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Philippine Law Governing Joint Ventures
Philippine Law Governing Joint Ventures
JOINT VENTURES
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Introduction
Formation Agreement: Nature of Joint Ventures in Philippine Setting
Alternative Legal Forms in Structuring a Joint Venture
Aspects which Influence Choice of Legal Form
Governing Laws and Language
Freedom to Contract, In General
Formal or Extrinsic Validity of Agreements
Capacity of Contract Parties
Intrinsic Validity
Language of Joint Venture Agreements
Defining Joint Ventures Scope of Business Activity
Foreign Investment Act of 1991
Establishing a Corporate Vehicle
Procedure in Establishing a Corporate Vehicle
Doing Business in the Philippines
Governing Law
What Constitutes Doing Business
Qualifications to Do Business in the Philippines
Registration under FIA 91
SEC Registration
Additional Requirements
Effects of Non-Compliance with FIA 91 Requirements
SEC License for Foreign Corporations Doing Business
SEC Requirements
Issuance of License
Requirements Upon Issuance of SEC License
Effects of Failure to Secure SEC License to Do Business by Foreign Corporation
Incentives Available to Foreign Joint Venture Partners
Preferred Areas of Investments (BOI Registered and with Incentives)
Non-Preferred Area Investor(Investment Without Incentives)
Incentives of Export Processing Zone Enterprises
Restrictions on Activities of Foreign Joint Venture Partners
Financing Joint Ventures
Schemes Recognized under the Act
Equity Limitations for Operators of Public Franchises
Reasonable Rate of Return on Investments and Operating and Maintenance Cost
Period Covered
Financing Allowed
Priority Projects
Preference to Filipino Contractors
Repayment Schemes
Land Reclamation or Industrial Estates
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The original paper was submitted by the author to the CENTER FOR INTERNATIONAL LEGAL
STUDIES based in Salzburg, Austria, as part of its international publication.
INTRODUCTION
Joint venture arrangements are fairly common media of doing business or
undertaking projects in the Philippines, both covering local transactions, such a
large infra-structure undertakings involving the resources of big corporations, or
structuring partnership arrangements between foreign investors and their local
partners in the pursuit of local projects in the Philippines.
In particular, the Government encourages the pursuit of construction
projects and petroleum operations under joint venture arrangements. Under the
National Internal Revenue Code of 1997 of the Philippines (NIRC), joint ventures
formed for the purpose of engaging in petroleum operations pursuant to
operating agreements under a service contract with the Government, or those
formed for the purpose of undertaking construction projects, are exempt from
corporate income tax.
Joint venture arrangements have particularly been the more popular
medium when foreign participation is involved in local projects since the
contractual nature of the arrangement allows the parties flexibility to adopt
special rules and procedures covering their situation, which would otherwise be
inapplicable in a straight corporate vehicle because of the restrictive rules of the
Philippine Corporation Code and jurisprudence on Philippine Corporate Law.
FORMATION AGREEMENT:
NATURE OF JOINT VENTURES IN PHILIPPINE SETTING
There is no statutory provision that recognizes or governs directly joint
ventures, although they have been recognized in jurisprudence and
commonplace in commercial ventures. Consequently, joint venture arrangements
fall generally within the realm of the Law on Contracts, and particularly within the
applicable provisions of the Law on Partnership, both of which are governed
under the Civil Code of the Philippines.
Since the prevailing contract rule in the Philippines is that parties to a
contract may establish such stipulations, clauses, terms and conditions, as they
may deem convenient, provided they are not contrary to laws, morals, good
customs, public order, or public policy,1 no model joint venture agreements have
been published by the Securities and Exchange Commission (SEC), Board of
Investments (BOI), or any other authority.
The prevailing school of thought in the Philippines is that a joint venture is
a species of partnership. By specific statutory provision when "two or more
persons bind themselves to contribute money, property, or industry to a common
fund, with the intention of dividing the profits among themselves," then a
partnership is created by definition of law. 2 The main distinction between an
ordinary partnership and a joint venture is that the ordinary partnership is
organized for general business venture and does not have a definite term of
existence; whereas a joint venture is organized for a specific project or
undertaking.
