Case Summary (G.R. No. 127882)
State Ownership and Control over Mineral Resources
Under Section 2, Article XII of the 1987 Constitution, all natural resources, including minerals and petroleum, are owned by the State and their exploration, development, and utilization (EDU) must be under the full control and supervision of the State. The State may either directly exploit these resources or enter into agreements with Filipino citizens or corporations at least 60% Filipino-owned. The Constitution explicitly reserves to the President the power to enter into agreements with foreign-owned corporations involving technical or financial assistance for large-scale EDU of minerals and petroleum, subject to general terms and conditions provided by law and based on real contributions to national economic growth and welfare.
Nature of Financial and Technical Assistance Agreements (FTAAs)
FTAAs, as contemplated by the Constitution, are essentially a form of service contract wherein foreign corporations provide capital, technology, and managerial expertise in large-scale mining operations acting as contractors of the State. These agreements are exceptions to the general rule restricting exploitation of natural resources to Filipinos. The Constitution allows these agreements with safeguards to prevent abuses that characterized the service contracts under the 1973 Constitution.
State's Full Control Compatible with Contractor's Management Role
Full control of the State over mineral resources does not preclude reasonable management prerogatives by the contractor necessary for efficient operations. The State retains overarching authority to direct policy, approve or disapprove work programs and expenditures, and impose sanctions including termination of contracts for breach. The State is not required to micro-manage day-to-day operations but exercises control through regulatory oversight, ensuring that operations align with national interests, economic growth, environmental protection, and community welfare.
Constitutionality of Republic Act No. 7942 and DAO 96-40
The Philippine Mining Act and its implementing rules, including DAO 96-40, are constitutional insofar as they relate to FTAAs. They provide mechanisms guaranteeing effective State control and supervision over mining operations, including:
- Government review and approval of work programs and budgets
- Monitoring compliance with environmental and safety standards
- Inspection of books and records
- Authority to cancel contracts for violations
- Obligation of contractors to surrender non-mineral parts of contract areas
These provisions allow the State to fulfill its constitutional mandate without interfering unnecessarily in contractor’s management functions.
Fiscal Regime and Sharing of Financial Benefits
The fiscal regime under DAO 99-56 provides for an equitable sharing of benefits between the government and FTAA contractors. Benefits are divided into a basic share (comprising various taxes, fees, and royalties) and an additional share (computed under one of three formulae involving cash flows, profits, or net mining revenues).
The government is entitled to more than just taxes and fees; the additional share ensures a potential 50-50 sharing of net benefits, thus reflecting the concept that the State receives a rightful portion of the economic gains from resource exploitation.
The provisions do not vest “beneficial ownership” of the mineral resources in the contractors; rather, contractors receive compensation for services rendered and investments made, with the State retaining ultimate ownership and control.
Validity of Financial and Technical Assistance Agreements
FTAAs entered into pursuant to RA 7942 and subject to DAO 96-40 are valid contracts. While some contractual provisions (Sections 7.8(e) and 7.9 of the WMCP FTAA) provide benefits unjustifiably favoring the contractor and contrary to public policy, these specific provisions are severable and may be invalidated without nullifying the entire contract.
The contract grants the contractor operational authority to manage mining activities subject to the State's oversight, but does not confer ownership rights over mineral resources.
The contract’s automatic renewal clause for 25 years beyond the initial term is constitutional because the constitutional 25-year term limit applies only to mineral agreements with Filipino citizens and corporations, not FTAAs.
Sale of Foreign Shares and Transfer of FTAA
The reported sale of Western Mining Corporation’s 100% foreign shares in WMCP to Sagittarius Mines, Inc.—a Filipino corporation owning at least 60% Filipino equity—does not render the case moot.
The transfer and registration of the FTAA to a Filipino entity affirm preference for Filipino ownership consistent with the Constitution.
While the case concerning the validity of share transfer is pending before other courts, the constitutional issues concerning the validity and regulatory framework of the FTAA remain justiciable, particularly as the FTAA is actively implemented by a Filipino-owned corporation.
Limits on Foreign Participation in Exploration Permits
Section 3(aq) of RA 7942, which deems foreign-owned corporations as qualified persons for purposes of granting exploration permits, violates the 1987 Constitution’s limitation reserving exploration, development, and utilization of natural resources to Filipino citizens and corporations at least 60% Filipino-owned.
Foreign corporations may participate only through FTAAs consistent with constitutional safeguards; they cannot hold exploration permits directly.
The granting of exploration permits to foreign entities poses risks, including potentially compromising national security and commercial disadvantage to the State.
Distinction from Petroleum Industry Contracts
The Court recognizes differences between mining and petroleum operations. The minimum government share of 60% in petroleum contracts (such as the Malampaya project) does not establish a fixed 60% minimum for the mining industry. The distinct technical and economic characteristics of mining warrant flexible arrangements subject to negotiation to encourage investments while ensuring reasonable State benefits.
Judicial Non-Intervention in Economic Policy
Judicial restraint is urged in economic matters, deferring to the discretion of the President and Congress in negotiating and implementing contracts involving natural resources.
The courts intervene only in cases of grave abuse of discretion or clear constitutional violation.
The Court underscores the need to balance economic development, national sovereignty, environmental protection, and social justice in natural resource utilization.
