Melchor vs. Commission on Audit

A government contract substantially complies with the requirement of LOI 968 that the chief accountant sign as witness when the accountant issues a certificate of availability of funds that is attached to and becomes an integral part of the contract, rendering the contract enforceable and precluding personal liability of the contracting officer for amounts paid thereunder. Extra work orders, however, constitute separate contracts requiring their own approval and appropriation; absent such approval and appropriation, they are void, but recovery is limited to a quantum meruit valuation, and the officer is liable only for any excess payment over the reasonable value of the work done.

Petitioner Mario R. Melchor served as Vocational School Administrator of the Alangalang Agro-Industrial School in Alangalang, Leyte. In that capacity, he was authorized to enter into infrastructure contracts for the school, subject to the requirements of Letter of Instruction No. 968 (LOI 968), which mandated that the chief accountant of the contracting agency sign government contracts as witness, and Presidential Decree No. 1445 (the Government Auditing Code), which required a certificate of fund availability from the proper accounting official before any contract involving public funds could be executed. These provisions implemented the constitutional mandate that no money shall be paid out of the Treasury except pursuant to an appropriation made by law.

On July 15, 1983, petitioner Mario R. Melchor, in his capacity as Vocational School Administrator of the Alangalang Agro-Industrial School in Alangalang, Leyte, entered into a contract with Cebu Diamond Construction for the construction of Phase I of the Home Technology Building of the school, at a contract price of P488,000. Pablo Narido, the chief accountant of the school, issued a certificate of availability of funds to cover the construction cost. Narido, however, failed to sign the contract as a witness, contrary to the requirement of Section 1 of LOI No. 968. The contract was approved by the then Minister of Education, Culture and Sports, Onofre D. Corpuz. The contract itself provided that "other essential related documents" were "made and acknowledged as integral parts of this agreement, by reference and/or incorporation."

While construction of Phase I was under way, the contractor, in a letter dated November 8, 1983, sought an additional charge of P73,000 — equivalent to 15% of the stipulated amount — due to an increase in the cost of labor and construction materials. Petitioner referred the request to the MECS Regional Director on November 17, 1983, and to the COA Regional Director in Tacloban City on November 22, 1983. Acting Assistant Regional Director Servillano C. Dela Cruz approved the contractor's request subject to the availability of funds and the imprimatur of the Resident Auditor. The COA Regional Office No. VIII, through Regional Director Sopronio Flores, Jr., took the position that approval of the price escalation rested on the Minister or head of the agency, with COA's participation limited to post-audit. The contractor also requested a series of extensions, which the petitioner granted.

On April 10, 1984, the contractor abandoned the project, citing increased costs of construction materials and labor. At that point, the contractor had accomplished only 61% of the construction work, valued at P344,430.88. As of September 13, 1984, however, the contractor had been paid a total of P515,305.60, which included approximately P172,003.26 for extra work found necessary to strengthen the building structure. On September 19, 1984, the petitioner wrote to COA Resident Auditor Gilda Ramos, requesting advice on whether to condone the contract or institute a legal action for breach. Ramos referred the matter to COA Regional Director Cesar A. Damole, who, in a third Indorsement dated April 8, 1985, directed the disallowance of the full payment of P515,305.60 in post-audit on the ground that the contract was null and void for lack of the chief accountant's signature as witness under Section 1 of LOI 968, and made the petitioner personally liable for the amount paid.

The petitioner sought reconsideration on May 3, 1985, arguing that the certificate of availability of funds signed by the chief accountant was an integral part of the contract and thus substantially complied with LOI 968; that the contract was approved by the head of the agency; that the Resident Auditor had been furnished a copy of the contract and raised no objection; and that he had complied with Sections 85 and 86 of PD 1445. COA Regional Director Damole denied the motion on July 17, 1985. The petitioner appealed to the COA Head Office, which dismissed the appeal for lack of merit and likewise denied his requests for reconsideration. The construction of the Home Technology Building was eventually completed and the building was being utilized as part of the Alangalang Industrial School.

