G.R. No.

L-40411 August 7, 1935

DAVAO SAW MILL CO., INC., plaintiff-appellant,

vs.
APRONIANO G. CASTILLO and DAVAO LIGHT & POWER CO., INC., defendants-appellees.

Arsenio Suazo and Jose L. Palma Gil and Pablo Lorenzo and Delfin Joven for appellant.
J.W. Ferrier for appellees.

MALCOLM, J.:

The issue in this case, as announced in the opening sentence of the decision in the trial court and as
set forth by counsel for the parties on appeal, involves the determination of the nature of the properties
described in the complaint. The trial judge found that those properties were personal in nature, and as
a consequence absolved the defendants from the complaint, with costs against the plaintiff.

The Davao Saw Mill Co., Inc., is the holder of a lumber concession from the Government of the
Philippine Islands. It has operated a sawmill in the sitio of Maa, barrio of Tigatu, municipality of Davao,
Province of Davao. However, the land upon which the business was conducted belonged to another
person. On the land the sawmill company erected a building which housed the machinery used by it.
Some of the implements thus used were clearly personal property, the conflict concerning machines
which were placed and mounted on foundations of cement. In the contract of lease between the
sawmill company and the owner of the land there appeared the following provision:

That on the expiration of the period agreed upon, all the improvements and buildings
introduced and erected by the party of the second part shall pass to the exclusive ownership
of the party of the first part without any obligation on its part to pay any amount for said
improvements and buildings; also, in the event the party of the second part should leave or
abandon the land leased before the time herein stipulated, the improvements and buildings
shall likewise pass to the ownership of the party of the first part as though the time agreed
upon had expired: Provided, however, That the machineries and accessories are not included
in the improvements which will pass to the party of the first part on the expiration or
abandonment of the land leased.

In another action, wherein the Davao Light & Power Co., Inc., was the plaintiff and the Davao, Saw,
Mill Co., Inc., was the defendant, a judgment was rendered in favor of the plaintiff in that action against
the defendant in that action; a writ of execution issued thereon, and the properties now in question
were levied upon as personalty by the sheriff. No third party claim was filed for such properties at the
time of the sales thereof as is borne out by the record made by the plaintiff herein. Indeed the bidder,
which was the plaintiff in that action, and the defendant herein having consummated the sale,
proceeded to take possession of the machinery and other properties described in the corresponding
certificates of sale executed in its favor by the sheriff of Davao.

As connecting up with the facts, it should further be explained that the Davao Saw Mill Co., Inc., has
on a number of occasions treated the machinery as personal property by executing chattel mortgages
in favor of third persons. One of such persons is the appellee by assignment from the original
mortgages.

Article 334, paragraphs 1 and 5, of the Civil Code, is in point. According to the Code, real property
consists of —

1. Land, buildings, roads and constructions of all kinds adhering to the soil;
 xxx xxx xxx

5. Machinery, liquid containers, instruments or implements intended by the owner of any

building or land for use in connection with any industry or trade being carried on therein and
which are expressly adapted to meet the requirements of such trade of industry.

Appellant emphasizes the first paragraph, and appellees the last mentioned paragraph. We entertain
no doubt that the trial judge and appellees are right in their appreciation of the legal doctrines flowing
from the facts.

In the first place, it must again be pointed out that the appellant should have registered its protest
before or at the time of the sale of this property. It must further be pointed out that while not conclusive,
the characterization of the property as chattels by the appellant is indicative of intention and impresses
upon the property the character determined by the parties. In this connection the decision of this court
in the case of Standard Oil Co. of New York vs. Jaramillo ( [1923], 44 Phil., 630), whether obiter dicta or
not, furnishes the key to such a situation.

It is, however not necessary to spend overly must time in the resolution of this appeal on side issues.
It is machinery which is involved; moreover, machinery not intended by the owner of any building or
land for use in connection therewith, but intended by a lessee for use in a building erected on the land
by the latter to be returned to the lessee on the expiration or abandonment of the lease.

A similar question arose in Puerto Rico, and on appeal being taken to the United States Supreme
Court, it was held that machinery which is movable in its nature only becomes immobilized when
placed in a plant by the owner of the property or plant, but not when so placed by a tenant, a
usufructuary, or any person having only a temporary right, unless such person acted as the agent of
the owner. In the opinion written by Chief Justice White, whose knowledge of the Civil Law is well
known, it was in part said:

To determine this question involves fixing the nature and character of the property from the
point of view of the rights of Valdes and its nature and character from the point of view of
Nevers & Callaghan as a judgment creditor of the Altagracia Company and the rights derived
by them from the execution levied on the machinery placed by the corporation in the plant.
Following the Code Napoleon, the Porto Rican Code treats as immovable (real) property, not
only land and buildings, but also attributes immovability in some cases to property of a movable
nature, that is, personal property, because of the destination to which it is applied. "Things,"
says section 334 of the Porto Rican Code, "may be immovable either by their own nature or
by their destination or the object to which they are applicable." Numerous illustrations are given
in the fifth subdivision of section 335, which is as follows: "Machinery, vessels, instruments or
implements intended by the owner of the tenements for the industrial or works that they may
carry on in any building or upon any land and which tend directly to meet the needs of the said
industry or works." (See also Code Nap., articles 516, 518 et seq. to and inclusive of article
534, recapitulating the things which, though in themselves movable, may be immobilized.) So
far as the subject-matter with which we are dealing — machinery placed in the plant — it is
plain, both under the provisions of the Porto Rican Law and of the Code Napoleon, that
machinery which is movable in its nature only becomes immobilized when placed in a plant by
the owner of the property or plant. Such result would not be accomplished, therefore, by the
placing of machinery in a plant by a tenant or a usufructuary or any person having only a
temporary right. (Demolombe, Tit. 9, No. 203; Aubry et Rau, Tit. 2, p. 12, Section 164; Laurent,
Tit. 5, No. 447; and decisions quoted in Fuzier-Herman ed. Code Napoleon under articles
522 et seq.) The distinction rests, as pointed out by Demolombe, upon the fact that one only
having a temporary right to the possession or enjoyment of property is not presumed by the
 law to have applied movable property belonging to him so as to deprive him of it by causing it
by an act of immobilization to become the property of another. It follows that abstractly
speaking the machinery put by the Altagracia Company in the plant belonging to Sanchez did
not lose its character of movable property and become immovable by destination. But in the
concrete immobilization took place because of the express provisions of the lease under which
the Altagracia held, since the lease in substance required the putting in of improved machinery,
deprived the tenant of any right to charge against the lessor the cost such machinery, and it
was expressly stipulated that the machinery so put in should become a part of the plant
belonging to the owner without compensation to the lessee. Under such conditions the tenant
in putting in the machinery was acting but as the agent of the owner in compliance with the
obligations resting upon him, and the immobilization of the machinery which resulted arose in
legal effect from the act of the owner in giving by contract a permanent destination to the
machinery.

xxx xxx xxx

The machinery levied upon by Nevers & Callaghan, that is, that which was placed in the plant
by the Altagracia Company, being, as regards Nevers & Callaghan, movable property, it
follows that they had the right to levy on it under the execution upon the judgment in their favor,
and the exercise of that right did not in a legal sense conflict with the claim of Valdes, since as
to him the property was a part of the realty which, as the result of his obligations under the
lease, he could not, for the purpose of collecting his debt, proceed separately against.
(Valdes vs. Central Altagracia [192], 225 U.S., 58.)

Finding no reversible error in the record, the judgment appealed from will be affirmed, the costs of this
instance to be paid by the appellant.

Villa-Real, Imperial, Butte, and Goddard, JJ., concur.

G.R. No. L-41643 July 31, 1935

B.H. BERKENKOTTER, plaintiff-appellant,

vs.
CU UNJIENG E HIJOS, YEK TONG LIN FIRE AND MARINE INSURANCE COMPANY,
MABALACAT SUGAR COMPANY and THE PROVINCE SHERIFF OF PAMPANGA, defendants-
appellees.

Briones and Martinez for appellant.

Araneta, Zaragoza and Araneta for appellees Cu Unjieng e Hijos.
No appearance for the other appellees.

VILLA-REAL, J.:

This is an appeal taken by the plaintiff, B.H. Berkenkotter, from the judgment of the Court of First
Instance of Manila, dismissing said plaintiff's complaint against Cu Unjiengs e Hijos et al., with costs.

In support of his appeal, the appellant assigns six alleged errors as committed by the trial court in its
decision in question which will be discussed in the course of this decision.
The first question to be decided in this appeal, which is raised in the first assignment of alleged error,
is whether or not the lower court erred in declaring that the additional machinery and equipment, as
improvement incorporated with the central are subject to the mortgage deed executed in favor of the
defendants Cu Unjieng e Hijos.

It is admitted by the parties that on April 26, 1926, the Mabalacat Sugar Co., Inc., owner of the sugar
central situated in Mabalacat, Pampanga, obtained from the defendants, Cu Unjieng e Hijos, a loan
secured by a first mortgage constituted on two parcels and land "with all its buildings, improvements,
sugar-cane mill, steel railway, telephone line, apparatus, utensils and whatever forms part or is
necessary complement of said sugar-cane mill, steel railway, telephone line, now existing or that
may in the future exist is said lots."

On October 5, 1926, shortly after said mortgage had been constituted, the Mabalacat Sugar Co.,
Inc., decided to increase the capacity of its sugar central by buying additional machinery and
equipment, so that instead of milling 150 tons daily, it could produce 250. The estimated cost of said
additional machinery and equipment was approximately P100,000. In order to carry out this plan,
B.A. Green, president of said corporation, proposed to the plaintiff, B.H. Berkenkotter, to advance
the necessary amount for the purchase of said machinery and equipment, promising to reimburse
him as soon as he could obtain an additional loan from the mortgagees, the herein defendants Cu
Unjieng e Hijos. Having agreed to said proposition made in a letter dated October 5, 1926 (Exhibit
E), B.H. Berkenkotter, on October 9th of the same year, delivered the sum of P1,710 to B.A. Green,
president of the Mabalacat Sugar Co., Inc., the total amount supplied by him to said B.A. Green
having been P25,750. Furthermore, B.H. Berkenkotter had a credit of P22,000 against said
corporation for unpaid salary. With the loan of P25,750 and said credit of P22,000, the Mabalacat
Sugar Co., Inc., purchased the additional machinery and equipment now in litigation.

On June 10, 1927, B.A. Green, president of the Mabalacat Sugar Co., Inc., applied to Cu Unjieng e
Hijos for an additional loan of P75,000 offering as security the additional machinery and equipment
acquired by said B.A. Green and installed in the sugar central after the execution of the original
mortgage deed, on April 27, 1927, together with whatever additional equipment acquired with said
loan. B.A. Green failed to obtain said loan.

Article 1877 of the Civil Code provides as follows.

ART. 1877. A mortgage includes all natural accessions, improvements, growing fruits, and
rents not collected when the obligation falls due, and the amount of any indemnities paid or
due the owner by the insurers of the mortgaged property or by virtue of the exercise of the
power of eminent domain, with the declarations, amplifications, and limitations established by
law, whether the estate continues in the possession of the person who mortgaged it or
whether it passes into the hands of a third person.

In the case of Bischoff vs. Pomar and Compañia General de Tabacos (12 Phil., 690), cited with
approval in the case of Cea vs. Villanueva (18 Phil., 538), this court laid shown the following
doctrine:

1. REALTY; MORTGAGE OF REAL ESTATE INCLUDES IMPROVEMENTS AND

FIXTURES. — It is a rule, established by the Civil Code and also by the Mortgage Law, with
which the decisions of the courts of the United States are in accord, that in a mortgage of
real estate, the improvements on the same are included; therefore, all objects permanently
attached to a mortgaged building or land, although they may have been placed there after
the mortgage was constituted, are also included. (Arts. 110 and 111 of the Mortgage Law,
 and 1877 of the Civil Code; decision of U.S. Supreme Court in the matter of Royal Insurance
Co. vs. R. Miller, liquidator, and Amadeo [26 Sup. Ct. Rep., 46; 199 U.S., 353].)

2. ID.; ID.; INCLUSION OR EXCLUSION OF MACHINERY, ETC. — In order that it may be

understood that the machinery and other objects placed upon and used in connection with a
mortgaged estate are excluded from the mortgage, when it was stated in the mortgage that
the improvements, buildings, and machinery that existed thereon were also comprehended,
it is indispensable that the exclusion thereof be stipulated between the contracting parties.

The appellant contends that the installation of the machinery and equipment claimed by him in the
sugar central of the Mabalacat Sugar Company, Inc., was not permanent in character inasmuch as
B.A. Green, in proposing to him to advance the money for the purchase thereof, made it appear in
the letter, Exhibit E, that in case B.A. Green should fail to obtain an additional loan from the
defendants Cu Unjieng e Hijos, said machinery and equipment would become security therefor, said
B.A. Green binding himself not to mortgage nor encumber them to anybody until said plaintiff be fully
reimbursed for the corporation's indebtedness to him.

Upon acquiring the machinery and equipment in question with money obtained as loan from the
plaintiff-appellant by B.A. Green, as president of the Mabalacat Sugar Co., Inc., the latter became
owner of said machinery and equipment, otherwise B.A. Green, as such president, could not have
offered them to the plaintiff as security for the payment of his credit.

Article 334, paragraph 5, of the Civil Code gives the character of real property to "machinery, liquid
containers, instruments or implements intended by the owner of any building or land for use in
connection with any industry or trade being carried on therein and which are expressly adapted to
meet the requirements of such trade or industry.

If the installation of the machinery and equipment in question in the central of the Mabalacat Sugar
Co., Inc., in lieu of the other of less capacity existing therein, for its sugar industry, converted them
into real property by reason of their purpose, it cannot be said that their incorporation therewith was
not permanent in character because, as essential and principal elements of a sugar central, without
them the sugar central would be unable to function or carry on the industrial purpose for which it was
established. Inasmuch as the central is permanent in character, the necessary machinery and
equipment installed for carrying on the sugar industry for which it has been established must
necessarily be permanent.

Furthermore, the fact that B.A. Green bound himself to the plaintiff B.H. Berkenkotter to hold said
machinery and equipment as security for the payment of the latter's credit and to refrain from
mortgaging or otherwise encumbering them until Berkenkotter has been fully reimbursed therefor, is
not incompatible with the permanent character of the incorporation of said machinery and equipment
with the sugar central of the Mabalacat Sugar Co., Inc., as nothing could prevent B.A. Green from
giving them as security at least under a second mortgage.

As to the alleged sale of said machinery and equipment to the plaintiff and appellant after they had
been permanently incorporated with sugar central of the Mabalacat Sugar Co., Inc., and while the
mortgage constituted on said sugar central to Cu Unjieng e Hijos remained in force, only the right of
redemption of the vendor Mabalacat Sugar Co., Inc., in the sugar central with which said machinery
and equipment had been incorporated, was transferred thereby, subject to the right of the
defendants Cu Unjieng e Hijos under the first mortgage.

For the foregoing considerations, we are of the opinion and so hold: (1) That the installation of a
machinery and equipment in a mortgaged sugar central, in lieu of another of less capacity, for the
purpose of carrying out the industrial functions of the latter and increasing production, constitutes a
permanent improvement on said sugar central and subjects said machinery and equipment to the
mortgage constituted thereon (article 1877, Civil Code); (2) that the fact that the purchaser of the
new machinery and equipment has bound himself to the person supplying him the purchase money
to hold them as security for the payment of the latter's credit, and to refrain from mortgaging or
otherwise encumbering them does not alter the permanent character of the incorporation of said
machinery and equipment with the central; and (3) that the sale of the machinery and equipment in
question by the purchaser who was supplied the purchase money, as a loan, to the person who
supplied the money, after the incorporation thereof with the mortgaged sugar central, does not vest
the creditor with ownership of said machinery and equipment but simply with the right of redemption.

Wherefore, finding no error in the appealed judgment, it is affirmed in all its parts, with costs to the
appellant. So ordered.

Malcolm, Imperial, Butte, and Goddard, JJ., concur.

G.R. Nos. L-10817-18 February 28, 1958

ENRIQUE LOPEZ, petitioner,

vs.
VICENTE OROSA, JR., and PLAZA THEATRE, INC., respondents.

Nicolas Belmonte and Benjamin T. de Peralta for petitioner.

Tolentino & Garcia and D. R. Cruz for respondent Luzon Surety Co., Inc. Jose B. Macatangay for
respondent Plaza Theatre, Inc.

FELIX, J.:

Enrique Lopez is a resident of Balayan, Batangas, doing business under the trade name of Lopez-
Castelo Sawmill. Sometime in May, 1946, Vicente Orosa, Jr., also a resident of the same province,
dropped at Lopez' house and invited him to make an investment in the theatre business. It was
intimated that Orosa, his family and close friends were organizing a corporation to be known as
Plaza Theatre, Inc., that would engage in such venture. Although Lopez expressed his unwillingness
to invest of the same, he agreed to supply the lumber necessary for the construction of the proposed
theatre, and at Orosa's behest and assurance that the latter would be personally liable for any
account that the said construction might incur, Lopez further agreed that payment therefor would be
on demand and not cash on delivery basis. Pursuant to said verbal agreement, Lopez delivered the
lumber which was used for the construction of the Plaza Theatre on May 17, 1946, up to December
4 of the same year. But of the total cost of the materials amounting to P62,255.85, Lopez was paid
only P20,848.50, thus leaving a balance of P41,771.35.

We may state at this juncture that the Plaza Theatre was erected on a piece of land with an area of
679.17 square meters formerly owned by Vicente Orosa, Jr., and was acquired by the corporation on
September 25, 1946, for P6,000. As Lopez was pressing Orosa for payment of the remaining unpaid
obligation, the latter and Belarmino Rustia, the president of the corporation, promised to obtain a
bank loan by mortgaging the properties of the Plaza Theatre., out of which said amount of
P41,771.35 would be satisfied, to which assurance Lopez had to accede. Unknown to him, however,
as early as November, 1946, the corporation already got a loan for P30,000 from the Philippine
National Bank with the Luzon Surety Company as surety, and the corporation in turn executed a
mortgage on the land and building in favor of said company as counter-security. As the land at that
time was not yet brought under the operation of the Torrens System, the mortgage on the same was
registered on November 16, 1946, under Act No. 3344. Subsequently, when the corporation applied
for the registration of the land under Act 496, such mortgage was not revealed and thus Original
Certificate of Title No. O-391 was correspondingly issued on October 25, 1947, without any
encumbrance appearing thereon.

Persistent demand from Lopez for the payment of the amount due him caused Vicente Orosa, Jr. to
execute on March 17, 1947, an alleged "deed of assignment" of his 420 shares of stock of the Plaza
Theater, Inc., at P100 per share or with a total value of P42,000 in favor of the creditor, and as the
obligation still remained unsettled, Lopez filed on November 12, 1947, a complaint with the Court of
First Instance of Batangas (Civil Case No. 4501 which later became R-57) against Vicente Orosa, Jr.
and Plaza Theater, Inc., praying that defendants be sentenced to pay him jointly and severally the
sum of P41,771.35, with legal interest from the firing of the action; that in case defendants fail to pay
the same, that the building and the land covered by OCT No. O-391 owned by the corporation be
sold at public auction and the proceeds thereof be applied to said indebtedness; or that the 420
shares of the capital stock of the Plaza Theatre, Inc., assigned by Vicente Orosa, Jr., to said plaintiff
be sold at public auction for the same purpose; and for such other remedies as may be warranted by
the circumstances. Plaintiff also caused the annotation of a notice of lis pendens on said properties
with the Register of Deeds.

Defendants Vicente Orosa, Jr. and Plaza Theatre, Inc., filed separate answers, the first denying that
the materials were delivered to him as a promoter and later treasurer of the corporation, because he
had purchased and received the same on his personal account; that the land on which the movie
house was constructed was not charged with a lien to secure the payment of the aforementioned
unpaid obligation; and that the 420 shares of stock of the Plaza Theatre, Inc., was not assigned to
plaintiff as collaterals but as direct security for the payment of his indebtedness. As special defense,
this defendant contended that as the 420 shares of stock assigned and conveyed by the assignor
and accepted by Lopez as direct security for the payment of the amount of P41,771.35 were
personal properties, plaintiff was barred from recovering any deficiency if the proceeds of the sale
thereof at public auction would not be sufficient to cover and satisfy the obligation. It was thus
prayed that he be declared exempted from the payment of any deficiency in case the proceeds from
the sale of said personal properties would not be enough to cover the amount sought to be collected.

Defendant Plaza Theatre, Inc., on the other hand, practically set up the same line of defense by
alleging that the building materials delivered to Orosa were on the latter's personal account; and that
there was no understanding that said materials would be paid jointly and severally by Orosa and the
corporation, nor was a lien charged on the properties of the latter to secure payment of the same
obligation. As special defense, defendant corporation averred that while it was true that the materials
purchased by Orosa were sold by the latter to the corporation, such transactions were in good faith
and for valuable consideration thus when plaintiff failed to claim said materials within 30 days from
the time of removal thereof from Orosa, lumber became a different and distinct specie and plaintiff
lost whatever rights he might have in the same and consequently had no recourse against the Plaza
Theatre, Inc., that the claim could not have been refectionary credit, for such kind of obligation
referred to an indebtedness incurred in the repair or reconstruction of something already existing
and this concept did not include an entirely new work; and that the Plaza Theatre, Inc., having been
incorporated on October 14, 1946, it could not have contracted any obligation prior to said date. It
was, therefore, prayed that the complaint be dismissed; that said defendant be awarded the sum P
5,000 for damages, and such other relief as may be just and proper in the premises.

The surety company, in the meantime, upon discovery that the land was already registered under
the Torrens System and that there was a notice of lis pendens thereon, filed on August 17, 1948, or
within the 1-year period after the issuance of the certificate of title, a petition for review of the decree
of the land registration court dated October 18, 1947, which was made the basis of OCT No. O-319,
in order to annotate the rights and interests of the surety company over said properties (Land
Registration Case No. 17 GLRO Rec. No. 296). Opposition thereto was offered by Enrique Lopez,
asserting that the amount demanded by him constituted a preferred lien over the properties of the
obligors; that the surety company was guilty of negligence when it failed to present an opposition to
the application for registration of the property; and that if any violation of the rights and interest of
said surety would ever be made, same must be subject to the lien in his favor.

The two cases were heard jointly and in a decision dated October 30, 1952, the lower Court, after
making an exhaustive and detailed analysis of the respective stands of the parties and the evidence
adduced at the trial, held that defendants Vicente Orosa, Jr., and the Plaza Theatre, Inc.,
were jointly liable for the unpaid balance of the cost of lumber used in the construction of
the building and the plaintiff thus acquired the materialman's lien over the same. In making the
pronouncement that the lien was merely confined to the building and did not extend to the land on
which the construction was made, the trial judge took into consideration the fact that when plaintiff
started the delivery of lumber in May, 1946, the land was not yet owned by the corporation; that the
mortgage in favor of Luzon Surety Company was previously registered under Act No. 3344; that the
codal provision (Art. 1923 of the old Spanish Civil Code) specifying that refection credits are
preferred could refer only to buildings which are also classified as real properties, upon which said
refection was made. It was, however, declared that plaintiff's lien on the building was superior to the
right of the surety company. And finding that the Plaza Theatre, Inc., had no objection to the review
of the decree issued in its favor by the land registration court and the inclusion in the title of the
encumbrance in favor of the surety company, the court a quo granted the petition filed by the latter
company. Defendants Orosa and the Plaza Theatre, Inc., were thus required to pay jointly the
amount of P41,771.35 with legal interest and costs within 90 days from notice of said decision; that
in case of default, the 420 shares of stock assigned by Orosa to plaintiff be sold at public auction
and the proceeds thereof be applied to the payment of the amount due the plaintiff, plus interest and
costs; and that the encumbrance in favor of the surety company be endorsed at the back of OCT No.
O-391, with notation I that with respect to the building, said mortgage was subject to the
materialman's lien in favor of Enrique Lopez.

Plaintiff tried to secure a modification of the decision in so far as it declared that the obligation of
therein defendants was joint instead of solidary, and that the lien did not extend to the land, but
same was denied by order the court of December 23, 1952. The matter was thus appealed to the
Court of appeals, which affirmed the lower court's ruling, and then to this Tribunal. In this instance,
plaintiff-appellant raises 2 issues: (1) whether a materialman's lien for the value of the materials used
in the construction of a building attaches to said structure alone and does not extend to the land on
which the building is adhered to; and (2) whether the lower court and the Court of Appeals erred in
not providing that the material mans liens is superior to the mortgage executed in favor surety
company not only on the building but also on the land.

It is to be noted in this appeal that Enrique Lopez has not raised any question against the part of the
decision sentencing defendants Orosa and Plaza Theatre, Inc., to pay jointly the sum of P41,771.35,
so We will not take up or consider anything on that point. Appellant, however, contends that the lien
created in favor of the furnisher of the materials used for the construction, repair or refection of a
building, is also extended to the land which the construction was made, and in support thereof he
relies on Article 1923 of the Spanish Civil Code, pertinent law on the matter, which reads as follows:

ART. 1923. With respect to determinate real property and real rights of the debtor, the
following are preferred:

xxx xxx xxx

 5. Credits for refection, not entered or recorded, with respect to the estate upon which the
refection was made, and only with respect to other credits different from those mentioned in
four preceding paragraphs.

It is argued that in view of the employment of the phrase real estate, or immovable property, and
inasmuch as said provision does not contain any specification delimiting the lien to the building, said
article must be construed as to embrace both the land and the building or structure adhering thereto.
We cannot subscribe to this view, for while it is true that generally, real estate connotes the land and
the building constructed thereon, it is obvious that the inclusion of the building, separate and distinct
from the land, in the enumeration of what may constitute real properties1 could mean only one thing
— that a building is by itself an immovable property, a doctrine already pronounced by this Court in
the case of Leung Yee vs. Strong Machinery Co., 37 Phil., 644. Moreover, and in view of the
absence of any specific provision of law to the contrary, a building is an immovable property,
irrespective of whether or not said structure and the land on which it is adhered to belong to the
same owner.

A close examination of the provision of the Civil Code invoked by appellant reveals that the law gives
preference to unregistered refectionary credits only with respect to the real estate upon which the
refection or work was made. This being so, the inevitable conclusion must be that the lien so created
attaches merely to the immovable property for the construction or repair of which the obligation was
incurred. Evidently, therefore, the lien in favor of appellant for the unpaid value of the lumber used in
the construction of the building attaches only to said structure and to no other property of the
obligors.

Considering the conclusion thus arrived at, i.e., that the materialman's lien could be charged only to
the building for which the credit was made or which received the benefit of refection, the lower court
was right in, holding at the interest of the mortgagee over the land is superior and cannot be made
subject to the said materialman's lien.

Wherefore, and on the strength of the foregoing considerations, the decision appealed from is
hereby affirmed, with costs against appellant. It is so ordered.

Paras, C.J., Bengzon, Padilla, Montemayor, Reyes, A., Bautista Angelo, Labrador, Concepcion,
Reyes, J.B.L. and Endencia, JJ., concur.

Footnotes

1
Article 415 of the new Civil Code (Art. 334 of the old) enumerates what are considered
immovable property, among which are land, buildings, roads and constructions of all kinds
adhered to the soil.

G.R. No. L-30173 September 30, 1971

GAVINO A. TUMALAD and GENEROSA R. TUMALAD, plaintiffs-appellees,
vs.
ALBERTA VICENCIO and EMILIANO SIMEON, defendants-appellants.

Castillo & Suck for plaintiffs-appellees.

Jose Q. Calingo for defendants-appellants.

REYES, J.B.L., J.:

Case certified to this Court by the Court of Appeals (CA-G.R. No. 27824-R) for the reason that only
questions of law are involved.

This case was originally commenced by defendants-appellants in the municipal court of Manila in
Civil Case No. 43073, for ejectment. Having lost therein, defendants-appellants appealed to the
court a quo (Civil Case No. 30993) which also rendered a decision against them, the dispositive
portion of which follows:

WHEREFORE, the court hereby renders judgment in favor of the plaintiffs and
against the defendants, ordering the latter to pay jointly and severally the former a
monthly rent of P200.00 on the house, subject-matter of this action, from March 27,
1956, to January 14, 1967, with interest at the legal rate from April 18, 1956, the filing
of the complaint, until fully paid, plus attorney's fees in the sum of P300.00 and to
pay the costs.

It appears on the records that on 1 September 1955 defendants-appellants executed a chattel

mortgage in favor of plaintiffs-appellees over their house of strong materials located at No. 550 Int.
3, Quezon Boulevard, Quiapo, Manila, over Lot Nos. 6-B and 7-B, Block No. 2554, which were being
rented from Madrigal & Company, Inc. The mortgage was registered in the Registry of Deeds of
Manila on 2 September 1955. The herein mortgage was executed to guarantee a loan of P4,800.00
received from plaintiffs-appellees, payable within one year at 12% per annum. The mode of payment
was P150.00 monthly, starting September, 1955, up to July 1956, and the lump sum of P3,150 was
payable on or before August, 1956. It was also agreed that default in the payment of any of the
amortizations, would cause the remaining unpaid balance to becomeimmediately due and Payable
and —

the Chattel Mortgage will be enforceable in accordance with the provisions of Special
Act No. 3135, and for this purpose, the Sheriff of the City of Manila or any of his
deputies is hereby empowered and authorized to sell all the Mortgagor's property
after the necessary publication in order to settle the financial debts of P4,800.00, plus
12% yearly interest, and attorney's fees... 2

When defendants-appellants defaulted in paying, the mortgage was extrajudicially foreclosed, and
on 27 March 1956, the house was sold at public auction pursuant to the said contract. As highest
bidder, plaintiffs-appellees were issued the corresponding certificate of sale.3 Thereafter, on 18 April
1956, plaintiffs-appellant commenced Civil Case No. 43073 in the municipal court of Manila, praying,
among other things, that the house be vacated and its possession surrendered to them, and for
defendants-appellants to pay rent of P200.00 monthly from 27 March 1956 up to the time the
possession is surrendered.4 On 21 September 1956, the municipal court rendered its decision —
 ... ordering the defendants to vacate the premises described in the complaint;
ordering further to pay monthly the amount of P200.00 from March 27, 1956, until
such (time that) the premises is (sic) completely vacated; plus attorney's fees of
P100.00 and the costs of the suit.5

Defendants-appellants, in their answers in both the municipal court and court a quo impugned the
legality of the chattel mortgage, claiming that they are still the owners of the house; but they waived
the right to introduce evidence, oral or documentary. Instead, they relied on their memoranda in
support of their motion to dismiss, predicated mainly on the grounds that: (a) the municipal court did
not have jurisdiction to try and decide the case because (1) the issue involved, is ownership, and (2)
there was no allegation of prior possession; and (b) failure to prove prior demand pursuant to
Section 2, Rule 72, of the Rules of Court.6

During the pendency of the appeal to the Court of First Instance, defendants-appellants failed to
deposit the rent for November, 1956 within the first 10 days of December, 1956 as ordered in the
decision of the municipal court. As a result, the court granted plaintiffs-appellees' motion for
execution, and it was actually issued on 24 January 1957. However, the judgment regarding the
surrender of possession to plaintiffs-appellees could not be executed because the subject house had
been already demolished on 14 January 1957 pursuant to the order of the court in a separate civil
case (No. 25816) for ejectment against the present defendants for non-payment of rentals on the
land on which the house was constructed.

The motion of plaintiffs for dismissal of the appeal, execution of the supersedeas bond and
withdrawal of deposited rentals was denied for the reason that the liability therefor was disclaimed
and was still being litigated, and under Section 8, Rule 72, rentals deposited had to be held until final
disposition of the appeal.7

On 7 October 1957, the appellate court of First Instance rendered its decision, the dispositive portion
of which is quoted earlier. The said decision was appealed by defendants to the Court of Appeals
which, in turn, certified the appeal to this Court. Plaintiffs-appellees failed to file a brief and this
appeal was submitted for decision without it.

Defendants-appellants submitted numerous assignments of error which can be condensed into two
questions, namely: .

(a) Whether the municipal court from which the case originated had jurisdiction to
adjudicate the same;

(b) Whether the defendants are, under the law, legally bound to pay rentals to the
plaintiffs during the period of one (1) year provided by law for the redemption of the
extrajudicially foreclosed house.

We will consider these questions seriatim.

(a) Defendants-appellants mortgagors question the jurisdiction of the municipal court from which the
case originated, and consequently, the appellate jurisdiction of the Court of First Instance a quo, on
the theory that the chattel mortgage is void ab initio; whence it would follow that the extrajudicial
foreclosure, and necessarily the consequent auction sale, are also void. Thus, the ownership of the
house still remained with defendants-appellants who are entitled to possession and not plaintiffs-
appellees. Therefore, it is argued by defendants-appellants, the issue of ownership will have to be
adjudicated first in order to determine possession. lt is contended further that ownership being in
issue, it is the Court of First Instance which has jurisdiction and not the municipal court.
Defendants-appellants predicate their theory of nullity of the chattel mortgage on two grounds, which
are: (a) that, their signatures on the chattel mortgage were obtained through fraud, deceit, or
trickery; and (b) that the subject matter of the mortgage is a house of strong materials, and, being an
immovable, it can only be the subject of a real estate mortgage and not a chattel mortgage.

