PSALM vs. Commission on Audit

COA's refusal to grant concurrence to government contracts for legal services must be based on findings that the expenditure itself is irregular, unnecessary, excessive, extravagant, or unconscionable within the meaning of Article IX(D), Section 2(2) of the Constitution — not merely on the procuring agency's procedural failure to secure prior written concurrence.

PSALM is a government-owned and controlled corporation created under Republic Act No. 9136 (EPIRA Law) to manage the orderly sale, disposition, and privatization of National Power Corporation generation assets, real estate, other disposable assets, and Independent Power Producer contracts, with the objective of liquidating all NPC financial obligations and stranded contract costs within a 25-year term of existence. Under Section 51(h) of the EPIRA Law, PSALM is authorized to hire its own personnel when availing the services of personnel detailed from other government agencies is not practicable. The Office of the Government Corporate Counsel serves as the principal law office of all GOCCs under the Administrative Code of 1987, but GOCCs may engage private lawyers in exceptional cases subject to the prior written conformity of the OSG or OGCC and the prior written concurrence of COA, as required by Memorandum Circular No. 9, COA Circular No. 86-255, and COA Circular No. 95-011. The EPIRA Law imposes time-bound mandates on PSALM, including submission of a privatization plan within six months, privatization of at least 70% of NPC generating assets within three years, and assumption of NPC obligations within 180 days.

PSALM, a government-owned and controlled corporation created under Republic Act No. 9136 (EPIRA Law), was tasked with managing the privatization of National Power Corporation generation assets, real estate, other disposable assets, and Independent Power Producer contracts, with the objective of liquidating all NPC financial obligations and stranded contract costs within its 25-year term of existence. To accomplish this mandate, PSALM, through its then President and Chief Executive Officer Jose C. Ibazeta, engaged the services of five legal advisors — Atty. Michael B. Tantoco (privatization of Genco/IPPA), Atty. Angelito C. Imperio (securitization of deferred NGCP payments to PSALM), John T.K. Yeap (international legal advisory on securitization, international business transactions, and IPPA appointment), Atty. Jay Angelo N. Anastacio (PSALM compliance with anti-trust provisions), and Atty. Maria Belen M. Nera (performance-based rate setting methodologies and reforms) — for consultancy services on legal matters involving PSALM privatization projects, each for a period of six months, with contract dates ranging from late 2009 to mid-2010.

On March 25, 2010, Ibazeta was appointed Acting Secretary of the Department of Energy. As a consequence of the change in the appointing authority, PSALM considered the existing consultancy contracts terminated on even date pursuant to Section 53.7 of the Revised Implementing Rules and Regulations of Republic Act No. 9184, which provides that the term of individual consultants shall not exceed the term of the head of the procuring entity. Because PSALM was only 2% short of the 70% EPIRA threshold for privatization, having attained 68% privatization level of the total energy output of IPP power plants under NPC contract, it regarded the consultants' services as vital to achieving its mandate. Thus, on April 5, 2010, PSALM, under the authority of its Officer-in-Charge Maria Luz L. Caminero, renewed the contracts of the five legal advisors for another six months.

Meanwhile, on March 15, 2010, the COA Legal Services Sector had issued Opinion No. 2010-020 stating that PSALM's engagement of foreign and local private lawyers as consultants was covered by Memorandum Circular No. 9 dated August 27, 1998 and COA Circular No. 95-011 dated December 4, 1995, requiring prior written conformity of the Office of the Solicitor General or the OGCC and concurrence of COA before the engagement of private lawyers. On April 20, 2010, COA Audit Team Leader Gina Maria P. Molina furnished PSALM with a copy of the Opinion and directed compliance. Two days later, on April 22, 2010, PSALM forwarded the contract renewals to the OGCC for review and conformity. The OGCC issued Contract Review No. 135, Series of 2010 on May 6, 2010, expressing conformity to the contract renewals, which PSALM received on May 14, 2010. Thereafter, on August 5, 2010, PSALM sought COA's concurrence to the contract renewals.

