FACTS:

RA 7942 (The Philippine Mining Act) took effect on April 9, 1995. Before the effectivity of RA 7942,
or on March 30, 1995, the President signed a Financial and Technical Assistance Agreement
(FTAA) with WMCP, a corporation organized under Philippine laws, covering close to 100,000
hectares of land in South Cotabato, Sultan Kudarat, Davao del Sur and North Cotabato. On August
15, 1995, the Environment Secretary Victor Ramos issued DENR Administrative Order 95-23,
which was later repealed by DENR Administrative Order 96-40, adopted on December 20, 1996.

Petitioners prayed that RA 7942, its implementing rules, and the FTAA between the government
and WMCP be declared unconstitutional on ground that they allow fully foreign owned corporations
like WMCP to exploit, explore and develop Philippine mineral resources in contravention of Article
XII Section 2 paragraphs 2 and 4 of the Charter.

In January 2001, WMC - a publicly listed Australian mining and exploration company - sold its
whole stake in WMCP to Sagittarius Mines, 60% of which is owned by Filipinos while 40% of which
is owned by Indophil Resources, an Australian company. DENR approved the transfer and
registration of the FTAA in Sagittarius name but Lepanto Consolidated assailed the same. The
latter case is still pending before the Court of Appeals.

EO 279, issued by former President Aquino on July 25, 1987, authorizes the DENR to accept,
consider and evaluate proposals from foreign owned corporations or foreign investors for contracts
or agreements involving wither technical or financial assistance for large scale exploration,
development and utilization of minerals which upon appropriate recommendation of the (DENR)
Secretary, the President may execute with the foreign proponent. WMCP likewise contended that
the annulment of the FTAA would violate a treaty between the Philippines and Australia which
provides for the protection of Australian investments.

ISSUES:

1. Whether or not the Philippine Mining Act is unconstitutional for allowing fully foreign-owned
corporations to exploit the Philippine mineral resources?
2. Whether or not the FTAA between the government and WMCP is a service contract that
permits fully foreign owned companies to exploit the Philippine mineral resources?

RULING:

1. RA 7942 is Unconstitutional

RA 7942 or the Philippine Mining Act of 1995 is unconstitutional for permitting fully foreign owned
corporations to exploit the Philippine natural resources.

Article XII Section 2 of the 1987 Constitution retained the Regalian Doctrine which states that All
lands of the public domain, waters, minerals, coal, petroleum, and other minerals, coal, petroleum,
and other mineral oils, all forces of potential energy, fisheries, forests or timber, wildlife, flora and
fauna, and other natural resources are owned by the State. The same section also states that,
the exploration and development and utilization of natural resources shall be under the full
control and supervision of the State.

Conspicuously absent in Section 2 is the provision in the 1935 and 1973 Constitution authorizing
the State to grant licenses, concessions, or leases for the exploration, exploitation, development,
or utilization of natural resources. By such omission, the utilization of inalienable lands of the public
domain through license, concession or lease is no longer allowed under the 1987 Constitution.

The 1987 Constitution, moreover, has deleted the phrase management or other forms of
assistance in the 1973 Charter. The present Constitution now allows only technical and financial
assistance. The management and the operation of the mining activities by foreign contractors, the


primary feature of the service contracts was precisely the evil the drafters of the 1987 Constitution
sought to avoid.

The constitutional provision allowing the President to enter into FTAAs is an exception to the rule
that participation in the nations natural resources is reserved exclusively to Filipinos. Accordingly,
such provision must be construed strictly against their enjoyment by non-Filipinos. Therefore, RA
7942 is invalid insofar as the said act authorizes service contracts. Although the statute employs
the phrase financial and technical agreements in accordance with the 1987 Constitution, its
pertinent provisions actually treat these agreements as service contracts that grant beneficial
ownership to foreign contractors contrary to the fundamental law.

The underlying assumption in the provisions of the law is that the foreign contractor manages the
mineral resources just like the foreign contractor in a service contract. By allowing foreign
contractors to manage or operate all the aspects of the mining operation, RA 7942 has, in effect,
conveyed beneficial ownership over the nations mineral resources to these contractors, leaving
the State with nothing but bare title thereto.

The same provisions, whether by design or inadvertence, permit a circumvention of the
constitutionally ordained 60-40% capitalization requirement for corporations or associations
engaged in the exploitation, development and utilization of Philippine natural resources.

Under Article XII Section 2 of the 1987 Charter, foreign owned corporations are limited only to
merely technical or financial assistance to the State for large scale exploration, development and
utilization of minerals, petroleum and other mineral oils.

Second Issue: RP Government-WMCP FTAA is a Service Contract

The FTAA between he WMCP and the Philippine government is likewise unconstitutional since the
agreement itself is a service contract.

Section 1.3 of the FTAA grants WMCP a fully foreign owned corporation, the exclusive right to
explore, exploit, utilize and dispose of all minerals and by-products that may be produced from the
contract area. Section 1.2 of the same agreement provides that EMCP shall provide all financing,
technology, management, and personnel necessary for the Mining Operations.

These contractual stipulations and related provisions in the FTAA taken together, grant WMCP
beneficial ownership over natural resources that properly belong to the State and are intended for
the benefit of its citizens. These stipulations are abhorrent to the 1987 Constitution. They are
precisely the vices that the fundamental law seeks to avoid, the evils that it aims to suppress.
Consequently, the contract from which they spring must be struck down.

Only technical assistance or financial assistance agreements may be entered into, and only for
large-scale activities. 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. The idea of full control is similar to that which is
exercised by the board of directors of a private corporation: the performance of managerial,
operational, financial, marketing and other functions may be delegated to subordinate officers or
given to contractual entities, but the board retains full residual control of the business.