Regalian doctrine La Bugal vs. Ramos (G.R. No.

127882, December 1, 2004)

Petitioner filed for Prohibition and Mandamus before the Court challenging the constitutionality of (1)
Republic Act No. [RA] 7942 (The Philippine Mining Act of 1995); (2) its IRR (DENR Administrative Order
No. [DAO] 96-40); and (3) the FTAA dated March 30, 1995, executed by the government with Western
Mining Corporation (Philippines), Inc. (WMCP).

On January 27, 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.

Subsequently, respondents filed separate Motions for Reconsideration.

Petitioners’ averments:
a. The FTAAs entered into by the government with foreign-owned corporations (WMCP) are
limited by the parag. 4 of Section 2 of Article XII to agreements involving only technical or
financial assistance for large-scale exploration, development and utilization of minerals,
petroleum and other mineral oils. And to permit them to fully manage and control the mining
operations would give them “beneficial ownership” of our mineral resources making the passive
regulator dependent on submitted plans and reports, with weak review and audit powers. The
State does not supposedly act as the owner of the natural resources for and on behalf of the
Filipino people.
b. Assuming the sale of WMCP shares to Sagittarius is valid, the same is precluded from entering to
FTAAs, first parag. of the constitutional provision limits the participation of Filipino corporations
in the EDU of natural resources to only three species of contracts -- production sharing, co-
production and joint venture -- to the exclusion of all other arrangements or variations
thereof(such as FTAAs).

Issues Raised:

1. Mootness of the case by the sale of WMC shares in WMCP to Sagittarius (60 percent of
Sagittarius’ equity is owned by Filipinos and/or Filipino-owned corporations while 40 percent is
owned by Indophil Resources NL, an Australian company) and by the subsequent transfer and
registration of the FTAA from WMCP to Sagittarius.

2. Propriety to resolve the constitutionality of the assailed provisions of the Mining Law, DAO 96-
40 and the WMCP FTAA.

3. Proper interpretation of the phrase Agreements Involving Either Technical or Financial

Assistance contained in paragraph 4 of Section 2 of Article XII of the Constitution.

Supreme Court Ruling:

a. Validity of the Sale of the FTAA to Sagittarius

Valid. Section 40 of the Mining Law, requiring the approval by the President and notification to Congress
expressly applies to the assignment or transfer of the FTAA, not to the sale and transfer of shares of
stock in WMCP to Sagittarius. The need for such safeguard is not critical when the transferee of the
FTAA happens to be a Filipino corporation, besides, approval by the president is not totally absent in this
case. Further, such provision would apply when the transferee of an FTAA is another foreign
corporation.

The FTAA per se is not void, defective or unconstitutional. It was questioned only because it had been
issued to an allegedly non-qualified, foreign-owned corporation. Hence, its reconveyance to a Filipino
Corporation cures the defect.

FTAA is to be implemented now by a Filipino corporation, it is no longer possible for the Court to declare
it unconstitutional considering the sale of the shares in WMCP from WMC to Sagittarius, and of the
transfer of the FTAA from WMCP to Sagittarius, resulting in the change of contractor in the FTAA in
question.

b. Mootness

Moot with regard to the sale of WMCP shares but the SC proceeded to settle the controversy on the
basis of (t)he Court’s duty to formulate guiding and controlling constitutional principles, precepts,
doctrines or rules, on the exceptional character of the situation and the paramount public interest
involved and the possibility that future FTAAs will be the subject of yet another suit grounded on
constitutional issues(capable of repetition, yet evading review)

c. The Proper Interpretation of the Constitutional Phrase "Agreements Involving Either Technical
or Financial Assistance"

Section 2, Article XII of the 1987 constitution provides:

1. All natural resources are owned by the State. Except for agricultural lands, natural resources
cannot be alienated by the State.
2. The exploration, development and utilization (EDU) of natural resources shall be under the full
control and supervision of the State.
3. The State may undertake these EDU activities through either of the following:
(a) By itself directly and solely
(b) By (i) co-production; (ii) joint venture; or (iii) production sharing agreements with Filipino
citizens or corporations, at least 60 percent of the capital of which is owned by such citizens
4.  Small-scale utilization of natural resources may be allowed by law in favor of Filipino citizens.
5. For large-scale EDU of minerals, petroleum and other mineral oils, the President may enter
into "agreements with foreign-owned corporations involving either technical or financial
assistance according to the general terms and conditions provided by law x x x."

a. On petitioners’ position that Foreign-owned corporations are only allowed limited and specific
technical assistance or financial assistance agreements and not the management or operation
of mining activities.

