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889 Phil. 1119
EN BANC
[ G.R. No. 242925, November 10, 2020 ]
NAOMI K. TORRETA AND JAIME M. LOPEZ, PETITIONERS, VS. COMMISSION ON AUDIT, RESPONDENT.
DECISION
GAERLAN, J.:
The case is a petition for certiorari and prohibition with application for preliminary injunction and temporary restraining order[1] filed by Naomi K. Torreta (Torreta) and Jaime M. Lopez (Lopez), herein (petitioners), who are officers of National Dairy Authority (NDA), seeking to annul and set aside the Notices[2] and Decisions[3] issued by herein public respondent Commission on Audit (COA) against NDA which awarded dairy cows in the amount of P17,316,000.00 to HapiCows@Tropical Dairy Farm, Inc. (Hapicows) under NDA's Dairy Multiplier Farm Program in 2009.
Antecedents
NDA is a government-owned and controlled corporation created by Republic Act (R.A.) No. 7884. The NDA was created to be the central policy determining and directing body tasked to ensure the accelerated development of the Philippine dairy industry, in accordance with the policies and objectives set forth by the law.
Under the NDA's Dairy Multiplier Farm Program (Program), NDA is to distribute imported, mature female dairy animal to eligible and qualified participants, who, within a certain period of time, would make a repayment-in-kind: For every one mature female dairy animals, payment shall be by way of two mature female dairy animals with similar or higher dairy blood composition and with condition similar to the animals originally received by the Multiplier Farm Partner from the NDA.[4]
The Qualification Requirements and Selection Criteria of the Application for the Batch 10 Imported Animals[5] under the Program is as follows:
COA, thereafter, conducted a post-audit on NDA's Program. The Audit Team Leader (ATL) of respondent issued Audit Observation Memorandum (AOM) No. 10-006[10] dated March 5, 2010 noting that the dispersal of the 150 heads of dairy animals in favor of Hapicows was of doubtful validity due to lack of proper recording as stated in the approved NDA Board Resolution No. 424 Series of 2009 and as required under Section 112 of Presidential Decree (P.D.) No. 1445. Thus, ATL recommended that management of NDA comply with the aforementioned laws and requested the submission of the following documents:
On July 26, 2010, ATL conducted an audit inventory of NDA Animals which resulted to the issuance of the second AOM No. 10-017[13] because Hapicows failed to comply with the prescribed standards of sound dairy production and husbandry management as mandated in the MOA due to observed high incidence of mortality and abortion cases among the dairy animals. Thus, ATL recommended the following actions:
On September 28, 2010, ATL issued a Notice of Disallowance (ND) No. 10-002(10)[16] stating that the dispersal of the 150 heads of dairy animals to Hapicows was irregular as it lacks proper evaluation and supporting documents holding herein petitioners, together with Molina, President-CEO of Hapicows, Orkhan H. Usman, NDA Former Administrator and Suplicio Bayawa Jr., NDA-Operations Department OIC, liable as signatories of the MOA.[17]
Petitioners appealed the ND to COA Office of the Cluster Director, Corporate Government Sector, Cluster C (CGS-C). In its Decision[18] dated July 1, 2011, the CGS-C denied the appeal, and further stating the following observations:
Hence, this review under Rule 64, in relation to Rule 65 of the Rules of Court.
Issues
Petitioners submit that the COA committed grave abuse of discretion amounting to lack or in excess of jurisdiction:
The petition for certiorari is bereft of merit.
I. COA acted within its constitutional mandate.
Petitioners contend that NDA was vested by law to be the country's authority on the dairy industry. Thus, they are in the best position to formulate the process of distribution of animals and the evaluation of the farms as recipient under the Program. Petitioners do not question the authority of COA to conduct audit, however, they claim that it was exercised without caution, fairness and circumspect. COA found the delivery of dairy animals to Hapicows farm irregular despite the petitioners providing it all the documents it requested in support of the award. Petitioners find COA's disallowance as arbitrary, unreasonable and wrong. By imposing its own interpretation and evaluation of the criteria set by NDA, COA effectively arrogated itself to be the authority in the dairy farm industry.[24]
We do not agree.
Petitioners' insistence for COA to accept the documents provided by Hapicows as sufficient compliance with the requirements of audit is misplaced. It proceeds from petitioners' myopic view that the term "supporting documents" in ND No. 10-002(10) should only refer to the qualification requirements of Hapicows during the selection of the Program. However, the proceedings that led to the issuance of ND No. 10-002(10) evince that the purpose of the subject audit was not simply to look into Hapicow's eligibility, but likewise to monitor the status of the government's transaction with the latter as one of the selected Multiplier Farm Partners for the Program. This was clear from the import of the ATL's observation in AOM No. 10-017 - a precursor of ND No. 10-002(10) - viz.:
On this score, it is well to note that the extent of the auditor's review does not unnecessarily encroach upon the administrative functions of the NDA. For one, no less than the Constitution has vested COA with the exclusive authority to define the scope of its audit and examination, and establish techniques and methods required therefor.[27] As such, it is vested with the broadest latitude to discharge its role as the guardian of public funds and property and is accorded the complete discretion to exercise its constitutional duty.[28]
Furthermore, the action taken by COA auditor of monitoring the progress of the project, with a view of ascertaining if the public assets were utilized economically, efficiently and effectively; and evaluating the adequacy of controls over the account, was completely in accord with the following examination standards and objectives prescribed under Sections 55 and 58 of P.D. No. 1445, otherwise known as the Government Auditing Code of the Philippines, viz.:
II. The Notice of Disallowance is proper.
Petitioners argued that they have provided COA all the necessary documentation it requested, however, COA still failed to recognize these documents and thus, violating their right to administrative due process.
Again, We are unimpressed.
Section 6 of COA Circular No. 77-55 provides:
6. AUDITORIAL ACTION:
Accordingly, by itself alone, the non-submission by petitioners of the documents required in audit within 90 days from receipt of NS No. 10-001-(10) constitutes a valid ground for disallowance.
In any case, even by looking into the pre-selection qualification of Hapicows, We agree with COA's conclusion that NDA failed to strictly implement the Qualification Requirements and Selection Criteria for the program when it awarded the project to Hapicows.
Well-settled is the rule that factual findings of administrative agencies are generally respected and even afforded finality because of the special knowledge and expertise gained by these agencies from handling matters falling under their specialized jurisdiction. By reason of their special knowledge and expertise over matters falling under their jurisdiction, administrative agencies are in a better position to pass judgment thereon, and their findings of fact are generally accorded great respect, if not finality by the courts. Such findings must be respected as long as they are supported by substantial evidence even if such evidence is not overwhelming or even preponderant. It is not the task of the appellate court or this Court to once again weigh the evidence submitted before and passed upon by the administrative body and to substitute its own judgment regarding the sufficiency of the evidence.[30]
It must be noted that at the time of the award, Hapicows does not have enough capital to secure the dairy animals amounting to P17,316,000.00. Even though it subsequently boosted its financial capability by infusing additional funds, it is still insufficient to cover the amount of the dairy animals. Moreover, the dispersal of the dairy animals happened before the capital infusion; hence, it could not have been considered in the evaluation of Hapicows' ability and capability to pay for the dairy animals.
Petitioners contend that they should not be held liable in this transaction as they acted in good faith in the dispersal of the dairy animals to Hapicows. They alleged that they followed the same requirements and procedures as they have with the other farms in the Program.
We are not persuaded.
Good faith is a state of mind denoting "honesty of intention, and freedom from knowledge of circumstances which ought to put the holder upon inquiry; an honest intention to abstain from taking any unconscientious advantage of another, even though technicalities of law, together with absence of all information, notice, or benefit or belief of facts which render transaction unconscientious.[31] Indeed, a public officer is presumed to have acted in good faith in the performance of his duties. However, public officials can be held personally accountable for acts claimed to have been performed in connection with official duties where they have acted beyond their scope of authority or where there is a showing of bad faith.[32]
Consistent thereto, Sections 38 and 39 of the Administrative Code of 1987 provides that the presumption of good faith is unavailable when there is a clear showing of gross negligence, to wit:
Further, petitioners allowed and accepted the reason of Hapicows with regard to the non-procurement of insurance for the animals notwithstanding the express requirement in the MOA. In an effort to justify, petitioners averred that such requirement of insurance is unavailable at that time. As such they still push through with the award even without it. Evidently, petitioners had been remiss in exercising the necessary diligence to protect government assets and prevent irregular disbursement. Petitioners already knew the circumstances which make Hapicows unqualified for the program yet they still signed the MOA. Considering that public funds are involved, the government would always be on the losing end in this transaction should an unfortunate event happens, without recourse to insurance coverage or Hapicows' insufficient assets. Accordingly, petitioners' gross negligence negates the presumption of good faith.
IV. Petitioners are solidarily liable
With the finding of gross negligence on the part of the petitioners, COA did not err in finding petitioners together with the other NDA officers who signed the MOA solidarily liable for the disallowed amount. According to Section 52 of the Administrative Code of 1987, [e]xpenditures 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 therefor.[37]
Notably, the ND also included Molina, the President-CEO of Hapicows in the list of persons liable. In their decision, COA ruled that the application of the doctrine of piercing the veil of corporate fiction is proper in the case because it was found that not only did Molina own the controlling interest in Hapicows but it was his expertise and experience which NDA considered to qualify Hapicows to the program despite its financial incapability.
We agree that the piercing of the corporate veil was properly applied by COA in the present case. Piercing the corporate veil is warranted when "[the separate personality of a corporation] is used as a means to perpetrate fraud or an illegal act, or as a vehicle for the evasion of an existing obligation, the circumvention of statutes, or to confuse legitimate issues." It is also warranted in alter ego cases "where a corporation is merely a farce since it is a mere alter ego or business conduit of a person, or where the corporation is so organized and controlled and its affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another corporation."[38] Based on the factual findings of respondent COA, Hapicows is a mere alter ego of Molina. As such, all liabilities being imputed to Hapicows is in fact attributed to Molina as they are considered one and the same.
Further, Hapicows is held to be solidarily liable as the recipient in an irregular expenditure. Section 43 of the Administrative Code of 1987 provides that:
We, however, recognize Senior Associate Justice Estela Perlas-Bernabe's (Justice Perlas-Bernabe) position that the Rules of Return in the Madera case will not squarely apply in the case at bar. The Rules of Return in Madera is as follows:
However, with regard to the amount to be returned, we take note of the peculiarity of the cases of government procurement contracts for goods or services. In the instant case, what makes it unique is that what was delivered to the recipient were live animals and not its monetary equivalent. Logically, the subject of the return must be the same animals delivered in case of valid ND. The peculiarity of this situation is that some of these dairy animals have died already at the time of audit. And because of its perishable nature, some may even die during the pendency of this case. In any case, the records provide that the dairy animals remain in the possession of Hapicows.[43]
It must also be noted that in the COA Decision, COA ordered the application of the repossession/termination clauses as provided under the MOA. Under the provisions of the MOA specifically 7.1 and 7.2 the repossession/termination clause shall only apply under the following instances:
Verily, the peculiarity of cases involving government contracts for procurement of goods or services necessitates the promulgation of a separate guidelines for the return of the disallowed amounts. In these cases, it is deemed fit that the passive recipients be ordered to return what they received subject to the application of the principle of quantum meruit. Quantum meruit literally means "as much as he deserves." Under this principle, a person may recover a reasonable value of the thing he delivered or the service he rendered. The principle also acts as a device to prevent undue enrichment based on the equitable postulate that it is unjust for a person to retain benefit without paying for it. The principle of quantum meruit is predicated on equity.[45] In the case of Geronimo v. COA,[46] it has been held that "the [r]ecovery on the basis of quantum meruit was allowed despite the invalidity or absence of a written contract between the contractor and the government agency."[47] In Dr. Eslao v. COA,[48] the Court explained that the denial of the contractor's claim would result in the government unjustly enriching itself The Court further reasoned that justice and equity demand compensation on the basis of quantum meruit. Thus, in applying this principle, the amount in which the petitioners together with the other liable individuals shall be equitably reduced.[49]
Accordingly, we hereby adopt the proposed guidelines on return of disallowed amounts in cases involving unlawful/irregular government contracts submitted by herein Justice Perlas-Bernabe, to wit:
WHEREFORE, premises considered, the Petition for Certiorari filed by petitioners is hereby DISMISSED. The Notice of Disallowance [No. 10-002(10)] issued by Commission on Audit against herein petitioners is AFFIRMED WITH MODIFICATION. Accordingly, the case is hereby remanded to COA to:
a. Direct NDA to repossess the remaining dairy animals and their offsprings in the possession of Hapicows and determine their fair market value in accordance with the general accepted accounting principles and COA's own rules and regulation.
b. Deduct the fair market value of the returned dairy animals from the civil liability of the named individuals held solidarily liable under ND 10-002(10); and
c. Issue an amended Notice of Disallowance reflecting any deductions in accordance with the COA's factual determination.
