NPM 018-2004

Requesting Entity: Philippine Air Force Procurement Center

Issues Concern: Recovery of Liquidated Damages, Termination of Contract and Imposition of Sanctions



1. Whether or not the Philippine Air Force Procurement Center (PAFPC) may unilaterally terminate contracts it has entered into with suppliers for CYs 2001 and 2002 whose amounts of liquidated damages already exceeded 15% of the total contract prices.

Applying the above-cited provision (Section 1, E.O. 40. Series of 2001), there is no doubt that the contract implementation aspect of the PAFPC goods and services procurement for CYs 2001 and 2002 is clearly governed by E.O. 262 and its IRR, as the “contract implementation” provisions thereof were not repealed by E.O. 40. Accordingly, the provisions on contract implementation of E.O. 262 and its IRR shall govern the imposition and recovery of liquidated damages on contracts entered into by PAFPC with accredited suppliers for CYs 2001 and 2002.

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As can be logically deduced from Section 5.10.2 of the IRR of E.O. 262, PAFPC has legal basis to terminate the contracts it has entered into with suppliers where the total liquidated damages exceeded fifteen percent (15%) of the amount of the contract price. Since the aspect of termination in the immediately cited provision is couched in mandatory and in no uncertain terms, it is clear that the PAFPC is allowed to terminate its contracts on the ground that the total sum of liquidated damages for each contract exceeded fifteen percent (15%) of the contract price.

2. Whether or not the procuring entity is legally justified in requiring the erring supplier to pay the total amount of accumulated liquidated damages and impose the appropriate sanctions aside from terminating the contract.

Section 5.10.1 of the IRR of E.O. 262 is silent as to whether partial or full recovery of liquidated damages should be made by PAFPC. The same is also true with respect to Section 5.10.2. Be that as it may, it can be inferred that PAFPC has the option to claim full or partial recovery of liquidated damages from the erring supplier. Simply put, recovery of liquidated damages, whether partial or full, is the prerogative of PAFPC.
Additionally, due to the termination of the contract by reason of its default, the PAFPC may likewise hold the supplier administratively liable and suspend it from participating in any of its public bidding for one (1) year for the first (1st) offense or two (2) years for the second (2nd) offense. (Section 44.1, IRR, E.O. 40, Series of 2001)