Verbis legis interpretation

Applying verbis legis in interpreting the provisions, SC ruled that the constitution does not limit. The
use of the use of the word "involving" signifies the possibility of the inclusion of other forms of
assistance or activities having to do with, otherwise related to or compatible with financial or technical
assistance. The word "involving" does not connote exclusivity.
Moreover, the word "involving," when understood in the sense of "including," as in including technical
or financial assistance, necessarily implies that there are activities other than those that are being
included. In other words, if an agreement includes technical or financial assistance, there is apart from
such assistance -- something else already in, and covered or may be covered by, the said agreement.

If strict interpretation were allowed, there would be no need to require the President of the Republic to
report to Congress there would be no need to limit them to large-scale mining operations, as there
would be far greater need for them in the smaller-scale mining activities (and even in non-mining areas).

And if paragraph 4 permits only agreements for loans and other forms of financial, or technical
assistance, what is the point of requiring that they be based on real contributions to the economic
growth and general welfare of the country?

Incapacity of government to directly undertake EDU

Further, considering the implausibility of a direct undertaking -- by the State itself -- of large-scale
exploration, development and utilization of minerals, petroleum and other mineral oils. It has to resort
to build-operate-transfer and similar arrangements with the private sector, in order to get vital
infrastructure projects built without any governmental outlay. Foreign corporations usually require that
they be given a say in the management, for instance, of day-to-day operations of the joint venture. They
would demand the appointment of their own men as, for example, operations managers, technical
experts, quality control heads, internal auditors or comptrollers.

Deliberations of ConCom and intendment of the framers

Pertinent portions of the deliberations of the members of the Constitutional Commission (ConCom)
conclusively show that they discussed agreements involving either technical or financial assistance in the
same breadth as service contracts and used the terms interchangeably. In brief, they were going to
permit service contracts with foreign corporations as contractors, but with safety measures to prevent
abuses.

Had the framers intended to put an end to service contracts, they would have at least left specific
instructions to Congress to deal with these closing-out issues, perhaps by way of general guidelines and
a timeline within which to carry them out.

In the end FTAA are interpreted as service contracts with safeguards. In the new service contracts, the
foreign contractors provide capital, technology and technical know-how, and managerial expertise in
the creation and operation of large-scale mining/extractive enterprises; and the government, through
its agencies (DENR, MGB), actively exercises control and supervision over the entire operation.

Full Test Control determinative of constitutionality

"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, as utilized in Section 2 of Article XII, 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.

b. On Petitioners position that Filipino Corp. not allowed to undertake FTAA

Not Valid. Parag. 1 of Section 2 of Article XII of the 1987 constitution allows for the EDU by FTAA of the
resources by Filipino corporation (60% capital owned by Filipino citizens). The Constitution does not
limit/restrict Filipino participation in the EDU only to production sharing, co-production and joint
venture to the exclusion of FTAA.

d. RA 7942 and its IRR enable the government to exercise that degree of control sufficient to direct
and regulate the conduct of affairs of individual enterprises and restrain undesirable activities

Yes. The gamut of requirements, regulations, restrictions and limitations imposed upon the FTAA
contractor by the statute and regulations easily overturns petitioners' contention. The setup under RA
7942 and DAO 96-40 hardly relegates the State to the role of a "passive regulator" dependent on
submitted plans and reports. On the contrary, the government agencies concerned are empowered to
approve or disapprove -- hence, 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 mining enterprise.

The State may likewise compel the contractor's compliance with mandatory requirements on mine
safety, health and environmental protection, and the use of anti-pollution technology and facilities.
Moreover, the contractor is also obligated to assist in the development of the mining community and to
pay royalties to the indigenous peoples concerned.

Financial Benefits not surrendered to the Contractor

Beneficial ownership has been defined as ownership recognized by law and capable of being enforced in
the courts at the suit of the beneficial owner. The contractor commits to perform certain services for
the government in respect of the mining operation, and in turn it is to be compensated out of the net
mining revenues generated from the sale of mineral products. The contractor does not benefit in excess
of the service rendered or value delivered, if any, in exchange therefor.

Equitable Sharing of Financial Benefits

The DAO spells out the financial benefits the government will receive from an FTAA, referred to as "the
Government Share," composed of a basic government share and an additional government share.

The basic government share is comprised of all direct taxes, fees and royalties, as well as other
payments made by the contractor during the term of the FTAA. These are amounts paid directly to (i)
the national government (through the Bureau of Internal Revenue, Bureau of Customs, Mines &
Geosciences Bureau and other national government agencies imposing taxes or fees), (ii) the local
government units where the mining activity is conducted, and (iii) persons and communities directly
affected by the mining project.
The additional government share is computed by using one of three options or schemes presented in
DAO 99-56: (1) a fifty-fifty sharing in the cumulative present value of cash flows; (2) the share based on
excess profits; and (3) the sharing based on the cumulative net mining revenue.