SO ORDERED.
Peralta, C. J., Gesmundo, Hernando, Carandang, Lopez, Delos Santos, and Rosario, JJ., concur.
Perlas-Bernabe, J., Please see Concurring Opinion.
Leonen, J., I join SAJ Perlas-Bernabe and J. Caguioa's separate opinion.
Caguioa, J., Please see Concurring Opinion.
Lazaro-Javier, Inting, and Zalameda, JJ., on official leave.
[1] Rollo, pp. 3-31.
[2] Id. at 42-43, 44.
[3] Id. at 45-50; penned by Director Jose R. Rocha, Jr., 51-59; signed by Chairperson Ma. Gracia M. Pulido Tan, Commissioners Heidi L. Mendoza and Jose A. Fabia with Director Nilda B. Plaras, attesting.
[4] Id. at 8-9.
[5] Id. at 61.
[6] Id.
[7] Id. at 11.
[8] Id. at 85-92.
[9] Id. at 13.
[10] Id. at 40-41.
[11] Id. at 41.
[12] Id. at 42-43.
[13] Id. at 262-264.
[14] Id. at 52.
[15] Id. at 12-13.
[16] Id. at 44.
[17] Id.
[18] Id. at 45-50.
[19] Id. at 48-50.
[20] Id. at 51-59.
[21] Id. at 58.
[22] Id. at 60.
[23] Id. at 14-15.
[24] Id. at 18-19.
[25] Id. at 264.
[26] Section 3.2 of the MOA provides:
The MULTIPLIER FARM PARTNER shall manage the dairy animals according to the prescribed standards of sound dairy production and husbandry management to ensure technical and financial viability of its business. Specifically, the MULTIPLIER FARM PARTNER shall:
3.2.1. Acknowledge the receipt of the animals by signing an Acknowledgment Receipt as well as this Agreement on the date of delivery of animals.
3.2.2. Insure the animals with a reputable insurance company to ensure that the animals can be repaid within the prescribed payment period.
3.2.3. Expenses for such insurance as an option shall be for the account of the MULTIPLIER FARM PARTNER.
3.2.4. Regularly, provide adequate inputs such as, but not limited to, safe drinking water, quality feeds and roughage, mineral supplements, drugs and biologics and other supplies necessary for the efficient care and management of the dairy animals including its offsprings.
3.2.5. Ensure that all offspring's borne out of the dairy animals provided by the NDA are properly registered in the municipality to where the farm/s is/are located and shall in no case be sold to anyone without prior consultation with and consent from the NDA
3.2.6. Offer first to the NDA the offsprings should the MULTIPLIER FARM PARTNER opt to sell or otherwise dispose of the same.
3.2.7. Ensure to milk all lactating animals, preferably, twice a day and according to standard milking practices, process them according to prescribed dairy technology standards and/or course the milk produce to the nearest processing center.
3.2.8. Ensure the breeding of the dairy animals with dairy bloodline and implement, as deemed necessary, the corrective measures as recommended by the NDA.
3.2.9. Monitor and maintain milk production, health and breeding records of each dairy animal and make available and submit the same to the NDA on a monthly basis including other reports as may be prescribed by the NDA from time to time.
3.2.10. Furnish the NDA with financial statements (preferably, audited) on an annual basis, including other documents pertaining to the project that may be required by duly authorized government entities.
3.2.11. Agree that, for purposes of the application of this Agreement, the liability of its Board of Directors shall be solidary with the MULTIPLIER FARM PARTNER.
3.2.12. Remit to NDA an Annual Milk Volume Service Fee equivalent to One Peso (Php 1.00) per liter of milk produced by the original dairy animals provided by the NDA to the MULTIPLIER FARM PARTNER based on the milk production records submitted by the latter and upon the former's validation thereof. It shall be understood that the Service Fee aforementioned shall be charged only on the milk actually marketed and sold by the MULTIPLIER FARM PARTNER.
The remittance of such fees to the NDA shall be on a quarterly basis. The period covered for the remittance shall be ten (10) days after every calving of the original dairy animalls provided by the NDA and shall continue throughout the aforesaid animal/s' lactation cycle; Provided however, that this obligation shall automatically cease upon full payment by the MULTIPLIER FARM PARTNER of its obligations under Article 5 of this Agreement.
3.2.13. Provide any other services and support within its means to ensure the success of the Program.
3.2.14. Continue its dairy activities and vigorously play its role in dairy development even after full payment of the animals has been completed.
NDA is a government-owned and controlled corporation created by Republic Act (R.A.) No. 7884. The NDA was created to be the central policy determining and directing body tasked to ensure the accelerated development of the Philippine dairy industry, in accordance with the policies and objectives set forth by the law.
Under the NDA's Dairy Multiplier Farm Program (Program), NDA is to distribute imported, mature female dairy animal to eligible and qualified participants, who, within a certain period of time, would make a repayment-in-kind: For every one mature female dairy animals, payment shall be by way of two mature female dairy animals with similar or higher dairy blood composition and with condition similar to the animals originally received by the Multiplier Farm Partner from the NDA.[4]
The Qualification Requirements and Selection Criteria of the Application for the Batch 10 Imported Animals[5] under the Program is as follows:
NDA found Hapicows qualified for the program. On August 20, 2009, NDA delivered 134 heads of imported pregnant dairy animals to Hapicows' farm in Pagbilao, Quezon. The other 16 heads empty imported animals were delivered in Ayusan, Tiaong, Quezon farm.[7] At the same time, the Memorandum of Agreement (MOA)[8] between NDA and Hapicows was executed; herein petitioners signing the said MOA as officers of NDA. Torreta is the Deputy Administrator while Lopez is Division Chief of the Technical Support Unit of NDA.[9]
- Submit a formal Letter of Intent to Avail of Batch 10 imported dairy animals[.]
- Pass the Technical Evaluation of NDA on Viable Dairy Farm Operation covering:
- The cooperative/organization to which the partner is a member must be of good standing in accordance with the Cooperative Development Authority (CDA) and Securities and Exchange Commission (SEC) rules and policies.
- Existing partner must have a good credit/updated loan standing with the National Dairy Authority while new farmers must have a good track record with the cooperative.
- Existing partners has the capacity and ability to pay the animals being availed from the National Dairy Authority (NDA); and
- Able to pay the hauling cost of the animals being availed from the quarantine site to point of destination.[6]
COA, thereafter, conducted a post-audit on NDA's Program. The Audit Team Leader (ATL) of respondent issued Audit Observation Memorandum (AOM) No. 10-006[10] dated March 5, 2010 noting that the dispersal of the 150 heads of dairy animals in favor of Hapicows was of doubtful validity due to lack of proper recording as stated in the approved NDA Board Resolution No. 424 Series of 2009 and as required under Section 112 of Presidential Decree (P.D.) No. 1445. Thus, ATL recommended that management of NDA comply with the aforementioned laws and requested the submission of the following documents:
NDA allegedly filed the requested documents. However, ATL found that not all the requested documents were submitted. This prompted them to issue Notice of Suspension (NS) No. 10-001-(10)[12] on June 21, 2010. Further, ATL requested for additional supporting documents.
On July 26, 2010, ATL conducted an audit inventory of NDA Animals which resulted to the issuance of the second AOM No. 10-017[13] because Hapicows failed to comply with the prescribed standards of sound dairy production and husbandry management as mandated in the MOA due to observed high incidence of mortality and abortion cases among the dairy animals. Thus, ATL recommended the following actions:
- Reevaluate the technical and financial capability of Hapicows and determine whether Mr. Benjamin Molina (Molina) is representing Hapicows or acting in his individual capacity;
- Implement Article 7 of the MOA providing for the repossession of the animals and termination of the MOA; and
- Submit management action to save the remaining animals in the custody of Hapicows and its proposal for the animals' rehabilitation.[14]
On September 28, 2010, ATL issued a Notice of Disallowance (ND) No. 10-002(10)[16] stating that the dispersal of the 150 heads of dairy animals to Hapicows was irregular as it lacks proper evaluation and supporting documents holding herein petitioners, together with Molina, President-CEO of Hapicows, Orkhan H. Usman, NDA Former Administrator and Suplicio Bayawa Jr., NDA-Operations Department OIC, liable as signatories of the MOA.[17]
Petitioners appealed the ND to COA Office of the Cluster Director, Corporate Government Sector, Cluster C (CGS-C). In its Decision[18] dated July 1, 2011, the CGS-C denied the appeal, and further stating the following observations:
- Torreta in her letter dated September 20, 2010, admitted that there was only partial submission of requirements by Hapicows, which fell short of the NDA requirements and stated that the NDA management decided to repossess the remaining animals with Hapicows;
- Hapicows did not have a good credit/updated loan standing with the NDA in violation of Item 4 of the Qualification Requirements having only partially updated its account with the NDA per Certification dated June 22, 2010 issued by the NDA Finance and Administrative manager;
- There was inadequate capitalization of Hapicows with paid-up capital of only P62,500; thus, unduly exposing the dairy animals to unnecessary risk in case the Hapiows reneges or fails to comply with its duty under the MOA;
- Hapicows was not a member of good standing in acordance with the CDA and SEC rules and policies. The certification issued by the SEC revealed that Hapicows was registered merely one year before the signing of the MOA. Also, Hapicows failed to submit certain required statements and to secure prior approval of the SEC for changes in its capital stock; and
- As to Hapicows' three farm sites, two of which were not substantiated due to lack of lease contracts and other pertinent documents while one was covered by a lease contract that was undated and not notarized, and entered into with the punong barangay who had no property rights over the property.[19]
WHEREFORE, the Commission hereby DENIES the herein petition for review for lack of merit and AFFIRMS Corporate Government Sector-C Decision No. 2011-021 dated July 1, 2011 affirming Notice of Disallowance No. 10-002-(10) dated September 28, 2010 pertaining to the dispersal of 150 heads of dairy animals to Hapicows@Tropical Dairy Farm, Inc. in the amount of P17,316,000.00. Accordingly, National Dairy Authority is hereby directed to Implement Article 7 of the Memorandum Agreement providing for the repossession of the dairy animals. Hapicows@Tropical Dairy Farm, Inc. and officials of the National Dairy Authority, who signed or initiated the Memorandum of Agreement, are jointly and severally liable for the difference between the book value of the originally distributed animals and the appraised/assessed value of the repossessed animals.[21]Petitioners filed a motion for reconsideration for the above Commission Proper's decision however the same was denied thru the Commission's Resolution dated August 16, 2018.[22]
Hence, this review under Rule 64, in relation to Rule 65 of the Rules of Court.
Petitioners submit that the COA committed grave abuse of discretion amounting to lack or in excess of jurisdiction:
- When its audit was wrongly based on its perceived evaluation process instead of what the NDA, as the country's sole dairy authority, had observed and implemented.
- When its findings and interpretations were not based on the documents actually submitted by Hapicows to NDA and adamantly refused to acknowledge NDA's evaluation process and documentation, in direct contravention of the petitioners' right to administrative due process.
- Thus, petitioners cannot and should not be held liable for this transaction as no irregularity attended the same; their participation in the evaluation process is minimal while documents required by the COA and the rules have been submitted and complied by them in good faith.[23]
Ruling of the Court
The petition for certiorari is bereft of merit.