The Philippine Supreme Court has adopted Black's definition of a joint
venture, thus: "Joint venture is defined as an association of persons or
companies jointly undertaking some commercial enterprisegenerally all
contribute assets and share risks. It requires a community of interest in the
performance of the subject matter, a right to direct and govern the policy
connected therewith, and duty, which may be altered by agreement to share both
in profit and losses."3
The foregoing definition of a joint venture essentially falls within the
statutory definition of what constitutes a partnership. Other reasons on why a
joint venture must be considered a species of partnership is that the Law on
Partnership provides that "A partnership may be constituted in any form, except
where immovable property or real rights are contributed, thereto, in which case a
public instrument shall be necessary." 4 That means that no special form, even
one seeking to establish a joint venture arrangement, is necessary to give rise to
a partnership.
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The previous ruling of the SEC on the matter is that a corporation cannot
enter into a contract of partnership with an individual or another corporation on
the premise that if a corporation enters into a partnership agreement, it would be
bound by the acts of the persons who are not its duly appointed and authorized
agents and officers, which is entirely inconsistent with the policy of the law that
the corporation shall mange its own affairs separately and exclusively.15
Later, the SEC provided for a clear exception to the foregoing ruling, and
allowed corporations to enter into partnership arrangement, provided the
following conditions are met:16
(a) The authority to enter into a partnership relation is expressly
conferred by the charter or the articles of incorporation of the
corporation, and the nature of the business venture to be
undertaken by the partnership is in line with the business
authorized by the charter or articles of incorporation;
(b) The agreement on the articles of partnership must provide
that all the partners shall manage the partnership, and the
articles of partnership must stipulate that all the partners
shall be jointly and severally liable for all the obligations of
the partnership;
(c) If it is a foreign corporation, it must obtain a license to
transact business in the country in accordance with the
Corporation Code of the Philippines.
In one opinion, the SEC clarified that the conditions imposed meant that
since the partners in a partnership of corporations are required to stipulate that
all of them shall manage the partnership and they shall be jointly and severally
liable for all the obligations of the partnership, it necessarily followed that a
partnership of corporations should be organized as a general partnership. 17
Lately, the SEC, realizing that the second condition actually prevented a
corporation from entering into a limited partnership, which if allowed to do so
would then be more congruent with the policy that the corporation would then not
be held liable for its venture beyond the investments made and determined by its
board of directors, and would therefore not be held liable (beyond its investment)
for debts arising from the acts of the general partners, reconsidered its position
and ruled that a corporation may become a limited partner in a limited
partnership, since there is no existing Philippine law that expressly prohibits a
corporation from becoming a limited partner in a partnership. In effect, the SEC
dropped the second condition imposed previously.18
15
SEC Opinion, 22 December 1966, SEC FOLIO 1960-1976, at p. 278; citing 6 FLETCHER
CYC. CORP., Perm. Ed. Rev. Repl. 1950, Sec. 2520.
16
SEC Opinion, 29 February 1980; SEC Opinion, dated 3 September 1984. Under Sec. 192
of the NATIONAL INTERNAL REVENUE CODE, documentary stamps of P15.00 must be affixed on
each proxy.
17
SEC Opinion, 23 February 1994, XXVIII SEC QUARTERLY BULLETIN 18 (No. 3, Sept.
1994).
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SEC Opinion, 17 August 1995, XXX SEC QUARTERLY BULLETIN 8 (No. 1, June 1996).
In the field of Taxation, both a partnership and a joint venture are treated
as corporate taxpayers, and both are subject to corporate income tax, except that
under the National Internal Revenue Code of 1997, "a joint venture or consortium
formed for the purpose of undertaking construction projects or engaging in
petroleum, coal, geothermal and other energy operations pursuant to an
operating or consortium agreement under a service contract with the
Government," shall not be taxed separately as a corporate taxpayer. 19
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4. Intrinsic Validity
The intrinsic validity of a joint venture agreement, as in all contracts in
general executed in the Philippines, including consideration or cause thereof, the
interpretation or constructions of its provisions, and the nature and amount of
damages for breach thereof, are governed by the law voluntarily agreed upon by
the parties. The parties to a joint venture arrangement can therefore validly
stipulate which laws shall govern their arrangement.
