ILC BLOG OF LEGAL UPDATES

PCAB’s Nationality-Based License Types for Construction Activities Challenged

by: Tiffany Kim Maglunog 

(21 November 2022)

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The Philippine Contractors Accreditation Board (PCAB) is vested with the authority to issue, suspend and revoke licenses of those in the construction business as contractors under Republic Act (RA) No. 4566 (Contractor’s License Law). Under Section 16 thereof, the contracting business is classified into three (3) main contracting classifications: general engineering, general building and specialty contracting.  Under Section 17, PCAB also has the power to issue rules and regulations to effect such classification of contractors. However, PCAB, in its implementing rules and regulations of RA 4566 (IRR), went beyond these classifications and created nationality-based license types or classifications. 

 

Under Section 3.1, Rule 3 of the IRR, the PCAB License is classified into two (2) categories: 1) a Regular License, and 2) a Special License. 

 

A regular license allows the licensee to engage in construction contracting for the duration of the validity of the license. It is reserved to a Filipino sole proprietorship, partnership or domestic corporation which is at least 60% Filipino-owned. 

 

This implies that that a foreign construction firm may not qualify for a Regular License and may only apply for a Special License which allows the licensee (such as a joint venture, consortium or any such similar association, or a project owner) to only engage in the construction of a single specific undertaking or project. This has been PCAB’s rule since 33 years ago when the IRR was last amended.  

Foreign Investment Negative List

 

As mandated by the Foreign Investment Act of 1991, the Foreign Investment Negative List (FINL) sets forth the investment areas or activities that are reserved to Filipino nationals subject to certain exceptions or conditions.

 

While “private domestic contracts” were included  in the 1st and 2nd (FINL) issued in 1994 and 1996, respectively, note that the these were omitted starting from the 3rd FINL issued in 1998 until the most recent 12th FINL issued this year. This means that the restriction on foreign investments on private construction contracts has been lifted since 1998. 

Constitutionality of the nationality requirements in the IRR

 

Does PCAB have the authority to make nationality-based classifications or types of license? The Supreme Court, in the case of Philippine Contractors Accreditation Board vs. Manila Water Company, Inc. [G.R. No. 217590. March 10, 2020.), declared as unconstitutional portions of Section 3.1, Rule 3 of the IRR. 

 

PCAB argued that its regulatory measures are consistent with its rule-making powers under RA 4566. The Supreme Court rejected this position and ruled that “PCAB exceeded the confines of the delegating statute when it created the nationality-based license types under Section 3.1.”, applying the basic rule that the clear letter of the law is controlling and cannot be amended by a mere administrative rule issued for its implementation.  

 

PCAB likewise argued that the assailed regulatory measures are also consistent with Section 14, Article XII of the 1987 Philippine Constitution which mandates that the practice of all professions in the Philippines shall be limited to Filipino citizens, save in cases prescribed by law. It further argued that the IRR does not restrict the construction industry to Filipinos but merely regulates the issuance of license to foreigners. 

 

The Supreme Court did not agree. According to the Supreme Court, the practice of profession in Section 14, Article XII refers to the privilege of a natural person to exercise his profession in the Philippines and that a licensed contractor does not automatically qualify as a “profession” per se. 

 

Moreover, the Supreme Court explained that “the licensing of contractors is not to engage in the practice of a specific profession, but rather to engage in the business of contracting/construction” and that “professionalizing the construction business is different from the exercise of profession which the Constitution exclusively restricts to Filipino citizens”. 

 

In finding  that setting the equity limit for a certain type of contractor's license has no basis, the Supreme Court stressed 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.” 

PCAB’s Motion for Reconsideration Denied

 

In a resolution dated October 5, 2021 made public last March 3, 2022, the Supreme Court denied the motion for reconsideration filed by PCAB and various petitions and motions filed by several construction associations and privately-owned construction firms. 

 

In effect, the Supreme Court affirmed its March 10, 2020 decision effectively allowing foreign-owned domestic construction companies to undertake certain construction projects in the Philippines under the same Regular License as Filipinos.

 

As of this writing, PCAB has yet to issue new guidelines on the classification of its licenses consistent with the recent Supreme Court decision.   

Atty. Kim Maglunog is a seasoned corporate lawyer who has represented ILC Law's clients in various government agencies. You can read more about her work here. You may contact her via e-mail.

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