SBMA vs. COA

Public officers who approve disbursements in violation of procurement rules may be excused from personal liability to refund disallowed amounts when they acted in good faith believing they could disburse based on the provisions of law and lacked knowledge of facts or circumstances rendering the disbursement illegal, even though the disbursement itself is properly disallowed.

The Subic Bay Metropolitan Authority (SBMA) is a government-owned and controlled corporation tasked with administering the Subic Bay Freeport Zone. Government procurement of goods and services is governed by R.A. No. 9184 (Government Procurement Reform Act of 2003) and its Implementing Rules and Regulations, which mandate competitive public bidding as the general rule and permit alternative methods only in exceptional circumstances defined by law. The Commission on Audit (COA) exercises audit authority over government expenditures pursuant to P.D. No. 1445 (Government Auditing Code of the Philippines), including the power to issue notices of disallowance for irregular expenditures.

In 2009, the Subic Bay Metropolitan Authority (SBMA) undertook the procurement of special and field uniforms for its employees. SBMA had previously procured uniforms through regular public bidding, with Topnotch Apparel Corporation as the winning bidder, but was dissatisfied with the quality and craftsmanship of the resulting uniforms. Seeking to avoid a repeat of the problems encountered in 2007, Lolita S. Mallari, then Human Resource Management Officer of SBMA, issued a memorandum dated December 10, 2009, recommending that department heads with special or field uniforms be authorized to procure their own uniforms following guidelines set by a Uniform Committee. Among her recommendations were that no uniform allowances be released directly to department managers, that the budget for 2009 uniforms be placed in a Trust Fund, and that payment to suppliers be made only upon delivery and acceptance of the uniforms by the end-user's Department Head.

SBMA Administrator and CEO Armand C. Arreza approved these recommendations, and a Uniform Committee was constituted. The various department heads of SBMA solicited price quotations from SBMA's accredited suppliers, conducted negotiations, and awarded contracts to the suppliers offering the lowest quotations that met their specification requirements. The Uniform Committee provided pro-forma contracts and a process flowchart for the acquisition. After delivery and acceptance of the uniforms, the winning contractors were paid out of the trust fund created for the purpose. The total amount paid was ₱2,420,603.99.

On March 26, 2012, the Special Audit Team of SBMA issued Special Audit ND No. 2012-001-(2011), disallowing the total amount of ₱2,420,603.99 on the ground that several requirements of R.A. No. 9184 and its IRR had been violated. Specifically, the uniform requirements were not included in the 2010 and 2011 Annual Procurement Plans; the procurement and bidding results were not posted on the PhilGEPs bulletin board; the procurement process was not conducted by a duly created Bids and Awards Committee; and the uniforms were procured through negotiated procurement without adhering to the criteria for alternative methods. The ND held several SBMA officers, department heads, and suppliers personally liable for the disallowed amount, including Mallari, Capt. Dante A. Romano, Gen. Orlando M. Maddela Jr., Perfecto C. Pascual, Zharrex R. Santos, Ranny D. Magno, Armila Llamas, Paulita R. Yee, Armand C. Arreza, and the various suppliers.

Petitioners appealed to COA-Region III, which denied the appeal on April 7, 2014, affirming the ND and stating that while disallowance may be drastic, it had no option but to apply the law. Petitioners received the COA-Region III decision on April 23, 2014, and filed a petition for review before the COA on June 2, 2014. The COA dismissed the petition on December 29, 2015 for having been filed out of time, holding that the 180-day reglementary period under Section 48 of P.D. No. 1445 had lapsed. A motion for reconsideration was denied on December 21, 2016.

• Timeliness of Petition: Petitioners argued that the 180-day period to file the petition for review before the COA fell on May 31, 2014, a Saturday, and that they timely filed the petition on the next working day, June 2, 2014. They asserted that COA failed to consider weekends in its computation of time.
• Validity of Alternative Procurement: Petitioners maintained that they properly used the alternative modes of procurement, as it was approved by the head of the procuring authority and justified by the conditions in R.A. No. 9184 to promote economy and efficiency. They resorted to alternative modes because regular bidding had previously compromised uniform quality, and the department heads followed the process flow provided by the Uniform Committee with negotiations subjected to control measures.
• Private Nature of Funds: Petitioners argued that the funds used for the uniforms were not public funds because they were kept in a trust fund on behalf of the employees, hence private in character. They also asserted that SBMA finances its operation with its own funds and may determine the procurement of uniforms for its employees.
• Good Faith and Transparency: Petitioners asserted they exercised good faith and transparency in procuring the uniforms, meticulously following the procedure provided by the Uniform Committee and acquiring the most advantageous price and quality for the government.

