REPUBLIC OF THE PHILIPPINES, Petitioner,

vs.
AFP RETIREMENT AND SEPARATION BENEFITS SYSTEM,* Respondent,
HEIRS OF CABALO KUSOP and ATTY. NILO J. FLAVIANO, Respondents-Intervenors.

The processes of the State should not be trifled with. The failure of a party to avail of the proper
remedy to acquire or perfect one's title to land cannot justify a resort to other remedies which
are otherwise improper and do not provide for the full opportunity to prove his title, but instead
require him to concede it before availment.

Certificates of title issued covering inalienable and non-disposable public land, even in the hands
of an alleged innocent purchaser for value, should be cancelled.

Before us is a Petition for Review on Certiorari1 questioning the October 26, 2007 Decision2 of
the Court of Appeals (CA) in CA-G.R. CV No. 75170, which reversed the November 5, 2001
Decision3 of the Regional Trial Court (RTC), Branch 23 of General Santos City in Civil Case No.
6419.

Factual Antecedents

Lots X, Y-1 and Y-2 lands of the public domain consisting of 52,678 square meters located in
Barrio Dadiangas, General Santos Municipality (now General Santos City) were reserved for
recreation and health purposes by virtue of Proclamation No. 1684 (Proc. 168), which was issued
in 1963. In 1983, Proclamation No. 22735 (Proc. 2273) was issued amending Proc. 168, and
removing and segregating Lots Y-1 and Y-2 from the reservation and declaring them open for
disposition to qualified applicants. As a result, only Lot X which consists of 15,020 square meters
remained part of the reservation now known as Magsaysay Park.

The record discloses that respondents-intervenors waged a campaign through petitions and
pleas made to the President to have Lots Y-1 and Y-2 taken out of the reservation for the reason
that through their predecessor Cabalo Kusop (Kusop), they have acquired vested private rights
over these lots. This campaign resulted in Proc. 2273, which re-classified and returned Lots Y-1
and Y-2 to their original alienable and disposable state.

In 1997, respondents-intervenors filed applications6 for the issuance of individual miscellaneous

sales patents over the whole of Lot X with the Department of Environment and Natural Resources
(DENR) regional office in General Santos City, which approved them. Consequently, 16 original
certificates of title7 (OCTs) covering Lot X were issued in the names of respondents-intervenors
and several others. In September 1997, these 16 titles were simultaneously conveyed 8 to herein
respondent AFP-Retirement and Separation Benefits System (AFP-RSBS), resulting in the issuance
of 16 new titles (the AFP-RSBS titles) Transfer Certificates of Title (TCT) No. T-81051 through T-
81062, T-81146-T-81147, and T-81150-T-81151.9
On September 11, 1998, herein petitioner Republic of the Philippines instituted Civil Case No.
6419, which is a Complaint10 for reversion, cancellation and annulment of the AFP-RSBS titles, on
the thesis that they were issued over a public park which is classified as inalienable and non-
disposable public land.

Respondents-intervenors intervened11 in Civil Case No. 6419, and, together with the defendant
AFP-RSBS, argued that their predecessor-in-interest Kusop had acquired vested interests over Lot
X even before Proc. 168 was issued, having occupied the same for more than 30 years. They
claimed that these vested rights, taken together with the favorable recommendations and
actions of the DENR and other government agencies to the effect that Lot X was alienable and
disposable land of the public domain, as well as the subsequent issuance of sales patents and
OCTs in their names, cannot be defeated by Proc. 168. They added that under Proc. 168, private
rights are precisely recognized, as shown by the preliminary paragraph thereof which states:

Upon the recommendation of the Secretary of Agriculture and Natural Resources and pursuant
to the authority vested in me by law, I, Diosdado Macapagal, President x x x, do hereby withdraw
from sale or settlement and reserve for recreational and health resort site purposes, under the
administration of the municipality of General Santos, subject to private rights, if any there be x x
x12 (Emphasis supplied.)

Ruling of the Regional Trial Court

On November 5, 2001, the trial court rendered judgment nullifying the AFP-RSBS titles and
ordering the return of Lot X to the Republic, with the corresponding issuance of new titles in its
name. The trial court ruled that the respondents-intervenors having benefited by the grant,
through Proc. 2273, of Lots Y-1 and Y-2 to them can no longer claim Lot X, which has been
specifically declared as a park reservation under Proc. 168 and further segregated under Proc.
2273. In other words, their private rights, which were guaranteed under Proc. 168, have already
been recognized and respected through the subsequently issued Proc. 2273; as a consequence,
the succeeding sales patents and OCTs in the names of the respondents-intervenors should be
declared null and void not only for being in violation of law, but also because respondents-
intervenors did not deserve to acquire more land.

Ruling of the Court of Appeals

The CA reduced the issues for resolution to just two: 1) whether the respondents-intervenors
acquired vested rights over Lot X, and 2) whether AFP-RSBS is a buyer in good faith.13 It went on
to declare that Lot X was alienable and disposable land, and that respondents-intervenors
predecessor-in-interest acquired title by prescription, on the basis of the documentary evidence
presented:

1. Report to the President of the Republic dated August 2, 1982 by the Board of
Liquidators, recommending the amendment of Proc. 168 to recognize and respect the
 rights of respondents-intervenors predecessors-in-interest, who have been in possession
of portions of the reservation since time immemorial;14

2. Report of District Land Officer Buenaventura Gonzales of the Bureau of Lands, dated
May 26, 1975, likewise stating that respondents-intervenors predecessors-in-interest
have been in possession of portions of the reservation since time immemorial, and that
for this reason, Proc. 168 was never in force and effect;15

3. Report of Deputy Public Land Inspector Jose Balanza of the Bureau of Lands, dated May
6, 1976, finding that the property covered by Proc. 168 is private property and within an
area declared as alienable and disposable under Project No. 47 per L.C. Map No. 700
established by the then Bureau of Forestry;16

4. Tax Declaration No. 716 in the name of Cabalo Kusop and its subsequent revisions;17

5. Certifications issued by the (then) municipal treasurer of General Santos and official
receipts showing payment of taxes from 1945-1972;18

6. Sworn declaration of ownership submitted to the Philippine Constabulary; 19

7. 1975 letter of then General Santos Mayor acknowledging that Kusop was in possession
of Lot X even before the war; and20

8. Statements and testimonies of several witnesses.21

The CA added that as a consequence of their predecessors possession of Lot X since time
immemorial, respondents-intervenors have acquired title without need of judicial or other
action, and the property ceased to be public land and thus became private property.22 It stressed
that while "government has the right to classify portions of public land, the primary right of a
private individual who possessed and cultivated the land in good faith much prior to such
classification must be recognized and should not be prejudiced by after-events which could not
have been anticipated."23

The CA went on to justify that the reason why Proc. 2273 did not take Lot X out of the public
domain is not because the Executive wanted it to remain a recreational park reserve but
because the respondents-intervenors were in the process of donating said Lot X to General
Santos City, and the President deemed it unnecessary to still place it within the coverage of Proc.
2273.

The CA further ruled that the miscellaneous sales patents issued in the names of the respondents-
intervenors affirm their claim of ownership over Lot X, while the OCTs subsequently issued in
their names rendered their claim indefeasible.
Finally, the appellate court declared that since respondents-intervenors titles to Lot X were duly
obtained, the sale and transfer thereof to respondent AFP-RSBS should be accorded the same
treatment as a sale or transfer made to a purchaser in good faith. Besides, it having been shown
that the petitioner is not entitled to Lot X since it already belonged to the respondents-
intervenors, petitioner had no right to raise the issue of AFP-RSBS good or bad faith.

Thus, petitioners Complaint for reversion was dismissed.

Issues

The petition now enumerates the following issues for resolution:

BY APPLYING FOR MISCELLANEOUS SALES PATENT, THE HEIRS HAVE ADMITTED THAT LOT
X IS PUBLIC LAND. THE EVIDENCE THEY SUBMITTED TO ESTABLISH THEIR ALLEGED
PRIVATE OWNERSHIP IS THEREFORE UNAVAILING.

II

THE ALLEGED "VESTED RIGHTS" OF THE HEIRS OVER LOT X CANNOT PREVAIL AGAINST
GOVERNMENT OWNERSHIP OF PUBLIC LAND UNDER THE REGALIAN DOCTRINE.

III

THERE IS NO BASIS TO CONCLUDE THAT PROCLAMATION 2273 RECOGNIZED THE

OWNERSHIP OF LOT X BY THE HEIRS. NEITHER IS THERE BASIS TO CLAIM THAT THE HEIRS
RETAINED OWNERSHIP OF LOT X DUE TO THE FAILURE OF THE CITY OF GENERAL SANTOS
TO ACCEPT THE DONATION OF LOT X.

IV

AFP-RSBS IS NOT A BUYER IN GOOD FAITH.24

Petitioners Arguments

Apart from echoing the pronouncements of the trial court, the Republic, in its Petition and
Consolidated Reply,25 submits that respondents-intervenors applications for miscellaneous sales
patents constitute acknowledgment of the fact that Lot X was public land, and not private
property acquired by prescription.

Petitioner argues further that with the express recognition that Lot X is public land, it became
incumbent upon respondents-intervenors granting that they are entitled to the issuance of
miscellaneous sales patents to prove that Lot X is alienable and disposable land pursuant to
Commonwealth Act No. 14126 (CA 141); and that in this regard respondents-intervenors failed.
They offered proof, in the form of reports and recommendations made by the Bureau of Lands
and the Board of Liquidators, among others, which were insufficient to establish that Lot X was
alienable and disposable land of the public domain. Besides, under the law governing
miscellaneous sales patents, Republic Act No. 73027 (RA 730), it is specifically required that the
property covered by the application should be one that is not being used for a public purpose.
Yet the fact remains that Lot X is being utilized as a public recreational park. This being the case,
Lot X should not have qualified for distribution allowable under RA 730.

Petitioner next insists that if indeed respondents-intervenors have become the owners of Lot X
by acquisitive prescription, they should have long availed of the proper remedy or remedies to
perfect their title through an action for confirmation of imperfect title or original registration. Yet
they did not; instead, they resorted to an application for issuance of miscellaneous sales patents.
By so doing, respondents-intervenors conceded that they had not acquired title to Lot X.

Petitioner next advances the view that respondents-intervenors vested rights cannot prevail as
against the States right to Lot X under the Regalian doctrine. Petitioner argues that the
presumption still weighs heavily in favor of state ownership of all lands not otherwise declared
private and that since Lot X was not declared open for disposition as were Lots Y-1 and Y-2 by
and under Proc. 2273, it should properly retain its character as an inalienable public recreational
park.

Finally, petitioner submits that the good or bad faith of AFP-RSBS is irrelevant because any title
issued on inalienable public land is void even in the hands of an innocent purchaser for value. 28

Respondents Arguments

AFP-RSBS and the respondents-intervenors collectively argue that the grounds relied upon by the
Republic in the petition involve questions of fact, which the Court may not pass upon. They add
that since private rights are explicitly recognized under Proc. 168, the respondents-intervenors
predecessors prior possession since time immemorial over Lot X should thus be respected and
should bestow title upon respondents-intervenors.

They argue that if respondents-intervenors chose the wrong remedy in their attempt to perfect
their title over Lot X, this was an innocent mistake that in no way divests such title, which was
already perfected and acquired by virtue of their predecessors open, continuous and
uninterrupted possession of Lot X.

Finally, they argue that the reports and recommendations of the Bureau of Lands and the Board
of Liquidators constitute findings of facts of administrative agencies which thus bind the Court.
They add that the presumption arising from the Regalian doctrine may be overcome by proof to
the contrary, and that it has in fact been overcome by the evidence presented before the trial
court.
Our Ruling

The Court grants the Petition.

From the wording of Proc. 168, the land it comprises is subject to sale or settlement, and thus
alienable and disposable Upon the recommendation of the Secretary of Agriculture and Natural

Resources and pursuant to the authority vested in me by law, I, Diosdado Macapagal, President
x x x, do hereby withdraw from sale or settlement and reserve for recreational and health resort
site purposes, under the administration of the municipality of General Santos, subject to private
rights, if any there be x x x29 (Emphasis and underscoring supplied.)

However, this alienable and disposable character of the land covered by the proclamation was
subsequently withdrawn, and the land was re-classified by then President Macapagal to pave the
way for the establishment of a park reservation, subject only to previously acquired private
rights. Respondents-intervenors then lobbied for the exclusion of certain portions of the
reservation which they claimed to be theirs, allegedly acquired by their predecessor Kusop
through prescription. They were successful, for in 1983, then President Marcos issued Proc. 2273,
which excluded and segregated Lots Y-1 and Y-2 from the coverage of Proc. 168. In addition, Proc.
2273 declared Lots Y-1 and Y-2 open for distribution to qualified beneficiaries which included
the herein respondents-intervenors. However, Lot X was retained as part of the reservation.

Respondents-intervenors did not question Proc. 2273, precisely because they were the
beneficiaries thereof; nor did they object to the retention of Lot X as part of the park reserve.
Instead, in 1997, they applied for, and were granted, sales patents over Lot X.

Evidently, the sales patents over Lot X are null and void, for at the time the sales patents were
applied for and granted, the land had lost its alienable and disposable character. It was set aside
and was being utilized for a public purpose, that is, as a recreational park. Under Section 83 of
CA 141, "the President may designate by proclamation any tract or tracts of land of the public
domain as reservations for the use of the Commonwealth of the Philippines or of any of its
branches, or of the inhabitants thereof, in accordance with regulations prescribed for this
purpose, or for quasi-public uses or purposes, when the public interest requires it, including
reservations for highways, rights of way for railroads, hydraulic power sites, irrigation systems,
communal pastures or leguas comunales, public parks, public quarries, public fishponds,
workingmen's village and other improvements for the public benefit." And under the present
Constitution, national parks are declared part of the public domain, and shall be conserved and
may not be increased nor diminished, except by law.30

The 1935 Constitution classified lands of the public domain into agricultural, forest or timber.
Meanwhile, the 1973 Constitution provided the following divisions: agricultural, industrial or
commercial, residential, resettlement, mineral, timber or forest and grazing lands, and such other
classes as may be provided by law, giving the government great leeway for classification. Then
the 1987 Constitution reverted to the 1935 Constitution classification with one addition: national
parks. Of these, only agricultural lands may be alienated. x x x31 (Emphasis supplied.)

Respondents-intervenors no longer had any right to Lot X not by acquisitive prescription, and
certainly not by sales patent. In fact, their act of applying for the issuance of miscellaneous sales
patents operates as an express acknowledgment that the State, and not respondents-
intervenors, is the owner of Lot X. It is erroneous to suppose that respondents-intervenors
possessed title to

Lot X when they applied for miscellaneous sales patents, for the premise of such grant or privilege
is precisely that the State is the owner of the land, and that the applicant acknowledges this and
surrenders to State ownership. The government, as the agent of the State, is possessed of the
plenary power as the persona in law to determine who shall be the favored recipients of public
lands, as well as under what terms they may be granted such privilege, not excluding the placing
of obstacles in the way of their exercise of what otherwise would be ordinary acts of ownership.32

Respondents-intervenors actions betray their claim of ownership to Lot X. When Proc. 168 was
issued, they did not institute action to question its validity, using as cause of action their claimed
ownership and title over the land. The same is true when Proc. 2273 came out. They did not file
suit to invalidate it because it contravenes their claimed ownership over Lot X. They simply sat
and waited for the good graces of the government to fall on their laps. They simply waited for
the

State to declare them beneficiaries of the land. And when the President failed to include Lot X in
Proc. 2273 and declare it open for disposition to them as beneficiaries, they filed their
applications for issuance of miscellaneous sales patents over said lot. All these actions are
anathema to a claim of ownership, and instead indicate a willingness to abide by the actions of
the State, a show of respect for its dominion over the land.

Under the law, respondents-intervenors are charged with knowledge of the law; they cannot
feign ignorance. In fact, they could not claim to be unaware of Proc. 168, for precisely they hid
under its protective mantle to seek the invalidation of a donation claimed to have been made by
them to one Jose Tayoto. Thus, in Tayoto v. Heirs of Kusop,33 an alleged donee (Tayoto) of
property located within Lots X, Y-1, and Y-2 filed a case for quieting of title against the donors
herein respondents-intervenors to protect the property which they allegedly donated to him,
which was then in danger of being lost for the reason that respondents-intervenors supposedly
reneged on the donation. Respondents-intervenors filed an urgent motion to dismiss the
Complaint claiming, among others, the "invalidity of the donation as the subject thereof had not
yet been excluded from the Magsaysay Park."34 In disposing of the case, the Court made the
following pronouncement:

Be that as it may, the donation is void. There are three essential elements of donations: [1] the
reduction of the patrimony of the donor, [2] the increase in the patrimony of the donee, and [3]
the intent to do an act of liberality (animus donandi). Granting that there is an animus donandi,
we find that the alleged donation lacks the first two elements which presuppose the donor's
ownership rights over the subject of the donation which he transmits to the donee thereby
enlarging the donee's estate. This is in consonance with the rule that a donor cannot lawfully
convey what is not his property. In other words, a donation of a parcel of land the dominical
rights of which do not belong to the donor at the time of the donation, is void. This holds true
even if the subject of the donation is not the land itself but the possessory and proprietary rights
over said land.

In this case, although they allegedly declared Magsaysay Park as their own for taxation purposes,
the heirs of Cabalo Kusop did not have any transmissible proprietary rights over the donated
property at the time of the donation. In fact, with respect to Lot Y-2, they still had to file a free
patents application to obtain an original certificate of title thereon. This is because Proclamation
No. 2273 declaring as open to disposition under the provisions of the Public Land Act some
portions of the Magsaysay Park, is not an operative law which automatically vests rights of
ownership on the heirs of Cabalo Kusop over their claimed parcels of land.

The import of said quoted proviso in a presidential proclamation is discussed in the aforecited
Republic v. Court of Appeals case which dealt with the validity of a donation by a sales awardee
of a parcel of land which was later reserved by presidential proclamation for medical center site
purposes. We held therein that where the land is withdrawn from the public domain and declared
as disposable by the Director of Lands under the Public Land Act, the Sales Award covering the
same confers on a sales awardee only a possessory and not proprietary right over the land
applied, for. The disposition of the land by the Director is merely provisional as the applicant still
has to comply with the requirements of the law before any patent is issued. It is only after the
compliance with such requirements that the patent is issued and the land applied for considered
permanently disposed of by the Government.

The interpretation of said proviso should even be more stringent in this case considering that
with respect to Lot Y-1, the heirs of Cabalo Kusop do not appear to have taken even the initial
steps mandated by the Public Land Act for claimants of the land excluded from the public domain.
The alleged donation was therefore no more than an exercise in futility.35 (Emphasis and
underscoring supplied.)

For obvious reasons, respondents-intervenors should have, as early as 1990 when the above
Decision was promulgated, taken exception to its pronouncements if they rightfully believed that
the property covered by Proc. 168 (which included Lot X) rightfully belonged to them. Yet they
did not. Instead, after seven long years or in 1997, they filed their applications for the issuance
of miscellaneous sales patents over Lot X. This act of filing applications for the issuance of
miscellaneous sales patents in their name, taken in conjunction with all the other attendant
circumstances, constitutes an express acknowledgment that the land does not belong to them,
but to the State.

Neither may respondents-intervenors claim innocent mistake for all their missteps in claiming
the subject property as their own. The mistakes are simply too numerous, and respondents-
intervenors inaction since 1963 is too glaring. To repeat, their actions are anathema to a claim
of ownership. While it is true that possession since time immemorial could result in the
acquisition of title without need of judicial or other action, respondents-intervenors actions and
conduct, as shown above, not only negate the application of such principle, but in fact point to
the opposite.

The principle of estoppel "bars [one] from denying the truth of a fact which has, in the
contemplation of law, become settled by the acts and proceedings of judicial or legislative
officers or by the act of the party himself, either by conventional writing or by representations,
express or implied or in pais."36

Besides, respondents-intervenors should not be allowed to trifle with the processes of the State.
They cannot resort to other remedies which are improper and do not provide for the opportunity
to prove their title, but instead require them to concede it before availment.

Contrary to the CAs pronouncements, proof or evidence of possession since time immemorial
becomes irrelevant and cannot support a claim of ownership or application for a patent, not only
because respondents-intervenors have conceded ownership to the State, but also on account of
the fact that Lot X has been withdrawn from being alienable and disposable public land, and is
now classified and being used as a national park. It has ceased to be alienable, and no proof by
the respondents-intervenors will operate to bolster their claim; Lot X will never be awarded to
them or to anybody so long as it is being used as a public park or reserve.

The CA justifies that Proc. 2273 was issued on the assumption that respondents-intervenors were
about to donate Lot X to the city (General Santos City); thus, the President has seen fit not to
include it in the proclamation. This is specious. If the President indeed knew of the intended
donation, then it was all the more necessary for him to have included Lot X in Proc. 2273 and
withdrawn it from the coverage of Magsaysay Park; or else the donation to the city would be null
and void, for want of right to donate. Yet he did not. Lot X was retained as part of the park reserve
precisely because the respondents-intervenors had no vested right to it. And, far from confirming
ownership over Lot X, the Republic is correct in the opinion that the miscellaneous sales patents
amount to an acknowledgment that respondents-intervenors rights are inferior, and cannot
defeat ownership over Lot X by the State.

Given the above pronouncements, the CAs ruling on other matters, as well as the respondents
arguments on specific points, become irrelevant and inapplicable, if not necessarily invalidated.

Finally, as regards AFP-RSBS rights, the Court sustains the petitioners view that "any title issued
covering non-disposable lots even in the hands of an alleged innocent purchaser for value shall
be cancelled."37 We deem this case worthy of such principle. Besides, we cannot ignore the basic
principle that a spring cannot rise higher than its source; as successor-in-interest, AFP-RSBS
cannot acquire a better title than its predecessor, the herein respondents-intervenors.38 Having
acquired no title to the property in question, there is no other recourse but for AFP-RSBS to
surrender to the rightful ownership of the State.
WHEREFORE, premises considered, the Petition is GRANTED. The October 26, 2007 Decision of
the Court of Appeals in CA-G.R. CV No. 75170 is ANNULLED and SET ASIDE. The November 5, 2001
Decision of the Regional Trial Court, Branch 23 of General Santos City in Civil Case No. 6419 is
REINSTATED.

G.R. No. L-44980 February 6, 1990

VIRGINIA MARAHAY, petitioner,

vs.
HON. MENELEO C. MELICOR, as Presiding Judge, Court of First Instance, Branch VI, Carigara,
Leyte; ALIWANAG B. VALLERAMOS, LIGAYA BRAZIL y PEREZ, FRUTO BRAZIL, MATIBAY BRAZIL
Y PALADIN and DALISAY BRAZIL Y AYASO, respondents.

In this petition for certiorari under Rule 65 of the Rules of Court, petitioner imputes grave abuse
of discretion on the part of respondent judge for issuing an order, dated February 27, 1976, in
Civil Case No. C-1222, entitled "Virginia Marahay vs. Aliwanag B. Valleramos et. al.," dismissing
the complaint; an order, issued on June 26, 1976, denying the motion for reconsideration filed
by therein plaintiff, and an order, dated September 18, 1976, denying her second motion for
reconsideration.

The records show that on June 20, 1974, petitioner filed with respondent court an action for
recovery of real property against Aliwanag B. Valleramos. Later, the complaint was amended to
implead and include other defendants, the other private respondents herein, as indispensable
parties. 1

After the issues were joined, the case was set for pre-trial on August 9,1974, but this was deferred
to a later date due to the absence of petitioner and her counsel. 2 On April 4, 1975, the same
case was again scheduled for pre-trial but the same did not proceed due to the fact that
petitioner appeared without her counsel while only one of the defendants appeared with
counsel. 3 Later, informed of her lawyer's inability to attend the pre-trial, petitioner secured the
services of another lawyer, Atty. Dominador Monjardin, who was present at the next pre-trial
conference held on October 9, 1975.

Trial on the merits commenced on November 13, 1975 with the petitioner taking the witness
stand on direct examination. 4 The defense failed to cross-examine her since the proceedings
were cut short for lack of time and the continuation thereof was set for January 19, 1976.

On January 7, 1976, Atty. Monjardin filed a motion for postponement for the reason that he was
taking the examination for government prosecutors in Manila on January 15, 1976, with a prayer
that the case be reset either in the first week of January or the second week of February of said
year. 5 The court eventually issued an order resetting the trial to February 18, 1976 with notice
to petitioner and her counsel. 6
On said date, petitioner appeared without counsel prompting private respondents, through their
counsel, to move for the dismissal of the case for petitioner's alleged inability to prosecute her
case and for apparent lack of interest. 7

The motion to dismiss, which was made orally in open court, was submitted for resolution by the
trial court. As earlier stated, the court below in its order dated February 27, 1976, dismissed the
complaint. Two motions for reconsideration were filed by petitioner but the same were denied
by respondent judge, hence, the present special civil action.

The sole issue is whether or not respondent judge committed grave abuse of discretion
amounting to lack or excess of jurisdiction in ordering the dismissal of the case and, consequently,
denying petitioner the right to fully prosecute her case.

