Osmeña vs. The Commission on Audit

Under Section 103 of Presidential Decree No. 1445, personal liability attaches to a public officer only when the expenditure of government funds or use of government property was made in violation of law; where change/extra work orders were necessary, tacitly approved and ratified, and the government accepted the benefits, the officer cannot be held personally liable. A supplemental agreement for change/extra work orders is not always mandatory, since the law uses the permissive word “may.”

Tomas R. Osmeña was the City Mayor of Cebu City when it was to play host to the 1994 Palarong Pambansa. The City engaged WT Construction, Inc. and Dakay Construction and Development Company to construct and renovate the Cebu City Sports Complex, and the Sangguniang Panlungsod authorized Osmeña to represent the City and execute the construction contracts. The dispute implicates Section 103 of Presidential Decree No. 1445, which makes expenditures of government funds in violation of law the personal liability of the responsible official, and the Implementing Rules and Regulations of Presidential Decree No. 1594, which govern change and extra work orders for government infrastructure contracts.

The City of Cebu was to play host to the 1994 Palarong Pambansa, and in preparation it engaged WT Construction, Inc. (WTCI) and Dakay Construction and Development Company (DCDC) to construct and renovate the Cebu City Sports Complex. Tomas R. Osmeña, then city mayor, was authorized by the Sangguniang Panlungsod of Cebu to represent the City and to execute the construction contracts.

While the construction was being undertaken, Osmeña issued a total of 20 Change/Extra Work Orders to WTCI amounting to ₱35,418,142.42, about 83% of the original contract price, and to DCDC amounting to ₱15,744,525.24, about 31% of the original contract price. These orders were not covered by any Supplemental Agreement, nor was there prior authorization from the Sanggunian. The work nevertheless proceeded on account of the extreme urgency and need to have a suitable venue for the Palaro, and the Palaro was successfully held at the Cebu City Sports Complex during the first six months of 1994. The Pre-Qualification, Bids and Awards Committee (PBAC), upon the recommendation of the Technical Committee and after careful deliberation, approved the change and extra work orders; two PBAC members, Rodolfo Cabrera (Chairman, Committee on Finance) and Ronald Cuenco (Minority Floor Leader), were also Sanggunian members, and a COA representative was present during the PBAC deliberations. None of these officials voiced any objection to the lack of prior Sanggunian authorization or a supplemental agreement. A 10-page letter of City Administrator Juan Saul F. Montecillo to the Sanggunian explained in detail the reasons for each change and extra work order, most of which were made to address security and safety concerns for the Palaro and for other events later held in the sports complex.

After the Palaro, WTCI and DCDC demanded payment for the extra work. Councilor Augustus Young sponsored a resolution authorizing Osmeña to execute supplemental agreements with WTCI and DCDC to cover the extra work, but the other Sanggunian members refused to pass the resolution. Because the extra work was not covered by the necessary appropriation, WTCI and DCDC filed two separate collection cases before the Regional Trial Court (RTC) of Cebu City, docketed as Civil Case Nos. CEB-17004 and CEB-17155. The RTC found the claims meritorious and ordered the City to pay for the extra work performed. It also awarded damages, litigation expenses, and attorney’s fees of ₱2,514,255.40 to WTCI and ₱102,015.00 to DCDC. The decisions were affirmed on appeal, subject to modifications as to the amounts due, and became final. To satisfy the judgment debts, the Sanggunian finally passed the required appropriation ordinances. The RTC also noted that the Project Post Completion Report and Acceptance was approved by an authorized representative of the City of Cebu on September 21, 1994, and that because the projects had been completed, accepted, and used by the City, there was no necessity of executing a supplemental agreement.

During post-audit, the City Auditor issued two notices disallowing the payment of litigation expenses, damages, and attorney’s fees to WTCI and DCDC. The City Auditor held Osmeña, the members of the Sanggunian, and the City Administrator liable for the ₱2,514,255.40 and ₱102,015.00 awarded to WTCI and DCDC, respectively, as damages, attorney’s fees, and interest charges. These amounts, the City Auditor concluded, were unnecessary expenses for which the public officers should be held liable in their personal capacities pursuant to law. Osmeña and the members of the Sanggunian sought reconsideration with the COA Regional Office.