I. COA acted within its constitutional mandate.
Petitioners contend that NDA was vested by law to be the country's authority on the dairy industry. Thus, they are in the best position to formulate the process of distribution of animals and the evaluation of the farms as recipient under the Program. Petitioners do not question the authority of COA to conduct audit, however, they claim that it was exercised without caution, fairness and circumspect. COA found the delivery of dairy animals to Hapicows farm irregular despite the petitioners providing it all the documents it requested in support of the award. Petitioners find COA's disallowance as arbitrary, unreasonable and wrong. By imposing its own interpretation and evaluation of the criteria set by NDA, COA effectively arrogated itself to be the authority in the dairy farm industry.[24]
We do not agree.
Petitioners' insistence for COA to accept the documents provided by Hapicows as sufficient compliance with the requirements of audit is misplaced. It proceeds from petitioners' myopic view that the term "supporting documents" in ND No. 10-002(10) should only refer to the qualification requirements of Hapicows during the selection of the Program. However, the proceedings that led to the issuance of ND No. 10-002(10) evince that the purpose of the subject audit was not simply to look into Hapicow's eligibility, but likewise to monitor the status of the government's transaction with the latter as one of the selected Multiplier Farm Partners for the Program. This was clear from the import of the ATL's observation in AOM No. 10-017 - a precursor of ND No. 10-002(10) - viz.:
x x x xGiven the scope of the audit made, COA was clearly justified in requiring the submission of the additional documents which consisted mainly of the documents listed under Section 3.2[26] of the MOA, in order to determine Hapicow's compliance with its duties and obligations under the Program.
From the farm records presented, the original important pregnant heifers reduction of 23.13% unaccounted pregnancy abortion cases of 30.59% and the absence of documents and farm facilities showing multiplier farm partner's capability, we have observed that the MULTIPLIER FARM PARTNER failed to manage the dairy animals according to the prescribed standards of sound dairy production and husbandry management as mandated by Article 3.2 of the Memorandum of Agreement, particularly animals at Pagbilao Farm.
Being a non-technical observer as to the farm status, we have observed that the multiplier partner was unable to implement the provisions of Sections 3.2.4, 3.2.7, 3.2.13 and 3.2.14 of the MOA. These resulted to poor animal condition as manifested by the majority of animals that were tick infested during our count. All original animals seem to be non-pregnant. According to Mr. Molina, he opted to dry all animals since he saw them not fit for lactation. The conditions were also incorporated in the inventory team's report.
Due to said failure of implementing the provisions of the MOA, the agency's objective as stipulated in the approved Board Resolution No. 424 S-2009 could not be attained.[25]
On this score, it is well to note that the extent of the auditor's review does not unnecessarily encroach upon the administrative functions of the NDA. For one, no less than the Constitution has vested COA with the exclusive authority to define the scope of its audit and examination, and establish techniques and methods required therefor.[27] As such, it is vested with the broadest latitude to discharge its role as the guardian of public funds and property and is accorded the complete discretion to exercise its constitutional duty.[28]
Furthermore, the action taken by COA auditor of monitoring the progress of the project, with a view of ascertaining if the public assets were utilized economically, efficiently and effectively; and evaluating the adequacy of controls over the account, was completely in accord with the following examination standards and objectives prescribed under Sections 55 and 58 of P.D. No. 1445, otherwise known as the Government Auditing Code of the Philippines, viz.:
Section 55. Examination and evaluation standards.In view of the foregoing, We find that COA acted within its mandate. It did not act beyond what was expected of it to do in audit. The Court is mindful that the implementation of the Program and the enforcement of the provisions of the subject MOA are functions which are lodged primarily in the NDA as the central policy in determining and directing the body of the Philippine dairy industry. However, in keeping with the COA's role as the watchdog of the financial operations of the government and the guardian of the people's property, it was well-within the scope of the respondent's audit power to enjoin the submission of the documentary requirements under Section 3.2 of the MOA for audit purposes.
(1) The audit work shall be adequately planned and assistants shall be properly supervised.
(2) A review shall be made of compliance with legal and regulatory requirements.
(3) An evaluation shall be made of the system of internal control and related administrative practices to determine the extent they can be relied upon to ensure compliance with laws and regulations and to provide for efficient, economical and effective operations.
(4) The auditor shall obtain through inspections, observation, inquiries, confirmation and other techniques, sufficient competent evidential matter to afford himself a reasonable basis for his opinions, judgments, conclusions, and recommendations.
Section 58. Audit of assets. The examination and audit of assets shall be performed with a view to ascertaining their existence, ownership, valuation and encumbrances as well as the propriety of items composing the respective asset accounts, determining their agreement with records; proving the accuracy of such records; ascertaining if the assets were utilized economically, efficiently and effectively; and evaluating the adequacy of controls over the accounts.
II. The Notice of Disallowance is proper.
Petitioners argued that they have provided COA all the necessary documentation it requested, however, COA still failed to recognize these documents and thus, violating their right to administrative due process.
Again, We are unimpressed.
Section 6 of COA Circular No. 77-55 provides:
6. AUDITORIAL ACTION:
Whenever, in the course of audit and guided by the set of standards aforementioned, an auditor is convinced and has satisfied himself that the transaction in question is irregular, unnecessary, excessive, or extravagant, he may pursue any of the following alternative courses of action:Corollarily, Section 82[29] of P.D. No. 1445 prescribes a period of 90 days for the settlement of NS.
In-pre-audit -
a) The auditor may tentatively suspend payment on the proposed expenditure and require compliance with certain auditing requirements within the period prescribed by existing regulations. After the lapse of said period without the requirements having been complied with, such tentative suspension shall become a final disallowance;
x x x x
Accordingly, by itself alone, the non-submission by petitioners of the documents required in audit within 90 days from receipt of NS No. 10-001-(10) constitutes a valid ground for disallowance.
In any case, even by looking into the pre-selection qualification of Hapicows, We agree with COA's conclusion that NDA failed to strictly implement the Qualification Requirements and Selection Criteria for the program when it awarded the project to Hapicows.
Well-settled is the rule that factual findings of administrative agencies are generally respected and even afforded finality because of the special knowledge and expertise gained by these agencies from handling matters falling under their specialized jurisdiction. By reason of their special knowledge and expertise over matters falling under their jurisdiction, administrative agencies are in a better position to pass judgment thereon, and their findings of fact are generally accorded great respect, if not finality by the courts. Such findings must be respected as long as they are supported by substantial evidence even if such evidence is not overwhelming or even preponderant. It is not the task of the appellate court or this Court to once again weigh the evidence submitted before and passed upon by the administrative body and to substitute its own judgment regarding the sufficiency of the evidence.[30]
It must be noted that at the time of the award, Hapicows does not have enough capital to secure the dairy animals amounting to P17,316,000.00. Even though it subsequently boosted its financial capability by infusing additional funds, it is still insufficient to cover the amount of the dairy animals. Moreover, the dispersal of the dairy animals happened before the capital infusion; hence, it could not have been considered in the evaluation of Hapicows' ability and capability to pay for the dairy animals.
III. | Petitioners are liable. There is no good faith when there is gross negligence. |
We are not persuaded.
Good faith is a state of mind denoting "honesty of intention, and freedom from knowledge of circumstances which ought to put the holder upon inquiry; an honest intention to abstain from taking any unconscientious advantage of another, even though technicalities of law, together with absence of all information, notice, or benefit or belief of facts which render transaction unconscientious.[31] Indeed, a public officer is presumed to have acted in good faith in the performance of his duties. However, public officials can be held personally accountable for acts claimed to have been performed in connection with official duties where they have acted beyond their scope of authority or where there is a showing of bad faith.[32]
Consistent thereto, Sections 38 and 39 of the Administrative Code of 1987 provides that the presumption of good faith is unavailable when there is a clear showing of gross negligence, to wit:
Section 38. Liability of Superior Qfficers. - (1) A public officer shall not be civilly liable for acts done in the performance of his official duties, unless there is a clear showing of bad faith, malice or gross negligence.Likewise, a person can be held liable under a ND, if it was proven that he or she is directly responsible for the illegal, irregular, unnecessary, excessive, extravagant, or unconscionable transactions. Section 103 of P.D. No. 1445 provides:
(2) Any public officer who, without just cause, neglects to perform a duty within a period fixed by law or regulation, or within a reasonable period if none is fixed, shall be liable for damages to the private party concerned without prejudice to such other liability as may be prescribed by law.
(3) A head of a department or a superior officer shall not be civilly liable for the wrongful acts, omissions of duty, negligence, or misfeasance of his subordinates, unless he has actually authorized by written order the specific act or misconduct complained of.
Section 39. Liability of Subordinate Qfficers. - No subordinate officer or employee shall be civilly liable for acts done by him in good faith in the performance of his duties. However, he shall be liable for willful or negligent acts done by him which are contrary to law, morals, public policy and good customs even if he acted under orders or instructions of his superiors.[33]
Section 103. General liability for unlawful expenditures. 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 therefor.Gross negligence is evident in the case at bar. Petitioners hold vital positions in the NDA. By holding such positions, they are knowledgeable of the principles and policies of the said government agency. Further, their signatures appearing in pertinent documents of the said program proves that they were directly responsible for the irregular transaction. Lopez's signature appeared in the Farm Evaluation Sheet[34] of Hapicows which recommended it as a qualified recipient farm of the imported dairy animals. On the other hand, Torreta's signature appeared in Qualification Requirements and Selection Criteria of the Applicants for Batch 10 Imported Animals Documents[35] which signifies that she reviewed and recommended the said criteria to which a farm must comply with. Clearly, the award to Hapicows is highly irregular as the qualifications set were not complied. The term "irregular expenditure" signifies an expenditure incurred without adhering to established rules, regulations, procedural guidelines, policies, principles or practices that have gained recognition in laws. Irregular expenditures are incurred if funds are disbursed without conforming with prescribed usages and rules of disciplines. There is no observance of an established pattern, course, mode of action, behavior, or conduct in the incurrence of an irregular expenditure. A transaction conducted in a manner that deviates or departs from, or which does not comply with standards set is deemed irregular. A transaction which fails to follow or violates appropriate rules of procedure is, likewise, irregular.[36] Both officers had the opportunity to review and scrutinize the evaluation and qualification documents, yet the dairy animals were still awarded to an unqualified recipient. The financial capability of Hapicows glaringly shows that it is an unqualified farm. This fact alone should have alerted petitioners.
Further, petitioners allowed and accepted the reason of Hapicows with regard to the non-procurement of insurance for the animals notwithstanding the express requirement in the MOA. In an effort to justify, petitioners averred that such requirement of insurance is unavailable at that time. As such they still push through with the award even without it. Evidently, petitioners had been remiss in exercising the necessary diligence to protect government assets and prevent irregular disbursement. Petitioners already knew the circumstances which make Hapicows unqualified for the program yet they still signed the MOA. Considering that public funds are involved, the government would always be on the losing end in this transaction should an unfortunate event happens, without recourse to insurance coverage or Hapicows' insufficient assets. Accordingly, petitioners' gross negligence negates the presumption of good faith.
IV. Petitioners are solidarily liable
With the finding of gross negligence on the part of the petitioners, COA did not err in finding petitioners together with the other NDA officers who signed the MOA solidarily liable for the disallowed amount. According to Section 52 of the Administrative Code of 1987, [e]xpenditures 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 therefor.[37]
Notably, the ND also included Molina, the President-CEO of Hapicows in the list of persons liable. In their decision, COA ruled that the application of the doctrine of piercing the veil of corporate fiction is proper in the case because it was found that not only did Molina own the controlling interest in Hapicows but it was his expertise and experience which NDA considered to qualify Hapicows to the program despite its financial incapability.
We agree that the piercing of the corporate veil was properly applied by COA in the present case. Piercing the corporate veil is warranted when "[the separate personality of a corporation] is used as a means to perpetrate fraud or an illegal act, or as a vehicle for the evasion of an existing obligation, the circumvention of statutes, or to confuse legitimate issues." It is also warranted in alter ego cases "where a corporation is merely a farce since it is a mere alter ego or business conduit of a person, or where the corporation is so organized and controlled and its affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another corporation."[38] Based on the factual findings of respondent COA, Hapicows is a mere alter ego of Molina. As such, all liabilities being imputed to Hapicows is in fact attributed to Molina as they are considered one and the same.
