Sargasso Construction & Development Corp. vs. Philippine Ports Authority

A government contract is perfected only upon approval by a competent authority where such approval is required by law. The contracting officer of a government-owned or controlled corporation possesses only actual agency authority, which exists only because and by virtue of a law creating and conferring it, and the government is bound only to the extent of the power it has actually given its officers-agents. The doctrine of apparent authority does not bind the government in the realm of government contracts.

The petitioner is a joint venture composed of Sargasso Construction and Development Corporation, Pick and Shovel, Inc., and Atlantic Erectors, Inc., which was awarded the construction of Pier 2 and the rock causeway for the port of San Fernando, La Union, after a public bidding conducted by the respondent Philippine Ports Authority (PPA), a government-owned and controlled corporation created under Presidential Decree No. 857. The port construction was in pursuance of the development of the Northwest Luzon Growth Quadrangle, and adjacent to Pier 2 was an area intended for a reclamation project as part of the overall port development plan. The applicable laws governing the matter include Executive Order No. 380, which prescribes revised levels of authority on approval of government contracts, and Section 51 of the Revised Administrative Code, which requires governing board approval for contracts of corporate agencies or instrumentalities.

The petitioner, a joint venture of Sargasso Construction and Development Corporation, Pick and Shovel, Inc., and Atlantic Erectors, Inc., was awarded the construction of Pier 2 and the rock causeway for the port of San Fernando, La Union, after a public bidding conducted by the respondent Philippine Ports Authority (PPA). Implementation of the project commenced on August 14, 1990. In a letter dated October 1, 1992, Mr. Melecio J. Go, Executive Director of the consortium, offered to undertake the reclamation between the Timber Pier and Pier 2 of the Port of San Fernando, La Union, as an extra work to its existing construction, for a price of ₱36,294,857.03. PPA replied through its Assistant General Manager Teofilo H. Landicho, who sent a letter dated December 18, 1992, stating that the proposal was not acceptable but that PPA "may consider favorably award of the project in your favor, subject to the approval of higher authority" if the offer was reduced to ₱30,794,230.89.

On August 26, 1993, a Notice of Award signed by PPA General Manager Rogelio Dayan was sent to petitioner for the Phase I Reclamation Contract in the amount of ₱30,794,230.89, instructing it to enter into and execute the contract agreement and to furnish documents representing performance security and credit line. The Notice made it a condition that "fendering of Pier No. 2 Port of San Fernando, and the Port of Tabaco is completed before the approval of the contract for the reclamation project." Installation of the rubber dock fenders was accomplished in 1994. PPA Management further set a condition that mobilization/demobilization cost shall not be included in the contract and that escalation shall be reckoned upon approval of the Supplemental Agreement. The award of the negotiated contract as an additional or supplemental project was intended "to save on the mobilization/demobilization costs and some items as provided for in the original contract." Then General Manager Carlos L. Agustin presented the contract proposal for the reclamation project to the PPA Board of Directors for consideration.

At its meeting held on September 9, 1994, the Board decided not to approve the contract proposal, noting that "the Pier 2 Project was basically for the construction of a pier while the supplemental agreement refers to reclamation. Thus there is no basis to compare the terms and conditions of the reclamation project with the original contract (Pier 2 Project) of Sargasso." PPA did not formally advise petitioner of the Board's action, and when Mr. Go wrote General Manager Agustin requesting that the proposal be presented again to the Board, no reply was received.

On June 30, 1997, petitioner filed a complaint for specific performance and damages before the Regional Trial Court of Manila, alleging that PPA's unjustified refusal to comply with its undertaking had put on hold petitioner's men and resources earmarked for the project. Petitioner also averred that it sought reconsideration of the August 9, 1996 letter of PPA informing it that it did not qualify to bid for the proposed extension of RC Pier No. 2 for not having IAC Registration and Classification and not complying with equipment requirements. PPA, through the Office of the Government Corporate Counsel, filed its Answer with Compulsory Counterclaim, contending that the Notice of Award had been properly revoked when the Supplemental Agreement was denied approval by the Board of Directors, and that petitioner "jumped the gun" by committing its resources despite no Notice to Proceed having been issued.

The trial court rendered a decision in favor of petitioner, ruling that the "higher authority" referred to in the December 18, 1992 letter did not necessarily mean the Board of Directors, and that under Section 9(iii) of P.D. 857, the General Manager had the power to sign contracts. The trial court also noted that the conspicuous absence of the phrase "approval of the higher authority" in the Notice of Award supported the finding that the General Manager had been vested with authority to enter into the contract. The Court of Appeals reversed, ruling that the law itself should serve as the basis of the General Manager's authority, that the power "to sign contracts" is different from the Board's power "to make or enter into contracts," and that evidence was wanting that the PPA Board delegated to its General Manager the authority to enter into a supplementary contract for the reclamation project.

