16. CASE DIGEST: PHILIPPINE NATIONAL RAILWAYS, Petitioner, v.

KANLAON CONSTRUCTION ENTERPRISES CO., INC.,Respondent.

FACTS: In July 1990, PNR and Kanlaon entered into contracts for the repair of three
PNR station buildings and passenger shelters.By November 1990, Kanlaon alleged that
it had already completed the three projects.

On 30 June 1994, Kanlaon sent a demand letter to PNR requesting for the release of
the retention money. However, PNR denied Kanlaon’s demand because of the Notices
of Suspension issued by the Commission on Audit (COA). Thus, forcing Kanlaon to file
a complaint for collection of sum of money plus damages against PNR. In its amended
complaint, Kanlaon even impleaded the COA.

In its answer, PNR admitted the existence of the three contracts but alleged that
Kanlaon did not comply with the conditions of the contract. Moreover, they alleged that
Kanlaon did not complete the projects. Thus, they did not have any unpaid balance. In
addition to that, PNR added that it had a valid ground to refuse the release of the
retention money because of the COA orders suspending the release of payment to
Kanlaon.

The TC ruled in favor of Kanlaon and ordered PNR to to pay the retention money and
unpaid contract price with 12% legal interest while COA was absolved of any liability
for actual or moral damages. Thus, prompting PNR to file a motion for reconsideration.
As a result, the TC modified its decision by lowering the legal interest rate from 12% to
6% per annum from the date of the first written demand. The CA affirmed the lower
court’s decision and held that the only reason PNR refused to pay Kanlaon was because
of COA’s Notices of Suspension and not Kanlaon’s non-completion of the projects.

ISSUE:

Were the projects completed?

HELD: One of the reasons the COA issued the Notices of Suspension was because the
contracts did not contain a Certificate of Availability of Funds as required under
Sections 85 and 86 of Presidential Decree No. 1445. The Administrative Code of 1987
expressly prohibits the entering into contracts involving the expenditure of public
funds unless two prior requirements are satisfied. First, there must be an appropriation
law authorizing the expenditure required in the contract. Second, there must be
attached to the contract a certification by the proper accounting official and auditor
that funds have been appropriated by law and such funds are available. The existence
of appropriation and the attachment of the certification are conditions sine qua non for
the execution of government contracts. Thus, failure to comply with any of these two
requirements renders the contract void.

The clear purpose of these requirements is to insure that government contracts are
never signed unless supported by the corresponding appropriation law and fund
availability. In the case at hand, the three contracts between PNR and Kanlaon do not
comply with the requirement of a certification of appropriation and fund availability.
Even if a certification of appropriation is not applicable to PNR if the funds used are
internally generated, still a certificate of fund availability is required. Thus, the three
contracts between PNR and Kanlaon are void.

Therefore, the CA erred in affirming the decision of the lower court and its is reversed
and set aside.

17. CASE DIGEST: RAMON R. YAP, Petitioner, v. COMMISION ON AUDIT,

Respondent.

FACTS: Ramon R. Yap is holder of a regular position of Department Manager of the

National Development Company (NDC), a government-owned and controlled
corporation with original charter. He was appointed by the Board of Directors, Manila
Gas Corporation (MGC), a subsidiary of NDC as Vice-President for Finance effective
June 14, 1991while remaining as a regular employee of NDC. The additional
employment entitled him to honoraria equivalent to fifty percent (50%) of his basic
salary at NDC and various allowances attached to the office. In the course of the regular
audit, the Corporate Auditor, MGC issued notices of disallowances against Mr. Ramon
R. Yap which were predicated on the ground that appellants appointment to MGC in
addition to his regular position as Department Manager III of NDC and the subsequent
receipt of the questioned allowances and reimbursements from the former directly
contravened the proscription contained in Section 7 (2) and Section 8, Article IX-b of
the Constitution. Mr. Yap appealed the Auditors disallowances primarily contending
that the questioned benefits were all approved by the MGC Board of Directors.

