Good Faith Exception to Disallowance: Protecting Public Servants from Personal Liability

G.R. No. 252092, March 14, 2023

Imagine a scenario where a government employee, acting under established guidelines and with the best intentions, authorizes a payment later deemed irregular by the Commission on Audit (COA). Should this employee be personally liable to return the funds, even if they acted in good faith? This question lies at the heart of a recent Supreme Court decision that clarifies the nuances of government disallowances and the crucial role of good faith in determining liability.

This case, involving employees of the Philippine Rice Research Institute (PhilRice), provides valuable insights into the complex interplay between public accountability and equitable considerations. It underscores the importance of understanding the exceptions to the general rule of returning disallowed funds, particularly when public servants act in reliance on established institutional practices.

Understanding Government Disallowances and Liability

Government disallowances occur when the COA disapproves a transaction, finding it irregular, unnecessary, excessive, extravagant, or unconscionable. These disallowances are aimed at safeguarding public funds and ensuring accountability in government spending. However, the question of who bears the responsibility for returning disallowed amounts can be complex, especially when multiple individuals are involved in the transaction.

The governing law in these situations is Section 12 of Republic Act No. 6758, also known as the Compensation and Position Classification Act of 1989. This provision mandates the consolidation of allowances and compensation into standardized salary rates, with specific exceptions. It states:

“Section 12. Consolidation of Allowances and Compensation. — All allowances, except for representation and transportation allowances: clothing and laundry allowances; subsistence allowance of marine officers and crew on board government vessels and hospital personnel; hazard pay; allowances of foreign service personnel stationed abroad: and such other additional compensation not otherwise specified herein as may be determined by the DBM, shall be deemed included in the standardized salary rates herein prescribed. Such other additional compensation, whether in cash or in kind, being received by incumbents only as of July 1, 1989 not integrated into the standardized salary rates shall continue to be authorized.”

Prior Supreme Court rulings like Laguna Lake Development Authority v. Commission on Audit have interpreted this section to mean that allowances not explicitly exempted are integrated into standardized salaries. This framework sets the stage for determining the propriety of benefits and the potential liability for disallowed amounts.

The PhilRice Car Plan: A Case of Good Intentions Gone Awry

The case revolves around a car plan implemented by PhilRice to attract and retain talented employees. Under this scheme, qualified officials acquired vehicles and then rented them to PhilRice for official use. This rental arrangement was intended to provide employees with a benefit while also addressing the institute’s transportation needs. However, the COA later disallowed the rental payments, deeming them an unauthorized additional allowance.

The COA issued Notices of Disallowance (NDs) totaling PHP 10,449,557.45, citing several irregularities, including the lack of presidential approval for the car plan and its conflict with austerity measures. The NDs targeted both the car owners and the officials who approved the disbursement vouchers.

The case wound its way through the COA’s regional and central offices before reaching the Supreme Court. Petitioners argued that the car plan was not a financial benefit but a necessary incentive to prevent a “brain drain” at PhilRice, and that they acted in good faith by following administrative orders issued by the institute’s leadership. The procedural journey involved the following steps:

• Issuance of Notices of Disallowance (NDs) by COA auditors
• Appeal to the COA Regional Director, who affirmed the NDs with some exceptions.
• Petition for Review filed with the COA Proper, reiterating arguments and emphasizing good faith.
• COA Proper partially approved the Petition, affirming most disallowances but excluding drivers’ salaries.
• Motion for Reconsideration filed by petitioners, arguing unfairness, unjust enrichment, and good faith.
• COA Proper partially granted the motion, lifting disallowances on per diems but maintaining disallowance of car rental payments.

The Supreme Court’s decision hinged on the application of the “good faith” exception to the general rule of returning disallowed funds. The Court noted:

“The additional allowance pursuant to the car benefit plan of the PhilRice, in the guise of monthly amortization payments of petitioners’ private vehicles, is utterly devoid of legal basis. Consequently, the COA did not act with grave abuse of discretion in rendering the challenged Decisions which, on the contrary, appear to be in accord with the facts and applicable law and jurisprudence.”

Despite acknowledging the irregularity of the payments, the Court ultimately sided with the petitioners, recognizing the exceptional circumstances and their good faith. Justice Dimaampao reasoned that:

“While, the arrangement resembled an additional allowance in favor of the beneficiaries or owners of the vehicles which, as aptly found by the COA, had no proper basis in law, still, to deny them of compensation for the lease of their vehicles would be tantamount to injustice, which cannot be countenanced by this Court.”

Practical Implications and Key Lessons

This decision provides important guidance for government employees and officials involved in authorizing payments that may later be subject to disallowance. It reinforces the principle that good faith, when demonstrated through reliance on established procedures and a genuine belief in the legitimacy of the transaction, can shield individuals from personal liability.

However, it is crucial to note that the good faith exception is not a blanket protection. Government employees must still exercise due diligence and ensure that transactions comply with applicable laws and regulations. Reliance on institutional practices should not be blind but rather informed and reasonable.

Key Lessons:

• Government employees can be excused from returning disallowed funds if they acted in good faith.
• Good faith is demonstrated by reliance on established procedures, a genuine belief in the legitimacy of the transaction, and the absence of malice or gross negligence.
• Even with good faith, government employees must exercise due diligence to ensure compliance with laws and regulations.

Hypothetical Example: Suppose a government agency provides its employees with a transportation allowance based on a long-standing internal policy. If the COA later disallows this allowance due to a lack of specific legal authorization, employees who received the allowance in good faith, relying on the agency’s policy, may be excused from returning the funds.

Frequently Asked Questions

Q: What is a government disallowance?

A: A government disallowance is the disapproval by the Commission on Audit (COA) of a transaction involving government funds, typically due to irregularities or non-compliance with regulations.

Q: What does it mean to be held liable for a disallowance?

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A: If held liable, you are required to return the disallowed amount to the government. The extent of your liability can vary depending on your role and the circumstances surrounding the disallowance.

Q: What factors does the COA consider when determining liability for a disallowance?

A: The COA considers several factors, including your role in the transaction, your knowledge of the relevant regulations, and whether you acted in good faith.

Q: What is the impact of the Madera doctrine on disallowance cases?

A: The Madera doctrine provides guidelines on who is liable to return disallowed amounts, distinguishing between approving officers, certifying officers, and passive recipients. It also introduces exceptions based on good faith and unjust enrichment.

Q: What is the effect of the decision in Borja v. COA on disallowances?

A: The Borja v. COA case clarifies the application of the good faith exception, protecting individuals who relied on established institutional practices from personal liability for disallowed amounts.

Q: What should I do if I receive a Notice of Disallowance?

A: Consult with a qualified legal professional experienced in government disallowance cases to assess your options and prepare a response.

ASG Law specializes in government disallowance cases and administrative law. Contact us or email hello@asglawpartners.com to schedule a consultation.