Before resolving said issue, it would be judicious to first clear the air of any misconception as to
the procedural propriety of giving due course to this petition. An order of dismissal, whether right
or wrong, is a final order. If it is erroneous, ordinarily the remedy of the aggrieved party is appeal,
hence the same cannot be assailed by certiorari. 8

Nevertheless, in the broader interests of justice, this Court has given due course to the present
petition in consideration of the fact that this is not the first time we have passed upon a petition
for certiorari, although the proper remedy is appeal, 9 where the equities warrant such
extraordinary recourse. This is especially true where, as in the case, petitioner's affidavit of merits
shows that she has a good cause of action, that her counsel's affidavit of merits avers justifiable
reasons for his non-appearance at said hearing, and the trial court is faulted with gravely abusing
its discretion to the extent of denying due process to therein plaintiff. Significantly, it was
respondent judge himself who advised petitioner to avail of said remedy in his order dismissing
petitioner's second motion for reconsideration, 10 obviously because appeal would not be a
speedy and adequate remedy under the circumstances and considering that dismissals on
technicalities are viewed with disapproval.

Turning now to the main issue, petitioner asseverates that respondent-judge acted capriciously
in denying her day in court by not postponing the continuation of the trial to some future time
and giving her an opportunity to secure the services of another lawyer. Parenthetically, it is of
record that petitioner is an invalid and moves around in a wheel chair.

The petition has the imprint of merit and the writ will lie.

Section 3, Rule 17 of the Rules of Court provides that

If plaintiff fails to appear at the time of the trial, or to prosecute his action for an unreasonable
length of time, or to comply with these rules or any order of the court, the action may be
dismissed upon motion of the defendant or upon the court's own motion. This dismissal shall
have the effect of an adjudication on the merits, unless otherwise provided by the court.
It is, therefore, the absence of the plaintiff, and not the absence of the lawyer, which may warrant
the dismissal of the case on the ground of non-suit. 11 In the case at bar, only the counsel for
plaintiff was absent, plaintiff herself being in attendance in court.

While the aforequoted provision also provides sanctions for failure to prosecute for an
unreasonable length of time, despite the presence of the interested parties, it cannot be said
that such neglect or failing obtains in the present case. There is failure to prosecute when the
plaintiff, being present, is not ready or is unwilling to proceed with the scheduled trial. 12 In the
instant case, petitioner did not in the least manifest unwillingness to proceed with the hearing.
Upon the call for appearances, petitioner responded that her counsel was in Manila and that he
had not yet returned. Unschooled as she is in the vagaries of procedural law, petitioner indeed
could not have responded otherwise nor done any better.

Considering all the attendant circumstances, the least that the trial court could have done was to
afford petitioner a reasonable time, especially considering her handicap, to procure the services
of another lawyer and, if necessary, with a stern warning that any further postponement of the
trial shall cause the dismissal of the case.

The counter-argument that petitioner had already moved for postponements in the past should
take into account the fact that the circumstances thereof were not of her making nor intended
to be dilatory and that no substantial prejudice has been caused private respondents. Besides,
judgments of non-suit are generally disfavored in the same manner that default judgments are
discouraged. Thus, in Padua vs. Ericta, etc., et al ., 13 we had the occasion to rule that:

Courts should not brook undue delays in the ventilation and determination of causes. It should
be their constant effort to ensure that litigations are prosecuted and resolved with dispatch.
Postponements of trials and hearings should not be allowed except on meritorious grounds; and
the grant or refusal thereof rests entirely in the sound discretion of the Judge. It goes without
saying, however, that discretion must be reasonably and wisely exercised, in the light of the
attendant circumstances. Some reasonable deferment of the proceedings may be allowed or
tolerated to the end that cases may be adjudged only after full and free presentation of evidence
by all the parties, especially where the deferment would cause no substantial prejudice to any
party. The desideratum of a speedy disposition of cases should not, if at all possible, result in the
precipitate loss of a party's right to present evidence and either in the plaintiffs being non-suited
or of the defendant's being pronounced liable under an ex-parte judgment.

Indeed, after the issues had been duly joined, a plaintiff is entitled to present his case. Seldom
does departure from orderly procedure bring satisfactory results. 14

While a court can dismiss a case on the ground of non prosequitur, the real test for the exercise
of such power is whether, under the circumstances, plaintiff is chargeable with want of due
diligence in failing to proceed with reasonable promptitude. 15 In the absence of a pattern or
scheme to delay the disposition of the case or a wanton failure to observe the mandatory
requirement of the rules on the part of the plaintiff, as in the case at bar, courts should decide to
dispense with rather than wield their authority to dismiss.

Further, when a party, without malice, fault, or inexcusable negligence, is not really prepared for
trial, the court would be abusing its discretion if a reasonable opportunity is denied him for
preparing therefor and for obtaining due process of law.

Time and again, we have emphasized that the rules should be liberally construed in order to
promote their object and assist the parties in obtaining not only speedy but, more importantly,
just and inexpensive determination of every action or proceeding.

ACCORDINGLY, the writ of certiorari is hereby granted and the order of the court a quo of
February 27, 1976 dismissing petitioner's complaint, as well as its orders dated June 26, 1976 and
September 18, 1976 denying petitioner's first and second motions for reconsideration,
respectively, are hereby ANNULLED and SET ASIDE. Civil Case No. C-1222 is hereby REINSTATED
and the Regional Trial Court which replaced Branch VI of the defunct Court of First Instance
and/or in which this action is now pending is DIRECTED to continue with the trial of petitioner's
action and decide the same on the merits in due course.

EDGARDO PINGA, Petitioner,

vs.
THE HEIRS OF GERMAN, SANTIAGO represented by FERNANDO SANTIAGO, Respondents.

The constitutional faculty of the Court to promulgate rules of practice and procedure 1 necessarily
carries the power to overturn judicial precedents on points of remedial law through the
amendment of the Rules of Court. One of the notable changes introduced in the 1997 Rules of
Civil Procedure is the explicit proviso that if a complaint is dismissed due to fault of the plaintiff,
such dismissal is "without prejudice to the right of the defendant to prosecute his counterclaim
in the same or in a separate action."2 The innovation was instituted in spite of previous
jurisprudence holding that the fact of the dismissal of the complaint was sufficient to justify the
dismissal as well of the compulsory counterclaim.3

In granting this petition, the Court recognizes that the former jurisprudential rule can no longer
stand in light of Section 3, Rule 17 of the 1997 Rules of Civil Procedure.

The relevant facts are simple enough. Petitioner Eduardo Pinga was named as one of two
defendants in a complaint for injunction4 filed with Branch 29 of the Regional Trial Court (RTC)5
of San Miguel, Zamboanga del Sur, by respondent Heirs of German Santiago, represented by
Fernando Santiago. The Complaint6 dated 28 May 1998 alleged in essence that petitioner and co-
defendant Vicente Saavedra had been unlawfully entering the coco lands of the respondent,
cutting wood and bamboos and harvesting the fruits of the coconut trees therein. Respondents
prayed that petitioner and Saavedra be enjoined from committing "acts of depredation" on their
properties, and ordered to pay damages.

In their Amended Answer with Counterclaim,7 petitioner and his co-defendant disputed
respondents ownership of the properties in question, asserting that petitioners father,
Edmundo Pinga, from whom defendants derived their interest in the properties, had been in
possession thereof since the 1930s.8 They alleged that as far back as 1968, respondents had
already been ordered ejected from the properties after a complaint for forcible entry was filed
by the heirs of Edmundo Pinga. It was further claimed that respondents application for free
patent over the properties was rejected by the Office of the President in 1971. Defendants in
turn prayed that owing to respondents forcible re-entry in the properties and the irresponsible
and reckless filing of the case, they be awarded various types of damages instead in amounts
totaling P2,100,000 plus costs of suit.9

By July of 2005, the trial of the case had not yet been completed. Moreover, respondents, as
plaintiffs, had failed to present their evidence. It appears that on 25 October 2004, the RTC
already ordered the dismissal of the complaint after respondents counsel had sought the
postponement of the hearing scheduled then.10 However, the order of dismissal was
subsequently reconsidered by the RTC in an Order dated 9 June 2005, which took into account
the assurance of respondents counsel that he would give priority to that case. 11

At the hearing of 27 July 2005, plaintiffs counsel on record failed to appear, sending in his stead
a representative who sought the postponement of the hearing. Counsel for defendants (who
include herein petitioner) opposed the move for postponement and moved instead for the
dismissal of the case. The RTC noted that it was obvious that respondents had failed to prosecute
the case for an unreasonable length of time, in fact not having presented their evidence yet. On
that ground, the complaint was dismissed. At the same time, the RTC allowed defendants "to
present their evidence ex-parte."12

Respondents filed a Motion for Reconsideration13 of the order issued in open court on 27 July
2005, opting however not to seek that their complaint be reinstated, but praying instead that the
entire action be dismissed and petitioner be disallowed from presenting evidence ex-parte.
Respondents claimed that the order of the RTC allowing petitioner to present evidence ex-parte
was not in accord with established jurisprudence. They cited cases, particularly City of Manila v.
Ruymann14 and Domingo v. Santos,15 which noted those instances in which a counterclaim could
not remain pending for independent adjudication.

On 9 August 2005, the RTC promulgated an order granting respondents Motion for
Reconsideration and dismissing the counterclaim, citing as the only ground therefor that "there
is no opposition to the Motion for Reconsideration of the [respondents]."16 Petitioner filed a
Motion for Reconsideration, but the same was denied by the RTC in an Order dated 10 October
2005.17 Notably, respondents filed an Opposition to Defendants Urgent Motion for
Reconsideration, wherein they argued that the prevailing jurisprudential rule 18 is that
"compulsory counterclaims cannot be adjudicated independently of plaintiffs cause of action,"
and "a conversu, the dismissal of the complaint carries with it the dismissal of the compulsory
counterclaims."19

The matter was elevated to this Court directly by way of a Petition for Review under Rule 45 on
a pure question of law, the most relevant being whether the dismissal of the complaint
necessarily carries the dismissal of the compulsory counterclaim.

We hold that under Section 3, Rule 17 of the 1997 Rules of Civil Procedure, the dismissal of the
complaint due to the fault of plaintiff does not necessarily carry with it the dismissal of the
counterclaim, compulsory or otherwise. In fact, the dismissal of the complaint is without
prejudice to the right of defendants to prosecute the counterclaim.

On a prefatory note, the RTC, in dismissing the counterclaim, did not expressly adopt
respondents argument that the dismissal of their complaint extended as well to the
counterclaim. Instead, the RTC justified the dismissal of the counterclaim on the ground that
"there is no opposition to [plaintiffs] Motion for Reconsideration [seeking the dismissal of the
counterclaim]."20 This explanation is hollow, considering that there is no mandatory rule
requiring that an opposition be filed to a motion for reconsideration without need for a court
order to that effect; and, as posited by petitioner, the "failure to file an opposition to the
Plaintiffs Motion for Reconsideration is definitely not one among the established grounds for
dismissal [of the counterclaim]."21 Still, the dismissal of the counterclaim by the RTC betrays at
very least a tacit recognition of respondents argument that the counterclaim did not survive the
dismissal of the complaint. At most, the dismissal of the counterclaim over the objection of the
defendant (herein petitioner) on grounds other than the merits of the counterclaim, despite the
provisions under Rule 17 of the 1997 Rules of Civil Procedure, constitutes a debatable question
of law, presently meriting justiciability through the instant action. Indeed, in reviewing the
assailed orders of the RTC, it is inevitable that the Court consider whether the dismissal of the
complaint, upon motion of the defendant, on the ground of the failure to prosecute on plaintiffs
part precipitates or carries with it the dismissal of the pending counterclaims.

Our core discussion begins with Section 3, Rule 17 of the 1997 Rules of Civil Procedure, which
states:

SEC. 3. Dismissal due to fault of plaintiff.If, for no justifiable cause, the plaintiff fails to appear
on the date of the presentation of his evidence in chief on the complaint, or to prosecute his
action for an unreasonable length of time, or to comply with these Rules or any order of the
court, the complaint may be dismissed upon motion of defendant or upon the court's own
motion, without prejudice to the right of the defendant to prosecute his counterclaim in the same
or in a separate action. This dismissal shall have the effect of an adjudication upon the merits,
unless otherwise declared by the court.

The express qualification in the provision that the dismissal of the complaint due to the plaintiffs
fault, as in the case for failure to prosecute, is without prejudice to the right of the defendant to
prosecute his counterclaim in the same or separate action. This stands in marked contrast to the
provisions under Rule 17 of the 1964 Rules of Court which were superseded by the 1997
amendments. In the 1964 Rules, dismissals due to failure to prosecute were governed by Section
3, Rule 17, to wit:

SEC. 3. Failure to prosecute. If plaintiff fails to appear at the time of the trial, or to prosecute
his action for an unreasonable length of time, or to comply with these rules or any order of the
court, the action may be dismissed upon motion of the defendant or upon the courts own
motion. This dismissal shall have the effect of an adjudication upon the merits, unless otherwise
provided by court.

Evidently, the old rule was silent on the effect of such dismissal due to failure to prosecute on
the pending counterclaims. As a result, there arose what one authority on remedial law
characterized as "the nagging question of whether or not the dismissal of the complaint carries
with it the dismissal of the counterclaim."22 Jurisprudence construing the previous Rules was
hardly silent on the matter.

In their arguments before the RTC on the dismissal of the counterclaim, respondents cited in
support City of Manila v.

Ruymann,23 Domingo v. Santos,24 Belleza v. Huntington,25 and Froilan v. Pan Oriental Shipping
Co.,26 all of which were decided more than five decades ago. Notably though, none of the
complaints in these four cases were dismissed either due to the fault of the plaintiff or upon the
instance of the defendant.27

The distinction is relevant, for under the previous and current incarnations of the Rules of Civil
Procedure, it is Section 3, Rule 17 that governs the dismissals due to the failure of the plaintiff to
prosecute the complaint, as had happened in the case at bar. Otherwise, it is Section 2, Rule 17,
which then, and still is now, covered dismissals ordered by the trial court upon the instance of
the plaintiff.28 Yet, as will be seen in the foregoing discussion, a discussion of Section 2 cannot be
avoided as the postulate behind that provision was eventually extended as well in cases that
should have properly been governed by Section 3.

Even though the cases cited by respondents involved different factual antecedents, there exists
more appropriate precedents which they could have cited in support of their claim that the
counterclaim should have been dismissed even if the dismissal of the complaint was upon the
defendants motion and was predicated on the plaintiffs fault. BA Finance Corp. v. Co29
particularly stands out in that regard, although that ruling is itself grounded on other precedents
as well. Elucidation of these cases is in order.

On the general effect of the dismissal of a complaint, regardless of cause, on the pending
counterclaims, previous jurisprudence laid emphasis on whether the counterclaim was
compulsory or permissive in character. The necessity of such distinction was provided in the 1964
Rules itself, particularly Section 2, Rule 17, which stated that in instances wherein the plaintiff
seeks the dismissal of the complaint, "if a counterclaim has been pleaded by a defendant prior to
the service upon him of the plaintiffs motion to dismiss, the action shall not be dismissed against
the defendants objection unless the counterclaim can remain pending for independent
adjudication by the court."30 The vaunted commentaries of Chief Justice Moran, remarking on
Section 2, Rule 17, noted that "[t]here are instances in which a counterclaim cannot remain
pending for independent adjudication, as, where it arises out of, or is necessarily connected with,
the transaction or occurrence which is the subject matter of the opposing partys claim." 31

This view expressed in Morans Commentaries was adopted by the Court in cases where the
application of Section 2, Rule 17 of the 1964 Rules of Court was called for, such as in Lim Tanhu
v. Ramolete,32 and Dalman v. City Court of Dipolog City.33 The latter case warrants brief
elaboration. Therein, the plaintiff in a civil case for damages moved for the withdrawal of her
own case on the ground that the dispute had not been referred to the barangay council as
required by law. Over the objection of the defendant, who feared that her own counterclaim
would be prejudiced by the dismissal, plaintiffs motion was granted, the complaint and the
counterclaim accordingly dismissed by the trial court. The Court refused to reinstate the
counterclaim, opining without elaboration, "[i]f the civil case is dismissed, so also is the
counterclaim filed therein."34 The broad nature of that statement gave rise to the notion that the
mandatory

dismissal of the counterclaim upon dismissal of the complaint applied regardless of the cause of
the complaints dismissal.35

Notably, the qualification concerning compulsory counterclaims was provided in Section 2, Rule
17 of the 1964 Rules, the provision governing dismissals by order of the court, and not Section 3,
Rule 17. As stated earlier, Section 3, which covered dismissals for failure to prosecute upon
motion of the defendant or upon motu proprio action of the trial court, was silent on the effect
on the counterclaim of dismissals of such nature.

Spouses Sta. Maria, Jr. v. Court of Appeals,36 decided in 1972, ostensibly supplied the gap on the
effect on the counterclaim of complaints dismissed under Section 3. The defendants therein
successfully moved before the trial court for the dismissal of the complaint without prejudice and
their declaration in default on the counterclaim after plaintiffs therein failed to attend the pre-
trial. After favorable judgment was rendered on the counterclaim, plaintiffs interposed an
appeal, citing among other grounds, that the counterclaim could no longer have been heard after
the dismissal of the complaint. While the Court noted that the adjudication of the counterclaim
in question "does not depend upon the adjudication of the claims made in the complaint since
they were virtually abandoned by the non-appearance of the plaintiffs themselves," it was also
added that "[t]he doctrine invoked is not available to plaintiffs like the petitioners, who prevent
or delay the hearing of their own claims and allegations."37 The Court, through Justice JBL Reyes,
noted:

The doctrine that the complaint may not be dismissed if the counterclaim cannot be
independently adjudicated is not available to, and was not intended for the benefit of, a
plaintiff who prevents or delays the prosecution of his own complaint. Otherwise, the trial of
counterclaims would be made to depend upon the maneuvers of the plaintiff, and the rule would
offer a premium to vexing or delaying tactics to the prejudice of the counterclaimants. It is in the
same spirit that we have ruled that a complaint may not be withdrawn over the opposition of the
defendant where the counterclaim is one that arises from, or is necessarily connected with, the
plaintiffs action and cannot remain pending for independent adjudication.38

There is no doubt that under the 1964 Rules, the dismissal of a complaint due to the failure of
the plaintiff to appear during pre-trial, as what had happened in Sta. Maria, fell within the
coverage of Section 3, Rule 17. On the other hand, Section 2 was clearly limited in scope to those
dismissals sustained at the instance of the plaintiff.39 Nonetheless, by the early 1990s,
jurisprudence was settling on a rule that compulsory counterclaims were necessarily terminated
upon the dismissal of the complaint not only if such dismissal was upon motion of the plaintiff,
but at the instance of the defendant as well. Two decisions from that period stand out in this
regard, Metals Engineering Resources Corp. v. Court of Appeals40 and International Container
Terminal Services v. Court of Appeals.41

In Metals, the complaint was expunged from the record after the defendant had filed a motion
for reconsideration of a trial court order allowing the filing of an amended complaint that
corrected a jurisdictional error in the original complaint pertaining to the specification of the
amount of damages sought. When the defendant was nonetheless allowed to present evidence
on the counterclaim, the plaintiff assailed such allowance on the ground that the counterclaim
was compulsory and could no longer remain pending for independent adjudication. The Court, in
finding for the plaintiff, noted that the counterclaim was indeed compulsory in nature, and as
such, was auxiliary to the proceeding in the original suit and derived its jurisdictional support
therefrom.42 It was further explained that the doctrine was in consonance with the primary
objective of a counterclaim, which was to avoid and prevent circuitry of action by allowing the
entire controversy between the parties to be litigated and finally determined in one action, and
to discourage multiplicity of suits.43 Also, the Court noted that since the complaint was dismissed
for lack of jurisdiction, it was as if no claim was filed against the defendant, and there was thus
no more leg for the complaint to stand on.44

In International Container, the defendant filed a motion to dismiss which was granted by the trial
court. The defendants counterclaim was dismissed as well. The Court summarized the key
question as "what is the effect of the dismissal of a complaint ordered at the instance of the
defendant upon a compulsory counterclaim duly raised in its answer."45 Then it ruled that the
counterclaim did not survive such dismissal. After classifying the counterclaim therein as
compulsory, the Court noted that "[i]t is obvious from the very nature of the counterclaim that
it could not remain pending for independent adjudication, that is, without adjudication by the
court of the complaint itself on which the counterclaim was based."46

Then in 1993, a divided Court ruled in BA Finance that the dismissal of the complaint for
nonappearance of plaintiff at the pre-trial, upon motion of the defendants, carried with it the
dismissal of their compulsory counterclaim.47 The Court reiterated the rule that "a compulsory
counterclaim cannot remain pending for independent adjudication by the court as it is auxiliary
to the proceeding in the original suit and merely derives its jurisdictional support therefrom." 48
Express reliance was made on Metals, International Container, and even Dalman in support of
the majoritys thesis. BA Finance likewise advised that the proper remedy for defendants desirous
that their counterclaims not be dismissed along with the main complaint was for them to move
to declare the plaintiffs to be "non-suited" on their complaint and "as in default" on their
compulsory counterclaim, instead of moving for the dismissal of the complaint.49

Justice Regalado, joined by Chief Justice Narvasa, registered a strong objection to the theory of
the majority. They agreed that the trial court could no longer hear the counterclaim, but only on
the ground that defendants motion to be allowed to present evidence on the counterclaim was
filed after the order dismissing the complaint had already become final. They disagreed however
that the compulsory counterclaim was necessarily dismissed along with the main complaint,
pointing out that a situation wherein the dismissal of the complaint was occasioned by plaintiffs
failure to appear during pre-trial was governed under Section 3, Rule 17, and not Section 2 of the
same rule. Justice Regalado, who ironically penned the decision in Metals cited by the majority,
explained:

Turning back to Rule 17, it is readily apparent that Sections 2 and 3 thereof envisage different
factual and adjective situations. The dismissal of the complaint under Section 2 is at the instance
of plaintiff, for whatever reason he is minded to move for such dismissal, and, as a matter of
procedure, is without prejudice unless otherwise stated in the order of the court or, for that
matter, in plaintiff's motion to dismiss his own complaint. By reason thereof, to curb any dubious
or frivolous strategy of plaintiff for his benefit or to obviate possible prejudice to defendant, the
former may not dismiss his complaint over the defendant's objection if the latter has a
compulsory counterclaim since said counterclaim would necessarily be divested of juridical basis
and defendant would be deprived of possible recovery thereon in that same judicial proceeding.

Section 3, on the other hand, contemplates a dismissal not procured by plaintiff, albeit justified
by causes imputable to him and which, in the present case, was petitioner's failure to appear at
the pre-trial. This situation is also covered by Section 3, as extended by judicial interpretation,
and is ordered upon motion of defendant or motu proprio by the court. Here, the issue of
whether defendant has a pending counterclaim, permissive or compulsory, is not of
determinative significance. The dismissal of plaintiff's complaint is evidently a confirmation of
the failure of evidence to prove his cause of action outlined therein, hence the dismissal is
considered, as a matter of evidence, an adjudication on the merits. This does not, however, mean
that there is likewise such absence of evidence to prove defendant's counterclaim although the
same arises out of the subject matter of the complaint which was merely terminated for lack of
proof. To hold otherwise would not only work injustice to defendant but would be reading a
further provision into Section 3 and wresting a meaning therefrom although neither exists even
by mere implication. Thus understood, the complaint can accordingly be dismissed, but relief can
nevertheless be granted as a matter of course to defendant on his counterclaim as alleged and
proved, with or without any reservation therefor on his part, unless from his conduct, express or
implied, he has virtually consented to the concomitant dismissal of his counterclaim. 50
Justice Regalado also adverted to Sta. Maria and noted that the objections raised and rejected
by the Court therein were the same as those now relied upon by the plaintiff. He pointed out
that Dalman and International Container, both relied upon by the majority, involved the
application of Section 2, Rule 17 and not Section 3, which he insisted as the applicable provision
in the case at bar.51

The partial dissent of Justice Regalado in BA Finance proved opportune, as he happened then to
be a member of the Rules of Court Revision Committee tasked with the revision of the 1964 Rules
of Court. Just a few months after BA Finance was decided, Justice Regalado proposed before the
Committee an amendment to Section 3, Rule 17 that would explicitly provide that the dismissal
of the complaint due to the fault of the plaintiff shall be "without prejudice to the right of the
defendant to prosecute his counterclaim in the same or in a separate action." The amendment,
which was approved by the Committee, is reflected in the minutes of the meeting of the
Committee held on 12 October 1993:

[Justice Regalado] then proposed that after the words "upon the courts own motion" in the 6th
line of the draft in Sec. 3 of Rule 17, the following provision be inserted: "without prejudice to
the right of the defendant to prosecute his counterclaim in the same or in a separate action."
The Committee agreed with the proposed amendment of Justice Regalado.

Justice Herrera observed that under Secs. 1 to 3 of Rule 17, it is not the action that is dismissed
but the complaint. He asked whether there is any distinction between "complaint" and "action."
Justice Regalado opined that the action of the plaintiff is initiated by his complaint.

Justice Feria then suggested that the dismissal be limited to the complaint[.] Thus, in the 1st
line of Sec. 1, the words "An action" will be changed to "a complaint"; in the 2nd line of Sec. 2,
the words "an action" will be changed to "a complaint" and in Sec. 3, the word "action" on the
5th line of the draft will be changed to "complaint." The Committee agreed with Justice Ferias
suggested amendments.

CA Pao believed that there is a need to clarify the counterclaim that the defendant will
prosecute, whether it is permissive or compulsory or all kinds of counterclaims.