On the charge of fraud, deceit or trickery, the Court of First Instance found defendants-appellants'
contentions as not supported by evidence and accordingly dismissed the charge,8 confirming the
earlier finding of the municipal court that "the defense of ownership as well as the allegations of
fraud and deceit ... are mere allegations."9

It has been held in Supia and Batiaco vs. Quintero and Ayala10 that "the answer is a mere statement
of the facts which the party filing it expects to prove, but it is not evidence;11 and further, that when
the question to be determined is one of title, the Court is given the authority to proceed with the
hearing of the cause until this fact is clearly established. In the case of Sy vs. Dalman,12 wherein the
defendant was also a successful bidder in an auction sale, it was likewise held by this Court that in
detainer cases the aim of ownership "is a matter of defense and raises an issue of fact which should
be determined from the evidence at the trial." What determines jurisdiction are the allegations or
averments in the complaint and the relief asked for. 13

Moreover, even granting that the charge is true, fraud or deceit does not render a contract void ab
initio, and can only be a ground for rendering the contract voidable or annullable pursuant to Article
1390 of the New Civil Code, by a proper action in court. 14 There is nothing on record to show that the
mortgage has been annulled. Neither is it disclosed that steps were taken to nullify the same. Hence,
defendants-appellants' claim of ownership on the basis of a voidable contract which has not been
voided fails.

It is claimed in the alternative by defendants-appellants that even if there was no fraud, deceit or
trickery, the chattel mortgage was still null and void ab initio because only personal properties can
be subject of a chattel mortgage. The rule about the status of buildings as immovable property is
stated in Lopez vs. Orosa, Jr. and Plaza Theatre Inc.,15cited in Associated Insurance Surety Co., Inc.
vs. Iya, et al. 16 to the effect that —

... it is obvious that the inclusion of the building, separate and distinct from the land,
in the enumeration of what may constitute real properties (art. 415, New Civil Code)
could only mean one thing — that a building is by itself an immovable
property irrespective of whether or not said structure and the land on which it is
adhered to belong to the same owner.

Certain deviations, however, have been allowed for various reasons. In the case of Manarang and
Manarang vs. Ofilada,17 this Court stated that "it is undeniable that the parties to a contract may by
agreement treat as personal property that which by nature would be real property", citing Standard
Oil Company of New York vs. Jaramillo. 18 In the latter case, the mortgagor conveyed and transferred
to the mortgagee by way of mortgage "the following described personal property." 19 The "personal
property" consisted of leasehold rights and a building. Again, in the case of Luna vs.
Encarnacion,20 the subject of the contract designated as Chattel Mortgage was a house of mixed
materials, and this Court hold therein that it was a valid Chattel mortgage because it was
so expressly designated and specifically that the property given as security "is a house of mixed
materials, which by its very nature is considered personal property." In the later case of Navarro vs.
Pineda,21 this Court stated that —

The view that parties to a deed of chattel mortgage may agree to consider a house
as personal property for the purposes of said contract, "is good only insofar as the
 contracting parties are concerned. It is based, partly, upon the principle of estoppel"
(Evangelista vs. Alto Surety, No. L-11139, 23 April 1958). In a case, a mortgaged
house built on a rented land was held to be a personal property, not only because
the deed of mortgage considered it as such, but also because it did not form part of
the land (Evangelists vs. Abad, [CA]; 36 O.G. 2913), for it is now settled that an
object placed on land by one who had only a temporary right to the same, such as
the lessee or usufructuary, does not become immobilized by attachment (Valdez vs.
Central Altagracia, 222 U.S. 58, cited in Davao Sawmill Co., Inc. vs. Castillo, et al.,
61 Phil. 709). Hence, if a house belonging to a person stands on a rented land
belonging to another person, it may be mortgaged as a personal property as so
stipulated in the document of mortgage. (Evangelista vs. Abad, Supra.) It should be
noted, however that the principle is predicated on statements by the owner declaring
his house to be a chattel, a conduct that may conceivably estop him from
subsequently claiming otherwise. (Ladera vs. C.N. Hodges, [CA] 48 O.G. 5374): 22

In the contract now before Us, the house on rented land is not only expressly designated as Chattel
Mortgage; it specifically provides that "the mortgagor ... voluntarily CEDES, SELLS and
TRANSFERS by way of Chattel Mortgage23 the property together with its leasehold rights over the lot
on which it is constructed and participation ..." 24 Although there is no specific statement referring to
the subject house as personal property, yet by ceding, selling or transferring a property by way of
chattel mortgage defendants-appellants could only have meant to convey the house as chattel, or at
least, intended to treat the same as such, so that they should not now be allowed to make an
inconsistent stand by claiming otherwise. Moreover, the subject house stood on a rented lot to which
defendats-appellants merely had a temporary right as lessee, and although this can not in itself
alone determine the status of the property, it does so when combined with other factors to sustain
the interpretation that the parties, particularly the mortgagors, intended to treat the house as
personalty. Finally unlike in the Iya cases, Lopez vs. Orosa, Jr. and Plaza Theatre, Inc. 25 and Leung
Yee vs. F. L. Strong Machinery and Williamson, 26 wherein third persons assailed the validity of the
chattel mortgage,27 it is the defendants-appellants themselves, as debtors-mortgagors, who are
attacking the validity of the chattel mortgage in this case. The doctrine of estoppel therefore applies
to the herein defendants-appellants, having treated the subject house as personalty.

(b) Turning to the question of possession and rentals of the premises in question. The Court of First
Instance noted in its decision that nearly a year after the foreclosure sale the mortgaged house had
been demolished on 14 and 15 January 1957 by virtue of a decision obtained by the lessor of the
land on which the house stood. For this reason, the said court limited itself to sentencing the
erstwhile mortgagors to pay plaintiffs a monthly rent of P200.00 from 27 March 1956 (when the
chattel mortgage was foreclosed and the house sold) until 14 January 1957 (when it was torn down
by the Sheriff), plus P300.00 attorney's fees.

Appellants mortgagors question this award, claiming that they were entitled to remain in possession
without any obligation to pay rent during the one year redemption period after the foreclosure sale,
i.e., until 27 March 1957. On this issue, We must rule for the appellants.

Chattel mortgages are covered and regulated by the Chattel Mortgage Law, Act No. 1508.28 Section
14 of this Act allows the mortgagee to have the property mortgaged sold at public auction through a
public officer in almost the same manner as that allowed by Act No. 3135, as amended by Act No.
4118, provided that the requirements of the law relative to notice and registration are complied
with. 29 In the instant case, the parties specifically stipulated that "the chattel mortgage will
be enforceable in accordance with the provisions of Special Act No. 3135 ... ." 30(Emphasis supplied).
Section 6 of the Act referred to 31 provides that the debtor-mortgagor (defendants-appellants herein)
may, at any time within one year from and after the date of the auction sale, redeem the property
sold at the extra judicial foreclosure sale. Section 7 of the same Act 32 allows the purchaser of the
property to obtain from the court the possession during the period of redemption: but the same
provision expressly requires the filing of a petition with the proper Court of First Instance and the
furnishing of a bond. It is only upon filing of the proper motion and the approval of the corresponding
bond that the order for a writ of possession issues as a matter of course. No discretion is left to the
court. 33 In the absence of such a compliance, as in the instant case, the purchaser can not claim
possession during the period of redemption as a matter of right. In such a case, the governing
provision is Section 34, Rule 39, of the Revised Rules of Court 34 which also applies to properties
purchased in extrajudicial foreclosure proceedings.35 Construing the said section, this Court stated in
the aforestated case of Reyes vs. Hamada.

In other words, before the expiration of the 1-year period within which the judgment-
debtor or mortgagor may redeem the property, the purchaser thereof is not entitled,
as a matter of right, to possession of the same. Thus, while it is true that the Rules of
Court allow the purchaser to receive the rentals if the purchased property is occupied
by tenants, he is, nevertheless, accountable to the judgment-debtor or mortgagor as
the case may be, for the amount so received and the same will be duly credited
against the redemption price when the said debtor or mortgagor effects the
redemption. Differently stated, the rentals receivable from tenants, although they may
be collected by the purchaser during the redemption period, do not belong to the
latter but still pertain to the debtor of mortgagor. The rationale for the Rule, it seems,
is to secure for the benefit of the debtor or mortgagor, the payment of the redemption
amount and the consequent return to him of his properties sold at public auction.
(Emphasis supplied)

The Hamada case reiterates the previous ruling in Chan vs. Espe.36

Since the defendants-appellants were occupying the house at the time of the auction sale, they are
entitled to remain in possession during the period of redemption or within one year from and after 27
March 1956, the date of the auction sale, and to collect the rents or profits during the said period.

It will be noted further that in the case at bar the period of redemption had not yet expired when
action was instituted in the court of origin, and that plaintiffs-appellees did not choose to take
possession under Section 7, Act No. 3135, as amended, which is the law selected by the parties to
govern the extrajudicial foreclosure of the chattel mortgage. Neither was there an allegation to that
effect. Since plaintiffs-appellees' right to possess was not yet born at the filing of the complaint, there
could be no violation or breach thereof. Wherefore, the original complaint stated no cause of action
and was prematurely filed. For this reason, the same should be ordered dismissed, even if there was
no assignment of error to that effect. The Supreme Court is clothed with ample authority to review
palpable errors not assigned as such if it finds that their consideration is necessary in arriving at a
just decision of the cases. 37

It follows that the court below erred in requiring the mortgagors to pay rents for the year following the
foreclosure sale, as well as attorney's fees.

FOR THE FOREGOING REASONS, the decision appealed from is reversed and another one
entered, dismissing the complaint. With costs against plaintiffs-appellees.

Concepcion, C.J., Dizon, Makalintal, Zaldivar, Castro, Fernando, Teehankee, Barredo, Villamor and
Makasiar, JJ., concur.
G.R. Nos. L-10837-38 May 30, 1958

ASSOCIATED INSURANCE and SURETY COMPANY, INC., plaintiff,

vs.
ISABEL IYA, ADRIANO VALINO and LUCIA VALINO, defendants.

ISABEL IYA, plaintiff,

vs.
ADRIANO VALINO, LUCIA VALINO and ASSOCIATED INSURANCE and SURETY COMPANY.
INC., defendants.

Jovita L. de Dios for defendant Isabel Iya.

M. Perez Cardenas and Apolonio Abola for defendant Associated Insurance and Surety Co., Inc.

FELIX, J.:

Adriano Valino and Lucia A. Valino, husband and wife, were the owners and possessors of a house
of strong materials constructed on Lot No. 3, Block No. 80 of the Grace Park Subdivision in
Caloocan, Rizal, which they purchased on installment basis from the Philippine Realty Corporation.
On November 6, 1951, to enable her to purchase on credit rice from the NARIC, Lucia A. Valino filed
a bond in the sum of P11,000.00 (AISCO Bond No. G-971) subscribed by the Associated Insurance
and Surety Co., Inc., and as counter-guaranty therefor, the spouses Valino executed an
alleged chattel mortgage on the aforementioned house in favor of the surety company, which
encumbrance was duly registered with the Chattel Mortgage Register of Rizal on December 6, 1951.
It is admitted that at the time said undertaking took place, the parcel of land on which the house is
erected was still registered in the name of the Philippine Realty Corporation. Having completed
payment on the purchase price of the lot, the Valinos were able to secure on October 18, 1958, a
certificate of title in their name (T.C.T. No. 27884). Subsequently, however, or on October 24, 1952,
the Valinos, to secure payment of an indebtedness in the amount of P12,000.00, executed a real
estate mortgage over the lot and the house in favor of Isabel Iya, which was duly registered and
annotated at the back of the certificate of title.

On the other hand, as Lucia A. Valino, failed to satisfy her obligation to the NARIC, the surety
company was compelled to pay the same pursuant to the undertaking of the bond. In turn, the surety
company demanded reimbursement from the spouses Valino, and as the latter likewise failed to do
so, the company foreclosed the chattel mortgage over the house. As a result thereof, a public sale
was conducted by the Provincial Sheriff of Rizal on December 26, 1952, wherein the property was
awarded to the surety company for P8,000.00, the highest bid received therefor. The surety
company then caused the said house to be declared in its name for tax purposes (Tax Declaration
No. 25128).

Sometime in July, 1953, the surety company learned of the existence of the real estate mortgage
over the lot covered by T.C.T. No. 26884 together with the improvements thereon; thus, said surety
company instituted Civil Case No. 2162 of the Court of First Instance of Manila naming Adriano and
Lucia Valino and Isabel Iya, the mortgagee, as defendants. The complaint prayed for the exclusion
of the residential house from the real estate mortgage in favor of defendant Iya and the declaration
and recognition of plaintiff's right to ownership over the same in virtue of the award given by the
Provincial Sheriff of Rizal during the public auction held on December 26, 1952. Plaintiff likewise
asked the Court to sentence the spouses Valino to pay said surety moral and exemplary damages,
attorney's fees and costs. Defendant Isabel Iya filed her answer to the complaint alleging among
other things, that in virtue of the real estate mortgage executed by her co-defendants, she acquired
a real right over the lot and the house constructed thereon; that the auction sale allegedly conducted
by the Provincial Sheriff of Rizal as a result of the foreclosure of the chattel mortgage on the house
was null and void for non-compliance with the form required by law. She, therefore, prayed for the
dismissal of the complaint and anullment of the sale made by the Provincial Sheriff. She also
demanded the amount of P5,000.00 from plaintiff as counterclaim, the sum of P5,000.00 from her
co-defendants as crossclaim, for attorney's fees and costs.

Defendants spouses in their answer admitted some of the averments of the complaint and denied
the others. They, however, prayed for the dismissal of the action for lack of cause of action, it being
alleged that plaintiff was already the owner of the house in question, and as said defendants
admitted this fact, the claim of the former was already satisfied.

On October 29, 1953, Isabel Iya filed another civil action against the Valinos and the surety company
(Civil Case No. 2504 of the Court of First Instance of Manila) stating that pursuant to the contract of
mortgage executed by the spouses Valino on October 24, 1952, the latter undertook to pay a loan of
P12,000.00 with interest at 12% per annum or P120.00 a month, which indebtedness was payable in
4 years, extendible for only one year; that to secure payment thereof, said defendants mortgaged
the house and lot covered by T.C.T. No. 27884 located at No. 67 Baltazar St., Grace Park
Subdivision, Caloocan, Rizal; that the Associated Insurance and Surety Co., Inc., was included as a
party defendant because it claimed to have an interest on the residential house also covered by said
mortgage; that it was stipulated in the aforesaid real estate mortgage that default in the payment of
the interest agreed upon would entitle the mortgagee to foreclose the same even before the lapse of
the 4-year period; and as defendant spouses had allegedly failed to pay the interest for more than 6
months, plaintiff prayed the Court to order said defendants to pay the sum of P12,000.00 with
interest thereon at 12% per annum from March 25, 1953, until fully paid; for an additional sum
equivalent to 20% of the total obligation as damages, and for costs. As an alternative in case such
demand may not be met and satisfied plaintiff prayed for a decree of foreclosure of the land, building
and other improvements thereon to be sold at public auction and the proceeds thereof applied to
satisfy the demands of plaintiff; that the Valinos, the surety company and any other person claiming
interest on the mortgaged properties be barred and foreclosed of all rights, claims or equity of
redemption in said properties; and for deficiency judgment in case the proceeds of the sale of the
mortgaged property would be insufficient to satisfy the claim of plaintiff.

Defendant surety company, in answer to this complaint insisted on its right over the building, arguing
that as the lot on which the house was constructed did not belong to the spouses at the time the
chattel mortgage was executed, the house might be considered only as a personal property and that
the encumbrance thereof and the subsequent foreclosure proceedings made pursuant to the
provisions of the Chattel Mortgage Law were proper and legal. Defendant therefore prayed that said
building be excluded from the real estate mortgage and its right over the same be declared superior
to that of plaintiff, for damages, attorney's fees and costs.

Taking side with the surety company, defendant spouses admitted the due execution of the
mortgage upon the land but assailed the allegation that the building was included thereon, it being
contended that it was already encumbered in favor of the surety company before the real estate
mortgage was executed, a fact made known to plaintiff during the preparation of said contract and to
which the latter offered no objection. As a special defense, it was asserted that the action was
premature because the contract was for a period of 4 years, which had not yet elapsed.

The two cases were jointly heard upon agreement of the parties, who submitted the same on a
stipulation of facts, after which the Court rendered judgment dated March 8, 1956, holding that the
chattel mortgage in favor of the Associated Insurance and Surety Co., Inc., was preferred and
superior over the real estate mortgage subsequently executed in favor of Isabel Iya. It was ruled that
as the Valinos were not yet the registered owner of the land on which the building in question was
constructed at the time the first encumbrance was made, the building then was still a personality and
a chattel mortgage over the same was proper. However, as the mortgagors were already the owner
of the land at the time the contract with Isabel Iya was entered into, the building was transformed
into a real property and the real estate mortgage created thereon was likewise adjudged as proper. It
is to be noted in this connection that there is no evidence on record to sustain the allegation of the
spouses Valino that at the time they mortgaged their house and lot to Isabel Iya, the latter was told
or knew that part of the mortgaged property, i.e., the house, had previously been mortgaged to the
surety company.

The residential building was, therefore, ordered excluded from the foreclosure prayed for by Isabel
Iya, although the latter could exercise the right of a junior encumbrance. So the spouses Valino were
ordered to pay the amount demanded by said mortgagee or in their default to have the parcel of land
subject of the mortgage sold at public auction for the satisfaction of Iya's claim.

There is no question as to appellant's right over the land covered by the real estate mortgage;
however, as the building constructed thereon has been the subject of 2 mortgages; controversy arise
as to which of these encumbrances should receive preference over the other. The decisive factor in
resolving the issue presented by this appeal is the determination of the nature of the structure
litigated upon, for where it be considered a personality, the foreclosure of the chattel mortgage and
the subsequent sale thereof at public auction, made in accordance with the Chattel Mortgage Law
would be valid and the right acquired by the surety company therefrom would certainly deserve prior
recognition; otherwise, appellant's claim for preference must be granted. The lower Court, deciding
in favor of the surety company, based its ruling on the premise that as the mortgagors were not the
owners of the land on which the building is erected at the time the first encumbrance was made, said
structure partook of the nature of a personal property and could properly be the subject of a chattel
mortgage. We find reason to hold otherwise, for as this Court, defining the nature or character of a
building, has said:

. . . while it is true that generally, real estate connotes the land and the building constructed
thereon, it is obvious that the inclusion of the building, separate and distinct from the land, in
the enumeration of what may constitute real properties (Art. 415, new Civil Code) could only
mean one thing — that a building is by itself an immovable property . . . Moreover, and in
view of the absence of any specific provision to the contrary, a building is an immovable
property irrespective of whether or not said structure and the land on which it is adhered to
belong to the same owner. (Lopez vs. Orosa, G.R. Nos. supra, p. 98).

A building certainly cannot be divested of its character of a realty by the fact that the land on which it
is constructed belongs to another. To hold it the other way, the possibility is not remote that it would
result in confusion, for to cloak the building with an uncertain status made dependent on the
ownership of the land, would create a situation where a permanent fixture changes its nature or
character as the ownership of the land changes hands. In the case at bar, as personal properties
could only be the subject of a chattel mortgage (Section 1, Act 3952) and as obviously the structure
in question is not one, the execution of the chattel mortgage covering said building is clearly invalid
and a nullity. While it is true that said document was correspondingly registered in the Chattel
Mortgage Register of Rizal, this act produced no effect whatsoever for where the interest conveyed
is in the nature of a real property, the registration of the document in the registry of chattels is merely
a futile act. Thus, the registration of the chattel mortgage of a building of strong materials produce no
effect as far as the building is concerned (Leung Yee vs. Strong Machinery Co., 37 Phil., 644). Nor
can we give any consideration to the contention of the surety that it has acquired ownership over the
property in question by reason of the sale conducted by the Provincial Sheriff of Rizal, for as this
Court has aptly pronounced:
 A mortgage creditor who purchases real properties at an extrajudicial foreclosure sale
thereof by virtue of a chattel mortgage constituted in his favor, which mortgage has been
declared null and void with respect to said real properties, acquires no right thereto by virtue
of said sale (De la Riva vs. Ah Keo, 60 Phil., 899).

Wherefore the portion of the decision of the lower Court in these two cases appealed from holding
the rights of the surety company, over the building superior to that of Isabel Iya and excluding the
building from the foreclosure prayed for by the latter is reversed and appellant Isabel Iya's right to
foreclose not only the land but also the building erected thereon is hereby recognized, and the
proceeds of the sale thereof at public auction (if the land has not yet been sold), shall be applied to
the unsatisfied judgment in favor of Isabel Iya. This decision however is without prejudice to any right
that the Associated Insurance and Surety Co., Inc., may have against the spouses Adriano and
Lucia Valino on account of the mortgage of said building they executed in favor of said surety
company. Without pronouncement as to costs. It is so ordered.

Paras, C.J., Bengzon, Montemayor, Reyes, A., Bautista Angelo, Labrador, Concepcion, Reyes,
J.B.L., and Endencia, JJ., concur.

G.R. No. L-58469 May 16, 1983

MAKATI LEASING and FINANCE CORPORATION, petitioner,

vs.
WEAREVER TEXTILE MILLS, INC., and HONORABLE COURT OF APPEALS, respondents.

Loreto C. Baduan for petitioner.

Ramon D. Bagatsing & Assoc. (collaborating counsel) for petitioner.

Jose V. Mancella for respondent.

DE CASTRO, J.:

Petition for review on certiorari of the decision of the Court of Appeals (now Intermediate Appellate
Court) promulgated on August 27, 1981 in CA-G.R. No. SP-12731, setting aside certain Orders later
specified herein, of Judge Ricardo J. Francisco, as Presiding Judge of the Court of First instance of
Rizal Branch VI, issued in Civil Case No. 36040, as wen as the resolution dated September 22, 1981
of the said appellate court, denying petitioner's motion for reconsideration.

It appears that in order to obtain financial accommodations from herein petitioner Makati Leasing
and Finance Corporation, the private respondent Wearever Textile Mills, Inc., discounted and
assigned several receivables with the former under a Receivable Purchase Agreement. To secure
the collection of the receivables assigned, private respondent executed a Chattel Mortgage over
certain raw materials inventory as well as a machinery described as an Artos Aero Dryer Stentering
Range.

Upon private respondent's default, petitioner filed a petition for extrajudicial foreclosure of the
properties mortgage to it. However, the Deputy Sheriff assigned to implement the foreclosure failed
to gain entry into private respondent's premises and was not able to effect the seizure of the
aforedescribed machinery. Petitioner thereafter filed a complaint for judicial foreclosure with the
Court of First Instance of Rizal, Branch VI, docketed as Civil Case No. 36040, the case before the
lower court.

Acting on petitioner's application for replevin, the lower court issued a writ of seizure, the
enforcement of which was however subsequently restrained upon private respondent's filing of a
motion for reconsideration. After several incidents, the lower court finally issued on February 11,
1981, an order lifting the restraining order for the enforcement of the writ of seizure and an order to
break open the premises of private respondent to enforce said writ. The lower court reaffirmed its
stand upon private respondent's filing of a further motion for reconsideration.

On July 13, 1981, the sheriff enforcing the seizure order, repaired to the premises of private
respondent and removed the main drive motor of the subject machinery.

The Court of Appeals, in certiorari and prohibition proceedings subsequently filed by herein private
respondent, set aside the Orders of the lower court and ordered the return of the drive motor seized
by the sheriff pursuant to said Orders, after ruling that the machinery in suit cannot be the subject of
replevin, much less of a chattel mortgage, because it is a real property pursuant to Article 415 of the
new Civil Code, the same being attached to the ground by means of bolts and the only way to
remove it from respondent's plant would be to drill out or destroy the concrete floor, the reason why
all that the sheriff could do to enfore the writ was to take the main drive motor of said machinery. The
appellate court rejected petitioner's argument that private respondent is estopped from claiming that
the machine is real property by constituting a chattel mortgage thereon.

A motion for reconsideration of this decision of the Court of Appeals having been denied, petitioner
has brought the case to this Court for review by writ of certiorari. It is contended by private
respondent, however, that the instant petition was rendered moot and academic by petitioner's act of
returning the subject motor drive of respondent's machinery after the Court of Appeals' decision was
promulgated.

The contention of private respondent is without merit. When petitioner returned the subject motor
drive, it made itself unequivocably clear that said action was without prejudice to a motion for
reconsideration of the Court of Appeals decision, as shown by the receipt duly signed by
respondent's representative. 1 Considering that petitioner has reserved its right to question the
propriety of the Court of Appeals' decision, the contention of private respondent that this petition has
been mooted by such return may not be sustained.

The next and the more crucial question to be resolved in this Petition is whether the machinery in
suit is real or personal property from the point of view of the parties, with petitioner arguing that it is a
personality, while the respondent claiming the contrary, and was sustained by the appellate court,
which accordingly held that the chattel mortgage constituted thereon is null and void, as contended
by said respondent.

A similar, if not Identical issue was raised in Tumalad v. Vicencio, 41 SCRA 143 where this Court,
speaking through Justice J.B.L. Reyes, ruled:

Although there is no specific statement referring to the subject house as personal

property, yet by ceding, selling or transferring a property by way of chattel mortgage
defendants-appellants could only have meant to convey the house as chattel, or at
least, intended to treat the same as such, so that they should not now be allowed to
make an inconsistent stand by claiming otherwise. Moreover, the subject house
 stood on a rented lot to which defendants-appellants merely had a temporary right as
lessee, and although this can not in itself alone determine the status of the property,
it does so when combined with other factors to sustain the interpretation that the
parties, particularly the mortgagors, intended to treat the house as personality.
Finally, unlike in the Iya cases, Lopez vs. Orosa, Jr. & Plaza Theatre, Inc. & Leung
Yee vs. F.L. Strong Machinery & Williamson, wherein third persons assailed the
validity of the chattel mortgage, it is the defendants-appellants themselves, as
debtors-mortgagors, who are attacking the validity of the chattel mortgage in this
case. The doctrine of estoppel therefore applies to the herein defendants-appellants,
having treated the subject house as personality.

Examining the records of the instant case, We find no logical justification to exclude the rule out, as
the appellate court did, the present case from the application of the abovequoted pronouncement. If
a house of strong materials, like what was involved in the above Tumalad case, may be considered
as personal property for purposes of executing a chattel mortgage thereon as long as the parties to
the contract so agree and no innocent third party will be prejudiced thereby, there is absolutely no
reason why a machinery, which is movable in its nature and becomes immobilized only by
destination or purpose, may not be likewise treated as such. This is really because one who has so
agreed is estopped from denying the existence of the chattel mortgage.

In rejecting petitioner's assertion on the applicability of the Tumalad doctrine, the Court of Appeals
lays stress on the fact that the house involved therein was built on a land that did not belong to the
owner of such house. But the law makes no distinction with respect to the ownership of the land on
which the house is built and We should not lay down distinctions not contemplated by law.

It must be pointed out that the characterization of the subject machinery as chattel by the private
respondent is indicative of intention and impresses upon the property the character determined by
the parties. As stated in Standard Oil Co. of New York v. Jaramillo, 44 Phil. 630, it is undeniable that
the parties to a contract may by agreement treat as personal property that which by nature would be
real property, as long as no interest of third parties would be prejudiced thereby.

Private respondent contends that estoppel cannot apply against it because it had never represented
nor agreed that the machinery in suit be considered as personal property but was merely required
and dictated on by herein petitioner to sign a printed form of chattel mortgage which was in a blank
form at the time of signing. This contention lacks persuasiveness. As aptly pointed out by petitioner
and not denied by the respondent, the status of the subject machinery as movable or immovable
was never placed in issue before the lower court and the Court of Appeals except in a supplemental
memorandum in support of the petition filed in the appellate court. Moreover, even granting that the
charge is true, such fact alone does not render a contract void ab initio, but can only be a ground for
rendering said contract voidable, or annullable pursuant to Article 1390 of the new Civil Code, by a
proper action in court. There is nothing on record to show that the mortgage has been annulled.
Neither is it disclosed that steps were taken to nullify the same. On the other hand, as pointed out by
petitioner and again not refuted by respondent, the latter has indubitably benefited from said
contract. Equity dictates that one should not benefit at the expense of another. Private respondent
could not now therefore, be allowed to impugn the efficacy of the chattel mortgage after it has
benefited therefrom,

From what has been said above, the error of the appellate court in ruling that the questioned
machinery is real, not personal property, becomes very apparent. Moreover, the case of Machinery
and Engineering Supplies, Inc. v. CA, 96 Phil. 70, heavily relied upon by said court is not applicable
to the case at bar, the nature of the machinery and equipment involved therein as real properties
never having been disputed nor in issue, and they were not the subject of a Chattel Mortgage.
Undoubtedly, the Tumalad case bears more nearly perfect parity with the instant case to be the
more controlling jurisprudential authority.

WHEREFORE, the questioned decision and resolution of the Court of Appeals are hereby reversed
and set aside, and the Orders of the lower court are hereby reinstated, with costs against the private
respondent.

SO ORDERED.

Makasiar (Chairman), Aquino, Concepcion Jr., Guerrero and Escolin JJ., concur.

Abad Santos, J., concurs in the result.

G.R. No. L-15334 January 31, 1964

BOARD OF ASSESSMENT APPEALS, CITY ASSESSOR and CITY TREASURER OF QUEZON

CITY, petitioners,
vs.
MANILA ELECTRIC COMPANY, respondent.

Assistant City Attorney Jaime R. Agloro for petitioners.

Ross, Selph and Carrascoso for respondent.

PAREDES, J.:

From the stipulation of facts and evidence adduced during the hearing, the following appear:

On October 20, 1902, the Philippine Commission enacted Act No. 484 which authorized the
Municipal Board of Manila to grant a franchise to construct, maintain and operate an electric street
railway and electric light, heat and power system in the City of Manila and its suburbs to the person
or persons making the most favorable bid. Charles M. Swift was awarded the said franchise on
March 1903, the terms and conditions of which were embodied in Ordinance No. 44 approved on
March 24, 1903. Respondent Manila Electric Co. (Meralco for short), became the transferee and
owner of the franchise.

Meralco's electric power is generated by its hydro-electric plant located at Botocan Falls, Laguna
and is transmitted to the City of Manila by means of electric transmission wires, running from the
province of Laguna to the said City. These electric transmission wires which carry high voltage
current, are fastened to insulators attached on steel towers constructed by respondent at intervals,
from its hydro-electric plant in the province of Laguna to the City of Manila. The respondent Meralco
has constructed 40 of these steel towers within Quezon City, on land belonging to it. A photograph of
one of these steel towers is attached to the petition for review, marked Annex A. Three steel towers
were inspected by the lower court and parties and the following were the descriptions given there of
by said court:

The first steel tower is located in South Tatalon, España Extension, Quezon City. The
findings were as follows: the ground around one of the four posts was excavated to a depth
of about eight (8) feet, with an opening of about one (1) meter in diameter, decreased to
about a quarter of a meter as it we deeper until it reached the bottom of the post; at the
 bottom of the post were two parallel steel bars attached to the leg means of bolts; the tower
proper was attached to the leg three bolts; with two cross metals to prevent mobility; there
was no concrete foundation but there was adobe stone underneath; as the bottom of the
excavation was covered with water about three inches high, it could not be determined with
certainty to whether said adobe stone was placed purposely or not, as the place abounds
with this kind of stone; and the tower carried five high voltage wires without cover or any
insulating materials.

The second tower inspected was located in Kamuning Road, K-F, Quezon City, on land
owned by the petitioner approximate more than one kilometer from the first tower. As in the
first tower, the ground around one of the four legs was excavate from seven to eight (8) feet
deep and one and a half (1-½) meters wide. There being very little water at the bottom, it
was seen that there was no concrete foundation, but there soft adobe beneath. The leg was
likewise provided with two parallel steel bars bolted to a square metal frame also bolted to
each corner. Like the first one, the second tower is made up of metal rods joined together by
means of bolts, so that by unscrewing the bolts, the tower could be dismantled and
reassembled.

The third tower examined is located along Kamias Road, Quezon City. As in the first two
towers given above, the ground around the two legs of the third tower was excavated to a
depth about two or three inches beyond the outside level of the steel bar foundation. It was
found that there was no concrete foundation. Like the two previous ones, the bottom
arrangement of the legs thereof were found to be resting on soft adobe, which, probably due
to high humidity, looks like mud or clay. It was also found that the square metal frame
supporting the legs were not attached to any material or foundation.

