THIRD DIVISION

EDGARDO PINGA, G.R. No. 170354

Petitioner,
Present:

QUISUMBING, J.,
- versus - Chairperson,
CARPIO,
CARPIO MORALES,
THE HEIRS OF GERMAN TINGA, and
SANTIAGO represented by VELASCO, JR. JJ.,
FERNANDO SANTIAGO,
Respondents.

x--------------------------------------------------------------------------------x

D E C I S I O N

TINGA, J.:

The constitutional Iaculty oI the Court to promulgate rules oI practice and
procedure
|1|
necessarily carries the power to overturn judicial precedents on points oI remedial
law through the amendment oI the Rules oI Court. One oI the notable changes introduced in
the 1997 Rules oI Civil Procedure is the explicit proviso that iI a complaint is dismissed due to
Iault oI the plaintiII, such dismissal is 'without prejudice to the right oI the deIendant to
prosecute his counterclaim in the same or in a separate action.
|2|
The innovation was
instituted in spite oI previous jurisprudence holding that the Iact oI the dismissal oI the
complaint was suIIicient to justiIy the dismissal as well oI the compulsory counterclaim.
|3|


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

The relevant Iacts are simple enough. Petitioner Eduardo Pinga was named as one oI
two deIendants in a complaint Ior injunction
|4|
Iiled with Branch 29 oI the Regional Trial
Court (RTC)
|5|
oI San Miguel, Zamboanga del Sur, by respondent Heirs oI German Santiago,
represented by Fernando Santiago. The Complaint
|6|
dated 28 May 1998 alleged in essence that
petitioner and co-deIendant Vicente Saavedra had been unlawIully entering the coco lands oI
the respondent, cutting wood and bamboos and harvesting the Iruits oI the coconut trees
therein. Respondents prayed that petitioner and Saavedra be enjoined Irom committing 'acts
oI depredation on their properties, and ordered to pay damages.

In their Amended Answer with Counterclaim,
|7|
petitioner and his co-deIendant disputed
respondents` ownership oI the properties in question, asserting that petitioner`s Iather,
Edmundo Pinga, Irom whom deIendants derived their interest in the properties, had been in
possession thereoI since the 1930s.
|8|
They alleged that as Iar back as 1968, respondents had
already been ordered ejected Irom the properties aIter a complaint Ior Iorcible entry was Iiled
by the heirs oI Edmundo Pinga. It was Iurther claimed that respondents` application Ior Iree
patent over the properties was rejected by the OIIice oI the President in 1971. DeIendants in
turn prayed that owing to respondents` Iorcible re-entry in the properties and the irresponsible
and reckless Iiling oI the case, they be awarded various types oI damages instead in amounts
totaling P2,100,000 plus costs oI suit.
|9|


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


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


Respondents Iiled a Motion Ior Reconsideration
|13|
oI 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 Irom presenting
evidence ex-parte. Respondents claimed that the order oI the RTC allowing petitioner to
present evidence ex-parte was not in accord with established jurisprudence. They cited cases,
particularly City of Manila v. Ruymann
|14|
and Domingo v. Santos,
|15|
which noted those
instances in which a counterclaim could not remain pending Ior independent adjudication.
On 9 August 2005, the RTC promulgated an order granting respondents` Motion Ior
Reconsideration and dismissing the counterclaim, citing as the only ground thereIor that 'there
is no opposition to the Motion Ior Reconsideration oI the |respondents|.
|16|
Petitioner Iiled a
Motion Ior Reconsideration, but the same was denied by the RTC in an Order dated 10
October 2005.
|17|
Notably, respondents Iiled an Opposition to DeIendants` Urgent Motion Ior
Reconsideration, wherein they argued that the prevailing jurisprudential rule
|18|
is that
'compulsory counterclaims cannot be adjudicated independently oI plaintiII`s cause oI
action, and 'a conversu, the dismissal oI the complaint carries with it the dismissal oI the
compulsory counterclaims.
|19|