On January 12, 2011, the COA General Counsel issued Legal Retainer Review No. 2011-004 denying PSALM's request for concurrence, citing non-compliance with M.C. No. 9 and COA Circular No. 98-002, which required prior written concurrence of COA before hiring private lawyers. COA also found the consultancy fees and reimbursable expenses excessive and the contracts non-compliant with various requirements. PSALM sought reconsideration through a letter dated March 17, 2011, but COA issued Decision No. 2014-136 on July 18, 2014, affirming the denial and disallowing the payments. COA's grounds were that the contract renewals were covered by the prior concurrence requirements, that the contracts were submitted to OGCC only after they had been signed by the parties on April 5, 2010, that the urgency of the EPIRA mandate could not excuse non-compliance with issuances in force since the 1990s, and that the requirements were substantive rather than merely procedural. COA denied PSALM's motion for reconsideration through Decision No. 2015-159 on April 6, 2015, affirming its earlier ruling with finality and directing the Audit Team Leader to issue a Notice of Disallowance. COA relieved the legal advisors from refunding compensations received for actual legal services rendered but held liable the persons responsible for the expenditures pursuant to Section 104 of Presidential Decree No. 1445, the Government Auditing Code. During the pendency of the petition before the Supreme Court, COA issued five Notices of Disallowance on January 16, 2018, directing various PSALM officers and the legal advisors to settle the amounts disallowed, which prompted PSALM to seek a status quo ante order or temporary restraining order from the Court. PSALM appealed the Notices of Disallowance to the COA Cluster 3 Director, who denied the appeal through Decision No. 2018-26 dated August 16, 2018, which remained pending appeal before COA Proper.

• Good Faith Compliance: PSALM contended that upon Ibazeta's appointment as Acting DOE Secretary, the unexpired six-month contracts had to be renewed on April 5, 2010 to allow the consultants to continue services vital to PSALM's EPIRA mandate, and that it complied in good faith with COA's directive by seeking OGCC conformity on April 22, 2010 and then COA concurrence on August 5, 2010, after receiving OGCC approval.
• Grave Abuse of Discretion: PSALM labeled as grave abuse of discretion COA's conclusion that the belated submission to COA was caused by the belated submission to OGCC, explaining that it honestly believed COA concurrence could not be sought without prior OGCC approval.
• Inapplicability of Circulars: PSALM insisted that M.C. No. 9 and COA Circular No. 95-011 should not be strictly applied because the contracts were for advisory opinions recommendatory in nature, not for representation in court or quasi-judicial proceedings, and that the urgency of EPIRA-mandated projects justified the failure to comply with the time-consuming approval process.
• Reliance on Prior Practice: PSALM noted that similar consultancy engagements in 2008 were not subject to negative audit findings, and it was only through COA Opinion No. 2010-020 that it became aware of the need to comply with COA Circular No. 95-011, which it then did by submitting the contract renewals to the OGCC.
• Substantial Compliance: PSALM argued that it substantially complied with the requirements when it submitted the contract renewals to COA on August 5, 2010, and that the continuity of service should not be held hostage to procedural requirements given the urgency of the EPIRA mandate.
• Quantum Meruit: PSALM contended that the legal advisors who rendered services under the renewed contracts should be compensated on the principle of quantum meruit, lest the government be unjustly enriched at the expense of another.
• Good Faith of Officers: PSALM officers who authorized the disbursement of funds should not be held personally liable as they acted in good faith and within the bounds of their official functions.

