NPM 122-2004

Requesting Entity: Office of the President

Issues Concern: Application of Advance/Down Payment in the Procurement of Goods



How will the (thirty percent) 30% down payment by the AFP be applied for payment of partial deliveries of the spare parts it procured?

While the government may have permitted advanced payment, thus, pushing the entire contract out of the ambit of the evil avoided in Section 88 of Presidential Decree No. 1554 or the Government Auditing Code of the Philippines, it could not have contemplated to procure “future goods.” It would be hardly believable that it was the intention of the government to finance the production or manufacture of the spare parts at the outset and pay for resulting deliveries.

Under Article 1378 of the New Civil Code, when it is absolutely impossible to settle doubts in the interpretation of contracts by any other rules established in the Civil Code, and the contract is onerous, the doubt shall be settled in favor of the greatest reciprocity of interests. The foregoing provision of law creates a prescription by which the interests of the parties are promoted and a mechanism to ensure that the contractual relationship is achieved on equal planes.

In the case under consideration, another draw down from the renewed letter of credit even before the initial (down) payment is exhausted would place the government in a disadvantageous position as such grant would, in effect, require the government to tender payment for undelivered goods and supplies. Reciprocity of interests, in this case, should mean fairness in mutual dealings between the parties. The government should not be situated in such manner as would require it to pay for goods and supplies that have yet to be delivered. Otherwise, he is being made to pay merely for expectancy, which definitely could not have been the intention of the government in entering into a contract for procurement.

In Legarda Hermanos vs. Saldana (55 SCRA 328) and Calasanz vs. Angeles (135 SCRA 323), involving the contracts of sale, the Supreme Court equitably allocated the benefits and losses between the parties to preclude undue enrichment by one at the expense of the other. Using the same norm, a draw down from the L/C before the initial draw down shall have been exhausted would prove to be prejudicial to the interests of the government. It would amount to an undue enrichment of the supplier at the government’s expense. Benefits and losses that may spring from the contract should weigh equally on both parties, otherwise, the scales of fairness unfairly tilts in favor of the supplier.

With the foregoing elucidations, it is the opinion of the GPPB that the down payment should first be exhausted before any additional draw downs from the L/C may be had. Assuming that the government indeed intended the thirty percent (30%) down payment to finance the manufacture or production of the spare parts, any further threat to its interests should be struck down. It should not be made to pay further for goods that are undelivered.