On November 15, 1955, petitioner City Assessor of Quezon City declared the aforesaid steel towers
for real property tax under Tax declaration Nos. 31992 and 15549. After denying respondent's
petition to cancel these declarations, an appeal was taken by respondent to the Board of
Assessment Appeals of Quezon City, which required respondent to pay the amount of P11,651.86
as real property tax on the said steel towers for the years 1952 to 1956. Respondent paid the
amount under protest, and filed a petition for review in the Court of Tax Appeals (CTA for short)
which rendered a decision on December 29, 1958, ordering the cancellation of the said tax
declarations and the petitioner City Treasurer of Quezon City to refund to the respondent the sum of
P11,651.86. The motion for reconsideration having been denied, on April 22, 1959, the instant
petition for review was filed.

In upholding the cause of respondents, the CTA held that: (1) the steel towers come within the term
"poles" which are declared exempt from taxes under part II paragraph 9 of respondent's franchise;
(2) the steel towers are personal properties and are not subject to real property tax; and (3) the City
Treasurer of Quezon City is held responsible for the refund of the amount paid. These are assigned
as errors by the petitioner in the brief.

The tax exemption privilege of the petitioner is quoted hereunder:

PAR 9. The grantee shall be liable to pay the same taxes upon its real estate, buildings,
plant (not including poles, wires, transformers, and insulators), machinery and personal
property as other persons are or may be hereafter required by law to pay ... Said percentage
shall be due and payable at the time stated in paragraph nineteen of Part One hereof, ... and
shall be in lieu of all taxes and assessments of whatsoever nature and by whatsoever
authority upon the privileges, earnings, income, franchise, and poles, wires, transformers,
and insulators of the grantee from which taxes and assessments the grantee is hereby
 expressly exempted. (Par. 9, Part Two, Act No. 484 Respondent's Franchise; emphasis
supplied.)

The word "pole" means "a long, comparatively slender usually cylindrical piece of wood or timber, as
typically the stem of a small tree stripped of its branches; also by extension, a similar typically
cylindrical piece or object of metal or the like". The term also refers to "an upright standard to the top
of which something is affixed or by which something is supported; as a dovecote set on a pole;
telegraph poles; a tent pole; sometimes, specifically a vessel's master (Webster's New International
Dictionary 2nd Ed., p. 1907.) Along the streets, in the City of Manila, may be seen cylindrical metal
poles, cubical concrete poles, and poles of the PLDT Co. which are made of two steel bars joined
together by an interlacing metal rod. They are called "poles" notwithstanding the fact that they are no
made of wood. It must be noted from paragraph 9, above quoted, that the concept of the "poles" for
which exemption is granted, is not determined by their place or location, nor by the character of the
electric current it carries, nor the material or form of which it is made, but the use to which they are
dedicated. In accordance with the definitions, pole is not restricted to a long cylindrical piece of wood
or metal, but includes "upright standards to the top of which something is affixed or by which
something is supported. As heretofore described, respondent's steel supports consists of a
framework of four steel bars or strips which are bound by steel cross-arms atop of which are cross-
arms supporting five high voltage transmission wires (See Annex A) and their sole function is to
support or carry such wires.

The conclusion of the CTA that the steel supports in question are embraced in the term "poles" is not
a novelty. Several courts of last resort in the United States have called these steel supports "steel
towers", and they denominated these supports or towers, as electric poles. In their decisions the
words "towers" and "poles" were used interchangeably, and it is well understood in that jurisdiction
that a transmission tower or pole means the same thing.

In a proceeding to condemn land for the use of electric power wires, in which the law provided that
wires shall be constructed upon suitable poles, this term was construed to mean either wood or
metal poles and in view of the land being subject to overflow, and the necessary carrying of
numerous wires and the distance between poles, the statute was interpreted to
include towers or poles. (Stemmons and Dallas Light Co. (Tex) 212 S.W. 222, 224; 32-A Words and
Phrases, p. 365.)

The term "poles" was also used to denominate the steel supports or towers used by an association
used to convey its electric power furnished to subscribers and members, constructed for the purpose
of fastening high voltage and dangerous electric wires alongside public highways. The steel supports
or towers were made of iron or other metals consisting of two pieces running from the ground up
some thirty feet high, being wider at the bottom than at the top, the said two metal pieces being
connected with criss-cross iron running from the bottom to the top, constructed like ladders and
loaded with high voltage electricity. In form and structure, they are like the steel towers in question.
(Salt River Valley Users' Ass'n v. Compton, 8 P. 2nd, 249-250.)

The term "poles" was used to denote the steel towers of an electric company engaged in the
generation of hydro-electric power generated from its plant to the Tower of Oxford and City of
Waterbury. These steel towers are about 15 feet square at the base and extended to a height of
about 35 feet to a point, and are embedded in the cement foundations sunk in the earth, the top of
which extends above the surface of the soil in the tower of Oxford, and to the towers are attached
insulators, arms, and other equipment capable of carrying wires for the transmission of electric
power (Connecticut Light and Power Co. v. Oxford, 101 Conn. 383, 126 Atl. p. 1).
In a case, the defendant admitted that the structure on which a certain person met his death was
built for the purpose of supporting a transmission wire used for carrying high-tension electric power,
but claimed that the steel towers on which it is carried were so large that their wire took their
structure out of the definition of a pole line. It was held that in defining the word pole, one should not
be governed by the wire or material of the support used, but was considering the danger from any
elevated wire carrying electric current, and that regardless of the size or material wire of its individual
members, any continuous series of structures intended and used solely or primarily for the purpose
of supporting wires carrying electric currents is a pole line (Inspiration Consolidation Cooper Co. v.
Bryan 252 P. 1016).

It is evident, therefore, that the word "poles", as used in Act No. 484 and incorporated in the
petitioner's franchise, should not be given a restrictive and narrow interpretation, as to defeat the
very object for which the franchise was granted. The poles as contemplated thereon, should be
understood and taken as a part of the electric power system of the respondent Meralco, for the
conveyance of electric current from the source thereof to its consumers. If the respondent would be
required to employ "wooden poles", or "rounded poles" as it used to do fifty years back, then one
should admit that the Philippines is one century behind the age of space. It should also be conceded
by now that steel towers, like the ones in question, for obvious reasons, can better effectuate the
purpose for which the respondent's franchise was granted.

Granting for the purpose of argument that the steel supports or towers in question are not embraced
within the termpoles, the logical question posited is whether they constitute real properties, so that
they can be subject to a real property tax. The tax law does not provide for a definition of real
property; but Article 415 of the Civil Code does, by stating the following are immovable property:

(1) Land, buildings, roads, and constructions of all kinds adhered to the soil;

xxx xxx xxx

(3) Everything attached to an immovable in a fixed manner, in such a way that it cannot be
separated therefrom without breaking the material or deterioration of the object;

xxx xxx xxx

(5) Machinery, receptacles, instruments or implements intended by the owner of the

tenement for an industry or works which may be carried in a building or on a piece of land,
and which tends directly to meet the needs of the said industry or works;

xxx xxx xxx

The steel towers or supports in question, do not come within the objects mentioned in paragraph 1,
because they do not constitute buildings or constructions adhered to the soil. They are not
construction analogous to buildings nor adhering to the soil. As per description, given by the lower
court, they are removable and merely attached to a square metal frame by means of bolts, which
when unscrewed could easily be dismantled and moved from place to place. They can not be
included under paragraph 3, as they are not attached to an immovable in a fixed manner, and they
can be separated without breaking the material or causing deterioration upon the object to which
they are attached. Each of these steel towers or supports consists of steel bars or metal strips,
joined together by means of bolts, which can be disassembled by unscrewing the bolts and
reassembled by screwing the same. These steel towers or supports do not also fall under paragraph
5, for they are not machineries, receptacles, instruments or implements, and even if they were, they
are not intended for industry or works on the land. Petitioner is not engaged in an industry or works
in the land in which the steel supports or towers are constructed.

It is finally contended that the CTA erred in ordering the City Treasurer of Quezon City to refund the
sum of P11,651.86, despite the fact that Quezon City is not a party to the case. It is argued that as
the City Treasurer is not the real party in interest, but Quezon City, which was not a party to the suit,
notwithstanding its capacity to sue and be sued, he should not be ordered to effect the refund. This
question has not been raised in the court below, and, therefore, it cannot be properly raised for the
first time on appeal. The herein petitioner is indulging in legal technicalities and niceties which do not
help him any; for factually, it was he (City Treasurer) whom had insisted that respondent herein pay
the real estate taxes, which respondent paid under protest. Having acted in his official capacity as
City Treasurer of Quezon City, he would surely know what to do, under the circumstances.

IN VIEW HEREOF, the decision appealed from is hereby affirmed, with costs against the petitioners.

Bengzon, C.J., Padilla, Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L., Barrera and Regala,
JJ., concur.
Makalintal, J., concurs in the result.
Dizon, J., took no part.

G.R. No. L-46245 May 31, 1982

MERALCO SECURITIES INDUSTRIAL CORPORATION, petitioner,

vs.
CENTRAL BOARD OF ASSESSMENT APPEALS, BOARD OF ASSESSMENT APPEALS OF
LAGUNA and PROVINCIAL ASSESSOR OF LAGUNA, respondents.

AQUINO, J.:

In this special civil action of certiorari, Meralco Securities Industrial Corporation assails the decision
of the Central Board of Assessment Appeals (composed of the Secretary of Finance as chairman
and the Secretaries of Justice and Local Government and Community Development as members)
dated May 6, 1976, holding that Meralco Securities' oil pipeline is subject to realty tax.

The record reveals that pursuant to a pipeline concession issued under the Petroleum Act of 1949,
Republic Act No. 387, Meralco Securities installed from Batangas to Manila a pipeline system
consisting of cylindrical steel pipes joined together and buried not less than one meter below the
surface along the shoulder of the public highway. The portion passing through Laguna is about thirty
kilometers long.

The pipes for white oil products measure fourteen inches in diameter by thirty-six feet with a
maximum capacity of 75,000 barrels daily. The pipes for fuel and black oil measure sixteen inches
by forty-eight feet with a maximum capacity of 100,000 barrels daily.
The pipes are embedded in the soil and are firmly and solidly welded together so as to preclude
breakage or damage thereto and prevent leakage or seepage of the oil. The valves are welded to
the pipes so as to make the pipeline system one single piece of property from end to end.

In order to repair, replace, remove or transfer segments of the pipeline, the pipes have to be cold-cut
by means of a rotary hard-metal pipe-cutter after digging or excavating them out of the ground where
they are buried. In points where the pipeline traversed rivers or creeks, the pipes were laid beneath
the bed thereof. Hence, the pipes are permanently attached to the land.

However, Meralco Securities notes that segments of the pipeline can be moved from one place to
another as shown in the permit issued by the Secretary of Public Works and Communications which
permit provides that the government reserves the right to require the removal or transfer of the pipes
by and at the concessionaire's expense should they be affected by any road repair or improvement.

Pursuant to the Assessment Law, Commonwealth Act No. 470, the provincial assessor of Laguna
treated the pipeline as real property and issued Tax Declarations Nos. 6535-6537, San Pedro; 7473-
7478, Cabuyao; 7967-7971, Sta. Rosa; 9882-9885, Biñan and 15806-15810, Calamba, containing
the assessed values of portions of the pipeline.

Meralco Securities appealed the assessments to the Board of Assessment Appeals of Laguna
composed of the register of deeds as chairman and the provincial auditor as member. That board in
its decision of June 18, 1975 upheld the assessments (pp. 47-49, Rollo).

Meralco Securities brought the case to the Central Board of Assessment Appeals. As already stated,
that Board, composed of Acting Secretary of Finance Pedro M. Almanzor as chairman and Secretary
of Justice Vicente Abad Santos and Secretary of Local Government and Community Development
Jose Roño as members, ruled that the pipeline is subject to realty tax (p. 40, Rollo).

A copy of that decision was served on Meralco Securities' counsel on August 27, 1976. Section 36 of
the Real Property Tax Code, Presidential Decree No. 464, which took effect on June 1, 1974,
provides that the Board's decision becomes final and executory after the lapse of fifteen days from
the date of receipt of a copy of the decision by the appellant.

Under Rule III of the amended rules of procedure of the Central Board of Assessment Appeals (70
O.G. 10085), a party may ask for the reconsideration of the Board's decision within fifteen days after
receipt. On September 7, 1976 (the eleventh day), Meralco Securities filed its motion for
reconsideration.

Secretary of Finance Cesar Virata and Secretary Roño (Secretary Abad Santos abstained) denied
the motion in a resolution dated December 2, 1976, a copy of which was received by appellant's
counsel on May 24, 1977 (p. 4, Rollo). On June 6, 1977, Meralco Securities filed the instant petition
for certiorari.

The Solicitor General contends that certiorari is not proper in this case because the Board acted
within its jurisdiction and did not gravely abuse its discretion and Meralco Securities was not denied
due process of law.

Meralco Securities explains that because the Court of Tax Appeals has no jurisdiction to review the
decision of the Central Board of Assessment Appeals and because no judicial review of the Board's
decision is provided for in the Real Property Tax Code, Meralco Securities' recourse is to file a
petition for certiorari.
We hold that certiorari was properly availed of in this case. It is a writ issued by a superior court to
an inferior court, board or officer exercising judicial or quasi-judicial functions whereby the record of
a particular case is ordered to be elevated for review and correction in matters of law (14 C.J.S. 121-
122; 14 Am Jur. 2nd 777).

The rule is that as to administrative agencies exercising quasi-judicial power there is an underlying
power in the courts to scrutinize the acts of such agencies on questions of law and jurisdiction even
though no right of review is given by the statute (73 C.J.S. 506, note 56).

"The purpose of judicial review is to keep the administrative agency within its jurisdiction and protect
substantial rights of parties affected by its decisions" (73 C.J.S. 507, See. 165). The review is a part
of the system of checks and balances which is a limitation on the separation of powers and which
forestalls arbitrary and unjust adjudications.

Judicial review of the decision of an official or administrative agency exercising quasi-judicial

functions is proper in cases of lack of jurisdiction, error of law, grave abuse of discretion, fraud or
collusion or in case the administrative decision is corrupt, arbitrary or capricious (Mafinco Trading
Corporation vs. Ople, L-37790, March 25, 1976, 70 SCRA 139, 158; San Miguel Corporation vs.
Secretary of Labor, L-39195, May 16, 1975, 64 SCRA 56, 60, Mun. Council of Lemery vs. Prov.
Board of Batangas, 56 Phil. 260, 268).

The Central Board of Assessment Appeals, in confirming the ruling of the provincial assessor and
the provincial board of assessment appeals that Meralco Securities' pipeline is subject to realty tax,
reasoned out that the pipes are machinery or improvements, as contemplated in the Assessment
Law and the Real Property Tax Code; that they do not fall within the category of property exempt
from realty tax under those laws; that articles 415 and 416 of the Civil Code, defining real and
personal property, have no application to this case; that even under article 415, the steel pipes can
be regarded as realty because they are constructions adhered to the soil and things attached to the
land in a fixed manner and that Meralco Securities is not exempt from realty tax under the Petroleum
Law (pp. 36-40).

Meralco Securities insists that its pipeline is not subject to realty tax because it is not real property
within the meaning of article 415. This contention is not sustainable under the provisions of the
Assessment Law, the Real Property Tax Code and the Civil Code.

Section 2 of the Assessment Law provides that the realty tax is due "on real property, including land,
buildings, machinery, and other improvements" not specifically exempted in section 3 thereof. This
provision is reproduced with some modification in the Real Property Tax Code which provides:

SEC. 38. Incidence of Real Property Tax.— There shall be levied, assessed and
collected in all provinces, cities and municipalities an annual ad valorem tax on real
property, such as land, buildings, machinery and other improvements affixed or
attached to real property not hereinafter specifically exempted. *

It is incontestable that the pipeline of Meralco Securities does not fall within any of the classes of
exempt real property enumerated in section 3 of the Assessment Law and section 40 of the Real
Property Tax Code.

Pipeline means a line of pipe connected to pumps, valves and control devices for conveying liquids,
gases or finely divided solids. It is a line of pipe running upon or in the earth, carrying with it the right
to the use of the soil in which it is placed (Note 21[10],54 C.J.S. 561).
Article 415[l] and [3] provides that real property may consist of constructions of all kinds adhered to
the soil and everything attached to an immovable in a fixed manner, in such a way that it cannot be
separated therefrom without breaking the material or deterioration of the object.

The pipeline system in question is indubitably a construction adhering to the soil (Exh. B, p. 39,
Rollo). It is attached to the land in such a way that it cannot be separated therefrom without
dismantling the steel pipes which were welded to form the pipeline.

Insofar as the pipeline uses valves, pumps and control devices to maintain the flow of oil, it is in a
sense machinery within the meaning of the Real Property Tax Code.

It should be borne in mind that what are being characterized as real property are not the steel pipes
but the pipeline system as a whole. Meralco Securities has apparently two pipeline systems.

A pipeline for conveying petroleum has been regarded as real property for tax purposes (Miller
County Highway, etc., Dist. vs. Standard Pipe Line Co., 19 Fed. 2nd 3; Board of Directors of Red
River Levee Dist. No. 1 of Lafayette County, Ark vs. R. F. C., 170 Fed. 2nd 430; 50 C. J. 750, note
86).

The other contention of Meralco Securities is that the Petroleum Law exempts it from the payment of
realty taxes. The alleged exemption is predicated on the following provisions of that law which
exempt Meralco Securities from local taxes and make it liable for taxes of general application:

ART. 102. Work obligations, taxes, royalties not to be changed.— Work obligations,
special taxes and royalties which are fixed by the provisions of this Act or by the
concession for any of the kinds of concessions to which this Act relates, are
considered as inherent on such concessions after they are granted, and shall not be
increased or decreased during the life of the concession to which they apply; nor
shall any other special taxes or levies be applied to such concessions, nor shall
0concessionaires under this Act be subject to any provincial, municipal or other local
taxes or levies; nor shall any sales tax be charged on any petroleum produced from
the concession or portion thereof, manufactured by the concessionaire and used in
the working of his concession. All such concessionaires, however, shall be subject
to such taxes as are of general application in addition to taxes and other levies
specifically provided in this Act.

Meralco Securities argues that the realty tax is a local tax or levy and not a tax of general
application. This argument is untenable because the realty tax has always been imposed by the
lawmaking body and later by the President of the Philippines in the exercise of his lawmaking
powers, as shown in section 342 et seq. of the Revised Administrative Code, Act No. 3995,
Commonwealth Act No. 470 and Presidential Decree No. 464.

The realty tax is enforced throughout the Philippines and not merely in a particular municipality or
city but the proceeds of the tax accrue to the province, city, municipality and barrio where the realty
taxed is situated (Sec. 86, P.D. No. 464). In contrast, a local tax is imposed by the municipal or city
council by virtue of the Local Tax Code, Presidential Decree No. 231, which took effect on July 1,
1973 (69 O.G. 6197).

We hold that the Central Board of Assessment Appeals did not act with grave abuse of discretion,
did not commit any error of law and acted within its jurisdiction in sustaining the holding of the
provincial assessor and the local board of assessment appeals that Meralco Securities' pipeline
system in Laguna is subject to realty tax.
WHEREFORE, the questioned decision and resolution are affirmed. The petition is dismissed. No
costs.

SO ORDERED.

Barredo (Chairman), Guerrero, De Castro and Escolin, JJ., concur.

Justice Abad Santos, Concepcion, Jr., JJ., took no part.

G.R. No. L-47943 May 31, 1982

MANILA ELECTRIC COMPANY, petitioner,

vs.
CENTRAL BOARD OF ASSESSMENT APPEALS, BOARD OF ASSESSMENT APPEALS OF
BATANGAS and PROVINCIAL ASSESSOR OF BATANGAS, respondents.

AQUINO, J.:

This case is about the imposition of the realty tax on two oil storage tanks installed in 1969 by Manila
Electric Company on a lot in San Pascual, Batangas which it leased in 1968 from Caltex (Phil.), Inc.
The tanks are within the Caltex refinery compound. They have a total capacity of 566,000 barrels.
They are used for storing fuel oil for Meralco's power plants.

According to Meralco, the storage tanks are made of steel plates welded and assembled on the
spot. Their bottoms rest on a foundation consisting of compacted earth as the outermost layer, a
sand pad as the intermediate layer and a two-inch thick bituminous asphalt stratum as the top layer.
The bottom of each tank is in contact with the asphalt layer,

The steel sides of the tank are directly supported underneath by a circular wall made of concrete,
eighteen inches thick, to prevent the tank from sliding. Hence, according to Meralco, the tank is not
attached to its foundation. It is not anchored or welded to the concrete circular wall. Its bottom plate
is not attached to any part of the foundation by bolts, screws or similar devices. The tank merely sits
on its foundation. Each empty tank can be floated by flooding its dike-inclosed location with water
four feet deep. (pp. 29-30, Rollo.)

On the other hand, according to the hearing commissioners of the Central Board of Assessment
Appeals, the area where the two tanks are located is enclosed with earthen dikes with electric steel
poles on top thereof and is divided into two parts as the site of each tank. The foundation of the
tanks is elevated from the remaining area. On both sides of the earthen dikes are two separate
concrete steps leading to the foundation of each tank.

Tank No. 2 is supported by a concrete foundation with an asphalt lining about an inch thick.
Pipelines were installed on the sides of each tank and are connected to the pipelines of the Manila
Enterprises Industrial Corporation whose buildings and pumping station are near Tank No. 2.
The Board concludes that while the tanks rest or sit on their foundation, the foundation itself and the
walls, dikes and steps, which are integral parts of the tanks, are affixed to the land while the
pipelines are attached to the tanks. (pp. 60-61, Rollo.) In 1970, the municipal treasurer of Bauan,
Batangas, on the basis of an assessment made by the provincial assessor, required Meralco to pay
realty taxes on the two tanks. For the five-year period from 1970 to 1974, the tax and penalties
amounted to P431,703.96 (p. 27, Rollo). The Board required Meralco to pay the tax and penalties as
a condition for entertaining its appeal from the adverse decision of the Batangas board of
assessment appeals.

The Central Board of Assessment Appeals (composed of Acting Secretary of Finance Pedro M.
Almanzor as chairman and Secretary of Justice Vicente Abad Santos and Secretary of Local
Government and Community Development Jose Roño as members) in its decision dated November
5, 1976 ruled that the tanks together with the foundation, walls, dikes, steps, pipelines and other
appurtenances constitute taxable improvements.

Meralco received a copy of that decision on February 28, 1977. On the fifteenth day, it filed a motion
for reconsideration which the Board denied in its resolution of November 25, 1977, a copy of which
was received by Meralco on February 28, 1978.

On March 15, 1978, Meralco filed this special civil action of certiorari to annul the Board's decision
and resolution. It contends that the Board acted without jurisdiction and committed a grave error of
law in holding that its storage tanks are taxable real property.

Meralco contends that the said oil storage tanks do not fall within any of the kinds of real property
enumerated in article 415 of the Civil Code and, therefore, they cannot be categorized as realty by
nature, by incorporation, by destination nor by analogy. Stress is laid on the fact that the tanks are
not attached to the land and that they were placed on leased land, not on the land owned by
Meralco.

This is one of those highly controversial, borderline or penumbral cases on the classification of
property where strong divergent opinions are inevitable. The issue raised by Meralco has to be
resolved in the light of the provisions of the Assessment Law, Commonwealth Act No. 470, and the
Real Property Tax Code, Presidential Decree No. 464 which took effect on June 1, 1974.

Section 2 of the Assessment Law provides that the realty tax is due "on real property, including land,
buildings, machinery, and other improvements" not specifically exempted in section 3 thereof. This
provision is reproduced with some modification in the Real Property Tax Code which provides:

Sec. 38. Incidence of Real Property Tax. — They shall be levied, assessed and
collected in all provinces, cities and municipalities an annual ad valorem tax on real
property, such as land, buildings, machinery and other improvements affixed or
attached to real property not hereinafter specifically exempted.

The Code contains the following definition in its section 3:

k) Improvements — is a valuable addition made to property or an amelioration in its

condition, amounting to more than mere repairs or replacement of waste, costing
labor or capital and intended to enhance its value, beauty or utility or to adapt it for
new or further purposes.

We hold that while the two storage tanks are not embedded in the land, they may, nevertheless, be
considered as improvements on the land, enhancing its utility and rendering it useful to the oil
industry. It is undeniable that the two tanks have been installed with some degree of permanence as
receptacles for the considerable quantities of oil needed by Meralco for its operations.

Oil storage tanks were held to be taxable realty in Standard Oil Co. of New Jersey vs. Atlantic City,
15 Atl. 2nd 271.

For purposes of taxation, the term "real property" may include things which should generally be
regarded as personal property(84 C.J.S. 171, Note 8). It is a familiar phenomenon to see things
classed as real property for purposes of taxation which on general principle might be considered
personal property (Standard Oil Co. of New York vs. Jaramillo, 44 Phil. 630, 633).

The case of Board of Assessment Appeals vs. Manila Electric Company, 119 Phil. 328, wherein
Meralco's steel towers were held not to be subject to realty tax, is not in point because in that case
the steel towers were regarded as poles and under its franchise Meralco's poles are exempt from
taxation. Moreover, the steel towers were not attached to any land or building. They were removable
from their metal frames.

Nor is there any parallelism between this case and Mindanao Bus Co. vs. City Assessor, 116 Phil.
501, where the tools and equipment in the repair, carpentry and blacksmith shops of a transportation
company were held not subject to realty tax because they were personal property.

WHEREFORE, the petition is dismissed. The Board's questioned decision and resolution are
affirmed. No costs.

SO ORDERED.

Barredo (Chairman), Guerrero, De Castro and Escolin, JJ., concur.

Concepcion, Jr., J., is on leave.

Justice Abad Santos, J., took no part.

G.R. No. L-50466 May 31, 1982

CALTEX (PHILIPPINES) INC., petitioner,

vs.
CENTRAL BOARD OF ASSESSMENT APPEALS and CITY ASSESSOR OF
PASAY, respondents.

AQUINO, J.:

This case is about the realty tax on machinery and equipment installed by Caltex (Philippines) Inc. in
its gas stations located on leased land.
The machines and equipment consists of underground tanks, elevated tank, elevated water tanks,
water tanks, gasoline pumps, computing pumps, water pumps, car washer, car hoists, truck hoists,
air compressors and tireflators. The city assessor described the said equipment and machinery in
this manner:

A gasoline service station is a piece of lot where a building or shed is erected, a

water tank if there is any is placed in one corner of the lot, car hoists are placed in an
adjacent shed, an air compressor is attached in the wall of the shed or at the
concrete wall fence.

The controversial underground tank, depository of gasoline or crude oil, is dug deep
about six feet more or less, a few meters away from the shed. This is done to prevent
conflagration because gasoline and other combustible oil are very inflammable.

This underground tank is connected with a steel pipe to the gasoline pump and the
gasoline pump is commonly placed or constructed under the shed. The footing of the
pump is a cement pad and this cement pad is imbedded in the pavement under the
shed, and evidence that the gasoline underground tank is attached and connected to
the shed or building through the pipe to the pump and the pump is attached and
affixed to the cement pad and pavement covered by the roof of the building or shed.

The building or shed, the elevated water tank, the car hoist under a separate shed,
the air compressor, the underground gasoline tank, neon lights signboard, concrete
fence and pavement and the lot where they are all placed or erected, all of them
used in the pursuance of the gasoline service station business formed the entire
gasoline service-station.

As to whether the subject properties are attached and affixed to the tenement, it is
clear they are, for the tenement we consider in this particular case are (is) the
pavement covering the entire lot which was constructed by the owner of the gasoline
station and the improvement which holds all the properties under question, they are
attached and affixed to the pavement and to the improvement.

The pavement covering the entire lot of the gasoline service station, as well as all the
improvements, machines, equipments and apparatus are allowed by Caltex
(Philippines) Inc. ...

The underground gasoline tank is attached to the shed by the steel pipe to the pump,
so with the water tank it is connected also by a steel pipe to the pavement, then to
the electric motor which electric motor is placed under the shed. So to say that the
gasoline pumps, water pumps and underground tanks are outside of the service
station, and to consider only the building as the service station is grossly erroneous.
(pp. 58-60, Rollo).

The said machines and equipment are loaned by Caltex to gas station operators under an
appropriate lease agreement or receipt. It is stipulated in the lease contract that the operators, upon
demand, shall return to Caltex the machines and equipment in good condition as when received,
ordinary wear and tear excepted.

The lessor of the land, where the gas station is located, does not become the owner of the machines
and equipment installed therein. Caltex retains the ownership thereof during the term of the lease.
The city assessor of Pasay City characterized the said items of gas station equipment and
machinery as taxable realty. The realty tax on said equipment amounts to P4,541.10 annually (p. 52,
Rollo). The city board of tax appeals ruled that they are personalty. The assessor appealed to the
Central Board of Assessment Appeals.

The Board, which was composed of Secretary of Finance Cesar Virata as chairman, Acting
Secretary of Justice Catalino Macaraig, Jr. and Secretary of Local Government and Community
Development Jose Roño, held in its decision of June 3, 1977 that the said machines and equipment
are real property within the meaning of sections 3(k) & (m) and 38 of the Real Property Tax Code,
Presidential Decree No. 464, which took effect on June 1, 1974, and that the definitions of real
property and personal property in articles 415 and 416 of the Civil Code are not applicable to this
case.

The decision was reiterated by the Board (Minister Vicente Abad Santos took Macaraig's place) in its
resolution of January 12, 1978, denying Caltex's motion for reconsideration, a copy of which was
received by its lawyer on April 2, 1979.

On May 2, 1979 Caltex filed this certiorari petition wherein it prayed for the setting aside of the
Board's decision and for a declaration that t he said machines and equipment are personal property
not subject to realty tax (p. 16, Rollo).

The Solicitor General's contention that the Court of Tax Appeals has exclusive appellate jurisdiction
over this case is not correct. When Republic act No. 1125 created the Tax Court in 1954, there was
as yet no Central Board of Assessment Appeals. Section 7(3) of that law in providing that the Tax
Court had jurisdiction to review by appeal decisions of provincial or city boards of assessment
appeals had in mind the local boards of assessment appeals but not the Central Board of
Assessment Appeals which under the Real Property Tax Code has appellate jurisdiction over
decisions of the said local boards of assessment appeals and is, therefore, in the same category as
the Tax Court.

Section 36 of the Real Property Tax Code provides that the decision of the Central Board of
Assessment Appeals shall become final and executory after the lapse of fifteen days from the receipt
of its decision by the appellant. Within that fifteen-day period, a petition for reconsideration may be
filed. The Code does not provide for the review of the Board's decision by this Court.

Consequently, the only remedy available for seeking a review by this Court of the decision of the
Central Board of Assessment Appeals is the special civil action of certiorari, the recourse resorted to
herein by Caltex (Philippines), Inc.

The issue is whether the pieces of gas station equipment and machinery already enumerated are
subject to realty tax. This issue has to be resolved primarily under the provisions of the Assessment
Law and the Real Property Tax Code.

Section 2 of the Assessment Law provides that the realty tax is due "on real property, including land,
buildings, machinery, and other improvements" not specifically exempted in section 3 thereof. This
provision is reproduced with some modification in the Real Property Tax Code which provides:

SEC. 38. Incidence of Real Property Tax.— There shall be levied, assessed and
collected in all provinces, cities and municipalities an annual ad valorem tax on real
property, such as land, buildings, machinery and other improvements affixed or
attached to real property not hereinafter specifically exempted.
The Code contains the following definitions in its section 3:

k) Improvements — is a valuable addition made to property or an amelioration in its

condition, amounting to more than mere repairs or replacement of waste, costing
labor or capital and intended to enhance its value, beauty or utility or to adapt it for
new or further purposes.

m) Machinery — shall embrace machines, mechanical contrivances, instruments,

appliances and apparatus attached to the real estate. It includes the physical
facilities available for production, as well as the installations and appurtenant service
facilities, together with all other equipment designed for or essential to its
manufacturing, industrial or agricultural purposes (See sec. 3[f], Assessment Law).

We hold that the said equipment and machinery, as appurtenances to the gas station building or
shed owned by Caltex (as to which it is subject to realty tax) and which fixtures are necessary to the
operation of the gas station, for without them the gas station would be useless, and which have been
attached or affixed permanently to the gas station site or embedded therein, are taxable
improvements and machinery within the meaning of the Assessment Law and the Real Property Tax
Code.

Caltex invokes the rule that machinery which is movable in its nature only becomes immobilized
when placed in a plant by the owner of the property or plant but not when so placed by a tenant, a
usufructuary, or any person having only a temporary right, unless such person acted as the agent of
the owner (Davao Saw Mill Co. vs. Castillo, 61 Phil 709).

That ruling is an interpretation of paragraph 5 of article 415 of the Civil Code regarding machinery
that becomes real property by destination. In the Davao Saw Mills case the question was whether
the machinery mounted on foundations of cement and installed by the lessee on leased land should
be regarded as real property for purposes of execution of a judgment against the lessee. The sheriff
treated the machinery as personal property. This Court sustained the sheriff's action. (Compare with
Machinery & Engineering Supplies, Inc. vs. Court of Appeals, 96 Phil. 70, where in a replevin case
machinery was treated as realty).

