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The Law un Public Service Cun/racts: A Service Delivery Alternative for LoCal G(I1Jernments

The Law on Public Service Contracts: A Service Delivery

Alternative for Local Governments!

Alberto C" Agra & Associates2

Introduction

Broadly defined, service contracts are agreements whereby the government contracts out to private parties the~rformance of a service for a fee. Employment contracts entered into between the goverJ)IDeIlt-and its employees fall under the above definition o£~ce csmtracts. Other examples of service contractSoinclude cOnsultancy contracts or contracts·with coatraetuai personnel.

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The Government Accounting and Auditing Manual' defines personal service contracts as a contract of employment between a department or agency ofthe government and a person: (i) to undertake a specific job requiring special or technical skills not available in the said department or agency; (ii) who accom- ' plishes the same within a specific period, which in no case shall exceed one year; and (iii) who performs the task under his or her own responsibility with minimum direction and supervision. Contracts entered into with consultants are considered per­sona! service contracts'

In this era of privatization, however, a new class of service contracting has taken shape. Government, recognizing its inability to directly and efficiently perform all its responsibilities to the public, has soughttheassistance and participation of the private sectoL It has entered into various contracts where it entrusts to private corporations, people's and non­governmental organizations, orother non-profit organizations the delivery of services usually under­taken by government. The private sector, on the other hand, keenly aware of the economic benefits such partnership with government would bring,' is desirous of investing its resources inbusiness en- . deavors that has a ready market, the public.

Examples of these contracts include simple service agreements entered into between the government and the private sector where the government con­tracts out certain services required by the public to the private contracting party. The Mandaluyong City government, for example, has contracted out such services like garbage collection, drainage improve­ment, or construction of public structures such as deepwells and pharmacies to private firms and non­governmental organizations.'

Another example of a public service contract is the lease management contract entered into by the municipality of San Juan with Asiatica Management and Consultants, hic. (Asiatica). This lease-man­agement contract allowed Asiatica, a profit-oriented entity, to finance the construction of a neW local public market, popularly known as the agora com­plex, for the municipality of San Juan: Italso allowed Asiatica to manage its operation for a period of25 years under a lease-management scheme. The success of the agora complex has not only benefited the municipality of SanJuan nor Asiatica but also the public who now has a market with easy access to public transport, improved and modernized market facilities and serviCes, and which provides a wide array of commodities at reasonable prices.

With the ever-growing sphere of services that government must render to the public, cantractiflg with the private sector has now become an alterna­tive' way of delivering services to the public:' It is in this context that discussion on public service con­tracts shall proceed.

- ., Scope and Limitation

This paper presents a review oflaws, issuances, jurisprudence, administrative and executive orders governing contract service agreements oflocal' .. >'

government units with the non-profit and for-profit entities of the private sector. It focuses on service agreements entered into by the local governmeht for the rendition of services to the pUblic. Contract ".

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Tire Law an Public Service Contracts: A Service Delivery Alternative for Local Governments 2

servic~ agreements that enhance the local government's ability to offer its services to the '.' public, but which do not result in the direct delivery of ,services to the public are not discussed in this . ~ paper. Thus, consultancy and infrastructure con- " tracts· fall outside the scope of this paper and shall not be included in the term "public service contract" as used in this paper.

Recognizing the complex system of contract prepa­ration, execution, performance and auditing involved, this paper attempts to present a balanced discussion of the most important issues involved in the process of entering into public service contracts, with refer­ences presented to the reader for further research.

Flow ofthe Paper

The first part of the paper highlights the salient features of public.service contracts, distinguishing it from other contracts,and setting out the different types of service contracts. The second part of the paper discusses basic requirements af service contracts, including substantive requirements fur its validity, formal requirements, considerations for contract preparation, execution and· payment. ,1'he tJ1ird part of the paper discusses the concept of,· " contractor default and the recourses available to local governments in case of such default.

I. Public Service Contracts , ;' ~

A. ,Salient Features of Public Service, i";

Contracts " "" " ' ".

Distinct features ofthe public service contracts discussed in this paper are set out below.

First, service contracting is a mode of privatization. Privatization means a change in status of a business, ' service or industry from state, government or public to private ownership or control. 10 One of the., recognized ways to privatize a public enterprise is to eilter into public service contracts and transfer the,,,

~ responsibility for the provision of basic services from

government to-the private sector with government still ~etaining the ultimate responsibilityf0r.~he.supply of servicell ::. : .; ,:' ., : i < .: '~, ,

Public service contracts are therefore entered into with private parties and entities not connected to the government. It does not cover employment contracts with government employees or agreements with, " '. other agencies or instrumentalities of the government fortbedeliveryofservices ... " :.) ,,:,'

Second, public service contracts have for its object the delivery of services required bythe'public, as opposed to other service contracts which involve delivery of services to the government alone. Consultancy contracts, for example, provide the' expertise needed by the government in the perfor­mance of its day-to-day functions. Contracts with contractual personne~ on the other hand, serve to complement the manpower requirements needed by the operations of the government.

In public service contracts, it is the public who is directly benefited by the rendition of service by the private sector. It allows government to privatize and I

delegate one of its many functions, i. e., to deliver basic services to the public.

Third, public service contracts do not establish any employer-employee relationship between the private contractor or its employees and the government.

An examination of public service contracts entered,; into by the Mandaluyong City Government reveal that the city government does not exercise any , control over the manner by which the services are'; performed by the private contracting party. Its contract with Clear Blue Services Corporation, for" example, to maintain the clean1iness, security, and order of the local public market, grants to the private contracting party the exelusive right to select, em- ,:' ploy; and· control the personnel it may hire to per" form its obligationsunder the contract;!2 The ".<

contract also expressly states that Clear Blue Ser­vices Corporation is not an employee of

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The Law rm Public Seruice Crmtracts: A Seruice Delivery Alternative for Local Governments 3

Mandaluyong City but is an independent contractor.

The absence of contro~ an essential element of an employer -employee relationship, establishes the status of the private contracting party as an indepen­dent contractor. An independent contractor is defined as one who, in the pursuit of an independent business, undertakes to do a specific piece or job of work for other persons, whether with a government or other public body or with private parties, using his own means and methods without submitting himself to control as to the petty details.13 As aptly stated in the case of Luzon Stevedoring Company vs. Collectoroj Internal Revenue:

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Thegeneral rule, variously stated, is that . whena person lets out work to another, the oontractee reserving no control over the work or workmen, the relationship of contractor and contractee exists and not that of master and servant, and the

.contractee is not liable for the negligence or improper exeCution of the work by the contractor"

Hence, the-private contracting party or its employees cannot be'considered government employees. The Revised Omrubus Rules on Appointment and Other Personnel Actions issued by the Civil Service Commission expressly states that services rendered pursuant to contracts of services or job orders may not be considered government services and conse­quently, such contracts are not covered by Civil Service law, rules and regulations." Furthermore, employees involved in the contracts or job orders do not enjoy the benefits granted to government em­ployees.16 The Civil Service Commission defines contracts of services or job orders as agreements to perform lump sum work or services, 'covering piece work or intennittent jobs of short duration not exceeding six months, where no employer-employee relationship exists. 17

government and whose object, i. e., the rendition of service, is of public interest. They must therefore comply with all the special rules and regulations governing government contracts. And bearing in rnind that the government may be held liable only fcir the authorized acts of its officials, the duty to know and to ascertain the existence or non-existence as ,.! well as the nature and extent of the authority oftlie II

contracting officerto enter into a public service contract for and in behalf of the public is vested on I the private contracting party, I B. Distinction with Other Government ;.' i

Contracts " ,I; i '. ! .,

One of the difficulties in detennining the relevant .' rules and regulationapplicableto public service -' contracts is its similarity with other special types of government contracts. It may be argued, for ex­ample, that public service contracts are govemnlent procurement contracts and mUst therefore comply with the rules and regulations governing government procurement contracts. Most, howeVer,argue that public service contracts must complywith·the ' I requir~ents enumerated ~ Republic Act771S,t' :';., I otherwIse known as the Build-Operate-Transfer' . , (BOT), since they confuse public service contracts with build-operate-and transfer contracts or any of '" its variants (the "BOT contracts'').

