment and Natural Resources of tree cutting certificates and additional tree balling requirements, prompting the parties to execute Supplemental Agreement No. 2 in June 1998, which revised the man-months to 893.23 and increased the Ceiling Amount to ¥1,305,779,200 and P84,870,589.31, with Physical Contingency set at ¥118,707,200 and P7,014,098.29. Supplemental Agreement No. 3 was executed in September 1999, further revising the man-months to 1,083.81 and the Ceiling Amount to ¥1,377,065,463 and P101,938,713.86, with Contingency at ¥33,586,963 and P2,260,281.90. A fourth Supplemental Agreement was entered into on January 25, 2000, extending the services for another 8 months, for a total of 77 months or 1,221.65 man-months. Each supplemental agreement used the word "revised" in reference to the estimated total number of man-months, indicating the parties' intention to modify the original agreement's estimated man-months and total cost of services.

On November 24, 1999, the MIAA Corporate Auditor issued Notice of Disallowance No. (FMT) 99-00-04, finding the Agreement's remuneration cost of P41,784,850.00 excessive at 19.80% above the COA-estimated cost of P34,876,915.00. MIAA General Manager Antonio P. Gana requested reconsideration, arguing that the cost was obtained after detailed negotiations, approved by the Office of the Government Corporate Counsel and concurred in by the Japan Bank of International Cooperation, and that the 10% contingency was accepted by MIAA and OGCC in view of the project being 100% funded by JBIC. The COA Technical Services Office re-evaluated the Agreement and reversed its earlier stand on the excessive remuneration cost, leading the MIAA Corporate Auditor to lift and settle the disallowed amount of P6,907,935.00 on August 17, 2000. On October 18, 2001, the MIAA Corporate Auditor opined that the payments charged to contingency were within the 5% ceiling prescribed under the NEDA Guidelines, noting that ¥36,349,705.00 and P2,752,610.77, representing 2.49% and 2.495% of the contract cost respectively, had been charged to contingency.

On November 21, 2008, the COA Legal and Adjudication Office-Corporate issued Decision No. 2008-067, denying the remaining disallowance of ¥53,697,150.00 (foreign portion) and P3,215,267.50 (local portion) under ND No. (FMT) 99-00-04, and issuing ND No. 2008-018 for an additional disallowance of ¥344,425,855.00 and P42,325,363.04. The COA arrived at these amounts by computing the difference between actual payments of ¥1,493,497,905.00 and P113,061,248.01 and the original cost of services of ¥1,041,677,750.00 and P64,305,350.00, yielding ¥451,820,155.00 and P48,755,898.04 as additional costs charged to "Contingency." Deducting the 5% contingency ceiling of ¥53,697,150.00 and P3,215,267.50, the COA found an excess of ¥398,123,005.00 and P45,540,630.54. MIAA appealed to the COA by petition for review, which was denied by Decision No. 2012-268 dated December 28, 2012, on the ground that the NEDA Guidelines' 5% contingency ceiling was mandatory and that the exemption under Section 9.3 pertained only to the selection of consultants. The COA denied MIAA's motion for reconsideration on January 26, 2015, prompting MIAA to file the present petition for certiorari with the Supreme Court.

• Grave Abuse of Discretion: Petitioner argued that the COA gravely abused its discretion in sustaining COA-LAO Corporate Decision No. 2008-067 and affirming the notices of disallowance.
• Executive Agreement Status: Petitioner maintained that Loan Agreement No. PH-136, executed between the Philippine Government and the OECF, was equivalent to an executive agreement based on the ruling in Abaya vs. Ebdane, and as such should control the determination of payments charged to contingency.
• Inapplicability of NEDA Guidelines: Petitioner argued that the 5% ceiling for payments charged to contingency under the NEDA Guidelines did not apply because the normal practice of international financial institutions was to provide a 10% contingency.
• Personal Liability Without Basis: Petitioner contended that the COA adjudged the officers personally liable for the disallowance without supplying any reasons for holding them personally liable.
• Failure to Establish Participation and Bad Faith: Petitioner argued that the COA failed to establish the direct participation of the persons held liable in the disallowance, as well as their evident malice and bad faith in relation to the disallowed transaction.
• Good Faith of Expenditures: Petitioner maintained that the additional works and expenditures were incurred in good faith and utilized for legitimate purposes.