• Substantial Compliance with LOI 968: Petitioner argued that the certificate of availability of funds signed by the chief accountant, being an integral part of the contract under Section 86 of PD 1445, substantially complied with the requirement of LOI 968 that the chief accountant sign as witness.
• Authority and Approval: Petitioner maintained that he did not exceed his authority because the contract was approved by the Minister of Education, Culture and Sports, the head of the agency concerned.
• Estoppel by COA's Inaction: Petitioner contended that the Resident Auditor of the school had been furnished a copy of the contract and did not object to the contract despite the flaw, invoking COA Circular No. 76-34, which required COA to call attention to defects within five days of receipt of the contract.
• Compliance with PD 1445: Petitioner asserted that he religiously complied with Sections 85 and 86 of PD 1445 regarding the requirements for execution of government contracts.
• Quantum Meruit as Alternative Relief: Petitioner argued that even assuming the contract was null and void, he should not be made personally accountable, citing Royal Trust Corporation vs. Commission on Audit, where the Court allowed compensation on a quantum meruit basis despite the absence of a covering appropriation.

• Nullity of Contract for Non-Compliance with LOI 968: Respondent COA maintained that the contract was null and void because the chief accountant did not affix his signature as witness, in violation of Section 1 of LOI 968, and that consequently the amount of P344,430.80 should be disallowed in post-audit and the petitioner held personally liable.
• Nullity of Extra Work Orders: Respondent argued that the extra work orders, exceeding 25% of the escalated original contract price, were null and void because no supplemental agreement was executed, as required by the implementing rules and regulations of PD 1594.

• Validity of the Main Contract: Whether the contract for the construction of the Home Technology Building is null and void for failure of the chief accountant to sign as a witness, as required by LOI 968, and whether the petitioner should be held personally liable for the amount of P344,430.80 paid for work accomplished within contract specifications.
• Validity of Extra Work Orders: Whether the extra work orders in the amount of P172,003.26 are null and void for lack of a supplemental agreement and proper approval, and whether the petitioner should be held personally liable for said amount.

• Validity of the Main Contract: No, the contract is not null and void. Substantial compliance with LOI 968 was achieved through the chief accountant's issuance of a certificate of availability of funds, which under Section 86 of PD 1445 is attached to and becomes an integral part of the contract; the petitioner should not be made personally liable for the P344,430.80.
• Validity of Extra Work Orders: Yes, the extra work orders are null and void for lack of approval by the Minister of Education, Culture and Sports and absence of a covering appropriation. However, the petitioner is not automatically liable for the full P172,003.26; COA must determine the value of the extra works on a quantum meruit basis, and the petitioner shall be liable only for any excess payment over that reasonable value.

• Validity of the Main Contract: LOI 968 and Sections 85 and 86 of PD 1445 share a uniform intent: to ensure that government contracts are signed only when supported by available funds, implementing the constitutional mandate that no money shall be paid out of the Treasury except pursuant to an appropriation. While the chief accountant failed to sign the contract as witness, he had issued a certificate of availability of funds, which Section 86 of PD 1445 expressly states "shall be attached to and become an integral part of the proposed contract." The contract itself acknowledged that "other essential related documents" were integral parts of the agreement. The accountant's certification was thus the "basic and more important validating document," and its incorporation into the contract made up for the absence of his signature as witness. Section 2 of LOI 968 further provides that the accountant's signature "shall be considered as constituting a certification," indicating that the certification, not the signature as witness, is the more reliable indicium of fund availability. A literal and stringent application of LOI 968 would defeat the statute's purpose, which was already served by the certificate. The contract and the 15% price escalation also bore the approval of the Minister of Education, Culture and Sports, as required by COA Circular No. 83-101-J and the Implementing Rules of PD 1594. COA was itself negligent: under COA Circular No. 76-34, it was required to call attention to contract defects within five days of receipt, and had it done so, the missing signature could have been remedied. Finally, the building had been completed and was serving an urgent public need; compelling the petitioner to shoulder the construction cost when the government was reaping the benefits would be highly inequitable.

