New Manila Lumber Company, Inc. vs. Republic of the Philippines

An unpaid supplier of materials for a public works contract has no direct cause of action against the Republic based on an alleged implied contract or on powers of attorney executed by the contractor; the supplier’s remedy is that provided by Act No. 3688, and any money claim against the State must be lodged with the Auditor General.

New Manila Lumber Company, Inc. supplied lumber materials to contractor Alfonso Mendoza, who had entered into a formal contract with the Republic of the Philippines, through the Director of Schools, for the construction of two public school buildings. Act No. 3688, “An Act for the protection of persons furnishing material and labor for the construction of public works,” required the contractor to post a penal bond and gave unpaid suppliers a defined remedy on that bond. The Republic, as owner, and the lumber company, as supplier, had no direct contractual relationship; any claim by the supplier against the Government implicated the rule that the State cannot be sued without its consent.

New Manila Lumber Company, Inc. furnished lumber materials for the construction of two public school buildings undertaken by contractor Alfonso Mendoza under a contract with the Republic of the Philippines, through the Director of Schools. According to the complaint, before the Republic paid any amount due the contractor, Mendoza executed powers of attorney in favor of the lumber company, constituting it as his sole, true, and lawful attorney-in-fact with specific and exclusive authority to collect and receive from the Republic any and all amounts due or that may become due to him in connection with the construction, as may be necessary to pay materials supplied by the lumber company. The originals of the powers of attorney were received by the Republic through the Director of Public Schools, who promised to pay the lumber company. The complaint alleged that despite this, the Republic paid the contractor several amounts on different occasions without first paying the lumber company.

The lumber company alleged that P18,327.15 remained unpaid as the balance of the cost of lumber it supplied and used in the school buildings. It also alleged that, after executing the powers of attorney, the contractor demanded and collected from the Republic the money the collection of which he had entrusted to the lumber company. On May 8, 1958, the lumber company filed a complaint in the Court of First Instance of Manila against the Republic for recovery of that sum, with interest at the legal rate from the date it was due, plus attorney’s fees and costs.

It was not disputed that the Republic had already instituted a suit against the contractor for forfeiture of the latter’s bond posted to secure faithful performance of the construction contract for one of the two school buildings, docketed as Civil Case No. 26815 in the Court of First Instance of Manila. The contractor had a similar bond with respect to the other school building.

The Court of First Instance of Manila found no juridical tie between the lumber company as supplier and the Republic as owner.

• Implied Contract: Petitioner argued that an implied contract arose between it and the Republic when the Republic, through the Director of Public Schools, was furnished copies of the powers of attorney executed by the contractor and promised to pay petitioner for the materials supplied for the construction of the school buildings.
• Irrevocable Agency: Petitioner maintained that the powers of attorney executed by the contractor in its favor were irrevocable and coupled with interest.
• Article 1729: Petitioner cited Article 1729 of the New Civil Code, providing that those who furnish materials for a piece of work undertaken by a contractor have an action against the owner up to the amount owing from the latter to the contractor at the time the claim is made.

• No Sufficient Cause of Action: Respondent moved to dismiss on the ground that the complaint did not allege a sufficient cause of action.
• No Right Under Act No. 3688: Respondent argued that plaintiff had no right to institute the action under Act No. 3688.
• Lack of Jurisdiction: Respondent argued that the court was without jurisdiction to entertain the action against the Republic.

• Cause of Action / Privity: Whether the complaint alleged a sufficient cause of action against the Republic based on an alleged implied contract or the contractor’s powers of attorney.
• Remedy Under Act No. 3688: Whether the supplier’s proper remedy was a direct suit against the Republic or the remedy provided by Act No. 3688 against the contractor’s bond.
• Agency and Revocation: Whether the powers of attorney made plaintiff the contractor’s agent and whether the agency was revoked when the contractor demanded and collected the amounts from the Republic.
• Irrevocable Agency: Whether the alleged irrevocability of the powers of attorney, even if coupled with interest, could affect the Republic, which was not a party to them.
• Article 1729: Whether Article 1729 of the New Civil Code gave plaintiff an action against the Republic as owner despite Act No. 3688.
• State Immunity / Auditor General: Whether the money claim arising from an alleged implied contract should have been lodged with the Auditor General because the State cannot be sued without its consent.

