UNIVERSITY OF THE EAST

Graduate School
Manila

Name: Engr. Jan Adrian G. Hernandez Date: March 24, 2023

Student No.: 20220125702 GCT 7206-1S

CASE PROBLEM 100

A CASE STUDY ON G.R. NOS. 151373-74: DEPARTMENT OF HEALTH VS. C.V.
CANCHELA & ASSOCIATES, ARCHITECTS (CVCAA), IN ASSOCIATION WITH MCS
ENGINEERS CO., AND A.O. MANSUETO IV – ELECTRICAL ENGINEERING
SERVICES, AND LUIS ALINA, SHERIFF IV, RTC, MANILA

I. ABSTRACT

In the G.R. Nos. 151373-74 case, this case study examines the construction
contract dispute between the Department of Health (DOH) and the consortium of C.V.
Canchela & Associates, Architects (CVCAA), MCS Engineers Co., and A.O. Mansueto IV
– Electrical Engineering Services.

DOH, the petitioner, executed three Owner-Consultant Agreements with

private respondents for infrastructure projects for the Baguio General Hospital and
Medical Center (Baguio Project), the Batangas Regional Hospital (Batangas Project), and
the Corazon L. Montelibano Memorial Regional Hospital in Bacolod City (Bacolod
Project). The Agreements required the preparation of the following documents by private
respondents: detailed architectural and engineering design plans; technical specifications
and detailed cost estimates for the construction of the hospital, including the preparation
of bid documents and requirements; and construction supervision until completion of
handover and final certificate. Various deficiencies in the performance of the agreed
scope of work by private respondents were allegedly discovered during the construction
of the projects, but were not communicated to private respondents. Due to these
deficiencies, the petitioner withheld payment of the private respondents' professional
fees.

1
 UNIVERSITY OF THE EAST
Graduate School
Manila

This case study on G.R. Nos. 151373-74 Department of Health vs. C.V.
Canchela & Associates, Architects (CVCAA), in collaboration with MCS Engineers Co.,
and A.O. Mansueto IV - Electrical Engineering Services, and Luis Alina, Sheriff IV, RTC,
Manila, provides an opportunity to investigate the issues that arise in the construction
industry, particularly between a client and a consulting firm in the context of a government
project.

II. STATEMENT OF THE PROBLEM

The construction industry is critical to the growth of infrastructure and

public services. However, construction projects frequently face challenges
and disagreements caused by unsatisfactory outcomes.

The main problem in this case study is the disagreement between the
petitioner, DOH, and the respondents, the consortium of CVCAA, MCS
Engineers Co., and A.O. Mansueto IV - Electrical Engineering Services,
over the petitioner's refusal to pay the consultancy fees due to the private
respondents because of several deficiencies in the performance of the
agreed scope of private respondents' work that were allegedly discovered
during the project's construction.

III. STATEMENT OF THE FACTS

Private respondents appealed, by letter dated August 29, 1997, to then

Department of Health Secretary Carmencita C. Reodica, stating that their
appeal was “purposely done as our ultimate administrative remedy before
resorting to arbitration under E.O. 1008.” Petitioner refused to pay their
professional fees despite written demands. Private respondents informed
Secretary Reodica and hospital chiefs of their intent to arbitrate under Article
12 of each Agreement in an undated demand letter for payment. Private

2
 UNIVERSITY OF THE EAST
Graduate School
Manila

respondents later informed Secretary Reodica on February 19, 1998, that they
would submit the dispute to the CIAC. Acting on the petition of private
respondents, the CIAC appointed a Sole Arbitrator, Atty. Custodio O. Parlade,
who awarded the claimants' assertions sentenced the respondent to pay the
claimants P3,492,713 for A&E services performed and completed for and
accepted by DOH. This sum will earn 6% annual interest from the date of this
award until the decision is finalized. Following that, the principal and interest
accrued as of that time will earn 12% per annum interest. However, the claim
for escalation is denied, and no award of attorney's fees and costs is made.

The petitioner elevated the case to the Court of Appeals via petition for review
under Rule 43 of the Rules of Court, docketed as CA-G.R. No. 52538, arguing
that the CIAC has no jurisdiction to hear and decide Case No. 31-98; the Sole
Arbitrator acted with severe discretionary abuse amounting to lack or excess
of jurisdiction when, despite lack of factual and legal basis, he awarded private
respondents the monetary award of P3,492,713 for A & E services, with
interest. The Court of Appeals, however, dismissed the petition for late filing.
On May 31, 1999, the Sole Arbitrator issued a writ of execution on private
respondents' Motion for Execution, filed soon after his decision was
promulgated. The petitioner filed a number of petitions, the majority of which
were denied.

