In Bayani F. Fernando vs. Commission on Audit, the Supreme Court held Metropolitan Manila Development Authority (MMDA) officials liable for disallowed expenses related to a contract with William L. Tan Construction (WLTC) for the construction of steel pedestrian bridges. The Court affirmed the Commission on Audit’s (COA) decision, which found irregularities in the handling of the project, particularly concerning extensions granted without proper justification or security, and the subsequent payment of costs despite the contractor’s delays and non-compliance with contractual obligations. This ruling underscores the responsibility of public officials to ensure strict adherence to procurement laws and protect public funds from misuse, even when relying on the advice or actions of subordinates.

Bridging the Gap: Who Pays When Public Projects Fall Behind?

The case revolves around a contract awarded to WLTC for the design and construction of 14 steel pedestrian bridges across Metro Manila. The contract, signed on March 24, 2004, stipulated a completion timeline of 120 calendar days. However, the project experienced significant delays. During the construction period, the MMDA issued several Suspension Orders (SOs) and Resume Orders (ROs) to WLTC. WLTC also executed Deeds of Assignment, subcontracting parts of the project to third-party contractors. Despite the delays, the MMDA paid WLTC a substantial amount, leading to a COA audit and subsequent disallowance of funds.

The COA’s audit revealed that the contract cost was excessively high compared to the COA’s estimated cost. Moreover, the COA determined that the liquidated damages imposed on WLTC for the project’s delay were significantly lower than what was warranted. This discrepancy, along with other irregularities, prompted the COA to issue a Notice of Disallowance (ND), holding WLTC and the responsible MMDA officials liable for the disallowed amount. The central legal question is whether the MMDA officials can be held liable for the liquidated damages and contract cost variance, given the contractor’s delays and alleged violations of the contract.

The Supreme Court, in its analysis, focused on the validity of the SOs, ROs, and extensions granted to WLTC. The Court highlighted the initial SO issued on March 23, 2004, a day before the contract was even formalized. This raised serious questions about its legitimacy. The Court stated:

Petitioners also failed to belie the COA’s finding that the first SO was dated March 23, 2004. This was highly suspicious, to say the least, because the Notice of Award and the NP were issued on the next day, March 24, 2004. The COA is correct, therefore, in holding that there was no contract or project to suspend yet when the first SO was issued.

Building on this, the Court found that the subsequent SOs and extensions were also questionable, primarily because no extension of contract time was issued before the original contract’s expiry. Furthermore, the Court noted that the reasons cited for the SOs were inherent risks associated with the project, risks that the contractor should have anticipated. It’s crucial to remember that contracts are legally binding agreements, and deviations from agreed-upon terms require proper justification and adherence to legal procedures. The court emphasized the critical role of performance security, mandated under Republic Act (RA) No. 9184 for contract time extensions, which was notably absent in this case.

The Court addressed the argument that WLTC should bear the sole liability for the delays and additional costs. Petitioners argued that the MMDA merely assented to WLTC’s requests for suspension and extension, but the Court held that the MMDA had a responsibility to protect public funds and ensure compliance with the contract. The Court emphasized the mandatory nature of deducting liquidated damages from payments due to the contractor, citing Paragraph 3, Item CI 8 of the Implementing Rules and Regulations of PD No. 1594, which provides that liquidated damages:

Shall be deducted from any money due or which may become due the contractor under the contract, and/or collect such liquidated damages from the retention money or other securities posted by the contractor, whichever is convenient to the Government.

The Court also tackled the issue of contract cost variance, which WLTC claimed was due to increased manpower and equipment to expedite the project. The Court agreed with the COA that these additional costs should not be borne by the government, as they were incurred because of WLTC’s delay. The court further noted that the alleged additional costs were incurred after WLTC entered into subcontract agreements, violating its contract with the MMDA. A key aspect of this case is the personal liability of public officials for expenditures made in violation of the law. The Court cited Section 43, Chapter V, Book VI of the Administrative Code of 1987, which states:

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.

Building on this legal framework, the Court highlighted the principles guiding the COA in determining liability for audit disallowances, as outlined in Section 19 of the Manual of Certificate of Settlement and Balances. The Court emphasized that public officers are stewards of government resources, obligated to use them efficiently, honestly, and economically. This responsibility necessitates the exercise of ordinary diligence, meaning adherence to relevant laws and rules, as well as exercising care and prudence in disbursing public funds. Failing to do so results in disallowances, with the law mandating the return of the disbursed amounts. The liability of the MMDA officials stemmed from their knowledge of the dubious circumstances surrounding the SOs, contract time extension, and payment of the contract cost variance, coupled with their admission of contractual violations. This, the Court concluded, constituted gross negligence in their duties.

FAQs

What was the key issue in this case?	The key issue was whether MMDA officials could be held liable for disallowed expenses related to a construction project due to irregularities in granting extensions and approving payments despite contractor delays and violations.
What did the Commission on Audit (COA) find?	The COA found that the contract cost was excessively high, liquidated damages were improperly calculated, and extensions were granted without proper justification, leading to a disallowance of funds.
What was the Supreme Court’s ruling?	The Supreme Court affirmed the COA’s decision, holding the MMDA officials liable for the disallowed expenses due to their negligence in overseeing the project and protecting public funds.
Why were the MMDA officials held liable?	The officials were held liable because they allowed and approved the disbursement of funds without properly addressing the contractor’s delays, violations, and the lack of required performance security for extensions.
What is the significance of the Suspension Orders (SOs) in the case?	The SOs were deemed questionable, especially the initial one issued before the contract was even formalized, raising doubts about their legitimacy and impact on the project’s timeline.
What is the role of liquidated damages in this case?	The liquidated damages were improperly calculated, and the MMDA failed to deduct the correct amount from payments due to the contractor, as mandated by regulations, contributing to the disallowance.
What is the principle of personal liability for public officials?	Public officials are personally liable for expenditures made in violation of the law or regulations, emphasizing their responsibility to protect public funds and ensure compliance with legal requirements.
What is performance security and why was it important in this case?	Performance security is a guarantee required for contract time extensions, ensuring the contractor’s ability to complete the project. Its absence in this case further invalidated the extensions granted.
How does this case affect future government projects?	This case serves as a reminder to government officials to exercise due diligence in overseeing projects, ensuring compliance with procurement laws, and protecting public funds from misuse.

The Supreme Court’s decision underscores the importance of accountability and due diligence in public works projects. Government officials must act as responsible stewards of public funds, ensuring strict adherence to regulations and protecting taxpayer money. This ruling serves as a reminder that public office demands vigilance and a commitment to upholding the law.

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: Bayani F. Fernando, et al. vs. Commission on Audit, G.R. No. 214910, February 13, 2018