When Government Contracts Meet Congressional Oversight: The Limits of Compromise Agreements

The power of government-owned and controlled corporations (GOCCs) to settle disputes is not absolute. In Binga Hydroelectric Plant, Inc. v. Commission on Audit (G.R. No. 218721, July 10, 2018), the Supreme Court En Banc reaffirmed that compromise agreements involving claims exceeding P100,000.00 against government agencies require congressional approval. The decision serves as a critical reminder that even court-approved settlements cannot bypass the constitutional framework governing public funds.

The Dispute: A Settlement That Fell Short

Binga Hydroelectric Plant, Inc. (BHEPI) entered into a Rehabilitate-Operate-Leaseback (ROL) Contract with the National Power Corporation (NPC) for the Binga Hydroelectric Power Plant in Benguet. In March 2003, BHEPI, NPC, and the Power Sector Assets and Liabilities Management Corporation (PSALM) signed a Settlement Framework Agreement (SFA) to resolve all claims and disputes arising from the contract. The SFA required NPC to pay BHEPI $5,000,000.00, conditioned on the settlement of unpaid claims of subcontractors and employees.

When NPC allegedly failed to comply, BHEPI filed a case for specific performance. During appeal, the parties entered into a Compromise Agreement, which the Court of Appeals approved. Under this agreement, NPC would pay BHEPI $5,000,000.00 plus P40,118,442.79 representing alleged savings from reduced subcontractor claims.

When BHEPI sought payment, the Commission on Audit (COA) denied the money claim. The COA ruled the Compromise Agreement was null and void because it was never submitted for congressional approval as required by law.

The Core Issue: Who May Compromise Government Claims?

BHEPI and NPC argued that under the Government Auditing Code (Presidential Decree No. 1445), GOCCs have the exclusive power to compromise claims when expressly authorized by their charters. They contended that NPC's power to sue and be sued implied the power to compromise.

The Supreme Court rejected this argument. The Court held that the relevant provision of PD No. 1445 had been superseded by a later law—the Administrative Code of 1987 (Executive Order No. 292)—which governs the power to compromise claims involving government agencies. Under this framework:

• The COA may compromise claims not exceeding P10,000.00
• With the President's written approval, claims not exceeding P100,000.00
• Claims exceeding P100,000.00 require submission to Congress through the COA and the President, with their recommendations

Since the liabilities here—$5,000,000.00 and P40,118,442.79—far exceeded P100,000.00, Congress alone had the power to compromise the claims. The Court cited its earlier ruling in Strategic Alliance Development Corporation v. Radstock Securities Limited (G.R. No. 178158, December 4, 2009), which applied the same principle to the Philippine National Construction Corporation.

Finality of Judgment Does Not Bind the COA

BHEPI argued that the Compromise Agreement, having been approved by the Court of Appeals and becoming final and executory, could no longer be questioned. The Court disagreed. While a court judgment may be final, the COA retains primary jurisdiction to examine, audit, and settle all debts and claims due from or owing to the Government.

Filing a money claim with the COA is a condition sine qua non before payment can be effected against a government agency. The COA's duty to settle claims means deciding whether to allow or disallow them—not merely affirming claims because courts have validated them.

The "Settled" Requirement and PSALM's Omission

The Court emphasized that the rule on congressional approval applies only to claims that are already "settled"—meaning liquidated, uncontested, and readily determinable from vouchers, invoices, and similar documents. In this case, the claims were not settled because PSALM, an indispensable party, was not a signatory to the Compromise Agreement.

Under the Electric Power Industry Reform Act (EPIRA, Republic Act No. 9136), PSALM is a separate corporate entity that assumed NPC's liabilities upon the law's effectivity in June 2001. Since PSALM never approved the Compromise Agreement, the claims against NPC remained doubtful and unsettled.

The "Savings" Claim: Unjust Enrichment

The Court also found the P40,118,442.79 claim improper. This amount represented 50% of the "savings" from reduced subcontractor and employee claims. The Court called this a "clear form of unjust enrichment at the expense of the subcontractors and employees," as BHEPI would effectively receive a commission on waived portions of legitimate claims.

Practical Takeaways

• Congressional approval is mandatory for compromise agreements involving government claims exceeding P100,000.00, regardless of what a GOCC's charter says.
• Court approval is not enough. Even a final and executory judgment approving a compromise does not bind the COA, which retains primary jurisdiction over money claims against the government.
• Identify the proper party. After EPIRA, liabilities transferred to PSALM must be negotiated with PSALM, not the NPC.
• Document everything. Claims must be supported by vouchers, invoices, receipts, and other substantiating papers. Bare assertions will not suffice.
• Beware of "savings" arrangements. Agreements that effectively reward one party for reducing legitimate claims of third parties may be struck down as unjust enrichment.

This article is general information and not legal advice. For your specific situation, consult a lawyer or ask ASG Legal AI.