Further, Hapicows is held to be solidarily liable as the recipient in an irregular expenditure. Section 43 of the Administrative Code of 1987 provides that:
SECTION 43. Liability for Illegal Expenditures. - Every expenditure or obligation authorized or incurred in violation of the provisions of this Code or of the general and special provisions contained in the annual General or other Appropriations Act shall be void. Every payment made in violation of said provisions shall be illegal and every official or employee authorizing or making such payment, or taking part therein, and every person receiving such payment shall be jointly and severally liable to the Government for the full amount so paid or received.Based on the foregoing, Hapicows, being the named partner farm in the MOA and the recipient of the dairy animals of the program, is held liable for the disallowed amount. This is in line with the recent pronouncement in the case of Madera[40] wherein it abandoned the "good faith rule" with regard to passive recipients of disallowed amounts. In the said case, it reconciled the previous rulings due to the presence of inadvertent injustice wherein passive recipients were excused from returning the amount they received on the basis of good faith and imposing upon the approving/certifying officers the responsibility to refund the amounts they did not personally receive or benefitted from. Thus, if we would deviate from the Madera ruling, Hapicows may evade its solidary liability using the good faith doctrine, to the detriment and disadvantage of the government. As earlier mentioned, Hapicows' solidary liability is in fact the liability of Molina, the former's corporate personality having been pierced.
Any official or employee of the Government knowingly incurring any obligation, or authorizing any expenditure in violation of the provisions herein, or taking part therein, shall be dismissed from the service, after due notice and hearing by the duly authorized appointing official. If the appointing official is other than the President and should he fail to remove such official or employee,
the President may exercise the power of removal.[39]
We, however, recognize Senior Associate Justice Estela Perlas-Bernabe's (Justice Perlas-Bernabe) position that the Rules of Return in the Madera case will not squarely apply in the case at bar. The Rules of Return in Madera is as follows:
E. The Rules on ReturnAs pointed out by Justice Perlas-Bernabe, the above-mentioned rules were specifically borne from the context of disallowance cases involving employee incentives and benefits and not to government contracts for the procurement of goods and services involving the use or expenditures of the public funds, as in this case. Quoting her discussion, to wit:
In view of the foregoing discussion, the Court pronounces:
1. If a Notice of Disallowance is set aside by the Court, no return shall be required from any of the persons held liable therein.
2. If the Notice of Disallowance is upheld, the rules on return are as follows:
To recall, Madera is a landmark jurisprudence which not only abandoned the then-prevailing "good faith rule" that absolved passive recipients from civil liability to return disallowed incentives and benefits received by them, but also detailed the statutory bases for the new rules of return in disallowance cases. In Madera, the Court primarily situated the civil liability of approving/authorizing officers under Section 38, Chapter 9, Book I of the Administrative Code, while that of recipients under the civil law principles of solutio indebiti and unjust enrichment.To summarize, the Rules of Return in Madera is applicable in cases involving government contracts for the procurement of goods and services only in so far as paragraph 2a and 2b is concerned which deals with the determination of who are liable for the disallowed amount.
Further, pursuant to Section 43, Chapter 5, Book VI of the Administrative Code, the Court ruled that the approving/authorizing officers who had acted with bad faith, malice, or gross negligence are solidarily liable for the disallowance. However, as discussed in Madera, such civil liability should only be confined to the net disallowed amount, i.e., the total disallowed amount minus the amounts excused to be returned by recipients particularly those: (a) genuinely given in consideration of services rendered (Rule 2c); and (b) excused by the Court based on undue prejudice, social justice considerations, and other bona fide exceptions as may be determined on a case-to-case basis (Rule 2d). These exceptions were formulated by the Court relative to the solutio indebiti nature of the recipients' civil obligation, on a finding that these grounds for return negated the existence of unjust enrichment, and hence, resulted in no proper loss on the part of the government.
x x x x
Given the backdrop of Madera, the solutio indebiti nature of the recipients' obligation to return the incentives and benefits they had received, and the considerations behind Rules 2c and 2d as above-discussed, it is my view that the Madera rules do not squarely apply in disallowances made under the peculiar auspices of unlawful/irregular government contracts authorizing the use or expenditure of public funds.
Since these contracts, by their very nature, provide for the expenditure of public funds in consideration of services rendered/to be rendered and/or the delivery of property/goods, the exception under Rule 2c of the Madera Rules (genuinely given in consideration of services rendered), as formulated, should not squarely apply. Neither should the grounds for excuse under Rule 2d (undue prejudice, social justice considerations, and other bona fide exceptions) apply since these grounds were intended to address the inequitable situation of requiring government employees to still return the incentives and benefits they had already received based on exceptional fairness or social justice considerations.
This notwithstanding, the general provisions of Sections 38 and 43 of the Administrative Code - which were utilized in Rules 2a and 2b of Madera still apply.[42]
However, with regard to the amount to be returned, we take note of the peculiarity of the cases of government procurement contracts for goods or services. In the instant case, what makes it unique is that what was delivered to the recipient were live animals and not its monetary equivalent. Logically, the subject of the return must be the same animals delivered in case of valid ND. The peculiarity of this situation is that some of these dairy animals have died already at the time of audit. And because of its perishable nature, some may even die during the pendency of this case. In any case, the records provide that the dairy animals remain in the possession of Hapicows.[43]
It must also be noted that in the COA Decision, COA ordered the application of the repossession/termination clauses as provided under the MOA. Under the provisions of the MOA specifically 7.1 and 7.2 the repossession/termination clause shall only apply under the following instances:
a) When there is failure to comply with the provisions of the MOA due to gross negligence and or mismanagement on the part of the Multiplier farm partner;To reiterate, respondent COA has not issued any findings regarding mismanagement or non-payment committed by Hapicows. It must be noted that the audit was made to ascertain the qualification of Hapicows and not as to its management or dealings with the dairy animals delivered. As such, the application of the clauses regarding repossession/termination in the MOA is improper.
b) the multiplier farm partner loses the capacity to manage the dairy animals properly; and
c) failure to submit to NDA the animal payments due and to pay the penalty charges, if any, one year after the due date.[44]
Verily, the peculiarity of cases involving government contracts for procurement of goods or services necessitates the promulgation of a separate guidelines for the return of the disallowed amounts. In these cases, it is deemed fit that the passive recipients be ordered to return what they received subject to the application of the principle of quantum meruit. Quantum meruit literally means "as much as he deserves." Under this principle, a person may recover a reasonable value of the thing he delivered or the service he rendered. The principle also acts as a device to prevent undue enrichment based on the equitable postulate that it is unjust for a person to retain benefit without paying for it. The principle of quantum meruit is predicated on equity.[45] In the case of Geronimo v. COA,[46] it has been held that "the [r]ecovery on the basis of quantum meruit was allowed despite the invalidity or absence of a written contract between the contractor and the government agency."[47] In Dr. Eslao v. COA,[48] the Court explained that the denial of the contractor's claim would result in the government unjustly enriching itself The Court further reasoned that justice and equity demand compensation on the basis of quantum meruit. Thus, in applying this principle, the amount in which the petitioners together with the other liable individuals shall be equitably reduced.[49]
Accordingly, we hereby adopt the proposed guidelines on return of disallowed amounts in cases involving unlawful/irregular government contracts submitted by herein Justice Perlas-Bernabe, to wit:
In applying the above rules to the present case, this Court is aware of the technicalities involved in fixing the amount that should ultimately be returned by the persons solidarily liable under the ND. The process requires assessing the value of animals to be repossessed and computing the value due to the government based on the applicable rules, regulations, and issuances. It is therefore, proper that the present case be remanded back to COA for the determination of amount ofliability of the petitioners, applying the general accepted accounting rules and COA rules and regulations.
- If a Notice of Disallowance is set aside by the Court, no return shall be required from any of the persons held liable therein.
- If a Notice of Disallowance is upheld, the rules on return are as follows:
- Approving and certifying officers who acted in good faith, in the regular performance of official functions, and with the diligence of a good father of the family are not civilly liable to return consistent with Section 38 of the Administrative Code of 1987.
- Pursuant to Section 43 of the Administrative Code of 1987, approving and certifying officers who are clearly shown to have acted with bad faith, malice, or gross negligence, are solidarily liable together with the recipients for the return of the disallowed amount.
- The civil liability for the disallowed amount may be reduced by the amounts due to the recipient based on the application of the principle of quantum meruit on a case to case basis.
- These rules are without prejudice to the application of the more specific provisions of law, COA rules and regulations, and accounting principles depending on the nature of the government contract involved.[50]
WHEREFORE, premises considered, the Petition for Certiorari filed by petitioners is hereby DISMISSED. The Notice of Disallowance [No. 10-002(10)] issued by Commission on Audit against herein petitioners is AFFIRMED WITH MODIFICATION. Accordingly, the case is hereby remanded to COA to:
a. Direct NDA to repossess the remaining dairy animals and their offsprings in the possession of Hapicows and determine their fair market value in accordance with the general accepted accounting principles and COA's own rules and regulation.
b. Deduct the fair market value of the returned dairy animals from the civil liability of the named individuals held solidarily liable under ND 10-002(10); and
c. Issue an amended Notice of Disallowance reflecting any deductions in accordance with the COA's factual determination.
SO ORDERED.
Peralta, C. J., Gesmundo, Hernando, Carandang, Lopez, Delos Santos, and Rosario, JJ., concur.
Perlas-Bernabe, J., Please see Concurring Opinion.
Leonen, J., I join SAJ Perlas-Bernabe and J. Caguioa's separate opinion.
Caguioa, J., Please see Concurring Opinion.
Lazaro-Javier, Inting, and Zalameda, JJ., on official leave.
[1] Rollo, pp. 3-31.
[2] Id. at 42-43, 44.
[3] Id. at 45-50; penned by Director Jose R. Rocha, Jr., 51-59; signed by Chairperson Ma. Gracia M. Pulido Tan, Commissioners Heidi L. Mendoza and Jose A. Fabia with Director Nilda B. Plaras, attesting.
[4] Id. at 8-9.
[5] Id. at 61.
[6] Id.
[7] Id. at 11.
[8] Id. at 85-92.
[9] Id. at 13.
[10] Id. at 40-41.
[11] Id. at 41.
[12] Id. at 42-43.
[13] Id. at 262-264.
[14] Id. at 52.
[15] Id. at 12-13.
[16] Id. at 44.
[17] Id.
[18] Id. at 45-50.
[19] Id. at 48-50.
[20] Id. at 51-59.
[21] Id. at 58.
[22] Id. at 60.
[23] Id. at 14-15.
[24] Id. at 18-19.
[25] Id. at 264.
[26] Section 3.2 of the MOA provides:
The MULTIPLIER FARM PARTNER shall manage the dairy animals according to the prescribed standards of sound dairy production and husbandry management to ensure technical and financial viability of its business. Specifically, the MULTIPLIER FARM PARTNER shall:
3.2.1. Acknowledge the receipt of the animals by signing an Acknowledgment Receipt as well as this Agreement on the date of delivery of animals.
3.2.2. Insure the animals with a reputable insurance company to ensure that the animals can be repaid within the prescribed payment period.
3.2.3. Expenses for such insurance as an option shall be for the account of the MULTIPLIER FARM PARTNER.
3.2.4. Regularly, provide adequate inputs such as, but not limited to, safe drinking water, quality feeds and roughage, mineral supplements, drugs and biologics and other supplies necessary for the efficient care and management of the dairy animals including its offsprings.
3.2.5. Ensure that all offspring's borne out of the dairy animals provided by the NDA are properly registered in the municipality to where the farm/s is/are located and shall in no case be sold to anyone without prior consultation with and consent from the NDA
3.2.6. Offer first to the NDA the offsprings should the MULTIPLIER FARM PARTNER opt to sell or otherwise dispose of the same.
3.2.7. Ensure to milk all lactating animals, preferably, twice a day and according to standard milking practices, process them according to prescribed dairy technology standards and/or course the milk produce to the nearest processing center.
3.2.8. Ensure the breeding of the dairy animals with dairy bloodline and implement, as deemed necessary, the corrective measures as recommended by the NDA.