Justice Regalado opined that there is no need of making a clarification because it is already
understood that it covers both counterclaims.52

It is apparent from these minutes that the survival of the counterclaim despite the dismissal of
the complaint under Section 3 stood irrespective of whether the counterclaim was permissive or
compulsory. Moreover, when the Court itself approved the revisions now contained in the 1997
Rules of Civil Procedure, not only did Justice Regalados amendment to Section 3, Rule 17 remain
intact, but the final version likewise eliminated the qualification formerly offered under Section
2 on "counterclaims that can remain pending for independent adjudication by the court." 53 At
present, even Section 2, concerning dismissals on motion of the plaintiff, now recognizes the
right of the defendant to prosecute the counterclaim either in the same or separate action
notwithstanding the dismissal of the complaint, and without regard as to the permissive or
compulsory nature of the counterclaim.

In his commentaries on the 1997 Rules of Civil Procedure, Justice Regalado expounds on the
effects of the amendments to Section 2 and 3 of Rule 17:

2. Under this revised section [2], where the plaintiff moves for the dismissal of his complaint to
which a counterclaim has been interposed, the dismissal shall be limited to the complaint. Such
dismissal shall be without prejudice to the right of the defendant to either prosecute his
counterclaim in a separate action or to have the same resolved in the same action. Should he opt
for the first alternative, the court should render the corresponding order granting and reserving
his right to prosecute his claim in a separate complaint. Should he choose to have his
counterclaim disposed of in the same action wherein the complaint had been dismissed, he must
manifest such preference to the trial court within 15 days from notice to him of plaintiffs motion
to dismiss. These alternative remedies of the defendant are available to him regardless of
whether his counterclaim is compulsory or permissive. A similar alternative procedure, with the
same underlying reason therefor, is adopted in Sec. 6, Rule 16 and Sec. 3 of this Rule, wherein
the complaint is dismissed on the motion of the defendant or, in the latter instance, also by the
court motu proprio.

xxxx

2. The second substantial amendment to [Section 3] is with respect to the disposition of the
defendants counterclaim in the event the plaintiffs complaint is dismissed. As already observed,
he is here granted the choice to prosecute that counterclaim in either the same or a separate
action. x x x x

3. With the aforestated amendments in Secs. 2 and 3 laying down specific rules on the
disposition of counterclaims involved in the dismissal actions, the controversial doctrine in BA
Finance Corporation vs. Co, et al., (G.R. No. 105751, June 30, 1993) has been abandoned,
together with the apparent confusion on the proper application of said Secs. 2 and 3. Said
sections were distinguished and discussed in the authors separate opinion in that case, even
before they were clarified by the present amendments x x x.54

Similarly, Justice Feria notes that "the present rule reaffirms the right of the defendant to move
for the dismissal of the complaint and to prosecute his counterclaim, as stated in the separate
opinion [of Justice Regalado in BA Finance.]"55 Retired Court of Appeals Justice Herrera
pronounces that the amendment to Section 3, Rule 17 settles that "nagging question" whether
the dismissal of the complaint carries with it the dismissal of the counterclaim, and opines that
by reason of the amendments, the rulings in Metals Engineering, International Container, and BA
Finance "may be deemed abandoned."56 On the effect of amendment to Section 3, Rule 17, the
commentators are in general agreement,57 although there is less unanimity of views insofar as
Section 2, Rule 17 is concerned.58
To be certain, when the Court promulgated the 1997 Rules of Civil Procedure, including the
amended Rule 17, those previous jural doctrines that were inconsistent with the new rules
incorporated in the 1997 Rules of Civil Procedure were implicitly abandoned insofar as incidents
arising after the effectivity of the new procedural rules on 1 July 1997. BA Finance, or even the
doctrine that a counterclaim may be necessarily dismissed along with the complaint, clearly
conflicts with the 1997 Rules of Civil Procedure. The abandonment of BA Finance as doctrine
extends as far back as 1997, when the Court adopted the new Rules of Civil Procedure. If, since
then, such abandonment has not been affirmed in jurisprudence, it is only because no proper
case has arisen that would warrant express confirmation of the new rule. That opportunity is
here and now, and we thus rule that the dismissal of a complaint due to fault of the plaintiff is
without prejudice to the right of the defendant to prosecute any pending counterclaims of
whatever nature in the same or separate action. We confirm that BA Finance and all previous
rulings of the Court that are inconsistent with this present holding are now abandoned.

Accordingly, the RTC clearly erred when it ordered the dismissal of the counterclaim, since
Section 3, Rule 17 mandates that the dismissal of the complaint is without prejudice to the right
of the defendant to prosecute the counterclaim in the same or separate action. If the RTC were
to dismiss the counterclaim, it should be on the merits of such counterclaim. Reversal of the RTC
is in order, and a remand is necessary for trial on the merits of the counterclaim.

It would be perfectly satisfactory for the Court to leave this matter at that. Still, an explanation
of the reason behind the new rule is called for, considering that the rationale behind the previous
rule was frequently elaborated upon.

Under Act No. 190, or the Code of Procedure in Civil Actions promulgated in 1901, it was
recognized in Section 127(1) that the plaintiff had the right to seek the dismissal of the complaint
at any time before trial, "provided a counterclaim has not been made, or affirmative relief sought
by the cross-complaint or answer of the defendant."59 Note that no qualification was made then
as to the nature of the counterclaim, whether it be compulsory or permissive. The protection of
the defendants right to prosecute the counterclaim was indeed unqualified. In City of Manila,
decided in 1918, the Court explained:

By paragraph 1 [of Section 127], it will be seen that, where the defendant has interposed a
counterclaim, or is seeking affirmative relief by a cross-complaint, that then, and in that case, the
plaintiff cannot dismiss the action so as to affect the right of the defendant in his counterclaim
or prayer for affirmative relief. The reason for that exception is clear. When the answer sets up
an independent action against the plaintiff, it then becomes an action by the defendant against
the plaintiff, and, of course, the plaintiff has no right to ask for a dismissal of the defendants
action.60

Nonetheless, a new rule was introduced when Act No. 190 was replaced by the 1940 Rules of
Court. Section 2, Rule 30 of the 1940 Rules specified that if a counterclaim is pleaded by a
defendant prior to the service of the plaintiffs motion to dismiss, the action shall not be
dismissed against the defendants objection unless the counterclaim can remain pending for
independent adjudication by the court. This qualification remained intact when the 1964 Rules
of Court was introduced.61 The rule referred only to compulsory counterclaims, or counterclaims
which arise out of or are necessarily connected with the transaction or occurrence that is the
subject matter of the plaintiffs claim, since the rights of the parties arising out of the same
transaction should be settled at the same time.62 As was evident in Metals, International
Container and BA Finance, the rule was eventually extended to instances wherein it was the
defendant with the pending counterclaim, and not the plaintiff, that moved for the dismissal of
the complaint.

We should not ignore the theoretical bases of the rule distinguishing compulsory counterclaims
from permissive counterclaims insofar as the dismissal of the action is concerned. There is a
particular school of thought that informs the broad proposition in Dalman that "if the civil case
is dismissed, so also is the counterclaim filed therein,"63 or the more nuanced discussions offered
in Metals, International Container, and BA Finance. The most potent statement of the theory may
be found in Metals,64 which proceeds from the following fundamental premisesa compulsory
counterclaim must be set up in the same proceeding or would otherwise be abated or barred in
a separate or subsequent litigation on the ground of auter action pendant, litis pendentia or res
judicata; a compulsory counterclaim is auxiliary to the main suit and derives its jurisdictional
support therefrom as it arises out of or is necessarily connected with the transaction or
occurrence that is the subject matter of the complaint; 65 and that if the court dismisses the
complaint on the ground of lack of jurisdiction, the compulsory counterclaim must also be
dismissed as it is merely ancilliary to the main action and no jurisdiction remained for any grant
of relief under the counterclaim.

The first point is derived from Section 4, Rule 9, of the 1964 Rules of Court, while the two latter
points are sourced from American jurisprudence. There is no disputing the theoretical viability of
these three points. In fact, the requirement that the compulsory counterclaim must be set up in
the same proceeding remains extant under the 1997 Rules of Civil Procedure.66 At the same time,
other considerations rooted in actual practice provide a counterbalance to the above-cited
rationales.

Whatever the nature of the counterclaim, it bears the same integral characteristics as a
complaint; namely a cause (or causes) of action constituting an act or omission by which a party
violates the right of another. The main difference lies in that the cause of action in the
counterclaim is maintained by the defendant against the plaintiff, while the converse holds true
with the complaint. Yet, as with a complaint, a counterclaim without a cause of action cannot
survive.

It would then seemingly follow that if the dismissal of the complaint somehow eliminates the
cause(s) of the counterclaim, then the counterclaim cannot survive. Yet that hardly is the case,
especially as a general rule. More often than not, the allegations that form the counterclaim are
rooted in an act or omission of the plaintiff other than the plaintiffs very act of filing the
complaint. Moreover, such acts or omissions imputed to the plaintiff are often claimed to have
occurred prior to the filing of the complaint itself. The only apparent exception to this
circumstance is if it is alleged in the counterclaim that the very act of the plaintiff in filing the
complaint precisely causes the violation of the defendants rights. Yet even in such an instance,
it remains debatable whether the dismissal or withdrawal of the complaint is sufficient to
obviate the pending cause of action maintained by the defendant against the plaintiff. 67

These considerations persist whether the counterclaim in question is permissive or compulsory.

A compulsory counterclaim arises out of or is connected with the transaction or occurrence
constituting the subject matter of the opposing partys claim, does not require for its adjudication
the presence of third parties, and stands within the jurisdiction of the court both as to the amount
involved and the nature of the claim.68 The fact that the culpable acts on which the counterclaim
is based are founded within the same transaction or occurrence as the complaint, is insufficient
causation to negate the counterclaim together with the complaint. The dismissal or withdrawal
of the complaint does not traverse the boundaries of time to undo the act or omission of the
plaintiff against the defendant, or vice versa. While such dismissal or withdrawal precludes the
pursuit of litigation

by the plaintiff, either through his/her own initiative or fault, it would be iniquitous to similarly
encumber the defendant who maintained no such initiative or fault. If the defendant similarly
moves for the dismissal of the counterclaim or neglects to timely pursue such action, let the
dismissal of the counterclaim be premised on those grounds imputable to the defendant, and
not on the actuations of the plaintiff.

The other considerations supplied in Metals are anchored on the premise that the jurisdictional
foundation of the counterclaim is the complaint itself. The theory is correct, but there are other
facets to this subject that should be taken into account as well. On the established premise that
a counterclaim involves separate causes of action than the complaint even if derived from the
same transaction or series of transactions, the counterclaim could have very well been lodged as
a complaint had the defendant filed the action ahead of the complainant.69 The terms "ancillary"
or "auxiliary" may mislead in signifying that a complaint innately possesses more credence than
a counterclaim, yet there are many instances wherein the complaint is trivial but the
counterclaim is meritorious. In truth, the notion that a counterclaim is, or better still, appears to
be merely "ancillary" or "auxiliary" is chiefly the offshoot of an accident of chronology, more than
anything else.

The formalistic distinction between a complaint and a counterclaim does not detract from the
fact that both of them embody causes of action that have in their end the vindication of rights.
While the distinction is necessary as a means to facilitate order and clarity in the rules of
procedure, it should be remembered that the primordial purpose of procedural rules is to provide
the means for the vindication of rights. A party with a valid cause of action against another party
cannot be denied the right to relief simply because the opposing side had the good fortune of
filing the case first. Yet this in effect was what had happened under the previous procedural rule
and correspondent doctrine, which under their final permutation, prescribed the automatic
dismissal of the compulsory counterclaim upon the dismissal of the complaint, whether upon the
initiative of the plaintiff or of the defendant.
Thus, the present rule embodied in Sections 2 and 3 of Rule 17 ordains a more equitable
disposition of the counterclaims by ensuring that any judgment thereon is based on the merit of
the counterclaim itself and not on the survival of the main complaint. Certainly, if the
counterclaim is palpably without merit or suffers jurisdictional flaws which stand independent of
the complaint, the trial court is not precluded from dismissing it under the amended rules,
provided that the judgment or order dismissing the counterclaim is premised on those defects.
At the same time, if the counterclaim is justified, the amended rules now unequivocally protect
such counterclaim from peremptory dismissal by reason of the dismissal of the complaint.

WHEREFORE, the petition is GRANTED. The Orders dated 9 August 2005 and 10 October 2005 of
Branch 29, Regional Trial Court of San Miguel, Zamboanga del Sur in Civil Case No. 98-012 are SET
ASIDE. Petitioners counterclaim as defendant in Civil Case. No. 98-012 is REINSTATED. The
Regional Trial Court is ORDERED to hear and decide the counterclaim with deliberate dispatch.

REPUBLIC OF THE PHILIPPINES, represented by the PRESIDENTIAL COMMISSION ON GOOD

GOVERNMENT (PCGG), Petitioner,
vs.
TRINIDAD DIAZ-ENRIQUEZ, LEANDRO ENRIQUEZ, ERLINDA ENRIQUEZ-PANLILIO, ALLAN E.
PANLILIO, JOSE MARCEL E. PANLILIO, KATRINA E. PANLILIO, NICOLE P. MORRIS, IMELDA R.
MARCOS, MA. IMELDA MARCOS-MANOTOC, FERDINAND R. MARCOS, JR., MA. VICTORIA IRENE
MARCOS-ARANETA, EMILIA T. CRUZ, RAFAEL ROMAN T. CRUZ, MA. RONA ROMANA T. CRUZ,
ANA CRISTINA CRUZ GA YLO, GINO R. CRUZ, ISAIAH PAVIA CRUZ, and DON M. FERRY.
Respondents.

Before this Court is the 11 March 2008 Petition for Review on Certiorari filed by petitioner under
Rule 45 of the Rules of Court, which assails the 1 October 2007 Order and 25 January 2008
Resolution of the Sandiganbayan (Second Division).1

The facts in this case are not disputed.

On 23 July 1987, the Republic of the Philippines (Republic), represented by the Presidential
Commission on Good Government (PCGG) and the Office of the Solicitor General (OSG), filed a
Complaint against respondents. Docketed as Civil Case No. 0014, this civil action sought the
recovery of ill-gotten wealth from respondents for the benefit of the Republic. Allegedly, these
properties were illegally obtained during the reign of former President Ferdinand E. Marcos and,
hence, were the subject of sequestration orders.

Thereafter, Civil Case No. 0014 went through a series of inclusions of individual defendants and
defendant corporations. As a result, respondents finished filing their separate Answers eight
years later, or in 1995.
In May 1996, some of the defendant corporations filed motions for dismissal. Six years thereafter,
the Sandiganbayan resolved the motions. It ruled in favor of defendant corporations and lifted
the sequestration orders against them.2

Aggrieved, the Republic filed a Petition for Certiorari3 before this Court on 23 August 2002.
Docketed as G.R. No. 154560,4 the Rule 65 petition questioned the lifting of the sequestration
orders against defendant corporations.

With these two cases at bay, the counsels for the Republic divided their responsibilities as
follows: Special PCGG Counsel Maria Flora A. Falcon (Falcon) attended to Civil Case No. 0014,
while OSG Senior State Solicitor Derek R. Puertollano (Puertollano) handled G.R. No. 154560.

After receiving the Answers, the Sandiganbayan scheduled pretrial dates for Civil Case No. 0014.
However, the court failed to conduct pretrial hearings from 2002 to 2007. For five years, it reset
the hearings in view of the pending incidents, which included G.R. No. 154560, and because the
case "was not yet ripe for a pretrial conference."5

On 28 June 2007, Civil Case No. 0014 was called for the initial presentation of plaintiff's evidence,
but the proceedings did not push through. Finally, two decades after the inception of the case,
both parties moved to set the pretrial and trial hearings on 1, 2, 29, and 30 October 2007. The
Sandiganbayan granted their motions in this wise:6

When this case was called for initial presentation of plaintiff's evidence, both parties moved for
postponement, and considering some issues still pending with the Supreme Court, but
considering also on the other hand, that this case has been pending for quite a long time, the
Court orders parties to submit Joint Stipulation of Facts, as well as substitution of parties, and by
the next hearing, the Court shall proceed to hear this case.

Accordingly, the hearing set for tomorrow is cancelled, and reset to October 1, 2, 29 & 30, 2007,
all at 1:30 o'clock in the afternoon.

SO ORDERED.

Following this Resolution, the defendants moved for the extension of the submission of these
requirements. Nevertheless, none of them fully complied, except petitioner who submitted an
"unofficial proposal for stipulation, for defendants to comment on the same."7

In the interim, the contract of Falcon with the PCGG terminated on 1 July 2007.8 Through a letter
dated 21 September 2007, she informed Puertollano that she was no longer connected with the
PCGG. She also turned over to him the records of Civil Case No. 0014.9 However, Puertollano
belatedly received the letter on 8 October 2007. For all he knew, Falcon had attended the
hearings prior to that date, while he was pursuing G.R. No. 154560.
Thus, on 1 October 2007, no representative appeared on behalf of petitioner. Consequently, the
Sandiganbayan issued its 1 October 2007 Order dismissing the case without prejudice. The court
ruled thus:10

On motion of Atty. Nini Priscilla D. Sison-Ledesma for the dismissal of this case, since plaintiff's
counsel failed to appear despite due notice and there was no representative from the plaintiff,
this case is ordered DISMISSED without prejudice. The issue of whether the pending incident
before the Supreme Court would affect this case is off tangent.

Accordingly, the hearings set tomorrow, October 2, 2007, and also on October 29 and 30, 2007
are cancelled.

SO ORDERED.

On 5 October 2007, Atty. Mary Charlene Hernandez took over the case from PCGG's previous
special counsel11 and only after a while did she learn of the trial dates. She also knew nothing
about the dismissal of the case. Hence, she proceeded to file an Urgent Motion for
Postponement12 of the 30 October 2007 hearing.

The OSG came to know of the dismissal of Civil Case No. 0014 only when it received the assailed
Order on 15 November 2007. On 29 November 2007, it filed a Motion for Reconsideration 13 with
a notice for hearing on 7 December 2007. This motion was served on the Sandiganbayan and
respondents on 29 November 2007 via registered mail.14 Unfortunately, the court received the
motion only on 10 December 2007.15

Considering the late receipt of the motion, the Sandiganbayan issued its 25 January 2008
Resolution denying it on the ground of failure to observe the three-day notice requirement.16 In
effect, it considered the motion as a worthless piece of paper. With this instant dismissal, the
Sandiganbayan no longer considered the reasons adduced by petitioner to explain the latter's
absence in court.

Specifically, petitioner brought to the Sandiganbayan's attention the fact that Falcon, who was
assigned to Civil Case No. 0014, had diligently attended to the civil action. But since she was no
longer connected to the PCGG, and given that the OSG only learned of this circumstance seven
days after the hearing on 1 October 2007, counsels for petitioner failed to appear during the
hearing.17

Hence, petitioner comes before this Court to seek the reinstatement of the 26-year-old case,
which has already reached the start of the trial stage.

Petitioner argues that its single incidence of absence after Falcon resigned on 1 October 2007
does not amount to failure to prosecute under Rule 17, Section 3 of the Rules of Court, which
states:
Sec. 3. Dismissal due to fault of plaintiff.

If, for no justifiable cause, the plaintiff fails to appear on the date of the presentation of his
evidence in chief on the complaint, or to prosecute his action for an unreasonable length of time,
or to comply with these Rules or any order of the court, the complaint may be dismissed upon
motion of the defendant or upon the court's own motion, without prejudice to the right of the
defendant to prosecute his counterclaim in the same or in a separate action. This dismissal shall
have the effect of an adjudication upon the merits, unless otherwise declared by the court.

Petitioner further avers that the Motion for Reconsideration questioning the dismissal of Civil
Case No. 0014 should not have been denied for supposedly violating the three-day notice
requirement. Rule 15, Section 4 of the Rules of Court, reads:

Sec. 4. Hearing of motion.

Except for motions which the court may act upon without prejudicing the rights of the adverse
party, every written motion shall be set for hearing by the applicant.

Every written motion required to be heard and the notice of the hearing thereof shall be served
in such a manner as to ensure its receipt by the other party at least three (3) days before the date
of hearing, unless the court for good cause sets the hearing on shorter notice.

Therefore, this Court is tasked to resolve the two issues raised by petitioner as follows:

I. Whether the Sandiganbayan gravely erred in dismissing Civil Case No. 0014 for the failure of
petitioner to appear during the 1 October 2007 hearing.

II. Whether the Sandiganbayan committed reversible error in denying the Motion for
Reconsideration on the ground that it failed to comply with the three-day notice rule.

RULING OF THE COURT

Dismissal of Civil Case No. 0014 for Petitioner's Failure to Appear

Petitioner asserts that, save for the absence of Falcon due to the termination of her contract with
the PCGG, she was diligent in attending the hearings and in submitting the requirements of the
Sandiganbayan. Likewise, Puertollano was responsible in pursuing G.R. No. 154560. Thus, their
inability to send representatives for the Republic in the 1 October 2007 hearing can only be
appreciated as mere inadvertence and excusable negligence, which cannot amount to failure to
prosecute.

Petitioner also advances the argument that this Court disfavors judgments based on non-suits
and prefers those based on the merits - especially in Civil Case No. 0014, which contains
allegations of ill-gotten wealth. Moreover, petitioner claims that reasonable deferments may be
tolerated if they would not cause substantial prejudice to any party.

Lastly, petitioner manifests good reasons to expect the cancellation of the 1 October 2007
hearing, as in the past resetting. At that time, the same circumstances for postponement were
present: (1) G.R. No. 154560 was still pending before this Court; (2) several incidents18 were also
still pending; and (3) no pretrial order has yet been issued by the Sandiganbayan.

On the other hand, in their Comments,19 respondents stress the letter of the law. Indeed, Rule
17, Section 3 of the Rules of Court, provides that complaints may be dismissed if a petitioner fails
to be present on the date of presentation of its evidence in chief.

Additionally, respondents contend that no justifiable cause exists to warrant petitioner's

absence. To support their contention, they cite the following: (1) Falcon agreed to set the hearing
on 1 October 2007; and (2) Puertollano should have attended the pretrial even if Falcon failed to
appear considering that, as counsels for petitioner, both of them had been notified of the orders
and resolutions of the Sandiganbayan.

Respondents also highlight the fact that the PCGG and the OSG failed to monitor the proceedings
when they filed a Motion for Reconsideration only after 14 days from the OSG's receipt of the
assailed Order of dismissal. Worse, the counsels of the Republic did not even inform the court
beforehand of the reason for their absence. Because of these circumstances, respondents posit
that the Sandiganbayan did not gravely err in dismissing Civil Case No. 0014.

This Court rules in favor of the Republic.

As worded, Rule 17, Section 3 of the Rules of Court, provides that the court may dismiss a
complaint in case there are no justifiable reasons that explain the plaintiff's absence during the
presentation of the evidence in chief. Generally speaking, the use of "may" denotes its directory
nature,20 especially if used in remedial statutes that are known to be construed liberally. Thus,
the word "may" in Rule 17, Section 3 of the Rules of Court, operates to confer on

the court the discretion21 to decide between the dismissal of the case on technicality vis--vis the
progressive prosecution thereof.

Given the connotation of this procedural rule, it would have been expected that the
Sandiganbayan would look into the body of cases that interpret the provision. From
jurisprudence, it is inevitable to see that the real test of the exercise of discretion is whether,
under the circumstances, the plaintiff is charged with want of due diligence in failing to proceed
with reasonable promptitude.22 In fact, we have ruled that there is an abuse of that discretion
when a judge dismisses a case without any showing that the party's conduct "is so indifferent,
irresponsible, contumacious or slothful."23
Here, the Sandiganbayan appears to have limited itself to a rigid application of technical rules
without applying the real test explained above. The 1 October 2007 Order was bereft of any
explanation alluding to the indifference and irresponsibility of petitioner. The Order was also
silent on any previous act of petitioner that can be characterized as contumacious or slothful.

Verily, the circumstances in Civil Case No. 0014 should have readily convinced the Sandiganbayan
that it would be farfetched to conclude that petitioner lacked interest in prosecuting the latter's
claims.

Firstly, based on the records, petitioner's counsels have actively participated in the case for two
decades. The Sandiganbayan has not made any remark regarding the attendance of petitioner,
save for this single instance. Secondly, after the latter received the assailed Order, it duly filed a
Motion for Reconsideration. These circumstances should have easily persuaded the
Sandiganbayan that the Republic intended to advance the ill-gotten wealth case.

More importantly, respondents' imputation of lack of interest to prosecute on the part of

petitioner becomes a hyperbole in the face of its explanation, albeit belated.

Respondents harp on the fact that since Falcon agreed to set the hearing on 1 October 2007 and
Puertollano, being a counsel of record, may have also known of the schedule, petitioner has no
excuse to be absent. But even if we concede to respondents' arguments, the most that they can
say is that petitioner had an instance of absence without an excuse. Juxtaposing this lapse against
its long history of actively prosecuting the case, it would be the height of rigidity to require from
petitioner complete attendance, at all times.

Similarly, in Perez v. Perez, we held thus:24

The records show that every time the case was set for hearing, the plaintiffs and their counsel
had always been present; however, the scheduled hearings were either cancelled by the court
motu propio and/or postponed by agreement of the parties, until the case was eventually set for
trial on the merits on February 15, 1967. It was only at this hearing where the plaintiffs and their
counsel failed to appear, prompting the court to issue its controversial order of dismissal.
Considering that it was the first time that the plaintiffs failed to appear and the added fact that
the trial on the merits had not as yet commenced, We believe that it would have been more in
consonance with the essence of justice and fairness for the court to have postponed the hearing
on February 15, 1967.