• Non-Compliance with Prior Concurrence: COA argued that it correctly denied concurrence because PSALM failed to comply with M.C. No. 9 and COA Circular No. 95-011, which required prior written conformity of the OSG or OGCC and prior written concurrence of COA before GOCCs could enter into contracts with private lawyers.
• Post Facto Approval Invalid: COA maintained that the post facto approval of the OGCC could not lend validity to the contracts since the circulars direct that conformity and concurrence be secured first before hiring.
• Urgency Not an Excuse: COA asserted that PSALM could not use the urgency of its EPIRA mandate as a shield to excuse non-compliance with issuances that had been in force since 1986 and reiterated in 1995 and 1998.
• Excessive Fees: COA found the consultancy fees and reimbursable expenses of PSALM's advisors excessive when compared to the benchmark fees of other legal consultants for calendar year 2010.
• Advisory Services Covered: COA cited Polloso vs. Hon. Gangan, which settled that the requirements in the issuances cover the hiring of private lawyers to render any form of legal service, making no distinction as to whether the services involve actual legal controversy or court litigation.
• No Quantum Meruit: COA stated that legal advisors hired without prior concurrence cannot be paid on the basis of quantum meruit, as this would allow circumvention of the circulars, though it relieved the advisors from refunding compensation already received for actual services rendered and held the responsible government officials personally liable instead.

• COA's Denial of Concurrence: Whether COA properly denied giving its concurrence to the contract renewals of PSALM's legal advisors and thereby disallowed in audit payments made for their services.
• Compensation of Legal Advisors: Whether the legal advisors hired by PSALM deserve compensation for the legal consultancy services rendered pursuant to the subject service contracts/contract renewals.
• Personal Liability of PSALM Officers: Whether the officers of PSALM who approved the said contracts should be held personally liable for the payment of the subject legal advisors' compensations.

• COA's Denial of Concurrence: No. COA gravely abused its discretion in denying concurrence solely on the ground of PSALM's procedural non-compliance with the prior concurrence requirement, without making any finding that the expenditures themselves were irregular, unnecessary, excessive, extravagant, or unconscionable under Article IX(D), Section 2(2) of the Constitution.
• Compensation of Legal Advisors: Moot. The issue was rendered moot by the ruling on the first issue, the contract renewals having been deemed concurred in by COA, with payments for services actually rendered allowed in audit.
• Personal Liability of PSALM Officers: Moot. The issue was likewise rendered moot by the ruling on the first issue.

• COA's Denial of Concurrence: The Court recognized COA's broad constitutional audit powers over GOCCs and the established requirement of prior written concurrence for hiring private lawyers, as set forth in Phividec International Authority vs. Capitol Steel Corporation and reaffirmed in PSALM vs. COA. The Court acknowledged that COA's written concurrence functions as a pre-audit aimed at determining the reasonableness of legal fees and assuring consistency in legal policies across state agencies. However, the Court drew a critical distinction between procedural irregularity — the failure to secure prior concurrence — and the substantive irregularity that the Constitution empowers COA to prevent. Under Article IX(D), Section 2(2) of the Constitution, COA's power to disallow pertains to "irregular, unnecessary, excessive, extravagant, or unconscionable expenditures or uses of government funds and properties." Applying the principle of ejusdem generis, the word "irregular," enumerated alongside "unnecessary," "excessive," "extravagant," and "unconscionable," pertains to the transaction per se — the procurement of the legal services itself — not to the process of securing approvals from key government agencies. The Court emphasized that PSALM had statutory authority under Section 51(h) of the EPIRA Law to hire private consultants given the urgency of its time-bound targets and its specialized needs, and that the OGCC itself recognized the imperative need by promptly giving its conformity even after the contracts had been renewed. COA failed to provide any detailed explanation or substantial justification why the renewal contracts were unreasonable or extravagant, offering only the statement that the matters "are all within the control of PSALM's management" and harping on the failure to secure prior approval. COA made no ruling on the merits — it did not determine the necessity of hiring external counsel or the reasonableness of the proposed rates, nor did it show that other individuals rendering the same kind of services of the same caliber offered lower fees. The Court held that any violation of the required pre-audit process cannot in itself be a proper justification to withhold concurrence; it is the expenditure itself, whether proposed or consummated, that is the proper subject of COA's audit jurisdiction. Having failed to make findings on the merits, COA gravely abused its discretion, and the contract renewals must be deemed concurred in.
• Compensation of Legal Advisors: Rendered moot by the ruling on the first issue. Since the contract renewals were deemed concurred in by COA, payments for services actually rendered by the legal advisors under the renewed contracts were allowed in audit.
• Personal Liability of PSALM Officers: Rendered moot by the ruling on the first issue. The Court found no necessity to belabor this issue as it was mooted by the disposition on the first issue.

