LA BUGAL-B-LAAN TRIBAL ASSOC. V.

DENR
Facts:

Petitioners filed a Petition for Prohibition and Mandamus before the Court challenging the constitutionality
of (1) Republic Act 7942 (The Philippine Mining Act of 1995); (2) its Implementing Rules and Regulations
(DENR Administrative Order [DAO] 96-40); and (3) the Financial and Technical Assistance Agreement
(FTAA) dated 30 March 1995, executed by the government with Western Mining Corporation (Philippines),
Inc. (WMCP).
On 27 January 2004, the Court en banc promulgated its Decision, granting the Petition and declaring the
unconstitutionality of certain provisions of RA 7942, DAO 96-40, as well as of the entire FTAA executed
between the government and WMCP, mainly on the finding that FTAAs are service contracts prohibited
by the 1987 Constitution.
o
The Decision struck down the subject FTAA for being similar to service contracts, which, though
permitted under the 1973 Constitution, were subsequently denounced for being antithetical to
the principle of sovereignty over our natural resources, because they allowed foreign control over
the exploitation of our natural resources, to the prejudice of the Filipino nation.
o
The Decision quoted several legal scholars and authors who had criticized service contracts for,
inter alia, vesting in the foreign contractor exclusive management and control of the enterprise,
including operation of the field in the event petroleum was discovered; control of production,
expansion and development; nearly unfettered control over the disposition and sale of the
products discovered/extracted; effective ownership of the natural resource at the point of
extraction; and beneficial ownership of our economic resources.
o
According to the Decision, the 1987 Constitution (Section 2 of Article XII) effectively banned such
service contracts. The Court ruled that these contracts were antithetical to the principle of
sovereignty over our natural resources, because they allowed foreign control over the exploitation
of our natural resources, to the prejudice of the Filipino nation.
Subsequently, Victor O. Ramos (Secretary, DENR) Horacio Ramos (Director, Mines and Geosciences Bureau
[MGB]), Ruben Torres (Executive Secretary), and the WMC (Philippines) Inc. filed separate Motions for
Reconsideration.

Held:
The SC declared as CONSTITUTIONAL (1) RA No. 7942 (the Philippine Mining Law), (2) its IRR contained in DAO
No. 9640 insofar as they relate to financial and technical assistance agreements (FTAA) referred to in par. 4 of
Sec 2 of Art XII of the Constitution; and (3) FTAA executed by the government and Western Mining Corporation
Philippines Inc. (WMCP), except Sections 7.8 and 7.9 of the subject FTAA which are hereby INVALIDATED for
being contrary to public policy and for being grossly disadvantageous to the government.
Interpretation of the Constitutional phrase "Agreements Involving Either Technical or Financial
Assistance"
Sec. 2 Article XII: "The President may enter into agreements with foreign-owned corporations
involving either technical or financial assistance for large-scale exploration,
development, and utilization of minerals, petroleum, and other mineral oils according to
the general terms and conditions provided by law, based on real contributions to the economic
growth and general welfare of the country...
Petitioners claim that the phrase "agreements x x x involving either technical or financial assistance" simply means
technical assistance or financial assistance agreements, nothing more and nothing else. This leads to the
inescapable conclusion that what a foreign-owned corporation may enter into with the government is merely an
agreement for either financial or technical assistance only, for the large-scale exploration, development and
utilization of minerals, petroleum and other mineral oils; such a limitation, excludes foreign management and
operation of a mining enterprise. This restrictive interpretation, petitioners believe, is in line with the general policy
enunciated by the Constitution reserving to Filipino citizens and corporations the use and enjoyment of the
country's natural resources.
However, the Supreme Court, applying familiar principles of constitutional construction to the phrase agreements
involving either technical or financial assistance, ruled that the framers' choice of words does not indicate the intent
to exclude other modes of assistance, but rather implies that there are other things being included or possibly
being made part of the agreement, apart from financial or technical assistance. The drafters avoided the use of
restrictive and stringent phraseology; a verba legis scrutiny does not give a hint of desire to prohibit foreign
involvement in the management or operation of mining activities, or to eradicate service contracts. Such moves
would necessarily imply an underlying drastic shift in fundamental economic and developmental policies of the
State. That change requires a much more definite and irrefutable basis than mere omission of the words "service
contract" from the new Constitution.