We are not unmindful of the fact that the matter of adjournment and postponement of trials is
within the sound discretion of the court; but such discretion should always be predicated on the
consideration that more than the mere convenience of the courts or of the parties in the case,
the ends of justice and fairness should be served thereby. Postponements and continuances are
part and parcel of our procedural system of dispensing justice, and when - as in the present case
- no substantial rights are affected and the intention to delay is not manifest, it is sound judicial
discretion to allow them.
This Court further considers that based on the records, the contract of the handling lawyer,
Falcon, with the PCGG terminated without the knowledge of Puertollano. After Falcon's
resignation, it was only on 5 October 2007 that the case was transferred to the new lawyer. These
facts then explain the nonattendance of petitioner on 1 October 2007, and why it failed to keep
abreast with the succeeding 2, 29, and 30 October 2007 hearings.

Moreover, this Court understands the absence of Puertollano in Civil Case No. 0014. The OSG has
explained that he attends to G.R. 154560, as the main case has been delegated to the PCGG. We
find this arrangement sensible, given that case management is needed to tackle this sensitive
case involving a number of high-profile parties, sensitive issues and, of course, numerous
offshoots and incidents.

Respondents are correct in saying that courts have a right to dismiss a case for failure of the
plaintiff to prosecute. Still, we remind justices, judges and litigants alike that rules "should be
interpreted and applied not in a vacuum or in isolated abstraction, but in light of surrounding
circumstances and attendant facts in order to afford justice to all."25

We underscore that there are specific rules that are liberally construed, and among them is the
Rules of Court. In fact, no less than Rule 1, Section 6 of the Rules of Court echoes that the
rationale behind this construction is to promote the objective of securing a just, speedy and
inexpensive disposition of every action and proceeding. Surprisingly, the Sandiganbayan obviated
the speedy disposition of the case when it chose to dismiss the case spanning two decades over
a technicality and, in the same breath, rationalized its cavalier attitude by saying that a complaint
for ill-gotten wealth should be reinstituted all over again.

Here, we find it incongruous to tip the balance of the scale in favor of a technicality that would
result in a complete restart of the 26-year-old civil case back to square one. Surely, this Court
cannot waste the progress of the civil case from the institution of the complaint to the point of
reaching the trial stage. Not only would this stance dry up the resources of the government and
the private parties, but it would also compromise the preservation of the evidence needed by
them to move forward with their respective cases. Thus, to prevent a miscarriage of justice in its
truest sense, and considering the exceptional and special history of Civil Case No. 0014, this Court
applies a liberal construction of the Rules of Court.1wphi1

Every party-litigant must be afforded the amplest opportunity for the proper and just
determination of its cause.26 "Adventitious resort to technicality resulting in the dismissal of cases
is disfavored because litigations must as much as possible be decided on the merits and not on
technicalities."27 Inconsiderate dismissals, even if without prejudice to its refiling as in this case,
merely postpone the ultimate reckoning between the parties. In the absence of a clear intention
to delay, justice is better served by a brief continuance, trial on the merits, and final disposition
of the case before the court.28

Denial of Petitioner's Motion for Reconsideration due to Petitioner's Failure to Observe the
Three-day Notice Rule
In its assailed 25 January 2008 Resolution, the Sandiganbayan held that petitioners failed to
comply with the three-day notice rule. It faulted petitioner for its belated receipt on 1 0
December 2007 of the Motion for Reconsideration set for hearing on 7 December 2007.

The Sandiganbayan is incorrect. By the very words of Rule 15, Section 4 of the Rules of Court, the
moving party is required to serve motions in such a manner as to ensure the receipt thereof by
the other party at least three days before the date of hearing. The purpose of the rule is to
prevent a surprise and to afford the adverse party a chance to be heard before the motion is
resolved by the trial court.29 Plainly, the rule does not require that the court receive the notice
three days prior to the hearing date.

Likewise, petitioner mailed the motion to the Sandiganbayan on 29 November 2007. Since Rule
13, Section 3 of the Rules of Court, states that the date of the mailing of motions through
registered mail shall be considered the date of their filing in court, it follows that petitioner filed
the motion to the court 10 days in advance of the hearing date. In so doing, it observed the 10-
day requirement under Rule 15, Section 5 of the Rules of Court, which provides that the time and
date of the hearing must not be later than ten days after the filing of the motion.

Considering that the Motion for Reconsideration containing a timely notice of hearing was duly
served in compliance with Rule 15, Sections 4 and 5 of the Rules of Court, the fact that the
Sandiganbayan received the notice on 10 December 2007 becomes trivial. The court cannot also
blame petitioner for this belated receipt of the registered mail since it followed the rules.

Therefore, the Sandiganbayan should have given due course to the Motion for Reconsideration
filed by petitioner. If it had done so, Civil Case No. 0014 would have progressed at the trial court
level.

IN VIEW THEREOF, the 11 March 2008 Petition for Review on Certiorari filed by petitioner is
GRANTED. The 1 October 2007 Order and 25 January 2008 Resolution of the Sandiganbayan
(Second Division) are REVERSED. Consequently, Civil Case No. 0014 is hereby REINSTATED.

SILVESTRE TIU, petitioner, vs. DANIEL MIDDLETON and REMEDIOS P. MIDDLETON, respondents.

Pre-trial* is an essential device for the speedy disposition of disputes. Hence, parties cannot
brush it aside as a mere technicality. Where the pre-trial brief does not contain the names of
witnesses and the synopses of their testimonies as required by the Rules of Court, the trial court,
through its pre-trial order, may bar the witnesses from testifying. However, an order allowing the
presentation of unnamed witnesses may no longer be modified during the trial, without the
consent of the parties affected.

The Case

Silvestre Tiu assails two Orders, both dated August 3, 1998,i[1] rendered by the Regional Trial
Court of Oroquieta City (Branch 14)ii[2] in Civil Case No. 4516-14-28. The first Order, which was
issued in open court, reads:

Considering the written arguments of both parties herein, the Court finds that the witness of
defendant Silvestre Tiu, Ms. Antonia Tiu, who is the aunt of the defendant, whose name was not
disclosed in the pre-trial brief is ordered excluded pursuant to the provisions of the 1997 Rules
of Civil Procedure wherein it is required that all names of witnesses must be stated in the Pre-
Trial Brief.iii[3]

The second Order denied reconsideration.

The Facts

The facts are undisputed. The present Petition arose from a Complaint for recovery of ownership
and possession of real property, accounting and damages filed against herein petitioner before
the Regional Trial Court of Oroquieta City.

Before the commencement of trial, the court a quo sent a Notice of Pre-trial Conference, stating
in part: The parties are WARNED that witnesses whose names and addresses are not submitted
at the pre-trial may not be allowed to testify at the trial, and documents not marked as exhibits
at the pre-trial, except those not then available or existing, may be barred admission in
evidence.iv[4] (Italics supplied.)

In his Pre-trial Brief, petitioner averred that he would be presenting six witnesses, but he did not
name them. After the pre-trial conference, the court a quo issued a Pre-trial Order stating that
the petitioner would present six witnesses and specifying the hearing dates for the said
purpose.v[5]

Trial ensued, and herein respondents, as plaintiffs in the case below, presented their witnesses
in due course. When his turn came, petitioner called Antonia Tiu as his first witness. Citing Section
6, Rule 18 of the 1997 Rules of Court, respondents objected, arguing that the witness could not
be allowed to testify because petitioner had failed to name her in his Pre-trial Brief. Sustaining
respondents, the lower court then issued its assailed Orders.

Hence, this recourse to this Court on pure questions of law.vi[6] On petitioners Motion, this Court
issued a Temporary Restraining Order enjoining the lower court from proceeding with the case
until further notice.vii[7]
Ruling of the Trial Court

In ruling that Antonia Tiu could not be presented as a witness, the trial court ratiocinated:

x x x [T]he plaintiffs counsels, Atty. Ricardo Lumantas and Atty. Benjamin Galindo, had cited
authorities that said witness, Ms. Antonia Tiu, must be barred as a witness because her name
was not included in the pre-trial brief. The plaintiffs cited Sec. 6 of Rule 18, of the 1997 Rules of
Civil Procedure x x x

Said provision is supported by corresponding jurisprudence taken by plaintiffs counsel from the
book, Effective Pre-Trial Technique, of Hon. Justice Josue N. Bellosillo, 1990 ed., p 134) which
states that this requirement that if a party does not place the name of a witness on such a list of
witnesses, the court may refuse to permit him to place the witness on the witness stand (Globe
Cereal Mills v. Scrivener, 240 F. 2nd 330 (1956); Tuggart v. Vesmont Transportation Co., 32 F.R.D.
587 (1063). Where both parties agreed to a pre-trial order requiring each to give the other the
names of witnesses to be called at the trial, and no request was made to amend that order, the
trial court did not err in refusing to allow the defendant to call on witness 2 (King v. Partride, 9
Mich. App. 540, 157, NW., 2nd 417 (1969), OP. cit. p. 135).viii[8]

Issues

In his Memorandum,ix[9] petitioner raised the following issues:

1. Whether or not it is still proper to question the deficiency of ones pre-trial brief on a
technical matter after the pre-trial conference ha[s] long been terminated, the Pre-Trial Order
issued, and the question interposed for the first time in the middle of a trial on the merits[.]

2. Whether or not the trial court could with propriety inhibit a witness from assuming the
witness stand purely on the basis that his name is not listed where there is neither warning nor
injunction in its Pre-Trial Order[.]

3. Whether or not the trial court may ban with propriety an unlisted witness in the absence
of a specific law supporting such order[.]

4. Whether or not the higher consideration of due process should yield to a procedural
technicality[.]x[10]

Respondents, on the other hand, formulated only one issue as follows:xi[11]

The issue in this petition is whether the Honorable Lower Court committed xxx grave abuse of
discretion in barring and disqualifying petitioners witness, Antonia Tiu, as well as his other
witnesses for that matter, from testifying in court on the particular ground that her name and
the substance of her testimony were not disclosed in petitioners (defendant therein) pre-trial
brief.
In the main, the question before us is whether a judge can exclude a witness whose name and
synopsis of testimony were not included in the pre-trial brief.

This Courts Ruling

We rule for petitioner.

Main Issue:

Can Petitioners Unnamed Witnesses Testify?

Pre-trial is an answer to the clarion call for the speedy disposition of cases. Although it was
discretionary under the 1940 Rules of Court, it was made mandatory under the 1964 Rules and
the subsequent amendments in 1997. Hailed as the most important procedural innovation in
Anglo-Saxon justice in the nineteenth century,xii[12] pre-trial seeks to achieve the
following:xiii[13]

(a) The possibility of an amicable settlement or of a submission to alternative modes of

dispute resolution;

(b) The simplification of the issues;

(c) The necessity or desirability of amendments to the pleadings;

(d) The possibility of obtaining stipulations or admissions of facts and of documents to avoid
unnecessary proof;

(e) The limitation of the number of witnesses;

(f) The advisability of a preliminary reference of issues to a commissioner;

(g) The propriety of rendering judgment on the pleadings, or summary judgment, or of

dismissing the action should a valid ground therefor be found to exist;

(h) The advisability or necessity of suspending the proceedings; and

(i) Such other matters as may aid in the prompt disposition of the action. (Italics supplied)

In light of these objectives, the parties are also required to submit a pre-trial brief, which must
contain the following:xiv[14]

(a) A statement of their willingness to enter into amicable settlement or alternative modes
of dispute resolution, indicating the desired terms thereof;
(b) A summary of admitted facts and proposed stipulation of facts;

(c) The issues to be tried or resolved;

(d) The documents or exhibits to be presented, stating the purpose thereof;

(e) A manifestation of their having availed or their intention to avail themselves of discovery
procedures or referral to commissioners; and

(f) The number and names of the witnesses, and the substance of their respective
testimonies. (Italics supplied)

Petitioner argues that the Rules of Court merely requires that witnesses be named in the pre-
trial brief, but it does not authorize a judge to exclude a witness who was not identified.
Furthermore, he maintains that neither the trial court nor the respondents required during the
pre-trial that unnamed witnesses be barred from testifying. Finally, he urges this Court to brush
aside as wholly trivial and indecisive all imperfections of form and technicalities of procedure.

Respondent, on the other hand, argues that the assailed Orders were not capricious or whimsical,
because the Notice of Pre-trial Conference contained a warning that witnesses whose names
were not listed might not be allowed to testify. They also contend that the rule enumerating the
contents of a pre-trial brief was not a mere technicality, but a salutary provision intended to avoid
surprise and entrapment of the contending parties.

At the outset, the Court emphasizes that pre-trial and its governing rules are not technicalities
which the parties may ignore or trifle with. As earlier stated, pre-trial is essential in the
simplification and the speedy disposition of disputes. Thus, the Court has observed:xv[15]

Everyone knows that a pre-trial in civil actions is mandatory, and has been so since January 1,
1964. Yet to this day its place in the scheme of things is not fully appreciated, and it receives but
perfunctory treatment in many courts. Some courts consider it a mere technicality, serving no
useful purpose save perhaps, occasionally to furnish ground for non-suiting the plaintiff, or
declaring a defendant in default, or, wistfully, to bring about a compromise. The pre-trial device
is not thus put to full use. Hence it has failed in the main to accomplish the chief objective for it:
the simplification, abbreviation and expedition of the trial, if not indeed its dispensation. This is
a great pity, because the objective is attainable, and with not much difficulty, if the device were
more intelligently and extensively handled.

In a pre-trial, the judge is not a passive arbiter; he is an active participant who constantly seeks
avenues through which trial can be expedited, simplified or even avoided by a resort to
alternative modes of dispute resolution. The role and the authority of the trial court during pre-
trial has been described by the Court in this wise:xvi[16]
Again, it is unquestionably within the trial courts power to require the parties at the pre-trial to
(a) state the number of witnesses intended to be called to the stand, their names addresses, and
a brief summary of the evidence each of them is expected to give, as well as to (b) formally
disclose the number of the documents and things to be submitted and to furnish copies thereof
or a short description of the nature of each. The tenor or character of the testimony of the
witnesses and of the writings to be adduced at the trial being thus made known, in addition to
the particular issues of fact and law, it becomes reasonably feasible to require the parties to state
the number of trial dates that each will need to put on his case, and maybe bring about a further
agreement as to some other controverted facts, or an amendment of the pleadings, etc.

What needs stressing is that the parties as well as the trial court must realize that the parties are
obliged not only to make formal identification and specification of the issues and of their proofs,
as above described [--] indeed, there is no reason why the Court may not oblige the parties to set
these matters down in the separate writings and submit them to the Court prior to the pre-trial,
and then to discuss, refine and embody the matters agreed upon in a single document at or
shortly after the pre-trial -- but also and equally as peremptorily, to directly address and discuss
with sincerity and candor and in entire good faith each of the other subjects enumerated in
Section 1, Rule 20, i.e., the possibility of an amicable settlement or of a submission to arbitration,
the advisability of a preliminary reference of issues to a commissioner, and such other matters
as may aid in the prompt disposition of the action, inclusive of a resort to the modes of discovery.

In light of the objectives of a pre-trial and the role of the trial court therein, it is evident that
judges have the discretion to exclude witnesses and other pieces of evidence not listed in the
pre-trial brief, provided the parties are given prior notice to this effect.xvii[17]

In the present case, the Notice of Pre-trial Conference warned the parties that witnesses whose
names and addresses are not submitted at the pre-trial may not be allowed to testify at the
trial.xviii[18] In his Pre-trial Brief, petitioner merely stated that he intended to present four (6)
witnesses whose direct testimony will be finished in an average of one (1) hour each. He further
requested four hearing days to present his evidence.xix[19] Evidently, he did not comply with the
above rules and the Notice of Pre-trial Conference, because he failed to give the names of his
witnesses and the synopsis of their testimonies.

In his Pre-trial Order,xx[20] however, the trial judge did not exercise his discretion to exclude
the unlisted or unnamed witnesses. Rather, it simply provided that [t]he defendant will present
six witnesses. It made no mention at all that they would be barred from testifying unless they
were named. Significantly, it also stated that plaintiffs will offer ten witnesses, without however
naming them. Since the Order allowed respondents (as plaintiffs before the trial court) to present
witnesses, it necessarily follows that it should grant the same right to petitioner.

Indeed, the court and the parties must pay attention not only to the pre-trial briefs, but also to
the pre-trial order. Section 7 of the same Rule states:
SEC. 7. Record of pre-trial. -- The proceedings in the pre-trial shall be recorded. Upon the
termination thereof, the court shall issue an order which shall recite in detail the matters taken
up in the conference, the action taken thereon, the amendments allowed to the pleadings, and
the agreements or admissions made by the parties as to any of the matters considered. Should
the action proceed to trial, the order shall explicitly define and limit the issues to be tried. The
contents of the order shall control the subsequent course of action, unless modified before trial
to prevent manifest injustice. (Italics supplied.)

Hence, the provision in the Pre-trial Order allowing petitioner to present six witnesses shall
control the subsequent course of action. The court a quo proceeded with the trial without
modifying the Order. In the same vein, respondents did not challenge it before the trial. Neither
did they invoke the power of the trial court to compel the petitioner to submit the names of his
witnesses and summaries of their testimonies. By their silence, respondents acquiesced to the
Pre-trial Order allowing the presentation of petitioners unnamed witnesses. Modifying a pre-trial
order during the trial or, worse, when the defendant is about to present witnesses will
indubitably result in manifest injustice. This could not have been the intention of the Rules.

WHEREFORE, in view of the foregoing, the Petition is hereby GRANTED and the two assailed
Orders, dated August 3, 1998, issued by the RTC Branch 14, Oroquieta City, are REVERSED and
SET ASIDE. The Temporary Restraining Order issued by this Court is hereby lifted and the trial
court is ORDERED to proceed with the hearing and to allow petitioner to present his six witnesses.
No pronouncement as to costs.

LICOMCEN, INC., Petitioner,

vs.
ENGR. SALVADOR ABAINZA, doing business under the name and style "ADS INDUSTRIAL
EQUIPMENT", Respondent.

The Case

This petition for review1 assails the 21 September 2011 Decision2 and the 6 December 2011
Resolution3 of the Court of Appeals in CA-G.R. CV No. 86296. The Court of Appeal affirmed the 7
November 2005 Decision4 of the Regional Trial Court, Branch 8, Legazpi City, in Civil Case No.
9919, which ordered petitioner LICOMCEN, Inc. (petitioner) to pay respondent Engr. Salvador
Abainza (respondent) the sum of P1,777,202.80 plus 12% interest per annum, P50,000 attorneys
fees, and P20,000 litigation and incidental expenses.

The Facts

Respondent filed an action for sum of money and damages against Liberty Commercial Center,
Inc. (Liberty). Respondent alleged that in 1997 and 1998, he was hired by Liberty to do various
projects in their commercial centers, mainly at the LCC Central Mall, Naga City, for the supply,
fabrication, and installation of air-conditioning ductworks. Respondent completed the project,
which included some changes and revisions of the original plan at the behest of Liberty. However,
despite several demands by respondent, Liberty failed to pay the remaining balance due on the
project in the sum of P1,777,202.80.

Liberty denied the material allegations of the complaint and countered that the collection suit
was not filed against the real party-in-interest. Thus, respondent amended his complaint to
include petitioner as defendant.5 The HRD Administrative Manager of Liberty testified that
petitioner LICOMCEN, Inc. is a sister company of Liberty and that the incorporators and directors
of both companies are the same.

The Ruling of the Trial Court

The trial court found that petitioners claim that it has fully paid respondent the total cost of the
project in the sum of P6,700,000 pertains only to the cost of the original plan of the project.
However, the additional costs of P1,777,202.80 incurred for labor, materials, and equipment on
the revised plan were not paid by petitioner.

As found by the trial court, petitioner (then defendant) ordered and approved the revisions in
the original plan, thus:

During the awarding of the work, defendants wanted the aircon duct[s] changed from
rectangular to round ducts because Ronald Tan, one of the LCC owners who came from abroad,
suggested round aircon ducts he saw abroad were preferable. Plaintiff prepared a plan
corresponding to the changes desired by the defendants (Exhibits "D", "D-1", "D-2").

The changing of the rectangular ducts to round ducts entailed additional cost in labor and
materials. Plaintiff had to remove the rectangular ducts installed, resize it to round ducts and re-
install again. More G.I. Sheets were needed and new fittings as well, because the fittings for the
rectangular ducts cannot be used in the round duct. There were movements of the equipment.
In the original plan, the air handling unit (AHU) was [o]n the ground floor. It was relocated to the
second floor. There were additional air ducting in the two big comfort rooms for customers, an
exhaust blower to the dondon and discaminos, fresh air blower and lock machine at the food
court were installed.

Because of the changes, defendants wanted the tonnage of the refrigeration (TR) to be increased
to cool up the space. The 855 tons capacity was increased to 900 [sic] tons. These changes
entailed additional expense for labor and materials in the sum of Php1,805,355.62 (Exhibits "F"
to "F-26").

Plaintiffs work was being monitored by Es De Castro and Associates (ESCA), defendants
engineering consultant. Paper works for the approval of ESCA are signed by Michal Cruz, an
electrical engineer, and Jake Ozaeta, mechanical engineer, both employees of the defendants
and a certain Mr. Tan, a representative of defendants who actually supervises the construction.
Plaintiff presented the cost changes on the rework and change to 960 ton capacity. The total
balance payable to plaintiff by defendant is Php 1,777.202.80 (Exhibit "G-42"). Accomplishment
report had been submitted by plaintiff and approved by ESCA, project was turned over in 1988
but plaintiff was not paid the balance corresponding to the changed plan of work and additional
work performed by plaintiff. Series of communications demanding payment (Exhibits "G-3" to
"G-11", "G-13", "G-17" to "G-18", "G-23", "G- 24", "G-25", "G-26", "G-35 to 42") were made but
plaintiff [sic] refused to pay.6

On 7 November 2005, the trial court rendered its Decision, the dispositive portion of which reads:

WHEREFORE, PREMISES CONSIDERED, decision is hereby rendered in favor of the plaintiff and
against defendant LICOMCEN, Inc. ordering the latter to pay the plaintiff the sum of
Php1,777,202.80 as its principal obligation with interest at 12% per annum until the amount is
fully paid, the sum of Php50,000.00 as attorneys fess [sic] and Php20,000.00 as litigation and
incidental expenses. Costs against defendant LICOMCEN, Inc.

The case against Liberty Commercial Center, Inc. is hereby ordered DISMISSED.

SO ORDERED.7

The Ruling of the Court of Appeals

Petitioner appealed the trial courts Decision to the Court of Appeals, invoking Article 1724 of the
Civil Code which provides:

Art. 1724. The contractor who undertakes to build a structure or any other work for a stipulated
price, in conformity with plans and specifications agreed upon with the landowner, can neither
withdraw from the contract nor demand an increase in the price on account of the higher cost of
labor or materials, save when there has been a change in the plans and specifications, provided:

(1) Such change has been authorized by the proprietor in writing; and

(2) The additional price to be paid to the contractor has been determined in writing by both
parties.

The Court of Appeals stated that petitioner never raised Article 1724 of the Civil Code as a
defense in the trial court. Citing Section 1, Rule 9 of the Rules of Court 8 and the case of Bank of
the Philippine Islands v. Leobrera,9 the Court of Appeals ruled that petitioner cannot be allowed
to change its theory on appeal since the adverse party would then be deprived of the opportunity
to present further evidence on the new theory. Besides, the Court of Appeals held that Article
1724 of the Civil Code is not even applicable to the case because the Contract of Agreement was
never signed by the parties considering that there were substantial changes to the original plan
as the work progressed. Thus, the Court of Appeals affirmed the trial courts Decision, finding
petitioner liable to respondent for the additional costs in labor and materials due to the revisions
in the original project.

Petitioner filed a Motion for Reconsideration, which the Court of Appeals denied in its Resolution
dated 6 December 2011. Hence, this petition.

The Issue

The issue in this case is whether petitioner is liable for the additional costs incurred for labor,
materials, and equipment on the revised project.

The Ruling of the Court

We find the petition without merit.

In this case, petitioner invoked Article 1724 of the Civil Code as a defense against respondents
claim. Petitioner alleged that respondent cannot recover additional costs since the agreement in
the change of plans and specifications of the project, the pricing and cost of materials and labor
was not in writing.

The Court of Appeals mistakenly stated that petitioner only raised Article 1724 of the Civil Code
as a defense on appeal. A perusal of the records reveals that, although petitioner did not invoke
Article 1724 of the Civil Code as a defense in its answer10 or in its pre-trial brief,11 petitioner
belatedly asserted such defense in its Memorandum12 filed before the trial court. Thus, from its
previous defense that it has fully paid its obligations to respondent, petitioner changed its theory
by adding that since the additional work done by respondent was not authorized in writing, then
respondent cannot recover additional costs. In effect, petitioner does not deny that additional
costs were incurred due to the change of plans in the original project, but justifies not paying for
such expense by invoking Article 1724 of the Civil Code.