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

We hold that under Section 3, Rule 17 oI the 1997 Rules oI Civil Procedure, the
dismissal oI the complaint due to the Iault oI plaintiII does not necessarily carry with it the
dismissal oI the counterclaim, compulsory or otherwise. In Iact, the dismissal oI the complaint
is without prejudice to the right oI deIendants to prosecute the counterclaim.
On a preIatory note, the RTC, in dismissing the counterclaim, did not expressly
adopt respondents` argument that the dismissal oI their complaint extended as well to the
counterclaim. Instead, the RTC justiIied the dismissal oI the counterclaim on the ground that
'there is no opposition to |plaintiII`s| Motion Ior Reconsideration |seeking the dismissal oI the
counterclaim|.
|20|
This explanation is hollow, considering that there is no mandatory rule
requiring that an opposition be Iiled to a motion Ior reconsideration without need Ior a court
order to that eIIect; and, as posited by petitioner, the 'Iailure to Iile an opposition to the
PlaintiII`s Motion Ior Reconsideration is deIinitely not one among the established grounds Ior
dismissal |oI the counterclaim|.
|21|
Still, the dismissal oI the counterclaim by the RTC betrays
at very least a tacit recognition oI respondents` argument that the counterclaim did not survive
the dismissal oI the complaint. At most, the dismissal oI the counterclaim over the objection oI
the deIendant (herein petitioner) on grounds other than the merits oI the counterclaim, despite
the provisions under Rule 17 oI the 1997 Rules oI Civil Procedure, constitutes a debatable
question oI law, presently meriting justiciability through the instant action. Indeed, in
reviewing the assailed orders oI the RTC, it is inevitable that the Court consider whether the
dismissal oI the complaint, upon motion oI the deIendant, on the ground oI the Iailure to
prosecute on plaintiII`s part precipitates or carries with it the dismissal oI the pending
counterclaims.

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

SEC. 3. Dismissal due to fault of plaintiff.II, Ior no justiIiable
cause, the plaintiII Iails to appear on the date oI the presentation oI his
evidence in chieI on the complaint, or to prosecute his action Ior an
unreasonable length oI time, or to comply with these Rules or any order oI
the court, the complaint may be dismissed upon motion oI deIendant or
upon the court's own motion, without prejudice to the right oI the
deIendant to prosecute his counterclaim in the same or in a separate
action. This dismissal shall have the eIIect oI an adjudication upon the
merits, unless otherwise declared by the court.


The express qualiIication in the provision that the dismissal oI the complaint due to the
plaintiII`s Iault, as in the case Ior Iailure to prosecute, is without prejudice to the right oI the
deIendant to prosecute his counterclaim in the same or separate action. This stands in marked
contrast to the provisions under Rule 17 oI the 1964 Rules oI Court which were superseded by
the 1997 amendments. In the 1964 Rules, dismissals due to Iailure to prosecute were governed
by Section 3, Rule 17, to wit:

SEC. 3. Failure to prosecute. II plaintiII Iails to appear at the
time oI the trial, or to prosecute his action Ior an unreasonable length oI
time, or to comply with these rules or any order oI the court, the action
may be dismissed upon motion oI the deIendant or upon the court`s own
motion. This dismissal shall have the eIIect oI an adjudication upon the
merits, unless otherwise provided by court.


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

In their arguments beIore the RTC on the dismissal
oI the counterclaim, respondents cited in support City of Manila v.
Ruymann,
|23|
Domingo v. Santos,
|24|
Belle:a v. Huntington,
|25|
and Froilan v. Pan Oriental
Shipping Co.,
|26|
all oI which were decided more than Iive decades ago. Notably though, none
oI the complaints in these Iour cases were dismissed either due to the Iault oI the plaintiII or
upon the instance oI the deIendant.
|27|