3.2.9. Monitor and maintain milk production, health and breeding records of each dairy animal and make available and submit the same to the NDA on a monthly basis including other reports as may be prescribed by the NDA from time to time.
3.2.10. Furnish the NDA with financial statements (preferably, audited) on an annual basis, including other documents pertaining to the project that may be required by duly authorized government entities.
3.2.11. Agree that, for purposes of the application of this Agreement, the liability of its Board of Directors shall be solidary with the MULTIPLIER FARM PARTNER.
3.2.12. Remit to NDA an Annual Milk Volume Service Fee equivalent to One Peso (Php 1.00) per liter of milk produced by the original dairy animals provided by the NDA to the MULTIPLIER FARM PARTNER based on the milk production records submitted by the latter and upon the former's validation thereof. It shall be understood that the Service Fee aforementioned shall be charged only on the milk actually marketed and sold by the MULTIPLIER FARM PARTNER.
The remittance of such fees to the NDA shall be on a quarterly basis. The period covered for the remittance shall be ten (10) days after every calving of the original dairy animalls provided by the NDA and shall continue throughout the aforesaid animal/s' lactation cycle; Provided however, that this obligation shall automatically cease upon full payment by the MULTIPLIER FARM PARTNER of its obligations under Article 5 of this Agreement.
3.2.13. Provide any other services and support within its means to ensure the success of the Program.
3.2.14. Continue its dairy activities and vigorously play its role in dairy development even after full payment of the animals has been completed.
[27] Section 2(2), Article IX(D) of the 1987 Constitution.
[28] Development Bank of the Phils. v. Commission on Audit, 808 Phil. 1001, 1017 (2017).
[29] Section 82. Auditor's notice to accountable officer of balance shown upon settlement. The auditor concerned shall, at convenient intervals, send a written notice under a certificate of settlement to each officer whose accounts have been audited and settled in whole or in part by him, stating the balances found due thereon and certified, and the charges or differences arising from the settlement by reason of disallowances, charges, or suspensions. The certificate shall be properly itemized and shall state the reasons for disallowance, charge, or suspension of credit. A charge of suspension which is not satisfactorily explained within ninety days after receipt of the certificate or notice by the accountable officer concerned shall become a disallowance, unless the Commission or auditor concerned shall, in writing and for good cause shown, extend the time for answer beyond ninety days.
[30] Sps. Hipolito v. Cinco, 611 Phil. 331, 349, (2011).
[31] Montejo v. COA, et al., G.R. No. 232272, July 24, 2018.
[32] Dr. Velasco, et al. v. COA, et al., 695 Phil. 226, 241 (2012).
[33] EXECUTIVE ORDER No. 292, Book I, Chapter 9-General Principles Governing Public Officers.
[34] Rollo, pp. 63-66.
[35] Id. at 61.
[36] Section 3.1, COA Circular No. 85-55-A dated September 8, 1985; Section 3.1, COA Circular No. 2012-003 dated October 29, 2012.
[37] EXECUTIVE ORDER No. 292, Book V, Title I Subtitle B Chapter 9-Accountability and Responsibility for Government Funds and Property.
[38] Lanuza, Jr. v. BF Corporation, 744 Phil. 612, 636-637 (2014).
[39] EXECUTIVE ORDER No. 292, Book VI, Chapter 5, Budget Execution.
[40] Madera, et al. v. Commission on Audit (COA) and COA Regional Office No. VIII, G. R. No. 244128, September 8, 2020.
[41] Id.
[42] Concurring Opinion, Justice Perlas-Bernabe, pp. 3-5.
[43] Rollo, p. 111.
[44] Id. at 89.
[45] Rolando S. Gregorio v. Commission on Audit and Department of Foreign Affairs, G.R. No. 240778, June 30, 2020.
[46] G.R. No. 224163, December 4, 2018.
[47] Id.
[48] 273 Phil. 97, 106 (1991).
[49] Id. at 107.
[50] Concurring Opinion, Justice Perlas-Bernabe, p. 7.
PERLAS-BERNABE, J.:
I concur.
Respondent the Commission on Audit (COA) properly disallowed the National Dairy Authority's (NDA) dispersal of dairy animals in favor of Hapicows @ Tropical Dairy Farm, Inc. (Hapicows). As the COA correctly ruled, the subject dairy animals were dispersed in violation of the NDA Qualification Requirements and Selection Criteria for applicants under its Dairy Multiplier Farm Program (Program) and the Memorandum of Agreement executed by the NDA and Hapicows pursuant thereto, and hence, irregular.[1]
To recount the COA's findings, it was observed that: (1) there was only partial submission by Hapicows of the NDA requirements, leading to the NDA's decision to repossess the remaining animals with Hapicows; (2) Hapicows did not have good credit standing/updated loan standing with the NDA; (3) Hapicows did not have sufficient capitalization to secure the dairy animals at the time the MOA was executed; (4) Hapicows was not a member of good standing in accordance with the Cooperative Development Authority and Securities and Exchange Commission; and (5) Hapicows' three (3) farm sites were not substantiated by lease contracts and in fact, violated the requirements on technical evaluation in connection with acceptability, adequacy, capability and readiness of the proponent.[2]
Thus, the following persons were held civilly liable under Notice of Disallowance No. 10-002(10)[3] dated September 28, 2020 (ND 10-002[10]):
Instead, considering the irregularity of the contract, Hapicows should turn over any remaining dairy animals and their offspring in its possession for being an unqualified beneficiary. By virtue of Section 7, Chapter 11 of the Government Accounting Manual for National Government Agencies,[7] the returned dairy animals, if any, should be valued at their fair market value at the time of the return. Said value, once determined, should then be considered as a form of restitution in kind that serves to partially satisfy the civil liability of the persons to be held liable under ND 10-002(10).
In this regard, the Rules on Return in Madera v. Commission on Audit[8] (Madera) have been generally resorted to by the Court in determining the civil liability of persons held liable in disallowance cases of recent vintage. However, I take this opportunity to clarify that the civil liability of the individuals under ND 10-002(10) should not be adjudged in accordance with the parameters laid down in Madera. This is because the Madera Rules on Return were specifically borne from the context of disallowance cases involving employee incentives and benefits, and not to government contracts for the procurement of goods and services involving the use or expenditure of public funds, as in this case.
To recall, Madera is a landmark jurisprudence which not only abandoned the then-prevailing "good faith rule" that absolved passive recipients from civil liability to return disallowed incentives and benefits received by them, but also detailed the statutory bases for the new rules of return in disallowance cases. In Madera, the Court primarily situated the civil liability of approving/authorizing officers under Section 38, Chapter 9, Book I of the Administrative Code, while that of recipients under the civil law principles of solutio indebiti and unjust enrichment.
Further, pursuant to Section 43, Chapter 5, Book VI of the Administrative Code, the Court ruled that the approving/authorizing officers who had acted with bad faith, malice, or gross negligence are solidarily liable for the disallowance. However, as discussed in Madera, such civil liability should only be confined to the net disallowed amount, i.e., the total disallowed amount minus the amounts excused to be returned by recipients, particularly those: (a) genuinely given in consideration of services rendered (Rule 2c); and (b) excused by the Court based on undue prejudice, social justice considerations, and other bona fide exceptions as may be determined on a case-to-case basis (Rule 2d). These exceptions were formulated by the Court relative to the solutio indebiti nature of the recipients' civil obligation, on a finding that these grounds for return negated the existence of unjust enrichment, and hence, resulted in no proper loss on the part of the government.
Accordingly, the Madera Rules on Return state in full:
Since these contracts, by their very nature, provide for the expenditure of public funds in consideration of services rendered/to be rendered and/or the delivery of property/goods, the exception under Rule 2c of the Madera Rules (genuinely given in consideration of services rendered), as formulated, should not squarely apply. Neither should the grounds for excuse under Rule 2d (undue prejudice, social justice considerations, and other bona fide exceptions) apply since these grounds were intended to address the inequitable situation of requiring government employees to still return the incentives and benefits they had already received based on exceptional fairness or social justice considerations.
This notwithstanding, the general provisions of Sections 38 and 43 of the Administrative Code - which were utilized in Rules 2a and 2b of Madera - still apply.
Even in disallowances involving illegal/irregular expenditures under a government contract, only those approving/authorizing officers acting in bad faith, with malice or gross negligence, should be held civilly liable for the return of any amounts disallowed. If bad faith, malice or gross negligence are not shown, then the presumption of regularity stands, negating the accountable officers' civil liability following Section 38 of the Administrative Code. Meanwhile, pursuant to Section 43 of the Administrative Code, the officers who had approved/authorized the unlawful/irregular government contract in bad faith, with malice, or gross negligence are solidarily liable together with the recipients of the amounts disallowed under the said contract.
Notably, the application of Sections 38 and 43 - as embodied in Rules 2a and 2b of the Madera Rules on Return - to unlawful/irregular government contracts is consistent with the provisions of the General Appropriations Act,[11] as well as pertinent COA rules and regulations.[12] However, it should be qualified that with respect to the application of Madera's Rule 2b in this case, it is discerned that instead of applying the concept of net disallowed amount - which was specifically formulated in Madera relative to the grounds for excuse under Rules 2c and 2d - the liability of the recipient-counter party may instead, be reduced by the amounts qualified by the principle of quantum meruit,[13] if so warranted by the peculiar facts and evidence submitted in each case. As discussed in Geronimo v. Commission on Audit:[14]
In fine, instead of directly applying the Madera Rules on Return, the following rules be applied in this case as well as in similar cases involving unlawful/irregular government contracts":
At this juncture, the COA has yet to determine (1) the total amount of dairy animals returned by Hapicows, if any, upon due notice for the purpose, and (2) the fair market value of the returned animals, among others. Hence as now ruled by the ponencia - a remand of this case is in order for the COA to:
(1) Direct the NDA to repossess any remaining dairy animals and their offspring in its possession, and determine their fair market value in accordance with the COA's own rules and regulations;
(2) Deduct the fair market value of the returned dairy animals from the civil liability of the named individuals held solidarily liable under ND 10-002(10); and
(3) Issue an amended Notice of Disallowance reflecting any deductions in accordance with the COA's factual determination.
Accordingly, the petition should be dismissed, and ND-10-002(10) affirmed with the foregoing modifications.
[1] See rollo, pp. 44, 47-50, and 54-58.
[2] See id. at 48-49 and 55-57.
[3] Id. at 44.
[4] See COA Decision dated September 11, 2014 in Decision No. 2014-245; Id. at 55-56.
[5] Id. at 58.
[6] See ponencia, pp. 17-18
[7] Section 7. Measurement. A biological asset shall be measured on initial recognition and at each reporting date at its fair value lass costs to sell, except where market - determined process of values are not available, and for which alternative estimates of fair value are determined to be clearly unreliable. In such a case, that biological asset shall be measured at its cost less any accumulated depreciation and any accumulated impairment losses. (Pars. 16 and 34, PPSAS 27)
In determining cost, accumulated depreciation and accumulated impairment losses, an entity considers policies on Inventories, Property, Plant and Equipment, Impairment of Non-Cash-Generating Assets and Impairment of Cash-Generating Assets. (Par. 37, PPSAS 27)
In all cases, agricultural produce harvested from an entity's biological assets shall be measured at its fair value less costs to sell at the point of harvest. Such measurement is the cost at that date when applying PPSAS 12-Inventories or another applicable Standard. (Par. 18, PPSAS 27)
[8] G.R. No. 244128, September 8, 2020.
[9] See Madera v. Commission on Audit, supra.
[10] This term is broadly used to refer to illegal, irregular, unnecessary, excessive, extravagant, or unconscionable use or expenditures of public funds authorized under government contracts.
[11] Section 85 of Republic Act No. 11260, otherwise known as "AN ACT APPROPRIATING FUNDS FOR THE OPERATION OF THE GOVERNMENT OF THE REPUBLIC OF THE PHILIPPINES FROM JANUARY ONE TO DECEMBER THIRTY-ONE, TWO THOUSAND AND NINETEEN AND FOR OTHER PURPOSES," approved on April 15, 2019, which was extended until the end of 2020 by Republic Act No. 11464, otherwise known as "AN ACT EXTENDING THE AVAILABILITY OF THE 2019 APPROPRIATIONS TO DECEMBER 31, 2020, AMENDING FOR THE PURPOSE SECTION 65 OF THE GENERAL PROVISIONS OF REPUBLIC ACT No. 11260," approved on December 20, 2019, reads:
[14] See G.R. No. 224163, December 4, 2018.
