Osmeña vs. Commission on Audit

A contract involving expenditure of public funds entered into without sufficient appropriation and certification of fund availability is void under Sections 85-87 of P.D. No. 1445, and a compromise agreement derived from such void contract is likewise void and unenforceable against the government, rendering the officer directly responsible personally liable.

The City of Cebu, a local government unit, engaged H. Franco Construction Company, Inc. as contractor for a city abattoir project involving disbursement of public funds. The Commission on Audit exercises constitutional power to examine, audit and settle all accounts pertaining to expenditures of government funds and property. P.D. No. 1445 requires antecedent appropriation and certification of fund availability as indispensable prerequisites to any government contract involving public expenditure.

Sometime in 1985 the City of Cebu decided to construct a modern abattoir. City Treasurer Ricardo Pestano issued a certificate of availability of funds dated April 30, 1985 in the amount of P5,419,180.00 specifically for construction of the Cebu City abattoir. After public bidding, H. Franco Construction Company, Inc. was awarded the construction, and the City, through Mayor Ronald R. Duterte, entered into a contract priced at P8,368,920.00. The contract recited that the City Treasurer certified availability of P2,092,230.00 for the first installment payable upon certification of substantial completion, while P6,276,690.00 representing the second, third and final installments would be included in the calendar year 1986 budget.

On March 13, 1986, Sen. John H. Osmeña, then Officer-In-Charge of Cebu City, ordered suspension of the project and review of the contract by COA, and wrote HFCCI to account for the value of its progress. On April 24, 1986, HFCCI claimed P2,142,964.29 as the value of work accomplished. Unable to collect after demands, HFCCI instituted Civil Case No. CEB-5966 on May 21, 1987 against the City for recovery of investment and damages. In its answer dated June 5, 1987, the City admitted the contract but alleged it was null and void as declared by COA in its 2nd Indorsement dated September 4, 1986, such that liability belonged solely to the officer or officers who entered into it.

Nevertheless, on December 15, 1988, the City, through Mayor Tomas R. Osmeña, entered into a court-approved compromise agreement to pay HFCCI P1,500,000.00 as full and final settlement. On the strength of the court's Order dated March 3, 1989, the Provincial Deputy Sheriff of RTC Branch 5, Cebu City was ordered on March 8, 1989 to serve a writ of execution, and P1,500,000.00 plus P15,052.00 as lawful fees were garnished from city funds deposited in the Philippine National Bank. The trial judgment based on compromise was referred to COA, which in its 3rd Indorsement dated May 2, 1989 refused to concur in the expenditure and treated it as personal liability, a ruling affirmed on reconsideration in its 5th Indorsement dated January 23, 1991.

• Jurisdiction to Void Contract: Petitioner argued that the COA decision in the 2nd Indorsement dated September 4, 1986 was null and void for having been made without, in excess of jurisdiction or with grave abuse of discretion.
• Non-Finality: Petitioner maintained that the COA decision never became final because it was made without, in excess of jurisdiction or with grave abuse of discretion.
• Executed Contract Beyond COA Power: Petitioner argued that COA had no authority to declare void a contract already executed and fulfilled, rendering the 2nd Indorsement a nullity that never attained finality.

• Void Compromise: Respondent countered that since petitioner and HFCCI knew of the absolute invalidity of the abattoir contract, the compromise agreement relative to the obligation resulting therefrom was also void and inexistent and the decision based thereon unenforceable against the City of Cebu under Art. 1422 of the Civil Code.
• Personal Liability: Respondent argued that settlement of the supposed obligation arising from a void contract became the personal liability of petitioner who was directly responsible therefor under Sec. 87 and Sec. 103 of P.D. No. 1445.
• Quantum Meruit Inapplicable: Respondent maintained that quantum meruit could not be invoked because payment was due to a compromise made pursuant to a void contract, no evidence was presented as to extent of work to substantiate the compromised amount, and petitioner entered the compromise after COA had voided the contract and thus could not evade sanctions for failure to comply with safeguards against undue expenditures.

• Validity of Abattoir Contract: Whether the abattoir contract between the City of Cebu and HFCCI was void for lack of appropriation and certification of fund availability, and whether COA validly declared it void.
• Finality of COA Ruling: Whether the COA 2nd Indorsement dated September 4, 1986 became final and executory for failure to appeal on certiorari to the Supreme Court within thirty days.
• Validity of Compromise Agreement: Whether the compromise agreement and the trial court judgment based thereon were valid and enforceable against the City despite the prior voiding of the underlying contract.
• Personal Liability and Quantum Meruit: Whether the P1,500,000.00 settlement was the personal liability of the officer responsible and whether recovery could be sustained on quantum meruit.

