PNOC Exploration Corporation vs. Commission on Audit

A GOCC's failure to secure the COA's prior written concurrence before engaging a private counsel does not automatically warrant disallowance of legal fees where COA Circular No. 2021-003 exempts certain engagements from that requirement, subject to compliance with specified conditions, the determination of which is a factual matter properly remanded to the COA.

PNOC-Exploration Corporation (PNOC-EC) is a government-owned or controlled corporation (GOCC) whose legal representation is principally handled by the Office of the Government Corporate Counsel (OGCC). Under COA Circular No. 86-255 and COA Circular No. 95-011, as well as Office of the President Memorandum Circular No. 9, GOCCs are prohibited from hiring private lawyers chargeable against public funds unless exceptional or extraordinary circumstances obtain and the written conformity of the OGCC and the prior written concurrence of the COA are first secured. These regulations trace their origin to Republic Act No. 3838, which designated the Government Corporate Counsel as the principal law officer of all GOCCs and prohibited GOCCs from hiring private practitioners without written consent.

In 2009, PNOC-Exploration Corporation (PNOC-EC) purchased steam coal from Wilson International Trading Private Limited (Wilson). A dispute later arose between the contracting parties, with Wilson claiming demurrage charges and losses against PNOC-EC amounting to US$1,392,064.53. As provided in their contract, Wilson referred the dispute to arbitration in Singapore under the International Chamber of Commerce (ICC) Rules of Arbitration. On February 1, 2010, PNOC-EC received the notice of request for arbitration dated January 18, 2010, which gave it 30 days from receipt, or until March 2, 2010, to either file an answer or apply for an extension of time, and to comment on Wilson's nomination of Mr. Neal Gregson as arbitrator within the same period.

Faced with the urgent need to be represented by an international legal counsel who was highly experienced in arbitration before the ICC, qualified to advise on English law, and qualified to practice law in Singapore, PNOC-EC immediately drafted the Terms of Reference for the selection of its counsel and sent invitations to different law firms for proposals. On February 15, 2010, the Office of the Government Corporate Counsel (OGCC) gave its "authority in principle" for PNOC-EC to engage private representation in the arbitration proceedings, subject to its review of the terms and conditions of the agreement and its exercise of control and supervision over the case. On February 23, 2010, PNOC-EC informed the OGCC that among the law firms that responded, it chose Baker Botts LLP (Baker Botts) to represent it before the ICC International Court of Arbitration, as it passed the required competence and offered the lowest fee. On March 12, 2010, the OGCC approved, ratified, and confirmed Baker Botts' engagement. The arbitration then proceeded and resulted in an Award dated October 4, 2011 in favor of PNOC-EC.

Meanwhile, the COA auditor found that PNOC-EC failed to secure the COA's written concurrence in the engagement of Baker Botts' legal services, in violation of COA Circular No. 86-255 dated April 2, 1986 and COA Circular No. 95-011 dated December 4, 1995. Consequently, Notice of Suspension No. PNOC-EC 2011-001 dated June 2, 2011 was issued, suspending the legal fees paid to Baker Botts in the total amount of ₱42,717,188.41, and naming several approving officers liable. The Notice of Suspension required PNOC-EC to settle the suspended amount by submitting the required written concurrence, warning that failure to settle within 90 days from notice would result in disallowance pursuant to Section 82 of Presidential Decree No. 1445.

This prompted PNOC-EC to file a post facto Letter-Request dated June 7, 2011 for the COA's concurrence in the hiring of Baker Botts, supported by a certificate of availability of funds. The request was nonetheless denied in Legal Retainer Review No. 2012-091 dated July 26, 2012, the COA finding that the request was made more than a year after, and not prior to, the hiring of the private lawyer as required. The COA also noted in its initial review that the retainer agreement contained provisions for advance payments contrary to Section 88(1) of PD No. 1445, and that the time-based payment scheme (hourly rate of US$450 for two private lawyers) was against COA policy requiring retainer fees in fixed monetary amounts. PNOC-EC, through the OGCC, questioned the denial, but the COA Proper affirmed Legal Retainer Review No. 2012-091 in Decision No. 2015-281 dated November 23, 2015, solely on the ground that the required written concurrence was not obtained before the engagement. COA Chairperson Aguinaldo inscribed that the Decision was still "subject to [the] rule on quantum meruit." PNOC-EC sought reconsideration but was again denied in a Resolution dated November 26, 2018, as stated in COA En Banc Notice No. 2019-018 dated February 6, 2019.

