MANUAL Department of Energy’s Model Coal Service Contract
MANUAL Department of Energy’s Model Coal Service Contract
OVERVIEW OF THE PHILIPPINE COAL OPERATING CONTRACT SYSTEM
Philippine Coal Policy The Philippine Coal Policy, as stated in “The Coal Development Act of 1976” and its amendments, is to promote the accelerated exploration, development, exploitation, production and utilization of coal through the establishment of a coal development program and the coal operating contract system. Under this system, the State retains ownership of the Philippines’ coal resources while the operator is authorized to explore, develop, exploit and market coal based on conditions agreed upon by the parties for a specific period of time.
Historical Background of PD 972 and PD 1174 Because of the increasing cost of imported crude oil during the 1970s, the government, under the administration of President Ferdinand Marcos, considered it necessary to actively pursue the exploration, development and exploitation of indigenous energy resources. Since coal was known to exist in mineable quantities in the Philippines, the government sought to establish a “well-planned, systematic and meaningful exploration, development, exploitation and production of local coal resources,” which encouraged the participation of the private sector and maximized their capital, technical and managerial resources. Acting from and within the authority given by the 1973 Constitution1, then-President Marcos promulgated Presidential Decree No. 972 or “The Coal Development Act of 1976” to establish a coal development program for the Philippines to accelerate the exploration and utilization of the Philippines’ coal resources. Under PD 972, the Energy Development Board was tasked to undertake the exploration, development and production of coal resources either through its active exploration or through execution of coal operating contracts in favor of private entities. The Board was also tasked to establish and delimit coal regions in the Philippines and the coal contract area per region. PD 972 also provided guidelines for the conduct of coal operations in the Philippines. In 1977, PD 972 was amended by Presidential Decree No. 1174 to grant additional incentives to coal operators participating in the coal development 1 Article XVII, Section 12 2 MANUAL | Department of Energy’s Model Coal Service Contract
program. These incentives include: (a) reimbursement for all operating expenses not exceeding ninety percent (90%) of the gross proceeds from production in any year (this was increased from 70% in PD 972); (b) increased special allowance; (c) extension to the operators of the authority to the exercise the power of eminent domain; (d) grant of “timber rights” which gives operators the right to cut trees or timber within their coal contract area as may be necessary for the exploration, development and exploitation of the coal contract area, subject to applicable law and to the rules and regulations of the Bureau of Forest Development; and (e) grant of “water rights” which allows operators to enjoy water rights as necessary for the exploration, development and exploitation of their coal contract area upon application filed with the Director of the Bureau of Public Works.
The Philippine Energy Contracting Rounds The Philippine Energy Contracting Rounds or PECR is a competitive system where the Government, through the Department of Energy (DOE or Department), offers prospective petroleum, geothermal and coal areas in Philippine territory for exploration, development and utilization of interested and qualified parties. During the contracting rounds, interested parties submit their documents (which include their proposed operating or service contracts and work programs) for evaluation by a Panel or Committee created by the DOE specifically for a contracting round. Under the 2009 PECR, this panel was called the Contract Negotiating Panel (CNP). However, under the guidelines for the 5th PECR, the evaluation will be conducted by the Review and Evaluation Committee (REC). The Panel or Committee evaluates the submitted documents based on an evaluation criteria that is determined before the start of the contracting rounds. After evaluation, the Panel or Committee shall finalize contract details with the highest ranking proponent, and recommends to the DOE Secretary the award of the contract to this proponent. The PECR’s predecessor, the First Philippine Petroleum Public Contracting Round (PCR-1), started in 2003. Then, only petroleum contract areas were available for bidding. In 2005, geothermal service contracts and coal operating contracts were included in the PECR, upon the instruction of the DOE Secretary2. In 2010, the DOE issued guidelines for the awarding of petroleum service contracts and coal operating contracts through public contracting by nomination/publication and by direct negotiation3. Under this Circular, applicants 2 DOE Circular No. DC2005-04-004 3 DOE Circular No. DC2010-03-0005 3
for petroleum service or coal operating contracts may formally nominate the areas of interest for the DOE’s consideration—previously, only the Energy Resource Development Bureau has the power and duty to determine and recommend the opening of prospective areas to the DOE Secretary. In addition to public contracting by nomination/publication, this Circular also allowed contracting by direct negotiation in the following instances: When frontier areas are involved; or When, during the PECR, no proposal is received or no one among the applicants was able to meet the requirements after the CNP evaluation. Proponents who nominated areas for inclusion under the regular PECR but failed to submit a proposal or application shall be disqualified for direct negotiation on the same nominated areas.