However, any stipulation in the joint venture agreement cannot operate to
oust Philippine courts of their jurisdiction under the law, although the local courts
would still apply the laws chosen by the parties to the agreement. 38
Although the parties to a contract, including a joint venture arrangements,
are granted liberty under Philippine laws to stipulate on governing laws, including
the laws of another country, nevertheless, Philippine restrictive laws, on taxes
and prohibition on foreign equity in some business areas or activities are likely to
be imposed as mandatory if suit is brought before a local forum seeking any
remedy under the joint venture arrangement.
5. Language of Joint Venture Agreements
There are likewise no restrictions on the language in which a document or
contract may be executed, since the language does not go into the validity or
enforceability of the agreement. Nevertheless, it would be prudent for the parties
to draw the documents in an official language, since any future suit on a
document must always be accompanied by an official transaction in the official
language.
Under Section 33, Rule 132 of the Philippine Rules of Court, documents
written in an unofficial language shall not be admitted as evidence, unless
accompanies with a translation into English or Filipino. Under the 1987
Constitution of the Philippines, the official languages are Filipino and, until
otherwise provided by law, English.39
Most, if not practically all, contracts and agreements in Philippine setting
are drawn-up and executed in English, since it is the official and dominant
language of commerce and the judiciary.
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List B also includes activities regulated by law because of risks they may
pose to public health and morals. For example, dangerous drugs, gambling,
nightclubs, bars, and message clinics are not open for foreign investments. 57
A third area under the negative List B refers to domestic market
enterprises with less than US$200,000 paid in equity capital, unless determined
by the Department of Science and Technology as involving advanced technology.
Finally, the negative List B also includes export enterprises using raw
materials from depleting natural resources and with less than US$200,000 paid
in equity capital.
The following therefore are covered under List B and would be open to
100% foreign equity investments:
(a) Manufacture and repair of firearms and similar defenserelated material with substantial export component and with
specific authorization from the Secretary of National
Defense.
(b) Domestic market enterprises certified by the DOST as
involving advanced technology even if the paid-in equity
capital is less than US$200,000.
(c) Export enterprises that use raw materials from depleting
natural resources but with paid-in capital of at least
US$200,000.
List C enumerates "adequately-served areas." The criteria to determine
"adequately served "areas of economic activity are the following:
(a) The industry is controlled by firms owned at least 60% by
Filipinos;
(b) Industry capacity is ample to meet domestic demand;
(c) Sufficient competition exists within the industry;
(d) Industry products comply with Philippine standards of health
and safety or, in the absence of such, with international
standards, and are reasonably competitive quality with
similar products in the same price range imported into the
country;
(e) Quantitative restrictions are not applied on imports of directly
competing products;
(f) Industry leaders comply with environmental rules; and
(g) The prices of industry products are reasonable.
The transitory Negative List C has already been scrapped under
Executive Order No. 182 which established the regular Foreign Investment
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Negative List, and took effect last October, 1994. There is in effect no longer
Negative List C.
Establishing a Corporate Vehicle
Mere investment by foreign entities into a joint venture company would be
covered by the rules on foreign equity allowance under FIA '91. The registration
of the joint venture company itself would be similar to the normal registration
requirements of the SEC on the organization, formation and registration of a
domestic corporation.
In addition, if aside from equity investment in the local company, the
foreign partners would participate in the affairs or projects of the domestic joint
venture company, it would be considered doing business in the Philippines and
would have to obtain a license to do business from the SEC.
1. Procedure in Establishing a Corporate Vehicle
Aside from the FIA '91, the are Corporation Code provisions and SEC
rules and regulations that must be complied with in setting-up the joint venture
company.
Section 10 of our Corporation Code requires the incorporators of a
corporation to be not less than five (5) natural persons, majority of whom must be
residents of the Philippines. This requirement is mandatory even to 100%
foreign-owned corporations. Since the Code provides that only natural persons
must be incorporators, a corporation cannot be considered an incorporator of the
corporation to be put up although said corporation may be among the
subscribers to the corporation's capital stock.