Here, the question is whether the gas station equipment and machinery permanently affixed by
Caltex to its gas station and pavement (which are indubitably taxable realty) should be subject to the
realty tax. This question is different from the issue raised in the Davao Saw Mill case.

Improvements on land are commonly taxed as realty even though for some purposes they might be
considered personalty (84 C.J.S. 181-2, Notes 40 and 41). "It is a familiar phenomenon to see things
classed as real property for purposes of taxation which on general principle might be considered
personal property" (Standard Oil Co. of New York vs. Jaramillo, 44 Phil. 630, 633).

This case is also easily distinguishable from Board of Assessment Appeals vs. Manila Electric Co.,
119 Phil. 328, where Meralco's steel towers were considered poles within the meaning of paragraph
9 of its franchise which exempts its poles from taxation. The steel towers were considered
personalty because they were attached to square metal frames by means of bolts and could be
moved from place to place when unscrewed and dismantled.

Nor are Caltex's gas station equipment and machinery the same as tools and equipment in the
repair shop of a bus company which were held to be personal property not subject to realty tax
(Mindanao Bus Co. vs. City Assessor, 116 Phil. 501).
The Central Board of Assessment Appeals did not commit a grave abuse of discretion in upholding
the city assessor's is imposition of the realty tax on Caltex's gas station and equipment.

WHEREFORE, the questioned decision and resolution of the Central Board of Assessment Appeals
are affirmed. The petition for certiorari is dismissed for lack of merit. No costs.

SO ORDERED.

G.R. No. 106041 January 29, 1993

BENGUET CORPORATION, petitioner,

vs.
CENTRAL BOARD OF ASSESSMENT APPEALS, BOARD OF ASSESSMENT APPEALS OF
ZAMBALES, PROVINCIAL ASSESSOR OF ZAMBALES, PROVINCE OF ZAMBALES, and
MUNICIPALITY OF SAN MARCELINO, respondents.

Romulo, Mabanta, Buenaventura, Sayoc & De los Angeles for petitioner.

CRUZ, J.:

The realty tax assessment involved in this case amounts to P11,319,304.00. It has been imposed on
the petitioner's tailings dam and the land thereunder over its protest.

The controversy arose in 1985 when the Provincial Assessor of Zambales assessed the said
properties as taxable improvements. The assessment was appealed to the Board of Assessment
Appeals of the Province of Zambales. On August 24, 1988, the appeal was dismissed mainly on the
ground of the petitioner's "failure to pay the realty taxes that fell due during the pendency of the
appeal."

The petitioner seasonably elevated the matter to the Central Board of Assessment Appeals,1 one of
the herein respondents. In its decision dated March 22, 1990, the Board reversed the dismissal of
the appeal but, on the merits, agreed that "the tailings dam and the lands submerged thereunder
(were) subject to realty tax."

For purposes of taxation the dam is considered as real property as it comes within
the object mentioned in paragraphs (a) and (b) of Article 415 of the New Civil Code.
It is a construction adhered to the soil which cannot be separated or detached
without breaking the material or causing destruction on the land upon which it is
attached. The immovable nature of the dam as an improvement determines its
character as real property, hence taxable under Section 38 of the Real Property Tax
Code. (P.D. 464).

Although the dam is partly used as an anti-pollution device, this Board cannot accede
to the request for tax exemption in the absence of a law authorizing the same.

xxx xxx xxx

 We find the appraisal on the land submerged as a result of the construction of the
tailings dam, covered by Tax Declaration Nos.
002-0260 and 002-0266, to be in accordance with the Schedule of Market Values for
Zambales which was reviewed and allowed for use by the Ministry (Department) of
Finance in the 1981-1982 general revision. No serious attempt was made by
Petitioner-Appellant Benguet Corporation to impugn its reasonableness, i.e., that the
P50.00 per square meter applied by Respondent-Appellee Provincial Assessor is
indeed excessive and unconscionable. Hence, we find no cause to disturb the
market value applied by Respondent Appellee Provincial Assessor of Zambales on
the properties of Petitioner-Appellant Benguet Corporation covered by Tax
Declaration Nos. 002-0260 and 002-0266.

This petition for certiorari now seeks to reverse the above ruling.

The principal contention of the petitioner is that the tailings dam is not subject to realty tax because it
is not an "improvement" upon the land within the meaning of the Real Property Tax Code. More
particularly, it is claimed —

(1) as regards the tailings dam as an "improvement":

(a) that the tailings dam has no value separate from and independent
of the mine; hence, by itself it cannot be considered an improvement
separately assessable;

(b) that it is an integral part of the mine;

(c) that at the end of the mining operation of the petitioner corporation
in the area, the tailings dam will benefit the local community by
serving as an irrigation facility;

(d) that the building of the dam has stripped the property of any
commercial value as the property is submerged under water wastes
from the mine;

(e) that the tailings dam is an environmental pollution control device

for which petitioner must be commended rather than penalized with a
realty tax assessment;

(f) that the installation and utilization of the tailings dam as a pollution
control device is a requirement imposed by law;

(2) as regards the valuation of the tailings dam and the submerged lands:

(a) that the subject properties have no market value as they cannot
be sold independently of the mine;

(b) that the valuation of the tailings dam should be based on its
incidental use by petitioner as a water reservoir and not on the
alleged cost of construction of the dam and the annual build-up
expense;
 (c) that the "residual value formula" used by the Provincial Assessor
and adopted by respondent CBAA is arbitrary and erroneous; and

(3) as regards the petitioner's liability for penalties for

non-declaration of the tailings dam and the submerged lands for realty tax purposes:

(a) that where a tax is not paid in an honest belief that it is not due, no
penalty shall be collected in addition to the basic tax;

(b) that no other mining companies in the Philippines operating a

tailings dam have been made to declare the dam for realty tax
purposes.

The petitioner does not dispute that the tailings dam may be considered realty within the meaning of
Article 415. It insists, however, that the dam cannot be subjected to realty tax as a separate and
independent property because it does not constitute an "assessable improvement" on the mine
although a considerable sum may have been spent in constructing and maintaining it.

To support its theory, the petitioner cites the following cases:

1. Municipality of Cotabato v. Santos (105 Phil. 963), where this Court considered the dikes and
gates constructed by the taxpayer in connection with a fishpond operation as integral parts of the
fishpond.

2. Bislig Bay Lumber Co. v. Provincial Government of Surigao (100 Phil. 303), involving a road
constructed by the timber concessionaire in the area, where this Court did not impose a realty tax on
the road primarily for two reasons:

In the first place, it cannot be disputed that the ownership of the road that was
constructed by appellee belongs to the government by right of accession not only
because it is inherently incorporated or attached to the timber land . . . but also
because upon the expiration of the concession said road would ultimately pass to the
national government. . . . In the second place, while the road was constructed by
appellee primarily for its use and benefit, the privilege is not exclusive, for . . .
appellee cannot prevent the use of portions of the concession for homesteading
purposes. It is also duty bound to allow the free use of forest products within the
concession for the personal use of individuals residing in or within the vicinity of the
land. . . . In other words, the government has practically reserved the rights to use
the road to promote its varied activities. Since, as above shown, the road in question
cannot be considered as an improvement which belongs to appellee, although in part
is for its benefit, it is clear that the same cannot be the subject of assessment within
the meaning of Section 2 of C.A.
No. 470.

Apparently, the realty tax was not imposed not because the road was an integral part of the lumber
concession but because the government had the right to use the road to promote its varied activities.

3. Kendrick v. Twin Lakes Reservoir Co. (144 Pacific 884), an American case, where it was declared
that the reservoir dam went with and formed part of the reservoir and that the dam would be
"worthless and useless except in connection with the outlet canal, and the water rights in the
reservoir represent and include whatever utility or value there is in the dam and headgates."
4. Ontario Silver Mining Co. v. Hixon (164 Pacific 498), also from the United States. This case
involved drain tunnels constructed by plaintiff when it expanded its mining operations downward,
resulting in a constantly increasing flow of water in the said mine. It was held that:

Whatever value they have is connected with and in fact is an integral part of the mine
itself. Just as much so as any shaft which descends into the earth or an underground
incline, tunnel, or drift would be which was used in connection with the mine.

On the other hand, the Solicitor General argues that the dam is an assessable improvement
because it enhances the value and utility of the mine. The primary function of the dam is to receive,
retain and hold the water coming from the operations of the mine, and it also enables the petitioner
to impound water, which is then recycled for use in the plant.

There is also ample jurisprudence to support this view, thus:

. . . The said equipment and machinery, as appurtenances to the gas station building
or shed owned by Caltex (as to which it is subject to realty tax) and which fixtures are
necessary to the operation of the gas station, for without them the gas station would
be useless and which have been attached or affixed permanently to the gas station
site or embedded therein, are taxable improvements and machinery within the
meaning of the Assessment Law and the Real Property Tax Code. (Caltex [Phil.] Inc.
v. CBAA, 114 SCRA 296).

We hold that while the two storage tanks are not embedded in the land, they may,
nevertheless, be considered as improvements on the land, enhancing its utility and
rendering it useful to the oil industry. It is undeniable that the two tanks have been
installed with some degree of permanence as receptacles for the considerable
quantities of oil needed by MERALCO for its operations. (Manila Electric Co. v.
CBAA, 114 SCRA 273).

The pipeline system in question is indubitably a construction adhering to the soil. It is

attached to the land in such a way that it cannot be separated therefrom without
dismantling the steel pipes which were welded to form the pipeline. (MERALCO
Securities Industrial Corp. v. CBAA, 114 SCRA 261).

The tax upon the dam was properly assessed to the plaintiff as a tax upon real
estate. (Flax-Pond Water Co. v. City of Lynn, 16 N.E. 742).

The oil tanks are structures within the statute, that they are designed and used by the
owner as permanent improvement of the free hold, and that for such reasons they
were properly assessed by the respondent taxing district as improvements.
(Standard Oil Co. of New Jersey v. Atlantic City, 15 A 2d. 271)

The Real Property Tax Code does not carry a definition of "real property" and simply says that the
realty tax is imposed on "real property, such as lands, buildings, machinery and other improvements
affixed or attached to real property." In the absence of such a definition, we apply Article 415 of the
Civil Code, the pertinent portions of which state:

Art. 415. The following are immovable property.

(1) Lands, buildings and constructions of all kinds adhered to the soil;
 xxx xxx xxx

(3) Everything attached to an immovable in a fixed manner, in such a way that it

cannot be separated therefrom without breaking the material or deterioration of the
object.

Section 2 of C.A. No. 470, otherwise known as the Assessment Law, provides that the realty tax is
due "on the real property, including land, buildings, machinery and other improvements" not
specifically exempted in Section 3 thereof. A reading of that section shows that the tailings dam of
the petitioner does not fall under any of the classes of exempt real properties therein enumerated.

Is the tailings dam an improvement on the mine? Section 3(k) of the Real Property Tax Code defines
improvement as follows:

(k) Improvements — is a valuable addition made to property or an amelioration in its

condition, amounting to more than mere repairs or replacement of waste, costing
labor or capital and intended to enhance its value, beauty or utility or to adopt it for
new or further purposes.

The term has also been interpreted as "artificial alterations of the physical condition of the ground
that are reasonably permanent in character."2

The Court notes that in the Ontario case the plaintiff admitted that the mine involved therein could
not be operated without the aid of the drain tunnels, which were indispensable to the successful
development and extraction of the minerals therein. This is not true in the present case.

Even without the tailings dam, the petitioner's mining operation can still be carried out because the
primary function of the dam is merely to receive and retain the wastes and water coming from the
mine. There is no allegation that the water coming from the dam is the sole source of water for the
mining operation so as to make the dam an integral part of the mine. In fact, as a result of the
construction of the dam, the petitioner can now impound and recycle water without having to spend
for the building of a water reservoir. And as the petitioner itself points out, even if the petitioner's
mine is shut down or ceases operation, the dam may still be used for irrigation of the surrounding
areas, again unlike in the Ontario case.

As correctly observed by the CBAA, the Kendrick case is also not applicable because it involved
water reservoir dams used for different purposes and for the benefit of the surrounding areas. By
contrast, the tailings dam in question is being used exclusively for the benefit of the petitioner.

Curiously, the petitioner, while vigorously arguing that the tailings dam has no separate existence,
just as vigorously contends that at the end of the mining operation the tailings dam will serve the
local community as an irrigation facility, thereby implying that it can exist independently of the mine.

From the definitions and the cases cited above, it would appear that whether a structure constitutes
an improvement so as to partake of the status of realty would depend upon the degree
of permanence intended in its construction and use. The expression "permanent" as applied to an
improvement does not imply that the improvement must be used perpetually but only until the
purpose to which the principal realty is devoted has been accomplished. It is sufficient that the
improvement is intended to remain as long as the land to which it is annexed is still used for the said
purpose.
The Court is convinced that the subject dam falls within the definition of an "improvement" because it
is permanent in character and it enhances both the value and utility of petitioner's mine. Moreover,
the immovable nature of the dam defines its character as real property under Article 415 of the Civil
Code and thus makes it taxable under Section 38 of the Real Property Tax Code.

The Court will also reject the contention that the appraisal at P50.00 per square meter made by the
Provincial Assessor is excessive and that his use of the "residual value formula" is arbitrary and
erroneous.

Respondent Provincial Assessor explained the use of the "residual value formula" as follows:

A 50% residual value is applied in the computation because, while it is true that when
slime fills the dike, it will then be covered by another dike or stage, the stage covered
is still there and still exists and since only one face of the dike is filled, 50% or the
other face is unutilized.

In sustaining this formula, the CBAA gave the following justification:

We find the appraisal on the land submerged as a result of the construction of the
tailings dam, covered by Tax Declaration Nos.
002-0260 and 002-0266, to be in accordance with the Schedule of Market Values for
San Marcelino, Zambales, which is fifty (50.00) pesos per square meter for third
class industrial land (TSN, page 17, July 5, 1989) and Schedule of Market Values for
Zambales which was reviewed and allowed for use by the Ministry (Department) of
Finance in the 1981-1982 general revision. No serious attempt was made by
Petitioner-Appellant Benguet Corporation to impugn its reasonableness, i.e, that the
P50.00 per square meter applied by Respondent-Appellee Provincial Assessor is
indeed excessive and unconscionable. Hence, we find no cause to disturb the
market value applied by Respondent-Appellee Provincial Assessor of Zambales on
the properties of Petitioner-Appellant Benguet Corporation covered by Tax
Declaration Nos. 002-0260 and 002-0266.

It has been the long-standing policy of this Court to respect the conclusions of quasi-judicial
agencies like the CBAA, which, because of the nature of its functions and its frequent exercise
thereof, has developed expertise in the resolution of assessment problems. The only exception to
this rule is where it is clearly shown that the administrative body has committed grave abuse of
discretion calling for the intervention of this Court in the exercise of its own powers of review. There
is no such showing in the case at bar.

We disagree, however, with the ruling of respondent CBAA that it cannot take cognizance of the
issue of the propriety of the penalties imposed upon it, which was raised by the petitioner for the first
time only on appeal. The CBAA held that this "is an entirely new matter that petitioner can take up
with the Provincial Assessor (and) can be the subject of another protest before the Local Board or a
negotiation with the local sanggunian . . ., and in case of an adverse decision by either the Local
Board or the local sanggunian, (it can) elevate the same to this Board for appropriate action."

There is no need for this time-wasting procedure. The Court may resolve the issue in this petition
instead of referring it back to the local authorities. We have studied the facts and circumstances of
this case as above discussed and find that the petitioner has acted in good faith in questioning the
assessment on the tailings dam and the land submerged thereunder. It is clear that it has not done
so for the purpose of evading or delaying the payment of the questioned tax. Hence, we hold that the
petitioner is not subject to penalty for its
non-declaration of the tailings dam and the submerged lands for realty tax purposes.

WHEREFORE, the petition is DISMISSED for failure to show that the questioned decision of
respondent Central Board of Assessment Appeals is tainted with grave abuse of discretion except as
to the imposition of penalties upon the petitioner which is hereby SET ASIDE. Costs against the
petitioner. It is so ordered.

Narvasa, C.J., Gutierrez, Jr., Padilla, Bidin, Griño-Aquino, Regalado, Davide, Jr., Romero, Nocon,
Bellosillo, Melo and Campos, Jr., JJ., concur.

Feliciano, J., took no part

G.R. No. 127882 January 27, 2004

LA BUGAL-B'LAAN TRIBAL ASSOCIATION, INC., represented by its Chairman F'LONG

MIGUEL M. LUMAYONG, WIGBERTO E. TAÑADA, PONCIANO BENNAGEN, JAIME TADEO,
RENATO R. CONSTANTINO, JR., F'LONG AGUSTIN M. DABIE, ROBERTO P. AMLOY, RAQIM
L. DABIE, SIMEON H. DOLOJO, IMELDA M. GANDON, LENY B. GUSANAN, MARCELO L.
GUSANAN, QUINTOL A. LABUAYAN, LOMINGGES D. LAWAY, BENITA P. TACUAYAN, minors
JOLY L. BUGOY, represented by his father UNDERO D. BUGOY, ROGER M. DADING,
represented by his father ANTONIO L. DADING, ROMY M. LAGARO, represented by his father
TOTING A. LAGARO, MIKENY JONG B. LUMAYONG, represented by his father MIGUEL M.
LUMAYONG, RENE T. MIGUEL, represented by his mother EDITHA T. MIGUEL, ALDEMAR L.
SAL, represented by his father DANNY M. SAL, DAISY RECARSE, represented by her mother
LYDIA S. SANTOS, EDWARD M. EMUY, ALAN P. MAMPARAIR, MARIO L. MANGCAL, ALDEN
S. TUSAN, AMPARO S. YAP, VIRGILIO CULAR, MARVIC M.V.F. LEONEN, JULIA REGINA
CULAR, GIAN CARLO CULAR, VIRGILIO CULAR, JR., represented by their father VIRGILIO
CULAR, PAUL ANTONIO P. VILLAMOR, represented by his parents JOSE VILLAMOR and
ELIZABETH PUA-VILLAMOR, ANA GININA R. TALJA, represented by her father MARIO JOSE
B. TALJA, SHARMAINE R. CUNANAN, represented by her father ALFREDO M. CUNANAN,
ANTONIO JOSE A. VITUG III, represented by his mother ANNALIZA A. VITUG, LEAN D.
NARVADEZ, represented by his father MANUEL E. NARVADEZ, JR., ROSERIO MARALAG
LINGATING, represented by her father RIO OLIMPIO A. LINGATING, MARIO JOSE B. TALJA,
DAVID E. DE VERA, MARIA MILAGROS L. SAN JOSE, SR., SUSAN O. BOLANIO, OND, LOLITA
G. DEMONTEVERDE, BENJIE L. NEQUINTO,1 ROSE LILIA S. ROMANO, ROBERTO S.
VERZOLA, EDUARDO AURELIO C. REYES, LEAN LOUEL A. PERIA, represented by his father
ELPIDIO V. PERIA,2 GREEN FORUM PHILIPPINES, GREEN FORUM WESTERN VISAYAS, (GF-
WV), ENVIRONMETAL LEGAL ASSISTANCE CENTER (ELAC), PHILIPPINE KAISAHAN TUNGO
SA KAUNLARAN NG KANAYUNAN AT REPORMANG PANSAKAHAN
(KAISAHAN),3 KAISAHAN TUNGO SA KAUNLARAN NG KANAYUNAN AT REPORMANG
PANSAKAHAN (KAISAHAN), PARTNERSHIP FOR AGRARIAN REFORM and RURAL
DEVELOPMENT SERVICES, INC. (PARRDS), PHILIPPINE PART`NERSHIP FOR THE
DEVELOPMENT OF HUMAN RESOURCES IN THE RURAL AREAS, INC. (PHILDHRRA),
WOMEN'S LEGAL BUREAU (WLB), CENTER FOR ALTERNATIVE DEVELOPMENT
INITIATIVES, INC. (CADI), UPLAND DEVELOPMENT INSTITUTE (UDI), KINAIYAHAN
FOUNDATION, INC., SENTRO NG ALTERNATIBONG LINGAP PANLIGAL (SALIGAN), LEGAL
RIGHTS AND NATURAL RESOURCES CENTER, INC. (LRC), petitioners,
vs.
VICTOR O. RAMOS, SECRETARY, DEPARTMENT OF ENVIRONMENT AND NATURAL
RESOURCES (DENR), HORACIO RAMOS, DIRECTOR, MINES AND GEOSCIENCES BUREAU
(MGB-DENR), RUBEN TORRES, EXECUTIVE SECRETARY, and WMC (PHILIPPINES),
INC.4 respondents.

DECISION

CARPIO-MORALES, J.:

The present petition for mandamus and prohibition assails the constitutionality of Republic Act No.
7942,5 otherwise known as the PHILIPPINE MINING ACT OF 1995, along with the Implementing
Rules and Regulations issued pursuant thereto, Department of Environment and Natural Resources
(DENR) Administrative Order 96-40, and of the Financial and Technical Assistance Agreement
(FTAA) entered into on March 30, 1995 by the Republic of the Philippines and WMC (Philippines),
Inc. (WMCP), a corporation organized under Philippine laws.

On July 25, 1987, then President Corazon C. Aquino issued Executive Order (E.O.) No.
2796 authorizing the DENR Secretary to accept, consider and evaluate proposals from foreign-
owned corporations or foreign investors for contracts or agreements involving either technical or
financial assistance for large-scale exploration, development, and utilization of minerals, which, upon
appropriate recommendation of the Secretary, the President may execute with the foreign
proponent. In entering into such proposals, the President shall consider the real contributions to the
economic growth and general welfare of the country that will be realized, as well as the development
and use of local scientific and technical resources that will be promoted by the proposed contract or
agreement. Until Congress shall determine otherwise, large-scale mining, for purpose of this
Section, shall mean those proposals for contracts or agreements for mineral resources exploration,
development, and utilization involving a committed capital investment in a single mining unit project
of at least Fifty Million Dollars in United States Currency (US $50,000,000.00).7

On March 3, 1995, then President Fidel V. Ramos approved R.A. No. 7942 to "govern the
exploration, development, utilization and processing of all mineral resources."8 R.A. No. 7942
defines the modes of mineral agreements for mining operations,9 outlines the procedure for their
filing and approval,10 assignment/transfer11 and withdrawal,12and fixes their terms.13 Similar
provisions govern financial or technical assistance agreements.14

The law prescribes the qualifications of contractors15 and grants them certain rights, including
timber,16 water17 and easement18 rights, and the right to possess explosives.19 Surface owners,
occupants, or concessionaires are forbidden from preventing holders of mining rights from entering
private lands and concession areas.20 A procedure for the settlement of conflicts is likewise provided
for.21

The Act restricts the conditions for exploration,22 quarry23 and other24 permits. It regulates the
transport, sale and processing of minerals,25 and promotes the development of mining communities,
science and mining technology,26and safety and environmental protection.27

The government's share in the agreements is spelled out and allocated,28 taxes and fees are
imposed,29 incentives granted.30 Aside from penalizing certain acts,31 the law likewise specifies
grounds for the cancellation, revocation and termination of agreements and permits.32

On April 9, 1995, 30 days following its publication on March 10, 1995 in Malaya and Manila Times,
two newspapers of general circulation, R.A. No. 7942 took effect.33 Shortly before the effectivity of
R.A. No. 7942, however, or on March 30, 1995, the President entered into an FTAA with WMCP
covering 99,387 hectares of land in South Cotabato, Sultan Kudarat, Davao del Sur and North
Cotabato.34
On August 15, 1995, then DENR Secretary Victor O. Ramos issued DENR Administrative Order
(DAO) No. 95-23, s. 1995, otherwise known as the Implementing Rules and Regulations of R.A. No.
7942. This was later repealed by DAO No. 96-40, s. 1996 which was adopted on December 20,
1996.

On January 10, 1997, counsels for petitioners sent a letter to the DENR Secretary demanding that
the DENR stop the implementation of R.A. No. 7942 and DAO No. 96-40,35 giving the DENR fifteen
days from receipt36 to act thereon. The DENR, however, has yet to respond or act on petitioners'
letter.37

Petitioners thus filed the present petition for prohibition and mandamus, with a prayer for a
temporary restraining order. They allege that at the time of the filing of the petition, 100 FTAA
applications had already been filed, covering an area of 8.4 million hectares,38 64 of which
applications are by fully foreign-owned corporations covering a total of 5.8 million hectares, and at
least one by a fully foreign-owned mining company over offshore areas.39

Petitioners claim that the DENR Secretary acted without or in excess of jurisdiction:

x x x in signing and promulgating DENR Administrative Order No. 96-40 implementing Republic Act
No. 7942, the latter being unconstitutional in that it allows fully foreign owned corporations to
explore, develop, utilize and exploit mineral resources in a manner contrary to Section 2, paragraph
4, Article XII of the Constitution;

II

x x x in signing and promulgating DENR Administrative Order No. 96-40 implementing Republic Act
No. 7942, the latter being unconstitutional in that it allows the taking of private property without the
determination of public use and for just compensation;

III

x x x in signing and promulgating DENR Administrative Order No. 96-40 implementing Republic Act
No. 7942, the latter being unconstitutional in that it violates Sec. 1, Art. III of the Constitution;

IV

x x x in signing and promulgating DENR Administrative Order No. 96-40 implementing Republic Act
No. 7942, the latter being unconstitutional in that it allows enjoyment by foreign citizens as well as
fully foreign owned corporations of the nation's marine wealth contrary to Section 2, paragraph 2 of
Article XII of the Constitution;

x x x in signing and promulgating DENR Administrative Order No. 96-40 implementing Republic Act
No. 7942, the latter being unconstitutional in that it allows priority to foreign and fully foreign owned
corporations in the exploration, development and utilization of mineral resources contrary to Article
XII of the Constitution;

VI
x x x in signing and promulgating DENR Administrative Order No. 96-40 implementing Republic Act
No. 7942, the latter being unconstitutional in that it allows the inequitable sharing of wealth contrary
to Sections [sic] 1, paragraph 1, and Section 2, paragraph 4[,] [Article XII] of the Constitution;

VII

x x x in recommending approval of and implementing the Financial and Technical Assistance

Agreement between the President of the Republic of the Philippines and Western Mining
Corporation Philippines Inc. because the same is illegal and unconstitutional.40

They pray that the Court issue an order:

(a) Permanently enjoining respondents from acting on any application for Financial or
Technical Assistance Agreements;

(b) Declaring the Philippine Mining Act of 1995 or Republic Act No. 7942 as unconstitutional
and null and void;

(c) Declaring the Implementing Rules and Regulations of the Philippine Mining Act contained
in DENR Administrative Order No. 96-40 and all other similar administrative issuances as
unconstitutional and null and void; and

(d) Cancelling the Financial and Technical Assistance Agreement issued to Western Mining
Philippines, Inc. as unconstitutional, illegal and null and void.41

Impleaded as public respondents are Ruben Torres, the then Executive Secretary, Victor O. Ramos,
the then DENR Secretary, and Horacio Ramos, Director of the Mines and Geosciences Bureau of
the DENR. Also impleaded is private respondent WMCP, which entered into the assailed FTAA with
the Philippine Government. WMCP is owned by WMC Resources International Pty., Ltd. (WMC), "a
wholly owned subsidiary of Western Mining Corporation Holdings Limited, a publicly listed major
Australian mining and exploration company."42 By WMCP's information, "it is a 100% owned
subsidiary of WMC LIMITED."43

Respondents, aside from meeting petitioners' contentions, argue that the requisites for judicial
inquiry have not been met and that the petition does not comply with the criteria for prohibition and
mandamus. Additionally, respondent WMCP argues that there has been a violation of the rule on
hierarchy of courts.

After petitioners filed their reply, this Court granted due course to the petition. The parties have since
filed their respective memoranda.

WMCP subsequently filed a Manifestation dated September 25, 2002 alleging that on January 23,
2001, WMC sold all its shares in WMCP to Sagittarius Mines, Inc. (Sagittarius), a corporation
organized under Philippine laws.44WMCP was subsequently renamed "Tampakan Mineral
Resources Corporation."45 WMCP claims that at least 60% of the equity of Sagittarius is owned by
Filipinos and/or Filipino-owned corporations while about 40% is owned by Indophil Resources NL, an
Australian company.46 It further claims that by such sale and transfer of shares, "WMCP has ceased
to be connected in any way with WMC."47

By virtue of such sale and transfer, the DENR Secretary, by Order of December 18,
2001,48 approved the transfer and registration of the subject FTAA from WMCP to Sagittarius. Said
Order, however, was appealed by Lepanto Consolidated Mining Co. (Lepanto) to the Office of the
President which upheld it by Decision of July 23, 2002.49 Its motion for reconsideration having been
denied by the Office of the President by Resolution of November 12, 2002,50 Lepanto filed a petition
for review51 before the Court of Appeals. Incidentally, two other petitions for review related to the
approval of the transfer and registration of the FTAA to Sagittarius were recently resolved by this
Court.52

It bears stressing that this case has not been rendered moot either by the transfer and registration of
the FTAA to a Filipino-owned corporation or by the non-issuance of a temporary restraining order or
a preliminary injunction to stay the above-said July 23, 2002 decision of the Office of the
President.53 The validity of the transfer remains in dispute and awaits final judicial determination.
This assumes, of course, that such transfer cures the FTAA's alleged unconstitutionality, on which
question judgment is reserved.

WMCP also points out that the original claimowners of the major mineralized areas included in the
WMCP FTAA, namely, Sagittarius, Tampakan Mining Corporation, and Southcot Mining Corporation,
are all Filipino-owned corporations,54 each of which was a holder of an approved Mineral Production
Sharing Agreement awarded in 1994, albeit their respective mineral claims were subsumed in the
WMCP FTAA;55 and that these three companies are the same companies that consolidated their
interests in Sagittarius to whom WMC sold its 100% equity in WMCP.56 WMCP concludes that in the
event that the FTAA is invalidated, the MPSAs of the three corporations would be revived and the
mineral claims would revert to their original claimants.57

These circumstances, while informative, are hardly significant in the resolution of this case, it
involving the validity of the FTAA, not the possible consequences of its invalidation.

Of the above-enumerated seven grounds cited by petitioners, as will be shown later, only the first
and the last need be delved into; in the latter, the discussion shall dwell only insofar as it questions
the effectivity of E. O. No. 279 by virtue of which order the questioned FTAA was forged.

Before going into the substantive issues, the procedural questions posed by respondents shall first
be tackled.

REQUISITES FOR JUDICIAL REVIEW

When an issue of constitutionality is raised, this Court can exercise its power of judicial review only if
the following requisites are present:

(1) The existence of an actual and appropriate case;

(2) A personal and substantial interest of the party raising the constitutional question;

(3) The exercise of judicial review is pleaded at the earliest opportunity; and

(4) The constitutional question is the lis mota of the case. 58

Respondents claim that the first three requisites are not present.
Section 1, Article VIII of the Constitution states that "(j)udicial power includes the duty of the courts of
justice to settle actual controversies involving rights which are legally demandable and enforceable."
The power of judicial review, therefore, is limited to the determination of actual cases and
controversies.59

An actual case or controversy means an existing case or controversy that is appropriate or ripe for
determination, not conjectural or anticipatory,60 lest the decision of the court would amount to an
advisory opinion.61 The power does not extend to hypothetical questions62 since any attempt at
abstraction could only lead to dialectics and barren legal questions and to sterile conclusions
unrelated to actualities.63

"Legal standing" or locus standi has been defined as a personal and substantial interest in the case
such that the party has sustained or will sustain direct injury as a result of the governmental act that
is being challenged,64alleging more than a generalized grievance.65 The gist of the question of
standing is whether a party alleges "such personal stake in the outcome of the controversy as to
assure that concrete adverseness which sharpens the presentation of issues upon which the court
depends for illumination of difficult constitutional questions."66 Unless a person is injuriously affected
in any of his constitutional rights by the operation of statute or ordinance, he has no standing.67

Petitioners traverse a wide range of sectors. Among them are La Bugal B'laan Tribal Association,
Inc., a farmers and indigenous people's cooperative organized under Philippine laws representing a
community actually affected by the mining activities of WMCP, members of said cooperative,68 as
well as other residents of areas also affected by the mining activities of WMCP.69 These petitioners
have standing to raise the constitutionality of the questioned FTAA as they allege a personal and
substantial injury. They claim that they would suffer "irremediable displacement"70 as a result of the
implementation of the FTAA allowing WMCP to conduct mining activities in their area of residence.
They thus meet the appropriate case requirement as they assert an interest adverse to that of
respondents who, on the other hand, insist on the FTAA's validity.

In view of the alleged impending injury, petitioners also have standing to assail the validity of E.O.
No. 279, by authority of which the FTAA was executed.

Public respondents maintain that petitioners, being strangers to the FTAA, cannot sue either or both
contracting parties to annul it.71 In other words, they contend that petitioners are not real parties in
interest in an action for the annulment of contract.

