In a landmark decision handed down on March 10, 2020, the Supreme Court (SC) declared void the 30-year-old foreign equity limitation on construction companies imposed under the “Revised Rules and Regulations Governing the Licensing and Accreditation of Contractors in the Philippines” or the implementing rules and regulations (IRR) of Republic Act (RA) 4566, or the “Contractors’ License Law.” This pronouncement effectively removed a substantial barrier to the entry of foreign contractors in the construction industry and is indeed a significant step toward fair competition in the Philippines. This decision is very timely, since it would give our economy a much-needed boost during the Covid-19 pandemic.
This case stemmed from the Philippine Contractors Accreditation Board’s (PCAB) denial of applications submitted by Manila Water Co. Inc. to accredit its foreign contractors. The denial was based on Section 3.1, Rule 3 of the IRR, which reserved regular licenses only to contractors or firms that are either Filipino sole proprietorships, Filipino partnerships or corporations with at least 60-percent Filipino equity participation. Aggrieved by the PCAB’s decision, Manila Water filed a petition for declaratory relief before a regional trial court, which rendered a decision favoring the company. The PCAB thus filed a petition for review with the SC.
Manila Water argued that the restriction imposed under Section 3.1, Rule 3 of the IRR is unconstitutional, since it creates a restriction on foreign investment, a power exclusively vested in Congress by the Constitution and one not provided for under RA 4566.
The PCAB defended its denial by relying on its power to issue the IRR under RA 4566 and to adopt the necessary rules and regulations to effect the classification of contractors. It maintained that the IRR do not restrict the construction industry to Filipinos, but merely regulates the issuance of licenses to foreign contractors.
The board also argued that the restriction is consistent with Section 14, Article 12 of the 1987 Constitution, which mandates that the practice of all professions in the Philippines shall be limited to Filipino citizens, save in cases prescribed by law. “Construction,” it said, falls under the definition of a “profession” under RA 465 as amended, the law standardizing the examination and registration fees charged by the National Examining Board.
Due to the nature of the controversy, the Philippine Competition Commission (PCC) moved to intervene in the SC case as amicus curiae (friend of the court). The PCC considers the nationality-based restriction imposed under the IRR as a “barrier to entry,” which violates the constitutional state policy against unfair competition. The PCC opined that the limitation of the practice of professions to Filipino citizens is inapplicable to construction, since contracting for purposes of engaging in construction activities is not a profession and not regulated by the Professional Regulation Commission. Also, the term “professional” refers only to an individual, not a corporation.
The PCAB’s argument that construction firms are exercising a profession was not given credence by the Supreme Court.
The term “profession” under Section 14, Article 12 of the 1987 Constitution refers to the privilege of a natural person to exercise his or her profession in the Philippines or the practice of “natural persons of a certain field in which they are trained, certified and licensed.” Even though the people make up construction firms are natural persons, the entity required to be licensed under the IRR of RA 4566 is the firm itself. Thus, a construction firm cannot be considered a “professional” who, under the Constitution and our other laws, must be a Filipino citizen. When contractors apply for a license under RA 4566, it is for the purpose of engaging in contracting or construction and not in practicing a profession.
The SC also held that the foreign equity limitation under the IRR has no legal basis. Construction is not one of the activities the Constitution has reserved exclusively for Filipino citizens or corporations with 60-percent Filipino equity. There are also no laws enacted by Congress that proscribe foreigners from entering into the same projects as Filipinos in construction.
The High Court also pointed out that the Constitution did not intend to pursue an isolationist policy. It allows an exchange with foreign countries based on equality and reciprocity, and frowns upon foreign competition that is unfair. Congress did not intend to discriminate against foreign contractors and there is no such restriction found in RA 4566. Thus, the PCAB went beyond the classifications under Section 16 of RA 4566 and exceeded the confines of the delegating statute when it proceeded to create nationality-based license types under Section 3.1, Rule 3 of the IRR.
It further pointed out that the foreign equity restriction imposed on private construction companies was lifted in 1998 with the issuance of the Third Foreign Investment Negative List. This indicated a shift in policy in favor of opening certain investment areas to foreign investors. Thus, the SC held that the IRR issued 30 years ago must conform to these developments to be consistent with current state policy.
Thus, the SC found it justifiable to declare portions of Section 3.1, Rule 3 of the IRR as void.
As mentioned earlier, this decision is very timely. It affirms our country’s commitment toward fair competition by removing a longstanding barrier that had no legal basis. It would definitely help boost our economy.
Euney Marie J. Mata-Perez is a CPA-lawyer and managing partner of Mata-Perez, Tamayo & Francisco (MTF Counsel). She is a corporate, M&A and tax lawyer, and president of the Asia-Oceana Tax Consultants’ Association. She thanks Ramon Dy for his help in this article.
This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. If you have any question or comment, email the author at email@example.com or visit www.mtfcounsel.com.