The COA Regional Office, through a 2nd Indorsement dated April 30, 2003, modified the City Auditor’s Decision by absolving the Sanggunian members from liability. It declared that the payment of the amounts awarded as damages and attorney’s fees should solely be Osmeña’s liability, as it was he who ordered the change or extra work orders without the supplemental agreement required by law or the prior authorization from the Sanggunian. The Sanggunian members could not be held liable for refusing to enact the necessary appropriation ordinance because they were supposed to exercise their own judgment and discretion and could not be mere rubber stamps of the city mayor. The COA Regional Office Decision was sustained by the COA’s National Director for Legal and Adjudication (Local Sector) in a Decision dated January 16, 2004. Osmeña appealed.

On May 6, 2008, the COA issued a Decision affirming the notices of disallowance. Osmeña received a copy on May 23, 2008, and eighteen days later, on June 10, 2008, filed a motion for reconsideration. The COA denied the motion through a Resolution dated June 8, 2009. The Office of the Mayor of Cebu City received the Resolution on June 29, 2009, but Osmeña had left for the United States the day before for a check-up after his cancer surgery in April 2009 and returned to his office only on July 15, 2009. He filed the present petition for certiorari under Rule 64 on July 27, 2009, assailing the COA Decision of May 6, 2008 and Resolution of June 8, 2009. The record also showed that the City had placed the entire funds allotted for the construction and renovation of the sports complex in a time deposit, and the interest earned amounted to ₱12,835,683.15, more than enough to cover the damages awarded to WTCI and DCDC.

• Timeliness and Liberal Construction of Rule 64: Petitioner argued that the remaining 12-day period to file a Rule 64 petition should be counted from July 15, 2009, when he officially reported back to his office after medical treatment abroad, rather than from June 29, 2009, when the Office of the Mayor received the COA Resolution; because he was being made liable in his personal capacity, the period should run from his actual knowledge of the denial, and he needed time to hire a private counsel to review and prepare the petition.
• Medical Justification for Delay: Petitioner cited the mandatory medical check-ups he had to undergo in Houston, Texas, after his cancer surgery in April 2009 and his weakened state of health as reasons he could not attend to office affairs or comply with the verification requirement while abroad.
• Urgency and Justification for Extra Work: Petitioner acknowledged the legal necessity for a supplemental agreement for extra work exceeding 25% of the original contract price, but justified the immediate execution of the extra work on the extreme urgency to complete the sports complex in time for the Palaro; the contractors proceeded without the supplemental agreement to avoid embarrassing the City.
• City Should Bear Liability: Petitioner maintained that the City had already been adjudged liable for the principal sum due for the extra work orders and had benefited from the extra work by accepting and using the sports complex for the Palaro, so all consequences of the liability, including damages and interest charges, should be shouldered by the City and not by him personally.
• Delay Caused by Sanggunian: Petitioner attributed the delay in payment, which gave rise to the damages and interest charges, to the refusal of the Sanggunian to appropriate the necessary amounts.

• Personal Liability Under Section 103 of PD 1445: Respondent COA held Osmeña personally liable for the damages, attorney’s fees, and interest charges under Section 103 of Presidential Decree No. 1445, pursuant to which expenditures of government funds in violation of law are the personal liability of the official directly responsible.
• Unnecessary Expenditures: COA disallowed the payments as unnecessary expenses, declaring them “not essential” and not “dictated by the demands of good government.”
• Illegality for Lack of Supplemental Agreement/Authorization: COA considered the change and extra work orders illegal because they failed to comply with Section III, C1 of the Implementing Rules and Regulations of Presidential Decree No. 1594, which requires a separate Supplemental Agreement for change or extra work orders exceeding 25% of the escalated original contract price and prior authorization from the Sanggunian.
• Osmeña as Directly Responsible: COA found Osmeña directly responsible because he ordered the change or extra work orders without the required supplemental agreement or prior Sanggunian authorization, while absolving the Sanggunian members because they exercised their own judgment and discretion.

• Timeliness and Liberal Construction of Rule 64: Whether the Court should relax the 30-day period under Section 3, Rule 64 of the Rules of Court and reckon the remaining period from July 15, 2009, when Osmeña returned to office, thereby making the July 27, 2009 petition timely.
• Personal Liability Under Section 103 of PD 1445: Whether Osmeña may be held personally liable for the damages, attorney’s fees, and litigation expenses awarded to WTCI and DCDC under Section 103 of Presidential Decree No. 1445.
• Necessity and Legality of Change/Extra Work Orders: Whether the change and extra work orders were unnecessary or illegal for lack of a supplemental agreement or prior Sanggunian authorization, and whether the City’s subsequent approval, acceptance, and ratification excused compliance.