Public respondents' contention fails. The present action is not merely one for annulment of contract
but for prohibition and mandamus. Petitioners allege that public respondents acted without or in
excess of jurisdiction in implementing the FTAA, which they submit is unconstitutional. As the case
involves constitutional questions, this Court is not concerned with whether petitioners are real parties
in interest, but with whether they have legal standing. As held in Kilosbayan v. Morato:72

x x x. "It is important to note . . . that standing because of its constitutional and public policy
underpinnings, is very different from questions relating to whether a particular plaintiff is the real
party in interest or has capacity to sue. Although all three requirements are directed towards
ensuring that only certain parties can maintain an action, standing restrictions require a partial
consideration of the merits, as well as broader policy concerns relating to the proper role of the
judiciary in certain areas.["] (FRIEDENTHAL, KANE AND MILLER, CIVIL PROCEDURE 328 [1985])

Standing is a special concern in constitutional law because in some cases suits are brought not by
parties who have been personally injured by the operation of a law or by official action taken, but by
concerned citizens, taxpayers or voters who actually sue in the public interest. Hence, the question
in standing is whether such parties have "alleged such a personal stake in the outcome of the
controversy as to assure that concrete adverseness which sharpens the presentation of issues upon
which the court so largely depends for illumination of difficult constitutional questions." (Baker v.
Carr, 369 U.S. 186, 7 L.Ed.2d 633 [1962].)

As earlier stated, petitioners meet this requirement.

The challenge against the constitutionality of R.A. No. 7942 and DAO No. 96-40 likewise fulfills the
requisites of justiciability. Although these laws were not in force when the subject FTAA was entered
into, the question as to their validity is ripe for adjudication.

The WMCP FTAA provides:

14.3 Future Legislation

Any term and condition more favourable to Financial &Technical Assistance Agreement contractors
resulting from repeal or amendment of any existing law or regulation or from the enactment of a law,
regulation or administrative order shall be considered a part of this Agreement.

It is undisputed that R.A. No. 7942 and DAO No. 96-40 contain provisions that are more favorable to
WMCP, hence, these laws, to the extent that they are favorable to WMCP, govern the FTAA.

In addition, R.A. No. 7942 explicitly makes certain provisions apply to pre-existing agreements.

SEC. 112. Non-impairment of Existing Mining/Quarrying Rights. – x x x That the provisions of

Chapter XIV on government share in mineral production-sharing agreement and of Chapter XVI on
incentives of this Act shall immediately govern and apply to a mining lessee or contractor unless the
mining lessee or contractor indicates his intention to the secretary, in writing, not to avail of said
provisions x x x Provided, finally, That such leases, production-sharing agreements, financial or
technical assistance agreements shall comply with the applicable provisions of this Act and its
implementing rules and regulations.

As there is no suggestion that WMCP has indicated its intention not to avail of the provisions of
Chapter XVI of R.A. No. 7942, it can safely be presumed that they apply to the WMCP FTAA.

Misconstruing the application of the third requisite for judicial review – that the exercise of the review
is pleaded at the earliest opportunity – WMCP points out that the petition was filed only almost two
years after the execution of the FTAA, hence, not raised at the earliest opportunity.

The third requisite should not be taken to mean that the question of constitutionality must be raised
immediately after the execution of the state action complained of. That the question of
constitutionality has not been raised before is not a valid reason for refusing to allow it to be raised
later.73 A contrary rule would mean that a law, otherwise unconstitutional, would lapse into
constitutionality by the mere failure of the proper party to promptly file a case to challenge the same.

PROPRIETY OF PROHIBITION AND MANDAMUS

Before the effectivity in July 1997 of the Revised Rules of Civil Procedure, Section 2 of Rule 65 read:

SEC. 2. Petition for prohibition. – When the proceedings of any tribunal, corporation, board, or
person, whether exercising functions judicial or ministerial, are without or in excess of its or his
jurisdiction, or with grave abuse of discretion, and there is no appeal or any other plain, speedy, and
adequate remedy in the ordinary course of law, a person aggrieved thereby may file a verified
petition in the proper court alleging the facts with certainty and praying that judgment be rendered
commanding the defendant to desist from further proceeding in the action or matter specified
therein.

Prohibition is a preventive remedy.74 It seeks a judgment ordering the defendant to desist from
continuing with the commission of an act perceived to be illegal.75

The petition for prohibition at bar is thus an appropriate remedy. While the execution of the contract
itself may be fait accompli, its implementation is not. Public respondents, in behalf of the
Government, have obligations to fulfill under said contract. Petitioners seek to prevent them from
fulfilling such obligations on the theory that the contract is unconstitutional and, therefore, void.

The propriety of a petition for prohibition being upheld, discussion of the propriety of the mandamus
aspect of the petition is rendered unnecessary.

HIERARCHY OF COURTS

The contention that the filing of this petition violated the rule on hierarchy of courts does not likewise
lie. The rule has been explained thus:

Between two courts of concurrent original jurisdiction, it is the lower court that should initially pass
upon the issues of a case. That way, as a particular case goes through the hierarchy of courts, it is
shorn of all but the important legal issues or those of first impression, which are the proper subject of
attention of the appellate court. This is a procedural rule borne of experience and adopted to
improve the administration of justice.

This Court has consistently enjoined litigants to respect the hierarchy of courts. Although this Court
has concurrent jurisdiction with the Regional Trial Courts and the Court of Appeals to issue writs of
certiorari, prohibition, mandamus, quo warranto, habeas corpus and injunction, such concurrence
does not give a party unrestricted freedom of choice of court forum. The resort to this Court's primary
jurisdiction to issue said writs shall be allowed only where the redress desired cannot be obtained in
the appropriate courts or where exceptional and compelling circumstances justify such invocation.
We held in People v. Cuaresma that:

A becoming regard for judicial hierarchy most certainly indicates that petitions for the issuance of
extraordinary writs against first level ("inferior") courts should be filed with the Regional Trial Court,
and those against the latter, with the Court of Appeals. A direct invocation of the Supreme Court's
original jurisdiction to issue these writs should be allowed only where there are special and important
reasons therefor, clearly and specifically set out in the petition. This is established policy. It is a
policy necessary to prevent inordinate demands upon the Court's time and attention which are better
devoted to those matters within its exclusive jurisdiction, and to prevent further over-crowding of the
Court's docket x x x.76 [Emphasis supplied.]

The repercussions of the issues in this case on the Philippine mining industry, if not the national
economy, as well as the novelty thereof, constitute exceptional and compelling circumstances to
justify resort to this Court in the first instance.

In all events, this Court has the discretion to take cognizance of a suit which does not satisfy the
requirements of an actual case or legal standing when paramount public interest is involved.77 When
the issues raised are of paramount importance to the public, this Court may brush aside
technicalities of procedure.78

II

Petitioners contend that E.O. No. 279 did not take effect because its supposed date of effectivity
came after President Aquino had already lost her legislative powers under the Provisional
Constitution.

And they likewise claim that the WMC FTAA, which was entered into pursuant to E.O. No. 279,
violates Section 2, Article XII of the Constitution because, among other reasons:

(1) It allows foreign-owned companies to extend more than mere financial or technical
assistance to the State in the exploitation, development, and utilization of minerals,
petroleum, and other mineral oils, and even permits foreign owned companies to "operate
and manage mining activities."

(2) It allows foreign-owned companies to extend both technical and financial assistance,
instead of "either technical or financial assistance."

To appreciate the import of these issues, a visit to the history of the pertinent constitutional provision,
the concepts contained therein, and the laws enacted pursuant thereto, is in order.

Section 2, Article XII reads in full:

Sec. 2. All lands of the public domain, waters, 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. With the exception of agricultural lands, all other natural
resources shall not be alienated. The exploration, development, and utilization of natural resources
shall be under the full control and supervision of the State. The State may directly undertake such
activities or it may enter into co-production, joint venture, or production-sharing agreements with
Filipino citizens, or corporations or associations at least sixty per centum of whose capital is owned
by such citizens. Such agreements may be for a period not exceeding twenty-five years, renewable
for not more than twenty-five years, and under such terms and conditions as may be provided by
law. In cases of water rights for irrigation, water supply, fisheries, or industrial uses other than the
development of water power, beneficial use may be the measure and limit of the grant.

The State shall protect the nation's marine wealth in its archipelagic waters, territorial sea, and
exclusive economic zone, and reserve its use and enjoyment exclusively to Filipino citizens.

The Congress may, by law, allow small-scale utilization of natural resources by Filipino citizens, as
well as cooperative fish farming, with priority to subsistence fishermen and fish-workers in rivers,
lakes, bays, and lagoons.

The President may enter into agreements with foreign-owned corporations involving either technical
or financial assistance for large-scale exploration, development, and utilization of minerals,
petroleum, and other mineral oils according to the general terms and conditions provided by law,
based on real contributions to the economic growth and general welfare of the country. In such
agreements, the State shall promote the development and use of local scientific and technical
resources.
The President shall notify the Congress of every contract entered into in accordance with this
provision, within thirty days from its execution.

THE SPANISH REGIME AND THE REGALIAN DOCTRINE

The first sentence of Section 2 embodies the Regalian doctrine or jura regalia. Introduced by Spain
into these Islands, this feudal concept is based on the State's power of dominium, which is the
capacity of the State to own or acquire property.79

In its broad sense, the term "jura regalia" refers to royal rights, or those rights which the King has by
virtue of his prerogatives. In Spanish law, it refers to a right which the sovereign has over anything in
which a subject has a right of property or propriedad. These were rights enjoyed during feudal times
by the king as the sovereign.

The theory of the feudal system was that title to all lands was originally held by the King, and while
the use of lands was granted out to others who were permitted to hold them under certain
conditions, the King theoretically retained the title. By fiction of law, the King was regarded as the
original proprietor of all lands, and the true and only source of title, and from him all lands were held.
The theory of jura regalia was therefore nothing more than a natural fruit of conquest.80

The Philippines having passed to Spain by virtue of discovery and conquest,81 earlier Spanish
decrees declared that "all lands were held from the Crown."82

The Regalian doctrine extends not only to land but also to "all natural wealth that may be found in
the bowels of the earth."83 Spain, in particular, recognized the unique value of natural resources,
viewing them, especially minerals, as an abundant source of revenue to finance its wars against
other nations.84 Mining laws during the Spanish regime reflected this perspective.85

THE AMERICAN OCCUPATION AND THE CONCESSION REGIME

By the Treaty of Paris of December 10, 1898, Spain ceded "the archipelago known as the Philippine
Islands" to the United States. The Philippines was hence governed by means of organic acts that
were in the nature of charters serving as a Constitution of the occupied territory from 1900 to
1935.86 Among the principal organic acts of the Philippines was the Act of Congress of July 1, 1902,
more commonly known as the Philippine Bill of 1902, through which the United States Congress
assumed the administration of the Philippine Islands.87 Section 20 of said Bill reserved the
disposition of mineral lands of the public domain from sale. Section 21 thereof allowed the free and
open exploration, occupation and purchase of mineral deposits not only to citizens of the Philippine
Islands but to those of the United States as well:

Sec. 21. That all valuable mineral deposits in public lands in the Philippine Islands, both surveyed
and unsurveyed, are hereby declared to be free and open to exploration, occupation and purchase,
and the land in which they are found, to occupation and purchase, by citizens of the United States or
of said Islands: Provided, That when on any lands in said Islands entered and occupied as
agricultural lands under the provisions of this Act, but not patented, mineral deposits have been
found, the working of such mineral deposits is forbidden until the person, association, or corporation
who or which has entered and is occupying such lands shall have paid to the Government of said
Islands such additional sum or sums as will make the total amount paid for the mineral claim or
claims in which said deposits are located equal to the amount charged by the Government for the
same as mineral claims.
Unlike Spain, the United States considered natural resources as a source of wealth for its nationals
and saw fit to allow both Filipino and American citizens to explore and exploit minerals in public
lands, and to grant patents to private mineral lands.88 A person who acquired ownership over a
parcel of private mineral land pursuant to the laws then prevailing could exclude other persons, even
the State, from exploiting minerals within his property.89 Thus, earlier jurisprudence90 held that:

A valid and subsisting location of mineral land, made and kept up in accordance with the provisions
of the statutes of the United States, has the effect of a grant by the United States of the present and
exclusive possession of the lands located, and this exclusive right of possession and enjoyment
continues during the entire life of the location. x x x.

x x x.

The discovery of minerals in the ground by one who has a valid mineral location perfects his claim
and his location not only against third persons, but also against the Government. x x x. [Italics in the
original.]

The Regalian doctrine and the American system, therefore, differ in one essential respect. Under the
Regalian theory, mineral rights are not included in a grant of land by the state; under the American
doctrine, mineral rights are included in a grant of land by the government.91

Section 21 also made possible the concession (frequently styled "permit", license" or
"lease")92 system.93 This was the traditional regime imposed by the colonial administrators for the
exploitation of natural resources in the extractive sector (petroleum, hard minerals, timber, etc.).94

Under the concession system, the concessionaire makes a direct equity investment for the purpose
of exploiting a particular natural resource within a given area.95 Thus, the concession amounts to
complete control by the concessionaire over the country's natural resource, for it is given exclusive
and plenary rights to exploit a particular resource at the point of extraction.96 In consideration for the
right to exploit a natural resource, the concessionaire either pays rent or royalty, which is a fixed
percentage of the gross proceeds.97

Later statutory enactments by the legislative bodies set up in the Philippines adopted the contractual
framework of the concession.98 For instance, Act No. 2932,99 approved on August 31, 1920, which
provided for the exploration, location, and lease of lands containing petroleum and other mineral oils
and gas in the Philippines, and Act No. 2719,100 approved on May 14, 1917, which provided for the
leasing and development of coal lands in the Philippines, both utilized the concession system.101

THE 1935 CONSTITUTION AND THE NATIONALIZATION OF NATURAL RESOURCES

By the Act of United States Congress of March 24, 1934, popularly known as the Tydings-McDuffie
Law, the People of the Philippine Islands were authorized to adopt a constitution.102 On July 30,
1934, the Constitutional Convention met for the purpose of drafting a constitution, and the
Constitution subsequently drafted was approved by the Convention on February 8, 1935.103 The
Constitution was submitted to the President of the United States on March 18, 1935.104 On March 23,
1935, the President of the United States certified that the Constitution conformed substantially with
the provisions of the Act of Congress approved on March 24, 1934.105 On May 14, 1935, the
Constitution was ratified by the Filipino people.106

The 1935 Constitution adopted the Regalian doctrine, declaring all natural resources of the
Philippines, including mineral lands and minerals, to be property belonging to the State.107 As
adopted in a republican system, the medieval concept of jura regalia is stripped of royal overtones
and ownership of the land is vested in the State.108

Section 1, Article XIII, on Conservation and Utilization of Natural Resources, of the 1935 Constitution
provided:

SECTION 1. All agricultural, timber, and mineral lands of the public domain, waters,
minerals, coal, petroleum, and other mineral oils, all forces of potential energy, and other
natural resources of the Philippines belong to the State, and their disposition, exploitation,
development, or utilization shall be limited to citizens of the Philippines, or to corporations or
associations at least sixty per centum of the capital of which is owned by such citizens,
subject to any existing right, grant, lease, or concession at the time of the inauguration of the
Government established under this Constitution. Natural resources, with the exception of
public agricultural land, shall not be alienated, and no license, concession, or lease for the
exploitation, development, or utilization of any of the natural resources shall be granted for a
period exceeding twenty-five years, except as to water rights for irrigation, water supply,
fisheries, or industrial uses other than the development of water power, in which cases
beneficial use may be the measure and the limit of the grant.

The nationalization and conservation of the natural resources of the country was one of the fixed and
dominating objectives of the 1935 Constitutional Convention.109 One delegate relates:

There was an overwhelming sentiment in the Convention in favor of the principle of state ownership
of natural resources and the adoption of the Regalian doctrine. State ownership of natural resources
was seen as a necessary starting point to secure recognition of the state's power to control their
disposition, exploitation, development, or utilization. The delegates of the Constitutional Convention
very well knew that the concept of State ownership of land and natural resources was introduced by
the Spaniards, however, they were not certain whether it was continued and applied by the
Americans. To remove all doubts, the Convention approved the provision in the Constitution
affirming the Regalian doctrine.

The adoption of the principle of state ownership of the natural resources and of the Regalian
doctrine was considered to be a necessary starting point for the plan of nationalizing and conserving
the natural resources of the country. For with the establishment of the principle of state ownership of
the natural resources, it would not be hard to secure the recognition of the power of the State to
control their disposition, exploitation, development or utilization.110

The nationalization of the natural resources was intended (1) to insure their conservation for Filipino
posterity; (2) to serve as an instrument of national defense, helping prevent the extension to the
country of foreign control through peaceful economic penetration; and (3) to avoid making the
Philippines a source of international conflicts with the consequent danger to its internal security and
independence.111

The same Section 1, Article XIII also adopted the concession system, expressly permitting the State
to grant licenses, concessions, or leases for the exploitation, development, or utilization of any of the
natural resources. Grants, however, were limited to Filipinos or entities at least 60% of the capital of
which is owned by Filipinos. lawph!l.ne+

The swell of nationalism that suffused the 1935 Constitution was radically diluted when on
November 1946, the Parity Amendment, which came in the form of an "Ordinance Appended to the
Constitution," was ratified in a plebiscite.112 The Amendment extended, from July 4, 1946 to July 3,
1974, the right to utilize and exploit our natural resources to citizens of the United States and
business enterprises owned or controlled, directly or indirectly, by citizens of the United States:113

Notwithstanding the provision of section one, Article Thirteen, and section eight, Article Fourteen, of
the foregoing Constitution, during the effectivity of the Executive Agreement entered into by the
President of the Philippines with the President of the United States on the fourth of July, nineteen
hundred and forty-six, pursuant to the provisions of Commonwealth Act Numbered Seven hundred
and thirty-three, but in no case to extend beyond the third of July, nineteen hundred and seventy-
four, the disposition, exploitation, development, and utilization of all agricultural, timber, and mineral
lands of the public domain, waters, minerals, coals, petroleum, and other mineral oils, all forces and
sources of potential energy, and other natural resources of the Philippines, and the operation of
public utilities, shall, if open to any person, be open to citizens of the United States and to all forms
of business enterprise owned or controlled, directly or indirectly, by citizens of the United States in
the same manner as to, and under the same conditions imposed upon, citizens of the Philippines or
corporations or associations owned or controlled by citizens of the Philippines.

The Parity Amendment was subsequently modified by the 1954 Revised Trade Agreement, also
known as the Laurel-Langley Agreement, embodied in Republic Act No. 1355.114

THE PETROLEUM ACT OF 1949 AND THE CONCESSION SYSTEM

In the meantime, Republic Act No. 387,115 also known as the Petroleum Act of 1949, was approved
on June 18, 1949.

The Petroleum Act of 1949 employed the concession system for the exploitation of the nation's
petroleum resources. Among the kinds of concessions it sanctioned were exploration and
exploitation concessions, which respectively granted to the concessionaire the exclusive right to
explore for116 or develop117 petroleum within specified areas.

Concessions may be granted only to duly qualified persons118 who have sufficient finances,
organization, resources, technical competence, and skills necessary to conduct the operations to be
undertaken.119

Nevertheless, the Government reserved the right to undertake such work itself.120 This proceeded
from the theory that all natural deposits or occurrences of petroleum or natural gas in public and/or
private lands in the Philippines belong to the State.121 Exploration and exploitation concessions did
not confer upon the concessionaire ownership over the petroleum lands and petroleum
deposits.122 However, they did grant concessionaires the right to explore, develop, exploit, and utilize
them for the period and under the conditions determined by the law.123

Concessions were granted at the complete risk of the concessionaire; the Government did not
guarantee the existence of petroleum or undertake, in any case, title warranty.124

Concessionaires were required to submit information as maybe required by the Secretary of

Agriculture and Natural Resources, including reports of geological and geophysical examinations, as
well as production reports.125Exploration126 and exploitation127 concessionaires were also required to
submit work programs. lavvphi 1.net

Exploitation concessionaires, in particular, were obliged to pay an annual exploitation tax,128 the
object of which is to induce the concessionaire to actually produce petroleum, and not simply to sit
on the concession without developing or exploiting it.129 These concessionaires were also bound to
pay the Government royalty, which was not less than 12½% of the petroleum produced and saved,
less that consumed in the operations of the concessionaire.130 Under Article 66, R.A. No. 387, the
exploitation tax may be credited against the royalties so that if the concessionaire shall be actually
producing enough oil, it would not actually be paying the exploitation tax.131

Failure to pay the annual exploitation tax for two consecutive years,132 or the royalty due to the
Government within one year from the date it becomes due,133 constituted grounds for the
cancellation of the concession. In case of delay in the payment of the taxes or royalty imposed by
the law or by the concession, a surcharge of 1% per month is exacted until the same are paid.134

As a rule, title rights to all equipment and structures that the concessionaire placed on the land
belong to the exploration or exploitation concessionaire.135 Upon termination of such concession, the
concessionaire had a right to remove the same.136

The Secretary of Agriculture and Natural Resources was tasked with carrying out the provisions of
the law, through the Director of Mines, who acted under the Secretary's immediate supervision and
control.137 The Act granted the Secretary the authority to inspect any operation of the concessionaire
and to examine all the books and accounts pertaining to operations or conditions related to payment
of taxes and royalties.138

The same law authorized the Secretary to create an Administration Unit and a Technical
Board.139 The Administration Unit was charged, inter alia, with the enforcement of the provisions of
the law.140 The Technical Board had, among other functions, the duty to check on the performance of
concessionaires and to determine whether the obligations imposed by the Act and its implementing
regulations were being complied with.141

Victorio Mario A. Dimagiba, Chief Legal Officer of the Bureau of Energy Development, analyzed the
benefits and drawbacks of the concession system insofar as it applied to the petroleum industry:

Advantages of Concession. Whether it emphasizes income tax or royalty, the most positive aspect of
the concession system is that the State's financial involvement is virtually risk free and administration
is simple and comparatively low in cost. Furthermore, if there is a competitive allocation of the
resource leading to substantial bonuses and/or greater royalty coupled with a relatively high level of
taxation, revenue accruing to the State under the concession system may compare favorably with
other financial arrangements.

Disadvantages of Concession. There are, however, major negative aspects to this system. Because
the Government's role in the traditional concession is passive, it is at a distinct disadvantage in
managing and developing policy for the nation's petroleum resource. This is true for several reasons.
First, even though most concession agreements contain covenants requiring diligence in operations
and production, this establishes only an indirect and passive control of the host country in resource
development. Second, and more importantly, the fact that the host country does not directly
participate in resource management decisions inhibits its ability to train and employ its nationals in
petroleum development. This factor could delay or prevent the country from effectively engaging in
the development of its resources. Lastly, a direct role in management is usually necessary in order
to obtain a knowledge of the international petroleum industry which is important to an appreciation of
the host country's resources in relation to those of other countries.142

Other liabilities of the system have also been noted:

x x x there are functional implications which give the concessionaire great economic power arising
from its exclusive equity holding. This includes, first, appropriation of the returns of the undertaking,
subject to a modest royalty; second, exclusive management of the project; third, control of
production of the natural resource, such as volume of production, expansion, research and
development; and fourth, exclusive responsibility for downstream operations, like processing,
marketing, and distribution. In short, even if nominally, the state is the sovereign and owner of the
natural resource being exploited, it has been shorn of all elements of control over such natural
resource because of the exclusive nature of the contractual regime of the concession. The
concession system, investing as it does ownership of natural resources, constitutes a consistent
inconsistency with the principle embodied in our Constitution that natural resources belong to the
state and shall not be alienated, not to mention the fact that the concession was the bedrock of the
colonial system in the exploitation of natural resources.143

Eventually, the concession system failed for reasons explained by Dimagiba:

Notwithstanding the good intentions of the Petroleum Act of 1949, the concession system could not
have properly spurred sustained oil exploration activities in the country, since it assumed that such a
capital-intensive, high risk venture could be successfully undertaken by a single individual or a small
company. In effect, concessionaires' funds were easily exhausted. Moreover, since the concession
system practically closed its doors to interested foreign investors, local capital was stretched to the
limits. The old system also failed to consider the highly sophisticated technology and expertise
required, which would be available only to multinational companies.144

A shift to a new regime for the development of natural resources thus seemed imminent.

PRESIDENTIAL DECREE NO. 87, THE 1973 CONSTITUTION AND THE SERVICE CONTRACT
SYSTEM

The promulgation on December 31, 1972 of Presidential Decree No. 87,145 otherwise known as The
Oil Exploration and Development Act of 1972 signaled such a transformation. P.D. No. 87 permitted
the government to explore for and produce indigenous petroleum through "service contracts."146

"Service contracts" is a term that assumes varying meanings to different people, and it has carried
many names in different countries, like "work contracts" in Indonesia, "concession agreements" in
Africa, "production-sharing agreements" in the Middle East, and "participation agreements" in Latin
America.147 A functional definition of "service contracts" in the Philippines is provided as follows:

A service contract is a contractual arrangement for engaging in the exploitation and development of
petroleum, mineral, energy, land and other natural resources by which a government or its agency,
or a private person granted a right or privilege by the government authorizes the other party (service
contractor) to engage or participate in the exercise of such right or the enjoyment of the privilege, in
that the latter provides financial or technical resources, undertakes the exploitation or production of a
given resource, or directly manages the productive enterprise, operations of the exploration and
exploitation of the resources or the disposition of marketing or resources.148

In a service contract under P.D. No. 87, service and technology are furnished by the service
contractor for which it shall be entitled to the stipulated service fee.149 The contractor must be
technically competent and financially capable to undertake the operations required in the contract.150

Financing is supposed to be provided by the Government to which all petroleum produced

belongs.151 In case the Government is unable to finance petroleum exploration operations, the
contractor may furnish services, technology and financing, and the proceeds of sale of the petroleum
produced under the contract shall be the source of funds for payment of the service fee and the
operating expenses due the contractor.152 The contractor shall undertake, manage and execute
petroleum operations, subject to the government overseeing the management of the
operations.153 The contractor provides all necessary services and technology and the requisite
financing, performs the exploration work obligations, and assumes all exploration risks such that if
no petroleum is produced, it will not be entitled to reimbursement.154 Once petroleum in commercial
quantity is discovered, the contractor shall operate the field on behalf of the government.155

P.D. No. 87 prescribed minimum terms and conditions for every service contract.156 It also granted
the contractor certain privileges, including exemption from taxes and payment of tariff duties,157 and
permitted the repatriation of capital and retention of profits abroad.158

Ostensibly, the service contract system had certain advantages over the concession regime.159 It has
been opined, though, that, in the Philippines, our concept of a service contract, at least in the
petroleum industry, was basically a concession regime with a production-sharing element.160

On January 17, 1973, then President Ferdinand E. Marcos proclaimed the ratification of a new
Constitution.161Article XIV on the National Economy and Patrimony contained provisions similar to
the 1935 Constitution with regard to Filipino participation in the nation's natural resources. Section 8,
Article XIV thereof provides:

Sec. 8. All lands of the public domain, waters, minerals, coal, petroleum and other mineral oils, all
forces of potential energy, fisheries, wildlife, and other natural resources of the Philippines belong to
the State. With the exception of agricultural, industrial or commercial, residential and resettlement
lands of the public domain, natural resources shall not be alienated, and no license, concession, or
lease for the exploration, development, exploitation, or utilization of any of the natural resources
shall be granted for a period exceeding twenty-five years, renewable for not more than twenty-five
years, except as to water rights for irrigation, water supply, fisheries, or industrial uses other than the
development of water power, in which cases beneficial use may be the measure and the limit of the
grant.

While Section 9 of the same Article maintained the Filipino-only policy in the enjoyment of natural
resources, it also allowed Filipinos, upon authority of the Batasang Pambansa, to enter into service
contracts with any person or entity for the exploration or utilization of natural resources.

Sec. 9. The disposition, exploration, development, exploitation, or utilization of any of the natural
resources of the Philippines shall be limited to citizens, or to corporations or associations at least
sixty per centum of which is owned by such citizens. The Batasang Pambansa, in the national
interest, may allow such citizens, corporations or associations to enter into service contracts for
financial, technical, management, or other forms of assistance with any person or entity for the
exploration, or utilization of any of the natural resources. Existing valid and binding service contracts
for financial, technical, management, or other forms of assistance are hereby recognized as such.
[Emphasis supplied.]

The concept of service contracts, according to one delegate, was borrowed from the methods
followed by India, Pakistan and especially Indonesia in the exploration of petroleum and mineral
oils.162 The provision allowing such contracts, according to another, was intended to "enhance the
proper development of our natural resources since Filipino citizens lack the needed capital and
technical know-how which are essential in the proper exploration, development and exploitation of
the natural resources of the country."163

The original idea was to authorize the government, not private entities, to enter into service contracts
with foreign entities.164 As finally approved, however, a citizen or private entity could be allowed by
the National Assembly to enter into such service contract.165 The prior approval of the National
Assembly was deemed sufficient to protect the national interest.166 Notably, none of the laws
allowing service contracts were passed by the Batasang Pambansa. Indeed, all of them were
enacted by presidential decree.

On March 13, 1973, shortly after the ratification of the new Constitution, the President promulgated
Presidential Decree No. 151.167 The law allowed Filipino citizens or entities which have acquired
lands of the public domain or which own, hold or control such lands to enter into service contracts for
financial, technical, management or other forms of assistance with any foreign persons or entity for
the exploration, development, exploitation or utilization of said lands.168

Presidential Decree No. 463,169 also known as The Mineral Resources Development Decree of 1974,
was enacted on May 17, 1974. Section 44 of the decree, as amended, provided that a lessee of a
mining claim may enter into a service contract with a qualified domestic or foreign contractor for the
exploration, development and exploitation of his claims and the processing and marketing of the
product thereof.

Presidential Decree No. 704170 (The Fisheries Decree of 1975), approved on May 16, 1975, allowed
Filipinos engaged in commercial fishing to enter into contracts for financial, technical or other forms
of assistance with any foreign person, corporation or entity for the production, storage, marketing
and processing of fish and fishery/aquatic products.171

Presidential Decree No. 705172 (The Revised Forestry Code of the Philippines), approved on May 19,
1975, allowed "forest products licensees, lessees, or permitees to enter into service contracts for
financial, technical, management, or other forms of assistance . . . with any foreign person or entity
for the exploration, development, exploitation or utilization of the forest resources."173

Yet another law allowing service contracts, this time for geothermal resources, was Presidential
Decree No. 1442,174 which was signed into law on June 11, 1978. Section 1 thereof authorized the
Government to enter into service contracts for the exploration, exploitation and development of
geothermal resources with a foreign contractor who must be technically and financially capable of
undertaking the operations required in the service contract.

Thus, virtually the entire range of the country's natural resources –from petroleum and minerals to
geothermal energy, from public lands and forest resources to fishery products – was well covered by
apparent legal authority to engage in the direct participation or involvement of foreign persons or
corporations (otherwise disqualified) in the exploration and utilization of natural resources through
service contracts.175

THE 1987 CONSTITUTION AND TECHNICAL OR FINANCIAL ASSISTANCE AGREEMENTS

After the February 1986 Edsa Revolution, Corazon C. Aquino took the reins of power under a
revolutionary government. On March 25, 1986, President Aquino issued Proclamation No.
3,176 promulgating the Provisional Constitution, more popularly referred to as the Freedom
Constitution. By authority of the same Proclamation, the President created a Constitutional
Commission (CONCOM) to draft a new constitution, which took effect on the date of its ratification
on February 2, 1987.177

The 1987 Constitution retained the Regalian doctrine. The first sentence of Section 2, Article XII
states: "All lands of the public domain, waters, 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."
Like the 1935 and 1973 Constitutions before it, the 1987 Constitution, in the second sentence of the
same provision, prohibits the alienation of natural resources, except agricultural lands.

The third sentence of the same paragraph is new: "The exploration, development and utilization of
natural resources shall be under the full control and supervision of the State." The constitutional
policy of the State's "full control and supervision" over natural resources proceeds from the concept
of jura regalia, as well as the recognition of the importance of the country's natural resources, not
only for national economic development, but also for its security and national defense.178 Under this
provision, the State assumes "a more dynamic role" in the exploration, development and utilization of
natural resources.179

Conspicuously absent in Section 2 is the provision in the 1935 and 1973 Constitutions 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 public domain
through "license, concession or lease" is no longer allowed under the 1987 Constitution.180

Having omitted the provision on the concession system, Section 2 proceeded to introduce
"unfamiliar language":181

The State may directly undertake such activities or it may enter into co-production, joint venture, or
production-sharing agreements with Filipino citizens, or corporations or associations at least sixty
per centum of whose capital is owned by such citizens.

Consonant with the State's "full supervision and control" over natural resources, Section 2 offers the
State two "options."182 One, the State may directly undertake these activities itself; or two, it may
enter into co-production, joint venture, or production-sharing agreements with Filipino citizens, or
entities at least 60% of whose capital is owned by such citizens.

