The Supreme Court in PHIVIDEC Industrial Authority vs. Capitol Steel Corporation clarified the stringent requirements for government-owned and controlled corporations (GOCCs) to hire private legal counsel. The Court emphasized that GOCCs must primarily rely on the Office of the Government Corporate Counsel (OGCC) for legal representation, and can only hire private lawyers in exceptional cases with prior written consent from both the OGCC and the Commission on Audit (COA). This ruling underscores the government’s policy to reduce public expenditures and ensure fidelity to the government’s cause.

Hiring Hurdles: Can PHIVIDEC Side-Step Rules on Government Counsel for Expropriation?

This case originated from an expropriation complaint filed by PHIVIDEC Industrial Authority against Capitol Steel Corporation, represented by Atty. Cesilo Adaza, a private lawyer. The central legal issue revolved around whether Atty. Adaza had the proper authority to represent PHIVIDEC, considering the rules governing the engagement of private counsel by GOCCs. Capitol Steel questioned Atty. Adaza’s authority, arguing that PHIVIDEC had not complied with the requirements of securing prior written consent from the OGCC and COA. The Regional Trial Court initially denied Capitol Steel’s motion to dismiss, but the Court of Appeals later reversed this decision, leading to the Supreme Court review.

The Supreme Court delved into the history of laws governing the role of the OGCC, tracing it back to Republic Act No. 2327 in 1959, which established the position of Government Corporate Counsel. Subsequent amendments, particularly Republic Act No. 3838, solidified the OGCC as the principal law office for GOCCs, imposing restrictions on hiring private counsels. Initially, GOCCs could hire private lawyers with the written consent of the Government Corporate Counsel or the Secretary of Justice. However, Presidential Decree No. 1415 in 1978, eliminated this exception, mandating the OGCC as the exclusive legal representative for all GOCCs without exception.

Executive Order No. 292, the Administrative Code of 1987, later removed the phrase “without exception,” but retained the OGCC’s role as the principal law office. The Court explained that this amendment, coupled with the President’s executive and administrative powers, allowed for the issuance of rules governing the relationship between GOCCs and the OGCC. This led to Administrative Order No. 130, which reaffirmed the exclusive mandate of the OGCC, allowing the President to authorize only the Office of the Solicitor General to represent GOCCs in place of or in addition to the OGCC.

A pivotal point came with Memorandum Circular No. 9, issued in 1998, which provided a specific exception to the prohibition of hiring private lawyers. According to Section 3 of this Circular:

“GOCCs are likewise enjoined to refrain from hiring private lawyers or law firms to handle their cases and legal matters. But in exceptional cases, the written conformity and acquiescence of the Solicitor General or the Government Corporate Counsel, as the case may be, and the written concurrence of the Commission on Audit shall first be secured before the hiring or employment of a private lawyer or law firm.”

The Supreme Court emphasized that this exception was subject to stringent conditions. First, hiring private counsel could only occur in exceptional cases. Second, the GOCC had to first secure written consent from the Solicitor General or the Government Corporate Counsel. Third, the written concurrence of the COA was also required before hiring. These requirements reflect a clear policy to curtail unnecessary public expenditures and ensure the fidelity of legal representation to the government’s interests.

The Court noted the significant reasons behind this public policy. Minimizing the expenses of GOCCs, particularly the high costs associated with private legal fees, was a primary concern. The whereas clauses of Memorandum Circular No. 9 explicitly state the need to reduce government expenditures by minimizing the expenses of GOCCs:

WHEREAS, there is a need to reduce government expenditures by minimizing the expenses of government-owned or controlled corporations (GOCCs) which hire private lawyers and law firms, considering the high cost of retainers, fees and charges that are paid to said private lawyers and law firms;

WHEREAS, one way of realizing savings on the part of government-owned or controlled corporations (GOCCs) is to implement and enforce pertinent laws and regulations which prohibit GOCCs from hiring private retainers and law firms to handle their cases and legal matters, and those which direct GOCCs to refer their cases and legal matters to the Office of the Government Corporate Counsel (OGCC) for proper handling.