Types of Permits or Contracts for Coal Exploration
Coal Operating Contract for Exploration, Development and Production A coal operating contract has two phases: (1) Exploration, and (2) Development and Production. The Exploration Phase4 refers to the phase when the conducts examination, investigation and exploration of lands supposed to contain coal through detailed surface geologic mapping, core drilling, trenching, test pitting and other appropriate means. The main goal of this phase is to determine presence of coal deposits and their extent. It generally has a term of two (2) years, and is extendible for another two (2) years, if the Operator has not been in default of its exploration work commitments or that it has submitted a work program that is acceptable to the Department. After the expiration of the period under the Exploration Phase, the Operator is given three options: To continue its exploration; or to terminate the contract; or to commence to the Development and Production Phase. The Development and Production Phase shall be, generally, for a period of ten (10) years, renewable for a series of three (3) years but not exceeding twelve (12) years. The Development and Production Phase5 refers to the stage of the contract during which the Operator conducts activities necessary to reach and extract the coal deposits, including beneficiation and transportation of the coal up to the delivery point.
4 Section 2.21, Model Contract 5 Section 2.18, Model Contract 4 MANUAL | Department of Energy’s Model Coal Service Contract
Small Scale Coal Mining Permit The Small Scale Coal Mining Permit (SSCMP) system allows small scale mining6 of marginal coal deposits, which are not available for exploration through coal operating contracts, by qualified individuals. The SSCMP system is regulated by the Department of Energy through the Energy Resource Development Bureau (ERDB), and is governed by three DOE circulars7 the full text of which are not available for perusal in the DOE website or the Government’s data.gov.ph portal. To qualify for a SSCMP, an individual must be a Filipino citizen, of legal age and a resident of the area where the coal deposit is located. He should also have a minimum working capital of Ten Thousand Philippine Pesos (P10,000) in cash or in kind. The SSCMP covers a maximum area of five (5) hectares with geological reserves of 50,000 metric tons. Under existing guidelines, SSCMP holders should sell its coal production to a supervising coal operator which is a valid holder of an existing coal operating contract if its operations are within a contract area or near a contract area. The mining operations of a SSCMP holder must be supervised by either: (a) the coal operator which is a valid holder of an existing coal operating contract in the same area where the mining operations of a SSCMP holder is conducted; or (b) the government through the DOE, if the coal operator refuses to supervise or there is no coal operator in the vicinity that can supervise the mining operations of the SSCMP holder. The SSCMP holder must remit 3% of its gross sale to the government.
Non-Exclusive Coal Reconnaissance Permit Under the guidelines for the PECR58, interested applicants for coal operating contracts may apply for non-exclusive reconnaissance permit with the Review and Evaluation Committee of the Department. This permit gives the corporations interested in submitting proposals in the PECR5 the legal personality to conduct geological mapping and to obtain samples from the contract area offered. The permit is valid until the deadline for submission of applications as prescribed in the PECR5 timeline.
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“Small scale mining” is defined in Republic Act No. 7076 or the “People’s SmallScale Mining Act of 1991” as mining activities which rely heavily on manual labor using simple implements and methods and do not use explosives or heavy mining equipment. BED Circular Bo. 87-03-001, OEA Circular No. 88-03-006, and BED Circular No. 88-02-002 DOE Circular No. DC2014-02-0005
Importance of the DOE Model Contracts Considering the recent changes to the system of public contracting, there is a need to increase regulation of these contracts to ensure that the government is not shortchanged in any agreement, and that public interest is protected. The DOE requires that the proposed coal operating contract submitted by the proponents is based on the existing DOE model contract. No material deviation from the DOE model contract shall be allowed at any given time. Therefore, considering the mandatory character of the provisions of the model contract, potential investors, agents of the government involved in the regulation and supervision of coal operations, residents who live near coal contract areas, and other stakeholders must understand the rights and obligations of parties emanating from the contract, and its implications. However, it is important to note that existing coal operating contracts entered into by the operators and the government before this model contract was released by the DOE do not need to conform to the provisions of the model contract.
6 MANUAL | Department of Energy’s Model Coal Service Contract
ANALYSIS OF THE SALIENT PROVISIONS OF THE MODEL COAL OPERATING CONTRACT
Governing Principles The Philippine system of coal contracting is rooted in the principle that all coal resources of the Philippines belong to the State. This is in accordance with the 1987 Constitution9 which mandates that the exploration, development, and utilization of coal resources of the Philippines shall be under the full control and supervision of the State. To explore, develop and utilize coal resources, the State has two options: (a) To directly undertake such activities, or (b) To enter into co-production, joint venture, or production-sharing agreements with Filipino citizens, or corporations or associations at least 60% of whose capital is owned by Filipino citizens. Such agreements may be for a period not exceeding twentyfive (25) years, renewable for not more than twenty-five (25) years. Presidential Decree No. 972 declared that it is the policy of the State to immediately accelerate the exploration, development, exploitation, production and utilization of the country’s coal resources because of the increased costs of importation of crude oil. Under the coal operating contract system, the Operator will furnish the necessary services, technology and financing for the coal operation in exchange of the permission given by the Government to said entity to explore, develop and utilize its coal resources to the exclusion of others.