Furthermore, literal and restrictive interpretation of this paragraph leads to logical inconsistencies. A constitutional
provision specifically allowing foreign-owned corporations to render financial or technical assistance in respect of
mining or any other commercial activity was clearly unnecessary; the provision was meant to refer to more than
mere financial or technical assistance.
Also, if paragraph 4 permits only agreements for financial or technical assistance, there would be no point in
requiring that they be "based on real contributions to the economic growth and general welfare of the country."
And considering that there were various long-term service contracts still in force and effect at the time the new
Charter was being drafted, the absence of any transitory provisions to govern the termination and closing-out of
the then existing service contracts strongly militates against the theory that the mere omission of "service
contracts" signaled their prohibition by the new Constitution.
According to the deliberations of the Constitutional Commission, the ConCom members discussed agreements
involving either technical or financial assistance in the same sense as service contracts and used the terms
interchangeably. The drafters in fact knew that the agreements with foreign corporations were going to entail not
mere technical or financial assistance but, rather, foreign investment in and management of an enterprise for
large-scale exploration, development and utilization of minerals.
The framers spoke about service contracts as the concept was understood in the 1973 Constitution. It is obvious
from their discussions that they did not intend to ban or eradicate service contracts. Instead, they were intent on
crafting provisions to put in place safeguards that would eliminate or minimize the abuses prevalent during the
martial law regime. In brief, They were going to permit service contracts with foreign corporations as
contractors, but with safety measures to prevent abuses, as an exception to the general norm
established in par.1, Sec 2 of Art XII, which reserves or limits to Filipino citizens and corporations at
least 60% owned by such citizens the exploration, development and utilization of mineral or petroleum
resources. This was prompted by the perceived insufficiency of Filipino capital and the felt need for foreign
expertise in the EDU of mineral resources.
The drafters, many of whom were economists, academicians, lawyers, businesspersons and politicians knew that
foreign entities will not enter into agreements involving assistance without requiring measures of protection to
ensure the success of the venture and repayment of their investments, loans and other financial assistance, and
ultimately to protect the business reputation of the foreign corporations. The drafters, by specifying such
agreements involving assistance, necessarily gave implied assent to everything that these agreements entailed or
that could reasonably be deemed necessary to make them tenable and effective -- including management authority
with respect to the day-to-day operations of the enterprise, and measures for the protection of the interests of the
foreign corporation, at least to the extent that they are consistent with Philippine sovereignty over natural
resources, the constitutional requirement of State control, and beneficial ownership of natural resources remaining
vested in the State.
From the foregoing, is clear that agreements involving either technical or financial assistance referred to are in fact
service contracts, but such new service contracts are between foreign corporations acting as contractors on the one
hand, and on the other hand government as principal or "owner" (of the works), whereby the foreign contractor
provides the capital, technology and technical know-how, and managerial expertise in the creation and operation of
the large-scale mining/extractive enterprise, and government through its agencies (DENR, Mines and Geosciences
Bureau (or MGB]) actively exercises full control and supervision over the entire enterprise.
Such service contracts may be entered into only with respect to minerals, petroleum and other mineral oils. The
grant of such service contracts is subject to several safeguards, among them: (1) that the service contract be
crafted in accordance with a general law setting standard or uniform terms, conditions and requirements; (2) the
President be the signatory for the government; and (3) the President report the executed agreement to Congress
within thirty days.
Ultimate Test: Full State Control
Full control and supervision" cannot be taken literally to mean that the State controls and supervises everything
down to the minutest details and makes all required actions, as this would render impossible the legitimate
exercise by the contractor of a reasonable degree of management prerogative and authority, indispensable to the
proper functioning of the mining enterprise. Control must be taken to mean a degree of control sufficient to enable
the State to direct, restrain, regulate and govern the affairs of the extractive enterprises. Control by the State may
be on a macro level, through the establishment of policies, guidelines, regulations, industry standards and similar
measures that would enable government to regulate the conduct of affairs in various enterprises, and restrain
activities deemed not desirable or beneficial, with the end in view of ensuring that these enterprises contribute to
the economic development and general welfare of the country, conserve the environment, and uplift the well-being
of the local affected communities. Such a degree of control would be compatible with permitting the foreign
contractor sufficient and reasonable management authority over the enterprise it has invested in, to ensure
efficient and profitable operation.
Government Granted Full Control by RA 7942 and DAO 96-40
The State's full control and supervision over mining operations are ensured through provisions in RA 7942 and DAO
96-40. The government agencies concerned are empowered to approve or disapprove hence, in a position to
influence, direct, and change the various work programs and the corresponding minimum expenditure
commitments for each of the exploration, development and utilization phases of the enterprise. Once they have
been approved, the contractor's compliance with its commitments therein will be monitored. Figures for mineral
production and sales are regularly monitored and subjected to government review, to ensure that the products and