A public service contract may be distingiIis1ied 'from other forms of contract by its principal conSideration: J

Government enters into public service ccintracts . -: / , primarily to purchase services. Any other cihl@ffidn;' for example, the acquisition of supplies, necessary for the effective and complete delivery of such service to the government is consideredincideil.tal to the primary purpose of the contractand hence, does ~ not change the nature of the public service Contract· Thus, in an opinion rendered by the Department of Justice dated December 22, 1993, a licensing agreement entered into between the National Home Mortgage Finance Corporation (NHMC) and Bear Steams Philippines, Ltd, (Bear Stearns) is c-onsid-

'. ered a service contract notwithstanding the acquisi-The last feature involves its public character. Public

~ service contracts are contracts entered into with the

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The Law on Public Service Contracts: A Service Delivery Alternative for Local Governments

tion by NHMFC of certain computer software C. Kinds of Public Service Contracts materials from Bear Stearns. The Department of Justice opined that the primary obligation of Bear The Philippine government has entered into various Steams is to act as financial adviser, manager and public service contracts, with each contractcontain-underwritedn the issuance of mortgage-backed "' itt); ing a different term or feature from the other.' 'They securi~ies,. The procurement of computer software may, however, be broadly classified accordingtu the" materials is merely incidental to the transfer of obligations undertaken by the private party into: (i) technology.tequired in the securitization plan. The service contracts; (ii) management contracts; (iii) licensing agreement should therefore be governed by lease contracts; and (iv) concessions. ". . . rules applicable to service contracts and not by those on the procurement of supplies. 1. Service Contracts

In the same manner may public service contracts be distinguished from the service components of other government contracts such as the BOT contracts. In BOT contracts, the principal consideration for the government is the financial package offered by the private sector to invest in and construct a certain capital asset for the government As such, after operating the asset for a period of time and recover­ing from its investment, the private p~ is obligated to transfer sucb asset to the government. This view has been adopted by the Department ofJustice in an opinion dated August 3, 1993 when it opined that the operation and management contract entered into between the National Power Corporation (NPC) andAsea Brown Boveri (ABB) is considered a service contract· Consequently, the financial obliga­tion ofNPC to pay service fees under the contract cannot be guaranteed by the national government unlike payment obligations of the NPC under BOT contracts:: Section 8(b) of Republic Act No. 6395 (NPC Charter) authorizes the President of the P\llIiPpineStoguaranteethe payment obligations of NPC in loan, credit, indebtedness and bond transac­tions. Such.authority to guarantee has been ex­tended to 'cover NPC's payment obligations under BOT, contracts'sinceBOT contracts are financing arrangements '~analogous to a loan agreement" as provenbythe obligation of the operator to eventu­ally transfer the capital asset to the government after a certain period .oftime.

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In service contracts, the private contractor solely undertakes to deliver services to the government This is the simplest mode of service contracting where the government contracts out the performance of specific tasks to a private party.19 Their duration is usually short -term lasting from one to two years only'>o

Silay City, for examj)le, entered into a Memorandum of Agreement where it contracted out the collection of garbage to a cooperative.21 The Memorandum of Agreement has a term of one year, renewable for another year at the option of the city. As cited earlier, Mandaluyong City has entered into similar contracts for garbagt'collection and improvement of drainage systems around the city.

2. Management Contracts

Management contracts oblige the private p~, known as the service-manager, to provide a wider range of activities to the government for a longer period of time. 22 Management contracts are ex­panded forms of service contracts with the service manager providing the whole operation and mainte-'" nance activities ofa particular project23 Duration of­the contract usually lasts three to five years.24

The contract mentioned earlier between the City of Mandaluyong and Clear Blue Services Corporation for the maintenance of the public market is an example.of a management contract 25 This contract .. binds the private party not only to undertake mainte- . ~I ,----------

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The Law on Public Service Contracts: A Service Delivery Alternative Jar Local Governments

nance and security work required by the public market but also: (i) to act as collecting agent insofar as the cost of water and electricity is concerned; (ii) to manage and collect parking fees from customers; and (iii) to implement the rules and regulations promulgated by the city for the operation of the public market.2• The contract has a term of three years.

3. Lease Contracts

Lease or affermage contracts,.on the other hand, allow the government to lease an asset to a private party (the service-lessee) in addition to taking on the responsibility of operating and maintaining it. Z1 In view of the lease, the service-lessee regularly pays the government a fixed fee for the lease and intends to recover :ruch fees from the income generated by the ()peratioJlofthe Pf(Jject.28 Lease contracts normallylasteightto 15 years.29 .

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TJ:!e lease management contract entered into be­tween.the municipalityc)fSanJuan and Asiatica is one such contract.30 As mentioned earlier, this lease-managemeI!ipontract allows the municipality to)~e, 1;he.publicI1l~et.andreceive rental income from Asiatica every J,llonth, In consideration of the lease, Asiatica is granted the right to operate and manage the public market. '.

4..(:oncession

Lastly, ~concession obliges the. private contracting party, known as the service concessionaire, to operate and maintain a project and to make further· fixed iny€stments thereon.31 Ownership of operating assets generally remain with the government but the right to use such assets as well as the revenue stream. derived therefrom are granted to the private sector for the whole duration of the contract.'2 Conces­sions usually last from 25 to 30 years33 Upon its termination, all rights revert to the government.

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II. Authority of Local Governments to Enter into Public Service Contracts

The authority ofiocal governments to enter into public service contracts is based on positive provi­sions of the Local Government Code and the Administrative Code of I 987.3> , .

Section 15 of the Local Government Code recogc ."

nizes the dual nature of every local government unit. It states that every local government unit is a bodY'" politic and corporate and as such shall exercise-:' powers as a political subdivision of the national government and as a corporate entity representing the inhabitants of the territory. As a body corporate, every local government unit is expressly granted the power to enter into contracts and to exercise such other powers as are granted to a corporation, . subject to the limitations provided in the Local. . . Government Code and other laws."

The general contracting power ofiocal gOVellilllellts • has been.held to include the power to contract out· . services to third parties. The AdministratiVe Code of I 987 expressly provides that agencies may '~'. -contract out activities to third parties subject to .... ' applicable provisions oflaw and guidelines approved by the President.36 As defined under the Adminis-· .. trative Code, the term "agency" includes a local government or any distinct unit therein. 37

The Local Government Code also contains various provisions allowing local government units to tap:·· private resources in the performance of certain governmental and proprietary functions.

Section 3(1) of the Local Government Code eX" pressly provides that the participation of private sector in local governance, particularly in the delivery of basic services, shall be encouraged to ensure the viability ofiocal autonomy as an alternative strategy for sustainable development.

Section 22( d) of the Local Government Code guarantees local government units "full autonomy in

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The Law on Public Service Contracts: A Service Delivery Alternative for Local Governments

the exercise.Qftheir proprietary functions and in the the application of Section 35 ofthe Local Govem-management of their economic enterprises, subject ment Code. It mandates local governments to join to limitations provided in the Local Government hands with the private sector and involve them in the Code and other laws." Powers which local govem- delivery of basic services.40

ments exercise in their proprietary capacity are those . which are meant to promote the local necessities and In sum, the Local Government Code as well as the conveniences of the communities they serve.38 On Administrative Code of1987 contain provisions that the other hand, the term "economic enterprises" has support, in both broad and specific language the been defined in Memorandum Circular No. 90-104 authority oflocal governments to enter into public as "income generating ventures oflocal govern- service contracts. ments"and include public markets, slaughterhouses, garbage collection and disposal, water supply, road construction, repair and maintenance, and health services.39

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Section 17(j) of the Local Government Code empowers local government units, by ordinance, to sell, lease, encumber, or otherwise dispose of public economic enterprises owned by them in their propri­etary capacity.