Applicable Laws, Department Circulars, Rules and Regulations The model contract mandates that the laws of the Philippines shall apply to the coal operating contract.10 In addition, the provisions and requirements embodied in the following shall also apply: BED Circular No. 81-11-1011, as amended; BED Circular No. 83-08-0912 as adopted and implemented by the Department; and 9 Article XII, Section 2 10 Section 12.2, Model Contract 11 Guidelines for Coal Operations in the Philippines 12 This Circular, issued on 21 July 1983 by the Ministry in Energy, increased the penalty for the following acts: (a) failure to submit the production/sales/inventory report on time; (b) failure to file the Coal Exploration, Development and Production Investment and Recoverable Cost Summary (BED-CD- Coal 6) on time; (c) failure to file the Coal Operations Return on time; (d) failure to remit the government share on time; (e) failure to report sales proceeds; and (f) filing of fraudulent return. 7
Other implementing circulars, rules and regulations of Presidential Decree No. 972, as amended, which shall be issued by the Department. To further bolster the applicability of department circulars issued by the Department after the execution of the contract, the model contract provides that “department circulars, rules and regulations issued or to be issued by the Department whether in the exercise of its regulatory powers or contractual rights”13 shall form part of the contract.
Parties to the Coal Operating Contract The parties to the contract are: (a) the Government of the Republic of the Philippines represented by the DOE Secretary, and (b) the Operator.
Qualifications of the Operator The Operator is the applicant which, after evaluation of the Panel or Committee during the PECR, came out with the highest rank based on an evaluation criteria determined at the start of the contracting rounds, and was awarded the contract to exclusively conduct coal operations in a defined contract area. The Operator must first qualify as an applicant for its proposal to be considered. Under the current guidelines for the PECR5, the applicant may either be a Filipino corporation or partnership, or a cooperative. If the applicant is a corporation or partnership, said entity’s capitalization is owned by Filipinos (by at least 60%), and is duly registered with the Securities and Exchange Commission (SEC). If the applicant is a cooperative, it must be organized or authorized for the purpose of engaging in coal exploration and development. The PECR5 Guidelines require a minimum working capital14 equivalent to 150% of the financial commitment for the first contract year of the proposed work program and budget. Liquid assets shall consist only of cash, trade accounts receivables and short term investments or placements. Credit line is not considered a liquid asset. The applicant shall have available working capital for each PECR application separate from other applied PECR areas, renewable energy service contract applications and existing energy service/ operating contracts.
13 Section 12.5, Model Contract 14 Liquid Assets less Current Liabilities 8 MANUAL | Department of Energy’s Model Coal Service Contract
Term
Exploration Phase The Exploration Phase is for a term of two (2) years from the Effective Date15, which is the date of execution of the contract by the parties. After the lapse of this two-year period, the contract shall automatically terminate. However, there are two instances wherein the contract will not automatically end after the lapse of the two-year period, these are: If Coal Reserves in Commercial Quantity is delineated by both Parties; and If the Exploration Phase is extended with the approval by the DOE for a maximum period of two (2) years, subject to conditions
Coal Reserves in Commercial Quantity is delineated by both parties The contract shall not automatically terminate if coal reserves in commercial quantity is delineated by both parties. Coal Reserves in Commercial Quantity16 means that the quantity of coal present will allow economic development and production of such. This determination is made jointly by the Operator and the DOE after taking into account factors such as measured reserves, quality of coal, mining method, location and accessibility to market.
Extension of the period The Operator and the DOE may agree to extend the two-year period under the Exploration Phase for a maximum of two (2) years. This extension is subject to the following conditions, all of which must be complied with: The Operator has not be been in default in its exploration work and other obligations; The Operator has complied with the Work Program and Budget submitted to the Department; and The Operator has provided a Work Program and Budget for the extension period that is acceptable to the Department. 15 Section 2.20, Model Contract 16 Section 2.11, Model Contract 9
The extension period agreed upon by the parties shall automatically terminate at the end of such extension period unless Coal Reserves in Commercial Quantity is measured in any area covered by the contract.
Development and Production Phase If the Parties have measured and agreed on the existence of Coal Reserves in Commercial Quantity, the contract shall proceed to the Development and Production Phase.