Furthermore, the policy recognized the stronger ties of OGCC lawyers to their client government corporations, fostering a deeper sense of fidelity and preserving the confidentiality of sensitive information. Given this framework, the Court scrutinized PHIVIDEC’s claim of compliance with these requirements.

The Supreme Court found that PHIVIDEC failed to meet the conditions set by Memorandum Circular No. 9. Atty. Adaza filed the expropriation suit on August 24, 1999, before PHIVIDEC secured the required written concurrences from the OGCC and the COA. The documents submitted by PHIVIDEC did not substantiate the claim that the requisite concurrences were obtained at all. The Court dismissed the COA Regional Office’s Indorsement as mere second-hand information and noted it was dated June 4, 2002, long after the case was filed. There was also no concrete proof of written concurrence from the Office of the Government Corporate Counsel. The Court referenced a letter from the OGCC suggesting changes to the retainer contract, but concluded that this could not serve as proof of concurrence.

The Court also mentioned COA Circular No. 86-255, which requires prior written concurrences from the OGCC or the Solicitor General and the COA before GOCCs hire private counsel. However, it clarified that the COA Circular does not grant or disallow the authority for GOCCs to hire private counsel, but rather governs the disbursement of public funds for retained lawyers. In conclusion, the Supreme Court determined that Atty. Adaza lacked the authority to file the expropriation case on behalf of PHIVIDEC. Citing analogous cases, the Court emphasized that such a lack of authority is sufficient grounds for dismissal.

Therefore, the Supreme Court upheld the Court of Appeals’ decision, ordering the dismissal of the case without prejudice to refiling by PHIVIDEC through a proper legal officer or counsel. The Court deemed it unnecessary to address the procedural issue raised in the petition, given the unauthorized engagement of Atty. Adaza. The decision underscores the importance of strict adherence to the rules governing the legal representation of GOCCs, reinforcing the policy of prioritizing the OGCC and minimizing unnecessary expenses.

FAQs

What was the key issue in this case?	The central issue was whether a private lawyer, Atty. Adaza, had the authority to represent PHIVIDEC, a government-owned corporation, in an expropriation case, given the regulations governing the hiring of private counsel by GOCCs. The court focused on the necessity of prior written consent from the OGCC and COA.
What is a GOCC?	A GOCC is a government-owned or controlled corporation. These are entities where the government owns the majority of shares or has significant control over their operations.
What is the role of the OGCC?	The Office of the Government Corporate Counsel (OGCC) is the principal law office for all government-owned and controlled corporations (GOCCs). It is primarily responsible for providing legal advice and representation to these entities.
Can GOCCs hire private lawyers?	Generally, GOCCs are expected to be represented by the OGCC. They can only hire private lawyers in exceptional cases, and only with prior written consent from both the OGCC and the Commission on Audit (COA).
What is Memorandum Circular No. 9?	Memorandum Circular No. 9, issued in 1998, outlines the conditions under which GOCCs can hire private lawyers. It requires that the hiring be for an exceptional case and that prior written consent from the OGCC (or Solicitor General) and COA be obtained.
Why are there restrictions on GOCCs hiring private lawyers?	The restrictions aim to reduce government expenditures by minimizing the legal fees paid to private lawyers. They also ensure that GOCCs are represented by counsel who are deeply committed to the government’s interests and maintaining confidentiality.
What happens if a private lawyer represents a GOCC without proper authorization?	If a private lawyer represents a GOCC without the required authorization, the actions taken by the lawyer on behalf of the GOCC may be deemed invalid. The case could be dismissed, as it was in this instance.
What does “without prejudice” mean in the court’s decision?	“Without prejudice” means that the case was dismissed, but PHIVIDEC is not barred from refiling the case. However, they must do so through a proper legal officer or counsel, ensuring compliance with the requirements for legal representation of GOCCs.

This case serves as a clear reminder of the strict regulations governing the engagement of private legal counsel by government-owned and controlled corporations. It emphasizes the importance of adhering to established procedures and securing the necessary approvals to ensure the validity of legal representation. This ruling reinforces the government’s commitment to fiscal responsibility and the integrity of legal processes within the public sector.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: PHIVIDEC INDUSTRIAL AUTHORITY VS. CAPITOL STEEL CORPORATION, G.R. No. 155692, October 23, 2003