The Law Firm of Laguesma Magsalin Consulta and Gastardo vs. The Commission on Audit

A government-owned or controlled corporation may engage private counsel only in exceptional cases and only after securing, prior to hiring, the written conformity and acquiescence of the Office of the Government Corporate Counsel and the written concurrence of the Commission on Audit; absent these requirements, the engagement is unauthorized, the government cannot be bound on a quantum meruit basis, and the officials who hired the private counsel are personally liable for the fees.

Clark Development Corporation is a government-owned and controlled corporation; petitioner is a private law firm. Under the Administrative Code of 1987, the Office of the Government Corporate Counsel is the principal law office of all government-owned and controlled corporations. COA Circular No. 86-255 and Office of the President Memorandum Circular No. 9 permit GOCCs to hire private counsel only in exceptional cases, subject to prior written conformity and acquiescence of the Government Corporate Counsel or Solicitor General and the written concurrence of the Commission on Audit. The dispute concerns the payment of retainer fees for legal services petitioner rendered to CDC.

Petitioner, the law firm of Laguesma Magsalin Consulta and Gastardo, is a private law firm. Clark Development Corporation (CDC) is a government-owned and controlled corporation. Sometime in 2001, officers of CDC approached petitioner for possible assistance in handling CDC's labor cases. CDC, through its legal officers and after petitioner's acquiescence, sought from the Office of the Government Corporate Counsel (OGCC) approval for petitioner's engagement as external counsel. On December 4, 2001, the OGCC denied the request. CDC then filed a request for reconsideration.

On May 20, 2002, the OGCC, through Government Corporate Counsel Amado D. Valdez, reconsidered the request and approved petitioner's engagement. It furnished CDC a copy of a pro-forma retainership contract containing suggested terms and conditions and instructed CDC to submit a copy of the contract to the OGCC after all parties concerned had signed it. In the meantime, petitioner commenced rendering legal services to CDC. At that point, CDC had yet to secure the authorization and clearance from the OGCC or the concurrence of the Commission on Audit (COA) of the retainership contract. According to petitioner, CDC's officers assured it that CDC was in the process of securing COA approval.

On June 28, 2002, CDC, through its Board of Directors, approved petitioner's engagement as private counsel. In 2003, it also approved the assignment of additional labor cases to petitioner. On July 13, 2005, CDC requested the COA for concurrence of the retainership contract it executed with petitioner. According to petitioner, it was only at that point that CDC informed it that the COA required the clearance and approval of the OGCC before it could approve the release of CDC's funds to settle the legal fees due to petitioner. On August 5, 2005, State Auditor IV Elvira G. Punzalan informed CDC that its request for clearance could not be acted upon until the OGCC approved the retainership contract with finality. On August 10, 2005, CDC sent a letter-request to the OGCC for final approval of the retainership contract, in compliance with the COA's requirements.

On December 22, 2005, Government Corporate Counsel Agnes VST Devanadera denied CDC's request for approval on the ground that the pro-forma retainership contract given to CDC was not based on the premise that the monthly retainer's fee and concomitant charges were reasonable and could pass in audit by the COA. She found that CDC had adopted petitioner's proposals concerning payment of a retainer's fee on a per case basis without informing the OGCC. She nevertheless ruled that petitioner was entitled to payment under the principle of quantum meruit, subject to CDC Board approval and the usual government auditing rules and regulations. On December 27, 2005, CDC relayed Devanadera's letter to the COA Audit Team Leader, highlighting the portion on payment to petitioner on the basis of quantum meruit.

On November 9, 2006, the COA's Office of the General Counsel, Legal and Adjudication Sector issued a Third Indorsement denying CDC's request for clearance, citing its failure to secure the prior written concurrence of the COA and the approval with finality of the OGCC. It also stated that CDC's request for concurrence was made three years after engaging petitioner's legal services. On December 4, 2006, petitioner appealed the Third Indorsement to the COA; on December 12, 2006, CDC also filed a motion for reconsideration.

