Salonte vs. Commission on Audit

The lapse of an estimated project completion period in a contract does not, by itself, constitute a "day certain" under Article 1193 of the Civil Code so as to automatically put the obligor in delay or trigger the transfer of ownership of improvements stipulated to vest only upon actual project completion. Where the contract states the period is an estimate and the MOA conditions ownership transfer on project completion, that completion is a suspensive condition; until it occurs, the builder retains ownership.

The City of Mandaue and F.F. Cruz and Co., Inc. entered into a Contract of Reclamation on April 26, 1989, under which F.F. Cruz agreed to reclaim approximately 180 hectares of foreshore and submerged lands at its own expense in exchange for a land-sharing arrangement. A supplementary Memorandum of Agreement dated October 24, 1989 permitted F.F. Cruz to construct office and housing facilities on 495 square meters of city-owned land near the project site, rent-free, on the condition that all improvements would ipso facto belong to the City of Mandaue upon completion of the reclamation project. The reclamation contract estimated project completion in six years, i.e., by 1995. Years later, the Metro Cebu Development Project II required the widening of the Plaridel Extension Mandaue Causeway, and the structures built by F.F. Cruz under the MOA stood directly in the path of the road-widening project.

On April 26, 1989, the City of Mandaue and F.F. Cruz and Co., Inc. entered into a Contract of Reclamation under which F.F. Cruz, in consideration of a defined land-sharing formula, agreed to undertake at its own expense the reclamation of approximately 180 hectares of foreshore and submerged lands from the Cabahug Causeway. The contract provided that work would commence not later than July 1989, after ratification by the Sangguniang Panlungsod, and estimated project completion in six years — three years for dredge-filling and seawall construction, and three years for infrastructure completion. Paragraph 15 expressly stated that "[t]he project is estimated to be completed in six (6) years."

On October 24, 1989, the parties executed a Memorandum of Agreement whereby the City of Mandaue allowed F.F. Cruz to use 495 square meters of city-owned land to construct offices and housing for personnel assigned to supervise the reclamation project, with no rental to be paid. Under paragraphs 4 and 5 of the MOA, the city agreed to the free use of the land, and the parties stipulated that upon completion of the Mandaue City Reclamation Project, all improvements introduced by F.F. Cruz on the subject land would ipso facto belong to the City of Mandaue as compensation for the free use of the property. Pursuant to the MOA, F.F. Cruz constructed housing units, a canteen, a septic tank, and other facilities on the subject land.

Years later, the City of Mandaue undertook the Metro Cebu Development Project II, part of which required widening the Plaridel Extension Mandaue Causeway. The structures built by F.F. Cruz under the MOA stood directly in the path of the road-widening project. On July 23, 1997, the Department of Public Works and Highways, through MCDP II Project Director Samuel B. Darza, entered into an Agreement to Demolish, Remove and Reconstruct Improvement with F.F. Cruz, whereby the latter would demolish the improvements affected by the road widening and receive PhP 1,084,836.42 in compensation. Petitioner Rowena B. Rances (now Rowena Rances Solante), Human Resource Management Officer III, prepared and, with Darza's approval, issued Disbursement Voucher No. 102-07-88-97 dated July 24, 1997 for PhP 1,084,836.42 in favor of F.F. Cruz, certifying that the expense was "necessary, lawful and incurred under my direct supervision."

Thereafter, Darza addressed a letter-complaint to the Office of the Ombudsman, Visayas, calling attention to irregularities in the implementation of MCDP II. The complaint was referred to the COA, which issued Assignment Order No. 2000-063 for an audit team to examine the accounts of MCDP II. The audit team issued Special Audit Office Report No. 2000-28, which found that F.F. Cruz was paid PhP 1,084,836.42 for the cost of property affected by the road widening, but that under Section 5 of the MOA, F.F. Cruz was no longer the lawful owner of the properties at the time payment was made, because the reclamation project should have been completed in 1995. Based on these findings, the audit team issued Notice of Disallowance No. 2000-002-101(97) dated November 14, 2001, disallowing the payment and naming F.F. Cruz, Darza, and Solante as liable. Solante sought reconsideration and F.F. Cruz appealed, but both were denied in LAO Local Decision No. 2004-040 dated March 5, 2004. Meanwhile, the Ombudsman case against Solante was dismissed by Resolution of June 29, 2006 for lack of merit, the Ombudsman finding that the six-year period was a mere estimate and that F.F. Cruz remained the owner of the structures at the time of demolition. The COA, however, in its February 15, 2008 Decision, affirmed the disallowance, and in its November 5, 2012 Resolution, denied Solante's motion for reconsideration. Solante received a Notice of Finality of Decision on February 15, 2013, but never received a copy of the COA Resolution; she obtained one only on May 8, 2013 after inquiring at the Cebu Central Post Office, which certified that the registered mail containing the copy was not delivered.

