Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. 91890 June 9, 1995

PHILIPPINE AIRLINES. INC., petitioner, 

vs.
COMMISSION ON AUDIT and PETRON CORPORATION, respondents.

ROMERO, J.:

In this special civil action for certiorari and prohibition, petitioner Philippine Airlines. Inc. (PAL) seeks
to review, annul end reverse Decision No. 1127 of the Commission on Audit (COA) dated January 5,
1990 and to prohibit, enjoin and prevent COA from enforcing or in any way implementing
Department Order No. 19, s. 1974 of the then Department of General Services as implemented by
COA Circular No. 78-84, Memorandum No. 498 and Memorandum No. 88-565. COA Decision No.
1127 required PAL to purchase its fuel requirements solely from Petron Corporation (Petron).

PAL is a domestic corporation duly organized and existing under Philippine laws, principally
engaged in the air transport business, both domestic and international. At the time of the filing of the
petition on February 8, 1990, majority of its shares of stock was owned by the Government Service
Insurance System (GSIS), a government corporation.

To assure itself of continuous, reliable and cost-efficient supply of fuel, PAL adopted a system of
bidding out its fuel requirements under a multiple supplier set-up whereby PAL awarded to the
lowest bidder sixty percent (60%) of its fuel requirements and to the second lowest bidder the
remaining forty percent(40%), provided it matched the price of the lowest bidder.

For the period September 1988 to August 1989, the fuel supply requirements of PAL were allocated
among Petron, Caltex and Shell in the following proportions:

Location Petron Shell Caltex Total

Requirements
Mla. Int'l. 36,720 1 (60%) 24,480 (40%) — 61,200.00
Mactan Int'l. 1,450 (100%) — — 1,450.00
Package A 2 —— 13,256 (40%) 19,884 (60%) 33,140.00
Package B 3 7,450 (100%) — — 7,450.00
OVERALL 45,620(44%) 37,736 (37%) 19,884(19%) 103,240.00

On August 17, 1989, COA wrote PAL a letter 4 stating:

 It has come to our attention that PAL international fuel supply contracts are expiring
this August 31, 1989. In this connection, you are advised to desist from bidding the
company's fuel supply contracts, considering that existing regulations require
government-owned or controlled corporations and other agencies of government to
procure their petroleum product requirements from PETRON Corporation.

The existing regulations referred to in the letter were Department Order No. 19 dated May 1, 1974 of
the defunct Department of General Services, COA Office Memorandum No. 498 dated September
12, 1974 and COA Circular No. 78-84 dated August 1, 1978, which required strict compliance with
said Department Order No. 19, as well as COA Memorandum No. 88-565 dated August 2, 1988,
reiterating COA Circular No. 78-84 and COA Office Memorandum No. 498. Department Order No.
19 reads as follows:

SUBJECT : PROCUREMENT OF PETROLEUM PRODUCTS BY GOVERNMENT.

TO : All Heads of Departments and Chiefs of Bureaus,

Offices and Agencies of the Government.

To give essence to the policy of: preference to government resources in the filling of
the needs of the government for supplies, It is hereby prescribed that all
departments, bureaus, offices and/or agencies of the Philippine government, procure
their petroleum product requirements (gasoline, diesel fuel, bunker fuel, jet fuel,
aviation oil, marine oil, kerosene lubricants, greases and asphalt) from the
PETROPHIL 5 Corporation, a government-owned corporation, whenever these
commodities are adequately available and whenever practicable, at prices not exceeding
those set by the Oil Industry Commission.

The PETROPHIL Corporation shall furnish copies of the price lists, showing points of
delivery, to the Commission on Audit and all prospective government requisitioners.

For statistical purposes, the PETROPHIL Corporation shall render a quarterly report
to the Bureau of Supply Coordination (BSC) of deliveries made during the quarter in
accordance with the format prescribed by the BSC and to be submitted within forty
five (45) days after the end of each quarter.

This Department Order shall take effect immediately.