• Validity of Abattoir Contract: Yes. The contract was void from the beginning, the agreed cost of P8,368,920.00 being way beyond the certified appropriated amount of P5,419,180.00 in violation of the explicit mandatory fund-availability requirement.
• Finality of COA Ruling: Yes. Finality attached because neither petitioner nor HFCCI questioned the invalidity ruling by certiorari within thirty days, and a COA decision not appealed within the period provided by law is final and executory.
• Validity of Compromise Agreement: No. The compromise was void as a mere derivative of the previously void contract, being based on an undisputedly illegal antecedent claim without consideration, and the trial judgment could not ratify a void ab initio contract.
• Personal Liability and Quantum Meruit: Yes. The settlement became the personal liability of the officer directly responsible under Secs. 87 and 103 of P.D. No. 1445, with quantum meruit unavailable where payment rested on a void contract, violated public policy safeguards, and lacked proof of work accomplished.

• Validity of Abattoir Contract: No contract involving expenditure of public funds may be entered into unless there is an appropriation therefor and the proper accounting official has certified fund availability, with any contrary contract void under Secs. 85-87 of P.D. No. 1445. Applied here, only P5,419,180.00 was certified while the contract obligated P8,368,920.00, with the balance merely to be included in the 1986 budget. Because antecedent appropriation is essential to government liability, the contract contravened Sec. 85 and was null and void by virtue of Sec. 87, correctly declared void in the 2nd Indorsement.
• Finality of COA Ruling: A party aggrieved by a COA decision must appeal on certiorari to the Supreme Court within thirty days, failing which the decision becomes final and executory. Neither petitioner nor HFCCI so appealed, resulting in finality even before the civil case was instituted. Moreover, estoppel barred repudiation of COA jurisdiction because the City itself invoked the void declaration as affirmative defense in the civil case to escape liability, and a party invoking jurisdiction to secure affirmative relief cannot afterwards deny that jurisdiction.
• Validity of Compromise Agreement: If a compromise is based upon an antecedent claim which is undisputedly and undoubtedly illegal, the compromise is invalid for illegality and lack of consideration, and entering it after COA voidance circumvents the constitutional thirty-day certiorari remedy. The compromise here derived entirely from the void abattoir obligation after both parties knew of its absolute invalidity, falling under Art. 1422 of the Civil Code. Hence the trial decision based on compromise could not ratify or render enforceable against the City a contract void ab initio.
• Personal Liability and Quantum Meruit: Under Secs. 87 and 103 of P.D. No. 1445, unlawful expenditure from a void contract is the personal liability of the officer directly responsible for its incurrence. Petitioner, having entered the compromise after voidance, bore that liability. Quantum meruit, grounded on justice and equity to compensate benefit received where restitution is equitable and involves no violation of public policy, was inapplicable because payment rested on a void contract, no evidence substantiated the extent of work to support the compromised amount, and allowance would permit evasion of legal safeguards against undue public expenditures.

• COA audit power — The Commission on Audit has the power, authority and duty to examine, audit and settle all accounts pertaining to revenue, receipts, expenditures or uses of funds and property owned or held in trust by, or pertaining to, the government or any of its subdivisions, agencies or instrumentalities. It was applied to sustain COA review and disapproval of the abattoir contract and the subsequent compromise disbursement.
• Void government contract for lack of appropriation and certification — No contract involving expenditure of public funds shall be entered into unless there is an appropriation therefor and the proper accounting official has certified that funds have been duly appropriated and the amount necessary to cover the proposed contract for the current year is available; any contract entered into contrary thereto is void. Fund availability is an indispensable prerequisite, with antecedent appropriation essential to government liability, as in Zobel vs. City of Manila. The P8,368,920.00 contract supported by only P5,419,180.00 certification was thus void under Secs. 85-87 of P.D. No. 1445.
• Estoppel to deny jurisdiction after invoking it — A party cannot invoke the jurisdiction of a court or administrative body to secure affirmative relief and, after obtaining or failing to obtain such relief, repudiate or question that same jurisdiction to escape a penalty. Having pleaded COA's void declaration as a defense in the collection suit, petitioner could not assert COA acted without jurisdiction.
• Finality of COA decisions — A decision of the Commission or any of its Auditors not appealed within the period provided by law shall be final and executory, appealable on certiorari to the Supreme Court within thirty days from receipt. Failure of petitioner and HFCCI to appeal the September 4, 1986 voidance rendered it final.
• Void compromise based on illegal antecedent claim — If a compromise is based upon an antecedent claim which is undisputedly and undoubtedly illegal, the compromise is invalid on the ground of illegality as well as lack of consideration. Applied to void the P1,500,000.00 settlement derived from the void abattoir contract, unenforceable under Art. 1422 of the Civil Code, which a court judgment on compromise cannot ratify if void ab initio.
• Quantum meruit limitation in public contracts — Quantum meruit, based on justice and equity to compensate benefit received where restitution is equitable and involves no violation, frustration or opposition to public policy, does not sustain payment under a void government contract lacking proof of work and entered in disregard of statutory safeguards against undue expenditures.