On September 27, 2007, the COA rendered the assailed decision denying the appeal and motion for reconsideration. It ruled that CDC violated COA Circular No. 98-002 dated June 9, 1998 and Office of the President Memorandum Circular No. 9 dated August 27, 1998 when it engaged petitioner's legal services without the final approval and written concurrence of the COA. It also ruled that it was not the government's responsibility to pay the legal fees already incurred by CDC, but rather that of the government officials who violated the regulations. CDC and petitioner separately filed motions for reconsideration, which the COA denied in the assailed resolution dated November 5, 2008. The resolution also disallowed payment of legal fees to petitioner on the basis of quantum meruit since COA Circular No. 86-255 mandates that the engagement of private counsel without prior approval shall be a personal liability of the officials concerned. Petitioner filed this petition for certiorari on December 19, 2008.

• Non-Applicability of Polloso and PHIVIDEC: Petitioner argued that Polloso vs. Gangan and PHIVIDEC Industrial Authority vs. Capitol Steel Corporation are not applicable because in both cases the government agency failed to secure the approval of both the OGCC and the COA, whereas petitioner secured OGCC authorization prior to rendering services for all but two labor cases.
• OGCC Approval as Authorization: Petitioner maintained that the May 20, 2002 letter of Government Corporate Counsel Valdez was tantamount to a grant of authorization because it granted CDC's request for reconsideration.
• Real Party-in-Interest: Petitioner argued that it is the real party-in-interest because it rendered services to CDC, which redounded to the benefit of the Republic, and it deserves payment as a matter of right.
• Different Factual Antecedents: Petitioner reiterated that Polloso and PHIVIDEC are not applicable because the factual antecedents differ.

• Real Party-in-Interest: Respondents argued that petitioner is not the real party-in-interest; CDC is, since the assailed decision denied CDC's request for clearance.
• Late COA Request: Respondents alleged that CDC requested COA concurrence only on July 13, 2005, three years after hiring petitioner.
• No Final OGCC Approval: Respondents argued that the retainership contract was not approved with finality by the OGCC.
• Applicability of Polloso and PHIVIDEC: Respondents argued that both cases apply because they involve the indispensability of prior written concurrence of both the OGCC and the COA before any GOCC can hire external counsel.

• Timeliness: Whether the petition for certiorari was filed within the reglementary period.
• Real Party-in-Interest: Whether petitioner is the real party-in-interest.
• COA Disallowance of Engagement: Whether the Commission on Audit erred in denying CDC's request for clearance to engage petitioner as private counsel.
• Applicability of Polloso and PHIVIDEC: Whether the Commission on Audit correctly cited Polloso vs. Gangan and PHIVIDEC Industrial Authority vs. Capitol Steel Corporation in support of its denial.
• Quantum Meruit and Personal Liability: Whether the Commission on Audit erred in ruling that petitioner should not be paid on the basis of quantum meruit and that any payment for its legal services should be the personal liability of CDC's officials.

• Timeliness: No. The petition was filed out of time, but the Court relaxed the procedural rules in view of the interests involved.
• Real Party-in-Interest: Yes. Petitioner stands to be benefited or injured by the judgment and is entitled to the avails of the suit under Rule 3, Section 2 of the 1997 Rules of Civil Procedure; CDC's Board of Directors should have been impleaded as a necessary party.
• COA Disallowance of Engagement: No. The COA did not commit grave abuse of discretion; GOCCs may hire private counsel only in exceptional cases and only after prior written conformity of the OGCC and written concurrence of the COA.
• Applicability of Polloso and PHIVIDEC: Yes. Both cases apply because they require prior written concurrence of both the OGCC and the COA; the OGCC approval was merely conditional and COA concurrence was absent.
• Quantum Meruit and Personal Liability: No. The COA correctly disallowed payment on quantum meruit; the unauthorized engagement cannot bind the government, and the officials who hired petitioner without the required authorization are personally liable under Section 103 of the Government Auditing Code.

