NPM 108-2004

Requesting Entity: Municipality of Virac, Catanduanes

Issues Concern: Warranty Security under Section 62 of Republic Act 9184 and its Implementing Rules and Regulations Part A



1. Whether or not warranty for goods covered by retention money or bank guarantee under Section 62.1 of the IRR-A of R.A. 9184 is required for highly-perishable goods, which are consumed before the expiration of the three-month warranty period.

By virtue of this provision (Sec. 62.1, IRR-A), procuring entities are now mandated to retain a part of the contract price, or require a bank guarantee from its suppliers, manufacturers or distributors in the procurement of goods. This provision is generic in application and provides for no exception such that even procurement of goods in small amounts and quantity including those highly-perishable goods, which are to be consumed immediately, are subject to this requirement.

However, as regards the warranty period which is fixed by law as three (3) months for supplies, we believe that this period may further be shortened for highly-perishable goods depending upon when such goods are consumed. It can be observed from the aforequoted provision that the release of the obligation for warranty, which is covered by a retention money or bank guarantee, though attached to a fixed period, is also dependent upon the condition that the goods supplied are free from patent and latent defects and that all of the conditions imposed under the contract have been fully met. Hence, it can be gainsaid the warranty obligation is not only with a term, but also with a resolutory condition.

Generally, the obligation on the warranty is extinguished upon the concurrence of the expiration of the term, which is three (3) months, and the resolutory condition that goods are without defects. However, in case of highly-perishable and fungible goods, their consumption would obviously bring about the extinguishment of the warranty obligation, since the use of the thing implies the fulfillment of the resolutory condition that the goods are without defects. Furthermore, since the goods, which are the object of the warranty obligation, no longer exists upon consumption, this will bring about the concomitant extinguishment of the obligation, and hence, the term of three (3) months on the warranty becomes irrelevant.

2. Whether or not the bidder is allowed to include the cost attendant to retention money in making estimates for his unit bid prices.

Considering that a new form of obligation on warranty is imposed by R.A. 9184 and its IRR-A for procurement of goods and infrastructure projects, some Government agencies have expressed the view that requiring a warranty security from contractors, suppliers, distributors and manufacturers would cause the rise in their bid prices, as they would consider the cost attendant thereto in their financial proposals. As maximum profit is the aim of any person or entity participating in the biddings of Government agencies, there is a great possibility that such bidder may include the cost of warranty security in making his financial proposal. This is within the prerogative of the bidder, to which R.A. 9184 and its IRR-A do not impose any restrictions. In this situation, there is admittedly a possibility for the bidders to submit higher financial proposals as they would include the premium it has to pay for the warranty security, or the cost of the use of its money retained or earmarked to secure the warranty obligation as part of its overhead cost.

Be that as it may, the probability of getting higher financial bid proposals due to warranty cost on the part of the bidder is equalized by the principle of open competition promoted by competitive bidding. Hence, as competitive bidding is the general mode of procurement mandated by R.A. 9184, we believe that procuring entities would still get the best possible deal, considering that the contract shall be awarded to the bidder with the lowest calculated responsive bid. Besides, procuring entities are sheltered by the approved budget for the contract, which is the ceiling for all bid prices, meticulously and judiciously estimated consistent with the appropriations for the project.

3. Whether or not it is mandatory for the Bids and Awards Committee (BAC) to require a warranty security with a validity period ranging from five (5) to fifteen (15) years for a completed infrastructure project.

Based on the above-quoted provisions (Secs. 62.2 and 62.2.2a, IRR-A), it cannot be doubted that it is mandatory for a contractor to post a warranty security in any or a combination of the prescribed forms from the final acceptance by the procuring entity for the infrastructure it has constructed. The warranty security shall only be returned to the contractor after the lapse of the warranty period.

4. Whether or not the inclusion of a provision on contractor’s liability in the conditions of the contract in lieu of a warranty security conforms with the provisions of R.A. 9184 and its IRR-A.

It can be deduced that the warranty obligation under Section 62 of the IRR-A of R.A. 9184, which shall be secured by specified forms of security stated therein is mandatory and exclusive. Hence, though the contractor’s liability for warranty should be actually included in the general and special conditions of the contract, the requirement under the IRR-A of R.A. 9184 as to the terms of the warranty obligation and the forms of security should be maintained.