• Perfection of Contract: Petitioner contended that the existence of the "Notice of Award of Contract and Contractor's Conforme thereto," resulting from its negotiation with respondent, proves that a contract had already been perfected, and that the other documents enumerated under the amended Rules and Regulations implementing P.D. 1594 are mere physical representations of the parties' meeting of the minds.
• Supporting Documents: Petitioner argued that the "Approval of Award by Approving Authority" is only a "supporting document," and not evidence of perfection of contract, and which merely "facilitates the approval of the contract."
• Apparent Authority: Petitioner maintained that PPA is bound by the acts of its general manager in issuing the Notice of Award under the doctrine of apparent authority.
• Estoppel: Petitioner argued that the doctrine of estoppel, being an equitable doctrine, cannot be invoked to perpetuate an injustice against petitioner.
• Board's Silence: Petitioner argued that had it been true that respondent's general manager was without authority to bind respondent by contract, then the former should have disapproved the supplemental contract on that ground, and that the Board's silence on the matter was an explicit recognition of the latter's authority.

• Revocation of Notice of Award: Respondent contended that the alleged Notice of Award had already been properly revoked when the Supplemental Agreement which should have implemented the award was denied approval by defendant's Board of Directors.
• Lack of Authority: Respondent argued that the General Manager lacked authority to bind the corporation, as the power "to sign contracts" is different from the Board's power "to make or enter into contracts," and that in the execution of contracts, the general manager only exercised a delegated power.
• Premature Commitment: Respondent disclaimed any liability for damages suffered by petitioner when it "jumped the gun" by committing its alleged resources for the reclamation project despite the fact that no Notice to Proceed was issued.
• Statute of Limitations: Respondent argued that the cause of action insofar as the Extension of R.C. Pier No. 2 was barred by the statute of limitations since petitioner filed its request for reconsideration way beyond the seven-day period allowed under IB 6-5 of the Implementing Rules and Regulations of P.D. 1594.
• Separate Projects: Respondent clarified that the proposed Reclamation Project and Extension of R.C. Pier No. 2 are separate projects of PPA, and that the Board's denial of approval was properly communicated to petitioner as shown by its letter dated September 19, 1994 seeking reconsideration thereof.

• Perfection of Contract: Whether a contract has been perfected between the parties.
• Authority of the General Manager: Whether the general manager of PPA is vested with authority to enter into a contract for and on behalf of PPA.

• Perfection of Contract: No. A government contract is perfected only upon approval by a competent authority where such approval is required. Because the PPA Board of Directors disapproved the supplemental agreement, no perfected contract existed to serve as a basis for specific performance.
• Authority of the General Manager: No. The PPA General Manager lacked actual authority to bind the corporation to a negotiated infrastructure contract, as the law requires governing board approval for such contracts of government-owned and controlled corporations, and the doctrine of apparent authority does not apply to government contracts.

• Perfection of Contract: The Court held that a government contract is essentially similar to a private contract under the Civil Code, requiring the concurrence of consent, object certain, and cause. However, a government contract is perfected only upon approval by a competent authority where such approval is required. The contracting officer functions as agent of the Philippine government, possessing only actual agency authority, which exists only because and by virtue of a law creating and conferring it. The government is bound only to the extent of the power it has actually given its officers-agents, and the acts of agents in entering into agreements beyond the scope of their actual authority do not bind or obligate the Government. Under Article 1881 of the Civil Code, the agent must act within the scope of his authority to bind his principal. The Court agreed with the CA that petitioner failed to present competent evidence to prove that respondent's general manager possessed actual authority delegated either by the Board of Directors or by statutory provision. Without such actual authority, there could be no real consent, much less a perfected contract.

• Authority of the General Manager: The Court applied Executive Order No. 380, which authorizes government-owned and controlled corporations to enter into negotiated infrastructure contracts involving not more than fifty million pesos, and Section 51 of the Revised Administrative Code, which provides that contracts in behalf of corporate agencies or instrumentalities shall be approved by their respective governing boards or councils and executed by their respective executive heads. The Court noted that P.D. 857 vests the Board of Directors with the corporate power to "reclaim... any part of the lands vested in the Authority" and to "exercise all the powers of a corporation under the Corporation Law," while the law merely vests the general manager the "general power... to sign contracts" and "to perform such other duties as the Board may assign." The Court found that the absence of the phrase "approval of higher authority" in the Notice of Award was of no moment, as applicable laws form part of and are read into the contract without need for any express reference thereto. The Court also noted that even granting arguendo that the Board's action or inaction was an explicit recognition of the general manager's authority, the negotiated contract itself contravened stringent legal requirements under Section 4 of P.D. 1594, which allows negotiated contracts only in exceptional cases.

• Apparent Authority: The Court held that petitioner's invocation of the doctrine of apparent authority was misplaced. In the realm of government contracts, the doctrine has been restated to mean that the government is NOT bound by unauthorized acts of its agents, even though within the apparent scope of their authority. Apparent authority is determined only by the acts of the principal and not by the acts of the agent. In this case, not a single act of respondent, acting through its Board of Directors, was cited as having clothed its general manager with apparent authority to execute the contract.

