Capalla v. COMELEC, G.R. No. 201112, June 13, 2012.

Facts

The Commission on Elections (COMELEC) posted an invitation to apply for eligibility and to bid
for the 2010 Poll Automation Project (the Project). On June 9, 2009, the COMELEC awarded
the contract for the 2010 Poll Automation, to Smartmatic-TIM. The contract between them was a
lease of the Automation Election System (AES) with option to purchase (OTP) the goods listed
in the contract. The COMELEC was also given until December 31, 2010 within which to
exercise the option.

On September 23, 2010, the COMELEC partially exercised its OTP 920 units of Precinct Count
Optical Scan (PCOS) machines with corresponding canvassing/consolidation system (CCS) for
special elections in certain areas. Smartmatic-TIM proposed a temporary extension of the option
period on the remaining 81,280 machines until March 31, 2011, but the COMELEC did not
exercise its OTP within such extension. Nonetheless, further extensions were given until a final
one on March 31, 2012.

On March 6, 2012, the COMELEC issued Resolution No. 9373 to consider exercising the OTP.
On March 21, 2012, COMELEC issued Resolution No. 9376 to exercise the OTP the PCOS and
CCS hardware and software subject to certain conditions. On March 29, 2012, the COMELEC
issued Resolution No. 9377 to accept Smartmatic-TIM’s offer to extend the period of exercising
the OTP until March 31, 2012. On the same date, COMELEC issued Resolution No. 9378 to
approve its Deed of Sale with Smartmatic-TIM and to purchase the PCOS machines for the
upcoming May 2013 elections.

Altogether, petitioners claim that these issuances and transactions are illegal, unconstitutional,
and are tainted with grave abuse of discretion amounting to lack or excess of jurisdiction on the
part of the COMELEC. They further claim that the resolutions of the COMELEC pursuant to the
transactions must be declared null and void.

In G.R. No. 201112, Archbishop Fernando R. Capalla, et al. argue that the COMELEC should
follow the Government Procurement Reform Act (RA 9184) that requires competitive public
bidding to purchase the PCOS machines. The OTP clause under the contract should be
rendered invalid because the OTP has already lapsed, and it is a circumvention of the said law.
They argue that the current PCOS machines do not meet the standards of RA 9184 because it
requires the system procured to have a demonstrated capability and should have been
successfully used in a prior electoral exercise. Lastly, they say COMELEC does not have the
capability to maintain the PCOS machines due to their lack of trained manpower and technical
expertise.

In G.R. No. 201121, Solidarity for Sovereignty, et al. argue that the exercise of OTP after the
period had already elapsed is illegal and unlawful because the period within which the
COMELEC may exercise the OTP could last only on December 31, 2010, and that the
extension of such period is a substantial amendment to the AES contract giving undue benefit to
the winning bidder not available to other bidders.

In G.R. No. 201127, Teofisto Guingona, et al. assert that the COMELEC should have followed
the recommendation of the COMELEC Advisory Council (CAC) that the procurement of the AES
be done only through public bidding. They insist that the extension of the option period by
Smartmatic-TIM is giving the winning bidder a benefit that was not available to other bidders,
which is a violation of the bidding rules and equal protection clause of the Constitution. They
further contend that since the option period already expired, the purchase of PCOS machines
requires competitive bidding. Lastly, they claim that the COMELEC committed grave abuse of
discretion in buying the PCOS machines and other goods from Smartmatic-TIM despite findings
of glitches, malfunctions, bugs, and defects.

In G.R. No. 201413, Tanggulang Demokrasya, et al. argue that the COMELEC committed grave
abuse of discretion amounting to lack or excess of jurisdiction in purchasing the ASE goods and
services from Smartmatic-TIM despite of the weak performance of the latter’s goods. They
likewise submit that the said purchase violates RA 9184 for the lack of competitive public
bidding. According to them, the lapse of the option period on December 31, 2010 renders the
purchase beyond that date as new procurement thus, there must be a public bidding.

Issue

1. Is the extension of time within which to exercise the option to purchase valid?
2. Does the extension of the option period and the issuance of COMELEC Resolution No.
9376 violate RA 9184 and its Implementing Rules and Regulation (IRR)?

Ruling

1. Yes. It is well-settled in the interpretation of contracts that an instrument must be construed

so as to give effect to all the provisions of the contract. 1 In other words, the contract must
be read and taken as a whole. 2 Although the contract required COMELEC to notify
Smartmatic-TIM of its OTP the goods until December 31, 2010, other provisions of the
contract reveals that the parties are given the right to amend the contract which may
include the period within which to exercise the option. There is also no prohibition on the
extension of the period, provided that the contract is still effective. Thus, it is important to
determine when the contract ceases to exist. Under Article 2 of the AES contract, the terms
of the contract begin from the date of effectivity until the release of the performance
security.3 However, Smartmatic-TIM categorically stated in its Consolidated Comment that
the COMELEC still retains the P50M of the amount as performance security. In other
words, the performance security had not yet been released to Smartmatic-TIM, this
indicates that the AES contract is still effective and not yet terminated. Article 19 of the
contract provides that its provisions may still be amended by mutual agreement of the
parties provided it is made in writing and signed by the parties. Therefore, there the
execution of the Extension Agreement is legally valid.4