Petitioners appeal was denied by the CAO II, which affirmed the MGC Corporate
Auditors findings.Unperturbed, petitioner sought a reconsideration of the CAO II
ruling from respondent COA arguing that his assignment to MGC was required by the
primary functions of his office and was also authorized by law, namely Executive Order
No. 284 issued on July 25, 1987. In turn, respondent COA denied petitioners appeal in
herein assailed COA Decision No. 2002-213.It upheld the CAO IIs ruling that
characterized the disallowed allowances and reimbursements as prohibited by the
Constitution.Furthermore, it also ruled that the said allowances and reimbursements
claimed by petitioner failed to pass the test of public purpose requirement of the law
and further emphasized that it is not enough that payments made to petitioner be
authorized by the Board of Directors of the MGC but it is likewise necessary that said
payments do not contravene the principles provided for under Section 4 of Presidential
Decree No. 1445 on the use of government funds, more specifically on the public
purpose requirement that is provided in Section 4(2) of Presidential Decree No. 1445,
otherwise known as the Government Auditing Code of the Philippines.A Motion for
Reconsiderationwas subsequently filed by petitioner, but this was likewise denied by
respondent COA in COA Decision No. 2003-087.
ISSUE:

Did the COA commit grave abuse of discretion amounting to lack of

jurisdiction when it used as a basis the public purpose requirement in
affirming the questioned disallowances?
HELD: Any disbursement of public funds, which includes payment of salaries and
benefits to government employees and officials, must (a) be authorized by law, and (b)
serve a public purpose. Public purpose in relation to disbursement of public funds
means any purpose or use directly available to the general public as a matter of
right.Thus, it has also been defined as an activity as will serve as benefit to the
community as a body and which at the same time is directly related function of
government.However, the concept of public use is not limited to traditional
purposes.Here as elsewhere, the idea that public use is strictly limited to clear cases of
use by the public has been discarded.In fact, this Court has already categorically stated
that the term public purpose is not defined, since it is an elastic concept that can be
hammered to fit modern standards.It should be given a broad interpretation; therefore,
it does not only pertain to those purposes that which are traditionally viewed as
essentially government functions, such as building roads and delivery of basic services,
but also includes those purposes designed to promote social justice.Thus, public money
may now be used for the relocation of illegal settlers, low-cost housing and urban or
agrarian reform. In short, public use is now equated with public interest,and that it is
not unconstitutional merely because it incidentally benefits a limited number of
persons.

In view of the public purpose requirement, the disbursement of public funds, salaries
and benefits of government officers and employees should be granted to compensate
them for valuable public services rendered, and the salaries or benefits paid to such
officers or employees must be commensurate with services rendered.In the same vein,
additional allowances and benefits must be shown to be necessary or relevant to the
fulfillment of the official duties and functions of the government officers and
employees.Petitioners theory that the compensation and benefits of public officers are
intended purely for the personal benefit of such officers, or that the mere payment of
salaries and benefits to a public officer satisfies the public purpose requirement is
wrong.That theory would lead to the anomalous conclusion that government officers
and employees may be paid enormous sums without limit or without any justification
necessary other than that such sums are being paid to someone employed by the
government.Public funds are the property of the people and must be used prudently at
all times with a view to prevent dissipation and waste.

DISMISSED
18. VERCELES v. COA

The Provincial Government of Catanduanes (the province), represented by then

Governor Leandro B. Verceles, Jr. (Verceles), engaged the Provincial Environment and
Natural Resources Office (PENRO) to carry out the province's tree seedlings production
project (the project). The province and PENRO entered into several Memoranda of
Agreement (MOA) to implement the project.

On June 11, 2001, the Sangguniang Panlalawigan (SP), through Resolution No. 067-
2001, gave blanket authority to the governor to enter into contracts on behalf of the
province. The SP reaffirmed the authority given to the governor through Resolution Nos.
068-2001 and 069-2001. On the same date, the SP also resolved to give the governor the
power to realign, revise, or modify items in the provincial budget.