Under Section 1, Rule 9 of the Rules of Court, defenses and objections not pleaded either in a
motion to dismiss or in the answer are deemed waived, with the following exceptions: (1) lack of
jurisdiction over the subject matter; (2) litis pendentia; (3) res judicata; and (4) prescription of
the action. Clearly, petitioner cannot change its defense after the termination of the period of
testimony and after the exhibits of both parties have already been admitted by the court. The
non-inclusion of this belated defense in the pre-trial order barred its consideration during the
trial. To rule otherwise would put the adverse party at a disadvantage since he could no longer
offer evidence to rebut the new theory. Indeed, parties are bound by the delimitation of issues
during the pre-trial.13 As held in Villanueva v. Court of Appeals:14

Pre-trial is primarily intended to insure that the parties properly raise all issues necessary to
dispose of a case. The parties must disclose during pre-trial all issues they intend to raise during
the trial, except those involving privileged or impeaching matters. Although a pre-trial order is
not meant to catalogue each issue that the parties may take up during the trial, issues not
included in the pre-trial order may be considered only if they are impliedly included in the issues
raised or inferable from the issues raised by necessary implication. The basis of the rule is simple.
Petitioners are bound by the delimitation of the issues during the pre-trial because they
themselves agreed to the same.15

Besides, Article 1724 of the Civil Code is not even applicable to this case. It is evident from the
records that the original contract agreement,16 submitted by respondent as evidence, which
stated a total contract price of P5,300,000, was never signed by the parties considering that there
were substantial changes in the plan imposed by petitioner in the course of the work on the
project.17 Petitioner admitted paying P6,700,000 to respondent which was allegedly the agreed
cost of the project. However, petitioner did not submit any written contract signed by both
parties which would substantiate its claim that the agreed cost of the project was only
P6,700,000. Clearly, petitioner cannot invoke Article 1724 of the Civil Code to avoid paying its
obligation considering that the alleged original contract was never even signed by both parties
because of the various changes imposed by petitioner on the original plan. The fact that
petitioner paid P1,400,00018 more than the amount stated in the unsigned contract agreement
clearly indicates that there were indeed additional costs during the course of the work on the
project. It is just unfortunate that petitioner is now invoking Article 1724 of the Civil Cide to avoid
further payment of the additional costs incurred on the project.

What was established in the trial court was that petitioner ordered the changes in the original
plan which entailed additional costs in labor and materials. The work done by respondent was
closely monitored and supervised by petitioners engineering consultant and all the paperworks
relating to the project were approved by petitioner through its representatives. We find no
justifiable reason to deviate from the findings and ruling of the trial court, which were also upheld
by the Court of Appeals. Thus, petitioner should be held liable for the additional costs incurred
for labor, materials, and equipment on the revised project.

NATIONAL POWER CORPORATION, represented by its President CYRIL DEL CALLAR,

Complainant,
vs.
JUDGE SANTOS B. ADIONG, RTC, BRANCH 8, MARAWI CITY, Respondent.

Before us is an administrative complaint1 filed by the National Power Corporation (NPC) through
its president Cyril C. Del Callar, charging respondent Judge Santos B. Adiong, Presiding Judge of
the Regional Trial Court (RTC), Branch 8, Marawi City, with gross ignorance of the law, manifest
partiality and conduct unbecoming a member of the Judiciary.

The complaint arose in connection with the following cases:

 a. Civil Case No. 1918-03 entitled "Ibrahim Abdo, et al. v. National Power Corporation" for
Damages;

b. Civil Case No. 1322-95 entitled "Pacalna Sanggacala v. National Power Corporation" for
Damages;

c. Civil Case No 1332-95 entitled "Ali Macaraya Mato v. National Power Corporation" for
Damages;

d. Civil Case No. 1367-95 entitled "Camar Dipatuan v. National Power Corporation" for
Damages;

e. Civil Case No. 1361-95 entitled "Casimra Sultan v. National Power Corporation" for
Damages; and

f. Civil Case No. 1355-95 entitled "Mualam Dimatingcal v. National Power Corporation"
for Damages.

In Civil Case No. 1918-03, plaintiffs Ibrahim Abdo, et al. who styled themselves as a "group of
farmers, fishermen, laborers, workers, vendors, household members, and businessmen",
collectively sought to hold NPC liable for damages for operating seven Hydroelectric Power plants
allegedly without due regard to the health and safety of the plaintiffs and other residents of
Marawi City and the province of Lanao del Sur. The plaintiffs alleged that they and several others
suffered ecological and economic disasters brought about by the operation of regulatory dams
which affected the natural flow of Lake Lanao and destroyed their farms, properties, businesses
and sources of livelihood. In addition to damages, the plaintiffs also sought the refund of millions
of pesos from the Purchase Power Adjustment (PPA) collected by NPC from its electric consumers
through the Lanao Del Sur Electric Cooperative.2

On October 21, 2003, said plaintiffs filed an ex-parte Motion for the Release of 640,000,000
worth of PPA and other generation charges. Judge Adiong granted the motion on November 9,
2004, but later set aside his order on November 24, 2005 3 after NPC filed a motion for
reconsideration on the ground of lack of notice and due process. Judge Adiong then required the
parties to present their respective evidence on December 8, 2005.

Subsequently, Judge Adiong issued a Resolution on February 28, 2006, ordering NPC to refund
the amount of 114,000,000, representing the Fuel Compensating Cost, Foreign Exchange, and
Incremental Cost Charges collected from April 1991 to December 1995; to refund the amount of
176,000,000, representing the Fuel and Power Cost Adjustment and PPA collected from January
1996 to April 2003; and to pay the amount of 97,537,000 as attorneys fees.4

NPC sought reconsideration of the order alleging that no pre-trial was conducted and yet
respondent judge already passed upon the merits of the case. NPCs motion, however, was
denied by Judge Adiong. Judge Adiong reasoned that before issuing the questioned resolution,
full-blown hearings were conducted and NPC was afforded all the opportunities to present its
evidence and to participate actively in the hearings. Having done so, NPC has submitted itself to
the courts jurisdiction and could no longer claim that no pre-trial was conducted. Later, Judge
Adiong also directed Sheriff Otto Gomampong to implement the February 28, 2006 Resolution
ratiocinating that the same has already become final.5

Thus, NPC filed the present administrative complaint, asserting that the issuance of the February
28, 2006 Resolution is contrary to and violative of the Rules of Court because said resolution was
issued by respondent judge without first conducting the requisite pre-trial conference and
despite the fact that no formal offer of exhibits was made by plaintiffs in support of their
allegations. Also, NPC complains of respondent judges failure to lay down the basis for granting
the plaintiffs ex-parte motion to release the PPA refunds, and in awarding the exorbitant amount
of 97,537,000.00 as attorneys fees.6

NPC further states that while it admits that judges are not to be administratively charged for acts
committed in the exercise of their judicial functions, respondent judge had acted in violation of
elementary rules that was equivalent to intolerable and inexcusable gross ignorance of the law.

As regards Civil Case Nos. 1322-95, 1332-95, 1367-95, 1361-95, and 1355-95, said cases involve
identical causes of action arising from the same facts and raising common issues. The plaintiffs in
said cases sought to hold NPC liable for damages for its refusal to open the Agus regulation dams
causing perennial flooding on their rice farmlands in 1979, 1984, 1986, 1989, 1993, 1994, 1995
and 1996. In all of these cases, respondent judge rendered judgments in favor of the plaintiffs.
Later, respondent judge also issued Joint Special Order7 dated January 25, 2006 granting the Joint
Motion for the Issuance of the Writ of Execution Pending Appeal 8 filed by the plaintiffs in Civil
Case Nos. 1367-95, 1361-95, and 1355-95 on January 2, 2006.9

A similar Order10 granting execution pending appeal was likewise issued in the two other cases,
Civil Case Nos. 1322-95 and 1332-95, on January 17, 2006. Nine days later, on January 26, 2006,
a Joint Writ of Execution11 for the two cases was issued.

NPC alleges that Judge Adiongs act of granting execution pending appeal failed to conform
strictly to the rigid criteria outlined by jurisprudence for executions pending appeal. There was
no special reason for the issuance of the writ, and the grant of the writ was whimsical and clearly
manifested the partiality of respondent judge. Further, Judge Adiongs evident bias and
unexplained interest to execute the decisions manifested when he immediately set for hearing a
motion to cite in contempt a Land Bank personnel who allegedly refused to comply with the
notice of garnishment despite the fact that the motion lacked the required notice of hearing and
the failure of the plaintiffs to comply with Rule 71 of the Rules of Court.12

In his Comment13 dated June 1, 2006, respondent judge raised the following in his defense. With
regard to the lack of pre-trial conference, respondent judge asserts that he has set the case for
hearing on December 8 and 15, 2005, and January 12, 13, and 27, 2006. In all these hearings, the
parties were allowed to present whatever evidence they had to support their claims. He also
claims that the lack of pre-trial was never raised by NPC since the time it filed its answer on May
15, 2003 up to the time plaintiffs started presenting their evidence on December 8, 2005. It was
only on February 14, 2006 that NPC belatedly filed a manifestation calling the courts attention
to the lack of pre-trial, without formally asking or praying for the setting of one. In addition, the
records show that the plaintiffs filed their pre-trial brief while defendant NPC did not. Thus, he
argues that NPC is deemed to have waived the holding of a pre-trial conference. Perforce, Judge
Adiong argues that he should not be held administratively liable for not conducting pre-trial.14

On the charge that he was biased and has unexplained interest to execute the Decisions in Civil
Case Nos. 1322-95, 1332-95, 1367-95, 1361-95 and 1355-95, respondent judge denied the
allegations and explained that he complied with the requirements for allowing an execution
pending appeal. He asserts there was good reason for its issuance and there was evidence
substantiating the need to issue the writ of execution which were clearly spelled out and stated
in the Special Orders dated January 17, 2006 and January 25, 2006. Further, there is no reason to
complain about the bank personnel being held for contempt, as said bank personnel was not
even adjudged guilty of contempt.15

Respondent judge adds that he should be absolved from the charges against him. He argues that
mere suspicion that a judge is partial to one of the parties to the case is not enough; there should
be evidence to support the charge.16 Also, he asserts that a judge cannot be held administratively
liable for errors in the appreciation of evidence unless the errors are gross or made in bad faith. 17
When such errors of judgment are committed, complainants may avail themselves of the remedy
of appeal or certiorari and not the filing of administrative charges against the judge who rendered
the challenged decision.

On October 2, 2007, this Court referred the present complaint to the Court of Appeals, Cagayan
De Oro City, for investigation, report and recommendation. Pursuant to the Rules of Court, now
retired Associate Justice Ruben C. Ayson, to whom this case was assigned, sent notices to the
parties informing them of the schedule of investigation and hearings. The case was heard for five
days, from May 25 to 29, 2009, and the parties were required to present oral, as well as
documentary evidence in support of their respective allegations and counter-allegations.

On July 10, 2009, Justice Ayson submitted his report finding respondent judge administratively
liable. Justice Ayson did not delve into the correctness of the Resolution dated February 28, 2006,
granting the refund of millions of pesos representing the PPA charges, as the resolution is now
the subject of an appeal with this Court, docketed as G.R. No. 177288 entitled, Ibrahim Abdo, et
al. v. Court of Appeals and National Power Corporation. Neither did he delve into the merits of
all the other cases from which the administrative cases filed by NPC against Judge Adiong arose,
for the reason that the proper venue for their review would be through the usual judicial process
of review by appellate courts.18

The Investigating Justice also noted the well-entrenched rule that a judge may not be held
administratively liable for every erroneous decision he renders, for no person called upon to
determine the facts or interpret the law in the administration of justice can be infallible.
However, he also noted that there is a prominent exception to the rule, that is, when the law is
so elementary that not to know it constitutes gross ignorance of the law.19 In said cases, a judge
committing such error may face administrative sanctions.

Specifically, Justice Ayson noted that in Civil Case No. 1918-03, Judge Adiong failed to conduct a
pre-trial conference and erred in conducting the series of hearings in the case without
determining the existence of necessary pre-conditions before the court could take cognizance of
the case. Records revealed that Judge Adiong failed to resolve (1) the issue on the insufficiency
of the complaint as a class suit; (2) the issue of nonpayment of docket fees necessary to vest the
court with jurisdiction over the case; (3) the issue on forum-shopping allegedly committed by
therein plaintiffs; and (4) the question regarding the alleged failure of therein plaintiffs to state
with particularity their respective residences. Justice Ayson noted that without a proper
resolution of these threshold jurisdictional questions, any decision in the case is premature and
without factual and legal basis. In other words, the court would only be engaged in a useless
exercise and would merely be wasting the time and resources of the parties.20

Further, the Investigating Justice stressed that the conduct of a pre-trial is mandatory. He
explained that pre-trial is a procedural device whereby the court is called upon to compel the
parties and their lawyers to appear before it and negotiate an amicable settlement or otherwise
make a formal statement and embody in a single document the issues of fact and law involved in
the action. Respondent judge asserts that NPC only called the attention of the court in passing in
one of its hearings held sometime in December 8, 2005 and January 27, 2006. Judge Adiong
alleges that he then advised NPC to file the appropriate pleading, but it was only after the case
was terminated that NPC made a manifestation on the lack of pre-trial. Judge Adiong adds that
the conduct of a pre-trial conference would have been a mere superfluity, and claims that the
absence of pre-trial did not cause substantial prejudice or injury to the parties as the purpose of
expediting the proceedings has been attained. However, Justice Ayson opined that under the
circumstances, Judge Adiong should have scheduled the case for pre-trial as he was already
aware of the procedural defect. His act of not minding the setting of pre-trial, when he had every
opportunity and reasonable time to do so, can be characterized as negligent and imprudent,
according to Justice Ayson. Justice Ayson added that respondent judge apparently failed to
comply with the rules and failed to exercise the required initiative to set the case for pre-trial.
Considering Judge Adiongs long years of service, a total of thirty-nine (39) years in the Judiciary,
more than anyone else, he should be presumed to be conversant with the law and the rules. The
law involved in this case being elementary, failure to consider it or to act as if he does not know
it, constitutes gross ignorance of the law. Justice Ayson said,

x x x Indeed, when the inefficiency springs from a failure to consider so basic and elemental a
rule, a law or a principle in the discharge of his duties, a judge is either too incompetent and
undeserving of the position and the title he holds or is too vicious that the oversight or omission
was deliberately done in bad faith and in grave abuse of judicial authority.21
As to the granting of the motions for execution pending appeal, Justice Ayson pointed out that
respondent judge gave flimsy and unsupported reasons to support his order to issue the writ of
execution pending appeal.

In Civil Case No. 1367-95, respondent judge granted the execution pending appeal on the ground
that the plaintiff therein suffered a stroke and allegedly needed to undergo an operation costing
millions of pesos. However, said allegations were based only on the self-serving testimony of the
plaintiffs sister whose testimony was uncorroborated by any other evidence.

In Civil Case Nos. 1361-95 and 1355-95, Judge Adiong granted the motion for execution pending
appeal based on the testimony of the plaintiff who testified on his medical condition as stated in
his medical certificate. Said medical certificate, however, was never verified by the doctor who
allegedly issued it. Hence, it was unreliable and was merely hearsay evidence.

Meanwhile, in Civil Case No. 1322-95, the motion for execution pending appeal was granted
based on the plaintiffs claim that he is getting old and needed money to support his family of
four wives and twenty-nine (29) children. But the plaintiffs allegation was not corroborated by
any competent evidence.

In all these cases, respondent judge found justification that the financial conditions of the
plaintiffs warranted the issuance of the writ of execution pending appeal. Justice Ayson,
however, opined that while the power to grant or deny immediate or advance execution is
addressed to the sound discretion of the court, it is required that good reason exists for granting
execution pending appeal as provided under Section 2,22 Rule 39 of the Rules of Court. Absent
any such good reason, the special order of execution must be struck down for having been issued
with grave abuse of discretion.

Standing alone, the alleged dire financial distress of the plaintiffs in Civil Case Nos. 1918-03, 1322-
95, 1332-95, 1367-95, 1361-95, 1355-95 cannot be taken as "good reason" for the immediate
execution of respondent judges decisions, according to Justice Ayson. Justice Ayson opined that
indeed, when respondent judge acted hastily in granting the execution of his Decision pending
appeal, his actuation did not indicate zeal to his duty but a clear disservice to the cause of justice.
Indubitably, respondent judge showed poor judgment and gross ignorance of basic legal
principles, added Justice Ayson.1avvphi1

After careful review of the records of this case, we find the above observations and findings of
the Investigating Justice well taken.

Judge Adiong failed to conduct a pre-trial conference in Civil Case No. 1918-03 contrary to
elementary rules of procedure which he should have known all too well considering his long years
of service in the bench. The mandatory character of pre-trial is embodied in Administrative
Circular No. 3-9923 dated January 15, 1999, and found its way in Section 2,24 Rule 18 of the Rules
of Court, which imposes a duty upon the plaintiff to promptly move ex parte that the case be set
for pre-trial. To further implement the pre-trial guidelines, this directive was reiterated in
Administrative Matter No. 03-1-09-SC25 entitled "Guidelines to be Observed by Trial Court Judges
and Clerks of Court in the Conduct of Pre-Trial and Use of Deposition-Discovery Measures" which
recognized the importance of pre-trial and the deposition-discovery measures as vital
components of case management in trial courts.26

To further show that the Court is serious in implementing the rules on pre-trial, in Alviola v.
Avelino27 the Court imposed the penalty of suspension on a judge who merely failed to issue a
pre-trial order within ten (10) days after the termination of the pre-trial conference as mandated
by Paragraph 8,28 Title I (A) of A.M. No. 03-1-09-SC.

Here, respondent judge failed to conduct the pre-trial conference itself. It is elementary and plain
that the holding of such a pre-trial conference is mandatory and failure to do so is inexcusable.
When the law or procedure is so elementary, such as the provisions of the Rules of Court, not to
know it or to act as if one does not know it constitutes gross ignorance of the law.29 Such
ignorance of a basic rule in court procedure, as failing to conduct pre-trial, sadly amounts to gross
ignorance and warrants a corresponding penalty.

As to the allegations of poor judgment and gross ignorance of basic legal principles in granting
the motions for execution pending appeal for flimsy and unsupported reasons, we find that the
particular reasons relied upon by respondent judge for issuing the writ of execution pending
appeal are so unreliably weak and feeble that it highlights the lack of knowledge of respondent
judge with regard to the proper appreciation of arguments.

In Florendo v. Paramount Insurance Corp.,30 the Supreme Court held:

x x x "Good reasons," it has been held, consist of compelling circumstances that justify immediate
execution lest the judgment becomes illusory. The circumstances must be superior, outweighing
the injury or damages that might result should the losing party secure a reversal of the judgment.
Lesser reasons would make of execution pending appeal, instead of an instrument of solicitude
and justice, a tool of oppression and inequity.

"Good reason" as required by Section 2, Rule 39 of the Rules of Court does not necessarily mean
unassailable and flawless basis but at the very least, it must be on solid footing. Dire financial
conditions of the plaintiffs supported by mere self-serving statements as "good reason" for the
issuance of a writ of execution pending appeal does not stand on solid footing. It does not even
stand on its own.

Section 8, Rule 140 of the Rules of Court, as amended, classifies gross ignorance of the law as a
serious charge and Section 11 thereof penalizes it with any of the following sanctions:

1. Dismissal from the service, forfeiture of all or part of the benefits as the Court may
determine, and disqualification from reinstatement or appointment to any public office,
including government-owned or controlled corporations. Provided, however, That the
forfeiture of benefits shall in no case include accrued leave credits;
 2. Suspension from office without salary and other benefits for more than three (3) but
not exceeding six (6) months; or

3. A fine of more than 20,000[.00] but not exceeding 40,000.00.31

Considering, however, that in A.M. No. RTJ-04-1826, this Court has already dismissed Judge
Adiong, the penalties of suspension from office without salary and dismissal from the service are
no longer possible. Hence, the penalty of fine is more appropriate.

WHEREFORE, the now dismissed respondent Judge Santos B. Adiong of the Regional Trial Court
of Marawi City, Branch 8 is, for gross ignorance of the law, FINED in the amount of 40,000.00 to
be deducted from his retained/withheld accrued leave credits.

G.R. No. L-40307 April 15, 1988

FILOIL MARKETING CORPORATION (now Petrophil Corporation), plaintiff/appellee,

vs.
DY PAC & CO., INC., defendant/appellant.

On 19 March 1969, an action for collection of a sum of money with interest was commenced by
plaintiff Filoil Marketing Corporation (now Petrophil Corporation) in the City Court of Manila
against defendant Dy Pac & Co., Inc., alleging that from 1961 to 1965, plaintiff had sold and
delivered on credit petroleum products to defendant, who became indebted to it in the total
amount of P 2,123.69; that notwithstanding repeated demands, defendant refused to pay.

In its Answer with Counterclaim, defendant Dy Pac & Co., Inc., admitted the credit transactions
alleged by plaintiff but denied indebtedness, alleging lack of cause of action, payment and
prescription.

At the hearing set on 17 June 1969, neither defendant nor his counsel appeared; plaintiff was
allowed to present its evidence ex parte, and accordingly, the City Court of Manila, Branch 3,
rendered a decision on the same date ordering defendant to pay plaintiff the sum of P2,123.69
plus 6% interest thereon, attorney's fees and costs.

Upon denial of its motion for reconsideration, defendant appealled to the Court of First Instance
of Manila, which appeal was subsequently assigned to Branch 19 thereof.

By 30 January 1973, the lower court, in accordance with Republic Act No. 6031, 1 immediately
set the case for pre-trial, with a warning that no further postponements would be granted.
On 23 March 1973, the lower court issued a pre-trial order, the fun text of which follows:

When this case was called for pre-trial, the parties were duly represented by their respective
counsel. Filoil Marketing was represented also by Mr. Rodolfo Bondoc, Accountant. Counsel for
defendant manifested that he is duly authorized to enter into this pre-trial and promises to
submit said authority within three (3) days from today, as required by the Rules, otherwise, the
Court will not recognize his authority for pre-trial. The plaintiff duly adopted his exhibits already
marked in the lower court and also adopted the markings in said court. In addition, he asked that
the decision in the City Court, found on page 17 of the records, be marked as Exhibits "F" and
that the letter addressed to the defendant dated February 7, 1968 be marked as Exhibit "G" to
"G-". These were all admitted by the defendant.

Defendant presented as its exhibits, Exhibit "1", a cash voucher dated February 16,1965, which
was admitted by the plaintiff, Exhibits "2" and "3" letters of defendant Filoil Marketing
Corporation, both of which were also admitted by the plaintiff.

The Court finds that this is just a matter of adjustment of accounts by the plaintiff and the
defendant, who are hereby ordered to prepare a stipulation of facts based on their exhibits
already marked and submit the same to the Court within thirty (30) days from today. It is also
ordered that in the stipulation of facts, the parties define the issues to be resolved by the Court
and if they are submitting the case for decision on the basis of their exhibits. The parties are
warned that if they cannot submit the stipulation off acts, the Court will dismiss the appeal, the
case having been filed on August 14, 1969 and up to the present no trial has been conducted. 2
(Emphasis supplied)

In a subsequent Order dated 24 May 1973, the trial court dismissed defendant's appeal for failure
of the parties to submit the required stipulation of facts and ordered the immediate return of
the records to the City Court for execution.

A subsequent motion to reconsider the order of dismissal having been denied, defendant-
appellant took this appeal to the Court of Appeals, which, as already noted, certified the case to
us as involving only questions of law. This case, without an appellee's brief, was submitted for
decision on 17 March 1975.

Appellant claimed, in its brief, that it was deprived of its day in court and urged that the trial court
erred (a) in dismissing its appeal on the ground that the parties failed to submit a stipulation of
facts and (b) in finding that defendant's counsel had not filed his authority to appear during pre-
trial. 3

We find merit in this appeal.

There is no law which compulsorily requires litigants to stipulate at pre-trial on the facts and
issues that may possibly crop up in a particular case, upon pain of dismissal of such case. The
process of securing admissions whether of facts or evidence is essentially voluntary, since
stipulations of facts, like contracts, bind the parties thereto who are not allowed to controvert
statements made therein. The trial court may, of course, advise and indeed urge the parties
during the pre-trial conference to try to arrive at a stipulation of facts principally for their own
convenience and to simplify subsequent proceedings by Identifying those facts which are not
really controverted and do not need to be proved. Courts, however, cannot compel the parties
to enter into an agreement upon the facts. Where the parties are unable to arrive at a stipulation
of agreed facts and do not reach an amicable settlement of their controversy, the court must
close the pre-trial proceedings and go forward with the trial of the case. The court a quo,
therefore, committed serious or reversible error in dismissing appellant's appeal from the then
City Court of Manila solely upon the ground that the parties had failed to comply with the court's
Order to submit a stipulation of facts. The trial court's desire speedily to dispose of the case which
had been pending for almost four (4) years in that sala is understandable and praiseworthy; but
it cannot justify the Order of dismissal. Defendant's appeal from the decision of the City Court of
Manila was entitled to a regular trial; under Section 45 of Republic Act No. 296 (the Judiciary Act
of 1948) as amended by Republic Act No. 6031, the defendant-appellant was entitled to have its
affirmative defenses and counterclaim passed upon by the Court of First Instance in a trial de
novo. It is perhaps noteworthy that defendant-appellant had never been afforded the benefit of
a trial, even by the City Court which had rendered its judgment on the evidence of the plaintiff
submitted ex parte. We hold that the trial court's Order of 24 May 1973 in effect denied
defendant-appellant its right to due process and must hence be set aside.

Under Section 33 (1) of B.P. Blg. 129, a suit for the collection of a sum of money not exceeding
P20,000.00 would fall within the exclusive original jurisdiction of the Metropolitan Trial Courts,
Municipal Trial Courts and the Municipal Circuit Trial Courts. This case, however, was pending
before the Court of First Instance of Manila on 14 February 1983, while this appeal remained
before this Court where it has been since 17 March 1975.