(SGD.) CONSTANCIO E. CASTAÑEDA

Secretary

PAL sought reconsideration of the August 17, 1989 advice, reiterating its reasons contained in an
earlier letter, for preferring to bid out and secure its fuel supply from more than one supplier and for
its contention that Department Order No. 19, s. 1974, as circularized by COA Office Memorandum
No. 490, should not apply to PAL. 6

In a letter 7 dated September 5, 1989, COA denied PAL 's request for reconsideration, holding that
Department Order No. 19. s. 1974 applied to government-owned or controlled corporations, including
subsidiaries. It disposed of PAL 's contention that. competitive bidding ensured the best price by
suggesting that "PAL negotiate with PETRON for the lowest possible price for its fuel requirements and to
request PETRON to ensure adequate and continued fuel supply to PAL."
A final appeal for reconsideration was made by PAL in a letter  8 dated September 15, 1989, but this
was denied in the now assailed COA Decision No. 1127, the essential portion of which states:

In this regard, we obtained information from PETRON Corporation that it can easily
supply PAL 's total jet fuel requirements on a daily basis and that there is an existing
Borrow and Loan Agreement (BLA) among oil companies whereby they assist each
other during times of product shortfall conformably to industry practice. In view
thereof, this Commission is unable to find merit in your justifications for the
procurement of petroleum products by PAL from oil companies other than PETRON
Corporation thru bidding as an exception to Department Order No. 19, s. 1974 of the
then Department of General Services, as implemented by COA Memorandum No.
88-565. Your contention that PAL is not covered by subject department order has
already been considered by this Commission when it rendered the decision in
question.

Pursuant to Article IX(A), Section 7 of the Constitution, and there being no appeal or any other plain,
speedy, adequate and effective remedy in the ordinary course of law from the aforementioned
Decision, PAL instituted the present petition, alleging that:

I.

THE COMMISSION ON AUDIT COMMITTED GRAVE ABUSE OF DISCRETION

AMOUNTING TO EXCESS OR LACK OF JURISDICTION IN HOLDING THAT
DEPARTMENT ORDER NO. 19 OF THE DEFUNCT DEPARTMENT OF GENERAL
SERVICES APPLIES TO PAL

II.

THE COA LIKEWISE EXCEEDED ITS JURISDICTION IN EXTENDING THE

APPLICATION OF SAID DEPARTMENT ORDER TO PETITIONER.

III.

ASSUMING ARGUENDO THAT THE ORDER IN QUESTION WAS INTENDED TO

COVER PAL, THE SAME CONSTITUTES AN ARBITRARY, CAPRICIOUS, AND
WHIMSICAL REGULATION THAT DEPRIVES PETITIONER OF ITS RIGHTS
UNDER THE CONSTITUTIONAL GUARANTEE OF SUBSTANTIVE DUE
PROCESS.

On May 17, 1990, after COA, through the Office of the Solicitor General, had filed its Comment on
the petition, the Court resolved "to dismiss the petition, there being no grave abuse of discretion
committed by the respondent Commission on Audit in rendering the questioned decision."  9 PAL
moved for reconsideration; whereupon, the Court resolved .on July 10, 1990 to implead Petron
Corporation as respondent in the case and to require both COA and Petron to comment on the motion for
reconsideration.

Respondents having filed their respective Comments and petitioner, its Reply to the Comments, the
motion for reconsideration was set for hearing on November 13, 1990. Thereafter, the Court
resolved to grant the motion for reconsideration, reinstate the petition, consider the respondent's
comment as Answer to the petition, give due course to the petition and require the parties to file
simultaneously their respective Memoranda. 11 The Court further resolved to issue a temporary
restraining order directing the respondent COA, or any other officer or subordinate official thereof to
cease and desist from enforcing its Decision No. 1127.

Once again, we find ourselves compelled to dismiss the petition. Pursuant to the government's
privatization program, PAL's shares of stock were bidded out early this year, resulting in the
acquisition by PR Holdings, a private corporation, of 67% PAL's outstanding stocks. PAL having
ceased to be a government-owned or controlled corporation, is no longer under the audit jurisdiction
of the COA.. Accordingly, the question raised in this petition has clearly become moot and academic.

Had it not been for this supervening event, PAL would have obtained the relief sought in the instant
petition. For although COA was correct in ruling that Department Order No. 19 applied to PAL as a
government agency at the time, it nonetheless gravely abused its discretion in not exempting PAL
therefrom.

The COA is clothed under Section 2(2), Article IX-D of the 1987 Constitution with the "exclusive
authority, subject to the limitations in this Article, to define the scope of its audit and examination,
establish the techniques and methods required therefor, and promulgate accounting and auditing
rules, and regulations including those for the prevention and disallowance of irregular, unnecessary,
excessive, extravagant or unconscionable expenditures, or uses of government funds and
properties." The authority granted under this constitutional provision, being broad and
comprehensive enough, enables COA to adopt as its own, simply by reiteration or by reference,
without the necessity of repromulgation, already existing rules and regulations. It may also expand
the coverage thereof to agencies or instrumentalities under its audit jurisdiction. It is in this light that
we view COA Memorandum No. 88-565 issued on August 1, 1988.