• Timeliness: The petition was filed under Rule XI, Section 1 of the 1997 Revised Rules of Procedure of the Commission on Audit, which, consistent with Article IX-A, Section 7 of the Constitution, allows a petition for certiorari within thirty days from receipt of the assailed decision, order, or resolution. Rule 64, Sections 2 and 3 of the Rules of Court likewise provide a thirty-day period from notice, interrupted by a motion for reconsideration, with the remaining period not less than five days. Petitioner received the COA decision on October 16, 2007 and filed its motion for reconsideration on November 6, 2007, leaving nine days after receipt of the denial on November 20, 2008; because November 29, 2008 was a Saturday, the petition could have been filed on December 1, 2008, but it was filed only on December 19, 2008. Although the petition was filed out of time, the Court relaxed the procedural rules under Barranco vs. Commission on the Settlement of Land Problems and Sanchez vs. Court of Appeals because the issues involve petitioner's right to due compensation and respondents' duty to prevent unauthorized disbursement of public funds.
• Real Party-in-Interest: Under Rule 3, Section 2 of the 1997 Rules of Civil Procedure, a real party-in-interest is the party who stands to be benefited or injured by the judgment or is entitled to the avails of the suit. The assailed COA decision and resolution disallowed the disbursement of public funds for payment of legal fees to petitioner; upholding or setting aside those rulings would either disallow or allow payment to petitioner. Petitioner therefore stands to be benefited or injured and is a real party-in-interest. Respondents' argument that CDC alone is the real party-in-interest erroneously narrows the issue to the denial of CDC's request for clearance. CDC's Board of Directors, whose actions precipitated the controversy, should have been impleaded as a necessary party because any relief would be incomplete without joining it; if the petition were granted, the officers would be relieved of liability, while if the COA rulings were upheld, the Board would be liable.
• COA Disallowance of Engagement: Section 10, Chapter 3, Title III, Book IV of the Administrative Code of 1987 mandates the OGCC to act as the principal law office of all GOCCs. Administrative Order No. 130 clarifies that all legal matters of GOCCs are exclusively referred to the OGCC unless their charters expressly name the OSG, but a GOCC may hire private counsel in exceptional cases with the written conformity and acquiescence of the Government Corporate Counsel and the concurrence of the COA. COA Circular No. 86-255 and Office of the President Memorandum Circular No. 9 similarly require that, before hiring private counsel, the GOCC must secure the written conformity and acquiescence of the Solicitor General or Government Corporate Counsel and the written concurrence of the COA. CDC failed to secure the final approval of the OGCC and the written concurrence of the COA before engaging petitioner. The May 20, 2002 approval by Government Corporate Counsel Valdez was merely conditional on CDC's submission of the signed pro-forma retainership contract, which CDC failed to do; Government Corporate Counsel Devanadera later denied final approval because CDC did not follow the pro-forma contract and adopted petitioner's per-case fee proposal without informing the OGCC. CDC requested COA concurrence only on July 13, 2005, three years after engaging petitioner. The labor cases handled by petitioner were standard illegal dismissal and collective bargaining agreement matters, not complicated or peculiar enough to justify hiring a known expert in labor law, and could have been handled by CDC's lawyers or the OGCC. No showing was made that delays were due to petitioner or that the approving authorities unreasonably delayed; the procurement of authorizations appeared to be an afterthought. The COA thus correctly denied CDC's request for clearance.
• Applicability of Polloso and PHIVIDEC: Polloso vs. Gangan upheld the disallowance of payment to Atty. Benemerito A. Satorre, who was engaged by the National Power Corporation without the prior conformity and acquiescence of the OSG or OGCC and the written concurrence of the COA. PHIVIDEC Industrial Authority vs. Capitol Steel Corporation found the engagement of Atty. Cesilo Adaza by PHIVIDEC Industrial Authority unauthorized for failure to secure the written conformity of the OGCC and the COA. Vargas vs. Ignes reiterated the three indispensable conditions before a GOCC can hire a private lawyer: (1) private counsel may be hired only in exceptional cases; (2) the GOCC must first secure the written conformity and acquiescence of the Solicitor General or the Government Corporate Counsel; and (3) the written concurrence of the COA must also be secured prior to the hiring. Petitioner's argument that Polloso and PHIVIDEC do not apply because it had OGCC authorization fails: COA Circular No. 86-255 requires not only the conformity and acquiescence of the OSG or OGCC but also the written concurrence of the COA. The hiring becomes unauthorized if only the OGCC gives its conformity. Moreover, the OGCC approval was merely conditional on submission of the retainership contract, and CDC's failure to submit it meant no final approval was secured.
• Quantum Meruit and Personal Liability: Government Corporate Counsel Devanadera allowed payment on a quantum meruit basis, but the COA disallowed it because the contract violated COA Circular No. 86-255 and Office of the President Memorandum Circular No. 9, and because the engagement was unauthorized. National Power Corporation vs. Heirs of Macabangkit Sangkay defines quantum meruit as "as much as he deserves," a basis for determining an attorney's professional fees in the absence of an express agreement, intended to prevent an unscrupulous client from running away with the fruits of legal services and to avoid unjust enrichment. Here, however, the Board of Directors contracted petitioner's services without the necessary prior approvals, so its actions were unauthorized. It was erroneous for the Government Corporate Counsel to bind CDC, a government entity, to pay petitioner on a quantum meruit basis for legal services neither approved nor authorized by the government. Even if petitioner ought to be paid, the liability should not be that of the government but of the officials who engaged petitioner without the required authorization. COA Circular No. 86-255 originally provided that payment out of public funds to private law practitioners hired without prior written conformity and acquiescence of the Solicitor General or Government Corporate Counsel and written concurrence of the COA shall be disallowed and shall be a personal liability of the officials concerned. When COA Circular No. 98-002 amended COA Circular No. 86-255, it failed to retain the liability of the officials who violated the circular, creating a gap. To fill that gap, respondents correctly held the officials of CDC who violated COA Circular No. 98-002 and Office of the President Memorandum Circular No. 9 personally liable to pay petitioner's legal fees, as previously provided in COA Circular No. 86-255. This is supported by Section 103 of the Government Auditing Code of the Philippines, which makes expenditures of government funds in violation of law or regulations the personal liability of the official or employee directly responsible, and by Gumaru vs. Quirino State College, which held that the fee of a lawyer who rendered legal service to the government in lieu of the OSG or OGCC is the personal liability of the government official who hired his services without prior written conformity. Petitioner rendered legal services to CDC, and it would be an injustice not to compensate it, but fulfillment of the requirements was CDC's responsibility, not petitioner's; the Board of Directors unjustly procured petitioner's services without compensation.