The Code sets the limit to the number of directors to not less than five (5)
nor more than fifteen (15). Section 23 of the Code, moreover, requires every
director to own at least one (1) share of the capital stock of the capital stock of
the corporation. Said section of the Code also requires majority of the directors to
be residents of the Philippines. However, the SEC does not insist on majority
residency requirements for directors when the domestic corporation is 100%
foreign-owned.
Alien incorporators and subscribers who are residents must furnish
provide any of the following: their immigration certificate of residence, special
investor's resident visa and any kind of visa valid for at least one (1) year.
Under SEC regulations, an alien may be appointed/elected as treasurer
only if he is a resident of the Philippines.
When a joint venture company is to be registered with foreign equity, the
following requirements are imposed by the SEC:
(a) All subscriptions of foreign incorporators to be fully paid. If
they will not be fully paid, the Filipino incorporators must
execute an undertaking to pay for the unpaid subscription;
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Officially designated as Bangko Sentral ng Pilipinas under Rep. Act No. 7653.
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Republic Act 7718 defines "reasonable rate of return" as the rate of return
that reflects the prevailing cost of capital in the domestic and international
markets.
4. Period Covered
The contractor transfers the facility to the government unit concerned at
the end of the fixed term which shall not exceed 50 years.
5. Financing Allowed
For the construction stage, the contractor may obtain financing from
foreign and/or domestic sources and/or engage the services of a foreign and/or
Filipino contractor.
The financing of a foreign or foreign-controlled contractor from Philippine
government financing institutions shall not exceed 20% of the total cost of the
infrastructure facility or project.
The financing from foreign sources shall not require a guarantee by the
Government or by government-owned or controlled corporation.
Projects which would have difficulty in sourcing funds may be financed
partly from direct government appropriations and/or from Official Development
Assistance (ODA) funds of foreign governments or institutions not exceeding
50% of the project cost, and the balance to be provided by the project proponent.
6. Priority Projects
The Philippine Congress passed Joint Resolution No. 03 enumerating the
following national priority infrastructure projects:
(a) Highways, including expressways, roads, bridges, interchanges, tunnels and related facilities;
(b) Rail-based projects packaged with commercial development
opportunities, e.g., use of government facilities;
(c) Non-rail based mass transit facilities, navigable inland
waterways and related facilities;
(d) Port infrastructure like piers, wharves, quays, storage,
handling ferry services and related facilities;
(e) Airports, air navigation and related facilities;
(f) Power generation, distribution, electrification and related
facilities;
(g) Telecommunications, backbone networks, terrestrial and
satellite facilities and related service facilities;
(h) Dams, irrigation and related facilities;
(i) Water supply, sewerage, drainage and related facilities;
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The imposition and collection of tools, fees, rentals and charges shall be
for a fixed term as proposed in the bid and incorporated in the contract but in no
case shall this term exceed 50 years.
During the lifetime of the franchise, the contractor shall undertake the
necessary maintenance and repair of the facility in accordance with standards
prescribed in the bidding documents and in the contract. In the case of build-andtransfer arrangement, the repayment scheme is to be effected through
amortization payments by the government infrastructure agency or local
government unit concerned to the contractor according to the scheme proposed
in the bid and incorporated in the contract.
Republic Act 7718 also allows for the receipt by the project proponent of
payment in non-monetary terms such as land (subject, however, to constitutional
limitations on ownership of land).
9. Land Reclamation or Industrial Estates
In the case of land reclamation or the building of industrial estates, the
repayment scheme may consist of the grant of a portion or percentage of the
reclaimed land or industrial estate built, subject to the constitutional requirements
with respect to the ownership of lands only by Filipino citizens.
10. Registration with BOI
Republic Act 7718 provides that projects costing in excess of P1 Billion
shall be registered with the Board of Investments and entitled to the incentives
provided under the Omnibus Investments Code.