• Cause of Action / Privity: No. No sufficient cause of action was alleged against the Republic, there being no privity of contract between the supplier and the Government; the contractor’s powers of attorney did not bind the Republic.
• Remedy Under Act No. 3688: The remedy is not a direct suit against the Government. Under Act No. 3688, the supplier may intervene in the Government’s action on the contractor’s bond or file an action in the name of the Republic against the contractor on the other bond.
• Agency and Revocation: The powers of attorney constituted plaintiff as the contractor’s agent for collection; the agency was apparently revoked when the contractor himself demanded and collected the amounts from the Republic under Articles 1920 and 1924 of the New Civil Code.
• Irrevocable Agency: No. Even if the powers of attorney were irrevocable and coupled with interest, their alleged irrevocability could not affect the Republic, which was not a party to them; they were obligatory only on the principal who executed the agency.
• Article 1729: Article 1729 did not support the action because it is expressly subject to the provisions of special law, and Act No. 3688 is the special law governing the case.
• State Immunity / Auditor General: The claim should have been lodged with the Auditor General. The State cannot be sued without its consent.

• Cause of Action / Privity: The complaint sought to enforce against the Republic a money claim based on powers of attorney executed by contractor Alfonso Mendoza. The Republic was not a party to those powers. The Director of Public Schools, though the official who entered into the construction contract, had no authority to bind the Republic on payment; payment of the contract price was not within his exclusive control but was subject to approval under existing laws by the Department Head under Section 568 of the Revised Administrative Code and by the Auditor General. Thus no implied contract or juridical tie arose between plaintiff and the Republic.
• Remedy Under Act No. 3688: Section 1 of Act No. 3688 requires a contractor entering into a formal contract with the Government for construction of a public building or public work to execute a penal bond with sureties, with the additional obligation to promptly pay all persons supplying labor and materials. An unpaid supplier may intervene in any action instituted by the Government on the contractor’s bond and have its claim adjudicated, subject to the Government’s priority. If the Government does not sue within six months from completion and final settlement or waives its right, the supplier may obtain a certified copy of the contract and bond and bring suit in the name of the Government against the contractor and sureties in the Court of First Instance where the contract was to be performed. Here, the Republic had already instituted Civil Case No. 26815 in the Court of First Instance of Manila against the contractor for forfeiture of the bond for one school building, and the contractor had a similar bond for the other. Plaintiff’s legal remedy was therefore to intervene in that case as an unpaid supplier or to file an action in the name of the Republic against the contractor on the other bond, not to sue the Government directly.
• Agency and Revocation: Under the facts alleged, the powers of attorney made plaintiff the contractor’s agent to collect whatever amounts were due the contractor from the Republic. Because the contractor, as principal, thereafter demanded and collected from the Republic the money the collection of which he had entrusted to plaintiff, the agency was apparently already revoked under Articles 1920 and 1924 of the New Civil Code.
• Irrevocable Agency: Even assuming the powers of attorney were irrevocable and coupled with interest, their alleged irrevocability could not affect the Republic, which was not a party to them. They were obligatory only on the principal who executed the agency.
• Article 1729: Article 1729 of the New Civil Code gives those who furnish materials for a piece of work undertaken by a contractor an action against the owner up to the amount owing from the owner to the contractor at the time the claim is made. Its last paragraph expressly makes it subject to the provisions of special law. The special law governing the present case is Act No. 3688, so Article 1729 did not authorize a direct action against the Republic.
• State Immunity / Auditor General: As an additional reason for upholding the dismissal, plaintiff’s action was a claim for a sum of money arising from an alleged implied contract between it and the Republic. Such a claim should have been lodged with the Auditor General. The State cannot be sued without its consent.

