PNR v. Kanlaon (G.R. No. 182967; April 6, 2011)


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.