• Timeliness and Liberal Construction of Rule 64: Yes. The Court relaxed the strict application of Section 3, Rule 64 and reckoned the remaining 12-day period from July 15, 2009, when Osmeña had actual knowledge of the denial of his motion for reconsideration; the July 27, 2009 petition was therefore filed within the reglementary period.
• Personal Liability Under Section 103 of PD 1445: No. Personal liability under Section 103 of PD 1445 arises only if the expenditure of government funds was made in violation of law; the damages were paid pursuant to final judgments, and the City had received and accepted the benefits of the extra work, so Osmeña could not be held personally liable.
• Necessity and Legality of Change/Extra Work Orders: No. The change and extra work orders were necessary and justified; the City tacitly approved them through PBAC approval, the participation of Sanggunian members, the presence of a COA representative, the project acceptance, and the eventual appropriation ordinance, rendering a supplemental agreement or prior Sanggunian authorization unnecessary.

• Timeliness and Liberal Construction of Rule 64: Section 3, Rule 64 requires the petition to be filed within 30 days from notice of the judgment or final order or resolution, and the filing of a motion for reconsideration interrupts the period; if the motion is denied, the aggrieved party may file the petition within the remaining period, but not less than five days from notice of denial. Osmeña filed his motion for reconsideration 18 days after receiving the May 6, 2008 COA Decision, leaving him 12 days. Although service of the June 8, 2009 Resolution was validly made on June 29, 2009 through the notice sent to the Office of the Mayor of Cebu City, the Court considered July 15, 2009—the date Osmeña reported back to office—as the effective date when he was actually notified of the resolution and the reckoning date of the period to appeal. The reasons were sufficient to justify relaxation: he had mandatory medical check-ups in Houston, Texas, after cancer surgery in April 2009; his weakened health prevented him from attending to office affairs; he was being charged in his personal capacity and could not require his office to attend to the case; he had yet to secure private counsel; and a Rule 64 petition must be verified by the petitioner, which he could not do while abroad. The City Attorney could not represent him because that office is authorized to represent city officials only in their official capacity. Strict application of the rule would deny him his right to appeal despite the merits of his case. The petition filed on July 27, 2009 was thus timely.
• Personal Liability Under Section 103 of PD 1445: Section 103 of PD 1445 declares that expenditures of government funds or uses of government property in violation of law or regulations shall be a personal liability of the official or employee found to be directly responsible. The public official’s personal liability arises only if the expenditure was made in violation of law. Here, the damages were paid to WTCI and DCDC pursuant to final judgments rendered against the City for its unreasonable delay in paying its obligations. The COA declared that those judgments would not have been rendered had it not been for the change and extra work orders that Osmeña made, which it considered unnecessary, without the Sanggunian’s approval, and not covered by a supplemental agreement. The term “unnecessary,” however, is relative. Under Salva vs. Carague, circumstances of time and place, behavioral and ecological factors, and political, social, and economic conditions influence the determination, and transactions under audit are judged not only by standards of legality but also by regularity, necessity, reasonableness, and moderation. The 10-page letter of City Administrator Juan Saul F. Montecillo to the Sanggunian explained in detail the reasons for each change and extra work order, most of which addressed security and safety concerns for the Palaro and later events. Against this, the COA’s general and unsubstantiated declarations that the expenses were “not essential” and not “dictated by the demands of good government” could not prevail. The expenses were necessary and justified. The COA also considered the orders illegal for failure to comply with Section III, C1 of the IRR of PD 1594, but the prevailing circumstances showed that the City tacitly approved the orders. The PBAC, upon the Technical Committee’s recommendation and after careful deliberation, approved them; two PBAC members were also Sanggunian members, and a COA representative was present, yet none objected to the lack of prior authorization or a supplemental agreement. The Project Post Completion Report and Acceptance was approved by an authorized City representative on September 21, 1994, and the projects had been completed, accepted, and used by the City. Under Melchor vs. COA, a supplemental agreement is not always mandatory because the law uses the permissive word “may.” Although the Sanggunian initially refused, it was eventually compelled to enact the appropriation ordinance to satisfy the RTC judgments; belatedly, this constituted sufficient compliance and a confirmatory act ratifying all the change and extra work orders. NPC vs. Alonzo-Legasto similarly treated a compromise agreement as ratification of extra work without prior Board approval. As in Melchor, it would be unjust to order Osmeña to shoulder the expenditure when the government had already received and accepted the benefits from the sports complex, especially since the City incurred no substantial loss: the entire funds allotted for the project were placed in a time deposit, and the interest earned, ₱12,835,683.15, was more than enough to cover the damages awarded to WTCI (₱2,514,255.40) and DCDC (₱102,015.00). There was no showing that Osmeña was ill-motivated, personally profited or sought to profit, or made the disbursements for personal or selfish ends. The circumstances showed that he issued the orders for the City’s successful hosting of the Palaro, not for any other “nefarious endeavour.” Hence, no violation of law justified personal liability under Section 103.
• Necessity and Legality of Change/Extra Work Orders: The change and extra work orders were necessary and justified. The term “unnecessary” is relative, and the detailed explanation in the City Administrator’s 10-page letter showed that most orders addressed security and safety concerns for the Palaro and later events at the sports complex. The COA’s contrary declarations were general and unsubstantiated. The orders were also not illegal for lack of a supplemental agreement or prior Sanggunian authorization. The PBAC approved the orders upon the Technical Committee’s recommendation and after careful deliberation; two PBAC members were Sanggunian members, and a COA representative was present, but none objected. The Project Post Completion Report and Acceptance was approved by an authorized City representative on September 21, 1994, and the projects were completed, accepted, and used by the City. Under Melchor vs. COA, a supplemental agreement is not always mandatory because the law uses “may.” The Sanggunian’s eventual enactment of the appropriation ordinance to satisfy the RTC judgments, though belated, was sufficient compliance and a confirmatory act ratifying the orders. NPC vs. Alonzo-Legasto supports the ratifying effect of subsequent acts. Thus, the COA’s finding of illegality could not stand.