The cost of the project was allegedly paid out of the Economic Development Fund (EDF)
allocation in the provincial budget for calendar years (CY) 2001 and 2002. The EDF is
the 20% portion of the province's internal revenue allotment (IRA) required by law to be
spent on development projects.

On October 12, 2001, the SP issued Resolution No. 104-A-2001, which effectively
revoked the blanket authority given to the governor to enter into contracts on behalf of
the Province.

On February 4, 2003, the COA Audit Team Leader issued an Audit Observation
Memorandum (AOM), finding that Verceles should have sought prior authority from the
SP pursuant to Sections 22 (c) and 465 (b) (1) (vi) of Republic Act No. 7160 or the Local
Government Code (LGC) before executing any MOA after the issuance of Resolution No.
104-A-2001.

Verceles filed his comments. The Audit Team Leader forwarded the AOM to the COA
Regional Office. The Regional Office affirmed the AOM and issued Notices of
Disallowance in the total amount of P7,528,175.46.

Verceles moved but failed to obtain reconsideration of the Notices of Disallowance. The
Legal and Adjudication Office also denied his appeal and motion for reconsideration.
Verceles elevated the case to the COA proper (national office) to challenge the disallowed
payments.

In his petition before the COA, Verceles mainly argued that the payments for the project
were covered by appropriations under the EDF allocation of the provincial budget for
CYs 2001 and 2002. Verceles argued that the local chief executive need not secure
express or specific authorization from the SP as long as a budget for a contract is already
appropriated. He claimed that the first and third MOAs were funded by the EDF
allocation in the CYs 2001 and 2002 budgets, and that, the second, fourth,
and fifth MOAs were funded by valid augmentations from other items also under the
EDF allocation.

ISSUE: WON the Notice of Disallowance issued by the COA Regional Office is proper.

Ruling: The COA denied Verceles' petition for lack of merit.

The COA held that the augmentations or realignments made by Verceles to fund
the second, fourth, and fifth MOAs were contrary to Section 336 of the LGC. The COA
ruled that the disbursements also violated Section 85 (1), of Presidential Decree (PD) No.
1445 or the Government Auditing Code of the Philippines and Section 305 (1) of the
LGC. These provisions underscore the need for an appropriation before contracts
involving the expenditure of public funds may be entered into.

The COA further ruled that at the time Verceles made the augmentations to fund
the second, fourth, and fifth MOAs, he was not authorized by the SP, and that the CY
2003 appropriation ordinance could not ratify the MOAs entered into in CYs 2001 and
2002.

The COA also explained that Resolution Nos. 067-2001, 068-2001, and 069-2001
authorized Verceles' predecessor only (former Governor Hector Sanchez) and that the
grant of authority did not extend to Verceles. The COA reasoned that a resolution does
not have the attribute of permanence. Consequently, the public funds spent to pay for
the project had no legal basis. Thus, the first and third MOAs were still unauthorized
even assuming they were funded by the EDF allocation in CYs 2001 and 2002.

The dispositive portion of the COA decision reads:

WHEREFORE, premises considered, the instant appeal is hereby DENIED for lack of
merit. Accordingly, LAO-Local Resolution No. 2007-002 dated January 16, 2007
affirming the Notices of Disallowance in the aggregate amount of P7,528,175.46 is
hereby AFFIRMED.
Verceles moved but failed to obtain reconsideration of the COA decision.He came to this
Court for relief through the present petition for certiorari. On August 12, 2014, the Court
granted Verceles' prayer for the issuance of a temporary restraining order enjoining the
implementation of the assailed COA decision.