by-products are disposed of at the best prices; copies of sales agreements have to be submitted to and registered
with MGB.
Overall, the State definitely has a pivotal say in the operation of the individual enterprises, and can set directions
and objectives, detect deviations and non-compliances by the contractor, and enforce compliance and impose
sanctions should the occasion arise. Hence, RA 7942 and DAO 96-40 vest in government more than a sufficient
degree of control and supervision over the conduct of mining operations.
WMCP FTAA Likewise Gives the State Full Control and Supervision
The FTAA provisions do not reduce or abdicate State control. The provisions of the WMCP FTAA, far from
constituting a surrender of control and a grant of beneficial ownership of mineral resources to the contractor in
question, vest the State with control and supervision over practically all aspects of the operations of the FTAA
contractor, including the charging of pre-operating and operating expenses, and the disposition of mineral products.
No Surrender of Financial Benefits
DAO 99-56 spells out the financial benefits government will receive from an FTAA, as consisting of not only a basic
government share, comprised of all direct taxes, fees and royalties, as well as other payments made by the
contractor during the term of the FTAA, but also an additional government share, being a share in the
earnings or cash flows of the mining enterprise, so as to achieve a fifty-fifty sharing of net benefits from
mining between the government and the contractor.
Moreover, there is no concrete basis for the view that, in FTAAs with a foreign contractor, the State must receive at
least 60 percent of the after-tax income from the exploitation of its mineral resources, and that such share is the
equivalent of the constitutional requirement that at least 60 percent of the capital, and hence 60 percent of the
income, of mining companies should remain in Filipino hands. Even if the State is entitled to a 60 percent share
from other mineral agreements (co-production agreements [CPA], joint venture agreements [JVA] and mineral
production-sharing agreements [MPSA]), that would not create a parallel or analogous situation for FTAAs. We are
dealing with an essentially different equation.
The Charter did not intend to fix an iron-clad rule of 60 percent share, applicable to all situations, regardless of
circumstances. There is no indication of such an intention on the part of the framers. Moreover, the terms and
conditions of petroleum FTAAs cannot serve as standards for mineral mining FTAAs, because the technical and
operational requirements, cost structures and investment needs of off-shore petroleum exploration and
drilling companies do not have the remotest resemblance to those of on-shore mining companies.
To take the position that government's share must be not less than 60 percent of after-tax income of FTAA
contractors is nothing short of this Court dictating upon the government. The State resultantly ends up losing
control. To avoid compromising the State's full control and supervision over the exploitation of mineral resources,
there must be no attempt to impose a "minimum 60 percent" rule. It is sufficient that the State has the power and
means, should it so decide, to get a 60 percent share (or greater); and it is not necessary that the State does so in
every case.
Invalid Provisions of the WMCP FTAA
Sec 7.9 of the WMCP FTAA clearly renders illusory the State's 60 percent share of WMCP's revenues. Under Sec
7.9, should WMCP's foreign stockholders (who originally owned 100 percent of the equity) sell 60 percent or more
of their equity to a Filipino citizen or corporation, the State loses its right to receive its share in net mining
revenues under Sec 7.7, without any offsetting compensation to the State. And what is given to the State in Sec
7.7 is by mere tolerance of WMCP's foreign stockholders, who can at any time cut off the government's entire
share by simply selling 60 percent of WMCP's equity to a Philippine citizen or corporation. Sec 7.9 of the WMCP
FTAA has effectively given away the State's share without anything in exchange. Moreover, it constitutes unjust
enrichment on the part of the local and foreign stockholders in WMCP, because by the mere act of divestment, the
local and foreign stockholders get a windfall, as their share in the net mining revenues of WMCP is automatically
increased, without having to pay anything for it.
Being grossly disadvantageous to government and detrimental to the Filipino people, as well as violative of public
policy, Sec 7.9 must therefore be stricken off as invalid. The FTAA in question does not involve mere contractual
rights but, being impressed as it is with public interest, the contractual provisions and stipulations must yield to the
common good and the national interest. Since the offending provision is very much separable from the rest of the
FTAA, the deletion of Sec 7.9 can be done without affecting or requiring the invalidation of the entire WMCP FTAA
itself.
Sec 7.8(e) of the WMCP FTAA likewise is invalid, since by allowing the sums spent by government for the benefit of
the contractor to be deductible from the State's share in net mining revenues, it results in benefiting the contractor
twice over. This constitutes unjust enrichment on the part of the contractor, at the expense of government. For
being grossly disadvantageous and prejudicial to government and contrary to public policy, Sec 7.8(e) must also be
declared without effect. It may likewise be stricken off