The distinction is relevant, Ior under the previous and current incarnations oI the
Rules oI Civil Procedure, it is Section 3, Rule 17 that governs the dismissals due to the Iailure
oI the plaintiII 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 oI the plaintiII.
|28|
Yet, as will be seen in the Ioregoing discussion, a
discussion oI 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 diIIerent Iactual antecedents, there
exists more appropriate precedents which they could have cited in support oI their claim that
the counterclaim should have been dismissed even iI the dismissal oI the complaint was upon
the deIendants` motion and was predicated on the plaintiII`s Iault. BA Finance Corp. v.
Co
|29|
particularly stands out in that regard, although that ruling is itselI grounded on other
precedents as well. Elucidation oI these cases is in order.


On the general eIIect oI the dismissal oI a complaint, regardless oI cause, on the
pending counterclaims, previous jurisprudence laid emphasis on whether the counterclaim was
compulsory or permissive in character. The necessity oI such distinction was provided in the
1964 Rules itselI, particularly Section 2, Rule 17, which stated that in instances wherein the
plaintiII seeks the dismissal oI the complaint, 'iI a counterclaim has been pleaded by a
deIendant prior to the service upon him oI the plaintiII`s motion to dismiss, the action shall not
be dismissed against the deIendant`s objection unless the counterclaim can remain pending
Ior independent adjudication by the court.
|30|
The vaunted commentaries oI ChieI Justice
Moran, remarking on Section 2, Rule 17, noted that '|t|here are instances in which a
counterclaim cannot remain pending Ior independent adjudication, as, where it arises out oI, or
is necessarily connected with, the transaction or occurrence which is the subject matter oI the
opposing party`s claim.
|31|


This view expressed in Moran`s Commentaries was adopted by the Court in cases where
the application oI Section 2, Rule 17 oI the 1964 Rules oI Court was called Ior, such as in Lim
Tanhu v. Ramolete,
|32|
and Dalman v. City Court of Dipolog City.
|33|
The latter case warrants
brieI elaboration. Therein, the plaintiII in a civil case Ior damages moved Ior the withdrawal
oI her own case on the ground that the dispute had not been reIerred to the barangay council as
required by law. Over the objection oI the deIendant, who Ieared that her own counterclaim
would be prejudiced by the dismissal, plaintiII`s motion was granted, the complaint and the
counterclaim accordingly dismissed by the trial court. The Court reIused to reinstate the
counterclaim, opining without elaboration, '|i|I the civil case is dismissed, so also is the
counterclaim Iiled therein.
|34|
The broad nature oI that statement gave rise to the notion
that the mandatory
dismissal oI the counterclaim upon dismissal oI the complaint applied regardless oI the cause
oI the complaint`s dismissal.
|35|


Notably, the qualiIication concerning compulsory counterclaims was provided in
Section 2, Rule 17 oI the 1964 Rules, the provision governing dismissals by order oI the court,
and not Section 3, Rule 17. As stated earlier, Section 3, which covered dismissals Ior Iailure to
prosecute upon motion oI the deIendant or uponmotu proprio action oI the trial court, was
silent on the eIIect on the counterclaim oI dismissals oI such nature.

Spouses Sta. Maria, Jr. v. Court of Appeals,
|36|
decided in 1972, ostensibly supplied the
gap on the eIIect on the counterclaim oI complaints dismissed under Section 3. The deIendants
therein successIully moved beIore the trial court Ior the dismissal oI the complaint without
prejudice and their declaration in deIault on the counterclaim aIter plaintiIIs therein Iailed to
attend the pre-trial. AIter Iavorable judgment was rendered on the counterclaim, plaintiIIs
interposed an appeal, citing among other grounds, that the counterclaim could no longer have
been heard aIter the dismissal oI the complaint. While the Court noted that the adjudication oI
the counterclaim in question 'does not depend upon the adjudication oI the claims made in the
complaint since they were virtually abandoned by the non-appearance oI the plaintiIIs
themselves, it was also added that '|t|he doctrine invoked is not available to plaintiIIs like the
petitioners, who prevent or delay the hearing oI 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 oI
counterclaims would be made to depend upon the maneuvers oI the
plaintiII, and the rule would oIIer a premium to vexing or delaying tactics
to the prejudice oI the counterclaimants. It is in the same spirit that we
have ruled that a complaint may not be withdrawn over the opposition oI
the deIendant where the counterclaim is one that arises Irom, or is
necessarily connected with, the plaintiII`s action and cannot remain
pending Ior independent adjudication.
|38|