• Untimeliness of Petition: COA countered that when petitioners received the COA-Region III decision on April 23, 2014, they only had 37 days or until May 30, 2014 (a Friday) to file the petition, making the June 2, 2014 filing out of time.
• Public Nature of Funds: COA argued that the funds, even though pooled in a trust fund, were still public funds because the grant of clothing allowance was covered by the appropriations for SBMA and regulated by DBM budget circulars.
• Failure to Comply with Procurement Law: COA maintained that the necessity of public bidding cannot be dispensed with and that petitioners failed to comply with the requirements of the alternative method of procurement, particularly negotiated procurement, under R.A. No. 9184.
• Absence of Good Faith: COA asserted that petitioners were not in good faith.

• Timeliness: Whether the petition for review before the COA was filed within the reglementary period, considering the 180-day period under Section 48 of P.D. No. 1445 and the rule on Saturdays and Sundays under the Rules of Court.
• Validity of Procurement Method: Whether the alternative method of procurement used by SBMA was valid under R.A. No. 9184 and its IRR.
• Nature of Funds: Whether the uniform allowance pooled in a trust fund constitutes public funds subject to R.A. No. 9184.
• Good Faith as Defense: Whether the SBMA officers and suppliers may be excused from personal liability to refund the disallowed amounts on the ground of good faith.

• Timeliness: Yes. The petition was filed on time because the last day of the period fell on a Saturday, and under Section 1, Rule 22 of the Rules of Court, applied suppletorily to P.D. No. 1445, the period runs until the next working day.
• Validity of Procurement Method: No. The requisites of negotiated procurement under Sections 53 and 54 of the IRR of R.A. No. 9184 were not satisfied; no calamity, emergency, or contract takeover justified dispensing with public bidding.
• Nature of Funds: No, the funds are public. The uniform allowance is appropriated by SBMA under R.A. No. 9524, and R.A. No. 9184 applies to all government procurement regardless of source of funds.
• Good Faith as Defense: Yes. The responsible officers and suppliers are excused from personal liability to refund because they acted in good faith and lacked knowledge of circumstances rendering the disbursement illegal.

• Timeliness: Section 48 of P.D. No. 1445 provides a six-month period to appeal an auditor's decision to the COA. Petitioners received the COA-Region III decision on April 23, 2014, and computed the 180-day period to end on May 31, 2014, a Saturday. Section 1, Rule 22 of the Rules of Court provides that if the last day of a period falls on a Saturday, Sunday, or legal holiday, the time shall not run until the next working day. The Court held that this rule may be applied suppletorily or by analogy to proceedings under P.D. No. 1445 in the interest of expeditious justice. Even under the COA's own computation (37 days, ending May 30, 2014, a Friday), the Court found compelling reasons to relax procedural rules, given the substantive merits of the case and petitioners' good faith in seeking alternative procurement. Procedural rules, while generally entitled to strict observance, may yield when stubborn obedience would defeat the ends of justice.

• Validity of Procurement Method: Public bidding is the general rule for government procurement, governed by principles of transparency, competitiveness, simplicity, and accountability. Alternative methods are exceptions available only in highly exceptional cases under Article XVI of R.A. No. 9184, subject to prior approval of the Head of the Procuring Entity. Petitioners admitted they did not conduct public bidding but claimed they used negotiated procurement. Under Section 53 of the IRR, negotiated procurement is justified only in specific circumstances, including imminent danger to life or property during a state of calamity (Section 53(b)) or takeover of rescinded or terminated contracts (Section 53(c)). The Court found that none of these circumstances existed: there was no calamity or emergency, and the contract with the previous supplier, Topnotch Apparel, was neither rescinded nor terminated. SBMA simply initiated a new procurement because it was unsatisfied with the previous supplier's products. Section 54's additional requirements, including posting on the PhilGEPs bulletin board, were also not complied with. The expenditure was therefore irregular under COA Circular No. 88-55-A, which defines irregular expenditure as one incurred without adhering to established rules, regulations, and procedural guidelines. Petitioners' bare assertion of good faith and transparency, and their dissatisfaction with a previous supplier, could not override the mandatory provisions of the law and its IRR.