Finally, Section 35 of the Local Government Code expressly grants the local government units the authority to enter into joint ventures and other cooperative arrangements with people's and non­governmental organizations for various purposes ., ranging from the delivery of basic services to the';' . enhancement ofthe economic and social well-being of the people. It states:

III. Basic Requir~inents of Service Contracts Entered into bY'Loeal Governments

A. Public Bidding"

In accordance with Executive Order No. 301, Series of1987, no'contract for public services shall be renewed or entered into without public bidding4 !

Furthermore, the Government Accounting and Auditing Manual mandates that all revenue-generat­ing contracts, except for-the rental or lease of market stalls and spaces, must be publicly bidded,,2 Rev-" enue-generating contracts refer to agreements whereby the government agencygrantsto it lessee, contractor or concessionaire the right to manage and . operate the revenue-genei-ating project or facility of the former for a fixed fee, such as buildings, markets, . market stalls and spaces, slaughterhouses, land parking lots, porterage services, stalls and advertis­ing spaces, port facilities, cargo handling, warehouse operations, stevedoring transport services and the like.43 Clearly, management 'and lease contracts as c

: well as concession agreements--different kinds of '''1

• public service contracts as described above-fall under the definition of revenue-generating contracts.

'/")" The requirement of public bidding aims to protect c,. '

the public interest bygiving the publicthe best ,,, possible advantages thru open competition. 44 It is a

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A local government unit may enter into joint -ventures and such other cooperative arrangements with people's and non­governmental organizations to engage in the delivery of certain basic services, capabil­ity-building and livelihood projects, and to develop local enterprises designed to improve productivity and income, diversifY agriculture, spur rural industrialization, promote ecological balance, and enhance the economic and social well-being of the people.

mechanism that enables the government agency to I .. avoid or preclude anomalies such as overpricing and .

favoritism in the execution of public contracts4' I

Rule XIII, Article 62 ofthe Implementing Rules and

~ Regulations oftheLocalGovemment COdeexten_d_s _____ _ ~~_~_I

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I Local Autonomy -The Law on Public Sennce Contracts: A Sennce Delivery Alternative for Local G(JlJemments

It is likewise worthy to note that this requirement for public bidding does not provide for exceptions. While Executive Order No. 301 covers both con­tracts for public services and for furnishing supplies, materials and equipment, all the exceptions provided therein apply only to contracts for furnishing sup­plies, materials and equipment.'"

Neither does Section 68 of Republic Act No. 7845, otherwise known as the General Appropriations Act for 1995,47 apply to service contracts entered into by local governments as the provision applies only to departments, bureaus, offices or agencies ofthe national government. Section 68 ofRepublicAct 7845, reiterated in Section 518 of the Government Auditing and Accounting Manual, expressly autho­rizes. departments, bureaus, offices or agencies of the nationaJ.gov.ernment to enter into contracts·with

it do away with the requirement of public bidding."

B. Substantial Requisites for Contract Validity

The same laws and regulations governing the validity and sufficiency of contracts between private indivi­duals apply to contracts where one of the parties is the local government. Thus, the same legal requisites for the validity of a contract (i.e., the consent of the contracting parties, an object certain which is the subject matter of the contract, and cause or consid­eration of the obligation which is established)" must be possessed by such contracts. However, because of the special nature of government contracts, certain additional requirements must also be considered."

private firms and non-governmentaI organizations for 1. services related or incidental to their respective functions and operations, either through public

Authority of the LoctlJ Govemment Representative .,

bidding ornegotiated contract:", . More importantly, the Supreme Court has expressly stated that such provision in the General Appropriations Act does not affect the general requirement of public bid-ding." It states that: ". ,

The General Appropriations Act (GAA) of 1993'· cannot be used by petitioners to justifY their actuations. An appropriations act is primarily a special type oflegislation whose content is limited to specified sums of money dedicated,to a special purpose or a separate fiscal unit., Section 31 on the'" Gener;ilProvisions of the GAA ofl993 '.'

'. merely authorizes the heads of departments; bureaus, offices or agencies of the national·, government to hire, through public bidding

The person who negotiates and enters into the contract on behalf of the local government must have all of the qualifications and none of the disqualifica­tions provided by law:,

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a. Qualifications' .. "

Contracts on behalf of poJiticalsubdivisions shall be approved by their respective governing boards or councils and executed by their respective executive heads," i.e., the local chiefexecutive." Thelocal sallggulliall S authorization must be given prior to the local chief executive's entering into the con-tract.'" .. ,. ..

b. DisqualifICations',"

. or negotiated contracts, contractual person- Public officials and employees are prohibited from ne! to perfoon speci£ieactivities or services directly or indirectly having any financial or material . related or incidental totbeir functions. This interest in any transaction which requires the ap-law specifically authorizes eJqJendituresfor proval of their office. j7 Section 89 of the Local

, the hiringofthese personnel. It is notthe Government Code declares it unlawful for any local· governing law onthe award of service government official or employee to engage in any

~ ___ co_n_t_ra_~c_ts_b_y_g_O_v_ernm __ e_n_t a_g_e_n_ci_es_n_o_r_d_o_es_. ___ b_u_s_in_ess or transaction (i) ""iththe local government

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Local Autonomy

The Law on Public Service Contracts: A Service Delivery Altei'i1ative for Local Governments

in which he is an official or employee or over which he has the power of supervision, or (ii) with any of its authorized boards, officials, agents or attorneys, whereby money is to be paid, or property or any other thing of value is to be transferred, directly or indirectly, out of the resources of the local govern­ment unit to such person or flfIll. Article 216 of the Revised Penal Code penalizes a public officer who directly or indirectly becomes interested in any contract or business inwhich it is his official duty to intervene.". The act of having a direct or indirect financial or p~ni<)ry interest in any contract or transactio!). in which thepl1blic officer is prohibited, , . by the Constitution, or ,by law, from having any " irterest is declared a corrupt practice andis there-foreiqegalperse.""" ,," ",

2. Object of the Contract ',-., ... , ~

All services which are not contrary to law" morals, good customs, public order, or public policy may be the object of a contract.o Thepublic .service c;:ontract can not be for the benefit or support of any sect, church, denorpination,. sectarian institution, or a system of religion, or any priest, preacher; minister or other religious teacher, or dignitary as such, except when such priest, minister or dignitary is assigned to the armed forces or to any penal institu­tion or government orphanage or leprosarium. 61

Nor Ill!ly.the cqntractbe for private,p~osesP . The.fac,t, however;. that private jndividuals are benefited does not invalidate the contract, as long as such benefit is only incidental,63 .' The service contrag: shall be for· specific services which cannot be provided by the regular staff of the agency.64 Moreover, local government units can not contract implementing, monitoring and other regular and recurring activities."

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3." .(;onsid!it;@'J!I .' , '." ··i '

The cO,st of contracted services must not exceed the amount that would otherwise.be incurred by the local government had regular employees of the

~ government performed the work"', .'., .