• Prior approval and concurrence for hiring private counsel by GOCCs — The general rule is that government-owned and controlled corporations must refer all legal matters to the Office of the Government Corporate Counsel. By way of exception, a GOCC may hire private counsel only in exceptional cases, and only after securing the written conformity and acquiescence of the Solicitor General or Government Corporate Counsel and the written concurrence of the Commission on Audit before the hiring. The Court applied this rule to CDC, which failed to secure final OGCC approval and prior COA concurrence; the OGCC approval was conditional, the COA concurrence was requested only three years later, and the labor cases were not exceptional.
• Three indispensable conditions before a GOCC may hire a private lawyer — The requisites are: (1) private counsel may be hired only in exceptional cases; (2) the GOCC must first secure the written conformity and acquiescence of the Solicitor General or the Government Corporate Counsel; and (3) the written concurrence of the Commission on Audit must also be secured prior to the hiring. None of these conditions was fully satisfied in this case.
• Quantum meruit — Literally meaning "as much as he deserves," quantum meruit is used as a basis for determining an attorney's professional fees in the absence of an express agreement. It prevents an unscrupulous client from running away with the fruits of legal services and avoids unjust enrichment on the part of the attorney. The Court held that quantum meruit cannot bind the government where the engagement of private counsel was unauthorized; any liability should fall on the officials who hired the counsel.
• Personal liability for unlawful expenditures — Under Section 103 of the Government Auditing Code of the Philippines, expenditures of government funds or uses of government property in violation of law or regulations shall be a personal liability of the official or employee found to be directly responsible. COA Circular No. 86-255 originally provided the same personal liability, and although COA Circular No. 98-002 failed to retain that liability, the Court held that Section 103 filled the gap. The CDC officials who hired petitioner without the required approvals were personally liable.
• Real party-in-interest — Under Rule 3, Section 2 of the 1997 Rules of Civil Procedure, a real party-in-interest is the party who stands to be benefited or injured by the judgment or is entitled to the avails of the suit. Petitioner was a real party-in-interest because the COA rulings either allowed or disallowed payment to it; CDC's Board of Directors should have been impleaded as a necessary party.
• Relaxation of procedural rules — Procedural rules may be relaxed in exceptional circumstances, including matters involving life, liberty, honor, or property, special or compelling circumstances, the merits of the case, lack of fault or negligence by the party favored, absence of a showing that review is frivolous or dilatory, and lack of unjust prejudice to the other party. The Court relaxed the rules because the petition, though late, involved petitioner's right to compensation and the duty to prevent unauthorized disbursement of public funds.
• Necessary party — A necessary party is one who is not indispensable but who ought to be joined if complete relief is to be accorded as to those already parties, or for a complete determination or settlement of the claim subject of the action. CDC's Board of Directors should have been impleaded because its actions precipitated the controversy and any relief would be incomplete without it.