Before such Phase may commence, the following conditions must be fulfilled: The Department must first approve of the coal development and production Work Program and feasibility study submitted by the Operator; and The Operator must submit an approved Environmental Compliance Certificate (ECC) from the DENR and a Certification Precondition from the NCIP17. Generally, the Development and Production Phase is for a period equivalent to the balance of the Exploration Phase or its extension, and for an additional period of ten (10) years. The Department may extend the term of the contract for a maximum of another ten (10) years, provided that the Operator is not in default of its obligations. After that, the Operator may request for the extension of the contract term for a series of three-year periods, the total of which shall not exceed twelve (12) years. The term may be reduced if a shorter period of time is required to continue and maintain economic coal development and production as jointly determined by the Operator and the Department.
Assignment of the Coal Operating Contract The general rule is that the rights and obligations of the Operator under the contract shall not be assigned or transferred without prior written approval of the Department.
17 National Commission on Indigenous Peoples 10 MANUAL | Department of Energy’s Model Coal Service Contract
When is assignment or transfer allowed? The contract may be assigned or transferred to another entity, who will act as the Operator, if the following conditions are met: The assignee or transferee is a qualified person or corporation possessing the resources and capability to continue the coal operation under the contract; The Operator has complied with all the obligations of the contract; and The Department has issued a written approval prior to the assignment or transfer.
Limitation During the Exploration Phase, the contract shall not be transferred or assigned except to an Affiliate of the Operator, created for the special purpose of handling the project under this contract. A company may be considered an “affiliate” under the contract if it falls under any of the following: A company in which the Operator holds directly or indirectly at least fifty percent (50%) of its outstanding voting shares; or A company which holds directly and indirectly at least fifty percent (50%) of the Operator’s outstanding voting shares; or A company in which at least fifty percent (50%) of its outstanding voting shares are owned by a company which owns directly and indirectly at least fifty percent (50%) of the outstanding voting shares of the Operator.18
Obligations of the Operator The Operator has numerous obligations under the coal operating contract. These obligations shall be discussed separately according to the section wherein it was found in the contract. Under Section 5.1, the Operator has the following obligations: Perform all coal operation and provide all necessary services, technology and financing 18 Section 2.3, Model Contract 11
Employ a full-time licensed mining engineer or geologist Conduct a boundary survey of the coal blocks covered by the contract within one (1) year from the effective date of the contract Operate the coal contract area subject to the provisions of all applicable laws relating to labor, health, safety, indigenous people’s rights and ecology/environment Employ a full-time safety engineer duly accredited by the Department Ensure safety of workers by providing gas detectors, safety devices and personal protective equipment in accordance with Coal Mine Safety Rules and Regulations Maintain detailed technical records and promptly furnish the DOE with all information, data and reports as required in circulars Maintain complete and accurate accounting records of all income, costs and expenses for the coal operation Keep books of account and audit related to the coal operation Conform to regulations regarding the non-interference with the rights of other operations Remit to the Department the government’s share from its reported sale of coal within sixty (60) days from the end of each calendar quarter Maintain all necessary equipment in good order and allow access to these and to the sites of coal operation Allow full access to books and records pertaining to coal operation to representatives authorized by the Department for tax and other fiscal purposes Respect right of the Department to inspect and audit such books, and inspect coal operation sites and facilities as necessary Give priority in employment to qualified personnel in the municipality or municipalities or province where the exploration, development and production are located Post a performance bond in favor of the Department within thirty (30) days after the execution of the contract Properly abandon and rehabilitate all sites affected by the coal operation, at its expense, immediately after the termination of any coal operation Regularly present tax clearance from the BIR and copies of income and business tax returns duly stamped and received by the BIR and duly vali-
dated with the tax payments made thereon Under Section IX of the model contract, the Operator obligates itself to do the following: Employ qualified Filipino personnel in coal operation Provide schooling and training of Filipino personnel for labor and staff position Provide “assistance in kind” Provide training conferences and other related programs and activities for the Department personnel Provide training and institutional development assistance to residents of host province Remit signature bonus in cash to the Department
Employ qualified Filipino personnel in coal operation The Operator agrees to employ qualified Filipino personnel in its coal operation but neither the quantity of personnel to be employed is identified nor the qualifications of the personnel is specified. This gives the Operator some leeway in identifying the qualifications of the employees to be hired.
Provide schooling and training of Filipino personnel for labor and staff position In addition, the Operator also undertakes the obligation to train Filipino personnel for labor and staff, administrative, technical and executive management positions after the Development and Production Phase has commenced.
Provide “assistance in kind”19 The Operator shall provide “assistance in kind” in the amount to be agreed upon by the parties. The freedom of the parties to stipulate the amount of this assistance may be abused by the officials and may become a possible means to justify corruption or bribery in awarding and negotiating the contract. 19 Section 9.2, Model Contract
Provide assistance for training, conferences and other related programs and activities for the Department personnel The Operator shall provide assistance for training, conferences and other related programs and activities for the Department personnel. The amount of such assistance shall be agreed upon by the Operator and the Department. The assistance is different from that provided during the Exploration Phase and during the Development and Production Phase. Further, the cost and expenses incurred by the Operator in connection with this obligation shall form part of the operating expenses, which can be deducted from the gross income.