• No privity, no cause of action against the Government — An unpaid supplier of materials to a contractor for a public works project has no direct cause of action against the Republic absent privity of contract. The contractor’s powers of attorney do not bind the Government, particularly where the contracting official lacks exclusive authority over payment and payment is subject to approval by the Department Head and the Auditor General.
• Act No. 3688 remedy for unpaid suppliers of public works — Under Section 1 of Act No. 3688, a contractor entering into a formal contract with the Government for construction of a public building or public work must execute a penal bond with sureties, obligating prompt payment to suppliers of labor and materials. An unpaid supplier may intervene in any action instituted by the Government on the contractor’s bond and have its claim adjudicated, subject to the Government’s priority; if the Government does not sue within six months from completion and final settlement or waives its right, the supplier may obtain a certified copy of the contract and bond and bring suit in the name of the Government against the contractor and sureties in the Court of First Instance where the contract was to be performed.
• Revocation of agency by principal’s act — The powers of attorney made the supplier the contractor’s agent for collection. When the contractor, as principal, himself demanded and collected from the Republic the money entrusted to the supplier, the agency was apparently revoked under Articles 1920 and 1924 of the New Civil Code.
• Irrevocable agency cannot bind non-party — Even an irrevocable agency coupled with interest is obligatory only on the principal who executed it; its alleged irrevocability cannot affect a third party, such as the Republic, that was not a party to the agency.
• Article 1729 subject to special law — The supplier’s action against the owner under Article 1729 of the New Civil Code is expressly subject to the provisions of special law. For public works, Act No. 3688 is the special law and governs the supplier’s remedy.
• State non-suability and money claims against the State — A claim for a sum of money arising from an alleged implied contract with the Republic should be lodged with the Auditor General. The State cannot be sued without its consent.

• "Pursuant to Act 3688, plaintiff's legal remedy is, not to bring suit against the Government, there being no privity of contract between them, but to intervene in the civil case above-mentioned as an unpaid supplier of materials to the contractor, or file an action in the name of the Republic against said contractor on the latter's other bond." — This passage states the ratio decidendi on the supplier’s proper remedy and the absence of privity with the Government.
• "It will be observed, however, that defendant was not a party to the execution of the powers of attorney. Besides, the Director of Public Schools had no authority to bind defendant on the payment." — This passage explains why no implied contract arose from the powers of attorney and the Director’s promise.
• "At any rate, under the facts alleged in the complaint, the powers of attorney in question made plaintiff the contractor's agent in the collection of whatever amounts may be due the contractor from the defendant. And since it is also alleged that, after the execution of the powers of attorney, the contractor (principal) demanded and collected from defendant the money the collection of which he entrusted to plaintiff, the agency apparently has already been revoked. (Articles 1920 and 1924, new Civil Code.)" — This passage applies agency law and concludes that the agency was apparently revoked.
• "Plaintiff's action being a claim for sum of money arising from an alleged implied contract between it and the Republic of the Philippines, the same should have been lodged with the Auditor General. The state cannot be sued without its consent." — This passage states the additional ground of state non-suability and the requirement to lodge the money claim with the Auditor General.

• Section 1, Act No. 3688 — Requires a contractor entering into a formal contract with the Government for construction of a public building or public work to execute a penal bond with sureties, with the additional obligation to promptly pay all persons supplying labor and materials. It allows an unpaid supplier to intervene in any action instituted by the Government on the contractor’s bond and have its claim adjudicated, subject to the Government’s priority; if the Government does not sue within six months from completion and final settlement or waives its right, the supplier may obtain a certified copy of the contract and bond and bring suit in the name of the Government against the contractor and sureties in the Court of First Instance where the contract was to be performed. Applied here, plaintiff’s remedy was not a direct suit against the Republic but intervention or an action in the Republic’s name on the contractor’s bond.
• Article 1920, New Civil Code — Cited by the Court in concluding that the agency was apparently revoked when the contractor, as principal, demanded and collected the money entrusted to plaintiff.
• Article 1924, New Civil Code — Cited together with Article 1920 in support of the conclusion that the agency was apparently revoked by the principal’s act of demanding and collecting the entrusted amounts.
• Article 1729, New Civil Code — Provides that those who put labor upon or furnish materials for a piece of work undertaken by a contractor have an action against the owner up to the amount owing from the latter to the contractor at the time the claim is made; its last paragraph makes it subject to the provisions of special law. Applied here, Act No. 3688 is the special law, so Article 1729 did not authorize a direct suit against the Republic.
• Section 568, Revised Administrative Code — Cited to show that payment of the contract price was not within the exclusive control of the Director of Public Schools but was subject to approval by the Department Head, in addition to the Auditor General. This supported the conclusion that the Director could not bind the Republic on payment.

Paras, C.J.; Labrador; Padilla; Montemayor; Bautista Angelo; Labrador; Concepcion; Endencia; and Barrera, JJ., concur (as listed in the source text).