There is no doubt that under the 1964 Rules, the dismissal oI a complaint due to the
Iailure oI the plaintiII to appear during pre-trial, as what had happened in Sta. Maria, Iell
within the coverage oI Section 3, Rule 17. On the other hand, Section 2 was clearly limited in
scope to those dismissals sustained at the instance oI the plaintiII.
|39|
Nonetheless, by the early
1990s, jurisprudence was settling on a rule that compulsory counterclaims were necessarily
terminated upon the dismissal oI the complaint not only iI such dismissal was upon motion oI
the plaintiII, but at the instance oI the deIendant as well. Two decisions Irom that period stand
out in this regard, Metals Engineering Resources Corp. v. Court of
Appeals
|40|
and International Container Terminal Services v. Court of Appeals.
|41|


In Metals, the complaint was expunged Irom the record aIter the deIendant had Iiled
a motion Ior reconsideration oI a trial court order allowing the Iiling oI an amended complaint
that corrected a jurisdictional error in the original complaint pertaining to the speciIication oI
the amount oI damages sought. When the deIendant was nonetheless allowed to present
evidence on the counterclaim, the plaintiII assailed such allowance on the ground that the
counterclaim was compulsory and could no longer remain pending Ior independent
adjudication. The Court, in Iinding Ior the plaintiII, 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 thereIrom.
|42|
It was Iurther explained that the doctrine was in
consonance with the primary objective oI a counterclaim, which was to avoid and prevent
circuitry oI action by allowing the entire controversy between the parties to be litigated and
Iinally determined in one action, and to discourage multiplicity oI suits.
|43|
Also, the Court
noted that since the complaint was dismissed Ior lack oI jurisdiction, it was as iI no claim was
Iiled against the deIendant, and there was thus no more leg Ior the complaint to stand on.
|44|


In International Container, the deIendant Iiled a motion to dismiss which was
granted by the trial court. The deIendant`s counterclaim was dismissed as well. The Court
summarized the key question as 'what is the eIIect oI the dismissal oI a complaint ordered at
the instance oI the deIendant upon a compulsory counterclaim duly raised in its
answer.
|45|
Then it ruled that the counterclaim did not survive such dismissal. AIter
classiIying the counterclaim therein as compulsory, the Court noted that '|i|t is obvious Irom
the very nature oI the counterclaim that it could not remain pending Ior independent
adjudication, that is, without adjudication by the court oI the complaint itselI on which the
counterclaim was based.
|46|


Then in 1993, a divided Court ruled in BA Finance that the dismissal oI the
complaint Ior nonappearance oI plaintiII at the pre-trial, upon motion oI the deIendants,
carried with it the dismissal oI their compulsory counterclaim.
|47|
The Court reiterated the rule
that 'a compulsory counterclaim cannot remain pending Ior independent adjudication by the
court. as it is auxiliary to the proceeding in the original suit and merely derives its
jurisdictional support thereIrom.
|48|
Express reliance was made on Metals, International
Container, and even Dalman in support oI the majority`s thesis. BA Finance likewise advised
that the proper remedy Ior deIendants desirous that their counterclaims not be dismissed along
with the main complaint was Ior them to move to declare the plaintiIIs to be 'non-suited on
their complaint and 'as in deIault on their compulsory counterclaim, instead oI moving Ior
the dismissal oI the complaint.
|49|