Provide training and institutional development assistance to residents of host province The Operator shall also provide training and institutional development assistance to will be granted to the residents of the host province in the form of scholarships preferably in a State University. The amount of such assistance shall be agreed upon by the Operator and the Department.
Remit signature bonus in cash to Department The Operator shall also remit to the Department signature bonus in cash within thirty (30) days from the date of execution the contract. The amount of this bonus shall be agreed upon by the Department and the Operator. Again, the freedom given to the parties by this provision is susceptible to abuse. In addition to the aforementioned obligations, the Operator also has to do the following: Secure necessary permits and certifications; Submission of development and production work program; Pay penalty fee to the Department in case of failure to produce minimum amount of coal; and Relinquish coal blocks where it has no coal development and production work program, after the end of the Exploration Phase
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Secure necessary permits and certifications Before the Exploration Phase
The Operator shall secure a Certificate of Non-Coverage from the DENR and a Certification Precondition (for Exploration Phase) from the NCIP within one (1) year from the award of the contract.
Before Development and Production Phase
The Operator shall secure an Environmental Compliance Certificate (ECC) from the DENR and Certification Precondition (for Development and Production Phase) from the NCIP before the commencement of coal development and production activities.
Submission of 5-year development and production work program If Coal Reserves in Commercial Quantity have been determined jointly by the Operator and Department, and the Operator opts to enter to the Development and Production Phase, the Operator shall do the following:  Submit a five (5)-year development and production work program and feasibility study to the Department, for approval; and  Submit an approved ECC from the DENR and a Certification Precondition from the NCIP.
After the approval by the Department of the work program and feasibility study, the Operator shall undertake coal development and production in the coal contract area within the period agreed by both parties. The Operator shall identify a minimum amount for the direct implementation of the work program.20 It shall be obliged to spend this minimum amount for the development and production of the coal contract area. If during any contract year, the Operator spends more than the amount of money required to be spent, the excess may be credited against the amount of money required to be spent by the Operator during the succeeding contract years. However, excess expenditures for exploration cannot be credited against financial commitments for development and production. 20 Section 4.3, Model Contract 15
If the Operator fails to comply with the work obligations provided for in the contract or fails to spend the amount committed, it shall pay to the Department the amount which is left unspent during each contract year. At least six (6) months prior to the expiration of the fifth year of the Development and Production Phase, the Operator shall submit to the Department for approval another coal production work program with the corresponding budget for the next five (5) contract years.
In case of failure to produce minimum amount of coal If during any contract year, the Operator fails to produce the minimum amount of coal that is prescribed to be produced in the work program, then the Operator shall pay to the Department a penalty.
Computation of the Penalty The formula for computation of the penalty to be paid by the Operator if it fails to produce the minimum amount of coal is:
16 MANUAL | Department of Energy’s Model Coal Service Contract
First, the deficiency in coal production is determined. In any contract year, the deficiency in coal production is the difference in the sum of coal produced and the sum of coal required to be produced. Second, the Department shall determine the average selling price per metric ton of all coal produced and sold by the Operator in the coal contract area during any contract year. Third, the amount of coal deficiency shall be multiplied with the average selling price. Thereafter, the Department shall proceed to apply Section VI of the model contract on recovery of operating expenses and accounting for proceeds of production. The share of the Government prescribed in Section 6.5 (i.e., balance of the Gross Income after deducting all Operating Expenses, Operator’s fee and special allowance) shall be the amount of the penalty to be paid to the Department.
Enforcement of the Penalty The Operator may pay the penalty to the Department, or the Department may enforce such unpaid penalty on the performance bond posted by the Operator for such purpose. The payment of the penalty is without prejudice to the actions and remedies which the Department may institute and avail of.