• Nature of Funds: Under Section 48 of R.A. No. 9524 (GAA for FY 2009), the uniform or clothing allowance of government employees is provided by the department, bureau, office, or agency concerned, at not more than ₱4,000 each per annum. The appropriation for the uniform allowance of SBMA employees is thus provided by SBMA itself. The alleged trust fund is not owned or controlled by the employees; they have no power to decide how to spend it, and only department heads have the discretion to utilize it. Employees are merely end-users without beneficial ownership. As long as the appropriation remains in SBMA's coffers and has not been disbursed to employees, it remains a public fund. Furthermore, Section 4 of R.A. No. 9184 expressly states that the Act applies to procurement regardless of source of funds, whether local or foreign, by all branches and instrumentalities of government, including government-owned and/or controlled corporations. The trust fund character of the pooled uniform allowance does not exempt the procurement from compliance with R.A. No. 9184.

• Good Faith as Defense: The Court applied the two-pronged test from DBP vs. COA: (1) that the officers acted in good faith believing they could disburse the disallowed amounts based on the provisions of law; and (2) that they lacked knowledge of facts or circumstances which would render the disbursements illegal, such as when there is no similar ruling by the Court prohibiting a particular disbursement or no clear and unequivocal law or administrative order barring the same. As to the first requisite, petitioners acted in good faith in disbursing public funds to procure uniforms, motivated by a genuine desire to address the problem of poor uniform quality from the previous supplier. SBMA had as many as 26 different uniforms, prompting the creation of a Uniform Committee to devise a specialized procurement method. The COA did not deny that petitioners secured the most advantageous price, and there was no allegation of overpricing or poor quality. As to the second requisite, the legal issue was novel: there was no specific law, regulation, or jurisprudence prohibiting the pooling of uniform allowance in a trust fund to procure uniforms under a Uniform Committee's supervision. The COA itself could not cite a definite law or regulation prohibiting the scheme. The Court had to analyze R.A. No. 9184 and dissect the applicable IRR provisions before concluding that the procurement method was not permitted. Petitioners obtained the imprimatur of the SBMA Administrator and CEO before implementing the procedure. Good faith is presumed, and the COA failed to overcome that presumption. While the disbursement was properly disallowed for violating the IRR, the good faith exercised by petitioners exempts them from personal liability under the ND.

• Good Faith as Defense to Personal Liability in COA Disallowances — Public officers may be excused from personal liability to refund disallowed amounts when: (1) they acted in good faith believing they could disburse the disallowed amounts based on the provisions of law; and (2) they lacked knowledge of facts or circumstances which would render the disbursements illegal, such as when there is no similar ruling by the Court prohibiting a particular disbursement or no clear and unequivocal law or administrative order barring the same. The Court applied this test from DBP vs. COA to excuse SBMA officers and suppliers from refunding the disallowed uniform procurement expenditures, finding that the legal issue was novel and that the officers acted with honest intentions and without knowledge of circumstances rendering the transaction illegal.

• Public Bidding as General Rule; Alternative Methods as Exceptions — Public bidding is the default method of government procurement, governed by the principles of transparency, competitiveness, simplicity, and accountability. Alternative methods of procurement (limited source bidding, direct contracting, repeat order, shopping, and negotiated procurement) may be resorted to only in highly exceptional cases and under the conditions set forth in Article XVI of R.A. No. 9184, with prior approval of the Head of the Procuring Entity. The burden is on the procuring entity to prove the definite and particular alternative method availed of and to justify it under the specific provisions of the law and its IRR.

• Irregular Expenditure — An expenditure incurred without adhering to established rules, regulations, procedural guidelines, policies, principles, or practices that have gained recognition in law. It differs from an illegal expenditure, which pertains to expenses incurred in violation of the law itself. Under COA Circular No. 88-55-A, irregular expenditures may be disallowed in audit.

• Suppletory Application of the Rules of Court — The pertinent provisions of the Rules of Court may be applied by analogy or in a suppletory manner to proceedings under P.D. No. 1445, in the interest of expeditious justice and whenever practical and convenient, including the rule that if the last day of a period falls on a Saturday, Sunday, or legal holiday, the time shall not run until the next working day.

• "While the disbursement of funds for the procurement of the employees' uniforms must be disallowed because it particularly contravenes the provisions of IRR of R.A. No. 9184, the good faith exercised by petitioners exempts them from liability under the ND." — This passage articulates the ratio decidendi on the good faith issue: the disallowance stands, but personal liability to refund is excused.