• Scope of COA's Audit Jurisdiction — COA's constitutional power to disallow expenditures under Article IX(D), Section 2(2) of the 1987 Constitution pertains to transactions per se that are "irregular, unnecessary, excessive, extravagant, or unconscionable." The word "irregular," construed under the principle of ejusdem generis alongside "unnecessary," "excessive," "extravagant," and "unconscionable," refers to the expenditure or use of government funds itself, not to the procedural lapse of failing to secure prior written concurrence from the OGCC or COA. A procedural violation in the pre-audit process cannot by itself justify denial of concurrence to the hiring of legal advisors or the renewal of their contracts. COA must make findings on the merits — the necessity of the engagement and the reasonableness of the rates — before it may properly withhold concurrence.
• Requirements for GOCCs to Hire Private Lawyers — Under Phividec International Authority vs. Capitol Steel Corporation, GOCCs may engage the services of private lawyers only when the following chronological requisites concur: (1) private counsels can be hired only in exceptional cases; (2) the GOCC must first secure the written conformity and acquiescence of the OSG or the OGCC, as the case may be, before any hiring can be done; and (3) the written concurrence of the COA must also be secured prior to the hiring. These requirements apply to the hiring of private lawyers to render any form of legal service and make no distinction as to whether the legal services involve an actual legal controversy or court litigation, as settled in Polloso vs. Hon. Gangan.
• COA's Written Concurrence as Pre-Audit — COA's written concurrence to the engagement of private lawyers by government agencies is essentially a pre-audit, involving a review that encompasses both the processes and goals of a pre-audit: determining the reasonableness of legal fees and assuring consistency in legal policies and practices of state agencies that transcend the parochial interests of individual agencies and promote the greater good of public interest. The purpose is to curtail the unauthorized and unnecessary disbursement of public funds to private lawyers for services rendered to the government.
• Grave Abuse of Discretion in Denial of Concurrence — COA gravely abuses its discretion when it denies concurrence to contracts for legal services solely on the ground of procedural non-compliance with prior concurrence requirements, without making any finding that the expenditure itself is irregular, unnecessary, excessive, extravagant, or unconscionable. In the absence of such findings, the contract renewals must be deemed concurred in by COA.

• "It is the expenditure itself, whether proposed or consummated — not the process of securing the necessary approval of key government agencies — that is the proper subject of COA's audit jurisdiction to safeguard against 'irregular, unnecessary, excessive, extravagant, or unconscionable expenditures or uses of government funds and properties.'" — This is the core ratio decidendi, defining the proper scope of COA's audit jurisdiction as pertaining to the transaction per se rather than the procedural compliance with pre-audit requirements.
• "Any violation of the required pre-audit process cannot be in itself a proper justification to withhold concurrence to the hiring of legal advisors or the renewal of their contracts." — This establishes that procedural lapses in securing prior concurrence cannot alone justify COA's denial of concurrence to government contracts for legal services.
• "Having failed to do so, COA gravely abused its discretion when it withheld giving its concurrence to the contract renewals of the subject legal advisors despite the inadequacy of the quantum of proof tending to establish such unreasonableness, excessiveness or extravagance, and disallowing in audit disbursements made by reason of the said contracts. In the absence of such findings, the renewal for the contract of PSALM's legal advisors and/or consultants must be deemed concurred in by the COA." — This states the legal consequence of COA's failure to make findings on the merits: the contract renewals are deemed concurred in.