• Applicability of NEDA Guidelines: Respondent countered that the NEDA Guidelines providing for the 5% contingency applied in the absence of any provision in the agreement stipulating that Philippine laws should not apply.
• No Reference to International Law: Respondent argued that the loan agreement did not mention international laws, regulations, or practices with respect to the payments of consultants.
• Limited Scope of Exemption: Respondent maintained that the exemption under Section 9.3 of the NEDA Guidelines pertained only to the selection of consultants and did not include exemption from the 5% ceiling on contingency.
• Accountability of Officials: Respondent argued that the petitioner's officials were held accountable for government funds and property as heads of agencies.

• Governing Law: Whether Loan Agreement No. PH-136 and its accessory agreements, including the Agreement for Consulting Services and the Supplemental Agreements, should be governed by international law under the doctrine of pacta sunt servanda as executive agreements, or by domestic law particularly the NEDA Guidelines' 5% contingency ceiling.
• Validity of Disallowance: Whether the COA gravely abused its discretion in affirming and issuing the notices of disallowance by applying the NEDA Guidelines' 5% contingency ceiling to disbursements made under the supplemental agreements.
• Personal Liability of Officers: Whether the COA properly held the petitioner's officers personally liable for the disallowed amounts without establishing their direct participation, malice, or bad faith.

• Governing Law: Yes. Loan Agreement No. PH-136, executed in conjunction with the Exchange of Notes between the Philippines and Japan, is an executive agreement governed by international law and the doctrine of pacta sunt servanda, and its accessory agreements are similarly governed, precluding application of the NEDA Guidelines.
• Validity of Disallowance: No. The COA gravely abused its discretion in affirming and issuing the notices of disallowance, having contravened the doctrine of pacta sunt servanda and the parties' intention in executing the supplemental agreements to revise the total cost of services and charge additional man-months against the total cost of services, not against contingency.
• Personal Liability of Officers: No. The COA's disallowances, having been issued with grave abuse of discretion, were reversed and set aside, necessarily nullifying the personal liability of the petitioner's officers arising from those disallowances.

• Governing Law: Pursuant to Abaya vs. Ebdane, a loan agreement executed in conjunction with an Exchange of Notes between the Philippine Government and a foreign government is an executive agreement governed by international law. This pronouncement has been consistently applied in DBM Procurement Service vs. Kolonwel Trading, Land Bank of the Philippines vs. Atlanta Industries, Inc., and Mitsubishi Corporation-Manila Branch vs. Commissioner of Internal Revenue. Loan Agreement No. PH-136 expressly referenced the Exchange of Notes between the Philippines and Japan dated August 16, 1993, in its pre-ambular paragraph, and was thus an adjunct of that Exchange of Notes, making it an executive agreement. International law applies in its implementation and construction, and the Philippine Government is bound to faithfully comply with its provisions under the doctrine of pacta sunt servanda, which has been incorporated into the 1987 Constitution pursuant to Section 2, Article II. The Agreement for Consulting Services, being a mere accessory of Loan Agreement No. PH-136, should likewise be treated as an executive agreement, as established in Land Bank of the Philippines vs. Atlanta Industries, Inc., where the Court held that an accessory contract's nature and consideration are the same as its principal contract, and that the accessory follows the principal. The three Supplemental Agreements should receive similar treatment. No express stipulation by the contracting parties referencing international law was necessary; the pronouncement in Abaya and its progeny was controlling. The COA's insistence that the NEDA Guidelines should apply because the contracting parties did not stipulate on the applicable law was therefore erroneous.
• Validity of Disallowance: The COA erroneously charged all additional man-months under the supplemental agreements against contingency and then concluded that the disbursements exceeded the 5% ceiling under the NEDA Guidelines. However, the supplemental agreements used the word "revised" in Clause 2.03 in reference to the estimated total number of man-months, indicating the parties' intention to modify the original agreement's estimated man-months and total cost of services corresponding to the delays incurred in completing the project. The contemporaneous and subsequent acts of the parties should be considered in determining their intention, pursuant to Article 1371 of the Civil Code. By executing the supplemental agreements, the petitioner and the ADP-JAC Consortium intended to charge all additional man-months to the total cost of services, not against contingency. Only extra man-months in excess of what had been finally agreed upon, and unforeseen expenditures incurred in connection with the project, should be charged against contingency. Parties to a contract have the right to amend their covenant by mutual consent, provided the modification does not contravene the law or public policy, and the contract as modified becomes a new contract between the parties. The COA's approach contravened the doctrine of pacta sunt servanda and the parties' intention, constituting grave abuse of discretion — such capricious and whimsical exercise of judgment as is equivalent to lack of jurisdiction, exercised in an arbitrary or despotic manner so patent and gross as to amount to an evasion of positive duty.
• Personal Liability of Officers: Because the COA's notices of disallowance were issued with grave abuse of discretion — contravening the Constitution and international law by going against the parties' intention as to how the cost of man-months should be charged — the disallowances were reversed and set aside, necessarily nullifying any personal liability of the petitioner's officers arising from those disallowances. The COA's failure to establish the direct participation of the persons held liable, as well as their evident malice and bad faith, further supported the nullification of the personal liability findings.