19. NEA vs MORALES

FACTS: Danilo Morales and 105 other employees5 (Morales, et al.) of the NEA filed with
the Regional Trial Court (RTC), Branch 88, Quezon City, a class suit against their
employer for payment of rice allowance, meal allowance, medical/dental/optical
allowance, children’s allowance and longevity pay purportedly authorized under
Republic Act (R.A.) No. 6758. In its December 16, 1999 Decision, the RTC ordered NEA
to settle the claims of the petitioners and other employees similarly situated and extend
to them the benefits and allowances to which they are entitled.

Thereafter, a Notice of Garnishment was issued against the funds of NEA with
Development Bank of the Philippines (DBP) to the extent of ₱16,581,429.00.

NEA filed a Motion to Quash Writs of Execution/Garnishment, claiming that the

garnished public funds are exempt from execution under Section 4 of Presidential
Decree (P.D.) No. 1445, but manifesting that it is willing to pay the claims of Morales, et
al., only that it has no funds to cover the same, although it already requested the
Department of Budget and Management (DBM) for a supplemental budget.

In its Order of May 17, 2000, the RTC denied the Motion to Quash but, at the same time,
held in abeyance the implementation of the Writ of Execution, thus:

WHEREFORE, the motion to quash writs of execution/ garnishment is DENIED but the
implementation of the judgment is placed on hold for ninety (90) days reckoned from
this day. The respondents are directed to formally inform this Court and the
petitioners of the prospect of obtaining funds from Department of Budget
and Management within 30 days from receipt and every 30 days
thereafter, until the 90 day period has lapsed.

The motion to direct DBP to release to the petitioners the NEA funds garnished earlier
amounting to ₱16,591.429 is also DENIED.

Meanwhile, in a letter dated June 28, 2000, former DBM Secretary Benjamin E. Diokno
informed NEA Administrator Conrado M. Estrella III of the denial of the NEA request
for a supplemental budget on the ground that the claims under R.A. No. 6758 which the
RTC had ordered to be settled cannot be paid because Morales, et al. are not "incumbents
of positions as of July 1, 1989 who are actually receiving and enjoying such benefits."

Subsequently, the RTC issued an Order dated January 8, 2001, denying the Motion for
an Order to Implement Writ of Execution, citing the same SC Administrative Circular
No. 10-2000.

Upon a Petition for Certiorari filed by Morales, et al., the CA rendered the July 4, 2002
Decision assailed herein, the decretal portion of which reads:

WHEREFORE, the petition is hereby GRANTED. The Order dated January 8, 2001 and
the Resolution of December 11, 2000 of the public respondent Judge are declared NULL
and VOID.
Accordingly, the respondent judge is directed to implement the Writ of Execution
relative thereto.

NEA and its Board of Directors (petitioners) immediately filed herein

petition for review. It is their contention that the CA erred in directing
implementation of the writ of execution on two grounds: first, execution is premature as
Morales, et al. (respondents) have yet to file their judgment claim with the COA in
accordance with P.D. No. 1445 and SC Administrative Circular No. 10-2000; and second,
execution is not feasible without DBM as an indispensable party to the petition
for certiorari for it is said department which can certify that funds are available to cover
the judgment claim.
ISSUE: WON the writ of execution/ garnishment is proper without award of judgement
from COA.
Ruling: No.
The petition is meritorious.
In its plain text, the December 16, 1999 RTC Decision merely directs petitioners to "settle
the claims of [respondents] and other employees similarly situated." It does not require
petitioners to pay a certain sum of money to respondents. The judgment is only for the
performance of an act other than the payment of money.
Garnishment is proper only when the judgment to be enforced is one for payment of a
sum of money.

Without question, petitioner NEA is a GOCC-- a juridical personality separate and

distinct from the government, with capacity to sue and be sued. As such GOCC,
petitioner NEA cannot evade execution; its funds may be garnished or levied upon in
satisfaction of a judgment rendered against it. However, before execution may proceed
against it, a claim for payment of the judgment award must first be filed with the COA.