• Liberality in Application of Rules: PNOC-EC pleaded for liberality in the application of the rules on engagement of private counsel under COA Circular No. 86-255 and COA Circular No. 95-011, citing the urgency to secure proper representation in the international arbitration as justification for its admitted failure to obtain the COA's written concurrence.
• Unjust Enrichment: PNOC-EC argued that the government already benefitted from the services rendered by Baker Botts, and thus would be unjustly enriched if the payment of legal fees remained suspended and eventually disallowed at the expense of PNOC-EC officers.

• Indispensable Compliance: The COA Proper, through the Office of the Solicitor General, acknowledged the urgency and the exceptional or extraordinary nature of the matter but maintained that compliance with the requirement of first securing the COA's written concurrence cannot be disregarded, nor was it difficult to observe.

• Grave Abuse of Discretion: Whether the COA Proper gravely abused its discretion in affirming Legal Retainer Review No. 2012-091, which denied PNOC-EC's belatedly filed request for the COA's written concurrence in the engagement of Baker Botts, and affirmed the suspension of the legal fees paid.

• Grave Abuse of Discretion: No grave abuse of discretion was found. The petition was dismissed without prejudice, the case being remanded to the COA for determination of the propriety of exempting PNOC-EC from the written concurrence requirement and for post-audit under COA Circular No. 2021-003, the evaluation of which entails purely factual and evidentiary matters beyond the purview of judicial review.

• Grave Abuse of Discretion: Since the 1960s, a general prohibition against the hiring of private counsels by GOCCs has been in place, with the Government Corporate Counsel designated as the principal law officer of all GOCCs. The prohibition was aimed at curtailing unnecessary expenditures of public funds on legal services of private practitioners readily providable by the OGCC. The rule, however, is not ironclad: exceptional or extraordinary circumstances may justify the hiring of private counsel, subject to three indispensable conditions — (1) the hiring is only in exceptional cases; (2) the written conformity and acquiescence of the OGCC must first be secured; and (3) the prior written concurrence of the COA must also be secured. These regulations carry the presumption of legality and their validity was not put in issue in the petition. During the pendency of the case, the COA issued Circular No. 2021-003 dated July 16, 2021, which exempts GOCCs from the prior written concurrence requirement subject to enumerated conditions for two categories of engagements (lawyers under Contract of Service or Job Order Contract, and Legal Consultants). The Circular expressly provides that all pending requests for written concurrence and appeals from Legal Retainer Reviews or petitions for review of Notices of Disallowance issued on the ground of lack of COA's written concurrence shall be granted after a finding by the COA of the existence of the specified conditions. Because the determination of whether PNOC-EC qualifies for exemption entails the evaluation of purely factual and evidentiary matters not available on record, and because the application of the new Circular should be entrusted to the COA itself, the Court found it proper to remand rather than to rule on the matter directly. The Court's role in certiorari is limited to reviewing whether the COA's actions are tainted with grave abuse of discretion, and the general policy is to give due deference to the COA's constitutional prerogatives in the absence of such abuse, grounded on both the doctrine of separation of powers and the COA's presumed expertise. As to PNOC-EC's argument on unjust enrichment, the Court found the concern premature: the denial of the request for concurrence was not the sole basis for civil liability in any disallowance, as COA Chairperson Aguinaldo had required a further post-audit to determine the proper amount of disallowance and corresponding liabilities in accordance with the rule on quantum meruit. The new Circular likewise instructs that notwithstanding any exemption, disbursements remain subject to post-audit, and compliance or non-compliance with the written concurrence requirement is not the only factor in assessing whether a disbursement should be disallowed. Established statutory and equitable principles — including solutio indebiti, unjust enrichment, quantum meruit, good faith of approving and certifying officers, and the solidary nature of officers' liability — must be considered in determining disallowance liability.