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(a) Any person who shall enter into any contract or agreement
or shall take part in any conspiracy or combination in the
form of a trust or otherwise, in restraint of trade or commerce
or to prevent by artificial means free competition in the
market;
(b) Any person who shall monopolize any merchandise or object
of trade or commerce, or shall combine with any other
person or persons to monopolize said merchandise or object
in order to alter the price thereof by spreading false rumors
or making use of any other artifice to restrain free
competition in the market;
(c) Any person who, being a manufacturer, producers, or
processor of any merchandise or object of commerce or an
importer of any merchandise or object of commerce from
any foreign country, either as principal or agent, wholesale or
retailer, shall combine, conspire or agree in any manner with
any person likewise engaged in the manufacture, production,
processing, assembling or importation or such merchandise
or object of commerce, or with any person not so similarly
engaged, for the purpose of making transactions prejudicial
to lawful commerce, or of increasing the market price in any
part of the Philippines.
Whenever any of the offenses described above is committed by a
corporation or association, the president and each one of the directors or
managers of said corporation or association or its agent or representative in the
Philippines, in case of foreign corporations or associations, who shall have
knowingly permitted or failed to prevent the commission of such offenses, shall
be held liable as principals thereof.
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DISPUTE RESOLUTION
Outside of judicial remedies, parties to a joint venture arrangement are
authorized to submit their controversies to arbitration, 68 or they can provide as
part of their joint venture arrangements that all issues and controversies shall be
resolved by arbitration through a procedure drawn out in the joint venture
contract. The stipulation on arbitration can validly provide that the resolution or
decision of the board of arbitrators is valid and final. 69
When the parties to a contract have a provision requiring arbitration in
case of disputes, no party may seek remedy from the courts of law. However,
should a case be filed in court without having resorted to prior arbitration, the
court will not dismiss the case; instead the court will refer the matter to the
arbitrators.70
In case there is a provision for arbitration, and one party refuses to
arbitrate, the other party may, through a summary court proceeding, enforce the
arbitration provisions of their contract; but the court is without authority to resolve
the issues on the merits.71
1. Arbitration Law
The special or particular law governing arbitration stipulation and
proceedings is Republic Act No. 876 (1953), formally designated as "The
Arbitration Law."
a. Persons and Matters Subject to Arbitration
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Under the said Law, two and more persons or parties may submit to the
arbitration of one or more arbitrators any controversy existing, between them at
the time of the submission and which may be subject of an action, or the parties
to any contract may in such contract agree to settle by arbitration a controversy
thereafter arising between them.
Such submission or contract shall be valid, enforceable and irrevocable,
save upon such grounds as exist at law for the revocation of any contract. Also,
such submission or contract may include questions arising out of valuations,
appraisals or other controversies which may be collateral, incidental, precedent
or subsequent to any issue between the parties.
b. Form of Arbitration Agreement
A contract to arbitrate a controversy thereafter arising between the parties,
as well as a submission to arbitrate an existing controversy shall be in writing and
subscribed by the party sought to be charged, or by his lawful agent. The making
of a contract or submission for arbitration shall be deemed a consent of the
parties to the jurisdiction of the Regional Trial Court of the province or city where
any of the parties resides, to enforce such contract or submission.
c. Appointment of Arbitrators
If, in the contract for arbitration or in the submission to arbitration,
provision is made for a method of naming and appointing arbitrators, such
method shall be followed; but if no method be provided therein, it is the Regional
Trial Court that shall designate an arbitrator or arbitrators.
The Arbitration Law provides specifically for the procedure of arbitration,
qualification of arbitrators, challenge of arbitrators, hearing by arbitrators,
rendering of awards and the form and contents of award, confirmation of award,
grounds for vacating, modifying or correcting awards, and appeals procedure.
2. Facilities for Commercial Arbitrations
The Philippine Chamber of Commerce and Industry, as a service to its
members and in response to request for assistance to provide arbitration facilities
and services to parties to a commercial dispute, has adopted its own Rules on
Conciliation and Arbitration.
In the construction industry, The Philippine Domestic Construction Board
was created under Pres. Decree No. 1476 "to adjudicate and settle claims and
disputes in the implementation of public construction contracts" and to "formulate
and recommend rules and procedures for the adjudication and settlements of
claims and disputes in the implementation of contracts in private construction."
Subsequently, the Philippine Construction Industry Arbitration Commission
(CIAC) was constituted under Executive order No. 1008, giving it original and
exclusive jurisdiction over claims and disputes arising from or connected with
public and private constructions contracts in the Philippines.
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