A third option is found in the third paragraph of the same section:

The Congress may, by law, allow small-scale utilization of natural resources by Filipino citizens, as
well as cooperative fish farming, with priority to subsistence fishermen and fish-workers in rivers,
lakes, bays, and lagoons.

While the second and third options are limited only to Filipino citizens or, in the case of the former, to
corporations or associations at least 60% of the capital of which is owned by Filipinos, a fourth
allows the participation of foreign-owned corporations. The fourth and fifth paragraphs of Section 2
provide:

The President may enter into agreements with foreign-owned corporations involving either technical
or financial assistance for large-scale exploration, development, and utilization of minerals,
petroleum, and other mineral oils according to the general terms and conditions provided by law,
based on real contributions to the economic growth and general welfare of the country. In such
agreements, the State shall promote the development and use of local scientific and technical
resources.

The President shall notify the Congress of every contract entered into in accordance with this
provision, within thirty days from its execution.
Although Section 2 sanctions the participation of foreign-owned corporations in the exploration,
development, and utilization of natural resources, it imposes certain limitations or conditions to
agreements with such corporations.

First, the parties to FTAAs. Only the President, in behalf of the State, may enter into these
agreements, and only with corporations. By contrast, under the 1973 Constitution, a Filipino
citizen, corporation or association may enter into a service contract with a "foreign person or
entity."

Second, the size of the activities: only large-scale exploration, development, and utilization is
allowed. The term "large-scale usually refers to very capital-intensive activities."183

Third, the natural resources subject of the activities is restricted to minerals, petroleum and
other mineral oils, the intent being to limit service contracts to those areas where Filipino
capital may not be sufficient.184

Fourth, consistency with the provisions of statute. The agreements must be in accordance
with the terms and conditions provided by law.

Fifth, Section 2 prescribes certain standards for entering into such agreements. The
agreements must be based on real contributions to economic growth and general welfare of
the country.

Sixth, the agreements must contain rudimentary stipulations for the promotion of the
development and use of local scientific and technical resources.

Seventh, the notification requirement. The President shall notify Congress of every financial
or technical assistance agreement entered into within thirty days from its execution.

Finally, the scope of the agreements. While the 1973 Constitution referred to "service
contracts for financial, technical, management, or other forms of assistance" the 1987
Constitution provides for "agreements. . . involving either financial or technical assistance." It
bears noting that the phrases "service contracts" and "management or other forms of
assistance" in the earlier constitution have been omitted.

By virtue of her legislative powers under the Provisional Constitution,185 President Aquino, on July
10, 1987, signed into law E.O. No. 211 prescribing the interim procedures in the processing and
approval of applications for the exploration, development and utilization of minerals. The omission in
the 1987 Constitution of the term "service contracts" notwithstanding, the said E.O. still referred to
them in Section 2 thereof:

Sec. 2. Applications for the exploration, development and utilization of mineral resources, including
renewal applications and applications for approval of operating agreements and mining service
contracts, shall be accepted and processed and may be approved x x x. [Emphasis supplied.]

The same law provided in its Section 3 that the "processing, evaluation and approval of all mining
applications . . . operating agreements and service contracts . . . shall be governed by Presidential
Decree No. 463, as amended, other existing mining laws, and their implementing rules and
regulations. . . ."
As earlier stated, on the 25th also of July 1987, the President issued E.O. No. 279 by authority of
which the subject WMCP FTAA was executed on March 30, 1995.

On March 3, 1995, President Ramos signed into law R.A. No. 7942. Section 15 thereof declares that
the Act "shall govern the exploration, development, utilization, and processing of all mineral
resources." Such declaration notwithstanding, R.A. No. 7942 does not actually cover all the modes
through which the State may undertake the exploration, development, and utilization of natural
resources.

The State, being the owner of the natural resources, is accorded the primary power and
responsibility in the exploration, development and utilization thereof. As such, it may undertake these
activities through four modes:

The State may directly undertake such activities.

(2) The State may enter into co-production, joint venture or production-sharing agreements
with Filipino citizens or qualified corporations.

(3) Congress may, by law, allow small-scale utilization of natural resources by Filipino
citizens.

(4) For the large-scale exploration, development and utilization of minerals, petroleum and
other mineral oils, the President may enter into agreements with foreign-owned corporations
involving technical or financial assistance.186

Except to charge the Mines and Geosciences Bureau of the DENR with performing researches and
surveys,187 and a passing mention of government-owned or controlled corporations,188 R.A. No. 7942
does not specify how the State should go about the first mode. The third mode, on the other hand, is
governed by Republic Act No. 7076189(the People's Small-Scale Mining Act of 1991) and other
pertinent laws.190 R.A. No. 7942 primarily concerns itself with the second and fourth modes.

Mineral production sharing, co-production and joint venture agreements are collectively classified by
R.A. No. 7942 as "mineral agreements."191 The Government participates the least in a mineral
production sharing agreement (MPSA). In an MPSA, the Government grants the contractor192 the
exclusive right to conduct mining operations within a contract area193 and shares in the gross
output.194 The MPSA contractor provides the financing, technology, management and personnel
necessary for the agreement's implementation.195 The total government share in an MPSA is the
excise tax on mineral products under Republic Act No. 7729,196 amending Section 151(a) of the
National Internal Revenue Code, as amended.197

In a co-production agreement (CA),198 the Government provides inputs to the mining operations
other than the mineral resource,199 while in a joint venture agreement (JVA), where the Government
enjoys the greatest participation, the Government and the JVA contractor organize a company with
both parties having equity shares.200 Aside from earnings in equity, the Government in a JVA is also
entitled to a share in the gross output.201The Government may enter into a CA202 or JVA203 with one
or more contractors. The Government's share in a CA or JVA is set out in Section 81 of the law:

The share of the Government in co-production and joint venture agreements shall be negotiated by
the Government and the contractor taking into consideration the: (a) capital investment of the
project, (b) the risks involved, (c) contribution of the project to the economy, and (d) other factors
that will provide for a fair and equitable sharing between the Government and the contractor. The
Government shall also be entitled to compensations for its other contributions which shall be agreed
upon by the parties, and shall consist, among other things, the contractor's income tax, excise tax,
special allowance, withholding tax due from the contractor's foreign stockholders arising from
dividend or interest payments to the said foreign stockholders, in case of a foreign national and all
such other taxes, duties and fees as provided for under existing laws.

All mineral agreements grant the respective contractors the exclusive right to conduct mining
operations and to extract all mineral resources found in the contract area.204 A "qualified person" may
enter into any of the mineral agreements with the Government.205 A "qualified person" is

any citizen of the Philippines with capacity to contract, or a corporation, partnership, association, or
cooperative organized or authorized for the purpose of engaging in mining, with technical and
financial capability to undertake mineral resources development and duly registered in accordance
with law at least sixty per centum (60%) of the capital of which is owned by citizens of the Philippines
x x x.206

The fourth mode involves "financial or technical assistance agreements." An FTAA is defined as "a
contract involving financial or technical assistance for large-scale exploration, development, and
utilization of natural resources."207 Any qualified person with technical and financial capability to
undertake large-scale exploration, development, and utilization of natural resources in the
Philippines may enter into such agreement directly with the Government through the DENR.208 For
the purpose of granting an FTAA, a legally organized foreign-owned corporation (any corporation,
partnership, association, or cooperative duly registered in accordance with law in which less than
50% of the capital is owned by Filipino citizens)209 is deemed a "qualified person."210

Other than the difference in contractors' qualifications, the principal distinction between mineral
agreements and FTAAs is the maximum contract area to which a qualified person may hold or be
granted.211 "Large-scale" under R.A. No. 7942 is determined by the size of the contract area, as
opposed to the amount invested (US $50,000,000.00), which was the standard under E.O. 279.

Like a CA or a JVA, an FTAA is subject to negotiation.212 The Government's contributions, in the

form of taxes, in an FTAA is identical to its contributions in the two mineral agreements, save that in
an FTAA:

The collection of Government share in financial or technical assistance agreement shall commence
after the financial or technical assistance agreement contractor has fully recovered its pre-operating
expenses, exploration, and development expenditures, inclusive.213

III

Having examined the history of the constitutional provision and statutes enacted pursuant thereto, a
consideration of the substantive issues presented by the petition is now in order.

THE EFFECTIVITY OF EXECUTIVE ORDER NO. 279

Petitioners argue that E.O. No. 279, the law in force when the WMC FTAA was executed, did not
come into effect.

E.O. No. 279 was signed into law by then President Aquino on July 25, 1987, two days before the
opening of Congress on July 27, 1987.214 Section 8 of the E.O. states that the same "shall take effect
immediately." This provision, according to petitioners, runs counter to Section 1 of E.O. No.
200,215 which provides:
SECTION 1. Laws shall take effect after fifteen days following the completion of their publication
either in the Official Gazette or in a newspaper of general circulation in the Philippines, unless it is
otherwise provided.216 [Emphasis supplied.]

On that premise, petitioners contend that E.O. No. 279 could have only taken effect fifteen days after
its publication at which time Congress had already convened and the President's power to legislate
had ceased.

Respondents, on the other hand, counter that the validity of E.O. No. 279 was settled in Miners
Association of the Philippines v. Factoran, supra. This is of course incorrect for the issue in Miners
Association was not the validity of E.O. No. 279 but that of DAO Nos. 57 and 82 which were issued
pursuant thereto.

Nevertheless, petitioners' contentions have no merit.

It bears noting that there is nothing in E.O. No. 200 that prevents a law from taking effect on a date
other than – even before – the 15-day period after its publication. Where a law provides for its own
date of effectivity, such date prevails over that prescribed by E.O. No. 200. Indeed, this is the very
essence of the phrase "unless it is otherwise provided" in Section 1 thereof. Section 1, E.O. No. 200,
therefore, applies only when a statute does not provide for its own date of effectivity.

What is mandatory under E.O. No. 200, and what due process requires, as this Court held in Tañada
v. Tuvera,217is the publication of the law for without such notice and publication, there would be no
basis for the application of the maxim "ignorantia legis n[eminem] excusat." It would be the height of
injustice to punish or otherwise burden a citizen for the transgression of a law of which he had no
notice whatsoever, not even a constructive one.

While the effectivity clause of E.O. No. 279 does not require its publication, it is not a ground for its
invalidation since the Constitution, being "the fundamental, paramount and supreme law of the
nation," is deemed written in the law.218 Hence, the due process clause,219 which, so Tañada held,
mandates the publication of statutes, is read into Section 8 of E.O. No. 279. Additionally, Section 1
of E.O. No. 200 which provides for publication "either in the Official Gazette or in a newspaper of
general circulation in the Philippines," finds suppletory application. It is significant to note that E.O.
No. 279 was actually published in the Official Gazette220 on August 3, 1987.

From a reading then of Section 8 of E.O. No. 279, Section 1 of E.O. No. 200, and Tañada v. Tuvera,
this Court holds that E.O. No. 279 became effective immediately upon its publication in the Official
Gazette on August 3, 1987.

That such effectivity took place after the convening of the first Congress is irrelevant. At the time
President Aquino issued E.O. No. 279 on July 25, 1987, she was still validly exercising legislative
powers under the Provisional Constitution.221 Article XVIII (Transitory Provisions) of the 1987
Constitution explicitly states:

Sec. 6. The incumbent President shall continue to exercise legislative powers until the first Congress
is convened.

The convening of the first Congress merely precluded the exercise of legislative powers by President
Aquino; it did not prevent the effectivity of laws she had previously enacted.

There can be no question, therefore, that E.O. No. 279 is an effective, and a validly enacted, statute.
 THE CONSTITUTIONALITY OF THE WMCP FTAA

Petitioners submit that, in accordance with the text of Section 2, Article XII of the Constitution,
FTAAs should be limited to "technical or financial assistance" only. They observe, however, that,
contrary to the language of the Constitution, the WMCP FTAA allows WMCP, a fully foreign-owned
mining corporation, to extend more than mere financial or technical assistance to the State, for it
permits WMCP to manage and operate every aspect of the mining activity. 222

Petitioners' submission is well-taken. It is a cardinal rule in the interpretation of constitutions that the
instrument must be so construed as to give effect to the intention of the people who adopted
it.223 This intention is to be sought in the constitution itself, and the apparent meaning of the words is
to be taken as expressing it, except in cases where that assumption would lead to absurdity,
ambiguity, or contradiction.224 What the Constitution says according to the text of the provision,
therefore, compels acceptance and negates the power of the courts to alter it, based on the
postulate that the framers and the people mean what they say.225 Accordingly, following the literal
text of the Constitution, assistance accorded by foreign-owned corporations in the large-scale
exploration, development, and utilization of petroleum, minerals and mineral oils should be limited to
"technical" or "financial" assistance only.

WMCP nevertheless submits that the word "technical" in the fourth paragraph of Section 2 of E.O.
No. 279 encompasses a "broad number of possible services," perhaps, "scientific and/or
technological in basis."226 It thus posits that it may also well include "the area of management or
operations . . . so long as such assistance requires specialized knowledge or skills, and are related
to the exploration, development and utilization of mineral resources."227

This Court is not persuaded. As priorly pointed out, the phrase "management or other forms of
assistance" in the 1973 Constitution was deleted in the 1987 Constitution, which allows only
"technical or financial assistance." Casus omisus pro omisso habendus est. A person, object or thing
omitted from an enumeration must be held to have been omitted intentionally.228 As will be shown
later, the management or operation of mining activities by foreign contractors, which is the primary
feature of service contracts, was precisely the evil that the drafters of the 1987 Constitution sought to
eradicate.

Respondents insist that "agreements involving technical or financial assistance" is just another term
for service contracts. They contend that the proceedings of the CONCOM indicate "that although the
terminology 'service contract' was avoided [by the Constitution], the concept it represented was not."
They add that "[t]he concept is embodied in the phrase 'agreements involving financial or technical
assistance.'"229 And point out how members of the CONCOM referred to these agreements as
"service contracts." For instance:

SR. TAN. Am I correct in thinking that the only difference between these future service
contracts and the past service contracts under Mr. Marcos is the general law to be enacted
by the legislature and the notification of Congress by the President? That is the only
difference, is it not?

MR. VILLEGAS. That is right.

SR. TAN. So those are the safeguards[?]

MR. VILLEGAS. Yes. There was no law at all governing service contracts before.

SR. TAN. Thank you, Madam President.230 [Emphasis supplied.]

WMCP also cites the following statements of Commissioners Gascon, Garcia, Nolledo and
Tadeo who alluded to service contracts as they explained their respective votes in the
approval of the draft Article:

MR. GASCON. Mr. Presiding Officer, I vote no primarily because of two reasons: One, the
provision on service contracts. I felt that if we would constitutionalize any provision on
service contracts, this should always be with the concurrence of Congress and not guided
only by a general law to be promulgated by Congress. x x x.231 [Emphasis supplied.]

x x x.

MR. GARCIA. Thank you.

I vote no. x x x.

Service contracts are given constitutional legitimization in Section 3, even when they have
been proven to be inimical to the interests of the nation, providing as they do the legal
loophole for the exploitation of our natural resources for the benefit of foreign interests. They
constitute a serious negation of Filipino control on the use and disposition of the nation's
natural resources, especially with regard to those which are nonrenewable.232[Emphasis
supplied.]

xxx

MR. NOLLEDO. While there are objectionable provisions in the Article on National Economy
and Patrimony, going over said provisions meticulously, setting aside prejudice and
personalities will reveal that the article contains a balanced set of provisions. I hope the
forthcoming Congress will implement such provisions taking into account that Filipinos
should have real control over our economy and patrimony, and if foreign equity is permitted,
the same must be subordinated to the imperative demands of the national interest.

x x x.

It is also my understanding that service contracts involving foreign corporations or entities

are resorted to only when no Filipino enterprise or Filipino-controlled enterprise could
possibly undertake the exploration or exploitation of our natural resources and that
compensation under such contracts cannot and should not equal what should pertain to
ownership of capital. In other words, the service contract should not be an instrument to
circumvent the basic provision, that the exploration and exploitation of natural resources
should be truly for the benefit of Filipinos.

Thank you, and I vote yes.233 [Emphasis supplied.]

x x x.

MR. TADEO. Nais ko lamang ipaliwanag ang aking boto.

Matapos suriin ang kalagayan ng Pilipinas, ang saligang suliranin, pangunahin ang salitang
"imperyalismo." Ang ibig sabihin nito ay ang sistema ng lipunang pinaghaharian ng iilang
monopolyong kapitalista at ang salitang "imperyalismo" ay buhay na buhay sa National
Economy and Patrimony na nating ginawa. Sa pamamagitan ng salitang "based on,"
 naroroon na ang free trade sapagkat tayo ay mananatiling tagapagluwas ng hilaw na
sangkap at tagaangkat ng yaring produkto. Pangalawa, naroroon pa rin ang parity rights, ang
service contract, ang 60-40 equity sa natural resources. Habang naghihirap ang
sambayanang Pilipino, ginagalugad naman ng mga dayuhan ang ating likas na yaman.
Kailan man ang Article on National Economy and Patrimony ay hindi nagpaalis sa
pagkaalipin ng ating ekonomiya sa kamay ng mga dayuhan. Ang solusyon sa suliranin ng
bansa ay dalawa lamang: ang pagpapatupad ng tunay na reporma sa lupa at ang national
industrialization. Ito ang tinatawag naming pagsikat ng araw sa Silangan. Ngunit ang mga
landlords and big businessmen at ang mga komprador ay nagsasabi na ang free trade na
ito, ang kahulugan para sa amin, ay ipinipilit sa ating sambayanan na ang araw ay sisikat sa
Kanluran. Kailan man hindi puwedeng sumikat ang araw sa Kanluran. I vote
no.234 [Emphasis supplied.]

This Court is likewise not persuaded.

As earlier noted, the phrase "service contracts" has been deleted in the 1987 Constitution's Article
on National Economy and Patrimony. If the CONCOM intended to retain the concept of service
contracts under the 1973 Constitution, it could have simply adopted the old terminology ("service
contracts") instead of employing new and unfamiliar terms ("agreements . . . involving either
technical or financial assistance"). Such a difference between the language of a provision in a
revised constitution and that of a similar provision in the preceding constitution is viewed as
indicative of a difference in purpose.235 If, as respondents suggest, the concept of "technical or
financial assistance" agreements is identical to that of "service contracts," the CONCOM would not
have bothered to fit the same dog with a new collar. To uphold respondents' theory would reduce the
first to a mere euphemism for the second and render the change in phraseology meaningless.

An examination of the reason behind the change confirms that technical or financial assistance
agreements are not synonymous to service contracts.

[T]he Court in construing a Constitution should bear in mind the object sought to be accomplished by
its adoption, and the evils, if any, sought to be prevented or remedied. A doubtful provision will be
examined in light of the history of the times, and the condition and circumstances under which the
Constitution was framed. The object is to ascertain the reason which induced the framers of the
Constitution to enact the particular provision and the purpose sought to be accomplished thereby, in
order to construe the whole as to make the words consonant to that reason and calculated to effect
that purpose.236

As the following question of Commissioner Quesada and Commissioner Villegas' answer shows the
drafters intended to do away with service contracts which were used to circumvent the capitalization
(60%-40%) requirement:

MS. QUESADA. The 1973 Constitution used the words "service contracts." In this particular
Section 3, is there a safeguard against the possible control of foreign interests if the Filipinos
go into coproduction with them?

MR. VILLEGAS. Yes. In fact, the deletion of the phrase "service contracts" was our first
attempt to avoid some of the abuses in the past regime in the use of service contracts to go
around the 60-40 arrangement. The safeguard that has been introduced – and this, of course
can be refined – is found in Section 3, lines 25 to 30, where Congress will have to concur
with the President on any agreement entered into between a foreign-owned corporation and
the government involving technical or financial assistance for large-scale exploration,
development and utilization of natural resources.237 [Emphasis supplied.]
 In a subsequent discussion, Commissioner Villegas allayed the fears of Commissioner
Quesada regarding the participation of foreign interests in Philippine natural resources,
which was supposed to be restricted to Filipinos.

MS. QUESADA. Another point of clarification is the phrase "and utilization of natural
resources shall be under the full control and supervision of the State." In the 1973
Constitution, this was limited to citizens of the Philippines; but it was removed and
substituted by "shall be under the full control and supervision of the State." Was the concept
changed so that these particular resources would be limited to citizens of the Philippines? Or
would these resources only be under the full control and supervision of the State; meaning,
noncitizens would have access to these natural resources? Is that the understanding?

MR. VILLEGAS. No, Mr. Vice-President, if the Commissioner reads the next sentence, it
states:

Such activities may be directly undertaken by the State, or it may enter into co-production, joint
venture, production-sharing agreements with Filipino citizens.

So we are still limiting it only to Filipino citizens.

x x x.

MS. QUESADA. Going back to Section 3, the section suggests that:

The exploration, development, and utilization of natural resources… may be directly undertaken by
the State, or it may enter into co-production, joint venture or production-sharing agreement with . . .
corporations or associations at least sixty per cent of whose voting stock or controlling interest is
owned by such citizens.

Lines 25 to 30, on the other hand, suggest that in the large-scale exploration, development and
utilization of natural resources, the President with the concurrence of Congress may enter into
agreements with foreign-owned corporations even for technical or financial assistance.

I wonder if this part of Section 3 contradicts the second part. I am raising this point for fear that
foreign investors will use their enormous capital resources to facilitate the actual exploitation or
exploration, development and effective disposition of our natural resources to the detriment of
Filipino investors. I am not saying that we should not consider borrowing money from foreign
sources. What I refer to is that foreign interest should be allowed to participate only to the extent that
they lend us money and give us technical assistance with the appropriate government permit. In this
way, we can insure the enjoyment of our natural resources by our own people.

MR. VILLEGAS. Actually, the second provision about the President does not permit foreign investors
to participate. It is only technical or financial assistance – they do not own anything – but on
conditions that have to be determined by law with the concurrence of Congress. So, it is very
restrictive.

If the Commissioner will remember, this removes the possibility for service contracts which we said
yesterday were avenues used in the previous regime to go around the 60-40
requirement.238 [Emphasis supplied.]
The present Chief Justice, then a member of the CONCOM, also referred to this limitation in scope
in proposing an amendment to the 60-40 requirement:

MR. DAVIDE. May I be allowed to explain the proposal?

MR. MAAMBONG. Subject to the three-minute rule, Madam President.

MR. DAVIDE. It will not take three minutes.

The Commission had just approved the Preamble. In the Preamble we clearly stated that the Filipino
people are sovereign and that one of the objectives for the creation or establishment of a
government is to conserve and develop the national patrimony. The implication is that the national
patrimony or our natural resources are exclusively reserved for the Filipino people. No alien must be
allowed to enjoy, exploit and develop our natural resources. As a matter of fact, that principle
proceeds from the fact that our natural resources are gifts from God to the Filipino people and it
would be a breach of that special blessing from God if we will allow aliens to exploit our natural
resources.

I voted in favor of the Jamir proposal because it is not really exploitation that we granted to the alien
corporations but only for them to render financial or technical assistance. It is not for them to enjoy
our natural resources. Madam President, our natural resources are depleting; our population is
increasing by leaps and bounds. Fifty years from now, if we will allow these aliens to exploit our
natural resources, there will be no more natural resources for the next generations of Filipinos. It
may last long if we will begin now. Since 1935 the aliens have been allowed to enjoy to a certain
extent the exploitation of our natural resources, and we became victims of foreign dominance and
control. The aliens are interested in coming to the Philippines because they would like to enjoy the
bounty of nature exclusively intended for Filipinos by God.

And so I appeal to all, for the sake of the future generations, that if we have to pray in the Preamble
"to preserve and develop the national patrimony for the sovereign Filipino people and for the
generations to come," we must at this time decide once and for all that our natural resources must
be reserved only to Filipino citizens.

Thank you.239 [Emphasis supplied.]

The opinion of another member of the CONCOM is persuasive240 and leaves no doubt as to the
intention of the framers to eliminate service contracts altogether. He writes:

Paragraph 4 of Section 2 specifies large-scale, capital-intensive, highly technological undertakings

for which the President may enter into contracts with foreign-owned corporations, and enunciates
strict conditions that should govern such contracts. x x x.

This provision balances the need for foreign capital and technology with the need to maintain the
national sovereignty. It recognizes the fact that as long as Filipinos can formulate their own terms in
their own territory, there is no danger of relinquishing sovereignty to foreign interests.

Are service contracts allowed under the new Constitution? No. Under the new Constitution, foreign
investors (fully alien-owned) can NOT participate in Filipino enterprises except to provide: (1)
Technical Assistance for highly technical enterprises; and (2) Financial Assistance for large-scale
enterprises.
The intent of this provision, as well as other provisions on foreign investments, is to prevent the
practice (prevalent in the Marcos government) of skirting the 60/40 equation using the cover of
service contracts.241 [Emphasis supplied.]

Furthermore, it appears that Proposed Resolution No. 496,242 which was the draft Article on National
Economy and Patrimony, adopted the concept of "agreements . . . involving either technical or
financial assistance" contained in the "Draft of the 1986 U.P. Law Constitution Project" (U.P. Law
draft) which was taken into consideration during the deliberation of the CONCOM.243 The former, as
well as Article XII, as adopted, employed the same terminology, as the comparative table below
shows:

DRAFT OF THE UP LAW PROPOSED ARTICLE XII OF THE

CONSTITUTION RESOLUTION NO. 496 1987 CONSTITUTION
PROJECT OF THE
CONSTITUTIONAL
COMMISSION

Sec. 1. All lands of the
public domain, waters,
minerals, coal, petroleum
and other mineral oils, all
forces of potential energy,
fisheries, flora and fauna
and other natural
resources of the
Philippines are owned by
the State. With the
exception of agricultural
lands, all other natural
resources shall not be
alienated. The exploration,
development and
utilization of natural
resources shall be under
the full control and
supervision of the State.
Such activities may be
directly undertaken by the
state, or it may enter into
co-production, joint
venture, production
sharing agreements with
Filipino citizens or
corporations or
associations sixty per cent
of whose voting stock or
controlling interest is
owned by such citizens for
a period of not more than
Sec. 3. All lands of the
public domain, waters,
minerals, coal, petroleum
and other mineral oils, all
forces of potential energy,
fisheries, forests, flora and
fauna, and other natural
resources are owned by
the State. With the
exception of agricultural
lands, all other natural
resources shall not be
alienated. The exploration,
development, and
utilization of natural
resources shall be under
the full control and
supervision of the State.
Such activities may be
directly undertaken by the
State, or it may enter into
co-production, joint
venture, production-
sharing agreements with
Filipino citizens or
corporations or
associations at least sixty
per cent of whose voting
stock or controlling interest
is owned by such citizens.
Such agreements shall be
for a period of twenty-five
Sec. 2. All lands of the
public domain, waters,
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. With the
exception of agricultural
lands, all other natural
resources shall not be
alienated. The exploration,
development, and
utilization of natural
resources shall be under
the full control and
supervision of the State.
The State may directly
undertake such activities
or it may enter into co-
production, joint venture,
or production-sharing
agreements with Filipino
citizens, or corporations or
associations at least sixty
per centum of whose
capital is owned by such
citizens. Such agreements
may be for a period not
exceeding twenty-five
twenty-five years,
renewable for not more
than twenty-five years and
under such terms and
conditions as may be
provided by law. In case
as to water rights for
irrigation, water supply,
fisheries, or industrial uses
other than the
development of water
power, beneficial use may
be the measure and limit
of the grant.
The National Assembly
may by law allow small
scale utilization of natural
resources by Filipino
citizens.
The National Assembly,
may, by two-thirds vote of
all its members by special
law provide the terms and
conditions under which a
foreign-owned corporation
may enter into agreements
with the government
involving either technical
or financial
assistance for large-scale
exploration, development,
or utilization of natural
resources. [Emphasis
supplied.]
years, renewable for not
more than twenty-five
years, and under such
term and conditions as
may be provided by law. In
cases of water rights for
irrigation, water supply,
fisheries or industrial uses
other than the
development for water
power, beneficial use may
be the measure and limit
of the grant.
The Congress may by law
allow small-scale
utilization of natural
resources by Filipino
citizens, as well as
cooperative fish farming in
rivers, lakes, bays, and
lagoons.
The President with the
concurrence of Congress,
by special law, shall
provide the terms and
conditions under which a
foreign-owned corporation
may enter into agreements
with the government
involving either technical
or financial
assistance for large-scale
exploration, development,
and utilization of natural
resources. [Emphasis
supplied.]
years, renewable for not
more than twenty-five
years, and under such
terms and conditions as
may be provided by law. In
case of water rights for
irrigation, water supply,
fisheries, or industrial uses
other than the
development of water
power, beneficial use may
be the measure and limit
of the grant.
The State shall protect the
nation's marine wealth in
its archipelagic waters,
territorial sea, and
exclusive economic zone,
and reserve its use and
enjoyment exclusively to
Filipino citizens.
The Congress may, by
law, allow small-scale
utilization of natural
resources by Filipino
citizens, as well as
cooperative fish farming,
with priority to subsistence
fishermen and fish-
workers in rivers, lakes,
bays, and lagoons.
The President may enter
into agreements with
foreign-owned
corporations
involving either technical
or financial
assistance for large-scale
exploration, development,
and utilization of minerals,
petroleum, and other
mineral oils according to
the general terms and
conditions provided by
law, based on real
contributions to the
economic growth and
 general welfare of the
country. In such
agreements, the State
shall promote the
development and use of
local scientific and
technical resources.
[Emphasis supplied.]

The President shall notify

the Congress of every
contract entered into in
accordance with this
provision, within thirty days
from its execution.

The insights of the proponents of the U.P. Law draft are, therefore, instructive in interpreting the
phrase "technical or financial assistance."

In his position paper entitled Service Contracts: Old Wine in New Bottles?, Professor Pacifico A.
Agabin, who was a member of the working group that prepared the U.P. Law draft, criticized service
contracts for they "lodge exclusive management and control of the enterprise to the service
contractor, which is reminiscent of the old concession regime. Thus, notwithstanding the provision of
the Constitution that natural resources belong to the State, and that these shall not be alienated, the
service contract system renders nugatory the constitutional provisions cited."244 He elaborates:

Looking at the Philippine model, we can discern the following vestiges of the concession regime,
thus:

1. Bidding of a selected area, or leasing the choice of the area to the interested party and
then negotiating the terms and conditions of the contract; (Sec. 5, P.D. 87)

2. Management of the enterprise vested on the contractor, including operation of the field if
petroleum is discovered; (Sec. 8, P.D. 87)

3. Control of production and other matters such as expansion and development; (Sec. 8)

4. Responsibility for downstream operations – marketing, distribution, and processing may

be with the contractor (Sec. 8);

5. Ownership of equipment, machinery, fixed assets, and other properties remain with
contractor (Sec. 12, P.D. 87);

6. Repatriation of capital and retention of profits abroad guaranteed to the contractor (Sec.
13, P.D. 87); and

7. While title to the petroleum discovered may nominally be in the name of the government,
the contractor has almost unfettered control over its disposition and sale, and even the
domestic requirements of the country is relegated to a pro rata basis (Sec. 8).
In short, our version of the service contract is just a rehash of the old concession regime x x x. Some
people have pulled an old rabbit out of a magician's hat, and foisted it upon us as a new and
different animal.

The service contract as we know it here is antithetical to the principle of sovereignty over our natural
resources restated in the same article of the [1973] Constitution containing the provision for service
contracts. If the service contractor happens to be a foreign corporation, the contract would also run
counter to the constitutional provision on nationalization or Filipinization, of the exploitation of our
natural resources.245 [Emphasis supplied. Underscoring in the original.]

Professor Merlin M. Magallona, also a member of the working group, was harsher in his reproach of
the system:

x x x the nationalistic phraseology of the 1935 [Constitution] was retained by the [1973] Charter, but
the essence of nationalism was reduced to hollow rhetoric. The 1973 Charter still provided that the
exploitation or development of the country's natural resources be limited to Filipino citizens or
corporations owned or controlled by them. However, the martial-law Constitution allowed them, once
these resources are in their name, to enter into service contracts with foreign investors for financial,
technical, management, or other forms of assistance. Since foreign investors have the capital
resources, the actual exploitation and development, as well as the effective disposition, of the
country's natural resources, would be under their direction, and control, relegating the Filipino
investors to the role of second-rate partners in joint ventures.

Through the instrumentality of the service contract, the 1973 Constitution had legitimized at the
highest level of state policy that which was prohibited under the 1973 Constitution, namely: the
exploitation of the country's natural resources by foreign nationals. The drastic impact of [this]
constitutional change becomes more pronounced when it is considered that the active party to any
service contract may be a corporation wholly owned by foreign interests. In such a case, the
citizenship requirement is completely set aside, permitting foreign corporations to obtain actual
possession, control, and [enjoyment] of the country's natural resources.246 [Emphasis supplied.]