C. Formal Requisites

A government service contract must be in writing, as it is against public policy to permit public funds to be obligated otherwise than by explicit and specific writings67 Non-adherence to the legal formalities-of contracts renders the contracting parties liable as private individuals.68

D. Restrictions on Contractual Terms and Stipulations

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Servi.cecontracts shall be for a specific period of time"and shall have a definite expected output6

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No management contract, lease contract;wnceSsion agreement or any other revenue-generating con­tract70 shall be entered into .stipulating an open­ended period or automatic renewal thereofif at the end of the period of contract no notice of termination is served the lessee, contractor, or concessionaire.71

Moreover, the contract period shall be lintited-to one year. A contract period longer than one year but not exceeding two years may, however, be fixed to allow the lessee; contractor or concessionaire to recover the cost of equipment or leasehold improve­ment necessary to be brougbt into or introduced in the operation to effectively fulfil its part of the agreement 72

The termSjof the contract must not be grossly disadvantageous to the Government· Entering, on behalf ofthe Government, into a contract or transac­tion manifestly and grossly disadvantageous to the Government, whether or not the public officer profited or will profit thereby, constitutes a corrupt practice and is declared to be unlawfuj73.

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Whether a contract is grossly disadvantageous to the Government is a political question left to the judg­ment ofthe authorized officer'or agency. -The charge that a contract ismanifestly and grossly disadvanta­geous to the government is not easily proved. Public officials enjoy the presumption of regularity in the performance of public duties; and so long as it is

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The Law on Public Service Contracts: A Service Delivery Alternative for Local Guuernments

shown that the terms of the contract were agreed after a thorough study of the filcts by the public official concerned, no finding of gross and manifest advantage will be made on the ground alone that the private party stands to profit from the transation. Thus, the Supreme Court, in the case of Tatad vs. Garcia,74 ruled in filvor of the validity of the "Re­vised and Restated agreement to Build, Lease and Transfer a Light Rail Transit System for EDSA" dated April 22, 1992, and the "Supplemental Agreement to the 22 April 1992 Revised and

I Restated Agreement to Build, Lease, and Transfer a I Light Rail Transit System for EDSA" dated May 6,

1993 ·after'considering that: '

The terms of the agreements were arrived at after a painstaking study by DOTC [Department of Trans­portation and Communication]. The determination by the proper administrative agencies and officials who have acquired expertise, specialized skills and knowledge in the performance of their functions should be accorded respect, absent and showing of grave abuse of discretion (Felipe Y smael, Jr. & Co. v. Dep-uty'Executive Secretary; 190 SCRA 673 [1990]; Board of Medical Edueatiortv: Alfonso, -176 SCRA304 [i989])'5 .,. ;.,

Consequently, in the absence of a clear and convinc­ing showing bfbeing made in grave abuse ofdiscre­tion byth~officerur agency in question, the tollIts win nOt revieW' such business decision. Public- . -bidding is one ofthe safeguards to prevent the terms of a contract from being grossly disadvantageous to government:7• -"

E!" CdfiirlEtExecunon. .

F. General Review and Approval Process

A government contract is not perfected until such contract has passed the appropriate review and approval process prescnbed by the law and other relevant rules and regulations. The review and approval process generally required for all types of contracts entered into by local governments is described below:

l. Sanggunian Approval . : .

In general, all contracts entered into by local govern­ment units require the approval of their respective sallggunians. Pursuant to Section 51 of the Admin­istrative Code ofl987, contracts executed in behalf of the political subdivisions require the approval of their respective governing boards or councils.

2. Posting Requirement

Section 22( c) of the Local Government Code requires the posting of a legIble copy of the contract at a conspicuous place in the provincial capitol'orthe city, municipal or barangay hall:

3. Review by Higher Sanggunian

Barangay ordinances must be submitted to the city andlor municipal councils forreview." The review power of cities and municipalities is limited to ensuring that the barangay ordinance is consistent with laws and ordinances.'"

Exceptfor ordinances and resolutions approving the development plans and public investment programs formuitated by the city or municipal development . councils and those authorizing annual or supplemen­tal appropriations, ordinances enacted by the sangglllliaJ/g pangillngsod or the smlgglllliang bayan are not subject to the same review process required for barcmgay ordinances'"

The existence of an appropriation and the Certificate of Availability of Funds at the time of the execution of the contract are conditions sine qlla non to the validity of the contract. A promise or assurance of the release of an appropriation is not adequate and can not substitute the required budgetary allocation, which must actually exist.77

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The Law an Public Service Contracts: A Service Delivery Alternative for Local Governments 10

G. COA Reviuwof Contracts

The Commission on Audit (COA) has jurisdiction over political subdivisions, provinces, cities, munici­palities and barangays'l Thus, local government contracts must be submitted to the COA for review As a general rule, the COA undertakes review of government contracts not as a prerequisite for their perfection, but for the purpose of passing upon the validity and enforceability of such contracts. The COA shall have the power, for purposes ofinspec­tion, to require the submission of the original of any order, peed, contract, or other document under ., . which any collection or payment from government. funds may bemade, together with any certificate, receipt or'other evidence in connection with the transaction, If.lllly, authenticated copy is needed for record purposes;,thecopy shall upon demand be furnished,82

The authority ofthe Commission extends to the examination, audit and settlement of all debts and claims of any sort due. from or owing to the local ~bvernment;orany of its SUbdivisions, agencies and instrumentalities. 83 The expenditure for the service' contract must not be irregular,84 unnecessary," excessive,'· extravagant,87 or unconscionable, 8&

Theresults of the COA's review of the, contracts and the verification of the CAF shall be communicated to the head of the government agency assoort as practicable without prejudice to the execution or implementation ofthe contract. 89 The auditor concerned shall, within five days following inform management inwritingof any defect and/or deficien­cies therein?" The results of the review of the contract and verification of the CAF shall be consid­ered in the post-audit of the related transaction.?1

H Payment ''\'. ,I"

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·3 The public official or employee shall, in addition, suffer the penalty imposed under the· ",., appropriate penal law ..

. "~,

No money shall be disbursed from the funds of the Local government unless the local budget officer certifies to the existence of the appropriation that has been legally made for the purpose!l the local ,', , accountant has obligated said appropriatiort% and the local treasurer certifies to the availability offunds forthe purpose. 97

" '! .~! .: I _, 1,")-',' ~ ,:.,:',,""._:'

No money shall,be-paid onaccountofany·contract . under whiehno services have been rendered or goods delivered,~8"A1I payments must be made by, check 99

IV ,Contralltor'sDefa\lI~" ,;", '. .'"

An event of default occurs when one of the contract­ing parties fails to perform its, obligations under a ' contract. Article 1159 of the Civil Code expressly provides that obligations arising from contracts have the force oflaw between the col)ttacting parties and should be. complied with in good faith: TherefOl[e, "" when an event of default takes place the injured party is granted legal remedies to protect its interest.

In public service contracts, the private contracting .' party is obliged to perform a positive personal obligation, i.e., an obligation to perform an act or render a service. The Civil,Code enQmerares tl)ree instances when a private contracting party may default in these contracts, towit: (i) wh~n itleQJ;ll.,'

pletely fails to perform the service; (ii) when it " performs the service but does it in contraventiolJ.:to the ten0r of the obligation; or (iii) when it performs the service but in a poor and defective manner. 100

I No money shall be paid out ofthe Treasury exeep~ in pursuance of an appropriation made by law 92

\ Every payment made contrary to, orin the absence In such cases, the Civil Code allows the local, :J' ,

1:)' of such an appropriation shall be illegal, The official government to hire another private party to execute

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TIre Law on Public Service Contracts: A Service Delivery Alternative fur LoClll Gwernments 11

the services or to have the work undone or redone at the expense of the defaulting party. 101 The de­faulting party is also liable to pay damages to the local government. IOZ

Damages represent compensation for any and all damages that the injured party may have suffered, whether physical, mental, moral or psychological, mental or spiritual, financial, economic, social, political and religious. IOJ Liquidated damages may be agreed upon by the parties to a contract, and are specifically to be paid in case ofbreach of the contract. I'" The amount agreed upon may, however, be equitably reduced ifiniquitousor unconscio­nablelO

'

": .. .":-., ' .-. ;;

Furthermore, the local government being the injured party is granted the power to rescind the contract. Article 1191 of the Civil Code expressly states that· c.

the power to rescind obligations is implied in recip-':' rocal ones, in case one of the obligors should not comply with what is incumbent upon him. Rescis­sion means invalidating and unmaking the juridical ,. tie, leaving things in their status before the celebra­tion of the contract. 106 Reciprocal obligations refer to cases when the two parties are mutually debtor and creditor of each other, the reciprocity having arisen from the same cause such that One obligation is correlative to another. I07 Public service contracts give rise to reciprocal obligations since the obligation to paythefee onthepart ofthe local government is depenaem on the obligation of the private contract-ing'party to perforrnthe service. . ' ..

