G.R. No. 128145; September 5, 2001
J.C. LOPEZ & ASSOCIATES, INC., petitioner, vs. COMMISSION ON AUDIT and NATIONAL POWER CORPORATION, respondents.

FACTS

Petitioner J.C. Lopez & Associates, Inc. entered into a contract with the National Power Corporation (NAPOCOR) for the dredging of silt at the Ambuklao Hydroelectric Plant. The contract, totaling P67,501,000.00, included specific pay items for mobilization, dredging per cubic meter, and demobilization. NAPOCOR made an advance payment of 15% of the total contract price to the petitioner. Due to substantial delays and slippages in the dredging operations, NAPOCOR terminated the contract. A subsequent joint survey determined the petitioner had dredged 167,983.70 cubic meters of silt. NAPOCOR later entered into a new contract with another entity for the plant’s rehabilitation, which included the dredging work. The petitioner filed a complaint for injunction with the Regional Trial Court, challenging the termination. The trial court issued a writ of preliminary injunction, which was later set aside by the Court of Appeals. The petitioner then sought relief from the Supreme Court.
The Commission on Audit (COA) disallowed the advance payment made by NAPOCOR to the petitioner, ruling it was illegal for being a mobilization fee not permitted under Presidential Decree No. 1594 and its Implementing Rules and Regulations. COA held that the contract was for an infrastructure project, making PD 1594 applicable, and that the payment constituted an unlawful advance payment for mobilization, which is prohibited. The petitioner argued the contract was for services, not infrastructure, and that the payment was a legitimate contractually stipulated “pay item” for mobilization costs, not a simple advance.

ISSUE

The primary issue is whether the COA correctly disallowed the advance payment made to the petitioner, classifying it as an illegal mobilization fee under PD 1594.

RULING

The Supreme Court upheld the decision of the Commission on Audit. The Court ruled that the dredging contract constituted an infrastructure project as defined under PD 1594, which covers “the construction, improvement, rehabilitation, repair, restoration, or demolition of structures and other public works.” The dredging activity was integral to the rehabilitation and maintenance of the Ambuklao Hydroelectric Plant, a public utility, thus falling squarely within the decree’s coverage. Consequently, the contract was subject to the policies and guidelines of PD 1594 and its Implementing Rules and Regulations.
The legal logic centers on the violation of specific provisions prohibiting certain advance payments. PD 1594 and its IRR expressly allow advance payments only for materials delivered, and explicitly prohibit advance payments for mobilization. The Court found that the 15% payment, though contractually labeled as an advance payment deductible from a later mobilization cost pay item, was in substance and effect a prohibited advance payment for mobilization. The contract’s attempt to structure the payment as a “pay item” could not circumvent the mandatory legal prohibition. The stipulations of contracting parties, while generally respected under the Civil Code, must yield when they are contrary to law, such as the specific proscriptions in PD 1594 designed to ensure the efficient and prudent use of public funds in government infrastructure projects. Therefore, COA correctly disallowed the payment as illegal and contrary to law.