When the Court of Appeals required private respondents to comment following

the petitioner's second petition, the Court of Appeals affirmed the decision of
the Sole Arbitrator, concluding that the CIAC, which has original and exclusive
jurisdiction over the dispute under Executive Order No. 1008, did not commit
grave abuse of discretion amounting to lack or excess of jurisdiction in
promulgating its assailed decision.

IV. ANALYSIS OF THE FACTS

3
 UNIVERSITY OF THE EAST
Graduate School
Manila

In accordance with the Court's Resolution requiring the parties to submit their
respective memoranda, the petitioner filed its Memorandum, arguing for the
first time that the Agreements are void from the very start due to the failure to
include a Certification of Availability of Funds, as required by existing law. The
failure of the various chief accountants to produce Certification of Availability of
Funds for respondents' services covered by the Agreements was not
addressed before the CIAC or the Court of Appeals. It is accepted that, except
in extraordinary circumstances, an issue that was not alleged in the complaint
nor mentioned during the trial cannot be raised for the first time on appeal since
it would be contrary to the fundamental principles of fair play, justice, and due
process.

According to P.D. 1445, The Auditing Code of the Philippines, no contract

involving the expenditure of public funds shall be entered into unless there is
an appropriation for it and the proper accounting official of the agency
concerned has certified to the officer entering into the obligation that funds have
been duly appropriated for the purpose and that the amount necessary to cover
the proposed contract for the current fiscal year is available for expending. The
certificate must be attached to and become an integral part of the proposed
contract after it has been signed by the proper accounting official and the
auditor who verified it. Any contract entered into in violation of the
aforementioned requirements is null and void.

In addition, E.O. 292 (The Administrative Code of 1987) also states that no
funds shall be disbursed unless the chief accountant or head of the accounting
unit of a government agency certifies the availability of funds. The granting of
such certification is thus a sine qua non condition precedent to entering into
any contract or incurring any obligation chargeable against the permitted
allotment in any department, office, or agency. The contract cannot be deemed

4
 UNIVERSITY OF THE EAST
Graduate School
Manila

final or binding until the certification is given. The illegality of the subject
Agreements rest from an express proclamation or prohibition by law, rather
than from any inherent illegality.

The Agreements are not illegal in and of themselves, and the party claiming
under them may recover what was paid or provided. The Court thus finds that
private respondents are entitled to be compensated for the services they
actually performed for petitioner, as shown by petitioner's acceptance and use
of the complete Contract or Bid Documents, including the A & E Design Plans
and Technical Specifications and the Detailed Cost Estimates for each project
that private respondents promptly submitted, as petitioner itself recommends.
However, periodic visits that the records prove were not performed must be
excluded from compensation. The Agreements' stipulation that private
respondents' professional fees would be 7.5% of the project fund allocation,
later amended to 6% of the project contract cost, violates Section 525 of the
Government Accounting and Auditing (GAA) Manual, which states that fees for
architectural, engineering design, and similar professional services should be
fixed in monetary or peso amounts, not as a percentage of the project.

V. CONCLUSION

The Owner-Consultant Agreements between the petitioner, Department of

Health, through the individual hospital chiefs, and private respondents were
ruled null and void from the beginning. The Court of Appeals' consolidated
judgement dated June 28, 2000 and Resolution of November 23, 2001 in CA-
G.R. SP Nos. 52538 and 53632 are Reversed and Set Aside. The Commission
on Audit was hereby authorized to decide and ascertain the entire
compensation payable to private respondents for the execution of consultancy
services on a quantum meruit basis as soon as possible, and to authorize
payment upon completion of said determination.

5
 UNIVERSITY OF THE EAST
Graduate School
Manila

VI. RECOMMENDATIONS

The problem and dispute between the two parties arose prior to the
commencement of the project as a result of the non-submission of required
legal documents, specifically the Certification of Funds Availability.

Prior to entering into legal contract agreements, it is best to have the binding
contract agreement thoroughly reviewed by multiple legal experts in order to
identify and analyze all potential flaws that could harm both parties in the future.

In addition, design and consulting firms should always provide the client with
the necessary requirements, particularly if it affects the compensation of the
professionals who have provided services. In the case of C.V. Canchella &
Associates, Architects and the other consultants, they failed to justify their
supervision work, which was the primary reason for withholding their
compensation. In addition, professionals must always refer to a quantum meruit
form of compensation. It may be based on the concept of being calculated from
a percentage of the estimated construction contract price calculated by the
design consultants, but never on the price of the actual awarded contractor's
price.

Both parties will be able to avoid similar issues in the future if they adhere to
these recommendations. This approach will promote transparency,
accountability, and fairness in public contracts, resulting in an improved
working environment for all parties.