The power to rescind, however, is not absolute. Rescission will not be pennitted for a slight or casual breach of the contract;-butonly for such breaches as are sosubstantialand'furidamental as to defeat the object of the partie's in tnakingthe agreement. I .. In a management contract executed between the Bureau ofCustOlTIs·aridthe Cebu Port Terminal, Inc. ("CTPr'), whereby CTPI was designated as sole manager of the arrastre service at the port ofCebu for a period offive years, the Supreme Court opined

~ thatresciSsion by the Bureau of Customs was

justified considering the numerous violations of the management contract committed by CPTI.I09 Apparently, CPTI failed to provide the necessary pier facilities to avoid congestion of cargoes at the port nor to submit the required monthly reports of operations to the Bureau of Customs. Allov;ing CTPI to continue as arrastre operator, according to the Supreme Court, placed the public interest in serious jeopardy. no

Furthermore, the Civil Code prescribes that the court shall decree the rescission c1aimed.lll This proviSion has led the Supreme Court to rule that the injured party itself cannot resolve the obligation and must secure a judicial declaration of rescission before it maY'exercise the power to rescind:'

It must be noted, however, that in tecent decisioris,· the Supreme Court has ruled that where the tetfus of I

the contract allow the injured party to extrajudicially' rescind the contract then rescission may be validly ,. effected even without Court intervention. The Bureau of Customs; for example, rescinded the management contract with CTPI on the basis of a contractual provision allowing the Bureau ofCus­toms to revoke and cancel the contract if the con­tractor violated any terms and conditions of the contract. I U The Supreme Court ruled thus:

CTPI first contends that a judicial action for rescission of said contract should have been filed. Inthis cOnnection it should be noted that under paragraph 32 of the management contract the satne may be revoked and cancelled for violation of any of its terms and conditions. All that is required before cancellation is"(a) that the Bureau inform the contractor (respondent CTPI) in writing of such violation, and (b) that the contractor fail within one week to satisfY the'Bureau that such violation has not been committed or does not exist, whereupon the Bureau may take over the management and opera­tion of the whole arrastre sef'.~ce. Resort to judicial action for rescission is obviously not

Local

The Law an Public Service Can/racts: A Service Delivery Alternative for Local Governments 12

contemplated under the circumstances just mentioned. The validity of the stipulation cannot be seriously disputed. It is in the nature of a facultative resolutory condition, which in many cases has been upheld by this Court. IJ3

It is therefore highly advisable that public service contracts executed by local governments contain stipulations on liquidated damages and expressly stipulate the right of the local government to rescind the contract ;lnd to take-9,v~r the 9perations if the pr,ivate contr;lcting party defaults in the perfqrmance ~iii,s obligation.<" . ." .

, .. -,

V Summary and Recommendations

Pubijc service contracts afI: ~eements wh~reby tl\e -&?y~~t contrac~~qut toprivateparti~~:!~ >., , d~jj,yery 9,[ services to the publi9 , Not ~ s,~~e" , contracts entered in.tO, by}lje government 'Ire BHbljc . '" ,,' _.

service contracts. Employfi).ent cont,rllcts, liS well lis , consultancy contracts.are not public service con­

tracts and consequently are governed by different .. laws, rules ;il\d regulations. . ," ..

", The following features characterize public service . contracts: (i) they allow the private sector to partici­pate in the delivery of services and are thus entered into with parties without any relationship to the government; (ii) no employ~ ".employee relationship exists between the,government and the private party nor its employees; (iii) the; P\lhlic is the .direct . beneficiariesoft4e servjce}!JP by. provided by the private contrllcto~;;il\4;(iv), pl/blic,s,ervjce qont~acts must comply ':'{ith tl\~p~lentrul~smwr~gu\ations appli<;able to all kind,.~8fgo~~f!1rru;Ilt cpntrac~r

_ \ ;YT ; ,f1:,f); .i~H:·!,"('

Public servicyGont!;ilctsmay be distinguished from government pro.curement contracts by its principal consideriltion. Government enters into public service «pnP;~ts primarily to purchase services; .and the aCCJ,ui.~i}iqn of supplies incidental to the.reQdition of such service does not change the nature of the

~ public syrvjqC9ntract. Similarly, BOT contracts

are different from public service contracts since the principal consideration in the execution of BOT contracts is not the rendition of service but the financial package offered by the private sector to invest in and construct a capital asset for the govern­ment.

The popular forms of public service contracts may be classified into four types: (i) pure service con­tracts, (ii) management contracts, (iii}lease con-' tracts, and (iv) concessions.

Local governments are granted the express authority to enter into public service contracts. The Local Government Code grants local government units, in their capacity as corporate entities, to enter into all kinds of contracts. The Administrative Code of: ,u ' 1987,further provides that agencies, including local . go;v;ernments, may contract out activities to third . parties, Likewise noteworthy are the various provisions, found in the.Local GovernmentCode:;". I

allowing local government units to tap private" .. , 0

resources in the performance of their governmental and proprietary functions.

"." ;,r,'

Local governments must, however, comply with the following requirements and restrictions prior to entering into public service contracts:

, " , ,,','

I. Public service contracts must be publicly bidded· out. Executive Order No . .301 mandatesthatallcr:' contracts for public services must undergo public bidding. No exceptions are allowed insofar asthe' bidding requirement for service contracts are con-cerned. ',. , ... ' ,,'r .,

,),,'>."1(,(, " ':' 'i;..-.'.t'>;'-·

2. The person negotiating and, executing:the.public· service contract onbehalf0fthelocal government must have all the qualificati0l\sand none of the' .,,' l disqualificationsprovidedbylaw, to wit: (i) ih,!;, " . designated as the executing officer; he or she must·i' be the local chief executive and must be authorlzed I

by the sanggunian, and {ii} he or she mustnot.;· . possess any financial or material interestin.th.€,. 1 "

transaction as described in Section 7(a)of.Republie. I··· ---

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The LauJ on Public Service Contracts: A Service Delivery Alternative for Local Governments

Act No. 6713, otherwise known as the Code of Conduct and Ethical Standards for Public Officials and Employees, Article 216 of the Revised Penal Code, and Section 3(h) of Republic Act No. 3019, otherwise known as the Anti-Graft and Conupt Practices Act. The local official must also not fall under the instances enumerated in Section 89 of the Local Government Code.

3. Public service contracts must not work for the benefit of any sect, church, denomination, sectarian institution, or system of religion. Nor may the contract be for private purposes.

4. Public service contracts must not contract out services that can be provided by the regular staff of the agency nor can implementing, monitoring and other regular and recurring activities be contracted out.

5. The cost of contracted service must not exceed the amount that would otherwise be incurred by the local government had its regular employees per­formed the work.

6. Public service contracts must be effective only for a specific period of time and must require a definite expected output.