• Pacta Sunt Servanda — Agreements must be faithfully observed and complied with by the parties. The doctrine has been incorporated into Philippine law through Section 2, Article II of the 1987 Constitution, which adopts generally accepted principles of international law as part of the law of the land. The Court applied this doctrine to hold that the Philippine Government was bound to faithfully comply with the provisions of Loan Agreement No. PH-136 and its accessory agreements, and that the COA could not validly insist on applying the NEDA Guidelines' 5% contingency ceiling to negate the Government's accession to the executive agreements. As quoted from Agustin vs. Edu, "[i]t is not for this country to repudiate a commitment to which it had pledged its word."
• Executive Agreements Governed by International Law — A loan agreement executed in conjunction with an Exchange of Notes between the Philippine Government and a foreign government is an executive agreement governed by international law. This principle, established in Abaya vs. Ebdane, has been consistently applied in subsequent rulings. No express stipulation by the contracting parties referencing international law is necessary for the doctrine to apply.
• Accessory Follows the Principal — An accessory contract's nature and consideration are the same as its principal contract from which it receives life and without which it cannot exist as an independent contract. Accessory contracts should not be read independently of the main contract. The Court applied this principle, drawn from Land Bank of the Philippines vs. Atlanta Industries, Inc., to hold that the Agreement for Consulting Services and the Supplemental Agreements, being accessories to Loan Agreement No. PH-136, should be treated as executive agreements governed by international law.
• Grave Abuse of Discretion — Grave abuse of discretion is such capricious and whimsical exercise of judgment as is equivalent to lack of jurisdiction. The abuse must be grave, where the power is exercised in an arbitrary or despotic manner by reason of passion or personal hostility, and must be so patent and gross as to amount to an evasion of positive duty or a virtual refusal to perform the duty enjoined by or to act at all in contemplation of law. The burden is on the petitioner to prove not merely reversible error, but grave abuse of discretion amounting to lack or excess of jurisdiction. The Court found that the COA's contravention of the Constitution and international law constituted grave abuse of discretion.
• Mutual Modification of Contracts — Parties to a contract are not forever locked into its terms but have the right to amend their covenant by mutual consent, provided the modification does not contravene the law or public policy. The contract as modified becomes a new contract between the parties, and the meaning to be given subsequent agreements depends on the intention of the parties. The contemporaneous and subsequent acts of the parties should be considered in determining their intention, pursuant to Article 1371 of the Civil Code. The Court applied this principle to uphold the supplemental agreements as valid modifications of the original Agreement for Consulting Services.

• "A loan agreement executed in conjunction with an exchange of notes between the Republic of the Philippines and a foreign government shall be governed by international law, with the rule on pacta sunt servanda as the guiding principle. Any subsequent agreement adjunct to the loan agreement shall be similarly governed." — This is the opening pronouncement of the decision, stating the core legal rule that governs the case and its accessory agreements.
• "It is not for this country to repudiate a commitment to which it had pledged its word. The concept of pacta sunt servanda stands in the way of such an attitude, which is, moreover, at war with the principle of international morality." — Quoted from Agustin vs. Edu, this passage articulates the binding force of international commitments under pacta sunt servanda and why the COA's approach of negating the Government's accession to executive agreements could not be adopted.
• "Its nature and consideration, being a mere accessory contract of Loan Agreement No. 4833-PH, are thus the same as that of its principal contract from which it receives life and without which it cannot exist as an independent contract. Indeed, the accessory follows the principal; and, concomitantly, accessory contracts should not be read independently of the main contract." — Quoted from Land Bank of the Philippines vs. Atlanta Industries, Inc., this passage establishes the principle that accessory agreements inherit the legal character of their principal agreement, supporting the Court's conclusion that the consulting services agreement is governed by international law.