Applying the Resolution of this Court en banc dated 14 February 1983, which established
guidelines for the distribution of cases pending upon implementation of B.P. Blg. 129 and which
provided in pertinent part as follows:

I. PENDING CASES AS OF FEBRUARY 14, 1983:

General Rule. All pending cases as of February 14,1983 shall be distributed, by raffle, among
all branches in a multiple sala seat with incumbent judges except as herein provided:

xxx xxx xxx

3. All pending cases in the Regional Trial Courts (under the former Judiciary Act, the Courts of
First Instance, Circuit Criminal Courts, Juvenile and Domestic Relations Court and Court of
Agrarian Relations) shall remain with the Regional Trial Courts even though there may have been
a change of jurisdiction provided in Batas Pambansa Blg. 129.

By way of example:
a. Cases in the Regional Trial Courts where the amount involved is above P10,000.00 up to
P20,000.00 exclusive of interest and costs shall remain therein even though the jurisdiction of
the Metropolitan Trial Courts, the Municipal Trial Courts, and Municipal Circuit Trial Court has
been increased to P20,000.00;

this case should remain with and be remanded to the Court of First Instance of Manila.

ACCORDINGLY, the Order dated 24 May 1973 of the Court of First Instance of Manila, dismissing
the appeal of defendant-appellant, is hereby SET ASIDE. This case is REMANDED to the Regional
Trial Court of Manila for trial on the merits. No pronouncement as to costs.

PIONEER INSURANCE & SURETY CORP. AND HADJI ESMAYATEN LUCMAN, petitioners-
appellants,
vs.
THE HON. AGAPITO HONTANOSAS, JUDGE OF THE COURT OF FIRST INSTANCE OF CEBU,
BRANCH XI AND THE SPOUSES BEN UY RODRIGUEZ, respondents-appellees.

We reverse the decision of the Court of Appeals 1 promulgated, on October 30, 1972 in CA-G.R.
No. 00951-R entitled "Pioneer Insurance & Surety Corp., et al., petitioners, vs. Hon Judge Agapito
Hontanosas, et al., respondents," which decision had denied for lack of merit the petition filed
therein for certiorari. prohibition and/or mandamus with preliminary injunction seeking to nullify
the order of default of February 29, 1972 and the decision of March 9, 1972 in Civil Case No. R-
12069, entitled "Ben Rodriguez, et al. vs. Allied Overseas Commercial Co., et al." issued by the
respondent Presiding Judge of the Court of First Instance of Cebu.

The case commenced on October 12, 1970 when Allied Overseas Commercial Co., Ltd., a foreign
corporation domiciled in Hongkong, filed in the Court of First Instance of Manila a complaint
against the respondent-appellee Ben Uy Rodriguez for the collection of a sum of money arising
out of a transaction between them in the amount of P450,533.00, the agreed peso equivalent of
the HK$418,279.60 balance unpaid. Plaintiff therein having prayed for the issuance of a writ of
preliminary attachment, the same was granted by the Court against Rodriguez upon the filing by
said plaintiff of a bond in the amount of P450,000.00, which petitioner-appellant Pioneer
Insurance & Surety Corp. duly posted. The corresponding levy in attachment was made by
annotation on the properties of Rodriguez which consisted of 4 pieces of lots; notices of
garnishment on different Cebu banks turned out negative, while personal properties found at the
Rodriguez residence, although attached, were, however, not removed therefrom.

A motion to dismiss the complaint was thereupon filed by Rodriguez, followed by an application
for damages against the bond, praying that he be permitted to present evidence of damages he
sustained by reason of the wrongful attachment, and to enforce said claim against the surety on
its bond, alleging further that otherwise his claim against the bond will forever be barred as said
claim cannot be the subject of an independent civil action under Sec. 20, Rule 57 of the Rules of
Court. The court iii its order of December 22, 1970 dismissed the complaint on the ground of
improper venue since defendant Rodriguez was a resident of Cebu, and lifted the writ of
preliminary attachment setting. the hearing on the claim for damages against the bond on
January 14, 1971.

With the intention of filing a separate civil action in the Court of First instance of Cebu,
respondent-appellee Rodriguez withdrew his claim for damages against Pioneer Insurance and
Surety Corp., which motion for withdrawal was granted by the Court Thereafter, the
respondents-appellees Rodriguez spouses filed a complaint for damages on February 15, 1971
against Pioneer Insurance & Surety Corp. and Allied Overseas (the Hongkong-based corporation),
docketed as Civil Case No. R-12069, Court of First Instance of Cebu presided by respondent judge
lion Agapito Hontanosas, the complaint praying that Rodriguez be declared as not in any manner
indebted to the defendant Allied Overseas Commercial Co. and that Pioneer Insurance & Surety
Corp. be held liable for damages, attorneys foes and expenses of litigation by reason of the and
malicious attachment issued by the Manila Court.

Defendant Pioneer Insurance and Surety Corp. filed its manner to the complaint (Civil Case No.
R-12069) alleging affirmative and special defenses. With respect to the other defendant Allied
Overseas Commercial Co., summons was (coursed thru the Philippine Consulate General in
Honkong which turned it down as it had no authority to serve the process under the Rules of
Court.

On April 27, 1971, defendant Pioneer Insurance & Surety Corp. filed a motion for a preliminary
hearing of its affirmative defenses of lack of cause of action and bar by prior judgment and/or
abandonment, which are grounds for a motion to dismiss. This was denied by the respondent
Judge in his Order dated May 15, 1971, so also was the motion for reconsideration per its Order
of June 2, 1971.

On May 5, 1971, the case was called for pre-trial. Plaintiffs with counsel attended; defendant
Pioneer Insurance & Surety Corp. thru counsel was present The other defendant, Allied Overseas
Commercial Co was not yet summoned, hence absent. The parties manifested failure to settle
the case amicably, thus the Court set the trial of the case on the merits for June 11, 1971.

A petition for certiorari and prohibition was then filed by Pioneer Insurance and Surety Corp. on
August 3, 1971 in the Court of Appeals, CA-G.R. No. 00369-R (Record on Appeal, p. 133) with
prayer to enjoin a hearing scheduled on August 7, 1971, alleging that respondent Judge
committed grave abuse of discretion amounting to lack and/or excess of jurisdiction in lending
the motion for preliminary hearing. The Court of Appeals In its Resolution dated August 7, 1971
distributed this petition for certiorari. Record on Appeal, pp. 133-137)

An amended complaint was now submitted to ad admitted by the Court on August 14, 1971 by
impleading left petitioner-appellant Hadji Esmayaten Lucman as additional, defendant., making
allegations tending show confabulation between the new defendant, and the foreign-based
corporation to collect a non-existing debt. To the amended complaint, Pioneer Insurance &
Surety Corp filed its answer.

Lucman having been impleaded as assignee defendant Allied Overseas Commercial filed a motion
to dismiss on the ground of auter action pendant, that is an action pending in the Court of First
Instance of Rizal, Civil Case No. 14351 between the same parties with the same allegation and
defences of counterclaims. On November 25, 1971, respondent Judge denied the motion to
dismiss, whereupon Lucman filed his answer to the amended complaint.

Upon an ex parte motion of Rodriguez, the Court declared Lucman in default in its Order of
January 10, 1972 and thereafter promulgated a decision dated January 28, 1972 against Lucman
only, ordering him to pay damage,- in the amount of P150,000.00; declaring that Rodriguez was
no in any manner indebted to Lucman or to Allied Overseas Commercial Co and that the
Metropolitan Bank & Trust Co. (Cebu Branch) Check No. CB2169 (xerox copy marked Exhibit M
issued iv Rodriguez to pay the indebtedness was a forgery.

Lucman moved on February 11, 1972 to set aside the order of default and to admit the answer
earlier filed by him to the amended complaint. On February 21. 1972, respondent Judge set aside
the order of default against Lucman including the decision against him, the dispositive portion of
which order reads as follows:

WHEREFORE, the Order of Default dated January 10, 1972 as well as the decision (Re: Hadji
Esmayaten Lucman) dated January 28, 1972, are hereby reconsidered and set aside. Let the
hearing of this case on the merits be scheduled as previously set for February 28, 1972 at 8:30
o'clock in the morning.

The parties thru their respective counsels are to be immediately notified of this order. The Clerk
of Court is directed to notify defendant Hadji Esmayaten Lucman thru counsel Atty. Eriberto D.
Ignacio At Rm. 414, Madrigal Bldg., Escolta, Manila by telegram.

SO ORDERED.

Cebu City, Philippines, February 21, 1972.

(SGD.) AGAPITO HONTANOSAS

JUDGE

(Record on Appeal, pp. 297-298)

Forthwith, the clerk of court sent the telegram notices in the following wise:
YOUR MOTION SET ASIDE ORDER, DEFAULT AND DECLARE PROCEEDINGS NULL AND VOID RE
CIVIL CASE BEN RODGIGUEZ ET AL VERSUS HADJI ESMAYATEN LUCMAN GRANTED STOP PRETRIAL
SHALL PROCEED AS PREVIOUSLY SCHEDULED FEBRARY 28 1972 MORNING

(Record on Appeal, p. 298)

Counsel for the petitioners received the telegram notices on February 21, 1972; and on February
23, 1972 counsel filed an urgent motion for postponement of the pre-trial, claiming that he was
not aware of any such pre-trial having been previously set for February 28, 1972 in the morning,
as indeed no such pre-trial can as yet be set as the issues with respect to the amended complaint
are not yet fully joined since plaintiffs have not answered the compulsory conterclaims separately
set up by the defendants in said summons to theforeign corporations Allied Overseas Commercial
Co. Ltd. of Hongkong, nor have plaintiffs asked that said foreign corporation be dropped from the
amended complaint; that counsel has a hearing in Manila of a criminal case which is of
intransferable character, and prayed that the pre-trial be set at some other date in March
preferably either March 22 or 23, 1972 at 9:00 a.m. which were the only free dates for the month
of March 1972 in the calendar of the counsel. (Record on Appeal, pp. 301-303)

Apparently, the above urgent motion for postponement although sent through registered airmail
special delivery and received by the Dispatching Section of the Post Office of Cebu on February
28, 1972 (Resolution, Court of Appeals, Recrod on Appeal, pp. 365-366) was not received by the
Court for on February 28, 1972 when the case was called, an order was issued by the Court
postponing the pre-trial of the case to March 20, 1972 in ivew of the absence of the defendants
and counsel notwithstanding notices of hearing and telegrams sent to them, on the condition
that should defendants be found that as to plaintiffs will be allowed to present their evidence
and the defendants will be declared in default for failure to appear at the pre-trial. (Record on
Appeal, pp. 304-305)

Upon verification from the radio Communications of the Philippines that the telegrams
mentioned above were delivered and received by the addresses on February 21, 1972, the Court
on February 29, 1972 declared the defendants in default and allowed the plaintiffs to present
their evidence in support of their complaint before the Clerk of Court. (Record on Appeal, pp.
306-307). The evidence was thereupon presented and on March 9, 1977 the respondent Judge
promulgated his Decision declaring that the plaintiff Rodriguez is not in any manner indebted to
defendant Lucman or to Allied Overseas Commercial Co., declaring the personal check of the
plaintiff to be a forgery; that the attachment of the properties of plaintiff in the Manila case was
wrongfu; amd malicious, and ordering defendant Pioneer Insurance and Surety Co. to pay
P350,000.00 as moral damages, P50,000.00 as exemplary damages and P50,000.00 for expenses
of litigation in Manila. Defendant Lucman was also ordered to pay plaintiffs the sum of
P50,000,00 as exemplary damages and P30,000.00 as attorney's fees.

Within 30 days reglementary period to perfect the appeal, defendants Pioneer Insurance &
Surety Corp. and Hadji Esmayaten Lucman filed the Notice of Appeal and the Original record on
Appeal, the latter ordered corrected and amended but finally approved by the Court on July 31,
1972.

Meanwhile, petitioner's filed on April 4, 1972 before the Court of Appeals a petition for certiorari,
prohibition and/or mandamus with preliminary injunction CA-G.R. No. 00951-R) seeking to nullify
the order of default of February 29, 1972 and the Decision of March 9, 1972 of respondent Judge,
to command said Judge to elevate the records of the case for review and to prohibit him from
enforcing his decision and from taking further action in the case, No. 12069.

On April 13, 1972, the Court of Appeals promulgated its resolution dismissing the petition
aforestated and ruled among others as follows:

Furthermore, petitioners instant remedy is not proper because of their own admission that
appeal is available from the decision of respondent Judge (Discussion, pp. 12-13 of their Petition).
This is shown by the handwriting at the upper right hand corner of Annex R (Decision) when they
received the decision on March 25, 1972 and the period to appeal will expire on April 24, 1972.

We are not, therefore, convinced that the remedy of appeal is inadequate, considering that
whatever errors respondent Judge might have committed can be assigned as specific errors on
appeal. It has been consistently held that certiorari is not available where the remedy of appeal
is present .

(Record on Appeal, p. 373)

On a motion for reconsideration, the Court of Appeals reconsidered the resolution cited above,
and issued another resolution dated July 25, 1972 giving due course to the petition and required
the respondents to answer the petition (not a motion to dismiss), and among others, stated, to
wit:

Upon this fact alone, we believe as petitioners contend that although appeal is available, such
remedy is not sufficiently speedy and adequate to cure the defects in the proceedings therein or
to remedy the disadvantageous position of Petitioners because, since they were deprived of
raising any issue or defense that they have in the respondent court by reason of the order of
default, they cannot raise said issues or defenses for the first time on appeal.

(Rollo, P. 98)

The petition having been given due course, the respondents herein answered the same, and on
October 30, 1972, the Court of Appeals rendered its Decision denying the petition for lack of
merit, and held among others, thus

Finally we are not also convinced that the remedy of appeal is inadequate under the
circumstances obtaining in the principal cue Whatever errors respondent Judge might have
committed in his order or judgment may be assigned as specific errors in their appeal. This Court
can review any all such errors of fact and law in the appeal.

(Rollo, p. 138)

Petitioners filed a motion for reconsideration which was denied, hence this appeal by certiorari
from the decision of the Court of Appeals and is now before Us being assailed and faulted on
three principal issues: 1. the illegality of th order of the default and the decision arising
therefrom; 2. the inadequacy of the remedy of appeal; and 3. the lack of jurisdiction of the Court
in the principal case.

The petitioner's main thrust in this legal attack is directed to the other dated February 29, 1972
declaring defendants (now the petitioners) in default at the second pre-trial hearing and allowing
the plaintiffs (the present private respondents) to present evidence ex parte before the Clerk of
Court, which evidence uncotradicted and unrebutted was lifted almost en toto as the basis of the
decision granting damages so enormous and so huge in amount as to exceed the bounds of
reason and fairness.

The procedure for the pre-trial of a case is laid down by Rule 20, Revised Rules of court, which
provides, to wit:

Sec. 1. Pre-trial mandatory. In any action, after the last pleading has been filed, the ourt shall
direct the parties and their attorneys to appear before it for a conference to consider':

(a) The possibility of an amicable settlement or of a submission to arbitration;

(b) The simplification of the issues;

(c) The necessity or desirability of amendments to the pleadings;

(d) The possibility of obtaining stipulations or admissions of facts and of documents to avoid
unnecessary proofs;

(e) The limitation of the number of witnesses;

(f) The advisability of a preliminary reference of issues to a commissioner,

(g) Such other matters as may aid in the prompt disposition of the action.

Sec. 2. Failure to appear at pre-trial conference. A party who fails to appear at a pre-trial
conference may be non-suited or considered as in default.

Sec. 3. Allows the court to render judgment on the pleading or summary judgment as justice
require. Sec. 4 directs that a record of the pre-trial results be made; and Sec. 5 requires the court
to prepare a pre-trial calendar of cases for consideration as above provided, and that upon the
submission of the last pleading in a particular case, it shall be the duty of the clerk of court to
place case in the pre-trial calendar.

Unquestionably, the present Rules make pre-trial mandatory. And the reason for making pre-trial
mandatory is that pre-trial conferences bring the parties together, thus making possible an
amicable settlement or doing away with at least the non-essentials of a case from the beginning.
(Borja vs. Roxas, 73 Phil. 647).

Philippine jurisprudence has laid down the legal doctrine that while it is true that it is mandatory
for the parties and their attorneys to appear before the trial court for a pre-trial conference to to
consider inter alia the possibility of an amicable settlement, the rule was by no means intended
as an implacable bludgeon but as a tool to assist the trial court in the orderly and expeditious
conduct of trial. The rule is addressed to the sound discretion of the trial court (Rice and Corn
Administration vs. Ong Ante, et. al., G.R. No. L-30558, Oct. 4, 1971).

Both client and counsel must appear at the pre-trial. this is mandatory. Failure of the client to
appear is a ground for dismissal. (American Ins. Co. vs. Republic 1967D Phil. 63; Home Ins. Co. vs.
United States Lines Co., 1967D Phil. 401, cited in Saulog vs. Custombuilt Manufacturing Corp. No.
L-29612, Nov. 15, 1968; Taroma v. Sayo, L-37296, Oct. 30, 1975 (67 SCRA 508).

In the case of Insurance Co. of the North America vs. Republic, et. al., G.R. No.L-26794, Nov. 15,
1967, 21 SCRA 887, the Supreme Court, speaking thru Justice Bengzon, held that Sec. 1, Rule 20
of the Rules requires the court to hold a pre-trial before the case is heard and since in this case,
a pre-trial has already been had, the fact that an amended complaint was later filed, did not
necessitate another pre-trial. it would have been impractical, useless and time-consuming to call
another pre-trial.

Under the rules of pleading and practice, the answer ordinarily is the last pleading, but when the
defendant's answer contains a counterclaim, plaintiff's answer to it is the last pleading. When
the defendant's answer has a cross-claim, the answer or the cross-defendant to it sit he last
pleading. Where the plaintiff's answer to a counterclaim contains a counterclaim contains a
counter-claim against the opposing party or a cross-claim against a co-defendant, the answer of
the opposing party to the counterclaim or the answer of the co-defendant to the cross-claim is
the last pleading. And where the plaintiff files a reply alleging facts in denial or avoidance of new
matter by way of defense in the answer, such reply constitutes the last pleading. (Francisco, the
Revised Rules of Court, Vo. II, pp. 2-3).

The above citations and authorities are the ground rules upon which the conflictings claims of
the opposing partie's may be resolved and decided.

First, the legality of the order of default dated February 29, 1971 and the decision dated March
9, 1972. there is spread out in the Record on Appeal, pp. 92-93 that on May 5, 1971, a pre-trial.
was conducted by the court between the plaintiff Ben Uy Rodriguez spouses and the defendant
Pioneer Insurance & Surety Corp. The record or results of said pre-trial is found in the order of
the court dated May 5, 1971, which states:

When this case was called for pre-trial today, the plaintiffs and their counsel, Atty. Hilario Davide
Jr. appeared. On the other hand, the defendant Pioneer Insurance & Surety Corp. represented
by its counsel, Atty. Amando Ignacio also appeared.

When asked by the court if there is any possibility of settling this case amicably, the counsel for
the defendant answered in the negative. Both counsels agreed that the only issue to the resolved
bu the Court is whether the bonding company is laible or not, and if so, how much?

Atty. Hilario Davide, Jr. caused the markings of the following exhibit.

Exhibit "A-pre-trial", the finanacial report of Ben Rodriguez as of December 31, 1969; and

Exhibit "B-pre-trial", the affidavit of handwriting expert Perfecto Espina, and thereafter he
reserved his right to mark additional exhibits during the trial on the merits.

The counsel for the defendant also reserved his right to object to the Exhibits of the plaintiffs and
mark his exhibits during the trial on the merits of the case.

Both counsels are given ten (10) days from today within which to file their simultaneous
memoranda or authorities in support of the motion for preliminary hearing and its objection
thereto. and thereafter his incident will be resolved by the Court.

Following agreement of the parties, the trial on the the merits of this case is set for June 11, 1971
at 8:30 o'clock in the morning.

The parties thru their respective counsels are notified in open court of this order.

SO ORDERED.

Cebu City, Philippines, May 5, 1971.

SGD.) AGAPITO HONTANOSAS

JUDGE

(Record on Appeal, p. 93)

The defendant Pioneer Insurance & Surety Corp. having complied with the order of the Court to
appear and attend this pre-trial, and had manifested its opposition to settling the case amicably,
said party may no longer be compelled to attend a second pre-trial hearing, and neither may it
be punished by the court by its order declaring said defendant as in default. The mandatory
character of a pre-trial and the serious consequences confronting the parties in the event that
each party fails to attend the same must impose a strict application of the Rule such that where
we find no authority for the the Court to call another pre-trial hearing, as in fact there is none in
said Rule, the conclusion is inescapable that the respondent Judge committed a grave and serious
abuse of discretion and acted in excess of jurisdiction in declaring defendant Pioneer Insurance
& Surety Corp. "as in default" for failure to attend the second pre-trial called by the Judge on
February 29, 1972. In other words, there is nothing in the Rules that empowers or has called a
first pre-trial duly attended by that prties, and lacking such authority, the court perforce lack the
authority to declare a failure to prosecute on the part of the plaintiff for failing to attend such
second pre-trial; it also lack the authority to declare the defendant "as in default" by reason of
the latter's failure to be present at the said second pre-trial.

It serves no purpose for the court to call again another pre-trial where the parties had previously
agreed to disagree, where the issues had been joined and where the court itself had been
satisfied that a hearing on the merits is the next step to conduct as int he instant case where the
court, after the pre-trial on May 5, 1971, set he trial of the case on its merits for June 11, 1971.
Indeed, a second pre-trial is impractical, useless and time-consuming.

We have not lost sight of the fact that when the first pre-trial was called and conducted, the party
litigants were the Ben Uy Rodriguez spouses as plaintiffs, while Pioneer Insurance & Surety Corp.
and Allied Overseas Commercial Co. (although not yet summoned) were the defendants, whereas
at the time the second pre-trial was called, the original complaint had been amended to implead
Hadji Esmayaten Lucman as additional defendant. The amendment of the complaint to implead
Lucman did not, however, alter the impracticability, the uselessness and the absence of authority
to call a second pretrial hearing since the amended complaint merely impleaded Lucman as the
assignee of the original defendant Allied Overseas Commercial Co. and no additional cause of
action was alleged; the prayer was the same and the amount of damages sought was the same
as that in the original complaint.

Second, the prematureness of the pre-trial called on February 28, 1972, assuming that there was
need to have another pre-trial. The records (Record on Appeal, p. 293) show that the notice of
the clerk of court setting the case for pre-trial on February 28, 1972 was issued and dated
February 7, 1972. As of this date, February 7,1972, the complaint had been amended on August
27, 1971 by impleading the defendant Hadji Esmayaten Lucman who filed his answer on
December 24, 1971, interposing therein a compulsory counterclaim. (Record on Appeal, pp. 239-
240). Before this date of February 7, 1972, the court had already promulgated the Decision dated
January 28, 1972 as against Lucman only.

Likewise, as of February 7, 1972, defendant Pioneer Insurance & Surety Corp. had also filed its
answer to the amended complaint, interposing too a compulsory counterclaim. But as of
February 7, 1972, the plaintiffs have not yet filed their answer to the compulsory counterclaims
of the defendants (which is necessarily the last pleading to be filed in order that the case is ready
and ripe for the pre-trial). It was only on February 22, 1972 that plaintiffs made their reply to the
answer, and their answer to the compulsory, counterclaim of defendant Lucman 'Record on
Appeal, pp. 299- 301).

The records do not disclose any reply of the plaintiffs to the answer of Pioneer Insurance & Surety
Corp., nor any answer to the compulsory counterclaim of the Corp. The above state of the case
as far as the pleadings are concerned clearly and manifestly show that the case was not yet ready
for pre-trial, that it was as yet premature because the last pleading had not yet been filed by the
plaintiffs.

Even the state of the pleadings as of February 21, 1972 when the telegrams were sent notifying
the parties of the pre-trial for February 28, 1972 reveals the prematureness of calendaring the
case pre-trial. As of February 21, 1972, the complaint was already amended to implead Lucman
who submitted his answer with compulsory counterclaim. but plaintiffs had not yet filed their
reply and their answer to the counterclaim, because the records indicate that the plaintiffs'
answer to the counterclaim, because the records indicate that the plaintiffs' answer to the
counterclaim is dated February 22, 1972. (Record on Appeal, pp. 299-301). And to the compulsory
counterclaim of defendant Pioneer Insurance & Surety Corp., plaintiffs made no answer
whatsoever.

Third, the notices given by the clerk of court thru telegrams on February 21, 1972 notifying the
parties of the pre-trial on February 28, 1972 were insufficient, in law and jurisprudence.

We have carefully noted the telegraphic notices sent by the clerk of court and we find this
omission which is fatal to the respondents' cause: no telegram was sent to the defendant Pioneer
Insurance & Surety Corp. The telegram was sent to the counsel of this defendant, but none to the
defendant itself.

The Court had directed the clerk of court to send notice by telegram to the parties for the
February 28 pre-trial. The clerk did send the telegram to Atty. Eriberto Ignacio, counsel for
Pioneer Insurance & Surety Corp., but omitted and failed to send telegram to the party itself, the
corporation, as required strictly by law. Notice to the counsel is not enough. We reiterate that
this failure is a jurisdictional defect.

Reading the order of the court dated February 29, it appears in black and white (Record on
Appeal, pp. 306-307, Annex W, Rollo, p. 194) that only two telegraphic messages were sent by
the clerk of court, thus (1) the message addressed to Atty. Eriberto Ignacio delivered to the
given address at 3:45 P.M. the same day it was filed but the signature of he recipient was
unreadable; (2) the other message addressed to Hadji Esmayaten Lucman per RCPI San Juan also
delivered on the same day, February 21, 1972 and personally 4eceived by the addressee himself.
This was the offficial advice received by the Court from the Radio Communications of the
Philippines thru which the telegrams were wired.