7. Terms ofthe contract must not be grossly disadvantageous to the government.

contract has substantially complied \vith all the substantial and procedural requirements prescribed by existing laws and regulations and, therefure, its validity, insofar as the COA is concerned, should not be a contentious issue in the prosecution of money claim arising from the contract.

During the implementation of the contract, local governments must ensure that any pa}ment putSUlll1t to a public service contract must be supported by a duly enacted appropriation as certified by the local budget officer. This certification must also state that the local accountant has obligated said appropriation and that the local treasurer has certified to the availability of funds for the purpose. Payment to the private contracting party must only be made by check and only after the service has been rendered.

If the private contracting party defaults, the local government may hire another private party to execute or complete the services ono have the work undone or redone at the expense of the defaulting party. The local gQvernment may also claim damages from the private contracting party.

More importantly, the local government may rescind the contract and thus need not be liable for any payment due to the private contracting party under the contract. Rescission, however, is not allowed for a slight or casual breach of the contract. Further­more, rescission must be declared by a court unless the contract authorizes the parties to extrajudicially

8. The local government must secure a certificate of rescind the contract. availability of funds.

9. The sanggunian must approve the contract. The contract must also be posted in a conspicuous place in the provincial capitol or the city, municipal or barangay hall. Lastly, the favorable review of the higher sanggunian, if required, must be secured .

After the public service contract shall have been executed, the contract must be submitted and favorably reviewed by the COA. A favorable review by the COA serves as an assurance that the

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Local

The Law on Public Service Contracts: A Service Delivery Alternative for Local Governments 14

Notes

1. The authors wish to acknowledge the Governance and Local Democracy (GOLD) Project of the United States Agency for Interna­tional Development (US AID) for its generous grant in supporting this researdJ.. The views expressed in this paper are the personal views of the authors and do not attempt to portray the ofticial opinion of the USAID.

2. ALBERTO C. AGRA & .A..sSOCIATF.S is a law fum primarily engaged in the practice of local governance and electoral law. It is composed of three groups - Political and Policy, Corporate and Commercial, and Litigation and Labor.

3. Commission on Audit Circular No. 368-91 (December 19, 1991; hereinafter, GAAM).

"'. 4. Id., Section 520, Chapter 1, Title 8, Book III, Volume L

5. .A..sidy from the consideration to be received from the local govenunent. Section 170) of Republic Act,No l 7160, the Local Gov­ernment Code' of 1991 (hereinafter, 'tile- tbecal Government Code), allows costs to )be charged for the delivery ~~; ~SI;Sic ,serviees.

6.":' See Sang. Res. 573 (1998) 'ratf1ymgthe contract agreement entered into between the City Government of Mandaluyong and MDB General Construction dated February 17, 1998; Sang. Res. 575 (1998) ratifying the contract' entered into between' th~' tify GoveInment of Mandaluyong and Manfil Constru,*ion and Development Corpora­tion; Sang. Res. 51'(1998) ratif)rffig the agreement between the City Government of Mandaluyonl~(aitd Cleat' 'Blue Services Corporation

dated March ? ,1998;~JI'll,. it", Sl!\ ~199p),a""",ding and ,.tiJYing the contract for sanitation services between the City Government of MandaJuyoog and' Reliab1e'Maintenance Services dated January II, 1999; Sang. Res., 640 (1999).ra!iiXing the contract entered into be'" tween the City Government of Mandaluyong and Twintech Builders and Developers Inc. dated September 9, 1999; Sang. Res. 645 (1999) ratifying,the c99-tra91 eqt~n~d into betwe,en the City Government.-of' MandaliiyOrig' ~nd' Hexacon Builders and 'Traders dated September 9, 1999; San:&' Res. 651 (1999) authorizing the Hon. 13mjamin C. Abalos Jr., qty Mayor:pf: M..a.1(Idaluyong to enter,into a Memorandum of Understanding with the Housing Development Foundation, Inc.; Sang. Res. 655 (2000) ratifyihg the Memorandum of Understatidmg: entered into b~ween the. Botika ng Mandaluyong Consumers Cooperative and the City' Government of Mandaluyong dated January 2000; and Sang. Res;- 665' (2000) ratifymg the -contract tor 'sanitation services etitered into b,el:~~_~, !p:~,;.;~~ty of,Man,daluyol}g and Reliable Marketing and Maintenance Servlces dated January 1,2000.

7. Perfecto L. Padilla and Remigio D. Ocenar, Local Govern-ment-Privare Consultancy Firm Partnership: The Agora Complex in San Juan in STRENGTI!ENlNG LocAL GoVERNMENT AoMI1'<lSTRATION MOO AcCELER­ATING LocAL DEVELOPMENT 401, 405-406 (Perfecto L. Padilla ed., 1992).

8. Alternative to delivery by the government itself

9. Infrastructure projects are defmed as:

[The1 construction, improvement or rehabilitation of roads and bridges., railways, airports, seaports, communication facilities, irriga­tion, flood control and drainage, water supply and sewerage systems, shore protection, power facilities, national buildings, Sdlool buildings, hospital buildings, and other rdated construction project~ that form part of the government capital investment. Se..:. 515, Chapter 1, Title 8, Book II, Volume I, GAAM, citing Executive Order No. 380, Series

10. lomo K. S., Privatization in Malaysia, in THE POl-mcAL ECONOMY OF PRIVATIZATION 437, 438 (Thomas Clarke and Christos Pitclis eds .. 1993).

11. Genielle B. Romano, PHu.IPPfNE Puauc El'ITffiPRISES' AND

PRIvATlZATION 228 (1996).

12. Agreemt.."t1t between the City of Mandaluyong and Clear Blue Services Corporation dated April 1, 1998. See also Sang. Res. 577 (1998).

13. Luzon Stevedoring Company vs.· Collector oFlnternai Revenue, G.R. No. L-18316 (September 23,1922).

14. Id. .{"

.,' 1,,1"11;

15. Sections and 2, Rule XI, Civil Service Commission Memorandum Circular No. 40-98.

16. Id.

17.Id.

1.8. An Act Amending Certain Sectioms!of ·Republic Act Nt/:,' 6957, entitled" "An Act Authorizing ~~~.,F,ir~ncin..g, Constructi<?n .. Operation and Maintenance of Infrastructurci Projects by the Private Sector, and for Other Purposes" (1994).

19. Carlos B. Gavino, LOU FINAI-"cING: PR.E.sEJ-..,. SOURCES, AVAILABIL­ITY M'D TERMS, 36 (1998)

20. Id.,'at'37. I '" , . '):! .-'" ' ,,~ 1''- ~ "

. 2 1. ' Memorandum of Agreement entered into between the City of Sitay'and the sihy City GQVenltii~t: ~mployees Multi­Purpose Cooperative dated April 7, 1998.

22. Carlos B. Gavino, LGU FINANCING: PREsENT SOURCES, AVAILABIL-ITY AND TERMS, 36 (1998). : ;..; -; P

23. Id. 'i

24. Id .. at 37.

25. Agreement between the City'of Mandaluyong and Clear Blue Services Corporation dated April 1, 1998 l1t 7.

,: :i" ,] ; '_J ~ ••

26. Id., at 7.

27.: ~arlos B. Gavino, LGU FIN~cING: PRESe.'T SOUR~:iA';~~~IL­ITY AND TERMS, 37 (1998)

28. Id

29. Id.

30. J~eqecto L. Padilla and Remigio D. Ocenar, Local Gover.rl.J, ment~PrJvate Consultancy Firm. Partnership: The Agora Comp,!ex.\in

San Juan in STRENGTHENING loCAL GoYER.."<MENT ADMINISTRATION Ai''!) ACGaER­ATfNG LocAL DEVl'l.OPl\-iENT 401, 405~406 (Perfecto L. Padilla ed., 1992).