• "The prohibition contained in Sec. 85 of PD 1445 (Government Auditing Code) is explicit and mandatory. Fund availability is, as it has always been, an indispensable prerequisite to the execution of any government contract involving the expenditure of public funds by all government agencies at all levels." — States the controlling statutory prerequisite that voided the abattoir contract for exceeding the certified appropriation.
• "A party cannot invoke the jurisdiction of a court or an administrative body to secure affirmative relief against his opponent and after obtaining or failing to obtain such relief, repudiate or question that same jurisdiction." — States the estoppel rule barring petitioner from disavowing COA jurisdiction after pleading its ruling as a defense.
• "Since petitioner and HFCCI knew of the absolute invalidity of said Abattoir Contract, the Compromise Agreement relative to the petitioner's obligation resulting from said Abattoir contract is also void and in existent and the decision based on said Compromise Agreement is unenforceable against the City of Cebu. (Art. 1422, Civil Code of the Philippines)." — States the Solicitor General's position adopted on why the compromise could not bind the City.

• Zobel vs. City of Manila, 47 Phil. 169 — Cited for the proposition that antecedent or advance appropriation is essential to government liability on contracts, supporting voidance for lack of fund availability.
• Marquez vs. Secretary of Labor, G.R. No. 80685, 171 SCRA 337 — Cited, quoting Dean vs. Dean and Littleton vs. Burges, for the estoppel rule that a party invoking jurisdiction for affirmative relief cannot later repudiate it to escape liability.

• Sec. 2, Art. IX, 1987 Constitution — Vests COA with power to examine, audit and settle all government revenue, expenditure and property accounts; basis for COA review of the abattoir contract and compromise disbursement.
• Sec. 85, Chap. 3, Title II, P.D. No. 1445 — Prohibits entering any contract involving public funds without an appropriation therefor; violated because the P8,368,920.00 obligation exceeded the P5,419,180.00 appropriation.
• Sec. 86, Chap. 3, Title II, P.D. No. 1445 — Requires certification by the proper accounting official of appropriation and availability of funds to cover the current-year contract amount; the limited Treasurer's certification failed to cover the full contract cost.
• Sec. 87, Chap. 3, Title II, P.D. No. 1445 — Declares contracts entered contrary to Secs. 85-86 void; applied to nullify the abattoir contract and its derivative compromise.
• Sec. 103, P.D. No. 1445 — Makes the unlawful expenditure the personal liability of the officer directly responsible; applied to hold petitioner personally liable for the settlement.
• Sec. 50, Chap. 3, Title I, P.D. No. 1445; Sec. 35, Chap. 5, Administrative Code of 1987; Sec. 7, Art. IX-A, 1987 Constitution — Require appeal from COA decisions on certiorari to the Supreme Court within thirty days; non-compliance rendered the 2nd Indorsement final.
• Sec. 51, Chap. 3, P.D. No. 1445; Sec. 36, Chap. 5, Administrative Code of 1987 — Provide that a COA decision not appealed within the legal period is final and executory; applied to bar collateral attack via compromise.
• Art. 1422, Civil Code of the Philippines — Governs void contracts and inexistent obligations; cited to hold the compromise and judgment based thereon unenforceable against the City.

Narvasa, C.J., Padilla, Regalado and Puno, JJ., concur.