Relinquish coal blocks at the end of the Exploration Phase At the end of the Exploration Phase, the Operator only retains coal blocks where it has a coal development and production work program approved by the Department at the end of the Exploration Phase.21 All other coal blocks covered by the coal operating contract must be relinquished prior to the start of the Development and Production Phase. The Operator may opt to retain coal blocks where no Development and Production Area is established, even after the end of the Exploration Phase, subject to the condition that it must submit an annual exploration work program over such coal blocks for approval of the Department. The coal blocks shall automatically be deemed relinquished and taken out of the coal contract area under the following instances:  If the Operator fails to submit an annual exploration work program prior to the start of any contract year; or 21 Section 3.3, Model Contract 17
If it fails without justifiable cause to implement the approved exploration work program for these retained coal blocks
Rights of the Operator Under the model contract, the Operator shall have the following rights: Exemption from all national taxes except income tax Exemption from payment of tariff duties, compensating tax and VAT on importations of machinery and equipment, spare parts and materials required for the Coal Operation subject to conditions The right of entry into the Philippines of alien technical and specialized personnel (including the immediate members of their families) for the coal operations of the Operator The right of ingress to and egress from the Coal Contract Area and to and from facilities wherever located The right to recover operating and other expenses
Exemption from all national taxes except income tax The Operator is exempted from the obligation of paying all national taxes except income tax. The term “national taxes” refers to those taxes that are stated in the National Internal Revenue Code (NIRC) of 1997, and its amendments, and are paid to the Bureau of Internal Revenue and its agents. However, the Operator is still required to pay income tax pursuant to the rules stated in the NIRC.
Exemption from payment of tariff duties, compensating tax and value-added tax on importations The Operator is exempted from paying (a) tariff duties imposed by the Bureau of Customs, (b) compensating tax, and (c) value-added tax on importations of machinery and equipment, spare parts and materials, provided that these are required for the Operator’s coal operation. The model contract defines “coal operation”22 to include the following: Examination, investigation and/or exploration of lands supposed to contain coal; 22 Section 2.10, Model Contract 18 MANUAL | Department of Energy’s Model Coal Service Contract
Steps necessary to reach the Coal deposits so that they can be mined; and Extraction, beneficiation and transportation up to the delivery point All machinery, equipment, spare parts and materials imported to the Philippines pursuant to the Operator’s coal exploration activities—such as but not limited to core drilling, trenching, test pitting, shaft sinking and tunneling—shall be exempted from VAT, provided that these are: Of comparable price and quality; Not manufactured in the Philippines; Directly and actually needed and will be used exclusively by the Operator in its operations or in the operations conducted by a Sub-contractor on behalf of the Operator; and Covered by shipping documents in the name of the Operator to whom the shipment will be delivered direct by customs authorities. Further, prior approval of the Department is needed before the importation of such machinery, equipment, spare parts and materials is exempted from VAT. The requirements are stringent because tax exemptions, by their nature, are construed strictly against the taxpayer. Also, there is a greater risk that this kind of exemption will be abused because of the costs involved in importation. The model contract also prohibits the Operator or its Sub-contractor from selling or disposing of such machinery etc. within the Philippines without the prior approval of the Department and payment of taxes due the government. Should the Operator sell or dispose of the same without the prior consent of the Department, it shall pay twice the amount of the tax exemption granted.23 However, the Department shall allow and approve the sale or disposition of the said items within the Philippines without payment of tax if the sale or disposition is made under any of the following instances: Sale or disposition to another operator under a coal operating contract; Sale or disposition for reason of technical obsolescence; or Sale or disposition for purposes of replacement to improve and/or expand coal operations under the coal operating contract
23 Section 5.2 (b) (ii), Model Contract 19
Right of entry Non-Filipino technical and specialized personnel employed by the Operator are allowed to enter the Philippines, upon approval of the Department. The immediate family members of these personnel shall likewise be allowed entry to the Philippines. Upon the termination of the employment of the non-Filipino personnel, the applicable laws and regulations on immigration shall apply to the personnel concerned and their immediate family members.
Right of ingress and egress The Operator shall have at all times the right of ingress and egress from the coal contract area, and to and from facilities, wherever located.
Right to recover operating and other expenses The Operator has the right to recover the following: All operating expenses, not exceeding 90% of total gross income in any calendar year; Operator’s fee, not exceeding 40% of net operating income; and Special allowance, not exceeding 30% of net operating income.24
All Operating Expenses The Operator may deduct all operating expenses from the gross income obtained through coal operations in the contract area, for each calendar year, starting from January 1 to December 31. The amount of the recoverable operating expenses must not exceed 90% of the total gross income in any calendar year. If the operating expenses exceed 90% of the gross income, or if there is no gross income, then the unrecovered operating expenses shall be recovered from the gross income in succeeding years.
24 Section VI, Model Contract
20 MANUAL | Department of Energy’s Model Coal Service Contract
Operator’s Fee Aside from recovery of expenses, the Operator is entitled to a fee, the amount of which is subject to the agreement of the Operator and the Department. The agreed fee shall not exceed 40% of the net operating income.
Special Allowance In addition to the Operator’s Fee, the Operator shall be granted a special allowance, the amount of which is subject to the agreement of the Operator and the Department. The special allowance shall not exceed 30% of the net operating income.