• Validity of Extra Work Orders: The implementing rules of PD 1594 provide that a separate supplemental agreement "may" be entered into for change orders or extra work orders exceeding 25% of the escalated original contract price. While the word "may" suggests the requirement is not always mandatory, the rule was found applicable in this case. Under COA Circular No. 83-101-J, the Minister of Education, Culture and Sports had authority to approve extra work orders not exceeding 50% of the original contract price or P1 Million, whichever is less, but there was no showing that the extra work order was approved by the Minister. A variation order is a contract by itself involving the expenditure of public funds, subject to the restrictions of Sections 85 and 86 of PD 1445 and LOI 968, and the petitioner presented no proof of an appropriation to cover the extra work order. The contract for extra works was therefore declared null and void under Section 87 of PD 1445. Nevertheless, the petitioner should not automatically be ordered to return the full P172,003.26, as the government had already received and accepted benefits from the building. Applying the principle of quantum meruit recognized in Royal Trust Construction vs. Commission on Audit and Eslao vs. Commission on Audit, the COA was directed to determine the reasonable value of the extra works; the petitioner would be personally liable only for any excess payment over that quantum meruit valuation.

• Substantial Compliance in Government Contracts — Where a statute requiring a particular formality in government contracts is intended to ensure the availability of funds, and the substance of that requirement is satisfied through another document that becomes an integral part of the contract, the failure to observe the literal formality does not render the contract void. The Court applied this by holding that the chief accountant's certificate of fund availability, incorporated into the contract under Section 86 of PD 1445, substantially complied with LOI 968's requirement that the accountant sign as witness.

• Rule Against Absurd or Inequitable Statutory Construction — A statute should be construed in a way that avoids absurd, unjust, or injurious consequences, and a construction that defeats the clear purpose of the lawmakers is disfavored. The Court invoked this principle to reject a narrow reading of LOI 968 that would nullify a completed public building contract and burden a public official personally for the cost of a structure from which the government was benefiting.

• Quantum Meruit in Government Contracts — Even where a government contract is void for non-compliance with statutory requirements, the contractor or the government may recover or be charged on a quantum meruit basis — the reasonable value of services rendered or work done — to prevent unjust enrichment. The Court extended this doctrine, previously applied in favor of contractors seeking payment, to a situation where the government sought reimbursement from a public official who had already paid the contractor.

• Variation Orders as Separate Contracts — A variation order (change order, extra work order, or supplemental agreement) is a contract by itself, involving the expenditure of public funds, and is subject to the same restrictions on government contracts, including the requirement of a covering appropriation and approval by the proper authority.

• "However, under the peculiar circumstances of this case, we agree with the petitioner's view that there was substantial compliance with the requirements of LOI 968 in the execution of the contract. He has not been charged under some regulations governing negligence in not going over auditing and accounting rules more carefully. But even assuming some kind of administrative responsibility for not being more careful, he should not be made to pay for a school building already constructed and serving an urgent need in his province." — This passage articulates the Court's equitable rationale for excusing the formal defect and shielding the petitioner from personal liability for the main contract.

• "It is a rule of statutory construction that the court may consider the spirit and reason of a statute where a literal meaning would lead to absurdity, contradiction, injustice or would defeat the clear purpose of the lawmakers." — This states the canonical formulation of the rule against absurd or inequitable statutory construction invoked to justify the substantial compliance ruling.

• "to deny payment to the contractor of the two buildings which are almost fully completed and presently occupied by the university would be to allow the government to unjustly enrich itself at the expense of another." — Quoted from Eslao vs. Commission on Audit, this passage defines the unjust enrichment principle underpinning quantum meruit recovery in void government contracts and was relied upon to limit the petitioner's liability for extra work orders.

• "If, after COA determines the value of the extra works computed on the basis of quantum meruit it finds that the petitioner made an excess or improper payment for these extra works, then petitioner Melchor shall be liable only for such excess payment." — This passage establishes the Court's remedial framework for the extra work orders, capping personal liability at the excess over reasonable value rather than the full disallowed amount.