• "When a government entity engages the legal services of private counsel, it must do so with the necessary authorization required by law; otherwise, its officials bind themselves to be personally liable for compensating private counsel’s services." — This opening passage states the core ratio of the decision: unauthorized engagement of private counsel by a government entity results in personal liability of the responsible officials.
• "The hiring of private counsel becomes unauthorized if it is only the Office of the Government Corporate Counsel that gives its conformity. The rules and jurisprudence expressly require that the government-owned and controlled corporation concerned must also secure the concurrence of respondents." — This passage rejects petitioner's argument that OGCC approval alone sufficed and confirms that COA concurrence is an indispensable requirement.
• "Even granting that petitioner ought to be paid for services rendered, it should not be the government’s liability, but that of the officials who engaged the services of petitioner without the required authorization." — This passage articulates the Court's ruling that quantum meruit cannot be used to bind the government for an unauthorized engagement.
• "The fulfillment of the requirements of the rules and regulations was Clark Development Corporation’s responsibility, not petitioner’s. The Board of Directors, by its irresponsible actions, unjustly procured for themselves petitioner’s legal services without compensation." — This passage explains why the officials, rather than petitioner or the government, must bear the liability for the unauthorized legal fees.

• Polloso vs. Gangan, 390 Phil. 1101 (2000) — Controlling precedent cited and applied; upheld the disallowance of payment to Atty. Benemerito A. Satorre for lack of prior conformity and acquiescence of the OSG or OGCC and written concurrence of the COA.
• PHIVIDEC Industrial Authority vs. Capitol Steel Corporation, 460 Phil. 493 (2003) — Controlling precedent cited and applied; found the engagement of Atty. Cesilo Adaza unauthorized for failure to secure OGCC conformity and COA concurrence, and enumerated the three indispensable conditions before a GOCC may hire a private lawyer.
• Vargas vs. Ignes, 637 Phil. 1 (2010) — Followed; reiterated the three indispensable conditions before a GOCC can hire a private lawyer.
• Gumaru vs. Quirino State College, 552 Phil. 481 (2007) — Followed; held that the fee of a lawyer who rendered legal service to the government in lieu of the OSG or OGCC is the personal liability of the government official who hired his services without prior written conformity.
• National Power Corporation vs. Heirs of Macabangkit Sangkay, G.R. No. 165828, August 24, 2011, 656 SCRA 60 — Cited for the definition of quantum meruit; its principle did not make the government liable for an unauthorized engagement.
• Pates vs. Commission on Elections, 609 Phil. 260 (2009) — Cited to explain the difference between Rule 64 and Rule 65, particularly the thirty-day period for petitions from constitutional commissions.
• Barranco vs. Commission on the Settlement of Land Problems, 524 Phil. 533 (2006) — Cited to support relaxation of procedural rules.
• Sanchez vs. Court of Appeals, 452 Phil. 665 (2003) — Cited for the exceptions allowing suspension of strict adherence to procedural rules.
• Land Bank of the Philippines vs. AMS Farming Corporation, 590 Phil. 170 (2008) — Cited for the rules on GOCC legal matters, including the requirement of written conformity and COA concurrence.