Summary:

All mineral resources are owned by the State. Their exploration, development and utilization (EDU) must
always be subject to the full control and supervision of the State. More specifically, given the
inadequacy of Filipino capital and technology in large-scale EDU activities, the State may secure the help
of foreign companies in all relevant matters -- especially financial and technical assistance -- provided
that, at all times, the State maintains its right of full control. The foreign assistor or contractor assumes
all financial, technical and entrepreneurial risks in the EDU activities; hence, it may be given reasonable
management, operational, marketing, audit and other prerogatives to protect its investments and to
enable the business to succeed.

Full control is not anathematic to day-to-day management by the contractor, provided that the State
retains the power to direct overall strategy; and to set aside, reverse or modify plans and actions of the
contractor.

Regalian Doctrine
DISSENTING OPINION
Carpio, J.

Section 2, Article XII of the 1987 Constitution4 provides as follows:

All x x x minerals, x x x petroleum, and other mineral oils, x x x and other natural
resources are owned by the State. x x x The exploration, development, and utilization of
natural resources shall be under the full control and supervision of the State. x x x.
(Emphasis supplied)

Two basic principles flow from this constitutional provision. First, the Constitution vests in the State
ownership of all mineral resources. Second, the Constitution mandates the State to exercise full control
and supervision over the exploitation of mineral resources.

The first principle reiterates the Regalian doctrine, which established State ownership of natural
resources since the arrival of the Spaniards in the Philippines in the 16th century. The 1935, 1973 and
1987 Constitutions incorporate the Regalian doctrine. The State, as owner of the nation's natural
resources, exercises the attributes of ownership over its natural resources. An important attribute of
ownership is the right to receive the income from any commercial exploitation of the natural resources.
The second principle insures that the benefits of State ownership of natural resources accrue to the
Filipino people. The framers of the 1987 Constitution introduced the second principle to avoid the
adverse effects of the "license, concession or lease" system of exploitation under the 1935 and 1973
Constitutions.

The State as owner of the natural resources must receive income from the exploitation of its natural
resources. The payment of taxes, fees and charges, derived from the taxing or police power of the State,
is not a substitute. The State is duty bound to secure for the Filipino people a fair share of the income
from any exploitation of the nation's precious and exhaustible natural resources.

In large-scale exploitation of minerals, petroleum and other mineral oils, the Constitution allows the
State to contract with "foreign-owned corporations" under an FTAA. This is still a direct exploitation by
the State but using a foreign instead of a local contractor. However, the Constitution requires that the
participation of foreign contractors must make a real contribution to the national economy and the
general welfare. The State pays the foreign contractor, for its technical services or financial assistance, a
share of the income from the exploitation of the minerals, petroleum or other mineral oils. The State
retains the rest of the income after paying the foreign contractor. To insure it retains its fair share of
the income, the State must exercise full control and supervision over the exploitation of its natural
resources.

Section 80 of RA 7942 does not allow the State to receive any income as owner of the mineral resources.
The proviso in Section 84 of RA 7942 reiterates this when it states that "the excise tax on mineral
products shall be the government share under said agreement." The State receives only an excise tax
flowing from its taxing power, not from its ownership of the mineral resources.

The second paragraph of Section 81 of RA 7942 also limits the State's share in FTAAs with foreign
contractors to taxes, duties and fees. Section 81 does not require the Government and the foreign
contractor to negotiate the State's share from the net proceeds.

The legislature has no power to waive for free the benefits accruing to the State from its ownership of
mineral resources. Absent considerations of social justice, the legislature has no power to give away for
free what forms part of the national patrimony of the State. Any surrender by the legislature of the
nation's mineral resources, especially to foreign private enterprises, is repugnant to the concept of
national patrimony. Mineral resources form part of the national patrimony under Article XII (National
Economy and Patrimony) of the 1987 Constitution.

Any law waiving for free the State's right to the benefits arising from its ownership of mineral resources
is unconstitutional. Such law negates Section 2, Article XII of the 1987 Constitution vesting ownership of
mineral resources in the State. Such law will not contribute to "economic growth and the general
welfare of the country" as required in the fourth paragraph of Section 2. Thus, in waiving the State's
income from the exploitation of mineral resources, Section 80, the second paragraph of Section 81, the
proviso in Section 84, and Section 112 of RA 7942 violate the Constitution and are therefore void.

Clearly, in the exploration, development and utilization of the nation's natural resources, the
Government is in a position analogous to a trustee, holding title to and managing these resources for the
benefit of the Filipino people, including future generations. As the trustee of the sovereign, the
Government has a fiduciary duty to ensure that the gains, rewards and advantages generated by the
Philippines' natural resources accrue to the benefit of the Filipino people. Corollary to this, the
Government cannot, without violating its sacred trust, enter into any agreement or arrangement which
effectively deprives the Filipino people of their beneficial ownership of these resources – e.g., when it
enters into an agreement whereby the vast majority of the resources, or the profit generated from the
resources, is bargained away in favor of a foreign entity.