• Ownership at Time of Demolition: Petitioner argued that the six-year period in the Contract of Reclamation was a mere estimate and not a fixed period, so the lapse thereof did not automatically deem the reclamation project completed or transfer ownership of the structures to the City of Mandaue.
• Project Completion as Suspensive Condition: Petitioner maintained that under the MOA, ownership of the improvements would vest in the City of Mandaue only upon actual completion of the reclamation project, which was a suspensive condition that had not yet been fulfilled at the time of demolition.
• No Demand Made: Petitioner contended that the City of Mandaue never demanded fulfillment of F.F. Cruz's obligation to complete the project, and none of the exceptions to the requirement of demand under Article 1169 of the Civil Code were applicable, so F.F. Cruz could not be deemed in delay.

• Lapse of Six-Year Period: Respondent COA argued that the Contract of Reclamation established an obligation on the part of F.F. Cruz to finish the project within six years from execution in August 1989, and that after the lapse of that period, F.F. Cruz was automatically deemed in delay, the contract considered completed, and ownership of the structures transferred to the City of Mandaue.
• Mutuality of Contracts: Respondent countered that petitioner's interpretation — that ownership would not transfer until the project was actually turned over — would put the entire contract at the mercy of F.F. Cruz, negating the mutuality of contracts principle expressed in Article 1308 of the Civil Code.
• Intention of the Parties: Respondent argued that the intention of the MOA stipulation was for F.F. Cruz to compensate the government for the use of the land, and that making the government pay for the cost of the demolished improvements would defeat that intention.

• Ownership of Demolished Structures: Whether the City of Mandaue or F.F. Cruz owned the structures that were demolished at the time material to the case, i.e., in July 1997.

• Ownership of Demolished Structures: No — the City of Mandaue had not acquired ownership. F.F. Cruz remained the owner of the structures at the time of demolition because the six-year period was a mere estimate, not a "day certain" under Article 1193, and project completion — the suspensive condition for ownership transfer — had not yet occurred.

• Ownership of Demolished Structures: The COA erred in treating the six-year period in the Contract of Reclamation as a fixed period that would automatically trigger delay and ownership transfer. Paragraph 15 of the contract expressly stated that "[t]he project is estimated to be completed in six (6) years," making the period a mere estimate rather than a "day certain" as contemplated by Article 1193 of the Civil Code. The lapse of six years did not, by itself, make the obligation to finish the reclamation project demandable or put F.F. Cruz in a state of actionable delay. Moreover, the City of Mandaue never made a demand for fulfillment of the obligation, and none of the exceptions to the requirement of demand under Article 1169 applied. Then Mayor Ouano himself affirmed in a July 9, 2004 affidavit that the reclamation project had not yet been fully completed and turned over to the city, and that the improvements belonged to F.F. Cruz at the time of demolition. The MOA stipulated that the structures would belong to the city only "upon the completion of the project," making project completion a suspensive condition. Until that condition was fulfilled, ownership of the structures properly pertained to F.F. Cruz, and the payment of compensation for their demolition was justified. The disallowance was thus without factual and legal basis, and the COA gravely abused its discretion in issuing it.