Justice Regalado, joined by ChieI Justice Narvasa, registered a strong objection to
the theory oI the majority. They agreed that the trial court could no longer hear the
counterclaim, but only on the ground that deIendant`s motion to be allowed to present
evidence on the counterclaim was Iiled aIter the order dismissing the complaint had already
become Iinal. They disagreed however that the compulsory counterclaim was necessarily
dismissed along with the main complaint, pointing out that a situation wherein the dismissal oI
the complaint was occasioned by plaintiII`s Iailure to appear during pre-trial was governed
under Section 3, Rule 17, and not Section 2 oI 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 thereoI, to curb any
dubious or Irivolous strategy oI plaintiII Ior his beneIit or to obviate
possible prejudice to deIendant, the Iormer may not dismiss his complaint
over the deIendant's objection iI the latter has a compulsory counterclaim
since said counterclaim would necessarily be divested oI juridical basis
and deIendant would be deprived oI 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
ormotu 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 relieI can nevertheless be granted as a matter oI course to
deIendant on his counterclaim as alleged and proved, with or without any
reservation thereIor on his part, unless Irom his conduct, express or
implied, he has virtually consented to the concomitant dismissal oI 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 plaintiII. He
pointed out that Dalman and International Container, both relied upon by the majority,
involved the application oI Section 2, Rule 17 and not Section 3, which he insisted as the
applicable provision in the case at bar.
|51|


The partial dissent oI Justice Regalado in BA Finance proved opportune, as he happened
then to be a member oI the Rules oI Court Revision Committee tasked with the revision oI the
1964 Rules oI Court. Just a Iew months aIter BA Finance was decided, Justice Regalado
proposed beIore the Committee an amendment to Section 3, Rule 17 that would explicitly
provide that the dismissal oI the complaint due to the Iault oI the plaintiII shall be 'without
prejudice to the right oI the deIendant to prosecute his counterclaim in the same or in a
separate action. The amendment, which was approved by the Committee, is reIlected in the
minutes oI the meeting oI the Committee held on 12 October 1993:

|Justice Regalado| then proposed that aIter the words 'upon the
court`s own motion in the 6
th
line oI the draIt in Sec. 3 oI Rule 17, the
Iollowing 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
1ustice Regalado.

Justice Herrera observed that under Secs. 1 to 3 oI 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 oI the plaintiII is initiated by his complaint.

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

C 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.

1ustice 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 Irom these minutes that the survival oI the counterclaim despite the
dismissal oI the complaint under Section 3 stood irrespective oI whether the counterclaim was
permissive or compulsory. Moreover, when the Court itselI approved the revisions now
contained in the 1997 Rules oI Civil Procedure, not only did Justice Regalado`s amendment to
Section 3, Rule 17 remain intact, but the Iinal version likewise eliminated the qualiIication
Iormerly oIIered under Section 2 on 'counterclaims that can remain pending Ior independent
adjudication by the court.
|53|
At present, even Section 2, concerning dismissals on motion oI
the plaintiII, now recognizes the right oI the deIendant to prosecute the counterclaim either in
the same or separate action notwithstanding the dismissal oI the complaint, and without regard
as to the permissive or compulsory nature oI the counterclaim.

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

2. Under this revised section |2|, where the plaintiff moves Ior the
dismissal oI 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 oI the deIendant to either prosecute his
counterclaim in a separate action or to have the same resolved in the same
action. Should he opt Ior the Iirst 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 oI in the same action wherein the complaint had been dismissed,
he must maniIest such preIerence to the trial court within 15 days Irom
notice to him oI plaintiII`s 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 thereIor, is adopted in Sec. 6,
Rule 16 and Sec. 3 oI this Rule, wherein the complaint is dismissed on the
motion oI the defendant or, in the latter instance, also by the court motu
proprio.

x x x x

2. The second substantial amendment to |Section 3| is with
respect to the disposition oI the deIendant`s counterclaim in the event the
plaintiII`s 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. ith 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 Finance
Corporation vs. Co, et al., (G.R. No. 105751, 1une 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 author`s separate opinion in that case, even beIore they
were clariIied by the present amendments x x x.
|54|


