The Supreme Court held that contractors who completed additional work on a government housing project, even without proper contracts and funding, are entitled to compensation based on quantum meruit—the reasonable value of services rendered. This decision ensures fairness and prevents unjust enrichment of the government, emphasizing that procedural lapses should not deprive contractors of payment for work that has benefited the public. This ruling underscores the principle that the government should act with fairness and integrity, especially when it has received the benefits of completed projects.

Beyond the Paper Trail: Can Contractors Recover for Unofficial Government Work?

This case revolves around a housing project initiated by the Ministry of Human Settlement in 1983. The Ministry entered into a Memorandum of Agreement (MOA) with the Ministry of Public Works and Highways (MPWH), now the Department of Public Works and Highways (DPWH), for the development of a housing site along the Manggahan Floodway in Pasig City. The DPWH then contracted several construction companies, including EPG Construction Co. and others, to build 145 housing units. The initial contracts covered only about two-thirds of each housing unit’s construction. However, upon the verbal request and assurance of a DPWH Undersecretary that additional funds would be allocated, the contractors agreed to perform additional work to complete the units, even without formal contracts or appropriations.

After completing the initial contracted work, the contractors sought payment for the additional constructions, amounting to P5,918,315.63. While the DPWH Assistant Secretary for Legal Services recommended payment based on implied contracts and quantum meruit, the Commission on Audit (COA) initially required the availability of funds before processing the claims. Eventually, funds were released by the Department of Budget and Management (DBM). However, the DPWH Secretary denied the claims, leading the contractors to file a Petition for Mandamus in the Regional Trial Court of Quezon City, seeking an order for the DPWH to pay the outstanding amount.

The Regional Trial Court dismissed the petition, prompting the contractors to appeal to the Supreme Court. The central issue before the Supreme Court was whether the contractors were entitled to compensation for the additional work performed on the housing project, despite the absence of formal contracts and appropriations. The respondent argued that the lack of proper appropriations and certifications rendered the implied contracts void, citing Sections 46 and 47 of the Administrative Code of 1987, which mandate that government contracts require appropriation and availability of funds.

While the Supreme Court acknowledged that the implied contracts were indeed void due to violations of applicable laws and auditing rules, it ruled in favor of the contractors, invoking the principle of quantum meruit. The court emphasized that the circumstances of the case warranted compensation in the interest of substantial justice. The court referred to prior cases, such as Eslao vs. Commission on Audit and Royal Trust Construction vs. Commission on Audit, where recovery based on quantum meruit was allowed even in the absence of a written contract, especially when the government benefited from the completed work.

“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.”

Building on this principle, the Supreme Court underscored several factors that justified the application of quantum meruit in the present case. The contractors undertook the additional constructions in good faith, believing that appropriations would be available. The verbal assurances of the DPWH Undersecretary led them to complete the project. The DPWH Assistant Secretary for Legal Affairs had recommended payment based on quantum meruit, and even the DPWH Auditor did not object to the payment. Crucially, the funds for the claims had already been released by the DBM, and the housing units had been completed and were under the government’s control and disposition.

The court stated that denying the contractors compensation would be an injustice, as the government and the public had benefited from their work. Furthermore, the court dismissed the argument of State immunity, asserting that it could not be used to perpetrate an injustice. The Supreme Court reiterated that the principle of governmental immunity from suit cannot serve as an instrument for perpetrating an injustice on a citizen, referencing the landmark cases of Amigable vs. Cuenca and Ministerio vs. CFI of Cebu.

“the doctrine of governmental immunity from suit cannot serve as an instrument for perpetrating an injustice on a citizen.”

The Court concluded that justice and equity demanded that the State’s immunity from suit be set aside in this particular instance, and that the contractors be compensated based on quantum meruit for the construction work done on the public works housing project. Therefore, the Supreme Court granted the petition and directed the Commission on Audit to determine the total compensation due to the contractors on a quantum meruit basis and to allow payment upon completion of the determination.

FAQs

What is the principle of quantum meruit?	Quantum meruit is a legal doctrine that allows a party to recover the reasonable value of services or materials provided, even in the absence of a formal contract. It is based on the idea that one party should not be unjustly enriched at the expense of another.
Why were the original contracts considered void?	The contracts were considered void because they violated Sections 46 and 47 of the Administrative Code of 1987, which require that government contracts have an existing appropriation and a certification of funds availability. The additional work was performed without these requirements.
What was the role of the DPWH Undersecretary in this case?	The DPWH Undersecretary verbally requested and assured the contractors that additional funds would be allocated for the completion of the housing units. This assurance led the contractors to perform the additional work, despite the absence of formal contracts or appropriations.
How did the COA respond to the contractors’ claims?	Initially, the COA required the availability of funds before processing the claims. Later, after funds were released by the DBM, the COA referred the money claims back to the DPWH pursuant to COA Circular 95-006, which lifted pre-audit activities.
What is the significance of the Royal Prerogative of Dishonesty in this case?	The Royal Prerogative of Dishonesty, or the principle of State immunity, was invoked by the respondent to argue that the State could not be sued. The Supreme Court dismissed this argument, stating that the principle cannot be used to perpetrate an injustice.
What previous cases influenced the Supreme Court’s decision?	The Supreme Court cited Eslao vs. Commission on Audit and Royal Trust Construction vs. Commission on Audit, where recovery based on quantum meruit was allowed even without a written contract. These cases set a precedent for compensating contractors who had benefited the government.
What was the final order of the Supreme Court?	The Supreme Court granted the petition, reversed the decision of the Regional Trial Court, and directed the Commission on Audit to determine the total compensation due to the contractors on a quantum meruit basis and to allow payment upon completion of that determination.
What is the practical implication of this ruling for contractors working with the government?	The ruling provides that contractors can be compensated for work done in good faith that benefits the government, even if the formal requirements for contracting are not fully met. It underscores the importance of fairness and prevents unjust enrichment of the government at the expense of the contractor.

In conclusion, this case emphasizes the importance of fairness and equity in government contracting. The Supreme Court’s decision ensures that contractors who perform work in good faith and provide value to the government are not unfairly deprived of compensation due to procedural lapses. This ruling serves as a reminder that the government should act with integrity and uphold its obligations, even when formal contracts are lacking.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: EPG Construction Co. vs. Vigilar, G.R. No. 131544, March 16, 2001