Assets and Equipment In acquiring assets in connection with the coal operation, the Operator must meet two requisites, which are: the asset must be (a) reasonably estimated to be required in carrying out the coal operations and (b) approved in the Work Program and Budget.25 There is no definition or standard given in the model contract of what qualifies as “reasonably estimated to be required.” The implication is that the Operator is given leeway to justify the necessity of the assets sought to be acquired. As a limitation, the model contract requires that the assets must be included in the Work Program and Budget which is subject to the approval of the DOE. The model contract also allows the Operator, in the conduct of its coal operation, to utilize equipment that it owns. The use of such equipment entitles the operator to recover costs, as provided for in the Accounting Procedures, which is annexed the model contract.
What happens after termination of the contract? At the termination of the contract, the Department has the option to retain ownership of any cost recovered assets and materials, equipment and facilities. This covers assets the cost of which have already been recovered in accordance with the rules of recovery as stated in Section VI of the model contract.
25 Section 8.2, Model Contract
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All other materials, equipment and facilities which the Department does not elect to retain shall be removed and disposed of by the Operator within one (1) year after the termination of the contract, or within the period agreed by the Parties. This provision gives the Government and the Operator the right to fix a period longer or shorter than the one-year period, provided that both parties agree to the period. Failure to agree on a period would result to the application of the one-year period provided in the model contract.
Suspension of Obligations
Failure of the Operator to perform or fulfill its obligations as required by the model contract will give the Department the power to unilaterally cancel and annul the contract.26 However, there is an exception. The duty of the Operator to perform or fulfill its obligations may be suspended if the failure or delay in the performance of either party’s obligations is attributable to force majeure.27 The model contract defined force majeure as “events or circumstances that cannot be foreseen or which, though foreseen, are inevitable.”28 This definition is the same as the definition of fortuitous event under Article 1174 of the Civil Code.29 A fortuitous event under Article 1174 may either be an “act of God,” or natural occurrences such as floods or typhoons, or an “act of man,” such as riots, strikes or wars. Section 12.3 specifically provided instances included in the definition of force majeure, such as acts of God (which include natural calamities), unavoidable accidents, acts of war or conditions arising out of or attributable to war, laws, rules and regulations and orders by any government or governmental agency, strikes, lockouts and other labor disturbances, floods, storms, and other natural disturbances, insurrections, riots and other civil disturbances and all others beyond the control of the party concerned. The parties may expand the definition of force majeure (from what is provided in the Civil Code) and stipulate additional causes or instances, as they deem fit—provided it is not contrary to law, morals, good customs, public order, or public policy.30 26 Section 12.6, Model Contract 27 Section 12.3, Model Contract 28 Section 2.22, Model Contract 29 Curiously, Section 2.22 of the model contract refers to Section 12.4 in defining force majeure. This seems to be a typographical error because it is Section 12.3 which enumerates the instances which are included in the definition of force majeure under the model contract. 30 Philcomsat v. Globe Telecom Inc., GR No. 147324 (promulgated by the Supreme Court on 25 May 2004)
Further, the provision qualified that as to the Department, laws, rules and regulations and orders issued by the Government or any of its agencies shall not constitute force majeure.
Manner of notification when force majeure is invoked It is the duty of the party invoking force majeure to notify the other party in writing of such fact within sixty (60) days from the existence of the event. The party invoking force majeure must describe the cause and nature “with reasonable detail.” Further, the parties shall do what is reasonably within their power to remove such cause.31 The notice to the other party must be in written form, addressed to the party’s address as specified in the contract, and may be served in four ways. Please refer to the table below.
Mode of Service
When Considered Effective
When a copy of the written notice is handed to or served upon the Party’s duly designated representative or the person in charge of the office or place of business
Notice shall be effective upon receipt of duly designated representative or the person in charge
When written notice is sent by telex with written confirmation subsequently received within fifteen (15) days
Notice shall be effective on date of telex receipt
When written notice is sent by facsimile
Notice shall be effective upon the issuance of a transmission report confirming that the notice was successfully transmitted to the addressee’s number
When written notice is sent by registered mail
General Rule: Notice shall be effective upon actual receipt by the addressee
Exception: If the addressee fails to claim its mail from the post office within five (5) days from the date of the first notice of the postmaster, service shall take effect at the expiration of such time.
31 Section 12.3 (d), Model Contract
Effect; If delay is considered due to force majeure If the coal operation is delayed by causes which are considered force majeure, the time for enjoying the rights and carrying out the obligations shall be extended for a period equal to the period of delay. However, regardless of the cause of the delay, the duration of the contract, as provided in Section III of the model contract, shall not be affected.
Termination The coal operating contract may be terminated either: (a) by expiration of the term; (b) by cancellation or annulment of the contract by the DOE32; or (c) by breach of warranties by the Operator33.