• Liberal Construction of Procedural Rules — Procedural rules are to be respected, but the Court may relax their strict application for the most compelling reasons where stubborn obedience would defeat rather than serve the ends of justice. A plea for liberal construction must be accompanied by an explanation of why the party failed to comply and a justification for the requested relaxation. The Court applied this to Section 3, Rule 64, reckoning the remaining period from Osmeña’s actual return to office after medical treatment abroad rather than from service on his office.
• Personal Liability Under Section 103 of PD 1445 — Expenditures of government funds or uses of government property in violation of law or regulations shall be the personal liability of the official or employee directly responsible. Liability arises only if the expenditure was made in violation of law. The Court found no violation because the change/extra work orders were necessary, tacitly approved and ratified, and the City accepted the benefits without any showing of ill motive or personal profit.
• Relativity of “Unnecessary” Expenditures — Whether an expenditure is “unnecessary” is relative and depends on circumstances of time and place, behavioral and ecological factors, and political, social, and economic conditions. Transactions under audit are judged not only by legality but also by regularity, necessity, reasonableness, and moderation. The Court used this to reject the COA’s general declarations and to uphold the expenses based on the City Administrator’s detailed justification.
• Supplemental Agreement for Change/Extra Work Orders Not Always Mandatory — Under the IRR of PD 1594, a separate supplemental agreement for change or extra work orders exceeding 25% of the escalated original contract price is permissive, not mandatory, because the provision uses “may.” The Court applied this in finding that the lack of a supplemental agreement did not render the orders illegal.
• Ratification by Subsequent Acts and Acceptance of Benefits — The government’s subsequent approval, acceptance, and use of completed works, as well as the enactment of an appropriation ordinance to satisfy judgment debts, can constitute ratification of change or extra work orders issued without prior authorization. The Court relied on this to hold that the City tacitly approved and ratified the orders.
• No Personal Liability Where Government Benefited and Officer Acted Without Ill Motive — It is unjust to hold a public officer personally liable for expenditures when the government has received and accepted the benefits of the work and the officer did not act with ill motive, did not personally profit, and did not seek personal or selfish ends. The Court applied this to absolve Osmeña.