• People vs. Manantan, 5 SCRA 684 (1962) — Cited for the rule of statutory construction that a court may consider the spirit and reason of a statute where a literal meaning would lead to absurdity or injustice. Applied to justify a non-literal reading of LOI 968.
• People vs. Purisima, 86 SCRA 542 (1978) — Cited for the presumption that undesirable consequences were never intended by a legislative measure, and that a construction avoiding objectionable consequences is favored. Applied to support the holding that compelling the petitioner to pay for a completed public building would be inequitable.
• Royal Trust Corporation vs. Commission on Audit, G.R. No. 84202, November 22, 1988 — Cited by the petitioner and relied upon by the Court for the principle that a contractor may be compensated on a quantum meruit basis despite the absence of a covering appropriation. Extended to the situation where the government seeks reimbursement from a public official.
• Dr. Rufino O. Eslao vs. Commission on Audit, G.R. No. 89745, April 8, 1991 — Cited for the holding that denying payment for buildings already completed and occupied would allow the government to unjustly enrich itself, and that quantum meruit recovery applies. Used to support limiting the petitioner's liability for extra work orders to any excess over reasonable value.

• Section 1, Letter of Instruction No. 968 (December 17, 1979) — Requires that all contracts for capital projects and supply of commodities and services chargeable to agency funds be signed by agency heads only when there are available funds, and that the chief accountant sign such contracts as witness; contracts without such witness shall be considered null and void. The Court held that the requirement was substantially complied with through the chief accountant's certificate of fund availability.
• Section 2, LOI No. 968 — Provides that it is the responsibility of the chief accountant to verify the availability of funds and that his signature shall be considered as constituting a certification to that effect. The Court inferred from this provision that the accountant's certification, not his signature as witness, is the more reliable indicium of fund availability.
• Sections 85 and 86, Presidential Decree No. 1445 (Government Auditing Code of the Philippines) — Require that no contract involving expenditure of public funds be entered into unless the proper accounting official certifies that funds have been appropriated and are available, and that the certificate be attached to and become an integral part of the proposed contract. The Court held that the chief accountant's certificate, as an integral part of the contract, validated the main contract.
• Section 87, PD No. 1445 — Declares void any contract entered into contrary to Sections 85 and 86, and makes the officer or officers entering into the contract liable to the government or other contracting party for consequent damage. Applied to declare the extra work orders null and void for lack of a covering appropriation.
• Article VI, Section 29(1), Constitution — Provides that no money shall be paid out of the Treasury except in pursuance of an appropriation made by law. Cited as the constitutional mandate underlying LOI 968 and Sections 85 and 86 of PD 1445.
• Implementing Rules of PD No. 1594, Section III, CIII, paragraph 5 — Provides that a separate supplemental agreement may be entered into for change orders or extra work orders exceeding 25% of the escalated original contract price. The Court found the rule applicable, noting the use of "may" but holding that the extra work orders were void for lack of approval and appropriation.
• COA Circular No. 83-101-J (June 8, 1983) — Authorizes the Minister of Education, Culture and Sports to approve infrastructure projects not exceeding P2 Million and extra work orders not exceeding 50% of the original contract price or P1 Million, whichever is less. The main contract and price escalation were approved by the Minister, but there was no showing of approval for the extra work orders.
• COA Circular No. 76-34 (July 15, 1976) — Requires COA, within five days from receipt of a copy of the contract, to call the attention of management regarding defects or deficiencies and suggest corrective measures. The Court found COA negligent for failing to comply, as the missing accountant's signature could have been remedied.
• COA Circular No. 80-122 (January 15, 1980) — Ensures that an extra work order is approved only when supported by available funds. Cited to reinforce the requirement of a covering appropriation for variation orders.

Fernan, C.J., Narvasa, Melencio-Herrera, Cruz, Paras, Feliciano, Gancayco, Padilla, Bidin, Sarmiento, Griño-Aquino, Medialdea, Regalado, and Davide, Jr., JJ., concurred.