• Three Indispensable Conditions for Hiring Private Counsel by GOCCs — Before a GOCC can hire a private lawyer, three conditions must be fulfilled: (1) the hiring is only in exceptional cases; (2) the written conformity and acquiescence of the OGCC must first be secured; and (3) the prior written concurrence of the COA must also be secured. The Court reaffirmed these as indispensable requisites, tracing their origin to COA Circular No. 86-255, COA Circular No. 95-011, and Office of the President Memorandum Circular No. 9.
• Presumption of Legality of Administrative Issuances — Administrative issuances have in their favor the presumption of legality and cannot be disregarded even by the Court, especially when their validity is not put in issue on review. The Court applied this doctrine in declining to question the validity of the COA circulars requiring written concurrence, as PNOC-EC itself did not attack their validity or constitutionality.
• Judicial Deference to COA's Constitutional Prerogatives — The Court's general policy is to give due deference to the COA's constitutional prerogatives in the absence of grave abuse of discretion, on the basis of both the doctrine of separation of powers and the COA's presumed expertise in the laws it is entrusted to enforce. The Constitution made the COA the guardian of public funds, endowing it with wide latitude to determine, prevent, and disallow irregular, excessive, extravagant, or unconscionable expenditures, and vesting it with broad powers over all accounts pertaining to government revenue and expenditures.
• Quantum Meruit in Disallowance of Legal Fees — Despite the denial of a request for COA's written concurrence, the determination of the proper amount of disallowance and corresponding liabilities must be conducted in accordance with the rule on quantum meruit. Compliance or non-compliance with the written concurrence requirement is not the only factor in assessing whether a disbursement should be disallowed; statutory and equitable principles such as solutio indebiti, unjust enrichment, quantum meruit, good faith of approving and certifying officers, and the solidary nature of officers' liability must also be considered.

• "Thus far, the following indispensable conditions must then be fulfilled before a GOCC can hire a private lawyer: (1) hiring is only in exceptional cases; (2) the written conformity and acquiescence of the OGCC must first be secured; and (3) the prior written concurrence of the COA must also be secured." — This passage articulates the canonical three-pronged test for the valid engagement of private counsel by GOCCs, frequently cited in administrative law jurisprudence.
• "Clearly, it is not for the Court to make such determinations. In this certiorari proceedings, we are merely tasked to review if the COA's actions are tainted with grave abuse of discretion." — This statement defines the scope of judicial review in certiorari proceedings against the COA, reinforcing the principle of deference to the COA's constitutional mandate.
• "Circular No. 2021-003 made it clear that compliance or non-compliance with the requirement of the COA's written concurrence is not the only factor to be considered in assessing whether a disbursement for legal fees should be disallowed, and in imposing liabilities arising from a disallowance." — This passage clarifies that the written concurrence requirement is not dispositive of disallowance liability, and that equitable and statutory principles must also be weighed.

• PHIVIDEC Industrial Authority vs. Capitol Steel Corporation, 460 Phil. 493 (2003) — Cited as foundational authority for the requirement of COA's written concurrence as an indispensable condition before any hiring of a private lawyer by a government agency, and for the general prohibition against GOCCs hiring private practitioners without written consent of the Government Corporate Counsel.
• Alejandrino vs. Commission on Audit, G.R. No. 245400, November 12, 2019 — Cited for the three indispensable conditions for hiring private counsel by GOCCs and for the application of the rule on quantum meruit in disallowance proceedings.
• Yap vs. Commission on Audit, 633 Phil. 174 (2010) — Cited for the COA's constitutional mandate as guardian of public funds under Section 2(1) and (2), Article IX-D of the 1987 Constitution, and for the presumption of legality of administrative issuances.
• Madera vs. Commission on Audit, G.R. No. 244128, September 8, 2020 — Cited in connection with the rule on quantum meruit and the good faith and diligence of approving and certifying officers in disallowance proceedings.
• Province of Camarines Sur vs. Commission on Audit, G.R. No. 227926, March 10, 2020 — Cited for the proposition that an action directly attacking the validity or constitutionality of the administrative and executive issuances requiring COA's written concurrence must be filed in the proper forum.