3 1. Carlos B. Gavino, LGU FINAI-"cING: PREsEJ"<, SOURCES, AVAILABILITY At"ID TER.\1s, 37 (1998)

32. [d.

33. Id. I

I ~ of 1989, Revising the Levels of Authority on Approval of Govern-

I ment Contracts.

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Local

TIle Law an Public Service Contracts: A Seroice Delivery Alternative for Local Guuernments

34. Executive Order No. 292, th~ AdministTati\"l;~ Code of 1987 (hereinafter, thl! Administrative Code of 1987).

35. Section 22(a)(5) and {6}, Local Govemmt!Zlt Code.

36. Section 58. Book VI, Chapter 7. Administrative Cod..: of 1987. See also Section 517. Cbaptt!r I. Trtle "ltI. Book. III. Volume L GAAM.

37. S~ 2, Chap. 1, Book VI, Administrative Corle of 1987.

38. City o[Alaniia v. Intermediate Appellale Court. G.R. No. 71159 (November 15, 1989); Tario v. Fontanilla. 85 SeRA 599 (1978).

39. The Dq>artment of Interior and Local Government issued Memorandum Cirruler No. 9()..104 on December 3, 1990 to presaibe policies and guidelines fOT the privatization of basic scr\-;ces.

40. Thus: Art. 62. Role of People s Organizations. JVongovernmenta!

Organizations and the Private Sector. - Local governments shan promote the establishment and operation of people's organiza­tions, NGOs and the private sector to make them active partners in the pursuit o(local autonomy. For this purpose,. people's organizations, NGOs and the private sector shall be directly involved in the following plans, programs, projects, or activities of the Local governments:

(a) Local special bodies;

(b) Delivery of basic services and facilities;

(c) Joint ventures and cooperative programs and undertak-ings.;

(d) Financial and other forms of assistance;

(e) .. Preferential treatment of organizations and cooperatives of margina~ .. fi~hennen;

. (f) .Pr~ferential treatment for cooperative development; and

(g) Financing, construction, maintenance, operation and management of infrastructure projects.

41. Section 1, Executive Order No. 301, Series of 1987, De­centralizing Actions on Go· .. emment Negotiated Contracts, Lease Contracts and Records Disposal (hereinafter, Executive Order No. 301).

42. Section 531, Chapter 2, Title 8, Book III, Vol. I. GAA.\t.

43. [d.

44. National Food Allthority and Romeo G. David v. the Han. Court of Appeals. et 01., G.R. Nos. 115121-25 (February 9, 1996), citing Danville Maritime. Inc. v. Commission on Audit. 175 SeRA 701 (1989) andAJa/aga v. Penachos, 213 SCRA 516 (1992).

45. Manila International Airport AuthOrity. et 01 .• v. Hon. Sergio Mabunay. Presiding Judge Regional Trial Court of Alani/a. Branch 24, et 01., G.R No. 126151 (Janu3I)' 20, 2000), citing Tanluico. Jr., STATE At:DIT CODE OF ruE PHn..IPPr:-cs 450 (1982).