• Obligations with a Period (Article 1193, Civil Code) — An obligation for whose fulfillment a day certain has been fixed is demandable only when that day comes; a day certain is one that must necessarily come, although it may not be known when. If the uncertainty consists in whether the day will come or not, the obligation is conditional. In this case, the six-year period stated as an estimate in the reclamation contract was not a "day certain" but a mere projection; its lapse did not render the obligation demandable or put the obligor in delay.
• Legal Delay (Mora Solvendi) and the Requirement of Demand (Article 1169, Civil Code) — A debtor incurs delay only from the time the obligee judicially or extrajudicially demands fulfillment, unless one of three exceptions applies: (1) when the obligation or law expressly declares it; (2) when the designation of time was a controlling motive for the contract; or (3) when demand would be useless. None of these exceptions was established here, and the city never demanded fulfillment, so F.F. Cruz could not be deemed in delay.
• Suspensive Condition in Contractual Stipulations — Where a contract provides that a right (such as ownership transfer) shall vest only upon the occurrence of a specified event (such as project completion), that event constitutes a suspensive condition. Until the condition arises, the right does not vest. Here, the MOA's stipulation that improvements would "ipso facto belong to" the city "upon the completion of the" reclamation project made project completion a suspensive condition for ownership transfer.
• Mutuality of Contracts (Article 1308, Civil Code) — Contracts must bind both contracting parties; their validity or compliance cannot be left to the will of one of them. The COA invoked this principle against petitioner's interpretation, but the Court found that it was the COA's own reading — which would automatically deem the project completed upon the lapse of a mere estimate — that distorted the parties' actual stipulation.

• "A plain reading of the Contract of Reclamation reveals that the six (6)-year period provided for project completion, or, with like effect, termination of the contract was a mere estimate and cannot be considered a period or a 'day certain' in the context of the aforequoted Art. 1193." — This passage articulates the ratio decidendi: the estimated nature of the completion period meant its lapse could not trigger automatic delay or ownership transfer.
• "Clearly, the completion of the project is a suspensive condition that has yet to be fulfilled. Until the condition arises, ownership of the structures properly pertains to F.F. Cruz." — This defines the controlling doctrinal framework: project completion as a suspensive condition for the vesting of ownership under the MOA.
• "The MOA does not state that the structures shall inure in ownership to the City of Mandaue after the lapse of six (6) years from the execution of the Contract of Reclamation. What the MOA does provide is that ownership of the structures shall vest upon, or ipso facto belong to, the City of Mandaue when the Contract of Reclamation shall have been completed." — This passage distinguishes the COA's erroneous interpretation from the actual contractual stipulation, clarifying that the trigger is actual completion, not the lapse of an estimated period.

• J Plus Asia Development Corporation vs. Utility Assurance Corporation, G.R. No. 199650, June 26, 2013, 700 SCRA 134 — Cited for the requisites of legal delay: (1) the obligation must be demandable and already liquidated; (2) the debtor delays performance; and (3) the creditor requires performance judicially or extrajudicially. Applied to show that F.F. Cruz could not be in default absent demand from the city.

• Article 1193, Civil Code — Defines obligations with a period and the concept of a "day certain." Applied to determine that the six-year estimate in the reclamation contract was not a "day certain" and its lapse did not render the obligation demandable.
• Article 1169, Civil Code — Governs when a debtor incurs delay and enumerates exceptions to the requirement of demand. Applied to show that F.F. Cruz was not in legal delay because the city never demanded fulfillment and no exception to the demand requirement was established.
• Article 1308, Civil Code — Embodies the mutuality of contracts principle. Invoked by the COA against petitioner's position, but the Court found the COA's own interpretation inconsistent with the parties' actual stipulation.
• Article 1315, Civil Code — Provides that from the moment a contract is perfected, the parties are bound to fulfill what has been expressly stipulated and all consequences according to their nature, in keeping with good faith, usage, and law. Cited by the COA in its decision, but the Court found the COA misapplied it by misreading the contractual stipulations.

Sereno, C.J.; Carpio, J.; Leonardo-De Castro, J.; Brion, J.; Peralta, J.; Bersamin, J.; Del Castillo, J.; Villarama, Jr., J. (on leave); Perez, J.; Mendoza, J.; Reyes, J.; Perlas-Bernabe, J.; Leonen, J.