This is also confirmed by the Order of the Court dated April 11, 1972 denying the defendant's
Urgent Motion for Reconsideration. The other states.
Per advice from the Radio Communications of the Philippines, Inc. these two messages were
received by the addressees, Atty. Eriberto Ignacio and Hadji Esmayaten Lucman on the same day
it was filed, that is on February 21, 1972.

(Record on Appeal, p. 357)

Decidedly, there was no telegram sent to party defendant Pioneer Insurance & Surety Corp.,
informing it of the February 28 pre-trial hearng. The reason for requiring the presence of the
party who must be notified is explained in the case of Home Insurance Co. vs. United Lines Co. (L-
25593, November 15, 1967, 21 SCRA 863), where the Court, speaking thru Justice Bengzon, said
that:

A party who fails to appear at a pre-trial conference may be non-suited or considered as in

default. This shows the purpose of the Rules to compel the parties to appear personally before
the court to reach, if possible, a compromise. Accordingly the court is given the discretion to
dismiss the case should plaintiff not appear at the pre-trial.

Fourth, the denial of the motion for postponement was a grave abuse of discretion. We grant the
court the discretion to postpone any hearing, pre-trial or on the merits of the case, but the
exercise of discretion must be based on reasonable grounds. The motion (Record on Appeal, pp.
301-303) had alleged grounds which are meritorious and not frivolous nor intended for delay,
which are 1. no formal order of the court scheduling the February 28 pre-trial had been
received; 2. pre-trial cannot be had as yet be set as the issues are not yet fully joined; 3. counsel
has a hearing previously set in Manila in a criminal case which was of an intransferable character.
We are also concede that counsel may not presume nor take for granted that his motion for
postponement and the proposed setting to March 22 or 23, 1972 will be granted by the court but
where the court had actually postponed the hearing on February 28, 1972 due to the absence of
the defendants and their counsel, and scheduled the pre-trial to March 20, 1972 at 8:30 o'clock
in the morning (Record on Appeal, pp. 304-306), we find no reason nor fairness in the court's
order of February 29, 1972 finding defendants as in default since the pre-trial was moved to a
later date in March as prayed in the motion.

The motion for postponement was received on February 28, 1972 at the Cebu Post Office, as
shown in the postmarks on the envelope (photographed on p. 322, record on Appeal) but was
not immediately delivered to the court although the envelope bore the words, "registered Air
Mail/Special Delivery with Return Card." If the letter containing the moton was not yet delivered
to the Court the next day, February 29, 1972 when the court made the order declaring
defendants in default, this was clearly a postal neglect and omission to perform its duty, not
attributable to defendants, The Court, in the exercise of wise discretion, could have restored their
standing in court and given them an even chance to face their opponents.

For refusing to set aside said order of default and the decision, we hold the Court of Appeals in
reversible error therefor. The respondent Court of Appeals has ignored established rulings of the
Supreme Court in Pineda vs. Court of Appeals, 67 SCRA 228, that a party may not be declared in
default for future to attend the pre-trial where only his counsel was notified of the pre-trial
schedule; in Sta. Maria, Jr. vs. Court of Appeals, 45 SCRA 596 that a pre-trial is unnecessary where
the case could not be settled and that the fact that an amended complaint was later filed with
leave of court did not, undue the circumstances, necessitate another pre-trial; and in Pineda vs.
Court of Appeals, 67 SCRA 288 that Courys should be liberal in setting asiode default judgment.

At this juncture, it is necessary to emphasize once more the pronouncement of this Court
speaking through Justice Teehankee in Taroma vs. sayo, 67 SCRA 509, pp. 512-513, that:

For the guidelines of the bench and bar, therefore, the Court in reaffirminf the ruling that notice
of pre-trial must be served separately upon the party and his counsel of record, retates that while
service of such notice to party may be made directly to the party, it is best that the trial courts
uniformly serve such notice to party through or care of his counsel of the obligation of notifying
the party of the date, time and palce of the pre-trial conference and assuring that the party either
appear thereat or deliver to counsel a written authority to represent the party with power to
compromise the case, with the warning that a party who fails to do so may be non-suited or
declared in default.

The second point at issue is whether the remedy of ordinary appeal in the case is Palin, speedy
and adequate such that the writ of certiorari will not lie. We have adverted to previously that the
Court of Appeals in its extended Resolution dated July 25, 1972 ruled that although appeal was
available, such remedy is not sufficiently speedy and adequate to cure the defects in the
proceedings therein or to remedy the disadvantageous position of petitioners because, since
they were deprived of raising any issue or defense that they have in the respondent court by
reason of the order of default, they cannot raise said issue or defense for the first time on appeal.
Yet, on October 30, 1972, the Court in its decision held that the remedy of appeal is not
inadequate in that whatever errors respondent Judge might have committed in his order or
judgment may be assigned as specific errors in their appeal before said tribunal, and that it can
review any errors of fact and of law in the appeal.

This conflicting stand of the Court of Appeals issuing from the same case is as difficult to resolve
as it is to reconcile them. We have but to rule on them. hold one to be correct and dislodge the
other as an error.

On general principles, the writ of certiorari will lie where there is no appeal, nor any plain, speedy
and adequate remedy in the ordinary course of law. The existence of an appeal is a bar to writ of
certiorari where such appeal is in itself a sufficient and adequate remedy, in that it will promptly
relieve the petitioner from the injurious effects of the order or judgment complained of. (Silvestre
v. Torres, 57 Philippines 885, 890; Pachoco v. Tumangday L-14500, May 25, 1960; Lopez et al. v.
Alvendia, et al. L-20697, Dec. 24, 1964). Courts ordinarily do not deny the writ if the result would
be to deprive a party of his substantial rights and leave him without remedy, and in those
instances wherein the lower court has acted without jurisdiction over the subject matter, or
where the order or judgment complained of is a patent nullity, courts have gone even as far as
to disregard completely the question of petitioner's fault, the reason being, undoubtedly, that
acts performed with absolute want of jurisdiction over the subject matter are void ab initio and
cannot be validated by consent, express or implied, of the parties. (Moran, Comments on the
Rules of Court, Vol. 3, 1970 ed., pp. 169-170).

There are numerous cases where the Supreme Court has granted the writ notwithstanding the
existence of an appeal. Thus, the Supreme Court to avoid future litigations, passed upon a
petition for certiorari though the proper remedy was appeal. Writs have been granted despite
the existence of the remedy of appeal where public welfare and the advancement of public policy
so dictate, the broader interests of justice so require, or where the orders complained of were
found to be completely null and void, or that the appeal was not considered the appropriate
remedy. (Fernando v. Varquez, No. L-26417, Jan. 30, 1970)

As to what is an adequate remedy, it has been defined as "a remedy which is equally beneficial,
speedy and sufficient, not merely a remedy which at some time in the future will bring about a
revival of the judgment of the lower court complained of in the certiorari proceeding, but a
remedy which will promptly relieve the petitioner from the injurious effects of that judgment and
the acts of the inferior court or tribunal." (Silvestre v. Torres, 57 Phil. 885, 11 CJ., p. 113)

Now to the case at bar, We find here a number of special facts and circumstances which
addresses themselves to the wise discretion of this court with such force to induce Us to grant
the writ in order to prevent a total or partial failure of justice, to redress or prevent the wrong
done. We are satisfied that petitioners are cornered into a desperate position where they have
been ordered to pay damages over and above the amount of the bond posted for the attachment
of private respondents' properties as ordered by the decision of the court based on evidence
presented ex parte by reason of the order of default, and more than that, plaintiff Rodriguez is
relieved from civil liability on an inexplicable and unprecedented finding that the plaintiffs' check
was a forgery, (when the check exhibited was only a xerox copy of the original, which original
was in the records of the case filed in the court of First instance of Rizal, Civil Case No. 14499
entitled "Hadji Esmayaten Lucman vs. Benjamin Rodriguez, et al.," (Record on Appeal, pp. 49-55).
Again, the conflicting notices as to the hearing ordered, pre-trial in one and on the merits in the
other, is not the doing of the petitioners of their standing in court was in effect a failure of justice.
Petitioners can no longer present their evidence to rebut the claim of damages, or reduce the
unconscionable and excessive damages or question the release of plaintiff's debt, for the same
may not be submitted nor raised for the first time on appeal. We, therefore, hold that the Court
of Appeals erred in holding that the appeal is adequate. The court erred in ignoring the doctrine
laid down in Omico v. Villegas, 63 SCRA 285, that appeal is not an adequate remedy where party
is illegally declared in default.

Petitioners assail the jurisdiction of the court of First Instance of Cebu in Civil Case No. 12069-R
filed by the Rodriguez spouses, seeking damages for the alleged malicious and unlawful is2suance
of the writ of preliminary attachment against the latter's properties granted by the Court of First
Instance of Manila upon the posting of a security bond in the amount of P450,000.00 given by
the petitioner Pioneer Insurance & Surety Corp. The petitioners contend that under See. 20, Rule
57 of the Revised Rules of Court, the claim for damages against a bond in an alleged wrongful
attachment can only be prosecuted in the same court where the bond was filed and the
attachment issued.

Rule 57, Sec. 20 of the Revised Rules of Court provides, to wit:

Claim for damages on account of illegal attachment. If the judgment on the action be in favor of
the party against whom attachment was issued, he may recover, upon the bond given or deposit
made by the attaching creditor, any damages resulting from the attachment. Such damages may
be awarded only upon application and after proper hearing, and shall be included in the final
judgment. The application must be filed before the trial or before appeal is perfected or before
the judgment becomes executory, with due notice to the attaching creditor and his surety or
sureties, setting forth the facts shaking his right if damages and the amount thereof.

xxx xxx xxx

On the other hand, the private respondents argue that the above rule is not applicable to the
case at bar, citing Moran, Vol. Rules of Court, 1963 pp. 51-52, to wit:

... the rule that a claim for damages arising from the issuance of a wit of attachment, injunction,
receivership and replevin should be presented in the same action is not applicable where the
principal case has been dismissed for lack of Jurisdiction and no claim for damages could
therefore have beer presented in said case.

The position of the petitioners is correct. The ruling in the case of Santos vs. Court of Appeals, et
al., 95 Phil. 360 advanced by respondents to support their stand, is not controlling here, or We
find that no claim for damages against the surety bond in support of a preliminary. attachment
was ever presented or filed. The latest decisions of this Court in Ty Tion et al., vs. Marsman & Co.,
et al., L-17229, July 31, 1962, 5 SCRA 761 reiterating the rulings in Del Rosario vs. Nava, 50 O.G.
4189; Estioco vs. Hamada, L- 11079, May 21, 1958; Neva Espa;a vs. Montelibano, 58 Phil, 807;
Tan Suyco vs. Javier, 21 Phil. 82; Raymundo vs. Carpio, 33 Phil. 894; Santos v. Moir, 36 Phil. 350;
lay down the proper and pertinent rule that the claim for damages against a bond in an aleged
wrongful attachment can only be prosecuted in the same court where the bond was filed and the
attachment issued.

Moreover, the records show that private respondent Rodriguez filed an Application for Damages
Against Bond dated December 3, 1970 (Record on Appeal, pp. 77-81) praying that

Wherefore, it is respectfully prayed that in the event the motion to dismiss and the motion to
discharge attachment were granted, the defendant be allowed to present evidence to prove
damages sustained by him by reason of the attachment against the Pioneer Insurance & Surety
Corp. in a hearing that may be conducted for the purpose with due notice to the plaintiff and the
surety, and that after due notice and hearing judgment be rendered against the Pioneer
Insurance and Surety Corp. for such amount of damages as may be proved and established for
defendant.
The defendant further prays for such other reliefs and remedies consistent with law, justice and
equity.

Cebu City, December 3, 1970.

ESTANISLAO FERNANDEZ

JOSE D. PALMA

Attorney for Defendant

The Court of First Instance of Manila in its order dated Dcember 22, 1970, after dismissing the
complaint and lifting the writ of preliminary attachment, ordered that the hearing of the
application for damages against the bond be set aside on January 14, 1971 at 8:30 a.m. (Record
on Appeal, pp. 82-86)

In other words, defendant Rodriguez sought that judgment be rendered against the surety for
such amount of damages as may be proved or established by him, and was granted by the court
the opportunity to prove damages against the bond of the surety company. He even cited the
very provision of the Revised Rules of Court, Rule 57, Sec. 20 to justify his application, and the
cases supporting his application, for otherwise his claim will forever be barred. In effect, at this
point in time, defendant Rodriguez waived the lack of jurisdiction on his person, be seeking an
affirmative relief from the court, which he cannot now complain before this Court.

Thus, Francisco, in his Revised Rules of Court, Vol. 1, p. 130 citing 21 C.J.S. writes that:

Objections to lack of jurisdiction of the person, and other objections to jurisdiction not based on
the contention that there is an absolute want of jurisdiction of the subject matter, are waived by
invoking the court's jurisdiction, as by a counterclaim, consent, or voluntary submission, to
jurisdiction, or conduct amounting to a general appearance.

In Soriano v. Palacio, 12 SCRA 557, this Court held that even if jurisdiction was not originally
acquired by the Court over the defendant due to allegedly defective services of summons, still
when the latter filed a motion for reconsideration of the judgment by default, he is considered
to have submitted to said court's jurisdiction.

We agree with the petitioners that the Court of Appeals erred in not dismissing the complaint
with respect to the petitioner Pioneer Insurance & Surety Corp., over which respondent-appellee
Judge had not acquired jurisdiction pursuant to Sec. 20, Rule 57 of the Revised Rules of the Court.

IN VIEW OF THE FOREGOING, the judgment of the Court of Appeals is reversed and another one
is entered declaring the order of default dated February 29, 1972 and the decision rendered by
the respondent Judge on March 9, 1972 null and void, holding that the Court of First Instance of
Cebu lacks jurisdiction to hear and determine the claim for damages arising from the alleged
wrongful attachment issued by the Court of First Instance of Manila and ordering the dismissal
of that case (Civil Case No. 12069 of the Court of First Instance of Cebu), as well as the pending
of the judgment herein annuled in the Court of Appeals which has been rendered moot

ISAGANI M. JUNGCO, petitioner,

vs.
HON. COURT OF APPEALS, and G. A. MACHINERIES, INC., respondents.

The instant petition for review seeks the setting aside of the order of default issued by the lower
court against petitioner (defendant) and that petitioner be allowed to present evidence in his
behalf.

On August 19, 1980, G.A. Machineries, Inc., filed a complaint for collection against petitioner-
defendant Isagani M. Jungco, in the Court of First Instance of Quezon City, Branch LII presided
over by Judge Concepcion Buencamino. The complaint was duly answered and the case was set
for pre-trial. On July 15, 1982, the Court issued an Order stating as follows: 'It appearing that the
defendant has not been claiming his mail, the pre-trial is terminated and the case is set for
hearing on October 27, 1982 at 8:30 o'clock in the morning.' Judge Buencamino retired. The
Judiciary Reorganization took place and the case was re-raffled and re-assigned to another
branch, No. 105 of the RTC of Quezon City, presided by Judge Johnico Serquina; who set the case
for Pre-trial hearings on August 15, 1984 and October 5, 1984. Defendant failed to appear but
there was no proof of notification, and the pre-trial was reset to November 9, 1984, and reset
again to March 1, 1985. At the hearing on March 1, 1985 defendant-petitioner herein, filed a
motion for postponement asking for a resetting of the hearing to April 5, 1985, declaring him as
a default and allowing plaintiff to present evidence ex-parte. Petitioner filed a Motion for
Reconsideration, alleging among others that the was not duly notified of the hearing on March
22, 1985.

On July 12, 1985, petitioner filed a motion to set aside order of default but said motion was
denied on July 22, 19685 for failure to comply with the requirements of Sections 4 and 5 of Rule
15.

On August 2, 1985, petitioner refiled his motion to set aside order of default furnishing copy to
opposing counsel.

On August 16, 1985, the said motion was denied by the Court for being devoid of merit.

On September 6, 19885, petitioner mailed his motion for reconsideration of the order dated
August 16, 1985. The same was denied by the Court on October 9, 1985, (CA decision, pp. 17-18,
Rollo, Annexes omitted)
On appeal to the then Intermediate Appellate Court (now Court of Appeals, or CA), the lower
court's orders were affirmed in the now questioned decision * with the following decretal
portion:

WHEREFORE, in view of the foregoing, the petition is DISMISSED for lack of merit, and the
temporary restraining order previously issued is hereby lifted. (CA Decision, p. 21, Rollo)

The petitioner's subsequent Motion for Reconsideration likewise failed as it was denied in a
minute resolution dated March 30, 1987 (vide, p. 85, CA Records), hence this petition .

Meanwhile, after the CA's disputed decision was promulgated, the trial court (presided over by
Judge Tomas V. Tadeo, Jr.), upon motion of private respondent, received the latter's evidence ex-
parte and the issued a judgment by Default dated August 18, 1987 (see p. 40, Rollo) Petitioner
was ordered to pay private respondent the aggregate amount of P8,330.00 as principal, plus
interest, and P2,082.50 in damages and attorney's fees. A "Manifestation, the trial court denied
petitioner's prayer to set aside its August 18, 1987 Decision, but considered the same
manifestation as a notice of appeal, which said court approved, (see p. 35, Rollo)

Considering now the respective submission of the parties and the evidence of record, we rule to
dismiss the petition.

Mainly, petitioner argues that the trial court gravely abused its discretion in considering him as
in default. We do not think so. Pursuant to Section 1, Rule 20 of the Rules of Court, the
appearance of the parties at the scheduled pre-trial conference is mandatory. And to ensure the
enforcement of such mandate.

Section 2 of the same Rule gives to the trial court the discretion to declare a party who fails to
appear at said conference as in default or non-suited.

The records show that the case was set for pre-trial on March 22, 1985 as it appears in the notice
of hearing dated January 21, 1985 qqqvide p. 54, Original Records). And as correctly found by
Judge Serquina in his June 9, 1985 Order (p. 17, CA Records), the return card attached at the back
of a copy of the said notice of hearing shows that "plaintiff s (should read 'defendant's') counsel
received a copy" of the latter. Under the foregoing, the ruling that factual findings of the trial
court are entitled to great weight (Pring v. CA, 138 SCRA 785) is well in point. And since We find
no compelling reason to deviate from said finding of the trial court, We uphold the same.

To pursue his argument that the lower court gravely abused its discretion in declaring him in
default, petitioner cites the case of Continental Leaf Tobacco (Phil.) Inc. v. IAC (140 or SCRA 269)
and adds that he has a meritorious defense as he goes on to narrate the latter. Before disposing
of this contention, a distinction first must be made between a party in default (Sec. 1, Rule 18)
and one declared as in default (Sec. 2, Rule 20). In the former case, one is declared in default due
to his failure to file his answer to the complaint within the period required by the Rules. On the
other hand, the latter contemplates a scenario wherein the defendant in a suit had already filed
his answer (therefore had set up both his negative and affirmative defenses) but failed to comply
with the mandate of the Rules in not appearing at the scheduled pre-trial hearing.

Taking into account the above distinction, reliance on the Continental Leaf Tobacco case (supra)
is not in place since the said case involves a defendant declared in default for failure to file an
answer. In the case at bar, petitioner was declared as in default by the trial court for failure to
appear at the scheduled pre-trial hearing despite due notice thereof. Consequently, petitioner
may not insist that the trial court set aside its Order of default in view of his meritorious defense
since such defense, as it appears in his answer (see p. 64, Rollo), is already within the knowledge
of said court prior to the issuance of the disputed Order. In fact, present jurisprudence show that
a "Motion to Set Aside Order of Default" is not the proper remedy of a party who had been so
declared as in default, a Motion for Reconsideration being the relevant remedy (Lucero v.
Dacayo, 22 SCRA 1004) withour need for a recital of defendant's "meritorious defenses" simply
because the said defenses of the defendant are already laid down in the answer (Regalado,
Remedial Law Compendium, 1986 ed.; p. 167).

Coming now to petitioner's prayer that We set aside the Judgement by Default rendered by the
tial court on August 18, 1987, suffice it to say that the same Judgment is now on appeal with the
Court of Appeals wherein petitioner can raise his exceptions.

WHEREFORE, the present petition is hereby DENIED and the questioned decision AFFIRMED. No
costs.

PHILIPPINE EXPORT AND FOREIGN LOAN GUARANTEE CORPORATION, petitioner, vs. V.P.
EUSEBIO CONSTRUCTION, INC.; 3-PLEX INTERNATIONAL, INC.; VICENTE P. EUSEBIO; SOLEDAD
C. EUSEBIO; EDUARDO E. SANTOS; ILUMINADA SANTOS; AND FIRST INTEGRATED BONDING
AND INSURANCE COMPANY, INC., respondents.

This case is an offshoot of a service contract entered into by a Filipino construction firm with the
Iraqi Government for the construction of the Institute of Physical Therapy-Medical Center, Phase
II, in Baghdad, Iraq, at a time when the Iran-Iraq war was ongoing.

In a complaint filed with the Regional Trial Court of Makati City, docketed as Civil Case No. 91-
1906 and assigned to Branch 58, petitioner Philippine Export and Foreign Loan Guarantee
Corporation1[1] (hereinafter Philguarantee) sought reimbursement from the respondents of the
sum of money it paid to Al Ahli Bank of Kuwait pursuant to a guarantee it issued for respondent
V.P. Eusebio Construction, Inc. (VPECI).

The factual and procedural antecedents in this case are as follows:

On 8 November 1980, the State Organization of Buildings (SOB), Ministry of Housing and
Construction, Baghdad, Iraq, awarded the construction of the Institute of Physical
TherapyMedical Rehabilitation Center, Phase II, in Baghdad, Iraq, (hereinafter the Project) to
Ajyal Trading and Contracting Company (hereinafter Ajyal), a firm duly licensed with the Kuwait
Chamber of Commerce for a total contract price of ID5,416,089/046 (or about
US$18,739,668).2[2]

On 7 March 1981, respondent spouses Eduardo and Iluminada Santos, in behalf of respondent 3-
Plex International, Inc. (hereinafter 3-Plex), a local contractor engaged in construction business,
entered into a joint venture agreement with Ajyal wherein the former undertook the execution
of the entire Project, while the latter would be entitled to a commission of 4% of the contract
price.3[3] Later, or on 8 April 1981, respondent 3-Plex, not being accredited by or registered with
the Philippine Overseas Construction Board (POCB), assigned and transferred all its rights and
interests under the joint venture agreement to VPECI, a construction and engineering firm duly
registered with the POCB.4[4] However, on 2 May 1981, 3-Plex and VPECI entered into an
agreement that the execution of the Project would be under their joint management.5[5]

The SOB required the contractors to submit (1) a performance bond of ID271,808/610
representing 5% of the total contract price and (2) an advance payment bond of ID541,608/901
representing 10% of the advance payment to be released upon signing of the contract.6[6] To
comply with these requirements, respondents 3-Plex and VPECI applied for the issuance of a
guarantee with petitioner Philguarantee, a government financial institution empowered to issue
guarantees for qualified Filipino contractors to secure the performance of approved service
contracts abroad.7[7]
Petitioner Philguarantee approved respondents application. Subsequently, letters of
guarantee8[8] were issued by Philguarantee to the Rafidain Bank of Baghdad covering 100% of
the performance and advance payment bonds, but they were not accepted by SOB. What SOB
required was a letter-guarantee from Rafidain Bank, the government bank of Iraq. Rafidain Bank
then issued a performance bond in favor of SOB on the condition that another foreign bank, not
Philguarantee, would issue a counter-guarantee to cover its exposure. Al Ahli Bank of Kuwait was,
therefore, engaged to provide a counter-guarantee to Rafidain Bank, but it required a similar
counter-guarantee in its favor from the petitioner. Thus, three layers of guarantees had to be
arranged.9[9]

Upon the application of respondents 3-Plex and VPECI, petitioner Philguarantee issued in favor
of Al Ahli Bank of Kuwait Letter of Guarantee No. 81-194-F 10[10] (Performance Bond Guarantee)
in the amount of ID271,808/610 and Letter of Guarantee No. 81-195-F11[11] (Advance Payment
Guarantee) in the amount of ID541,608/901, both for a term of eighteen months from 25 May
1981. These letters of guarantee were secured by (1) a Deed of Undertaking12[12] executed by
respondents VPECI, Spouses Vicente P. Eusebio and Soledad C. Eusebio, 3-Plex, and Spouses
Eduardo E. Santos and Iluminada Santos; and (2) a surety bond13[13] issued by respondent First
Integrated Bonding and Insurance Company, Inc. (FIBICI). The Surety Bond was later amended on
23 June 1981 to increase the amount of coverage from P6.4 million to P6.967 million and to
change the bank in whose favor the petitioners guarantee was issued, from Rafidain Bank to Al
Ahli Bank of Kuwait.14[14]

On 11 June 1981, SOB and the joint venture VPECI and Ajyal executed the service contract15[15]
for the construction of the Institute of Physical Therapy Medical Rehabilitation Center, Phase II,
in Baghdad, Iraq, wherein the joint venture contractor undertook to complete the Project within
a period of 547 days or 18 months. Under the Contract, the Joint Venture would supply
manpower and materials, and SOB would refund to the former 25% of the project cost in Iraqi
Dinar and the 75% in US dollars at the exchange rate of 1 Dinar to 3.37777 US Dollars.16[16]

The construction, which was supposed to start on 2 June 1981, commenced only on the last week
of August 1981. Because of this delay and the slow progress of the construction work due to
some setbacks and difficulties, the Project was not completed on 15 November 1982 as
scheduled. But in October 1982, upon foreseeing the impossibility of meeting the deadline and
upon the request of Al Ahli Bank, the joint venture contractor worked for the renewal or
extension of the Performance Bond and Advance Payment Guarantee. Petitioners Letters of
Guarantee Nos. 81-194-F (Performance Bond) and 81-195-F (Advance Payment Bond) with expiry
date of 25 November 1982 were then renewed or extended to 9 February 1983 and 9 March
1983, respectively.17[17] The surety bond was also extended for another period of one year,
from 12 May 1982 to 12 May 1983.18[18] The Performance Bond was further extended twelve
times with validity of up to 8 December 1986,19[19] while the Advance Payment Guarantee was
extended three times more up to 24 May 1984 when the latter was cancelled after full refund or
reimbursement by the joint venture contractor.20[20] The surety bond was likewise extended to
8 May 1987.21[21]

As of March 1986, the status of the Project was 51% accomplished, meaning the structures were
already finished. The remaining 47% consisted in electro-mechanical works and the 2%, sanitary
works, which both required importation of equipment and materials.22[22]

On 26 October 1986, Al Ahli Bank of Kuwait sent a telex call to the petitioner demanding full
payment of its performance bond counter-guarantee.

