FACTS
The Civil Service Commission (CSC) Regional Office No. X awarded Engr. Domingo F. Estomo, doing business as Domingo F. Estomo Trading & Construction, the contract for the construction of the third floor of the CSC Regional Office building for ₱1,475,789.07. During the implementation of the project, Estomo also performed additional works and change orders upon the instruction and approval of CSC officials. After completing the project, CSC withheld portions of the contract price by deducting retention money, taxes, and other amounts allegedly representing deficiencies. Estomo claimed that these deductions were unauthorized and that CSC also failed to pay him for the approved extra works.
Unable to obtain full payment, Estomo filed before the Regional Trial Court (RTC) an action for specific performance, collection of sum of money, and damages. During the pendency of the case, CSC deposited part of the disputed amount in escrow. The RTC ruled substantially in favor of Estomo and ordered CSC to pay the remaining balance. However, the Court of Appeals reversed the RTC, holding that CSC's obligation had already been extinguished because the escrow deposit had been released to Estomo. Dissatisfied, Estomo elevated the case to the Supreme Court through a petition for review on certiorari under Rule 45 of the Rules of Court.
The Supreme Court examined not only whether the CA correctly appreciated the evidence but also whether the deductions made by CSC were legally justified, whether Estomo was entitled to payment for the extra works, and whether the retained amounts should be released. Although factual issues are generally not reviewable under Rule 45, the Court applied the recognized exception because the factual findings of the RTC and the CA were conflicting.
The Court likewise interpreted several laws governing government infrastructure contracts and taxation, including Presidential Decree No. 1594 and its 1992 Implementing Rules and Regulations on public infrastructure projects, as well as the National Internal Revenue Code of 1997 (NIRC), Section 114(C) on withholding Value-Added Tax (VAT), Revenue Regulations No. 2-98 on creditable withholding taxes, and the rule in Nacar v. Gallery Frames on the applicable legal interest for monetary awards.
ISSUE
Whether the Court of Appeals erred in ruling that CSC's obligation had already been extinguished despite Estomo's claim for unpaid balances, extra works, and retention money.
Whether the deductions made by CSC from the contract price—including withholding taxes, retention money, and alleged deficiencies—were valid under the applicable procurement laws and tax regulations, and whether Estomo was entitled to payment for additional works and the release of retention money.
Whether legal interest should be imposed on any amount adjudged in favor of Estomo, and what rate should apply under prevailing jurisprudence.
HELD
The Supreme Court PARTIALLY GRANTED the petition. It held that while several deductions made by CSC were valid, the Court found that Estomo remained entitled to the release of certain retention money that had been improperly withheld. The Court explained that under P.D. No. 1594 and its 1992 IRR, retention money serves as security for the faithful performance of the contractor's obligations but must be released once the conditions prescribed by law and the contract have been satisfied. Since Estomo had substantially complied with the contractual requirements, portions of the retained amounts should have been released in his favor.
The Court further ruled that CSC correctly deducted the applicable withholding taxes pursuant to Section 114(C) of the National Internal Revenue Code of 1997, which required government agencies to withhold 6% VAT on payments to contractors, as implemented by Revenue Regulations No. 2-98. Likewise, deductions representing documented deficiencies and certain adjustments were sustained because they were supported by the records and applicable government procurement rules. However, Estomo could recover only those extra works that had been properly approved in accordance with P.D. No. 1594 and its implementing regulations, since government contracts cannot be modified or expanded without the required approvals.
Finally, the Court ruled that the monetary award due Estomo should earn legal interest following Nacar v. Gallery Frames. Accordingly, the unpaid amount shall earn 12% per annum from the date of judicial demand on February 4, 1998 until June 30, 2013, and 6% per annum from July 1, 2013 until full satisfaction, reflecting the change in the legal interest rate adopted in Nacar. The case was remanded to the RTC solely for the computation of the exact amount due in accordance with the Supreme Court's findings and the governing laws on government contracts and taxation
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