• Actual Agency Authority of Government Contracting Officers — The contracting officer of the government possesses only actual agency authority, meaning his contracting power exists only because and by virtue of a law, or by authority of law, creating and conferring it. He may make only such contracts as he is so authorized to make, and the government is bound only to the extent of the power it has actually given its officers-agents. The moment an agent acts beyond the scope of actual authority, the principal-agent relationship ceases to exist. Applied here, the PPA General Manager could not bind the corporation to a negotiated infrastructure contract without prior Board approval.

• Perfection of Government Contracts — A government contract is perfected only upon approval by a competent authority where such approval is required. While government contracts are generally subject to the same laws and regulations governing contracts between private individuals, the approval of the contract by a higher authority is usually required by law or administrative regulation as a requisite for its perfection. Applied here, because the PPA Board disapproved the supplemental agreement, no perfected contract existed.

• Apparent Authority in Government Contracts — In the realm of government contracts, the doctrine of apparent authority means that the government is NOT bound by unauthorized acts of its agents, even though within the apparent scope of their authority. This contrasts with private agency law, where apparent authority may bind the principal. Apparent authority is determined only by the acts of the principal and not by the acts of the agent. Applied here, no act of the PPA Board clothed the General Manager with apparent authority to execute the contract.

• "A government contract, however, is perfected only upon approval by a competent authority, where such approval is required." — This states the core ratio decidendi distinguishing government contracts from private contracts, requiring approval by a competent authority as a requisite for perfection.

• "The contracting officer functions as agent of the Philippine government for the purpose of making the contract. There arises then, in that regard, a principal-agent relationship between the Government, on one hand, and the contracting official, on the other. The latter though, in contemplation of law, possesses only actual agency authority." — This defines the limited authority of government contracting officers, establishing that their power exists only by virtue of law and that the government is bound only to the extent of the power actually given.

• "This doctrine, in the realm of government contracts, has been restated to mean that the government is NOT bound by unauthorized acts of its agents, even though within the apparent scope of their authority." — This articulates the modified application of apparent authority in government contracts, rejecting its application to bind the government.

• "Applicable laws form part of, and are read into, the contract without need for any express reference thereto; more so, to a purported government contract, which is imbued with public interest." — This establishes that statutory requirements are deemed incorporated into government contracts, so the absence of an express condition requiring higher authority approval does not negate the legal requirement.

• Philippine Ports Authority vs. Sargasso Construction and Development Corp., Pick & Shovel, Inc./Atlantic Erectors, Inc. (Joint Venture), G.R. No. 146478, July 30, 2004, 435 SCRA 512 — Prior Supreme Court decision in the same case, granting respondent's petition on a liberal interpretation of the rules of procedure and ordering the CA to conduct further proceedings.

• Central Bank of the Philippines vs. Court of Appeals, G.R. No. L-33022, April 22, 1975, 63 SCRA 446 — Cited for the proposition that a government contract is deemed perfected upon meeting of minds, but distinguished because in that case, the Monetary Board had unanimously voted and approved the award.

• Intra-Strata Assurance Corp. and Philippine Home Assurance Corp. vs. Republic, G.R. No. 156571, July 9, 2008, 557 SCRA 363 — Cited for the principle that applicable laws form part of and are read into contracts without need for express reference.

• Professional Services, Inc. vs. Agana, G.R. No. 126297, January 31, 2007, 513 SCRA 500 — Cited for the definition of apparent authority or the "holding out" theory or doctrine of ostensible agency.

• People's Aircargo and Warehousing Co., Inc. vs. CA, 357 Phil. 850 (1998) — Cited for the requisites to ascertain the existence of apparent authority.

• Article 1881, Civil Code — Provides that the agent must act within the scope of his authority to bind his principal. Applied to hold that the PPA General Manager could not bind the corporation without actual authority.

• Section 9(iii), Presidential Decree No. 857 — The Revised Charter of the Philippine Ports Authority, vesting the General Manager with the power "to sign contracts" but not the power to enter into contracts, which belongs to the Board of Directors.

• Section 1, Executive Order No. 380 (1989) — Revising the levels of authority on approval of government contracts, authorizing GOCCs to enter into negotiated infrastructure contracts involving not more than fifty million pesos, subject to strict compliance with Section 5 of Executive Order No. 164.

• Section 51, Revised Administrative Code — Provides that contracts in behalf of corporate agencies or instrumentalities shall be approved by their respective governing boards or councils and executed by their respective executive heads.

• Section 4, Presidential Decree No. 1594 — Provides that construction projects shall generally be undertaken by contract after competitive public bidding, and that projects may be undertaken by negotiated contract only in exceptional cases, subject to approval of the appropriate minister or the President. Applied to find that the negotiated contract contravened stringent legal requirements.

• IB 10.6.2, Implementing Rules and Regulations of P.D. 1594 (as amended August 12, 2000) — Lists the exceptional conditions under which negotiated contracts may be entered into, including emergencies, failure to award after public bidding, and projects adjacent or contiguous to an on-going project.

• Associate Justice Antonio T. Carpio (Chairperson)
• Associate Justice Antonio Eduardo B. Nachura
• Associate Justice Diosdado M. Peralta
• Associate Justice Roberto A. Abad

N/A — No dissenting opinions were noted in the provided case text.