Upon receiving a copy of that telex message on 27 October 1986, respondent VPECI requested
Iraq Trade and Economic Development Minister Mohammad Fadhi Hussein to recall the telex call
on the performance guarantee for being a drastic action in contravention of its mutual agreement
with the latter that (1) the imposition of penalty would be held in abeyance until the completion
of the project; and (2) the time extension would be open, depending on the developments on
the negotiations for a foreign loan to finance the completion of the project.23[23] It also wrote
SOB protesting the call for lack of factual or legal basis, since the failure to complete the Project
was due to (1) the Iraqi governments lack of foreign exchange with which to pay its (VPECIs)
accomplishments and (2) SOBs noncompliance for the past several years with the provision in
the contract that 75% of the billings would be paid in US dollars.24[24] Subsequently, or on 19
November 1986, respondent VPECI advised the petitioner not to pay yet Al Ahli Bank because
efforts were being exerted for the amicable settlement of the Project.25[25]

On 14 April 1987, the petitioner received another telex message from Al Ahli Bank stating that it
had already paid to Rafidain Bank the sum of US$876,564 under its letter of guarantee, and
demanding reimbursement by the petitioner of what it paid to the latter bank plus interest
thereon and related expenses.26[26]

Both petitioner Philguarantee and respondent VPECI sought the assistance of some government
agencies of the Philippines. On 10 August 1987, VPECI requested the Central Bank to hold in
abeyance the payment by the petitioner to allow the diplomatic machinery to take its course, for
otherwise, the Philippine government , through the Philguarantee and the Central Bank, would
become instruments of the Iraqi Government in consummating a clear act of injustice and
inequity committed against a Filipino contractor.27[27]

On 27 August 1987, the Central Bank authorized the remittance for its account of the amount of
US$876,564 (equivalent to ID271, 808/610) to Al Ahli Bank representing full payment of the
performance counter-guarantee for VPECIs project in Iraq. 28[28]

On 6 November 1987, Philguarantee informed VPECI that it would remit US$876,564 to Al Ahli
Bank, and reiterated the joint and solidary obligation of the respondents to reimburse the
petitioner for the advances made on its counter-guarantee.29[29]
The petitioner thus paid the amount of US$876,564 to Al Ahli Bank of Kuwait on 21 January
1988.30[30] Then, on 6 May 1988, the petitioner paid to Al Ahli Bank of Kuwait US$59,129.83
representing interest and penalty charges demanded by the latter bank.31[31]

On 19 June 1991, the petitioner sent to the respondents separate letters demanding full payment
of the amount of P47,872,373.98 plus accruing interest, penalty charges, and 10% attorneys fees
pursuant to their joint and solidary obligations under the deed of undertaking and surety
bond.32[32] When the respondents failed to pay, the petitioner filed on 9 July 1991 a civil case
for collection of a sum of money against the respondents before the RTC of Makati City.

After due trial, the trial court ruled against Philguarantee and held that the latter had no valid
cause of action against the respondents. It opined that at the time the call was made on the
guarantee which was executed for a specific period, the guarantee had already lapsed or expired.
There was no valid renewal or extension of the guarantee for failure of the petitioner to secure
respondents express consent thereto. The trial court also found that the joint venture contractor
incurred no delay in the execution of the Project. Considering the Project owners violations of
the contract which rendered impossible the joint venture contractors performance of its
undertaking, no valid call on the guarantee could be made. Furthermore, the trial court held that
no valid notice was first made by the Project owner SOB to the joint venture contractor before
the call on the guarantee. Accordingly, it dismissed the complaint, as well as the counterclaims
and cross-claim, and ordered the petitioner to pay attorneys fees of P100,000 to respondents
VPECI and Eusebio Spouses and P100,000 to 3-Plex and the Santos Spouses, plus costs. 33[33]

In its 14 June 1999 Decision,34[34] the Court of Appeals affirmed the trial courts decision,
ratiocinating as follows:

First, appellant cannot deny the fact that it was fully aware of the status of project
implementation as well as the problems besetting the contractors, between 1982 to 1985, having
sent some of its people to Baghdad during that period. The successive renewals/extensions of
the guarantees in fact, was prompted by delays, not solely attributable to the contractors, and
such extension understandably allowed by the SOB (project owner) which had not anyway
complied with its contractual commitment to tender 75% of payment in US Dollars, and which
still retained overdue amounts collectible by VPECI.

Second, appellant was very much aware of the violations committed by the SOB of its contractual
undertakings with VPECI, principally, the payment of foreign currency (US$) for 75% of the total
contract price, as well as of the complications and injustice that will result from its payment of
the full amount of the performance guarantee, as evident in PHILGUARANTEEs letter dated 13
May 1987 .

Third, appellant was fully aware that SOB was in fact still obligated to the Joint Venture and there
was still an amount collectible from and still being retained by the project owner, which amount
can be set-off with the sum covered by the performance guarantee.

Fourth, well-apprised of the above conditions obtaining at the Project site and cognizant of the
war situation at the time in Iraq, appellant, though earlier has made representations with the
SOB regarding a possible amicable termination of the Project as suggested by VPECI, made a
complete turn-around and insisted on acting in favor of the unjustified call by the foreign
banks.35[35]

The petitioner then came to this Court via Rule 45 of the Rules of Court claiming that the Court
of Appeals erred in affirming the trial courts ruling that

RESPONDENTS ARE NOT LIABLE UNDER THE DEED OF UNDERTAKING THEY EXECUTED IN FAVOR
OF PETITIONER IN CONSIDERATION FOR THE ISSUANCE OF ITS COUNTER-GUARANTEE AND THAT
PETITIONER CANNOT PASS ON TO RESPONDENTS WHAT IT HAD PAID UNDER THE SAID COUNTER-
GUARANTEE.

II

PETITIONER CANNOT CLAIM SUBROGATION.

III

IT IS INIQUITOUS AND UNJUST FOR PETITIONER TO HOLD RESPONDENTS LIABLE UNDER THEIR
DEED OF UNDERTAKING.36[36]
The main issue in this case is whether the petitioner is entitled to reimbursement of what it paid
under Letter of Guarantee No. 81-194-F it issued to Al Ahli Bank of Kuwait based on the deed of
undertaking and surety bond from the respondents.

The petitioner asserts that since the guarantee it issued was absolute, unconditional, and
irrevocable the nature and extent of its liability are analogous to those of suretyship. Its liability
accrued upon the failure of the respondents to finish the construction of the Institute of Physical
Therapy Buildings in Baghdad.

By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the obligation
of the principal debtor in case the latter should fail to do so. If a person binds himself solidarily
with the principal debtor, the contract is called suretyship. 37[37]

Strictly speaking, guaranty and surety are nearly related, and many of the principles are common
to both. In both contracts, there is a promise to answer for the debt or default of another.
However, in this jurisdiction, they may be distinguished thus:

1. A surety is usually bound with his principal by the same instrument executed at the same time
and on the same consideration. On the other hand, the contract of guaranty is the guarantor's
own separate undertaking often supported by a consideration separate from that supporting the
contract of the principal; the original contract of his principal is not his contract.

2. A surety assumes liability as a regular party to the undertaking; while the liability of a guarantor
is conditional depending on the failure of the primary debtor to pay the obligation.

3. The obligation of a surety is primary, while that of a guarantor is secondary.

4. A surety is an original promissor and debtor from the beginning, while a guarantor is charged
on his own undertaking.

5. A surety is, ordinarily, held to know every default of his principal; whereas a guarantor is not
bound to take notice of the non-performance of his principal.

6. Usually, a surety will not be discharged either by the mere indulgence of the creditor to the
principal or by want of notice of the default of the principal, no matter how much he may be
injured thereby. A guarantor is often discharged by the mere indulgence of the creditor to the
principal, and is usually not liable unless notified of the default of the principal. 38[38]
In determining petitioners status, it is necessary to read Letter of Guarantee No. 81-194-F, which
provides in part as follows:

In consideration of your issuing the above performance guarantee/counter-guarantee, we

hereby unconditionally and irrevocably guarantee, under our Ref. No. LG-81-194 F to pay you on
your first written or telex demand Iraq Dinars Two Hundred Seventy One Thousand Eight
Hundred Eight and fils six hundred ten (ID271,808/610) representing 100% of the performance
bond required of V.P. EUSEBIO for the construction of the Physical Therapy Institute, Phase II,
Baghdad, Iraq, plus interest and other incidental expenses related thereto.

In the event of default by V.P. EUSEBIO, we shall pay you 100% of the obligation unpaid but in
no case shall such amount exceed Iraq Dinars (ID) 271,808/610 plus interest and other incidental
expenses. (Emphasis supplied)39[39]

Guided by the abovementioned distinctions between a surety and a guaranty, as well as the
factual milieu of this case, we find that the Court of Appeals and the trial court were correct in
ruling that the petitioner is a guarantor and not a surety. That the guarantee issued by the
petitioner is unconditional and irrevocable does not make the petitioner a surety. As a guaranty,
it is still characterized by its subsidiary and conditional quality because it does not take effect
until the fulfillment of the condition, namely, that the principal obligor should fail in his obligation
at the time and in the form he bound himself.40[40] In other words, an unconditional guarantee
is still subject to the condition that the principal debtor should default in his obligation first before
resort to the guarantor could be had. A conditional guaranty, as opposed to an unconditional
guaranty, is one which depends upon some extraneous event, beyond the mere default of the
principal, and generally upon notice of the principals default and reasonable diligence in
exhausting proper remedies against the principal.41[41]

It appearing that Letter of Guarantee No. 81-194-F merely stated that in the event of default by
respondent VPECI the petitioner shall pay, the obligation assumed by the petitioner was simply
that of an unconditional guaranty, not conditional guaranty. But as earlier ruled the fact that
petitioners guaranty is unconditional does not make it a surety. Besides, surety is never
presumed. A party should not be considered a surety where the contract itself stipulates that he
is acting only as a guarantor. It is only when the guarantor binds himself solidarily with the
principal debtor that the contract becomes one of suretyship.42[42]
Having determined petitioners liability as guarantor, the next question we have to grapple with
is whether the respondent contractor has defaulted in its obligations that would justify resort to
the guaranty. This is a mixed question of fact and law that is better addressed by the lower courts,
since this Court is not a trier of facts.

It is a fundamental and settled rule that the findings of fact of the trial court and the Court of
Appeals are binding or conclusive upon this Court unless they are not supported by the evidence
or unless strong and cogent reasons dictate otherwise.43[43] The factual findings of the Court of
Appeals are normally not reviewable by us under Rule 45 of the Rules of Court except when they
are at variance with those of the trial court. 44[44] The trial court and the Court of Appeals were
in unison that the respondent contractor cannot be considered to have defaulted in its
obligations because the cause of the delay was not primarily attributable to it.

A corollary issue is what law should be applied in determining whether the respondent contractor
has defaulted in the performance of its obligations under the service contract. The question of
whether there is a breach of an agreement, which includes default or mora,45[45] pertains to
the essential or intrinsic validity of a contract. 46[46]

No conflicts rule on essential validity of contracts is expressly provided for in our laws. The rule
followed by most legal systems, however, is that the intrinsic validity of a contract must be
governed by the lex contractus or proper law of the contract. This is the law voluntarily agreed
upon by the parties (the lex loci voluntatis) or the law intended by them either expressly or
implicitly (the lex loci intentionis). The law selected may be implied from such factors as
substantial connection with the transaction, or the nationality or domicile of the parties.47[47]
Philippine courts would do well to adopt the first and most basic rule in most legal systems,
namely, to allow the parties to select the law applicable to their contract, subject to the limitation
that it is not against the law, morals, or public policy of the forum and that the chosen law must
bear a substantive relationship to the transaction. 48[48]

It must be noted that the service contract between SOB and VPECI contains no express choice of
the law that would govern it. In the United States and Europe, the two rules that now seem to
have emerged as kings of the hill are (1) the parties may choose the governing law; and (2) in the
absence of such a choice, the applicable law is that of the State that has the most significant
relationship to the transaction and the parties.49[49] Another authority proposed that all
matters relating to the time, place, and manner of performance and valid excuses for non-
performance are determined by the law of the place of performance or lex loci solutionis, which
is useful because it is undoubtedly always connected to the contract in a significant way.50[50]

In this case, the laws of Iraq bear substantial connection to the transaction, since one of the
parties is the Iraqi Government and the place of performance is in Iraq. Hence, the issue of
whether respondent VPECI defaulted in its obligations may be determined by the laws of Iraq.
However, since that foreign law was not properly pleaded or proved, the presumption of identity
or similarity, otherwise known as the processual presumption, comes into play. Where foreign
law is not pleaded or, even if pleaded, is not proved, the presumption is that foreign law is the
same as ours.51[51]

Our law, specifically Article 1169, last paragraph, of the Civil Code, provides: In reciprocal
obligations, neither party incurs in delay if the other party does not comply or is not ready to
comply in a proper manner with what is incumbent upon him.

Default or mora on the part of the debtor is the delay in the fulfillment of the prestation by reason
of a cause imputable to the former. 52[52] It is the non-fulfillment of an obligation with respect
to time.53[53]

It is undisputed that only 51.7% of the total work had been accomplished. The 48.3% unfinished
portion consisted in the purchase and installation of electro-mechanical equipment and
materials, which were available from foreign suppliers, thus requiring US Dollars for their
importation. The monthly billings and payments made by SOB54[54] reveal that the agreement
between the parties was a periodic payment by the Project owner to the contractor depending
on the percentage of accomplishment within the period. 55[55] The payments were, in turn, to
be used by the contractor to finance the subsequent phase of the work. 56[56] However, as
explained by VPECI in its letter to the Department of Foreign Affairs (DFA), the payment by SOB
purely in Dinars adversely affected the completion of the project; thus:

4. Despite protests from the plaintiff, SOB continued paying the accomplishment billings of the
Contractor purely in Iraqi Dinars and which payment came only after some delays.

5. SOB is fully aware of the following:

5.2 That Plaintiff is a foreign contractor in Iraq and as such, would need foreign currency (US$),
to finance the purchase of various equipment, materials, supplies, tools and to pay for the cost
of project management, supervision and skilled labor not available in Iraq and therefore have to
be imported and or obtained from the Philippines and other sources outside Iraq.

5.3 That the Ministry of Labor and Employment of the Philippines requires the remittance into
the Philippines of 70% of the salaries of Filipino workers working abroad in US Dollars;

5.5 That the Iraqi Dinar is not a freely convertible currency such that the same cannot be used to
purchase equipment, materials, supplies, etc. outside of Iraq;

5.6 That most of the materials specified by SOB in the CONTRACT are not available in Iraq and
therefore have to be imported;

5.7 That the government of Iraq prohibits the bringing of local currency (Iraqui Dinars) out of
Iraq and hence, imported materials, equipment, etc., cannot be purchased or obtained using
Iraqui Dinars as medium of acquisition.

8. Following the approved construction program of the CONTRACT, upon completion of the civil
works portion of the installation of equipment for the building, should immediately follow,
however, the CONTRACT specified that these equipment which are to be installed and to form
part of the PROJECT have to be procured outside Iraq since these are not being locally
manufactured. Copy f the relevant portion of the Technical Specification is hereto attached as
Annex C and made an integral part hereof;

10. Due to the lack of Foreign currency in Iraq for this purpose, and if only to assist the Iraqi
government in completing the PROJECT, the Contractor without any obligation on its part to do
so but with the knowledge and consent of SOB and the Ministry of Housing & Construction
of Iraq, offered to arrange on behalf of SOB, a foreign currency loan, through the facilities of
Circle International S.A., the Contractors Sub-contractor and SACE MEDIO CREDITO which will act
as the guarantor for this foreign currency loan.
Arrangements were first made with Banco di Roma. Negotiation started in June 1985. SOB is
informed of the developments of this negotiation, attached is a copy of the draft of the loan
Agreement between SOB as the Borrower and Agent. The Several Banks, as Lender, and counter-
guaranteed by Istituto Centrale Per II Credito A Medio Termine (Mediocredito) Sezione Speciale
Per LAssicurazione Del Credito AllExportazione (Sace). Negotiations went on and continued until
it suddenly collapsed due to the reported default by Iraq in the payment of its obligations with
Italian government, copy of the news clipping dated June 18, 1986 is hereto attached as Annex
D to form an integral part hereof;

15. On September 15, 1986, Contractor received information from Circle International S.A. that
because of the news report that Iraq defaulted in its obligations with European banks, the
approval by Banco di Roma of the loan to SOB shall be deferred indefinitely, a copy of the letter
of Circle International together with the news clippings are hereto attached as Annexes F and F-
1, respectively.57[57]

As found by both the Court of Appeals and the trial court, the delay or the non-completion of the
Project was caused by factors not imputable to the respondent contractor. It was rather due
mainly to the persistent violations by SOB of the terms and conditions of the contract, particularly
its failure to pay 75% of the accomplished work in US Dollars. Indeed, where one of the parties
to a contract does not perform in a proper manner the prestation which he is bound to perform
under the contract, he is not entitled to demand the performance of the other party. A party
does not incur in delay if the other party fails to perform the obligation incumbent upon him.

The petitioner, however, maintains that the payments by SOB of the monthly billings in purely
Iraqi Dinars did not render impossible the performance of the Project by VPECI. Such posture is
quite contrary to its previous representations. In his 26 March 1987 letter to the Office of the
Middle Eastern and African Affairs (OMEAA), DFA, Manila, petitioners Executive Vice-President
Jesus M. Taedo stated that while VPECI had taken every possible measure to complete the
Project, the war situation in Iraq, particularly the lack of foreign exchange, was proving to be a
great obstacle; thus:

VPECI has taken every possible measure for the completion of the project but the war situation
in Iraq particularly the lack of foreign exchange is proving to be a great obstacle. Our performance
counterguarantee was called last 26 October 1986 when the negotiations for a foreign currency
loan with the Italian government through Banco de Roma bogged down following news report
that Iraq has defaulted in its obligation with major European banks. Unless the situation in Iraq
is improved as to allay the banks apprehension, there is no assurance that the project will ever
be completed. 58[58]
In order that the debtor may be in default it is necessary that the following requisites be present:
(1) that the obligation be demandable and already liquidated; (2) that the debtor delays
performance; and (3) that the creditor requires the performance because it must appear that the
tolerance or benevolence of the creditor must have ended. 59[59]

As stated earlier, SOB cannot yet demand complete performance from VPECI because it has not
yet itself performed its obligation in a proper manner, particularly the payment of the 75% of the
cost of the Project in US Dollars. The VPECI cannot yet be said to have incurred in delay. Even
assuming that there was delay and that the delay was attributable to VPECI, still the effects of
that delay ceased upon the renunciation by the creditor, SOB, which could be implied when the
latter granted several extensions of time to the former. 60[60] Besides, no demand has yet been
made by SOB against the respondent contractor. Demand is generally necessary even if a period
has been fixed in the obligation. And default generally begins from the moment the creditor
demands judicially or extra-judicially the performance of the obligation. Without such demand,
the effects of default will not arise.61[61]

Moreover, the petitioner as a guarantor is entitled to the benefit of excussion, that is, it cannot
be compelled to pay the creditor SOB unless the property of the debtor VPECI has been
exhausted and all legal remedies against the said debtor have been resorted to by the
creditor.62[62] It could also set up compensation as regards what the creditor SOB may owe the
principal debtor VPECI.63[63] In this case, however, the petitioner has clearly waived these rights
and remedies by making the payment of an obligation that was yet to be shown to be rightfully
due the creditor and demandable of the principal debtor.

As found by the Court of Appeals, the petitioner fully knew that the joint venture contractor had
collectibles from SOB which could be set off with the amount covered by the performance
guarantee. In February 1987, the OMEAA transmitted to the petitioner a copy of a telex dated 10
February 1987 of the Philippine Ambassador in Baghdad, Iraq, informing it of the note verbale
sent by the Iraqi Ministry of Foreign Affairs stating that the past due obligations of the joint
venture contractor from the petitioner would be deducted from the dues of the two
contractors.64[64]
Also, in the project situationer attached to the letter to the OMEAA dated 26 March 1987, the
petitioner raised as among the arguments to be presented in support of the cancellation of the
counter-guarantee the fact that the amount of ID281,414/066 retained by SOB from the Project
was more than enough to cover the counter-guarantee of ID271,808/610; thus:

6.1 Present the following arguments in cancelling the counterguarantee:

The Iraqi Government does not have the foreign exchange to fulfill its contractual obligations
of paying 75% of progress billings in US dollars.

It could also be argued that the amount of ID281,414/066 retained by SOB from the
proposed project is more than the amount of the outstanding counterguarantee.65[65]

In a nutshell, since the petitioner was aware of the contractors outstanding receivables from SOB,
it should have set up compensation as was proposed in its project situationer.

Moreover, the petitioner was very much aware of the predicament of the respondents. In fact,
in its 13 May 1987 letter to the OMEAA, DFA, Manila, it stated:

VPECI also maintains that the delay in the completion of the project was mainly due to SOBs
violation of contract terms and as such, call on the guarantee has no basis.

While PHILGUARANTEE is prepared to honor its commitment under the guarantee,

PHILGUARANTEE does not want to be an instrument in any case of inequity committed against a
Filipino contractor. It is for this reason that we are constrained to seek your assistance not only
in ascertaining the veracity of Al Ahli Banks claim that it has paid Rafidain Bank but possibly
averting such an event. As any payment effected by the banks will complicate matters, we cannot
help underscore the urgency of VPECIs bid for government intervention for the amicable
termination of the contract and release of the performance guarantee. 66[66]

But surprisingly, though fully cognizant of SOBs violations of the service contract and VPECIs
outstanding receivables from SOB, as well as the situation obtaining in the Project site
compounded by the Iran-Iraq war, the petitioner opted to pay the second layer guarantor not
only the full amount of the performance bond counter-guarantee but also interests and penalty
charges.
This brings us to the next question: May the petitioner as a guarantor secure reimbursement
from the respondents for what it has paid under Letter of Guarantee No. 81-194-F?

As a rule, a guarantor who pays for a debtor should be indemnified by the latter67[67] and would
be legally subrogated to the rights which the creditor has against the debtor.68[68] However, a
person who makes payment without the knowledge or against the will of the debtor has the right
to recover only insofar as the payment has been beneficial to the debtor.69[69] If the obligation
was subject to defenses on the part of the debtor, the same defenses which could have been set
up against the creditor can be set up against the paying guarantor.70[70]

From the findings of the Court of Appeals and the trial court, it is clear that the payment made
by the petitioner guarantor did not in any way benefit the principal debtor, given the project
status and the conditions obtaining at the Project site at that time. Moreover, the respondent
contractor was found to have valid defenses against SOB, which are fully supported by evidence
and which have been meritoriously set up against the paying guarantor, the petitioner in this
case. And even if the deed of undertaking and the surety bond secured petitioners guaranty, the
petitioner is precluded from enforcing the same by reason of the petitioners undue payment on
the guaranty. Rights under the deed of undertaking and the surety bond do not arise because
these contracts depend on the validity of the enforcement of the guaranty.

The petitioner guarantor should have waited for the natural course of guaranty: the debtor VPECI
should have, in the first place, defaulted in its obligation and that the creditor SOB should have
first made a demand from the principal debtor. It is only when the debtor does not or cannot
pay, in whole or in part, that the guarantor should pay.71[71] When the petitioner guarantor in
this case paid against the will of the debtor VPECI, the debtor VPECI may set up against it defenses
available against the creditor SOB at the time of payment. This is the hard lesson that the
petitioner must learn.

As the government arm in pursuing its objective of providing the necessary support and
assistance in order to enable [Filipino exporters and contractors to operate viably under the
prevailing economic and business conditions,72[72] the petitioner should have exercised
prudence and caution under the circumstances. As aptly put by the Court of Appeals, it would be
the height of inequity to allow the petitioner to pass on its losses to the Filipino contractor VPECI
which had sternly warned against paying the Al Ahli Bank and constantly apprised it of the
developments in the Project implementation.

WHEREFORE, the petition for review on certiorari is hereby DENIED for lack of merit, and the
decision of the Court of appeals in CA-G.R. CV No. 39302 is AFFIRMED.