Accordingly, Professor Agabin recommends that:

Recognizing the service contract for what it is, we have to expunge it from the Constitution and
reaffirm ownership over our natural resources. That is the only way we can exercise effective control
over our natural resources.

This should not mean complete isolation of the country's natural resources from foreign investment.
Other contract forms which are less derogatory to our sovereignty and control over natural resources
– like technical assistance agreements, financial assistance [agreements], co-production
agreements, joint ventures, production-sharing – could still be utilized and adopted without violating
constitutional provisions. In other words, we can adopt contract forms which recognize and assert
our sovereignty and ownership over natural resources, and where the foreign entity is just a pure
contractor instead of the beneficial owner of our economic resources.247 [Emphasis supplied.]

Still another member of the working group, Professor Eduardo Labitag, proposed that:

2. Service contracts as practiced under the 1973 Constitution should be discouraged, instead the
government may be allowed, subject to authorization by special law passed by an extraordinary
majority to enter into either technical or financial assistance. This is justified by the fact that as
presently worded in the 1973 Constitution, a service contract gives full control over the contract area
to the service contractor, for him to work, manage and dispose of the proceeds or production. It was
a subterfuge to get around the nationality requirement of the constitution.248[Emphasis supplied.]

In the annotations on the proposed Article on National Economy and Patrimony, the U.P. Law draft
summarized the rationale therefor, thus:

5. The last paragraph is a modification of the service contract provision found in Section 9, Article
XIV of the 1973 Constitution as amended. This 1973 provision shattered the framework of
nationalism in our fundamental law (see Magallona, "Nationalism and its Subversion in the
Constitution"). Through the service contract, the 1973 Constitution had legitimized that which was
prohibited under the 1935 constitution—the exploitation of the country's natural resources by foreign
nationals. Through the service contract, acts prohibited by the Anti-Dummy Law were recognized as
legitimate arrangements. Service contracts lodge exclusive management and control of the
enterprise to the service contractor, not unlike the old concession regime where the concessionaire
had complete control over the country's natural resources, having been given exclusive and plenary
rights to exploit a particular resource and, in effect, having been assured of ownership of that
resource at the point of extraction (see Agabin, "Service Contracts: Old Wine in New Bottles").
Service contracts, hence, are antithetical to the principle of sovereignty over our natural resources,
as well as the constitutional provision on nationalization or Filipinization of the exploitation of our
natural resources.

Under the proposed provision, only technical assistance or financial assistance agreements may be
entered into, and only for large-scale activities. These are contract forms which recognize and assert
our sovereignty and ownership over natural resources since the foreign entity is just a pure
contractor and not a beneficial owner of our economic resources. The proposal recognizes the need
for capital and technology to develop our natural resources without sacrificing our sovereignty and
control over such resources by the safeguard of a special law which requires two-thirds vote of all
the members of the Legislature. This will ensure that such agreements will be debated upon
exhaustively and thoroughly in the National Assembly to avert prejudice to the nation.249 [Emphasis
supplied.]

The U.P. Law draft proponents viewed service contracts under the 1973 Constitution as grants of
beneficial ownership of the country's natural resources to foreign owned corporations. While, in
theory, the State owns these natural resources – and Filipino citizens, their beneficiaries – service
contracts actually vested foreigners with the right to dispose, explore for, develop, exploit, and utilize
the same. Foreigners, not Filipinos, became the beneficiaries of Philippine natural resources. This
arrangement is clearly incompatible with the constitutional ideal of nationalization of natural
resources, with the Regalian doctrine, and on a broader perspective, with Philippine sovereignty.

The proponents nevertheless acknowledged the need for capital and technical know-how in the
large-scale exploitation, development and utilization of natural resources – the second paragraph of
the proposed draft itself being an admission of such scarcity. Hence, they recommended a
compromise to reconcile the nationalistic provisions dating back to the 1935 Constitution, which
reserved all natural resources exclusively to Filipinos, and the more liberal 1973 Constitution, which
allowed foreigners to participate in these resources through service contracts. Such a compromise
called for the adoption of a new system in the exploration, development, and utilization of natural
resources in the form of technical agreements or financial agreements which, necessarily, are
distinct concepts from service contracts.

The replacement of "service contracts" with "agreements… involving either technical or financial
assistance," as well as the deletion of the phrase "management or other forms of assistance,"
assumes greater significance when note is taken that the U.P. Law draft proposed other equally
crucial changes that were obviously heeded by the CONCOM. These include the abrogation of the
concession system and the adoption of new "options" for the State in the exploration, development,
and utilization of natural resources. The proponents deemed these changes to be more consistent
with the State's ownership of, and its "full control and supervision" (a phrase also employed by the
framers) over, such resources. The Project explained:

3. In line with the State ownership of natural resources, the State should take a more active role in
the exploration, development, and utilization of natural resources, than the present practice of
granting licenses, concessions, or leases – hence the provision that said activities shall be under the
full control and supervision of the State. There are three major schemes by which the State could
undertake these activities: first, directly by itself; second, by virtue of co-production, joint venture,
production sharing agreements with Filipino citizens or corporations or associations sixty per cent
(60%) of the voting stock or controlling interests of which are owned by such citizens; or third, with a
foreign-owned corporation, in cases of large-scale exploration, development, or utilization of natural
resources through agreements involving either technical or financial assistance only. x x x.

At present, under the licensing concession or lease schemes, the government benefits from such
benefits only through fees, charges, ad valorem taxes and income taxes of the exploiters of our
natural resources. Such benefits are very minimal compared with the enormous profits reaped by
theses licensees, grantees, concessionaires. Moreover, some of them disregard the conservation of
natural resources and do not protect the environment from degradation. The proposed role of the
State will enable it to a greater share in the profits – it can also actively husband its natural
resources and engage in developmental programs that will be beneficial to them.

4. Aside from the three major schemes for the exploration, development, and utilization of our
natural resources, the State may, by law, allow Filipino citizens to explore, develop, utilize natural
resources in small-scale. This is in recognition of the plight of marginal fishermen, forest dwellers,
gold panners, and others similarly situated who exploit our natural resources for their daily
sustenance and survival.250

Professor Agabin, in particular, after taking pains to illustrate the similarities between the two
systems, concluded that the service contract regime was but a "rehash" of the concession system.
"Old wine in new bottles," as he put it. The rejection of the service contract regime, therefore, is in
consonance with the abolition of the concession system.

In light of the deliberations of the CONCOM, the text of the Constitution, and the adoption of other
proposed changes, there is no doubt that the framers considered and shared the intent of the U.P.
Law proponents in employing the phrase "agreements . . . involving either technical or financial
assistance."

While certain commissioners may have mentioned the term "service contracts" during the CONCOM
deliberations, they may not have been necessarily referring to the concept of service contracts under
the 1973 Constitution. As noted earlier, "service contracts" is a term that assumes different
meanings to different people.251 The commissioners may have been using the term loosely, and not
in its technical and legal sense, to refer, in general, to agreements concerning natural resources
entered into by the Government with foreign corporations. These loose statements do not
necessarily translate to the adoption of the 1973 Constitution provision allowing service contracts.

It is true that, as shown in the earlier quoted portions of the proceedings in CONCOM, in response to
Sr. Tan's question, Commissioner Villegas commented that, other than congressional notification,
the only difference between "future" and "past" "service contracts" is the requirement of a general
law as there were no laws previously authorizing the same.252 However, such remark is far
outweighed by his more categorical statement in his exchange with Commissioner Quesada that the
draft article "does not permit foreign investors to participate" in the nation's natural resources – which
was exactly what service contracts did – except to provide "technical or financial assistance."253

In the case of the other commissioners, Commissioner Nolledo himself clarified in his work that the
present charter prohibits service contracts.254 Commissioner Gascon was not totally averse to foreign
participation, but favored stricter restrictions in the form of majority congressional concurrence.255 On
the other hand, Commissioners Garcia and Tadeo may have veered to the extreme side of the
spectrum and their objections may be interpreted as votes against any foreign participation in our
natural resources whatsoever.

WMCP cites Opinion No. 75, s. 1987,256 and Opinion No. 175, s. 1990257 of the Secretary of Justice,
expressing the view that a financial or technical assistance agreement "is no different in concept"
from the service contract allowed under the 1973 Constitution. This Court is not, however, bound by
this interpretation. When an administrative or executive agency renders an opinion or issues a
statement of policy, it merely interprets a pre-existing law; and the administrative interpretation of the
law is at best advisory, for it is the courts that finally determine what the law means.258

In any case, the constitutional provision allowing the President to enter into FTAAs with foreign-
owned corporations is an exception to the rule that participation in the nation's natural resources is
reserved exclusively to Filipinos. Accordingly, such provision must be construed strictly against their
enjoyment by non-Filipinos. As Commissioner Villegas emphasized, the provision is "very
restrictive."259 Commissioner Nolledo also remarked that "entering into service contracts is an
exception to the rule on protection of natural resources for the interest of the nation and, therefore,
being an exception, it should be subject, whenever possible, to stringent rules."260 Indeed, exceptions
should be strictly but reasonably construed; they extend only so far as their language fairly warrants
and all doubts should be resolved in favor of the general provision rather than the exception.261

With the foregoing discussion in mind, this Court finds that R.A. No. 7942 is invalid insofar as said
Act authorizes service contracts. Although the statute employs the phrase "financial and technical
agreements" in accordance with the 1987 Constitution, it actually treats these agreements as service
contracts that grant beneficial ownership to foreign contractors contrary to the fundamental law.

Section 33, which is found under Chapter VI (Financial or Technical Assistance Agreement) of R.A.
No. 7942 states:

SEC. 33. Eligibility.—Any qualified person with technical and financial capability to undertake large-
scale exploration, development, and utilization of mineral resources in the Philippines may enter into
a financial or technical assistance agreement directly with the Government through the Department.
[Emphasis supplied.]

"Exploration," as defined by R.A. No. 7942,

means the searching or prospecting for mineral resources by geological, geochemical or

geophysical surveys, remote sensing, test pitting, trending, drilling, shaft sinking, tunneling or any
other means for the purpose of determining the existence, extent, quantity and quality thereof and
the feasibility of mining them for profit.262

A legally organized foreign-owned corporation may be granted an exploration permit,263 which vests
it with the right to conduct exploration for all minerals in specified areas,264 i.e., to enter, occupy and
explore the same.265Eventually, the foreign-owned corporation, as such permittee, may apply for a
financial and technical assistance agreement.266
"Development" is the work undertaken to explore and prepare an ore body or a mineral deposit for
mining, including the construction of necessary infrastructure and related facilities.267

"Utilization" "means the extraction or disposition of minerals."268 A stipulation that the proponent shall
dispose of the minerals and byproducts produced at the highest price and more advantageous terms
and conditions as provided for under the implementing rules and regulations is required to be
incorporated in every FTAA.269

A foreign-owned/-controlled corporation may likewise be granted a mineral processing

permit.270 "Mineral processing" is the milling, beneficiation or upgrading of ores or minerals and rocks
or by similar means to convert the same into marketable products.271

An FTAA contractor makes a warranty that the mining operations shall be conducted in accordance
with the provisions of R.A. No. 7942 and its implementing rules272 and for work programs and
minimum expenditures and commitments.273 And it obliges itself to furnish the Government records
of geologic, accounting, and other relevant data for its mining operation.274

"Mining operation," as the law defines it, means mining activities involving exploration, feasibility,
development, utilization, and processing.275

The underlying assumption in all these provisions is that the foreign contractor manages the mineral
resources, just like the foreign contractor in a service contract.

Furthermore, Chapter XII of the Act grants foreign contractors in FTAAs the same auxiliary mining
rights that it grants contractors in mineral agreements (MPSA, CA and JV).276 Parenthetically,
Sections 72 to 75 use the term "contractor," without distinguishing between FTAA and mineral
agreement contractors. And so does "holders of mining rights" in Section 76. A foreign contractor
may even convert its FTAA into a mineral agreement if the economic viability of the contract area is
found to be inadequate to justify large-scale mining operations,277 provided that it reduces its equity
in the corporation, partnership, association or cooperative to forty percent (40%).278

Finally, under the Act, an FTAA contractor warrants that it "has or has access to all the financing,
managerial, and technical expertise. . . ."279 This suggests that an FTAA contractor is bound to
provide some management assistance – a form of assistance that has been eliminated and,
therefore, proscribed by the present Charter.

By allowing foreign contractors to manage or operate all the aspects of the mining operation, the
above-cited provisions of R.A. No. 7942 have in effect conveyed beneficial ownership over the
nation's mineral resources to these contractors, leaving the State with nothing but bare title thereto.

Moreover, 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.

In sum, the Court finds the following provisions of R.A. No. 7942 to be violative of Section 2, Article
XII of the Constitution:

(1) The proviso in Section 3 (aq), which defines "qualified person," to wit:
 Provided, That a legally organized foreign-owned corporation shall be deemed a qualified
person for purposes of granting an exploration permit, financial or technical assistance
agreement or mineral processing permit.

(2) Section 23,280 which specifies the rights and obligations of an exploration permittee,
insofar as said section applies to a financial or technical assistance agreement,

(3) Section 33, which prescribes the eligibility of a contractor in a financial or technical
assistance agreement;

(4) Section 35,281 which enumerates the terms and conditions for every financial or technical
assistance agreement;

(5) Section 39,282 which allows the contractor in a financial and technical assistance
agreement to convert the same into a mineral production-sharing agreement;

(6) Section 56,283 which authorizes the issuance of a mineral processing permit to a
contractor in a financial and technical assistance agreement;

The following provisions of the same Act are likewise void as they are dependent on the foregoing
provisions and cannot stand on their own:

(1) Section 3 (g),284 which defines the term "contractor," insofar as it applies to a financial or
technical assistance agreement.

Section 34,285 which prescribes the maximum contract area in a financial or technical
assistance agreements;

Section 36,286 which allows negotiations for financial or technical assistance agreements;

Section 37,287 which prescribes the procedure for filing and evaluation of financial or
technical assistance agreement proposals;

Section 38,288 which limits the term of financial or technical assistance agreements;

Section 40,289 which allows the assignment or transfer of financial or technical assistance
agreements;

Section 41,290 which allows the withdrawal of the contractor in an FTAA;

The second and third paragraphs of Section 81,291 which provide for the Government's share
in a financial and technical assistance agreement; and

Section 90,292 which provides for incentives to contractors in FTAAs insofar as it applies to
said contractors;

When the parts of the statute are so mutually dependent and connected as conditions,
considerations, inducements, or compensations for each other, as to warrant a belief that the
legislature intended them as a whole, and that if all could not be carried into effect, the legislature
would not pass the residue independently, then, if some parts are unconstitutional, all the provisions
which are thus dependent, conditional, or connected, must fall with them.293
There can be little doubt that the WMCP FTAA itself is a service contract.

Section 1.3 of the WMCP FTAA grants WMCP "the exclusive right to explore, exploit, utilise[,]
process and dispose of all Minerals products and by-products thereof that may be produced from the
Contract Area."294 The FTAA also imbues WMCP with the following rights:

(b) to extract and carry away any Mineral samples from the Contract area for the purpose of
conducting tests and studies in respect thereof;

(c) to determine the mining and treatment processes to be utilised during the
Development/Operating Period and the project facilities to be constructed during the
Development and Construction Period;

(d) have the right of possession of the Contract Area, with full right of ingress and egress and
the right to occupy the same, subject to the provisions of Presidential Decree No. 512 (if
applicable) and not be prevented from entry into private ands by surface owners and/or
occupants thereof when prospecting, exploring and exploiting for minerals therein;

xxx

(f) to construct roadways, mining, drainage, power generation and transmission facilities and
all other types of works on the Contract Area;

(g) to erect, install or place any type of improvements, supplies, machinery and other
equipment relating to the Mining Operations and to use, sell or otherwise dispose of, modify,
remove or diminish any and all parts thereof;

(h) enjoy, subject to pertinent laws, rules and regulations and the rights of third Parties,
easement rights and the use of timber, sand, clay, stone, water and other natural resources
in the Contract Area without cost for the purposes of the Mining Operations;

xxx

(i) have the right to mortgage, charge or encumber all or part of its interest and obligations
under this Agreement, the plant, equipment and infrastructure and the Minerals produced
from the Mining Operations;

x x x. 295

All materials, equipment, plant and other installations erected or placed on the Contract Area remain
the property of WMCP, which has the right to deal with and remove such items within twelve months
from the termination of the FTAA.296

Pursuant to Section 1.2 of the FTAA, WMCP shall provide "[all] financing, technology, management
and personnel necessary for the Mining Operations." The mining company binds itself to "perform all
Mining Operations . . . providing all necessary services, technology and financing in connection
therewith,"297 and to "furnish all materials, labour, equipment and other installations that may be
required for carrying on all Mining Operations."298> WMCP may make expansions, improvements
and replacements of the mining facilities and may add such new facilities as it considers necessary
for the mining operations.299
These contractual stipulations, 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.

In arguing against the annulment of the FTAA, WMCP invokes the Agreement on the Promotion and
Protection of Investments between the Philippine and Australian Governments, which was signed in
Manila on January 25, 1995 and which entered into force on December 8, 1995.

x x x. Article 2 (1) of said treaty states that it applies to investments whenever made and thus the
fact that [WMCP's] FTAA was entered into prior to the entry into force of the treaty does not preclude
the Philippine Government from protecting [WMCP's] investment in [that] FTAA. Likewise, Article 3
(1) of the treaty provides that "Each Party shall encourage and promote investments in its area by
investors of the other Party and shall [admit] such investments in accordance with its Constitution,
Laws, regulations and investment policies" and in Article 3 (2), it states that "Each Party shall ensure
that investments are accorded fair and equitable treatment." The latter stipulation indicates that it
was intended to impose an obligation upon a Party to afford fair and equitable treatment to the
investments of the other Party and that a failure to provide such treatment by or under the laws of
the Party may constitute a breach of the treaty. Simply stated, the Philippines could not, under said
treaty, rely upon the inadequacies of its own laws to deprive an Australian investor (like [WMCP]) of
fair and equitable treatment by invalidating [WMCP's] FTAA without likewise nullifying the service
contracts entered into before the enactment of RA 7942 such as those mentioned in PD 87 or EO
279.

This becomes more significant in the light of the fact that [WMCP's] FTAA was executed not by a
mere Filipino citizen, but by the Philippine Government itself, through its President no less, which, in
entering into said treaty is assumed to be aware of the existing Philippine laws on service contracts
over the exploration, development and utilization of natural resources. The execution of the FTAA by
the Philippine Government assures the Australian Government that the FTAA is in accordance with
existing Philippine laws.300 [Emphasis and italics by private respondents.]

The invalidation of the subject FTAA, it is argued, would constitute a breach of said treaty which, in
turn, would amount to a violation of Section 3, Article II of the Constitution adopting the generally
accepted principles of international law as part of the law of the land. One of these generally
accepted principles is pacta sunt servanda, which requires the performance in good faith of treaty
obligations.

Even assuming arguendo that WMCP is correct in its interpretation of the treaty and its assertion
that "the Philippines could not . . . deprive an Australian investor (like [WMCP]) of fair and equitable
treatment by invalidating [WMCP's] FTAA without likewise nullifying the service contracts entered
into before the enactment of RA 7942 . . .," the annulment of the FTAA would not constitute a breach
of the treaty invoked. For this decision herein invalidating the subject FTAA forms part of the legal
system of the Philippines.301 The equal protection clause302 guarantees that such decision shall apply
to all contracts belonging to the same class, hence, upholding rather than violating, the "fair and
equitable treatment" stipulation in said treaty.

One other matter requires clarification. Petitioners contend that, consistent with the provisions of
Section 2, Article XII of the Constitution, the President may enter into agreements involving "either
technical or financial assistance" only. The agreement in question, however, is a technical and
financial assistance agreement.
Petitioners' contention does not lie. To adhere to the literal language of the Constitution would lead
to absurd consequences.303 As WMCP correctly put it:

x x x such a theory of petitioners would compel the government (through the President) to enter into
contract with two (2) foreign-owned corporations, one for financial assistance agreement and with
the other, for technical assistance over one and the same mining area or land; or to execute two (2)
contracts with only one foreign-owned corporation which has the capability to provide both financial
and technical assistance, one for financial assistance and another for technical assistance, over the
same mining area. Such an absurd result is definitely not sanctioned under the canons of
constitutional construction.304 [Underscoring in the original.]

Surely, the framers of the 1987 Charter did not contemplate such an absurd result from their use of
"either/or." A constitution is not to be interpreted as demanding the impossible or the impracticable;
and unreasonable or absurd consequences, if possible, should be avoided.305 Courts are not to give
words a meaning that would lead to absurd or unreasonable consequences and a literal
interpretation is to be rejected if it would be unjust or lead to absurd results.306 That is a strong
argument against its adoption.307 Accordingly, petitioners' interpretation must be rejected.

The foregoing discussion has rendered unnecessary the resolution of the other issues raised by the
petition.

WHEREFORE, the petition is GRANTED. The Court hereby declares unconstitutional and void:

(1) The following provisions of Republic Act No. 7942:

(a) The proviso in Section 3 (aq),

(b) Section 23,

(c) Section 33 to 41,

(d) Section 56,

(e) The second and third paragraphs of Section 81, and

(f) Section 90.

(2) All provisions of Department of Environment and Natural Resources Administrative Order
96-40, s. 1996 which are not in conformity with this Decision, and

(3) The Financial and Technical Assistance Agreement between the Government of the
Republic of the Philippines and WMC Philippines, Inc.

SO ORDERED.

Davide, Jr., C.J., Puno, Quisumbing, Carpio, Corona, Callejo, Sr., and Tinga. JJ., concur.
Vitug, J., see Separate Opinion.
Panganiban, J., see Separate Opinion.
Ynares-Santiago, Sandoval-Gutierrez and Austria-Martinez, JJ., joins J., Panganiban's separate
opinion.
Azcuna, no part, one of the parties was a client.
Footnotes

1 Appears as "Nequito" in the caption of the Petition but "Nequinto" in the body. (Rollo, p. 12.)

2 As appears in the body of the Petition. (Id., at 13.) The caption of the petition does not
include Louel A. Peria as one of the petitioners but the name of his father Elpidio V. Peria
appears therein.

3Appears as "Kaisahan Tungo sa Kaunlaran ng Kanayunan at Repormang Pansakahan

(KAISAHAN)" in the caption of the Petition by "Philippine Kaisahan Tungo sa Kaunlaran ng
Kanayunan at Repormang Pansakahan (KAISAHAN)" in the body. (Id., at 14.)

4Erroneously designated in the Petition as "Western Mining Philippines Corporation." (Id., at

212.) Subsequently, WMC (Philippines), Inc. was renamed "Tampakan Mineral Resources
Corporation." (Id., at 778.)

5An Act Instituting A New System of Mineral Resources Exploration, Development,

Utilization and Conservation.

6Authorizing the Secretary of Environment and Natural Resources to Negotiate and

Conclude Joint Venture, Co-Production, or Production-Sharing Agreements for the
Exploration, Development and Utilization of Mineral Resources, and Prescribing the
Guidelines for such Agreements and those Agreements involving Technical or Financial
Assistance by Foreign-Owned Corporations for Large-Scale Exploration, Development and
Utilization of Minerals.

7 Exec. Order No. 279 (1987), sec. 4.

8 Rep. Act No. 7942 (1995), sec. 15.

9 Id., sec. 26 (a)-(c).

10 Id., sec. 29.

11 Id., sec. 30.

12 Id., sec. 31.

13 Id., sec. 32.

14 Id., ch. VI.

15 Id., secs. 27 and 33 in relation to sec. 3 (aq).

16 Id., sec. 72.

17 Id., sec. 73.

18 Id., sec. 75.

19 Id., sec. 74.

20 Id., sec. 76.

21 Id., ch. XIII.

22 Id., secs. 20-22.

23 Id., secs. 43, 45.

24 Id., secs. 46-49, 51-52.

25 Id., ch. IX.

26 Id., ch. X.

27 Id., ch. XI.

28 Id., ch. XIV.

29 Id., ch. XV.

30 Id., ch. XVI.

31 Id., ch. XIX.

32 Id., ch. XVII.

33 Section 116, R.A. No. 7942 provides that the Act "shall take effect thirty (30) days following
its complete publication in two (2) newspapers of general circulation in the Philippines."

34 WMCP FTAA, sec. 4.1.

35 Rollo, p. 22.

36 Ibid.

37 Ibid.

38Ibid. The number has since risen to 129 applications when the petitioners filed their Reply.
(Rollo, p. 363.)

39 Id., at 22.
40 Id., at 23-24.

41 Id., at 52-53. Emphasis and underscoring supplied.

42 WMCP FTAA, p. 2.

43 Rollo, p. 220.

44 Id., at 754.

45 Vide Note 4.

46 Rollo, p. 754.

47 Id., at 755.

48 Id., at 761-763.

49 Id., at 764-776.

50 Id., at 782-786.

51 Docketed as C.A.-G. R. No. 74161.

52G.R. No. 153885, entitled Lepanto Consolidated Mining Company v. WMC Resources
International Pty. Ltd., et al., decided September 24, 2003 and G.R. No. 156214, entitled
Lepanto Mining Company v. WMC Resources International Pty. Ltd., WMC (Philippines),
Inc., Southcot Mining Corporation, Tampakan Mining Corporation and Sagittarius Mines,
Inc., decided September 23, 2003.

53Section 12, Rule 43 of the Rules of Court, invoked by private respondent, states, " The
appeal shall not stay the award, judgment, final order or resolution sought to be reviewed
unless the Court of Appeals shall direct otherwise upon such terms as it may deem just."

WMCP's Reply (dated May 6, 2003) to Petitioners' Comment (to the Manifestation and
54

Supplemental Manifestation), p. 3.

55 Ibid.

56
Ibid.

WMCP's Reply (dated May 6, 2003) to Petitioners' Comment (to the Manifestation and
57

Supplemental Manifestation), p. 4.

58Philippine Constitution Association v. Enriquez, 235 SCRA 506 (1994); National Economic
Protectionism Association v. Ongpin, 171 SCRA 657 (1989); Dumlao v. COMELEC, 95
SCRA 392 (1980).

59 Dumlao v. COMELEC, supra.

60 Board of Optometry v. Colet, 260 SCRA 88 (1996).

61 Dumlao v. COMELEC, supra.

62 Subic Bay Metropolitan Authority v. Commission on Elections, 262 SCRA 492 (1996).

63 Angara v. Electoral Commission, 63 Phil. 139 (1936).

Integrated Bar of the Philippines v. Zamora, 338 SCRA 81, 100 (2000); Dumlao v.
64

COMELEC, supra; People v. Vera, 65 Phil. 56 (1937).

65 Dumlao v. COMELEC, supra.

66 Integrated Bar of the Philippines v. Zamora, supra.

Ermita-Malate Hotel and Motel Operators Association, Inc. v. City Mayor of Manila¸ 21
67

SCRA 449 (1967).

68Petitioners Roberto P. Amloy, Raqim L. Dabie, Simeon H. Dolojo, Imelda Gandon, Leny B.
Gusanan, Marcelo L. Gusanan, Quintol A. Labuayan, Lomingges Laway, and Benita P.
Tacuayan.

Petitioners F'long Agutin M. Dabie, Mario L. Mangcal, Alden S. Tusan, Sr. Susuan O.
69

Bolanio, OND, Lolita G. Demonteverde, Benjie L. Nequinto, Rose Lilia S. Romano and
Amparo S. Yap.

70
Rollo, p. 6.

71 Id. at 337, citing Malabanan v. Gaw Ching, 181 SCRA 84 (1990).

72 246 SCRA 540 (1995).

73 People v. Vera, supra.

74 Militante v. Court of Appeals, 330 SCRA 318 (2000).

75 Ibid.

Cruz v. Secretary of Environment and Natural Resources, 347 SCRA 128 (2000),
76

Kapunan, J., Separate Opinion. [Emphasis supplied.]

77 Joya v. Presidential Commission on Good Government, 225 SCRA 568 (1993).

78 Integrated Bar of the Philippines v. Zamora, supra.

79 J. Bernas, S.J., The 1987 Constitution of the Philippines: A Commentary 1009 (1996).

Cruz v. Secretary of Environment and Natural Resources, supra, Kapunan, J., Separate
80

Opinion.
81 Id., Puno, J., Separate Opinion, and Panganiban, J., Separate Opinion.

82Cariño v. Insular Government, 212 US 449, 53 L.Ed. 595 (1909). For instance, Law 14,
Title 12, Book 4 of the Recopilacion de Leyes de las Indias proclaimed:

We having acquired full sovereignty over the Indies, and all lands, territories, and
possessions not heretofore ceded away by our royal predecessors, or by us, or in
our name, still pertaining to the royal crown and patrimony, it is our will that all lands
which are held without proper and true deeds of grant be restored to us according as
they belong to us, in order that after reserving before all what to us or to our viceroys,
audiencias, and governors may seem necessary for public squares, ways, pastures,
and commons in those places which are peopled, taking into consideration not only
their present condition, but also their future and their probable increase, and after
distributing to the natives what may be necessary for tillage and pasturage,
confirming them in what they now have and giving them more if necessary, all the
rest of said lands may remain free and unencumbered for us to dispose of as we
may wish.

83Republic v. Court of Appeals, 160 SCRA 228 (1988). It has been noted, however, that "the
prohibition in the [1935] Constitution against alienation by the state of mineral lands and
minerals is not properly a part of the Regalian doctrine but a separate national policy
designed to conserve our mineral resources and prevent the state from being deprived of
such minerals as are essential to national defense." (A. Noblejas, Philippine Law on Natural
Resources 126-127 [1959 ed.], citing V. Francisco, The New Mining Law.)

84Cruz v. Secretary of Environment and Natural Resources, supra, Kapunan, J., Separate
Opinion, citing A. Noblejas, Philippine Law on Natural Resources 6 (1961). Noblejas
continues:

Thus, they asserted their right of ownership over mines and minerals or precious
metals, golds, and silver as distinct from the right of ownership of the land in which
the minerals were found. Thus, when on a piece of land mining was more valuable
than agriculture, the sovereign retained ownership of mines although the land has
been alienated to private ownership. Gradually, the right to the ownership of minerals
was extended to base metals. If the sovereign did not exploit the minerals, they grant
or sell it as a right separate from the land. (Id., at 6.)

In the unpublished case of Lawrence v. Garduño (L-10942, quoted in V. Francisco,

85

Philippine Law on Natural Resources 14-15 [1956]), this Court observed:

The principle underlying Spanish legislation on mines is that these are subject to the
eminent domain of the state. The Spanish law of July 7, 1867, amended by the law of
March 4, 1868, in article 2 says: "The ownership of the substances enumerated in
the preceding article (among them those of inflammable nature), belong[s] to the
state, and they cannot be disposed of without the government authority."

The first Spanish mining law promulgated for these Islands (Decree of Superior Civil
Government of January 28, 1864), in its Article I, says: "The supreme ownership of
mines throughout the kingdom belong[s] to the crown and to the king. They shall not
be exploited except by persons who obtained special grant from this superior
government and by those who may secure it thereafter, subject to this regulation."
 Article 2 of the royal decree on ownership of mines in the Philippine Islands, dated
May 14, 1867, which was the law in force at the time of the cession of these Islands
to the Government of the United States, says: "The ownership of the substances
enumerated in the preceding article (among them those of inflammable nature)
belongs to the state, and they cannot be disposed of without an authorization issued
by the Superior Civil Governor."

Furthermore, all those laws contained provisions regulating the manner of

prospecting, locating and exploring mines in private property by persons other than
the owner of the land as well as the granting of concessions, which goes to show that
private ownership of the land did not include, without express grant, the mines that
might be found therein.

Analogous provisions are found in the Civil Code of Spain determining the ownership
of mines. In its Article 339 (Article 420, New Civil Code) enumerating properties of
public ownership, the mines are included, until specially granted to private
individuals. In its article 350 (Art. 437, New Civil Code) declaring that the proprietor of
any parcel of land is the owner of its surface and of everything under it, an exception
is made as far as mining laws are concerned. Then in speaking of minerals, the
Code in its articles 426 and 427 (Art. 519, New Civil Code) provides rules governing
the digging of pits by third persons on private-owned lands for the purpose of
prospecting for minerals.

86 Atok Big-Wedge Mining Co. v. Intermediate Appellate Court, 261 SCRA 528 (1996).

87 Ibid.

Cruz v. Secretary of Environment and Natural Resources, supra, Kapunan, J., Separate
88

Opinion.

89 Ibid.

90 McDaniel v. Apacible and Cuisia, 42 Phil. 749 (1922).

91 Noblejas, supra, at 5.

92 V. M. A. Dimagiba, Service Contract Concepts in Energy, 57 Phil. L. J. 307, 313 (1982).

93P. A. Agabin, Service Contracts: Old Wine in New Bottles?, in II Draft Proposal of the 1986
U.P. Law Constitution Project 3.