Summation and Final Disposition
The Court grants the motions for reconsideration filed by respondents and intervenors, reverses and sets aside the January 27, 2004 decision, and dismisses the petition challenging the constitutionality of RA 7942 as amended and its implementing rules and regulations insofar as they pertain to FTAAs.
The Financial and Technical Assistance Agreement dated March 30, 1995 between the government and WMCP
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Case Syllabus (G.R. No. 127882)
Background and Context of the Case
- The case challenges the constitutionality of Republic Act No. 7942 (Philippine Mining Act of 1995), its Implementing Rules and Regulations (DAO No. 96-40), and the Financial and Technical Assistance Agreement (FTAA) executed between the Philippine government and Western Mining Corporation (Philippines), Inc. (WMCP), on March 30, 1995.
- The FTAA covers large-scale exploration, development, and commercial exploitation of mineral deposits in several provinces, covering a contract area of 99,387 hectares.
- Previously, this Court en banc had declared certain provisions of RA 7942, DAO 96-40, and the WMCP FTAA unconstitutional on the ground that FTAAs constitute “service contracts” prohibited by the 1987 Constitution.
- Petitions for reconsideration and interventions by the Chamber of Mines of the Philippines and other parties were filed, leading to a comprehensive re-examination of constitutional provisions on state ownership, control, foreign participation, and contractual terms under the 1987 Constitution.
State Ownership, Control, and Supervision of Natural Resources
- All mineral resources are owned by the State under Section 2, Article XII of the 1987 Constitution, and their exploration, development, and utilization (EDU) must be under the State's full control and supervision.
- The State may undertake these activities directly or enter into agreements with Filipino citizens or corporations with at least 60% Filipino ownership—such agreements include co-production, joint venture, or production-sharing agreements.
- The President may enter into agreements with foreign-owned corporations involving either technical or financial assistance for large-scale mineral, petroleum, and mineral oil projects, subject to terms provided by law and real contributions to economic growth and welfare.
- The concept of “full control and supervision” is not literal totality but rather control sufficient to direct overall policy, regulate operations, and enforce compliance without necessarily micro-managing daily operations.
- Foreign contractors may be allowed reasonable management and operational authority to protect investments and ensure project success, provided the State retains ultimate authority to direct, modify or reverse plans as necessary.
- The President is constitutionally mandated to enter into these agreements; Congress has a review function upon notification within thirty days; the judiciary’s role is limited to grave abuses of discretion and must not unduly interfere.
Interpretation of “Agreements Involving Either Technical or Financial Assistance”
- The phrase “agreements involving either technical or financial assistance” in the fourth paragraph of Section 2, Article XII refers to service contracts under the 1973 Constitution but with safeguards to prevent previous abuses.
- The use of the word “involving” suggests inclusivity—it does not limit agreements solely to financial or technical assistance but allows for reasonable accompanying activities necessary to sustain the agreements.
- The Constitutional Commission acknowledged that service contracts are not banned; rather, they are permitted as exceptions subject to conditions and legislative guidelines.
- The constitutional provision aims to prevent monopolistic foreign control while allowing foreign participation for capital and expertise shortages.
- The constitutional vocabulary used deliberately excluded the term “service contract” to eliminate negative aspects of prior regimes but was understood by the framers to allow contracts with protections over sovereignty.
- The construction of this phrase is strictly construed against foreign dominance, affirming Filipino ownership priority and limiting foreign involvement to complementary roles.
Constitutionality of RA 7942, DAO 96-40, and the FTAA
- The 1995 Mining Act and its implementing rules vest the State with full ownership and an extensive control and supervisory framework over mining operations, including:
- Mandatory submission of work programs, budgets, environmental impact reports, and other operational data subject to government approval.
- Provisions for monitoring, inspection, sanctions, including cancellation of agreements for violations or failure to pay government shares.
- Obligations to ensure equitable sharing of financial benefits, environmental protection, respect for indigenous peoples' rights, and social welfare.
- The FTAA contract between the Philippine Government and WMCP contains provisions requiring state approval of budgets and work programs, periodic reports, relinquishment of unneeded land, environmental compliance, and allows state termination for breaches.
- However, certain provisions in the WMCP FTAA, specifically Sections 7.8(e) and 7.9, were found grossly disadvantageous to the State because:
- Section 7.9 allows reduction of government’s 60% share in net mining revenues depending on Filipino ownership changes without compensation.
- Section 7.8(e) unjustly allows deductions from government share equivalent to government expenditures benefiting the contractor.
- The majority invalidated these two specific clauses but upheld the constitutionality of the rest of the Mining Law, its rules, and the FTAA.
- The exploration permit provision allowing foreign corporations to hold permits (Section 3(aq)) was upheld as not unconstitutional because permits authorize exploration but do not equate to exploitation or utilization rights.
- The Court reversed the previous declaration that service contracts are unconstitutional, holding that such contracts, properly safeguarded by the State's control and supervision and legislative oversight, are constitutional.
Financial Benefits, Government Share, and Contractual Fiscal Regime
- The State’s financial benefits consist of a “basic government share” (taxes, royalties, fees paid) and an “additional government share” computed under one of three formulas designed to ensure equitable sharing of net benefits.
- The additional share formulas include fifty-fifty sharing of present value of cash flows, profit-related sharing based on income ratios, or shari