Similarly, Justice Feria notes that 'the present rule reaIIirms the right oI the deIendant
to move Ior the dismissal oI the complaint and to prosecute his counterclaim, as stated in the
separate opinion |oI Justice Regalado in BA Finance.|
|55|
Retired Court oI Appeals Justice
Herrera pronounces that the amendment to Section 3, Rule 17 settles that 'nagging question
whether the dismissal oI the complaint carries with it the dismissal oI the counterclaim, and
opines that by reason oI the amendments, the rulings in Metals Engineering, International
Container, and BA Finance 'may be deemed abandoned.
|56|
On the eIIect oI amendment to
Section 3, Rule 17, the commentators are in general agreement,
|57|
although there is less
unanimity oI views insoIar as Section 2, Rule 17 is concerned.
|58|


To be certain, when the Court promulgated the 1997 Rules oI Civil Procedure, including
the amended Rule 17, those previous jural doctrines that were inconsistent with the new rules
incorporated in the 1997 Rules oI Civil Procedure were implicitly abandoned insoIar as
incidents arising aIter the eIIectivity oI 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 conIlicts with the 1997 Rules oI Civil Procedure. The abandonment oI BA
Finance as doctrine extends as Iar back as 1997, when the Court adopted the new Rules oI
Civil Procedure. II, since then, such abandonment has not been aIIirmed in jurisprudence, it is
only because no proper case has arisen that would warrant express conIirmation oI the new
rule. That opportunity is here and now, and we thus rule that the dismissal oI a complaint due
to Iault oI the plaintiII is without prejudice to the right oI the deIendant to prosecute any
pending counterclaims oI whatever nature in the same or separate action. We conIirm that BA
Finance and all previous rulings oI the Court that are inconsistent with this present holding are
now abandoned.

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

It would be perIectly satisIactory Ior the Court to leave this matter at that. Still, an
explanation oI the reason behind the new rule is called Ior, considering that the rationale
behind the previous rule was Irequently elaborated upon.

Under Act No. 190, or the Code oI Procedure in Civil Actions promulgated in 1901,
it was recognized in Section 127(1) that the plaintiII had the right to seek the dismissal oI the
complaint at any time beIore trial, 'provided a counterclaim has not been made, or aIIirmative
relieI sought by the cross-complaint or answer oI the deIendant.
|59|
Note that no qualiIication
was made then as to the nature oI the counterclaim, whether it be compulsory or permissive.
The protection oI the deIendant`s right to prosecute the counterclaim was indeed unqualiIied.
In City of Manila, decided in 1918, the Court explained:

By paragraph 1 |oI Section 127|, it will be seen that, where the
deIendant has interposed a counterclaim, or is seeking aIIirmative relieI by
a cross-complaint, that then, and in that case, the plaintiII cannot dismiss
the action so as to aIIect the right oI the deIendant in his counterclaim or
prayer Ior aIIirmative relieI. The reason Ior that exception is clear. hen
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
thedefendant's action.
|60|


Nonetheless, a new rule was introduced when Act No. 190 was replaced by the 1940
Rules oI Court. Section 2, Rule 30 oI the 1940 Rules speciIied that iI a counterclaim is
pleaded by a deIendant prior to the service oI the plaintiII`s motion to dismiss, the action shall
not be dismissed against the deIendant`s objection unless the counterclaim can remain pending
Ior independent adjudication by the court. This qualiIication remained intact when the 1964
Rules oI Court was introduced.
|61|
The rule reIerred only to compulsory counterclaims, or
counterclaims which arise out oI or are necessarily connected with the transaction or
occurrence that is the subject matter oI the plaintiII`s claim, since the rights oI the parties
arising out oI 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 deIendant with the pending counterclaim, and not the plaintiII,
that moved Ior the dismissal oI the complaint.