• Phividec International Authority vs. Capitol Steel Corporation, 460 Phil. 493 (2003) — Controlling precedent establishing the three chronological requisites for GOCCs to hire private lawyers: exceptional cases, prior written conformity of OSG/OGCC, and prior written concurrence of COA. Followed in this case.
• PSALM vs. COA, G.R. No. 247924, November 16, 2021 — Recognized the requirement of prior COA concurrence as a form of pre-audit and stressed that its purpose is to curtail unauthorized and unnecessary disbursement of public funds. Followed and relied upon for the proposition that COA must make findings on the merits — necessity of hiring and reasonableness of rates — before denying concurrence.
• Polloso vs. Hon. Gangan, 390 Phil. 1101 (2000) — Settled that the requirements for hiring private lawyers cover any form of legal service, not only representation in judicial or quasi-judicial proceedings. Cited by COA and acknowledged by the Court.
• Alta Vista Golf and Country Club vs. The City of Cebu, 778 Phil. 685 (2016) — Cited for the principle of ejusdem generis, applied by the Court to construe the word "irregular" in Article IX(D), Section 2(2) of the Constitution alongside "unnecessary," "excessive," "extravagant," and "unconscionable" as referring to the transaction per se.

• Article IX(D), Section 2(2), 1987 Constitution — Grants COA exclusive authority to define the scope of its audit and promulgate accounting and auditing rules and regulations, including those for the prevention and disallowance of irregular, unnecessary, excessive, extravagant, or unconscionable expenditures or uses of government funds and properties. The Court interpreted "irregular" under ejusdem generis as pertaining to the transaction per se, not the process of securing approvals.
• Section 10, Chapter 3, Title III, Book IV, Administrative Code of 1987 (Executive Order No. 292) — Defines the OGCC as the principal law office of all GOCCs, with power to exercise control and supervision over legal departments or divisions maintained separately by GOCCs. The Court read this provision as implying recognition that GOCCs may maintain their own legal departments, including temporarily-hired specialists for specific undertakings.
• Section 51(h), Republic Act No. 9136 (EPIRA Law) — Authorizes PSALM to appoint or hire, transfer, remove, and fix the compensation of its personnel, provided it shall hire its own personnel only if absolutely necessary and as far as practicable avail of services of personnel detailed from other government agencies. Recognized by the Court as allowing PSALM to hire private consultants when OGCC resources are insufficient.
• Sections 47, 49, and 50, Republic Act No. 9136 (EPIRA Law) — Impose time-bound mandates on PSALM: submission of a privatization plan within six months, privatization of at least 70% of NPC generating assets within three years, assumption of NPC obligations within 180 days, and a 25-year term of existence. Cited by the Court to establish the urgency and specialized nature of PSALM's statutory duties.
• Section 53.7, Revised Implementing Rules and Regulations of Republic Act No. 9184 — Provides that the term of individual consultants shall be on a six-month basis, renewable at the option of the appointing head, but in no case shall exceed the term of the latter. This provision caused the automatic termination of the original consultancy contracts when Ibazeta was appointed Acting DOE Secretary.
• Memorandum Circular No. 9 (August 27, 1998) — Issued by the Office of the President, requiring prior written conformity of the OSG or OGCC and concurrence of COA before government agencies may hire private lawyers.
• COA Circular No. 95-011 (December 4, 1995) — Requires prior written concurrence of COA before the engagement of private lawyers by government agencies, including the extension of legal consultancy services.
• Section 104, Presidential Decree No. 1445 (Government Auditing Code of the Philippines) — COA relied on this provision to hold liable the persons responsible for expenditures disallowed in audit. The Court's ruling on the first issue mooted the question of personal liability.

Gesmundo, C.J., Leonen, SAJ., Caguioa, Hernando, Lazaro-Javier, Inting, Zalameda, M. Lopez, Gaerlan, Rosario, Dimaampao, Marquez, Kho, Jr., and Singh, JJ., concur.