La Bugal-Bulaan v.

Ramos
G.R. No. 127882
December 1, 2004

Doctrine: State must exercise full control and supervision over the exploration,
development and utilization of mineral resources.
FACTS:
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.
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.

ISSUE:
Whether or not the Court has the power of control over the Exploitation, Utilization and
Development (EDU) of our natural resources
Whether or not certain provisions of RA 7942, DAO 96-40, as well as of the entire FTAA
executed between the government and WMCP are unconstitutional

HELD:
1.NO. Who or what organ of government actually exercises this power of control on
behalf of the State? The Constitution is crystal clear: the President. Indeed, the Chief
Executive is the official constitutionally mandated to enter into agreements with foreign
owned corporations. On the other hand, Congress may review the action of the
President once it is notified of every contract entered into in accordance with this
[constitutional] provision within thirty days from its execution. In contrast to this express
mandate of the President and Congress in the EDU of natural resources, Article XII of
the Constitution is silent on the role of the judiciary. However, should the President
and/or Congress gravely abuse their discretion in this regard, the courts may -- in
a proper case -- exercise their residual duty under Article VIII. Clearly then, the judiciary
should not inordinately interfere in the exercise of this presidential power of control over
the EDU of our natural resources.

The crux of the controversy is the amount of discretion to be accorded the Executive
Department, particularly the President of the Republic, in respect of negotiations over
the terms of FTAAs, particularly when it comes to the government share of financial
benefits from FTAAs. The Court believes that it is not unconstitutional to allow a wide
degree of discretion to the Chief Executive, given the nature and complexity of such
agreements, the humongous amounts of capital and financing required for large-scale
mining operations, the complicated technology needed, and the intricacies of
international trade, coupled with the States need to maintain flexibility in its dealings, in
order to preserve and enhance our countrys competitiveness in world markets.

2. NO.
RA 9742
An objection has been expressed that Section 3(aq) [55] of RA 7942 -- which allows a
foreign contractor to apply for and hold an exploration permit -- is unconstitutional. The
reasoning is that Section 2 of Article XII of the Constitution does not allow foreignowned corporations to undertake mining operations directly. They may act only as
contractors of the State under an FTAA; and the State, as the party directly undertaking
exploitation of its natural resources, must hold through the government all exploration
permits and similar authorizations. Hence, Section 3(aq), in permitting foreign-owned
corporations to hold exploration permits, is unconstitutional.
The objection, however, is not well-founded. While the Constitution mandates the State
to exercise full control and supervision over the exploitation of mineral
resources, nowhere does it require the government to hold all exploration permits and
similar authorizations. In fact, there is no prohibition at all against foreign or local
corporations or contractors holding exploration permits. The reason is not hard to see.
Pursuant to Section 20 of RA 7942, an exploration permit merely grants to a qualified
person the right to conduct exploration for all minerals in specified areas. Such a permit
does not amount to an authorization to extract and carry off the mineral resources that
may be discovered. This phase involves nothing but expenditures for exploring the
contract area and locating the mineral bodies. As no extraction is involved, there are no
revenues or incomes to speak of. In short, the exploration permit is an authorization for
the grantee to spend its own funds on exploration programs that are pre-approved by
the government, without any right to recover anything should no minerals in commercial
quantities be discovered. The State risks nothing and loses nothing by granting these
permits to local or foreign firms; in fact, it stands to gain in the form of data generated by
the exploration activities.
Pursuant to Section 24 of RA 7942, an exploration permit grantee who determines the
commercial viability of a mining area may, within the term of the permit, file with the
MGB a declaration of mining project feasibility accompanied by a work program for

development. The approval of the mining project feasibility and compliance with other
requirements of RA 7942 vests in the grantee the exclusive right to an MPSA or any
other mineral agreement, or to an FTAA.
In brief, the exploration permit serves a practical and legitimate purpose in that it
protects the interests and preserves the rights of the exploration permit grantee
(the would-be contractor) -- foreign or local -- during the period of time that it is
spending heavily on exploration works, without yet being able to earn revenues
to recoup any of its investments and expenditures. Minus this permit and the
protection it affords, the exploration works and expenditures may end up benefiting only
claim-jumpers. Such a possibility tends to discourage investors and contractors. Thus,
Section 3(aq) of RA 7942 may not be deemed unconstitutional.

DAO 96-40, as well as of the entire FTAA executed between the government and
WMCP

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 the first paragraph of Section
2 of Article XII, which reserves or limits to Filipino citizens and corporations at
least 60 percent 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.
Despite strong opposition from some ConCom members during the final voting, the
Article on the National Economy and Patrimony -- including paragraph 4 allowing
service contracts with foreign corporations as an exception to the general norm in
paragraph 1 of Section 2 of the same Article -- was resoundingly and overwhelmingly
approved.
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, it is clear that agreements involving either technical or financial
assistance referred to in paragraph 4 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, 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.