• Section 2(1) and (2), Article IX-D, 1987 Constitution — Vests the COA with exclusive authority to promulgate accounting and auditing rules and regulations, including for the prevention and disallowance of irregular, unnecessary, excessive, extravagant, and/or unconscionable expenditures or uses of public funds and property. The Court relied on this provision to underscore the COA's broad constitutional mandate and the basis for judicial deference.
• COA Circular No. 86-255, dated April 2, 1986 — Inhibits government agencies, instrumentalities, and GOCCs from employing private lawyers to handle their legal cases. Applied as the governing regulation requiring the COA's written concurrence before the hiring of a private lawyer.
• COA Circular No. 95-011, dated December 4, 1995 — Amended COA Circular No. 86-255, providing that where a government agency has a legal officer or office that can handle its legal requirements, it may not hire private lawyers unless exceptional or extraordinary circumstances obtain, and requiring the written conformity of the Solicitor General or Government Corporate Counsel and the written concurrence of the COA before such hiring.
• Office of the President Memorandum Circular No. 9, dated August 27, 1998 — Directs GOCCs to refer all legal matters exclusively to the OGCC and enjoins them from hiring private lawyers, except in exceptional cases where the written conformity of the OGCC and the written concurrence of the COA must first be secured.
• COA Circular No. 2021-003, dated July 16, 2021 — Exempts government agencies and GOCCs from the requirement of written concurrence from the COA on the engagement of lawyers under Contracts of Service or Job Order Contracts and Legal Consultants, subject to specific enumerated conditions. The Court remanded the case for the COA's determination of whether PNOC-EC qualifies for exemption under this Circular and for post-audit in accordance with its provisions.
• Section 82, Presidential Decree No. 1445 (Government Auditing Code of the Philippines) — Provides that a charge or suspension which is not satisfactorily explained within 90 days after receipt of the notice by the accountable officer shall become a disallowance. The COA auditor invoked this provision in the Notice of Suspension issued against PNOC-EC.
• Section 88(1), Presidential Decree No. 1445 — Proscribes advance payments on government contracts. The COA cited this provision in its initial review of the retainer agreement, noting that advance payment provisions for filing fees, messenger services, and other charges were contrary to this section.
• _Article 2154, Civil Code (solutio indebiti)_ — Provides that if something is received when there is no right to demand it, and it was unduly delivered through mistake, the obligation to return it arises. Cited as an established statutory principle to be considered in determining disallowance liability.
• Article 22, Civil Code (unjust enrichment) — Provides that every person who through an act or performance by another, or any other means, acquires or comes into possession of something at the expense of the latter without just or legal ground, shall return the same. Cited as an equitable principle relevant to the assessment of disallowance liability.
• Republic Act No. 3838 — Designated the Government Corporate Counsel as the principal law officer of all GOCCs and prohibited GOCCs from hiring private law practitioners without the written consent of the Government Corporate Counsel or the Secretary of Justice. Cited as the statutory origin of the general prohibition against GOCCs hiring private counsel.

Gesmundo, C.J., Perlas-Bernabe (S.A.J.), Caguioa, Hernando, Carandang, Lazaro-Javier, Inting, Zalameda, Gaerlan, Rosario, J. Lopez, and Dimaampao, JJ., concurred. Leonen, J., filed a concurring opinion (see concurring opinion).