[15] See id.
[16] See for example Section 7 of Republic Act No. 6957, entitled "AN ACT AUTHORIZING THE FINANCING, CONSTRUCTION, OPERATION AND MAINTENANCE OF INFRASTRUCTURE PROJECTS BY THE PRIVATE SECTOR, AND FOR OTHER PURPOSES," as amended by Republic Act No. 7718, entitled "AN ACT AMENDING CERTAIN SECTIONS OF REPUBLIC ACT NO. 6957, ENTITLED 'AN ACT AUTHORIZING THE FINANCING, CONSTRUCTION, OPERATION AND MAINTENANCE OF INFRASTRUCTURE PROJECTS BY THE PRIVATE SECTOR, AND FOR OTHER PURPOSES,'" which provides for an additional reasonable rate of return to the counter-party when a build-operate-transfer project is revoked, cancelled or terminated by the government through no fault of their own.
See also Sections 65 (b) and (c), and 67 of Republic Act No. 9184, or the "Government Procurement Reform Act," which provides for particular criminal liability of counter-parties for violation of the bidding regulations contained therein and provides for a corresponding civil liability for restitution or forfeiture in cases of conviction.
[17] See ponencia, pp. 13-14.
[18] Rollo, p. 44; emphases supplied.
CAGUIOA, J.:
I concur with the disposition of the ponencia which held the officers who acted with gross negligence as solidarity liable for the disallowance, and limiting the liability to the loss incurred by the government in the transaction by deducting the value of the animals repossessed by the National Dairy Authority (NDA) or returned by the project beneficiary HapiCows@Tropical Dairy Farm, Inc. (HapiCows).
Thus, I limit my Concurring Opinion on the question of the applicability of the Rules of Return in Madera v. COA[1] (Madera) to government contracts.
I respectfully submit that, save for Rule 2(d), the Rules of Return may be made to apply to disallowances in general-including personnel benefits disallowances AND government contracts. The Madera Rules can be made to apply to government contracts in general, for the following reasons:
That said, in appropriate cases, there is nothing that prevents the Court from applying Rules 2(a), 2(b) and 2(c) to government contracts. I agree therefore with the ponente that in this case, Rule 2(b) squarely applies to NDA officers who were found to have acted with gross negligence.
In this regard, the application of solutio indebiti in personnel benefits disallowances is not materially different from its application in government contracts to foreclose the application of the Rules in Madera.
To stress, Rule 2(c), only intended to cover "true" solutio indebiti cases, such that cases where a refund would result in unjust enrichment in favor of the government, no recovery on an otherwise proper disallowance will be allowed. Again, under this conception of Rule 2(c), the application of quantum meruit is obviously built in and cannot but come into play. The determination of the amount which was unduly received by a payee - whether a government employee or a contractor - and the amount of recovery which will result in unjust enrichment in favor of the government will necessarily entail the determination of the reasonable value of the services rendered or goods delivered, which is quantum meruit.
This inevitable interplay between the principles of solutio indebiti, unjust enrichment, and quantum meruit, is illustrated in the case of Eslao v. Commission on Audit,[7] also cited in Madera, thus:
Thus, I believe that there is no cause to limit the application of the Rules in Madera - which I had hoped would serve as a blueprint to examining disallowances in general - to only personnel benefits disallowances. Nevertheless, I submit to the collective wisdom of the banc.
Proceeding now to the case of Torreta, the proper amount of the liability in this case only requires the determination of the difference between the value of the animals dispersed by NDA to the farm partner HapiCows and the value of the animals that have been returned. In other words, the disposition needs only to order COA to determine the balance in what is essentially a loan of agricultural assets as the proper amount of disallowance.
Accordingly, I vote to DISMISS the petition.
[1] G.R. No. 244128. September 8, 2020.
[2] Id. at 35-36.
[3] G.R. No. 185806, November 17, 2020.
[4] Such that retention by payees of the disallowed personnel benefits extinguishes the obligation of officers solidarily liable.
[5] Madera v. COA, supra note 1, at 27. The citation for the quoted portion reads: See Melchor v. Commission on Audit, G.R. No. 95398, August 16, 1991, 200 SCRA 704, 714, citing Eslao v. Commission on Audit, G.R. No. 89745, April 8, 1991, 195 SCRA 730, 739. This case applies the same principle of unjust enrichment in cases where the contractor seeks payment to this case where reimbursement is sought from the official concerned; see also Andres v. Commission on Audit, G.R. No. 94476, September 26, 1991, 201 SCRA 780.
[6] Concurring Opinion, Abellanosa v. COA, supra note 3, at 2-3.
[7] Supra note 5.
[8] Id. at 738-739.
[9] Supra note 5.
[10] Id. at 713-714.
[11] See Manual on Position Classification and Compensation, Chapter 3, Total Compensation Chart, p. 3-3.
[30] Sps. Hipolito v. Cinco, 611 Phil. 331, 349, (2011).
[31] Montejo v. COA, et al., G.R. No. 232272, July 24, 2018.
[32] Dr. Velasco, et al. v. COA, et al., 695 Phil. 226, 241 (2012).
[33] EXECUTIVE ORDER No. 292, Book I, Chapter 9-General Principles Governing Public Officers.
[34] Rollo, pp. 63-66.
[35] Id. at 61.
[36] Section 3.1, COA Circular No. 85-55-A dated September 8, 1985; Section 3.1, COA Circular No. 2012-003 dated October 29, 2012.
[37] EXECUTIVE ORDER No. 292, Book V, Title I Subtitle B Chapter 9-Accountability and Responsibility for Government Funds and Property.
[38] Lanuza, Jr. v. BF Corporation, 744 Phil. 612, 636-637 (2014).
[39] EXECUTIVE ORDER No. 292, Book VI, Chapter 5, Budget Execution.
[40] Madera, et al. v. Commission on Audit (COA) and COA Regional Office No. VIII, G. R. No. 244128, September 8, 2020.
[41] Id.
[42] Concurring Opinion, Justice Perlas-Bernabe, pp. 3-5.
[43] Rollo, p. 111.
[44] Id. at 89.
[45] Rolando S. Gregorio v. Commission on Audit and Department of Foreign Affairs, G.R. No. 240778, June 30, 2020.
[46] G.R. No. 224163, December 4, 2018.
[47] Id.
[48] 273 Phil. 97, 106 (1991).
[49] Id. at 107.
[50] Concurring Opinion, Justice Perlas-Bernabe, p. 7.
CONCURRING OPINION
PERLAS-BERNABE, J.:
I concur.
Respondent the Commission on Audit (COA) properly disallowed the National Dairy Authority's (NDA) dispersal of dairy animals in favor of Hapicows @ Tropical Dairy Farm, Inc. (Hapicows). As the COA correctly ruled, the subject dairy animals were dispersed in violation of the NDA Qualification Requirements and Selection Criteria for applicants under its Dairy Multiplier Farm Program (Program) and the Memorandum of Agreement executed by the NDA and Hapicows pursuant thereto, and hence, irregular.[1]
To recount the COA's findings, it was observed that: (1) there was only partial submission by Hapicows of the NDA requirements, leading to the NDA's decision to repossess the remaining animals with Hapicows; (2) Hapicows did not have good credit standing/updated loan standing with the NDA; (3) Hapicows did not have sufficient capitalization to secure the dairy animals at the time the MOA was executed; (4) Hapicows was not a member of good standing in accordance with the Cooperative Development Authority and Securities and Exchange Commission; and (5) Hapicows' three (3) farm sites were not substantiated by lease contracts and in fact, violated the requirements on technical evaluation in connection with acceptability, adequacy, capability and readiness of the proponent.[2]
Thus, the following persons were held civilly liable under Notice of Disallowance No. 10-002(10)[3] dated September 28, 2020 (ND 10-002[10]):
The amount of P17,316,000.00 was disallowed in audit because the dairy animals were dispersed without proper evaluation and lacked the required supporting documents. This constitutes an irregular transaction.As indicated in the ND, Hapicows' President-CEO Benjamin Molina (Mr. Molina) was held civilly liable together with the erring authorizing/approving officers. In this regard, the COA applied the piercing doctrine as follows:
The following persons have been determined to be liable for the transaction:
It should be noted also that according to the 2008 audited financial statement, which was supposed to be considered by the NDA in their evaluation, Mr. Molina appears to be the controlling stockholder of Hapicows, having P2,000,000.00 out of the P3,400,000.00 subscribed and paid-up capital or 58.8% of the corporation. In view of the peculiarity of factual antecedents of this case, the doctrine of piercing the corporate veil can be applied in this case. x x xMeanwhile, with respect to Hapicows, the COA invoked the repossession/termination clauses under the MOA, and thereby resolved that Hapicows should be held accountable only for the difference between the book value of the originally distributed animal/s and the appraised/assessed values of the repossessed animals, viz.:
x x x x
Contrary to the submission of the petitioners that Mr. Molina and Hapicows should be treated as distinct personalities, the statements in the petition show that the NDA, in evaluating the capability of Hapicows, considered Mr. Molina and Hapicows as one. These statements consist of Mr. Molina's expertise and experience outweighing the financial limitations of Hapicows and of Mr. Molina's active participation in the management and operations of Hapicows. These and his controlling interest in the corporation justify the conclusion that Mr. Molina and Hapicows are one and the same.[4] (Emphases and underscorring supplied)
From the foregoing, this Commission finds the dispersal of 150 heads of dairy animals to Hapicows to be irregular, hence, the issuance of the assailed ND is proper. For this reason, NDA should implement Article 7 of the MOA providing for the repossession of the dairy animals and the termination of the MOA. As provided under Article 7.3 of the MOA, Hapicows "x x x shall be accountable for the difference between the book value of the originally distributed animal/s and the appraise/assessed values of the repossessed animals x x x". x x x.[5]However, as the ponencia correctly pointed out,[6] the COA should not have applied the repossession/termination clauses under the MOA since the case at bar does not fall under the circumstances stipulated therein.
Instead, considering the irregularity of the contract, Hapicows should turn over any remaining dairy animals and their offspring in its possession for being an unqualified beneficiary. By virtue of Section 7, Chapter 11 of the Government Accounting Manual for National Government Agencies,[7] the returned dairy animals, if any, should be valued at their fair market value at the time of the return. Said value, once determined, should then be considered as a form of restitution in kind that serves to partially satisfy the civil liability of the persons to be held liable under ND 10-002(10).
In this regard, the Rules on Return in Madera v. Commission on Audit[8] (Madera) have been generally resorted to by the Court in determining the civil liability of persons held liable in disallowance cases of recent vintage. However, I take this opportunity to clarify that the civil liability of the individuals under ND 10-002(10) should not be adjudged in accordance with the parameters laid down in Madera. This is because the Madera Rules on Return were specifically borne from the context of disallowance cases involving employee incentives and benefits, and not to government contracts for the procurement of goods and services involving the use or expenditure of public funds, as in this case.
To recall, Madera is a landmark jurisprudence which not only abandoned the then-prevailing "good faith rule" that absolved passive recipients from civil liability to return disallowed incentives and benefits received by them, but also detailed the statutory bases for the new rules of return in disallowance cases. In Madera, the Court primarily situated the civil liability of approving/authorizing officers under Section 38, Chapter 9, Book I of the Administrative Code, while that of recipients under the civil law principles of solutio indebiti and unjust enrichment.
Further, pursuant to Section 43, Chapter 5, Book VI of the Administrative Code, the Court ruled that the approving/authorizing officers who had acted with bad faith, malice, or gross negligence are solidarily liable for the disallowance. However, as discussed in Madera, such civil liability should only be confined to the net disallowed amount, i.e., the total disallowed amount minus the amounts excused to be returned by recipients, particularly those: (a) genuinely given in consideration of services rendered (Rule 2c); and (b) excused by the Court based on undue prejudice, social justice considerations, and other bona fide exceptions as may be determined on a case-to-case basis (Rule 2d). These exceptions were formulated by the Court relative to the solutio indebiti nature of the recipients' civil obligation, on a finding that these grounds for return negated the existence of unjust enrichment, and hence, resulted in no proper loss on the part of the government.