• Abaya vs. Ebdane, G.R. No. 167919, February 14, 2007 — Controlling precedent establishing that a loan agreement executed in conjunction with an Exchange of Notes between the Philippine Government and a foreign government is an executive agreement governed by international law. The Court applied this ruling to hold that Loan Agreement No. PH-136 should be treated as an executive agreement.
• DBM Procurement Service vs. Kolonwel Trading, G.R. Nos. 175608, 175616 and 175659, June 8, 2007 — Followed as part of the consistent line of authority applying the Abaya doctrine to executive agreements.
• Land Bank of the Philippines vs. Atlanta Industries, Inc., G.R. No. 193796, July 2, 2014 — Followed for the principle that an accessory contract's nature and consideration are the same as its principal contract, and that accessory contracts should not be read independently of the main contract. Applied to establish that the Agreement for Consulting Services and Supplemental Agreements, as accessories to Loan Agreement No. PH-136, are governed by international law.
• Mitsubishi Corporation-Manila Branch vs. Commissioner of Internal Revenue, G.R. No. 175772, June 5, 2017 — Followed as part of the consistent application of the Abaya doctrine.
• Agustin vs. Edu, G.R. No. L-49112, February 2, 1979 — Cited for the principle that the country cannot repudiate a commitment to which it had pledged its word, reinforcing the doctrine of pacta sunt servanda.
• Miralles vs. Commission on Audit, G.R. No. 210571, September 19, 2017 — Cited for the standard that the Court may intervene to correct a COA decision when the COA acted without or in excess of jurisdiction, or with grave abuse of discretion.
• United Coconut Planters Bank vs. Looyuko, G.R. No. 156337, September 28, 2007 — Cited for the definition of grave abuse of discretion as capricious and whimsical exercise of judgment equivalent to lack of jurisdiction.
• Tan vs. Antazo, G.R. No. 187208, February 23, 2011 — Cited for the burden of proof on the petitioner to establish grave abuse of discretion amounting to lack or excess of jurisdiction.

• Section 2, Article II, 1987 Constitution — Declares that the Philippines renounces war as an instrument of national policy, adopts the generally accepted principles of international law as part of the law of the land, and adheres to the policy of peace, equality, justice, freedom, cooperation, and amity with all nations. The Court relied on this provision to incorporate the doctrine of pacta sunt servanda into Philippine domestic law, binding the Government to faithfully comply with the provisions of the loan agreement and its accessory agreements.
• Section 2(2), Article IX, 1987 Constitution — Grants the COA exclusive authority to promulgate accounting and auditing rules, including those for the prevention and disallowance of irregular, unnecessary, excessive, extravagant, or unconscionable expenditures or uses of government funds and properties. The Court acknowledged this authority but held that the COA gravely abused its discretion in this case by contravening the Constitution and international law.
• Section 6.10, NEDA Guidelines — Provides that contingency amounts shall not exceed 5% of the amount of the contract, using the mandatory verb "shall." The Court held this provision inapplicable because the agreements were governed by international law as executive agreements, not by domestic administrative guidelines.
• Section 9.3, NEDA Guidelines — Provides an exemption with respect to the selection of consultants financed partly or wholly with funds from international financial institutions. The COA interpreted this exemption as limited to consultant selection; the Court did not need to resolve this interpretation because it held the NEDA Guidelines inapplicable altogether.
• Article 1371, Civil Code — Provides that the contemporaneous and subsequent acts of the parties should be considered in determining their intention. The Court applied this provision in interpreting the supplemental agreements as modifying the original agreement's estimated man-months and total cost of services, based on the parties' use of the word "revised" and their subsequent acts.

Carpio, Peralta, Perlas-Bernabe, Caguioa, A. Reyes, Jr., Gesmundo, Hernando, Carandang, Lazaro-Javier, Inting, and Zalameda, JJ., concurred. Leonen, J., filed a separate opinion. J. Reyes, Jr., J., was on leave.

N/A — The text indicates that Leonen, J. filed a separate opinion but does not provide its content or indicate whether it is a concurrence or dissent.