Case 2.

Philippine National Railways (Petitioner) vs.

Kanlaon Construction Enterprises Co. Inc. (Respondent)

Facts of the Case

In July 1990, PNR and Kanlaon entered into a contract of construction of PNR stations i.e. College station,
Binan station, and Buendia station. On June 1994, Kanlaon send a demand letter to PNR requesting for
the release of the retention money in the amount of PhP333,894.07 plus PhP531,652.72 for unpaid
contract price. However, PNR was constraint to pay because of some Audit findings by the Commission
on Audit (COA). Hence, Kanlaon filed a case for collection of sum of money and damages in RTC which
sided respondent. Unsatisfied, PNR elevated the case to the Court of Appeals (CA) wherein it affirmed the
decision of RTC. Hence, the petition to the Supreme Court.

Issue of the Case

Whether or not the CA is correct in affirming the decision of RTC to pay Kanlaon for the unpaid contract
price plus damages.

Decision

No, CA erred in affirming the RTC. The contract between PNR and Kanlaon violated a requirement of the
law, making their contract void. The Administrative Code of 1987 expressly prohibits the entering into
contracts involving the expenditure of public funds unless two (2) 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.

PS. What is the recourse now of Kanlaon? Having already completed the project for PNR.

 The officers entering into the contract shall be liable to the Government or other contracting party
for any consequent damage to the same extent as if the transaction had been wholly between
private parties as provided in Section 48 of the Administrative Code of the Philippines