Expiration of the Term Under Section III, the contract shall automatically terminate after the lapse of two (2) years from the date of execution of the contract, unless the coal reserves in commercial quantity is delineated by both parties, or there is an extension of the two-year period with the approval of the Department and under the conditions specified in the model contract.34
Cancellation or Annulment The Department shall have the power to unilaterally cancel and annul the contract if the Operator fails to perform the obligations set out in Section 12.6 subparagraphs (a) to (h). However, the DOE must notify the Operator of its intention to unilaterally cancel the contract before the DOE can exercise such power. Further, the exercise of the power to cancel the contract does not preclude the Department from forfeiting in its favor the performance bond posted by the Operator. The said bond shall satisfy any and all obligations of the Operator to the Department. The grounds for unilateral cancellation or annulment of the contract by the Department are as follows: a) Failure to fulfill work obligation in any contract year without justifiable cause; 32 Section 12.6, Model Contract 33 Section 12.7, Model Contract 34 Please refer to the discussion under the heading “Term” of this Manual. 24 MANUAL | Department of Energy’s Model Coal Service Contract
b) Failure to secure the Certificate of Non-Coverage and Certification Precondition within one (1) year from the award of the contract; c) Failure to conduct a boundary survey of the coal blocks covered by the contract within one (1) year from the date of execution of the contract; d) Failure to remit the government share within sixty (60) days following the end of each calendar quarter; e) Failure to post the required performance bond within thirty (30) days; f) Failure to meet safety standards set by the Department;35 g) Failure to submit the reportorial requirements despite repeated notice or demands; and h) Failure to comply with PD 972, as amended, and its implementing rules, regulations and circulars issued by the Department
Breach of Warranties The Operator, by signing the contract, makes an assurance, or a warranty, of two things: That it or any of its officials or representatives has not given or has not promised to give any money or gift to any employee or official of the Department to influence the decision regarding the awarding of the contract to the Operator; and That it or its officials or representatives has not exerted or utilized any unlawful influence on any employee or official of the Department to solicit or secure the contract through an agreement to pay a commission, percentage, brokerage or contingent fee. Further, the Operator agrees that the breach of the above-mentioned warranties are sufficient ground for the Department to terminate or cancel the contract without prejudice to the Operator’s or any other person’s civil or criminal liability under applicable laws. These warranties undertaken by the Operator has a two-fold function. First, it serves as a mechanism to ensure that the Operator will not, or is less likely to, extend gifts or money, or agree to pay a commission or any other fee to any Department employee or official because of the possibility of loss of investment and revenue as a result of termination of the contract. Second, the inclusion of these warranties in a coal operating contract indirectly forces 35 The safety standards referred to is stated in the Coal Mine Safety Rules and Regulations and Guidelines for Coal Operation in the Philippines. 25
the Operator to rely on the competitiveness and sufficiency of its bid in the PECRs—and not on other external factors or illicit conditions. In addition, in the event that the Operator is found to have breached these warranties, the Operator or its officers will also be exposed to criminal prosecution for violation of the Anti-Graft and Corrupt Practices Act or a civil suit for recovery of damages. It is important to note that the model contract does not give the Operator the power or option to terminate the contract unilaterally upon breach or nonperformance of the Department of its obligations under the contract. The contract also does not obligate the government, through the DOE, to undertake and make itself liable for breach of any warranty. This policy of limiting the power of the Operator in terms of terminating the contract is rooted in the constitutional principle that the exploration, development and exploitation of natural resources shall be under the control of the State. However, despite the absence of any provision empowering the Operator to cancel or annul the contract, the rules on breach of obligations under the Civil Code will still apply because Philippine laws apply to the contract, as stated in Section 12.2. Under the Civil Code, the party who did not violate the contract has the option to have the contract rescinded, or to demand specific performance, or demand damages from the party who caused the breach or violated the terms of the contract.
Venue of Judicial Action Section XIV mandates that in settling disputes pertaining to the coal operating contract, parties must, as much as possible, make an effort to settle them amicably. Litigation or going to court to settle disputes may a take a long time which would be detrimental to both the Operator and the Government. However, in the event that a party decides to go to court to enforce its rights, the said party must file the case in the proper court located in Taguig City, where the main office of the Department is located. In addition, writs of attachment, injunction, replevin or seizure issued by any court in Taguig City may be served and enforced anywhere in the Philippines. It is beneficial for the State that the venue of judicial actions is limited to Taguig City, and that the enforceability of writs issued by courts located in Taguig City be extended to anywhere in the Philippines so that the costs of litigation will be lessened, and that the employees who are needed to participate in the proceedings will not be forced to travel long distances or to far-flung provinces which may hamper the performance of their duties as public officers.
26 MANUAL | Department of Energy’s Model Coal Service Contract
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