As asserted by the Solicitor General, while Memorandum No. 88-565 still referred to Office
Memorandum No 498, dated September 12, 1974 requiring strict compliance with Department Order
No. 19 dated May 1, 1974, in restating in full said Department Order No. 19 in Memorandum No 88-
565, COA effectively adopted it as its own, thereby expanding its coverage to government-owned or
controlled corporations. Such action was in consonance with its jurisdiction as defined under the
1987 Constitution, as follows,

Sec. 2. (1) The Commission on Audit shall have the power, authority and duty to
examine, audit and settle all accounts pertaining to the revenue and receipts of, and
expenditures of uses of funds and property, owned or held in trust by, or pertaining
to, the Government, or any of its subdivisions, agencies, or instrumentalities,
including government-owned and controlled corporations with original charters, and
on a post-audit basis: (a) constitutional bodies, commissions and offices that have
been granted fiscal autonomy under this Constitution; (b) autonomous state colleges
and universities; (c) other government-owned or controlled corporations with original
charters and their subsidiaries; and (d) such non-governmental entities receiving
subsidy or equity, directly or indirectly, from or through the government, which are
required by law of the granting institution to submit to such audit as a condition of
subsidy or equity. . . .

as well as the settled legal meaning of the phrase "agency of the Government," as incorporated in
Section 2, Chapter I, Subtitle 8, of the Revised Administrative Code of 1987, thus:

(8) "Government agency" or "agency of the government," or "agency" refers to any

department, bureau or office of the National Government, or any of its branches and
instrumentalities, or any political sub-division, as well as any government-owned or
 controlled corporation , including its subsidiaries or other self-governing board or
commission of the Government.

As a corporation, the majority Shares of Stocks of which were owned by the GSIS at that time, PAL
could not hope to escape the operation of Memorandum No. 88-565.

Be that as it may, it must be noted that Department Order No. 19 itself states that the procurement of
petroleum product requirements from the then PETROPHIL, now PETRON Corporation, prescribed
"whenever these commodities are adequately available and whenever practicable, at prices not
exceeding those set by the Oil Industry Commission."

In its letters of reconsideration addressed to COA, PAL stated the reasons why procuring all its fuel
requirements from PETRON Corporation might not be practicable. One reason was that bidding
gave the best and lowest prices. If compelled to purchase all of its fuel needs from PETRON, PAL
stood to lose some P34,055,377.00; indeed, a considerable amount for a corporation trying to effect
a financial turnabout, and consequently an additional burden to the riding public which has to
eventually shoulder the added operating costs.

Another reason given by PAL was that relying on a single fuel supplier would put into jeopardy the
regularity of its services, as there were possible contingencies not within PETRON's control which
could cause a disruption of fuel supply. In fact, during the pendency of the petition, PETRON gave
notice to PAL of its inability at the time to serve PAL's requirement at
Nichols/Cebu/Davao/Zamboanga and suggested that PAL arrange with its other suppliers for the
balance of its needs by simply extending all of its existing contracts covering domestic fuels.

The reasons given by PAL for seeking exemption from the operation of Department Order No. 19
were, to our mind, meritorious. They far outweigh the policy enunciated in Department Order No. 19
of giving preference to government sources in the filling of the needs of the government for supplies.
Thus, PAL's bidding requirement conformed to the accepted policy of the government to subject
every transaction/contract to public bidding in order to protect public interest by giving the public the
best possible advantages thru open competition and to avoid or preclude suspicion of favoritism  and
anomalies in the execution of public contracts. 12

Its multiple supplier set-up was designed precisely to meet every contingency that might disrupt its
fuel supply. It bespoke of foresight, careful planning and sound business judgment on the part of
PAL. As a business operation heavily dependent on fuel supply, for PAL to rely solely on a single
supplier would indeed be impracticable. To compel it to do so would amount to a grave abuse of
discretion on its part as this might well lead to irregular, excessive or unconscionable expenditures,
the very evil sought to be avoided in the creation of the COA.

This, however, is so much water under the bridge. PAL's corporate complexion having changed
during the pendency of the instant petition from government-controlled to private ownership, we
dismiss the petition for being moot and academic.

WHEREFORE, the petition is hereby DISMISSED for being moot and academic. No pronouncement
as to costs.

Regalado, Davide, Jr., Melo, Kapunan and Francisco, JJ., concur

Padilla, Puno, Vitug and Mendoza, JJ., concur in the result.

Narvasa, C.J., Feliciano, Bellosillo and Quiason, JJ., are on leave.