94 Id., at 2-3.

95 Id., at 3.

96 Ibid.

97 Ibid.

98 Ibid.
99An Act to Provide for the Exploration, Location and Lease of Lands Containing Petroleum
and other Mineral Oils and Gas in the Philippine Islands.

100An Act to Provide for the Leasing and Development of Coal Lands in the Philippine
Islands.

101 Agabin, supra, at 3.

102 People v. Linsangan, 62 Phil. 646 (1935).

103 Ibid.

104 Ibid.

105 Ibid.

106 Ibid.

107 Atok Big-Wedge Mining Co. v. Intermediate Appellate Court, supra.

108 Bernas, S.J., supra, at 1009-1010, citing Lee Hong Hok v. David, 48 SCRA 372 (1972).

109 II J. Aruego, The Framing of the Philippine Constitution 592 (1949).

110 Id., at 600-601.

111 Id., at 604. Delegate Aruego expounds:

At the time of the framing of the Philippine Constitution, Filipino capital had been
known to be rather shy. Filipinos hesitated as a general rule to invest a considerable
sum of their capital for the development, exploitation, and utilization of the natural
resources of the country. They had not as yet been so used to corporate enterprises
as the peoples of the West. This general apathy, the delegates knew, would mean
the retardation of the development of the natural resources, unless foreign capital
would be encouraged to come in and help in that development. They knew that the
nationalization of the natural resources would certainly not encourage the investment
of foreign capital into them. But there was a general feeling in the Convention that it
was better to have such development retarded or even postponed altogether until
such time when the Filipinos would be ready and willing to undertake it rather than
permit the natural resources to be placed under the ownership or control of
foreigners in order that they might be immediately developed, with the Filipinos of the
future serving not as owners but at most as tenants or workers under foreign
masters. By all means, the delegates believed, the natural resources should be
conserved for Filipino posterity.

The nationalization of natural resources was also intended as an instrument of

national defense. The Convention felt that to permit foreigner to own or control the
natural resources would be to weaken the national defense. It would be making
possible the gradual extension of foreign influence into our politics, thereby
increasing the possibility of foreign control. x x x.
 Not only these. The nationalization of the natural resources, it was believed, would
prevent making the Philippines a source of international conflicts with the consequent
danger to its internal security and independence. For unless the natural resources
were nationalized, with the nationals of foreign countries having the opportunity to
own or control them, conflicts of interest among them might arise inviting danger to
the safety and independence of the nation. (Id., at 605-606.)

Palting v. San Jose Petroleum Inc., 18 SCRA 924 (1966); Republic v. Quasha, 46 SCRA
112

160 (1972).

113 Atok Big-Wedge Mining Co. v. Intermediate Appellate Court, supra.

114 Article VI thereof provided:

1. The disposition, exploitation, development and utilization of all agricultural, timber,

and mineral lands of the public domain, waters, minerals, coal, petroleum and other
mineral oils, all forces and sources of potential energy, and other natural resources
of either Party, and the operation of public utilities, shall, if open to any person, be
open to citizens of the other Party and to all forms of business enterprise owned or
controlled directly or indirectly, by citizens of such other Party in the same manner as
to and under the same conditions imposed upon citizens or corporations or
associations owned or controlled by citizens of the Party granting the right.

2. The rights provided for in Paragraph 1 may be exercised x x x in the case of

citizens of the United States, with respect to natural resources in the public domain in
the Philippines, only through the medium of a corporation organized under the laws
of the Philippines and at least 60% of the capital stock of which is owned or
controlled by citizens of the United States x x x.

3. The United States of America reserves the rights of the several States of the
United States to limit the extent to which citizens or corporations or associations
owned or controlled by citizens of the Philippines may engage in the activities
specified in this Article. The Republic of the Philippines reserves the power to deny
any of the rights specified in this Article to citizens of the United States who are
citizens of States, or to corporations or associations at least 60% of whose capital
stock or capital is owned or controlled by citizens of States, which deny like rights to
citizens of the Philippines, or to corporations or associations which ore owned or
controlled by citizens of the Philippines x x x.

115An Act to Promote the Exploration, Development, Exploitation, and Utilization of the
Petroleum Resources of the Philippines; to Encourage the Conservation of such Petroleum
Resources; to Authorize the Secretary of Agriculture and Natural Resources to Create an
Administration Unit and a Technical Board in the Bureau of Mines; to Appropriate Funds
therefor; and for other purposes.

116 Rep. Act No. 387 (1949), as amended, art. 10 (b).

117 Id., art. 10 (c).

118 Id., art. 5.

 Id., art. 31. The same provision recognized the rights of American citizens under the Parity
119

Amendment:

During the effectivity and subject to the provisions of the ordinance appended to the
Constitution of the Philippines, citizens of the United States and all forms of business
enterprises owned and controlled, directly or indirectly, by citizens of the United
States shall enjoy the same rights and obligations under the provisions of this Act in
the same manner as to, and under the same conditions imposed upon, citizens of the
Philippines or corporations or associations owned or controlled by citizens of the
Philippines.

120 Id., art. 10.

121 Id., art. 3.

122 Id., art. 9.

123 Ibid.

124 Rep. Act No. 387 (1949), as amended, art. 8.

125 Id., art. 25.

126 Id., art. 47.

127 Id., art. 60.

Id., art. 64. Article 49, R.A. No. 387 originally imposed an annual exploration tax on
128

exploration concessionaires but this provision was repealed by Section 1, R.A. No. 4304.

129 Francisco, supra, at 103.

130 Rep. Act No. 387 (1949), as amended, art. 65.

131 Francisco, supra, at 103.

132 Rep. Act No. 387 (1949), as amended, art. 90 (b) 3.

133 Id., art. 90 (b) 4.

134 Id., art. 93-A.

135 Id., art. 93.

136 Ibid.

137 Rep. Act No. 387 (1949), as amended, art. 94.

138 Id., art. 106.

139 Id., art. 95.

140 Ibid.

141 Rep. Act No. 387 (1949), as amended, art. 95 (e).

142Dimagiba, supra, at 315, citing Fabrikant, Oil Discovery and Technical Change in
Southeast Asia, Legal Aspects of Production Sharing Contracts in the Indonesian Petroleum
Industry, 101-102, sections 13C.24 and 13C.25 (1972).

143 Agabin, supra, at 4.

144 Dimagiba, supra, at 318.

Amending Presidential Decree No. 8 issued on October 2, 1972, and Promulgating an

145

Amended Act to Promote the Discovery and Production of Indigenous Petroleum and
Appropriate Funds Therefor.

146 Pres. Decree No. 87 (1972), sec. 4.

147 Agabin, supra, at 6.

148M. Magallona, Service Contracts in Philippine Natural Resources, 9 World Bull. 1, 4

(1993).

149 Pres. Decree No. 87 (1972), sec. 6.

150 Id., sec. 4.

151 Id., sec. 6.

152 Id., sec. 7.

153 Id., sec. 8.

154 Ibid.

155 Ibid.

156 Pres. Decree No. 87 (1972), sec. 9.

157 Id., sec. 12.

158 Id., sec. 13.

Dimagiba draws the following comparison between the service contract scheme and the
159

concession system:

In both the concession system and the service contract scheme, work and financial
obligations are required of the developer. Under Republic Act No. 387 and
 Presidential Decree No. 87, the concessionaire and the service contractors are
extracted certain taxes in favor of the government. In both arrangements, the
explorationist/developer is given incentives in the form of tax exemptions in the
importation or disposition of machinery, equipment, materials and spare parts
needed in petroleum operations.

The concessionaire and the service contractor are required to keep in their files
valuable data and information and may be required to submit need technological or
accounting reports to the Government. Duly authorized representatives of the
Government could, under the law, inspect or audit the books of accounts of the
contract holder.

In both systems, signature, discovery or production bonuses may be given by the

developer to the host Government.

The concession system, however, differs considerably from the service contract
system in important areas of the operations. In the concession system, the
Government merely receives fixed royalty which is a certain percentage of the crude
oil produced or other units of measure, regardless of whether the concession holder
makes profits or not. This is not so in the service contract system. A certain
percentage of the gross production is set aside for recoverable expenditures by the
contractor. Of the net proceeds the parties are entitled percentages of share that will
accrue to each of them.

In the royalty system, the concessionaire may be discouraged to produce more for
the reason that since the royalty paid to the host country is closely linked to the
volume of production, the greater the produce, the more amount or royalty would be
allocated to the Government. This is not so in the production sharing system. The
share of the Government depends largely on the net proceeds of production after
reimbursing the service contractor of its recoverable expenses.

As a general rule, the Government plays a passive role in the concession system,
more particularly, interested in receiving royalties from the concessionaire. In the
production-sharing arrangement, the Government plays a more active role in the
management and monitoring of oil operations and requires the service contractor
entertain obligations designed to bring more economic and technological benefits to
the host country. (Dimagiba, supra, at 330-331.)

160 Agabin, supra, at 6.

The antecedents leading to the Proclamation are narrated in Javellana v. Executive

161

Secretary, 50 SCRA 55 (1973):

On March 16, 1967, Congress of the Philippines passed Resolution No. 2, which was
amended by Resolution No. 4, of said body, adopted on June 17, 1969, calling a
convention to propose amendments to the Constitution of the Philippines. Said
Resolution No. 2, as amended, was implemented by Republic Act No. 6132
approved on August 24, 1970, pursuant to the provisions of which the election of
delegates to said convention was held on November 10, 1970, and the 1971
Convention began to perform its functions on June 1, 1971. While the Convention
was in session on September 21, 1972, the President issued Proclamation No. 1081
placing the entire Philippines under Martial Law. On November 29, 1972, the
 President of the Philippines issued Presidential Decree No. 73, submitting to the
Filipino people for ratification or rejection the Constitution of the Republic of the
Philippines proposed by the 1971 Constitutional Convention, and appropriating funds
therefor, as well as setting the plebiscite for such ratification on January 15, 1973.

On January 17, 1973, the President issued Proclamation No. 1102 certifying and
proclaiming that the Constitution proposed by the 1971 Constitutional Convention
"has been ratified by an overwhelming majority of all the votes cast by the members
of all the Barangays (Citizens Assemblies) throughout the Philippines, and has
thereby come into effect."

162 Bernas, S.J., supra, at 1016, Note 28, citing Session of November 25, 1972.

Agabin, supra, at 1, quoting Sanvictores, The Economic Provisions in the 1973

163

Constitution, in Espiritu, 1979 Philconsa Reader on Constitutional and Policy Issues 449.

164
Bernas, S.J., supra, at 1016, Note 28, citing Session of November 25, 1972.

165 Ibid.

166 Ibid.

167Allowing Citizens of the Philippines or Corporations or Associations at least Sixty Per

Centum of the Capital of which is Owned by such Citizens to Enter into Service Contracts
with Foreign Persons, Corporations for the Exploration, Development, Exploitation or
Utilization of Lands of the Public Domain, Amending for the purpose certain provisions of
Commonwealth Act No. 141.

168 Pres. Decree No. 151 (1973), sec. 1.

Providing for A Modernized System of Administration and Disposition of Mineral Lands

169

and to Promote and Encourage the Development and Exploitation thereof.

170 Revising and Consolidating All Laws and Decrees Affecting Fishing and Fisheries.

171 Pres. Decree No. 704 (1975), sec. 21.

172Revising Presidential Decree No. 389, otherwise known as The Forestry Reform Code of
the Philippines.

173 Pres. Decree No. 705 (1975), sec. 62.

174 An Act to Promote the Exploration and Development of Geothermal Resources.

175 Magallona, supra, at 6.

176Declaring a National Policy to Implement the Reforms Mandated by the People, Protecting
their Basic Rights, Adopting a Provisional Constitution, and Providing for an Orderly
Transition to a Government under a New Constitution.
177 Const., art. XVIII, sec. 27; De Leon v. Esguerra, 153 SCRA 602 (1987).

178 Miners Association of the Philippines, Inc. v. Factoran, Jr., 240 SCRA 100 (1995).

179 Ibid.

180 Ibid.

181 J. Bernas, S.J., The Intent of the 1986 Constitution Writers 812 (1995).

182 Miners Association of the Philippines, Inc. v. Factoran, Jr., supra.

183 III Records of the Constitutional Commission 255.

184 Id., at 355-356.

185 Const. (1986), art. II, sec. 1.

Cruz v. Secretary of Environment and Natural Resources, supra, Puno, J., Separate
186

Opinion.

187 Rep. Act No. 7942 (1995), sec. 9.

188SEC. 82. Allocation of Government Share.—The Government share as referred to in the

preceding sections shall be shared and allocated in accordance with Sections 290 and 292
of Republic Act No. 7160 otherwise known as the Local Government Code of 1991. In case
the development and utilization of mineral resources is undertaken by a government-owned
or -controlled corporation, the sharing and allocation shall be in accordance with Sections
291 and 292 of the said Code.

189 An Act Creating A People's Small-Scale Mining Program and for other purposes.

190 Rep. Act No. 7942 (1995), sec. 42.

191 Id., secs. 3 (ab) and 26.

"Contractor" means a qualified person acting alone or in consortium who is a party to a

192

mineral agreement or to a financial or technical assistance agreement. (Id., sec. 3[g].)

"Contract area" means land or body water delineated for purposes of exploration,
193

development, or utilization of the minerals found therein. (Id., sec. 3[f].)

"Gross output" means the actual market value of minerals or mineral products from its
194

mining area as defined in the National Internal Revenue Code (Id., sec. 3[v]).

195 Id., sec. 26 (a).

An Act Reducing Excise Tax Rates on Metallic and Non-Metallic Minerals and Quarry
196

Resources, amending for the purpose Section 151 (a) of the National Internal Revenue
Code, as amended.
197 Rep. Act No. 7942 (1995), sec. (80).

198 Id., Sec. 26 (b).

199"Mineral resource" means any concentration of minerals/rocks with potential economic

value. (Id., sec. 3[ad].)

200 Id., sec. 26 (c).

201 Ibid.

202 Id., sec. 3 (h).

203 Id., sec. 3 (x).

204 Id., sec. 26, last par.

205 Id., sec. 27.

206 Id., sec. 3 (aq).

207 Id., sec. 3 (r).

208 Id., sec. 33.

209 Id., sec. 3 (t).

210 Id., sec. 3 (aq).

211 The maximum areas in cases of mineral agreements are prescribed in Section 28 as
follows:

SEC. 28. Maximum Areas for Mineral Agreement. – The maximum area that a
qualified person may hold at any time under a mineral agreement shall be:

(a) Onshore, in any one province –

(1) For individuals, ten (10) blocks; and

(2) For partnerships, cooperatives, associations, or corporations, one

hundred (100) blocks.

(b) Onshore, in the entire Philippines –

(1) For individuals, twenty (20) blocks; and

(2) For partnerships, cooperatives, associations, or corporations, two

hundred (200) blocks.

(c) Offshore, in the entire Philippines –

 (1) For individuals, fifty (50) blocks;

(2) For partnerships, cooperatives, associations, or corporations, five

hundred (500) blocks; and

(3) For the exclusive economic area, a larger area to be determined

by the Secretary.

The maximum areas mentioned above that a contractor may hold under a
mineral agreement shall not include mining/quarry areas under operating
agreements between the contractor and a
claimowner/lessee/permittee/licensee entered into under Presidential Decree
No. 463.

On the other hand, Section 34, which governs the maximum area for FTAAs
provides:

SEC. 34. Maximum Contract Area. – The maximum contract area that may be
granted per qualified person, subject to relinquishment shall be:

(a) 1,000 meridional blocks onshore;

(b) 4,000 meridional blocks offshore; or

(c) Combinations of (a) and (b) provided that it shall not exceed the maximum
limits for onshore and offshore areas.

212 Id., sec. 33.

213 Id., sec. 81.

214 Kapatiran v. Tan, 163 SCRA 371 (1988).

Providing for the Publication of Laws either in the Official Gazette or in a Newspaper of
215

General Circulation in the Philippines as a Requirement for their Effectivity.

Section 1, E.O. No. 200 was subsequently incorporated in the Administrative Code of
216

1987 (Executive Order No. 292 as Section 18, Chapter 5 (Operation and Effect of Laws),
Book 1 (Sovereignty and General Administration).

217 136 SCRA 27 (1985).

218 Manila Prince Hotel v. Government Service Insurance System, 267 SCRA 408 (1997).

219 Const., art. 3, sec. 1.

220 83 O.G. (Suppl.) 3528-115 to 3528-117 (August 1987).

221 Miners Association of the Philippines, Inc. v. Factoran, Jr., supra.

222 Petitioners note in their Memorandum that the FTAA:

x x x guarantees that wholly foreign owned [WMCP] entered into the FTAA in order
to facilitate "the large scale exploration, development and commercial exploitation of
mineral deposits that may be found to exist within the Contract area." [Section 1.1]
As a contractor it also has the "exclusive right to explore, exploit, utilize, process and
dispose of all mineral products and by-products thereof that may be derived or
produced from the Contract Area." [Section 1.3] Thus, it is divided into an
"exploration and feasibility phase" [Section 3.2 (a)] and a "construction, development
and production phase." [Section 3. 2 (b).]

Thus, it is this wholly foreign owned corporation that, among other things:

(a) operates within a prescribed contract area [Section 4],

(b) opts to apply for a Mining Production Sharing Agreement [Section 4.2],

(c) relinquishes control over portions thereof at their own choice [Section 4.6],

(d) submits work programs, incurs expenditures, and makes reports during
the exploration period [Section 5],

(e) submits a Declaration of Mining Feasibility [Sections 5.4 and 5.5],

(f) during the development period, determines the timetable, submits work
programs, provides the reports and determines and executes expansions,
modifications, improvements and replacements of new mining facilities within
the area [Section 6],

(g) complies with the conditions for environmental protection and industrial
safety, posts the necessary bonds and makes representations and
warranties to the government [Section 10.5].

The contract subsists for an initial term of twenty-five (25) years from the date of its
effectivity [Section 3.1] and renewable for a further period of twenty-five years under
the same terms and conditions upon application by private respondent [Section 3.3].
(Rollo, pp. 458-459.)

223 H. C. Black, Handbook on the Construction and Interpretation of the Laws § 8.

224 Ibid.

225 J. M. Tuason & Co., Inc. v. Land Tenure Association, 31 SCRA 413 (1970).

226 Rollo, p. 580.

227 Ibid. Emphasis supplied.

228People v. Manantan, 115 Phil. 657 (1962); Commission on Audit of the Province of Cebu
v. Province of Cebu, 371 SCRA 196 (2001).
229 Rollo, p. 569.

230 III Record of the Constitutional Commission 351-352.

231 V Record of the Constitutional Commission 844.

232 Id., at 841.

233 Id., at 842.

234 Id. at 844.

Vide Cherey v. Long Beach, 282 NY 382, 26 NE 2d 945, 127 ALR 1210 (1940), cited in
235

16 Am Jur 2d Constitutional Law §79.

236 Civil Liberties Union v. Executive Secretary, 194 SCRA 317, 325 (1991).

237 III Record of the Constitutional Commission 278.

238 Id., at 316-317.

239 III Record of the Constitutional Commission 358-359.

240 Vera v. Avelino, 77 Phil. 192 (1946).

241 J. Nolledo, The New Constitution of the Philippines Annotated 924-926 (1990).

Resolution to Incorporate in the New Constitution an Article on National Economy and

242

Patrimony.

243The Chair of the Committee on National Economy and Patrimony, alluded to it in the
discussion on the capitalization requirement:

MR. VILLEGAS. We just had a long discussion with the members of the team from
the UP Law Center who provided us a draft. The phrase that is contained here which
we adopted from the UP draft is "60 percent of voting stock." (III Record of the
Constitutional Commission 255.)

Likewise, in explaining the reasons for the deletion of the term "exploitation":

MR. VILLEGAS. Madam President, following the recommendation in the UP draft, we

omitted "exploitation" first of all because it is believed to be subsumed under
"development" and secondly because it has a derogatory connotation. (Id., at 358.)

244 Id., at 12.

245 Id., at 15-16.

246M. Magallona, Nationalism and Its Subversion in the Constitution 5, in II Draft Proposal of
the 1986 U.P. Law Constitution Project.
247 Agabin, supra, at 16.

E. Labitag, Philippine Natural Resources: Some Problems and Perspectives 17 in II Draft

248

Proposal of the 1986 U.P. Law Constitution Project.

249 I Draft Proposal of the 1986 U.P. Law Constitution Project 11-13.

250 Id., at 9-11. Professor Labitag also suggests that:

x x x. The concession regime of natural resources disposition should be

discontinued. Instead the State shall enter into such arrangements and agreements
like co-production, joint ventures, etc. as shall bring about effective control and a
larger share in the proceeds, harvest or production. (Labitag, supra, at 17.)

251 Vide Note 147.

252Vide Note 230. The question was posed before the Jamir amendment and subsequent
proposals introducing other limitations.

Comm. Villegas' response that there was no requirement in the 1973 Constitution for
a law to govern service contracts and that, in fact, there were then no such laws is
inaccurate. The 1973 Charter required similar legislative approval, although it did not
specify the form it should take: "The Batasang Pambansa, in the national interest,
may allow such citizens… to enter into service contracts…." As previously noted,
however, laws authorizing service contracts were actually enacted by presidential
decree.

253 Vide Note 238.

254 Vide Note 241.

255 Vide Note 231.

256 Dated July 28, 1987.

257 Dated October 3, 1990.

258 Peralta v. Civil Service Commission, 212 SCRA 425 (1992).

259 Vide Note 238.

260 III Record of the Constitutional Commission 354.

261 Salaysay v. Castro, 98 Phil. 364 (1956).

262 Rep. Act No. 7942 (1995), sec. 3 (q).

263 Id., sec. 3 (aq).

264 Id., sec. 20.

265 Id., sec. 23, first par.

266 Id., sec. 23, last par.

267 Id., sec. 3 (j).

268 Id., sec. 3 (az).

269 Id., sec. 35 (m).

270 Id., secs. 3 (aq) and 56.

271 Id., sec. 3 (y).

272 Id., sec. 35 (g).

273 Id., sec. 35 (h).

274 Id., sec. 35 (l).

275 Id., sec. 3 (af).

276SEC. 72. Timber Rights.—Any provision of the law to the contrary notwithstanding, a
contractor may be granted a right to cut trees or timber within his mining area as may be
necessary for his mining operations subject to forestry laws, rules and regulations: Provided,
That if the land covered by the mining area is already covered by exiting timber concessions,
the volume of timber needed and the manner of cutting and removal thereof shall be
determined by the mines regional director, upon consultation with the contractor, the timber
concessionaire/permittee and the Forest Management Bureau of the Department: Provided,
further, That in case of disagreement between the contractor and the timber concessionaire,
the matter shall be submitted to the Secretary whose decision shall be final. The contractor
shall perform reforestation work within his mining area in accordance with forestry laws, rules
and regulations. [Emphasis supplied.]

SEC. 73. Water Rights.—A contractor shall have water rights for mining operations
upon approval of application with the appropriate government agency in accordance
with existing water laws, rules and regulations promulgated thereunder: Provided,
That water rights already granted or vested through long use, recognized and
acknowledged by local customs, laws and decisions of courts shall not thereby be
impaired: Provided, further, That the Government reserves the right to regulate water
rights and the reasonable and equitable distribution of water supply so as to prevent
the monopoly of the use thereof. [Emphasis supplied.]

SEC. 74. Right to Possess Explosives.—A contractor/exploration permittee shall

have the right to possess and use explosives within his contract/permit area as may
be necessary for his mining operations upon approval of an application with the
appropriate government agency in accordance with existing laws, rules and
regulations promulgated thereunder: Provided, That the Government reserves the
right to regulate and control the explosive accessories to ensure safe mining
operations. [Emphasis supplied.]
 SEC. 75. Easement Rights.—When mining areas are so situated that for purposes of
more convenient mining operations it is necessary to build, construct or install on the
mining areas or lands owned, occupied or leased by other persons, such
infrastructure as roads, railroads, mills, waste dump sites, tailings ponds,
warehouses, staging or storage areas and port facilities, tramways, runways,
airports, electric transmission, telephone or telegraph lines, dams and their normal
flood and catchment areas, sites for water wells, ditches, canals, new river beds,
pipelines, flumes, cuts, shafts, tunnels, or mills, the contractor, upon payment of just
compensation, shall be entitled to enter and occupy said mining areas or lands.
[Emphasis supplied.]

SEC. 76. Entry into Private Lands and Concession Areas.—Subject to prior
notification, holders of mining rights shall not be prevented from entry into private
lands and concession areas by surface owners, occupants, or concessionaires when
conducting mining operations therein: Provided, That any damage done to the
property of the surface owner, occupant, or concessionaire as a consequence of
such operations shall be properly compensated as may be bee provided for in the
implementing rules and regulations: Provided, further, That to guarantee such
compensation, the person authorized to conduct mining operation shall, prior thereto,
post a bond with the regional director based on the type of properties, the prevailing
prices in and around the area where the mining operations are to be conducted, with
surety or sureties satisfactory to the regional director. [Emphasis supplied.]

277 Id., sec. 39, first par.

278 Id., sec. 39, second par.

279
Id., sec. 35 (e).

280 SEC. 23. Rights and Obligations of the Permittee.—x x x.

The permittee may apply for a mineral production sharing agreement, joint venture
agreement, co-production agreement or financial or technical assistance agreement
over the permit area, which application shall be granted if the permittee meets the
necessary qualifications and the terms and conditions of any such agreement:
Provided, That the exploration period covered by the exploration period of the
mineral agreement or financial or technical assistance agreement.

SEC. 35. Terms and Conditions. — The following terms, conditions, and warranties shall
281

be incorporated in the financial or technical assistance agreement, to wit:

(a) A firm commitment in the form of a sworn statement, of an amount corresponding

to the expenditure obligation that will be invested in the contract area: Provided, That
such amount shall be subject to changes as may be provided for in the rules and
regulations of this Act;

(b) A financial guarantee bond shall be posted in favor of the Government in an

amount equivalent to the expenditure obligation of the applicant for any year;

(c) Submission of proof of technical competence, such as, but not limited to, its track
record in mineral resource exploration, development, and utilization; details of
technology to be employed in the proposed operation; and details of technical
personnel to undertake the operation;

(d) Representations and warranties that the applicant has all the qualifications and
none of the disqualifications for entering into the agreement;

(e) Representations and warranties that the contractor has or has access to all the
financing, managerial and technical expertise and, if circumstances demand, the
technology required to promptly and effectively carry out the objectives of the
agreement with the understanding to timely deploy these resources under its
supervision pursuant to the periodic work programs and related budgets, when
proper, providing an exploration period up to two (2) years, extendible for another
two (2) years but subject to annual review by the Secretary in accordance with the
implementing rules and regulations of this Act, and further, subject to the
relinquishment obligations;

(f) Representations and warranties that, except for paymets for dispositions for its
equity, foreign investments in local enterprises which are qualified for repatriation,
and local supplier's credits and such other generally accepted and permissible
financial schemes for raising funds for valid business purposes, the conractor shall
not raise any form of financing from domestic sources of funds, whether in Philippine
or foreign currency, for conducting its mining operations for and in the contract area;

(g) The mining operations shall be conducted in accordance with the provisions of
this Act and its implementing rules and regulations;

(h) Work programs and minimum expenditures commitments;

(i) Preferential use of local goods and services to the maximum extent practicable;

(j) A stipulation that the contractors are obligated to give preference to Filipinos in all
types of mining employment for which they are qualified and that technology shall be
transferred to the same;

(k) Requiring the proponent to effectively use appropriate anti-pollution technology

and facilities to protect the environment and to restore or rehabilitate mined out areas
and other areas affected by mine tailings and other forms of pollution or destruction;

(l) The contractors shall furnish the Government records of geologic, accounting, and
other relevant data for its mining operations, and that book of accounts and records
shall be open for inspection by the government;

(m) Requiring the proponent to dispose of the minerals and byproducts produced
under a financial or technical assistance agreement at the highest price and more
advantageous terms and conditions as provided for under the rules and regulations
of this Act;

(n) Provide for consultation and arbitration with respect to the interpretation and
implementation of the terms and conditions of the agreements; and
 (o) Such other terms and conditions consistent with the Constitution and with this Act
as the Secretary may deem to be for the best interest of the State and the welfare of
the Filipino people.

282SEC. 39. Option to Convert into a Mineral Agreement. — The contractor has the option to
convert the financial or technical assistance agreement to a mineral agreement at any time
during the term of the agreement, if the economic viability of the contract area is found to be
inadequate to justify large-scale mining operations, after proper notice to the Secretary as
provided for under the implementing rules and regulations; Provided, That the mineral
agreement shall only be for the remaining period of the original agreement.

In the case of a foreign contractor, it shall reduce its equity to forty percent (40%) in
the corporation, partnership, association, or cooperative. Upon compliance with this
requirement by the contractor, the Secretary shall approve the conversion and
execute the mineral production-sharing agreement.

SEC. 56. Eligibility of Foreign-owned/-controlled Corporation.—A foreign owned/ -

283

controlled corporation may be granted a mineral processing permit.

SEC. 3. Definition of Terms. – As used in and for purposes of this Act, the following terms,
284

whether in singular or plural, shall mean:

xxx

(g) "Contractor" means a qualified person acting alone or in consortium who is a

party to a mineral agreement or to a financial or technical assistance agreement.

SEC. 34. Maximum Contract Area. — The maximum contract area that may be granted
285

per qualified person, subject to relinquishment shall be:

(a) 1,000 meridional blocks onshore;

(b) 4,000 meridional blocks offshore; or

(c) Combinations of (a) and (b) provided that it shall not exceed the maximum limits
for onshore and offshore areas.

SEC. 36. Negotiations. — A financial or technical assistance agreement shall be

286

negotiated by the Department and executed and approved by the President. The President
shall notify Congress of all financial or technical assistance agreements within thirty (30)
days from execution and approval thereof.

SEC. 37. Filing and Evaluation of Financial or Technical Assistance Agreement

287

Proposals. — All financial or technical assistance agreement proposals shall be filed with the
Bureau after payment of the required processing fees. If the proposal is found to be sufficient
and meritorious in form and substance after evaluation, it shall be recorded with the
appropriate government agency to give the proponent the prior right to the area covered by
such proposal: Provided, That existing mineral agreements, financial or technical assistance
agreements and other mining rights are not impaired or prejudiced thereby. The Secretary
shall recommend its approval to the President.
288SEC. 38. Term of Financial or Technical Assistance Agreement. — A financial or technical
assistance agreement shall have a term not exceeding twenty-five (25) years to start from
the execution thereof, renewable for not more than twenty-five (25) years under such terms
and conditions as may be provided by law.

289SEC. 40. Assignment/Transfer. — A financial or technical assistance agreement may be

assigned or transferred, in whole or in part, to a qualified person subject to the prior approval
of the President: Provided, That the President shall notify Congress of every financial or
technical assistance agreement assigned or converted in accordance with this provision
within thirty (30) days from the date of the approval thereof.

290 SEC. 41. Withdrawal from Financial or Technical Assistance Agreement. — The
contractor shall manifest in writing to the Secretary his intention to withdraw from the
agreement, if in his judgment the mining project is no longer economically feasible, even
after he has exerted reasonable diligence to remedy the cause or the situation. The
Secretary may accept the withdrawal: Provided, That the contractor has complied or satisfied
all his financial, fiscal or legal obligations.

291 SEC. 81. Government Share in Other Mineral Agreements.—x x x.

The Government share in financial or technical assistance agreement shall consist

of, among other things, the contractor's corporate income tax, excise tax, special
allowance, withholding tax due from the contractor's foreign stockholders arising from
dividend or interest payments to the said foreign stockholder in case of a foreign
national and all such other taxes, duties and fees as provided for under existing laws.

The collection of Government share in financial or technical assistance agreement

shall commence after the financial or technical assistance agreement contractor has
fully recovered its pre-operating expenses, exploration, and development
expenditures, inclusive.

292SEC. 90. Incentives.—The contractors in mineral agreements, and financial or technical

assistance agreements shall be entitled to the applicable fiscal and non-fiscal incentives as
provided for under Executive Order No. 226, otherwise known as the Omnibus Investments
Code of 1987: Provided, That holders of exploration permits may register with the Board of
Investments and be entitled to the fiscal incentives granted under the said Code for the
duration of the permits or extensions thereof: Provided, further, That mining activities shall
always be included in the investment priorities plan.

293 Lidasan v. Commission on Elections, 21 SCRA 496 (1967).

294 Vide also WMCP FTAA, sec. 10.2 (a).

295 WMCP, sec. 10.2.

296 Id., sec. 11.

297 Id., sec. 10.1(a).

298 Id., sec. 10.1(c).

299 Id., sec. 6.4.

300 Rollo, pp. 563-564.

301 Civil Code, art. 8.

302 Const., art III, sec. 1.

303 Vide Note 223.

304 Rollo, p. 243.

305 Civil Liberties Union v. Executive Secretary, supra.

306 Automotive Parts & Equipment Company, Inc. v. Lingad, 30 SCRA 248 (1969).

307 Ibid.