46. Kilosbayan, Inc., et at. v. Manllel L Alorato, el 01., G.R .

~. No. 118910 (july 17. 1995); Department of Justice Opinion No. 173, Scr.i.es of 1993 (DCCL~ber 22, 1993).

~~~

According to Executive Order 301. public bidding 11l3y be dooe away with only under the following circumsl3tu::es:

a. Wh~JH:ver the supplies arc urgently ne.!dcd to meet an <!11lergency which may invoh'e th~ loss of. or danger to. lif~ and Of"

property:

b. Wherll .. >VCT the supplies 3n: to be usOO in cooned.ioo with a projC!Ct or activity whid! cannot be delayed without ~using dc!'tri· ment to the public service;

c. \\'1:une\'er the materials are sold by an exclusive distributor or manufacturer \\TIO does not have subdealers sdling 31. lower prices and for which no suitable substitute C3D be obtained dsomcre 31 more advantageous terms to the go,.-emment:

d. Vr'h.:never the supplies und.:r procurement havc beat un-successfully placed on bid for 3t least two consecuti'o'c tim-cs. either due to lack of bidders or the offers received in each lnst:mOl: were exorbitant or non-confonning to specifications:

c. In C3Ses where it is apparent that the requisition of the needed supplies through negotiated purchase is most :!d\·3J1t3geous to the government to be determined by the Department HC3d con­cerned:

f. \\'benever the purchase is made from 3n agen.::' of the government. (Section 1, EO ?\o. 301, Series of 1987)

47. Also please see Sec. 76, R~. Act 8174. o(hem-i:se known as the '''General .-\ppropriations Act for FiSC31 Yen 1996."

48. Section 518 states:

Dep3rtments. bure3us, offices or agencies of the n3tiooal go'o'­emment are hereby authorized to enter into contT3cts with pri\"3tc finns and non-governmental organizations for services rcl3tcd or incidental to their respective functions and opentions, through pub­lic bidding or negotiated contracts. wbene\."'a" it is Uq:tf3d.ial or more e:\-pellsi\'e for the government to directly undertake such functions and operations, subject to accounting and auditing rules and regula­tions: Pro .... ided. that the exeanion of the sen;ce coottacts shaU not operate to automatically abolish or render vacant any e.Usting occu­pied position in the contracting officer or agency. (citing S.ectioo. '31 of the general provisions of the 1992 General Appropriations Act)

49. NaCional Food AuthOrity and Romeo G. Dm'id v.. the Hon. Calm of Appeals. el aL. G.R. Xos. 115121-25 (february 9, 1996).

50. Sec. 68 of Rep. Act 7845 copies this provision wrbalim.

51. ld.

52. Article 1318. Republic Act ~o. 386. as amended. the Ci\'il Codl! ofthl! Philippines (1949: hereinafter the Ci\.'il Cod.::).

53. Commission on Audit - Policy TraiDing and T«hnic31 .-\s.<;ist.3noe Facility, ~lA...,t.'A1. os CO:<-iRACiS RE.'IDIo· 14 (1991: hercinaf­tcr, !l.lA.WAl. OOS CO~"TIlACTs RE:..1:£W").

54. Section 51, Chapter II. Book I, Administrath'c Code of 1987.

55. Sections 389 (2), 444 ( .... i), 455 ('0;): and 465 (vi). LO..."'"".l1 Government Code.

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Local

The Law an Public Service Contracts: A Service Delivery Alternative for Local Governments

56. Section 22 (c), Local Government Code.

57. Sec. 7 (a), Republic Act No. 6713, the Code of Conduct and Ethical Standards for Public Officials and Employees (1989). An example would be a 9overnor whose daughters own companies that are suppliers for the Provincial Government. eOA Decision No. 2175, dated Jan. 21, 1992, cited in MANuAL ON CONTRACTS REvIEw, at 37.

.5 8. The penahy imposed is arresto mayor in its medium pe­riod to prision correccional in its minimum period, or a fme ranging from 200 to 1,000 pesos.

?? Section 3 (h), Republic Act No. 3019, the Anti-Graft and Corrupt Practices Act (1960; hereinafter, the Anti-Graft and COT­

rupt Practices Act).

. ,60. Article 1347, Civil Code.

61. Section 29. Article VI, 1987 Constitution and Section 335, Local Government Code.

62. Section 335, Local Government Code.

63. Unnumbered COA Decision dated January 6, 1994, as cited in the MANuAL ON CONTRACTS REvIEw 40.

64: Sec. 517, Chapt~ 1, Title 8, Book III, GAAM.

65. Sec. 58, Chapter 7, Book VI, Administrative Code of 198~ .•

66. Sec. 58, Chapter 7, Book VI, Administrative Code of 1987.

,!??: . S~. ~ II, C;haptet: I, Title I, Book HI, GAAM.

68. C6AD~si?~.No. 353, dated February 15,1985, as cited in ~'lUAL ON ~ONTRACTS REvIEw 16.

69. 'Sec: 517,. Chapter 1, Title 8, Book III, GMM. !' ,', .,

70. !o reit~ate: a revenue generating contract is an agree­ment \Vhereby the government agency grants to a lessee, contractor or ~~~cess19naire the righ~ to manage and operate the revenue: generating project or facility of the fonner for a fixed fee, such as, but not limited to, buildings, market and market stalls and spaces, slaughterhouses, land, parking lots~ porterage services, stalls and advertising spaces, port facilities, cargo handling, warehouse opera­tions, stevedoring, transport service and the like. Sec. 531, Chapter 2, ,Title 8, Book Ill, GAAM.

71. Sec. 533, Chapter 2, Title 8, Book III, GAAM.

72. Sec. 533, Chapter 2, Title 8, Book III, GAAM

73. Section 3 (g), the Anti-Graft and Corrupt Practices Act.

74. Tatad vs. Garcia, G.R. No. 114222 (..A.pril 6, 1995).

75. [d.

76. Kilosbayan Incorporated, et al., v. Manuel L. Morato, et aI., G.R. No. 118910 (July 17, 1995). In this case, what petitioners

I sought to qu~tion as being grossly disadvantageous to the govem-

I ment was the Philippine Charity Sweepstakes Office's agreeing to a C minimum fixed rental of P35,OOO per lotto tenninal, giving rise to

~ Le possibility that the rental could exceed 15% of the net receipts.

77. COA Decision No. 942 dated July 13, 1989, cited in the Manual on Contracts Review, at 24.

78. Sec. 57(a), Local Government Code.

79. [d.

80. Art. 59 (2), (3), Implementing Rules and Regulations of the Local Gowrnment Code .

81. Sec. 5, Chapter I, Book I, GA.AM.

82. Sec. 8, Chapter 2, Book I, GAAM, citing Section 39(1) and (2), PD 1445 the Government Auditing Code of the Philippines (1978; hereinafter, PD 1445).

83. Sec. 8, Chapter 2, Book I, GAAM, citing Section 26; PD 1445.

84. The term "irregular expenditures" signifies an expendi­ture incurred without adhering to established rules, regulations, pro­cedural guidelines, policies, principles or practices that have gained recognition in law. Irregular expenditures are incurred without con­fonning with prescribed usages and rules of discipline. There is no observance of an established pattern, course, mode of action, behav­ior, or conduct in the incurrence of an irregular expenditure. A transaction conducted in a manner that deviates or departs from, or which does not comply with standards set, is deemed irregular. An anomalous transaction which fails to follow or violate appropriate rules or procedures is likewise irregular (Section 162, Article 2, Title 3, Book III, Volume I, G.A.AL\1, citing, COA Cir. 85-55A, Sept. 8,

1985)

85. The term "unnecessary expenditures" pertains to expen­ditures which could not pass the test of prudence or the obligation of a good father of the famity, thereby denoting non-responsiveness to the exigencies of the service. Unnecessary expenditures are those not supportive of the implementation of the objectives and mission of the agency relative to the nature of its operation. ·This would also include incurrence of expenditure not dictated by the demands of good government, and those the utility of· which, cannot be ascer­tained at a specific time. An expenditure that is not essential or that which can be dispensed with without loss or damage to property is considered unnecessary. The mission and thrusts of the agency , in-· curring the expenditures must be considered in determining whether or not an expenditure is unnecessary. (Section 163, Article 2, Title 3, Book III, Volume I, GAAM, citing COA Cir. No. 85-55A)

86. The terms "excessive expenditures" signifies unreason­able expense or expenses incurred at an immoderate quantity, or exorbitant price. It also includes expenses which exceed what is usual or proper as well as expenses which are unreasonably high, and be­yond just measure or amount. They also include expenses in excess of reasonable limits. (Section 165, Article 2, Title 3, Book III, Volume I, GAAM, citing COA Cir. 85-55A)

87. The teon "extravagant expenditures" signifies those in­curred without restraint, judiciousness and economy. Extravagant expenditures exceed the bounds or propriety. These expenditures are immoderate, prodigal, lavish, luxurious, wasteful, grossly exces­sive, and injudicious. (Sec. 166, Article 2, Book III, Volume I, GAAM, citing COA Cir. 85-55A).

88. Article IX-D, Sec. 2 (2), 1987 Constitution. The term "unconscionable expenditures" signifies expenses·'\'vithout a knowl­edge or sense of what is right, reasonable, and just and not guided or restrained by conscience. These are unreasonable, and immoderate expenses incurrcd in violation of ethics and morality by one who

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Local

The Law on Public Service Contracts: A Service Delivery Alternative for Local Governments

does not have any feeling of guilt for the violation. (Section 166. Article 2, Title J, Book llr. Volume T, GAA..\i citing COA CiT. 85-55A)

89. COA Memorandum No. 95·088 dat<!d July 3, 1995. as cited in MAA'UAL 0:-1' CO:-''''TRACTS REvIew 40.

90. COA Memorandum No. 96-010 dated August 15, 1996.

9 L COA Memorandum No. 95-088 dated July 3. 1995. as cited in MMl.IAL ON CO:-''TRACTS REvlE\1r 40.

92. Section 29, Article VI, 1987 Constitution.

93. Section 43. Book VI. Administrative Code of 1987.

94. Section 80, Book VI, Administrative Code of 1987. For instance, Article 217 of the Revised Penal Code defmes malversa­tion of public funds or property as the act of a public officer who, by reason of the duties of bis office. is accountable for public funds or property, and appropriates the same, or takes or misappropriates, or shall consent, or through abandonment or negligence, shall permit any other person to take such public funds or property, wholly or partially, or shall othenvise be guilty of the misappropriation or malversation of such funds or property. The penalty mcreases in accordance with the amount of money misappropriated. In all cases, persons guilty of malversation shall also suffer the penalty of per. petual special disqualification and a fme equal to the amount of the funds malversed or equal to the total value of the property em· bezzled.

95. Section 34, Local Government Code and Sectioo 57, COA Circular No. 92-382.

96. Sed:ion 34, Local Government Code and Section 59, COA Circular No. 92-382 as cited in Commission 00 Audit- Policy Train­ing and Tedmical Assistance Facility. 1.1A.."'"liAL 0:- AcCOUXfl:'lG A."D Au­DITING ~!E'."TSFOR SEl£CTED GoVER..'i:\fE'o'T 0!SBlJRSE',®."TS 58 (1999).

1l0.ld.

111. Article 1191. Civil Code.

112. Juan Ponce Enrile "'. CQurt o/Appeals. G.R. :-\0. L-27549 (S'!'t"",ber 30. 1969).

113. Jd.

Iii 97. Sedion 34, Local Governm"" Code and Section 58, COA

1M

III

.. ...

Circular No. 92-382.

98. Section 338, Local Government Code.

99. Section 172, .-'\rticle 2, Tille 4, Book III, Volume I, GAA.\l

100. Article 1167, Civil Code.

101. [d.

102. Article 1170, Civil Code.

103. Manalac v. GarCia, 76 Phil. 216 (1946).

104. Article 2226, Civil Code.

105. Article 2227, Civil Code.

106. ARn."RO M. TOi.E'-"Tl!io, IV CO"l\.~TARIES A."1> JeR.lSPRt'DESCE os

7HE CIVIL CODE OF THE PHILIPPr:-c:s 174 (1973).

107. Id .• at 169.

108. Massive Constmclion. Inc. v. the intermediate Appel/ale Court, G.R. Nos. 70310-11 (Jtme 1. 1993) .

109.Juan Ponce Enrile v. COllrt of Appeals, G.R No. I .... 27549 (S,!,tember 30, 1969) .

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