• Article IX-A, Section 7, 1987 Constitution — Decisions of constitutional commissions may be brought to the Supreme Court on certiorari within thirty days from receipt; applied to the timeliness issue.
• Article IX-D, Section 2(2), 1987 Constitution — COA's exclusive authority to promulgate accounting and auditing rules, including the prevention and disallowance of irregular, unnecessary, excessive, extravagant, or unconscionable expenditures; cited in COA Circular No. 86-255 and Polloso.
• Book IV, Title III, Chapter 3, Section 10, Administrative Code of 1987 (Executive Order No. 292) — The OGCC shall act as the principal law office of all GOCCs; applied to establish the general rule that GOCC legal matters must be handled by the OGCC.
• Administrative Order No. 130 (May 19, 1994) — All legal matters of GOCCs are exclusively referred to the OGCC unless their charters expressly name the OSG; private counsel may be hired only in exceptional cases with written conformity and acquiescence of the Government Corporate Counsel and COA concurrence.
• COA Circular No. 86-255 (April 2, 1986, as amended) — Public funds shall not be utilized for payment of private legal counsel; in exceptional cases, prior written conformity and acquiescence of the Solicitor General or Government Corporate Counsel and written concurrence of the COA must first be secured; originally made payment disallowed and a personal liability of the officials concerned.
• Office of the President Memorandum Circular No. 9 (August 27, 1998) — GOCCs are enjoined from hiring private lawyers; in exceptional cases, the written conformity and acquiescence of the Solicitor General or Government Corporate Counsel and the written concurrence of the COA must first be secured before hiring.
• COA Circular No. 98-002 (June 9, 1998) — Amended COA Circular No. 86-255; failed to retain the liability of officials who violated the circular, creating a gap that the Court held was filled by Section 103 of the Government Auditing Code.
• Section 103, Presidential Decree No. 1445 (Government Auditing Code of the Philippines) — Expenditures of government funds or uses of government property in violation of law or regulations shall be a personal liability of the official or employee directly responsible; applied to hold CDC officials personally liable.
• Rule 64, Sections 2 and 3, Rules of Court — A petition for certiorari from COA decisions may be brought to the Supreme Court under Rule 65, subject to a thirty-day period from notice; a motion for reconsideration interrupts the period, and if denied, the remaining period shall not be less than five days.
• Rule 3, Section 2, 1997 Rules of Civil Procedure — Defines a real party-in-interest as the party who stands to be benefited or injured by the judgment or is entitled to the avails of the suit; applied to hold petitioner a real party-in-interest.
• Rule 3, Section 8, 1997 Rules of Civil Procedure — Defines a necessary party as one who is not indispensable but ought to be joined for complete relief or complete determination of the claim; applied to CDC's Board of Directors.
• Rule XI, Section 1, 1997 Revised Rules of Procedure of the Commission on Audit — Any decision, order, or resolution of the COA may be brought to the Supreme Court on certiorari within thirty days from receipt; applied to the timeliness issue.
• Rule 65, Rules of Court — The general certiorari rule mentioned as the procedural basis for petitions from COA decisions, subject to the special period under Rule 64.

The decision lists the following under "WE CONCUR": Chief Justice Maria Lourdes P.A. Sereno; Associate Justices Antonio T. Carpio, Presbitero J. Velasco, Jr., Teresita J. Leonardo-De Castro, Diosdado M. Peralta, Lucas P. Bersamin, Mariano C. Del Castillo, Martin S. Villarama, Jr., Jose Portugal Perez, Jose Catral Mendoza, Bienvenido L. Reyes, Estela M. Perlas-Bernabe, and Francis H. Jardeleza. Associate Justice Arturo D. Brion is listed with an asterisk indicating he was on leave.