1 Adriatico Consortium, Inc. v. Land Bank of the Philippines, G.R. No. 187838, December 23, 2009, 609 SCRA 403,
416; Domingo Realty, Inc. v. Court of Appeals, G.R. No. 126236, January 26, 2007, 513 SCRA 40, 62.
2 Catungal v. Rodriguez, G.R. No. 146839, March 23, 2011, 646 SCRA 130, 155; Adriatico Consortium, Inc. v. Land
Bank of the Philippines, supra; Domingo Realty, Inc. v. Court of Appeals, supra.
3 “2.1. This Contract shall take effect upon the fulfillment of all of the following conditions:
(a) Submission by the PROVIDER of the Performance Security;
(b) Signing of this Contract in seven (7) copies by the parties; and
(c) Receipt by the PROVIDER of the Notice to Proceed.
2.2. The Term of this Contract begins from the date of effectivity until the release of the Performance Security,
without prejudice to the surviving provisions of this Contract, including the warranty provision as prescribed in
Article 8.3 and the period of the option to purchase.” (Art. 2, AES Contract)
4 “This contract and its Annexes may be amended by mutual agreement of the parties. All such amendments shall be
in writing and signed by the duly authorized representatives of both parties.” (Art. 9, AES Contract)
2. No. First, the AES contract was awarded to Smartmatic-TIM after compliance with the
requirements of a competitive public bidding. Section 4.3 of the contract gives the
COMELEC the OTP the goods and states the conditions in exercising the option, including
the additional amount that the COMELEC is required to pay should it exercise the right. 5
The grant of the option is recognized by both parties and is already a part of the principal
contract of lease. Having been included in the Request for Proposal and bid bulletins, the
right to exercise the option was known to all the bidders and was considered in preparing
their bids. Thus, the bidders were informed that aside from the lease of goods and
purchase of services, their proposals should include an OTP the subject goods. Although
the AES contract was amended after the award of the contract, the amendment only
pertains to the period within which the COMELEC could exercise the option because of its
failure to exercise the same before the deadline originally agreed upon. Moreover, the
option contract in this case was already a part of the original contract and not given only
after Smartmatic-TIM emerged as winner. The OTP was in fact, a requirement by the
COMELEC when the contract of lease was bidded upon.

Second, it has been held that any government action which permits any substantial change
between the conditions under which the bids are invited, and the contract executed after the
award thereof is a grave abuse of discretion amounting to lack or excess of jurisdiction. 6 In
this case, the amendment of the AES contract is not substantial. After the competitive
public bidding, Smartmatic-TIM emerged as winner, then the AES contract was executed.
To reiterate, the AES contract is one of lease with OTP giving the COMELEC the right to
purchase the goods agreed upon if it decides to do so. The AES contract not only indicated
the contract price for the lease of goods and purchase of services which is
P7,191,484,739.48, but also stated the amount that the COMELEC must pay if it decides to
exercise the option which is P2,130,635,048.15. Thus, the competitive public bidding
conducted for the AES contract was sufficient.

Lastly, the amendment of the AES contract is more advantageous for the COMELEC and
the public because the rentals paid for the lease of goods and purchase of services under
the AES contract was considered part of the purchase price. For the Comelec to own the
goods, it was required to pay only P2,130,635,048.15. If the Comelec did not exercise the
option, the rentals already paid would just be one of the government expenses for the past
election and would useless for future elections. Assuming the exercise of the option is

5 “4.3. OPTION TO PURCHASE

In the event the COMELEC exercises its option to purchase the Goods as listed in Annex L, COMELEC shall
pay the PROVIDER an additional amount of Two Billion One Hundred Thirty Million Six Hundred Thirty- Five
Thousand Forty-Eight Pesos and Fifteen Centavos (Php2,130,635,048.15) as contained in the Financial
Proposal of the joint venture partners Smartmatic and TIM.

In case COMELEC should exercise its option to purchase, a warranty shall be required in order to assure that:
(a) manufacturing defects shall be corrected; and/or (b) replacements shall be made by the PROVIDER, for a
minimum period of three (3) months, in the case of supplies, and one (1) year, in the case of equipment, after
performance of this Contract. The obligation for the warranty shall be covered by retention money of ten
percent (10%) of every option to purchase payment made.

The retention money will be returned within five (5) working days after the expiration of the above warranty,
provided, however, that the goods supplied are in good operating condition free from patent and latent
defects, all the conditions imposed under the purchase contract have been fully met, and any defective
machines, except to those attributable to the COMELEC, have been either repaired at no additional charge or
replaced or deducted from the price under the Option to Purchase.” (Art. 4.3, AES Contract)
6 Agan, Jr. v. Philippine International Air Terminals Co., Inc., supra  note 42, at 664.
nullified, the Comelec would again conduct another public bidding for the AES for the 2013
elections with its available budget of P7 billion. Considering that the said amount is the
available fund for the whole election process, the amount for the purchase or lease of new
AES will definitely be less than P7 billion. Moreover, it is possible that Smartmatic-TIM
would again participate in the public bidding and could win at a possibly higher price. The
Comelec might end up acquiring the same PCOS machines but now at a higher price.