NPM 044-2004

Requesting Entity: Manila International Airport Authority

Issues Concern: Retention Money as a Form of Warranty under Republic Act No. 9184 (R.A. 9184) and its Implementing Rules and Regulations Part A (IRR-A)



1. Whether or not warranty retention money may be imposed to cover for the warranty of the following items: (a) Gasoline for Manila International Airport Authority (“MIAA”) vehicles; (b) Construction/Electrical/Electronic/Mechanical materials procured in cases of emergency and in small volume; (c) Office supplies such as papers, folders, books, paper clips, tissue paper, ink cartridges, toner etc.; (d) Chemicals for building maintenance; (e) Spare parts for immediate replacement; and (f) Printing of office forms, tickets, etc.

By virtue of this provision (Section 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 acquired through the alternative methods of procurement are subject to this requirement. It must be noted that the above-quoted section has no specific price threshold as to when warranty for goods may be applicable, likewise, it does not restrict the application of warranty exclusively to goods procured under competitive bidding.

To properly guide you in the application of said provision and to avoid further complaints from suppliers in the future, we want to emphasize the prominent features of Section 62.1 of the IRR-A, to wit:

First, warranty under said section applies only to the procurement of goods, which refer to all items, supplies, materials and general support services, except consulting services and infrastructure projects, which may be needed in the transaction of public businesses or in the pursuit of any government undertaking, project or activity, whether in the nature of equipment, furniture, stationary, materials for construction, or personal property of any kind, including nonpersonal or contractual services.

Second, the IRR-A provides that warranty period for goods is for a minimum period of three (3) months for supplies and one (1) year for equipment, which will commence after performance of the contract. This connotes that the procuring entity may impose a longer warranty period depending on the nature of goods, but it cannot shorten the said specified periods;

Third, the warranty for goods shall be covered by either a retention money or a special bank guarantee. No other arrangements or credit instruments are allowed;

Fourth, the amount of retention money should be equivalent to at least ten percent (10%) of every progress payment and, in case of special bank guarantee, it shall be equivalent to at least ten percent (10%) of the total contract price. This denotes that the procuring entity may impose a higher percentage amount of the progress payment or contract price to cover for the warranty but not lower than the percentage provided by the IRR-A ; and

Lastly, the retention money or bank guarantee shall only be released after the lapse of warranty period, provided that the goods supplied are free from latent and patent defects and satisfies the conditions of the contract.

2. Whether or not the commencement of the warranty period is upon delivery or final acceptance by the MIAA of the subject goods.

Based on the above-cited provision (Section 62.1, IRR-A), the warranty period of three (3) months for supplies and one (1) month for equipment shall begin after the performance of the contract. In other words, the reckoning point for the commencement of warranty period in the procurement of goods is not on the date of actual delivery of goods procured or final acceptance of the procuring entity concerned, as you suggest, but it is on the date of the consummation of the contract. However, in order to determine the instance when a contract for procurement of goods is consummated, we have to refer to the specific provisions of the Civil Code on the Contract of Sale, which have suppletory application to this type of government contract.

A government contract for the procurement of goods is deemed consummated after the goods have been delivered by the manufacturer, supplier or distributor and the procuring entity has accepted and paid the same. Accordingly, it is only upon the concurrence of these two reciprocal and bilateral acts that the warranty period under Section 62.1 of the IRR-A commences and the retention money or bank guarantee becomes enforceable. In sum, after delivery of the goods procured, the procuring entity is bound to accept the goods, if it finds the goods in conformity with the contract, and pay its price with the right to retain a part thereof or require a special bank guarantee of ten percent (10%) of the contract price to cover for the warranty. From thereon, the warranty period begins to run.