The Supreme Court in the recent case of Philippine Contractors Accreditation Board (“PCAB”) v. Manila Water Company, Inc. has struck down the validity of Section 3.1., Rule 3 of the Implementing Rules and Regulations (“IRR”) of Republic Act No.4566 also known as an Act Creating the Philippine Licensing Board for Contractors, Prescribing its Powers, Duties and Functions, Providing Funds Therefor, and For Other Purposes, otherwise known as the Contractors’ License Law of 1965 (“RA No.4566”).

Briefly, Manila Water Company, Inc. initially applied for a regular license of its foreign contractors for the construction of waterworks and sewerage system. However, PCAB denied the application, reasoning that regular licenses were only granted to local contractors under Section 3.1, Rule 3 of the IRR.

Section 3.1. of the IRR lays down specific license classification for contractors. It provides that regular licenses are reserved for, and issued only to, contractor-firms of Filipino sole proprietorship or partnership/corporation with at least 60% Filipino equity participation and duly organised and existing, under and by virtue of the laws of the Philippines. Under the IRR, foreign contractors are required to obtain a special license.

The Court held that Congress did not intend to discriminate against foreign contractors as there is no restriction that may be found in RA No. 4566. While RA No.4566 allows PCAB to effect classifications, the same should be reasonable.

Implications for Business in the Philippines

The lifting of the nationality-based restriction in the IRR is expected to translate to foreign direct investments (“FDI”) inflows and the development, as well as fast-tracking of infrastructure projects in the Philippines. Foreign contractors are now allowed to engage in the construction industry. Consequently, the entry of foreign contractors would introduce the application of the newest and most advanced technologies in the Philippines.

Salient Points of Discussion provided by the Case

Assailed provision in the IRR imposing a nationality requirement in the Philippine construction industry

Rule 3 CONTRACTOR’S LICENSE

Section 3.1 License Types. Two types of licenses are hereby instituted and designated as follows:

a. The Regular License

“Regular License” means a license of the type issued to a domestic construction firm which shall authorise the licensee to engage in construction contracting within the field and scope of his license classification(s) for as long as the license validity is maintained through annual renewal; unless renewal is denied or the license is suspended, cancelled or revoked for cause(s).

The Regular License shall be reserved for and issued only to constructor-firms of Filipino sole proprietorship, or partnership/corporation with at least sixty percent Filipino equity participation and duly organised and existing under and by virtue of the laws of the Philippines. [Emphasis supplied]

b. The Special License

“Special License” means a license of the type issued to a joint venture, a consortium, a foreign constructor or a project owner which shall authorise the licensee to engage only in the construction of a single specific undertaking/project. In case the licensee is a foreign firm, the license authorisation shall be further subject to condition(s) as may have been imposed by the proper Philippine government authority in the grant of the privilege for him to so engage in construction contracting in the Philippines. Annual renewal shall be required for as the undertaking/project is in progress, but shall be restricted to only as many times as necessary for completion of the same.

The following can qualify only for the Special License:

(ba) a joint venture, consortium or any such similar association organised for a single specific undertaking/project

(bb) a foreign firm legally allowed by the proper Philippine government authority to undertake construction activities in the Philippines

(bc) a project owner undertaking by himself, sans the service of a constructor, the construction of a project intended for sale, lease, commercial/industrial use or any other income generating purpose.

PCAB went beyond the prescribed classifications under RA No.4566 and created a nationality-based license types

Section 15 of RA No.4566 provides for an enumeration of the statutorily mandated classifications for the contracting business i.e. General Engineering Contracting, General Building Contracting and Specialty Contracting. The classification provided by law defined the areas of specialisation as may be recognised by industry practice. The Supreme Court ruled that PCAB exceed the confines of the delegating statute when it created the nationality-based license types under Section 3.1. The law does not authorise PCAB to set an equity limit for a contractor’s license.

The argument that the classification is pursuant to the Constitutional mandate to limit to Filipino citizens the practice of all professions is misplaced

PCAB insists that the regulation was formed consistent with the Constitutional mandate to limit to Filipino citizens the practice of all professions. The ‘profession’ under the Constitution refers to the practice of natural persons of a certain field in which they are trained, certified, and licensed. Being a licensed contractor does not automatically qualify within the ambit of the Constitution as a ‘profession’ per se. A contractor under RA No.4566 does not refer to a specific practice of profession i.e. architecture, medicine, accountancy and the like. The licensing of contractors cannot be considered as an act of engaging in the practice of a specific profession, but rather an act of engaging in the business of contracting/construction. The license required under RA No.4566 is for purposes of engaging in the business of contracting under the terms of the said act for a fiscal year or a certain period/project, and not for the purpose of practicing a particular profession.

Construction industry is not one which the Constitution has reserved exclusively for Filipinos

The Court finds that the construction industry is not one which the Constitution has reserved exclusively for Filipinos. Neither do the laws enacted by Congress show any indication that foreigners are proscribed from entering into the same projects as Filipinos in the field of construction.

Introduction of foreign equity into a construction firm with regular license is not a ground for license invalidation

Further, the provision which ipso facto invalidates the contractor’s license of a construction firm holding a regular license in case 30% or more foreign equity is introduced to it has also been declared void by the Supreme Court.

Classification made by Section 3.1 is merely a licensing regulation

Justice Leonen registered his dissent explaining that the classification under Sec. 3.1. does not create a nationality requirement. Sec. 31 is not an absolute restriction against foreign contractors, but is merely a licensing regulation. Foreign contractors are not prohibited from engaging in the construction industry, Sec.3.1 simply classified the types of licenses that may be applied for, which will then determine the documentary requirements,  term of license, and the number of projects a license may undertake. The classification appears to have only meant to facilitate the grant of licenses. Justice Leonen emphasises that the classification only regulates the application of licenses to allow PCAB to address licensing concerns. The additional requirements imposed on foreign contractors aid PCAB in its duty to monitor and regulate the industry.

Conclusion

In declaring void the specific provisions of the IRR, the Supreme Court clarified that the construction industry is not one of the industries which the Constitution has reserved or limited the enjoyment of to Filipino citizens. While generally laws enacted by the Congress authorises administrative agencies to promulgate its own rules and issuances to effectively regulate their corresponding industries and jurisdictions, the powers of these agencies are only delegated, and thus, it is vital that the rules, guidelines and other issuances they enact stay within the confines of the delegating statute granting them authority. In this case, the PCAB exceeded its powers when it created a nationality requirement in construction licensing.

If you have any questions or require any additional information, please contact Felix Sy or Margarita M. Galon of Insights Philippines Legal Advisors (a member of ZICO Law).

This alert is for general information only and is not a substitute for legal advice.