Accordingly, the Madera Rules on Return state in full:
E. The Rules on ReturnGiven the backdrop of Madera, the solutio indebiti nature of the recipients' obligation to return the incentives and benefits they had received, and the considerations behind Rules 2c and 2d as above-discussed, it is my view that the Madera rules do not squarely apply in disallowances made under the peculiar auspices of unlawful/irregular[10] government contracts authorizing the use or expenditure of public funds.
In view of the foregoing discussion, the Court pronounces:
- If a Notice of Disallowance is set aside by the Court, no return shall be required from any of the persons held liable therein.
- If a Notice of Disallowance is upheld, the rules on return are as follows:
- Approving and certifying officers who acted in good faith, in regular performance of official functions, and with the diligence of a good father of the family are not civilly liable to return consistent with Section 38 of the Administrative Code of 1987.
- Approving and certifying officers who are clearly shown to have acted in bad faith, malice, or gross negligence are, pursuant to Section 43 of the Administrative Code of 1987, solidarily liable to return only the net disallowed amount, which, as discussed herein, excludes amounts excused under the following sections 2c and 2d.
- Recipients-whether approving or certifying officers or mere passive recipients - are liable to return the disallowed amounts respectively received by them, unless they are able to show that the amounts they received were genuinely given in consideration of services rendered.
- The Court may likewise excuse the return of recipients based on undue prejudice, social justice considerations, and other bona fide exceptions as it may determine on a case to case basis.[9]
Since these contracts, by their very nature, provide for the expenditure of public funds in consideration of services rendered/to be rendered and/or the delivery of property/goods, the exception under Rule 2c of the Madera Rules (genuinely given in consideration of services rendered), as formulated, should not squarely apply. Neither should the grounds for excuse under Rule 2d (undue prejudice, social justice considerations, and other bona fide exceptions) apply since these grounds were intended to address the inequitable situation of requiring government employees to still return the incentives and benefits they had already received based on exceptional fairness or social justice considerations.
This notwithstanding, the general provisions of Sections 38 and 43 of the Administrative Code - which were utilized in Rules 2a and 2b of Madera - still apply.
Even in disallowances involving illegal/irregular expenditures under a government contract, only those approving/authorizing officers acting in bad faith, with malice or gross negligence, should be held civilly liable for the return of any amounts disallowed. If bad faith, malice or gross negligence are not shown, then the presumption of regularity stands, negating the accountable officers' civil liability following Section 38 of the Administrative Code. Meanwhile, pursuant to Section 43 of the Administrative Code, the officers who had approved/authorized the unlawful/irregular government contract in bad faith, with malice, or gross negligence are solidarily liable together with the recipients of the amounts disallowed under the said contract.
Notably, the application of Sections 38 and 43 - as embodied in Rules 2a and 2b of the Madera Rules on Return - to unlawful/irregular government contracts is consistent with the provisions of the General Appropriations Act,[11] as well as pertinent COA rules and regulations.[12] However, it should be qualified that with respect to the application of Madera's Rule 2b in this case, it is discerned that instead of applying the concept of net disallowed amount - which was specifically formulated in Madera relative to the grounds for excuse under Rules 2c and 2d - the liability of the recipient-counter party may instead, be reduced by the amounts qualified by the principle of quantum meruit,[13] if so warranted by the peculiar facts and evidence submitted in each case. As discussed in Geronimo v. Commission on Audit:[14]
Recovery on the basis of quantum meruit [is] x x x allowed despite the invalidity or absence of a written contract between the contractor and the government agency. x x xAnd finally, owing to the variances in the nature of some peculiar government contracts, the determination of civil liability under Sections 38 and 43 of the Administrative Code - as herein discussed - is nonetheless without prejudice to the application of the more specific provisions of law, COA rules and regulations, and recognized accounting principles.[16]
x x x x
Quantum meruit literally means "as much as he deserves." Under this principle, a person may recover a reasonable value of the thing he delivered or the service he rendered. The principle also acts as a device to prevent undue enrichment based on the equitable postulate that it is unjust for a person to retain benefit without paying for it. The principle of quantum meruit is predicated on equity.[15]
In fine, instead of directly applying the Madera Rules on Return, the following rules be applied in this case as well as in similar cases involving unlawful/irregular government contracts":
Here, petitioners Naomi K. Torreta and Jaime M. Lopez, as the officers of the NDA responsible for the irregular government contract, were correctly found by the ponencia to have acted with gross negligence,[17] and hence civilly liable consistent with Rule 2b of the above-stated rules. Further, also following Rule 2b above, their liability is solidary with the other individuals named in the COA's ND 10-002(10):[18]
- If a Notice of Disallowance is set aside by the Court, no return shall be required from any of the persons held liable therein.
- If a Notice of Disallowance is upheld, the rules on return are as follows:
- Approving and certifying officers who acted in good faith, in the regular performance of official functions, and with the diligence of a good father of the family are not civilly liable to return consistent with Section 38 of the Administrative Code of 1987.
- Pursuant to Section 43 of the Administrative Code of 1987, approving and certifying officers who are clearly shown to have acted with bad faith, malice, or gross negligence, are solidarily liable together with the recipients for the return of the disallowed amount.
- The civil liability for the disallowed amount may be reduced by the amounts due to the recipient based on the application of the principle of quantum meruit on a case to case basis.
- These rules are without prejudice to the application of the more specific provisions of law, COA rules and regulations, and accounting principles depending on the nature of the government contract involved.
However, as earlier intimated, Hapicows should be directed to turn over to the NDA any remaining dairy animals and their offspring in its possession for being an unqualified beneficiary. This should consequently reduce the civil liability of P17,316,000.00 under the ND by the equivalent fair market value of these returned animals, if any, subject to COA rules and regulations and accepted accounting principles. To be sure, the repossessed animals, if any, partake the nature of restitution in kind which should consequently reduce the civil liability of the named individuals under the ND. Properly speaking, this is not an application of the quantum meruit principle where goods delivered or services rendered by the contractor are to be credited.
At this juncture, the COA has yet to determine (1) the total amount of dairy animals returned by Hapicows, if any, upon due notice for the purpose, and (2) the fair market value of the returned animals, among others. Hence as now ruled by the ponencia - a remand of this case is in order for the COA to:
(1) Direct the NDA to repossess any remaining dairy animals and their offspring in its possession, and determine their fair market value in accordance with the COA's own rules and regulations;
(2) Deduct the fair market value of the returned dairy animals from the civil liability of the named individuals held solidarily liable under ND 10-002(10); and
(3) Issue an amended Notice of Disallowance reflecting any deductions in accordance with the COA's factual determination.
Accordingly, the petition should be dismissed, and ND-10-002(10) affirmed with the foregoing modifications.
[1] See rollo, pp. 44, 47-50, and 54-58.
[2] See id. at 48-49 and 55-57.
[3] Id. at 44.
[4] See COA Decision dated September 11, 2014 in Decision No. 2014-245; Id. at 55-56.
[5] Id. at 58.
[6] See ponencia, pp. 17-18
[7] Section 7. Measurement. A biological asset shall be measured on initial recognition and at each reporting date at its fair value lass costs to sell, except where market - determined process of values are not available, and for which alternative estimates of fair value are determined to be clearly unreliable. In such a case, that biological asset shall be measured at its cost less any accumulated depreciation and any accumulated impairment losses. (Pars. 16 and 34, PPSAS 27)
In determining cost, accumulated depreciation and accumulated impairment losses, an entity considers policies on Inventories, Property, Plant and Equipment, Impairment of Non-Cash-Generating Assets and Impairment of Cash-Generating Assets. (Par. 37, PPSAS 27)
In all cases, agricultural produce harvested from an entity's biological assets shall be measured at its fair value less costs to sell at the point of harvest. Such measurement is the cost at that date when applying PPSAS 12-Inventories or another applicable Standard. (Par. 18, PPSAS 27)
[8] G.R. No. 244128, September 8, 2020.
[9] See Madera v. Commission on Audit, supra.
[10] This term is broadly used to refer to illegal, irregular, unnecessary, excessive, extravagant, or unconscionable use or expenditures of public funds authorized under government contracts.
[11] Section 85 of Republic Act No. 11260, otherwise known as "AN ACT APPROPRIATING FUNDS FOR THE OPERATION OF THE GOVERNMENT OF THE REPUBLIC OF THE PHILIPPINES FROM JANUARY ONE TO DECEMBER THIRTY-ONE, TWO THOUSAND AND NINETEEN AND FOR OTHER PURPOSES," approved on April 15, 2019, which was extended until the end of 2020 by Republic Act No. 11464, otherwise known as "AN ACT EXTENDING THE AVAILABILITY OF THE 2019 APPROPRIATIONS TO DECEMBER 31, 2020, AMENDING FOR THE PURPOSE SECTION 65 OF THE GENERAL PROVISIONS OF REPUBLIC ACT No. 11260," approved on December 20, 2019, reads:
SECTION 85. Incurrence or Payment of Unauthorized or Unlawful obligation or Expenditure. - Disbursements or expenditures incurred in violation of existing laws, rules and regulations shall be rendered void. Any and all public officials or employees who will authorize, allow or permit, as well as those who are negligent in the performance of their duties and functions which resulted in the incurrence or payment of unauthorized and unlawful obligation or expenditure shall be, personally liable to the government for the full amount committed or expended and, subject to disciplinary actions in accordance with Section 43, Chapter 5 and Section 80, Chapter 7, Book VI of E.O. No. 292. (Emphases and underscoring supplied)[12] Section 30. 1.2 of COA Circular No. 94-001, otherwise known as the "Manual on Certificate of Settlement and Balances," provides:
Section 30. Liability for Unlawful/Illegal Expenditures or Uses of Government FundsPresently, the foregoing rule is partly reflected, in essence, under Section 16.1.4 COA Circular No. 2009-006, otherwise known as the "Rules and Regulations on Settlement of Accounts," which stipulates:
x x x x
30.1.2 Every expenditure or obligation authorized or incurred in violation of law or of the annual budgetary measure shall be void. Every payment in violation thereof shall be illegal and every official or employee authorizing such payment, or taking part therein, and every person receiving such payment shall be jointly and severally liable for the full amount so paid or received. (Emphases and underscoring supplied)
16.1.4 Public officers and other persons who confederated or conspired in a transaction which is disadvantageous or prejudicial to the government shall be held liable jointly and severally with those who benefited therefrom. (Emphases and underscoring supplied)[13] The principle of quantum meruit has been often applied in disallowances involving government contracts. See Sto. Niño Construction v. Commission on Audit, G.R. No. 244443, October 15, 2019; F.L. Hong Architects and Associates v. Armed Forces of the Philippines, G.R. No. 214245, September 19, 2017; Department of Public Works and Highways v. Quiwa, 681 Phil. 485 (2012); Vigilar v. Aquino, 654 Phil. 755 (2011); Department of Health v. C.V. Canchela & Associates, 511 Phil. 654 (2005); Melchor v. Commission on Audit, 277 Phil. 801 (1991); Eslao v. Commission on Audit, 273 Phil. 97 (1991).
[14] See G.R. No. 224163, December 4, 2018.
[15] See id.
[16] See for example Section 7 of Republic Act No. 6957, entitled "AN ACT AUTHORIZING THE FINANCING, CONSTRUCTION, OPERATION AND MAINTENANCE OF INFRASTRUCTURE PROJECTS BY THE PRIVATE SECTOR, AND FOR OTHER PURPOSES," as amended by Republic Act No. 7718, entitled "AN ACT AMENDING CERTAIN SECTIONS OF REPUBLIC ACT NO. 6957, ENTITLED 'AN ACT AUTHORIZING THE FINANCING, CONSTRUCTION, OPERATION AND MAINTENANCE OF INFRASTRUCTURE PROJECTS BY THE PRIVATE SECTOR, AND FOR OTHER PURPOSES,'" which provides for an additional reasonable rate of return to the counter-party when a build-operate-transfer project is revoked, cancelled or terminated by the government through no fault of their own.