• "[e]xpenditures of government funds or uses of government property in violation of law or regulations shall be a personal liability of the official or employee found to be directly responsible therefor." — This is the Court’s quotation of Section 103 of PD 1445, the controlling provision on personal liability; the Court held that liability attaches only if the expenditure was made in violation of law.
• "The term 'unnecessary,' when used in reference to expenditure of funds or uses of property, is relative." — The Court used this formulation to reject the COA’s characterization of the change/extra work orders as unnecessary and to require assessment of the surrounding circumstances.
• "a supplemental agreement to cover change or extra work orders is not always mandatory, since the law adopts the permissive word 'may.'" — This states the Court’s holding, drawn from Melchor vs. COA, that the absence of a supplemental agreement did not by itself make the orders illegal.
• "unjust to order the petitioner to shoulder the expenditure when the government had already received and accepted benefits from the utilization of the [sports complex]" — This is the equitable rationale for absolving Osmeña from personal liability, emphasizing the City’s acceptance and use of the completed project.

• Dr. Teresita L. Salva, etc. vs. Guillermo N. Carague, etc., et al., G.R. No. 157875, December 19, 2006, 511 SCRA 258, 266 — Relied on for the rule that “unnecessary” expenditures are relative and that transactions under audit are judged by standards of legality, regularity, necessity, reasonableness, and moderation; the Court used it to reject the COA’s general declarations and to absolve the petitioner from personal liability.
• Mario R. Melchor vs. COA, G.R. No. 95398, August 16, 1991, 200 SCRA 704, 712 — Followed for the holding that a supplemental agreement for change or extra work orders is not always mandatory because the law uses “may,” and for the principle that it is unjust to order the petitioner to shoulder the expenditure when the government had already received and accepted benefits.
• National Power Corporation (NPC) vs. Hon. Rose Marie Alonzo-Legasto, etc., et al., G.R. No. 148318, November 22, 2004, 443 SCRA 342 — Cited to support the ratifying effect of a subsequent compromise agreement on extra work performed without prior approval from the NPC Board of Directors.
• Pates vs. Commission on Elections, G.R. No. 184915, June 30, 2009, 591 SCRA 481 — Cited for the requirement that every plea for liberal construction of the Rules must be accompanied by an explanation of why the party failed to comply and by a justification for the requested liberal construction.
• Philippine Ports Authority vs. Sargasso Construction & Development Corp., G.R. No. 146478, July 30, 2004, 435 SCRA 512 — Cited for the principle that the Court may relax the strict application of procedural rules where strong considerations of substantive justice are manifest.

• Section 3, Rule 64, Rules of Court — Provides that a petition for certiorari to review a COA judgment or final order or resolution must be filed within 30 days from notice, and that a motion for reconsideration interrupts the period; if denied, the petition may be filed within the remaining period, but not less than five days from notice of denial. The Court relaxed this period and reckoned the remaining 12 days from July 15, 2009, making the July 27, 2009 petition timely.
• Section 103, Presidential Decree No. 1445 — Declares that expenditures of government funds or uses of government property in violation of law or regulations shall be the personal liability of the official or employee directly responsible. The Court held that no violation of law occurred, so Osmeña could not be personally liable.
• Section III, C1, Implementing Rules and Regulations of Presidential Decree No. 1594 — Requires that change or extra work orders be issued upon approval of competent authorities, that a separate supplemental agreement may be entered into if the aggregate amount exceeds 25% of the escalated original contract price, and that change orders beyond 100% of the escalated original contract cost be subject to public bidding except for inseparable works. The Court found the supplemental agreement permissive and the City’s tacit approval and ratification sufficient.
• Section 6, Rule 13, Rules of Court — Governs personal service of pleadings and papers. The Court noted that service of the June 8, 2009 COA Resolution was validly made on June 29, 2009 through the notice sent to the Office of the Mayor of Cebu City, but it considered July 15, 2009 as the effective date of actual notice for purposes of the appeal period.
• Section 481(3)(i), Local Government Code — Provides that the City Attorney is authorized to represent city officials only in their official capacity. The Court cited this to explain why Osmeña could not avail of the City Attorney’s services for a personal liability case and had to secure private counsel.

Renato C. Corona (Chief Justice), Antonio T. Carpio, Conchita Carpio Morales, Presbitero J. Velasco, Jr., Antonio Eduardo B. Nachura, Teresita J. Leonardo-De Castro, Diosdado M. Peralta, Lucas P. Bersamin, Roberto A. Abad, Martin S. Villarama, Jr., Jose Portugal Perez, Jose Catral Mendoza, and Maria Lourdes P.A. Sereno. Mariano C. Del Castillo is listed under the concurring justices but is marked with an asterisk indicating “On Official Leave.”