Under Commonwealth Act No. 327, as amended by Section 26 of P.D. No. 1445, it is the
COA which has primary jurisdiction to examine, audit and settle "all debts and claims of
any sort" due from or owing the Government or any of its subdivisions, agencies and
instrumentalities, including government-owned or controlled corporations and their
subsidiaries. With respect to money claims arising from the implementation of R.A. No.
6758, their allowance or disallowance is for COA to decide, subject only to the remedy of
appeal by petition for certiorari to this Court.

All told, the RTC acted prudently in halting implementation of the writ of execution to
allow the parties recourse to the processes of the COA.

In fine, it was grave error for the CA to reverse the RTC and direct immediate
implementation of the writ of execution through garnishment of the funds of petitioners,
WHEREFORE, the petition is GRANTED. The July 4, 2002 Decision of the Court of
Appeals is REVERSED and SET ASIDE. The Resolution dated December 11, 2000
and Order dated January 8, 2001 of the Regional Trial Court, Branch 88, Quezon City in
Special Civil Action No. Q-99-38275 are REINSTATED.

SO ORDERED.

20. TOMAS R. OSMEÑA vs. COMMISSION ON AUDIT, and Honorable

COMMISSIONERS DOMINGO, ESPIRITU and ORSAL, G.R. No. 110045,
November 29, 1994, J. Narvasa

Facts: The controversy had its origin in the stabbing of Reynaldo de la Cerna, the son
of the de la Cerna Spouses. He was rushed to the Cebu City Medical Center, but died due
to severe loss of blood. The de la Cerna Spouses claimed that their son died because of
the ineptitude, gross negligence, irresponsibility, stupidity and incompetence of the
medical staff. They filed a complaint for damages in the Regional Trial Court of Cebu
City against the city of Cebu, the Sangguniang Panlungsod, and five physicians. The City
of Cebu was impleaded as defendant on the theory that as employer of the doctors, it was
vicariously responsible for the latter’s negligence.

An amicable settlement was entered into between the parties whereby the City of Cebu
agreed to pay the plaintiff the sum of P30,000.00 as financial assistance. This
agreement was ratified by the Sangguniang Panlungsod and the City Budget Officer was
authorized to include in the Supplemental Budget for the year 1989 the amount of
P30,000.00. The agreement was approved by the Regional Trial Court.

About eleven (11) months later, the Commission on Audit (COA) disallowed the financial
assistance declaring that it is not within the powers of the Sangguniang Panlungsod to
provide monetary assistance that would promote the economic condition and private
interests of certain individuals only.

The Motion for Reconsideration of the City was denied by COA, hence, this petition
ascribing grave abuse of discretion to the COA and its Members.

Issue: Whether or not COA committed grave abuse of discretion in disallowing the
city’s appropriation of P30,000.00 made conformably with the compromise agreement
in the civil suit against the City of Cebu.

Held: COA’s disallowance of the appropriation is tainted by grave abuse of discretion

and should be rectified.

The participation by the City in negotiations for an amicable settlement of a pending

litigation and its eventual execution of a compromise relative thereto, are indubitably
within its authority and capacity as a public corporation; and a compromise of a civil suit
in which it is involved as a party, is a perfectly legitimate transaction, not only recognized
but even encouraged by law.

That the City of Cebu complied with the relevant formalities contemplated by law can
hardly be doubted. The compromise agreement was submitted to its legislative council,
the Sangguniang Panlungsod, which approved it conformably with its established rules
and procedure. Neither may it be disputed that since, as a municipal corporation, Cebu
City has the power to sue and be sued, it has the authority to settle or compromise suits,
as well as the obligation to pay just and valid claims against it.

The COA failed to realize that payment thereof was part of the consideration, not merely
for the settlement of a claim, but for the settlement of an actual controversy. By making
reciprocal concessions, the parties put an end to the action in a manner acceptable to all
of them, thus eliminated the contingency of being made to assume heavier liability in
said suit for damages instituted against it in connection with activities being undertaken
by it in its proprietary functions and in accordance with which it may be held liable ex
contractu or ex delito, for the negligent performance of its corporate, proprietary or
business functions.