See also Sections 65 (b) and (c), and 67 of Republic Act No. 9184, or the "Government Procurement Reform Act," which provides for particular criminal liability of counter-parties for violation of the bidding regulations contained therein and provides for a corresponding civil liability for restitution or forfeiture in cases of conviction.
[17] See ponencia, pp. 13-14.
[18] Rollo, p. 44; emphases supplied.
CONCURRING OPINION
CAGUIOA, J.:
I concur with the disposition of the ponencia which held the officers who acted with gross negligence as solidarity liable for the disallowance, and limiting the liability to the loss incurred by the government in the transaction by deducting the value of the animals repossessed by the National Dairy Authority (NDA) or returned by the project beneficiary HapiCows@Tropical Dairy Farm, Inc. (HapiCows).
Thus, I limit my Concurring Opinion on the question of the applicability of the Rules of Return in Madera v. COA[1] (Madera) to government contracts.
I respectfully submit that, save for Rule 2(d), the Rules of Return may be made to apply to disallowances in general-including personnel benefits disallowances AND government contracts. The Madera Rules can be made to apply to government contracts in general, for the following reasons:
- Rules 2(a) and 2(b) are based on Sections 38 and 43 of the Administrative Code of 1987, which apply to disallowances in general;
- Precisely because Rule 2(c) is but an express adoption in personnel benefits disallowances of the application of the principles of solutio indebiti and unjust enrichment -and inevitably, quantum meruit - in disallowances relating to infrastructure contracts and contracts for services.
E. The Rules on ReturnIn my Concurring Opinion in Abellanosa v. COA,[3] I have already clarified how the entire rubric was structured, and how the application of solutio indebiti and unjust enrichment in Rule 2(c) had been distilled from jurisprudence dealing with government contracts. To reiterate:
In view of the foregoing discussion, the Court pronounces:
- If a Notice of Disallowance is set aside by the Court, no return shall be required from any of the persons held liable therein.
- If a Notice of Disallowance is upheld, the rules on return are as follows:
- Approving and certifying officers who acted in good faith, in regular performance of official functions, and with the diligence of a good father of the family are not civilly liable to return consistent with Section 38 of the Administrative Code of 1987.
- Approving and certifying officers who are clearly shown to have acted in bad faith, malice, or gross negligence are, pursuant to Section 43 of the Administrative Code of 1987, solidarity liable to return only the net disallowed amount which, as discussed herein, excludes amounts excused under the following sections 2c and 2d.
- Recipients - whether approving or certifying officers or mere passive recipients - are liable to return the disallowed amounts respectively received by them, unless they are able to show that the amounts they received were genuinely given in consideration of services rendered.
- The Court may likewise excuse the return of recipients based on undue prejudice, social justice considerations, and other bona fide exceptions as it may determine on a case to case basis.[2]
Essence of recalibration by the Rules in MaderaI have not encountered an application of Rule 2(d) in favor of contractors, for which reason, I can concede that Rule 2(d) - which was really intended to cover instances where the Court would opt to extend compassionate justice to government employees - is not entirely translatable to disallowances not involving personnel benefits.
At its core, and as exhaustively discussed during the deliberations of Madera, its animating spirit is (1) the return to the proper recognition of the liability for unlawful expenditures as a single solidary obligation,[4] of officers and payees and (2) an appeal to a more predictable application of solutio indebiti across disallowance cases.
x x x x
In the same manner that contractors in disallowances involving infrastructure or service contracts are allowed to retain amounts representing reasonable compensation for services rendered on the basis of quantum meruit, excuse under Rule 2c was intended to recognize situations where payees may be allowed to retain the amounts they received if there is legal basis for the grant of the benefit, and they are entitled to said amounts for having rendered actual services for which the said benefits were given. To do otherwise would sanction unjust enrichment. x x x
In Madera, the Court held:To be sure, the application of the principles of unjust enrichment and solutio indebiti in disallowed benefits does not contravene the law on the general liability for unlawful expenditures. In fact, these principles are consistently applied in government infrastructure or procurement cases which recognized that a payee contractor or approving and/or certifying officers cannot be made to shoulder the cost of a correctly disallowed transaction when it will unjustly enrich the government and the public who accepted the benefits of the project.[5]The import of Rule 2c is it exempts payees from return when there are legal and factual bases to retain (i.e., that the disallowed benefit was authorized by law, and the payee can show that he rendered actual service so as to be entitled to the said benefit).
To clarify, each Rule in Madera covers distinct situations:
- Rule 2a provides for no liability for officers acting in good faith, in regular performance of official functions, and with the diligence of a good father of a family.
- Rule 2b treats of the solidary liability of officers who are clearly shown to have acted in bad faith, malice, or gross negligence.
- Rule 2c provides the general rule that payees must return based on solutio indebiti, EXCEPT if the return will sanction unjust enrichment.
- Rule 2d treats of situations that would otherwise be covered by the general rule in Rule 2c save for the unique circumstances in the case that would prompt the exercise of the Court's discretion to excuse the return on a case-to-case basis.[6]
That said, in appropriate cases, there is nothing that prevents the Court from applying Rules 2(a), 2(b) and 2(c) to government contracts. I agree therefore with the ponente that in this case, Rule 2(b) squarely applies to NDA officers who were found to have acted with gross negligence.
In this regard, the application of solutio indebiti in personnel benefits disallowances is not materially different from its application in government contracts to foreclose the application of the Rules in Madera.
To stress, Rule 2(c), only intended to cover "true" solutio indebiti cases, such that cases where a refund would result in unjust enrichment in favor of the government, no recovery on an otherwise proper disallowance will be allowed. Again, under this conception of Rule 2(c), the application of quantum meruit is obviously built in and cannot but come into play. The determination of the amount which was unduly received by a payee - whether a government employee or a contractor - and the amount of recovery which will result in unjust enrichment in favor of the government will necessarily entail the determination of the reasonable value of the services rendered or goods delivered, which is quantum meruit.
This inevitable interplay between the principles of solutio indebiti, unjust enrichment, and quantum meruit, is illustrated in the case of Eslao v. Commission on Audit,[7] also cited in Madera, thus:
The Court finds and so holds that petitioner entered into the two contracts in good faith for the good and interest of the university and the government. As it is, the two projects are now 95% complete. The buildings are now being used by the university. On the basis of quantum meruit the contractor should be allowed to recover for the work accomplished.Adopted into a disallowance case, the Court explained in Melchor v. Commission on Audit:[9]
In Royal Trust Construction vs. COA, a case involving the widening and deepening of the Betis River in Pampanga at the urgent request of the local officials and with the knowledge and consent of the Ministry of Public Works, even without a written contract and the covering appropriation, the project was undertaken to prevent the overflowing of the neighboring areas and to irrigate the adjacent farmlands. The contractor sought compensation for the completed portion in the sum of over P1 million. While the payment was favorably recommended by the Ministry of Public Works, it was denied by the respondent COA on the ground of violation of mandatory legal provisions as the existence of corresponding appropriations covering the contract cost. Under COA Res. No. 36-58 dated November 15, 1986 its existing policy is to allow recovery from covering contracts on the basis of quantum meruit if there is delay in the accomplishment of the required certificate of availability of funds to support a contract.
In said case, the Solicitor General agreed with the respondent COA but in the present case he agrees with petitioner.
Thus, this Court held therein -
"The work done by it was impliedly authorized and later expressly acknowledged by the Ministry of Public Works, which has twice recommended favorable action on the petitioner's request for payment. Despite the admitted absence of a specific covering appropriation as required under COA Resolution No. 36-58, the petitioner may nevertheless be compensated for the services rendered by it, concededly for the public benefit, from the general fund alloted by law to the Betis River project. Substantial compliance with the said resolution, in view of the circumstances of this case, should suffice. The Court also feels that the remedy suggested by the respondent, to wit, the filing of a complaint in court for recovery of the compensation claimed, would entail additional expense, inconvenience and delay which in fairness should not be imposed on the petitioner.
Accordingly, in the interest of substantial justice and equity, the respondent Commission on Audit is DIRECTED to determine on a quantum meruit basis the total compensation due to the petitioner for the services rendered by it in the channel improvement of the Betis River in Pampanga and to allow the payment thereof immediately upon completion of the said determination."
In the present case, the Court finds that the contractor should be duly compensated for services rendered, which were for the benefit of the general public. To deny the payment to the contractor of the two buildings which are almost fully completed and presently occupied by the university would be to allow the government to unjustly enrich itself at the expense of another. Justice and equity demand compensation on the basis of quantum meruit.
WHEREFORE, the petition is GRANTED. The questioned decision of the respondent COA dated February 16, 1989 and its resolution dated August 2, 1989 are hereby REVERSED AND SET ASIDE. The respondent COA is directed to determine on a quantum meruit basis the total compensation due to the contractor for the completed portion of these two projects and to allow the payment thereof immediately upon the completion of said determination. No costs.[8] (Emphasis, underscoring and italics supplied; citations omitted.)
As previously discussed, it would be unjust to order the petitioner to shoulder the expenditure when the government had already received and accepted benefits from the utilization of the building.This compensation on the basis of quantum meruit applies whether a government employee or contractor rendered the service. The only difference is that the reasonable compensation for the work performed or goods delivered by a contractor is determined by the Commission on Audit (COA), while the reasonable compensation for a government employee is inescapably limited to compensation authorized by law which includes: (i) basic pay in the form of salaries and wages; (ii) other fixed compensation in the form of fringe benefits authorized by law; (iii) variable compensation (e.g., honoraria or overtime pay) within the amounts authorized by law despite the procedural mistakes that might have been committed by approving and certifying officers.[11] These separate parameters for personnel benefits were set in Abellanosa v. COA.
x x x x
In a more recent case, Dr. Rufino O. Eslao v. Commission on Audit, G.R. No. 89745, April 8, 1991, the Court directed payment to the contractor on a quantum meruit basis despite the petitioner's failure to undertake a public bidding. In that case, the Court held that "to deny payment to the contractor of the two buildings which are almost fully completed and presently occupied by the university would be to allow the government to unjustly enrich itself at the expense of another."
x x x x
Although the two cases mentioned above contemplated a situation where it is the contractor who is seeking recovery, we find that the principle of payment by quantum meruit likewise applies to this case where the contractor had already been paid and the government is seeking reimbursement from the public official who heads the school. If after COA determines the value of the extra works computed on the basis of quantum meruit, it finds that the petitioner made an excess or improper payment for these extra works, then petitioner Melchor shall be liable only for such excess payment.[10] (Emphasis supplied)
Thus, I believe that there is no cause to limit the application of the Rules in Madera - which I had hoped would serve as a blueprint to examining disallowances in general - to only personnel benefits disallowances. Nevertheless, I submit to the collective wisdom of the banc.
Proceeding now to the case of Torreta, the proper amount of the liability in this case only requires the determination of the difference between the value of the animals dispersed by NDA to the farm partner HapiCows and the value of the animals that have been returned. In other words, the disposition needs only to order COA to determine the balance in what is essentially a loan of agricultural assets as the proper amount of disallowance.
Accordingly, I vote to DISMISS the petition.
[1] G.R. No. 244128. September 8, 2020.
[2] Id. at 35-36.
[3] G.R. No. 185806, November 17, 2020.
[4] Such that retention by payees of the disallowed personnel benefits extinguishes the obligation of officers solidarily liable.
[5] Madera v. COA, supra note 1, at 27. The citation for the quoted portion reads: See Melchor v. Commission on Audit, G.R. No. 95398, August 16, 1991, 200 SCRA 704, 714, citing Eslao v. Commission on Audit, G.R. No. 89745, April 8, 1991, 195 SCRA 730, 739. This case applies the same principle of unjust enrichment in cases where the contractor seeks payment to this case where reimbursement is sought from the official concerned; see also Andres v. Commission on Audit, G.R. No. 94476, September 26, 1991, 201 SCRA 780.
[6] Concurring Opinion, Abellanosa v. COA, supra note 3, at 2-3.
[7] Supra note 5.
[8] Id. at 738-739.
[9] Supra note 5.
[10] Id. at 713-714.
[11] See Manual on Position Classification and Compensation, Chapter 3, Total Compensation Chart, p. 3-3.