• "As public bidding is the general rule and alternative methods of procurement are mere exceptions, it was incumbent upon petitioners to prove the definite and particular alternative method of procurement they availed of under Section 48 of R.A. No. 9184." — This states the burden placed on procuring entities to justify any departure from public bidding, a principle frequently cited in procurement law jurisprudence.

• "Manifestly, as long as the appropriation for the uniform allowance stays in the coffers of SBMA and was not disbursed to its employees, it remains as public fund." — This defines the controlling test for the public or private character of pooled government funds held in trust for employees.

• "In conclusion, it is unfair to penalize public officials based on overly stretched and strained interpretations of rules which were not that readily capable of being understood at the time such functionaries acted in good faith." — This articulates the policy rationale for prospectively applying clarified legal interpretations and excusing good-faith actors, a principle with broad implications for administrative law.

• DBP vs. COA, G.R. No. 221706, March 13, 2018 — Established the two-pronged test for appreciating good faith in COA disallowances: (1) officers acted in good faith believing they could disburse based on law; and (2) they lacked knowledge of facts rendering the disbursement illegal. Followed and applied to excuse SBMA officers from personal liability.
• Joson III vs. COA, G.R. No. 223762, November 7, 2017 — Held that mistakes committed by a public officer are not actionable absent any showing of malice or gross negligence amounting to bad faith, and that good faith is always presumed. Followed.
• Blaquera vs. Alcala — Held that absent bad faith or malice, public officers are not personally liable for damages resulting from the performance of official duties. Cited as supporting authority within the good faith analysis in DBP vs. COA.
• PEZA vs. COA, 797 Phil. 117 (2016) — Cited for the proposition that it is unfair to penalize public officials based on strained interpretations of rules not readily capable of being understood at the time they acted in good faith.
• CMTC International Marketing Corp. vs. Bhagis International Trading Corp., 700 Phil. 575 (2012) — Cited for the principle that exceptions to procedural rules may be recognized for compelling reasons where strict obedience would defeat the ends of justice.

• Section 48, P.D. No. 1445 (Government Auditing Code of the Philippines) — Provides that any person aggrieved by the decision of an auditor may, within six months from receipt, appeal in writing to the COA. Applied to determine the reglementary period for filing the petition for review.
• Section 1, Rule 22, Rules of Court — Provides that if the last day of a period falls on a Saturday, Sunday, or legal holiday, the time shall not run until the next working day. Applied suppletorily to P.D. No. 1445 to hold that the petition was filed on time.
• Section 48, R.A. No. 9184 — Enumerates the alternative methods of procurement (limited source bidding, direct contracting, repeat order, shopping, and negotiated procurement), subject to prior approval of the Head of the Procuring Entity and justified by the conditions in the Act. Applied to determine whether SBMA's procurement method was valid.
• Section 53, IRR of R.A. No. 9184 — Enumerates the specific grounds for negotiated procurement, including imminent danger during calamity (Section 53(b)) and takeover of rescinded or terminated contracts (Section 53(c)). Applied to test whether SBMA's negotiated procurement was justified; the Court found none of the grounds present.
• Section 54, IRR of R.A. No. 9184 — Provides additional terms and conditions for alternative methods, including posting requirements on the PhilGEPs website. Applied to find that SBMA failed to comply with posting obligations.
• Section 4, R.A. No. 9184 — States that the Act applies to procurement regardless of source of funds, by all branches and instrumentalities of government, including GOCCs. Applied to hold that the trust fund remained subject to R.A. No. 9184.
• Section 48, R.A. No. 9524 (General Appropriations Act for FY 2009) — Appropriates uniform or clothing allowance for government employees at not more than ₱4,000 each per annum, to be provided by the department, bureau, office, or agency concerned. Applied to establish that the uniform allowance was a public appropriation provided by SBMA.
• COA Circular No. 88-55-A — Defines irregular expenditure as one incurred without adhering to established rules, regulations, procedural guidelines, policies, principles, or practices recognized in law. Applied to characterize the uniform procurement as an irregular expenditure.

Bersamin, C.J., Carpio, Peralta, Del Castillo, Perlas-Bernabe, Leonen, Jardeleza, Caguioa, A. Reyes, Jr., J. Reyes, Jr., Hernando, and Carandang, JJ., concur.