We should not ignore the theoretical bases oI the rule distinguishing compulsory
counterclaims Irom permissive counterclaims insoIar as the dismissal oI the action is
concerned. There is a particular school oI thought that inIorms the broad proposition
in Dalman that 'iI the civil case is dismissed, so also is the counterclaim Iiled therein,
|63|
or
the more nuanced discussions oIIered in Metals, International Container, and BA Finance. The
most potent statement oI the theory may be Iound in Metals,
|64|
which proceeds Irom the
Iollowing Iundamental 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 oI auter action pendant, litis pendentia or res fudicata; a compulsory counterclaim is
auxiliary to the main suit and derives its jurisdictional support thereIrom as it arises out oI or is
necessarily connected with the transaction or occurrence that is the subject matter oI the
complaint;
|65|
and that iI the court dismisses the complaint on the ground oI lack oI jurisdiction,
the compulsory counterclaim must also be dismissed as it is merely ancilliary to the main
action and no jurisdiction remained Ior any grant oI relieI under the counterclaim.

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

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

It would then seemingly Iollow that iI the dismissal oI the complaint somehow
eliminates the cause(s) oI the counterclaim, then the counterclaim cannot survive. Yet that
hardly is the case, especially as a general rule. ore often than not, the allegations that
form the counterclaim are rooted in an act or omission of the plaintiff other than the
plaintiff`s very act of filing the complaint. oreover, 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
defendant`s 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 oI or is connected with the transaction or
occurrence constituting the subject matter oI the opposing party`s claim, does not require Ior
its adjudication the presence oI third parties, and stands within the jurisdiction oI the court both
as to the amount involved and the nature oI the claim.
|68|
The Iact that the culpable acts on
which the counterclaim is based are Iounded within the same transaction or occurrence as the
complaint, is insuIIicient causation to negate the counterclaim together with the complaint. The
dismissal or withdrawal oI the complaint does not traverse the boundaries oI time to undo the
act or omission oI the plaintiII against the deIendant, or vice versa. While such dismissal or
withdrawal precludes the pursuit oI litigation by the plaintiII, either through his/her own
initiative or Iault, it would be iniquitous to similarly encumber the deIendant who maintained
no such initiative or Iault. II the deIendant similarly moves Ior the dismissal oI the
counterclaim or neglects to timely pursue such action, let the dismissal oI the counterclaim be
premised on those grounds imputable to the deIendant, and not on the actuations oI the
plaintiII.

The other considerations supplied in Metals are anchored on the premise that the
jurisdictional Ioundation oI the counterclaim is the complaint itselI. The theory is correct, but
there are other Iacets to this subject that should be taken into account as well. On the
established premise that a counterclaim involves separate causes oI action than the complaint
even iI derived Irom the same transaction or series oI transactions, the counterclaim could have
very well been lodged as a complaint had the deIendant Iiled the action ahead oI the
complainant.
|69|
The terms 'ancillary or 'auxiliary may mislead in signiIying 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 chieIly the
oIIshoot oI an accident oI chronology, more than anything else.

The Iormalistic distinction between a complaint and a counterclaim does not detract
Irom the Iact that both oI them embody causes oI action that have in their end the vindication
oI rights. While the distinction is necessary as a means to Iacilitate order and clarity in the rules
oI procedure, it should be remembered that the primordial purpose oI procedural rules is to
provide the means Ior the vindication oI rights. A party with a valid cause oI action against
another party cannot be denied the right to relieI simply because the opposing side had the
good Iortune oI Iiling the case Iirst. Yet this in eIIect was what had happened under the
previous procedural rule and correspondent doctrine, which under their Iinal permutation,
prescribed the automatic dismissal oI the compulsory counterclaim upon the dismissal oI the
complaint, whether upon the initiative oI the plaintiII or oI the deIendant.

Thus, the present rule embodied in Sections 2 and 3 oI Rule 17 ordains a more equitable
disposition oI the counterclaims by ensuring that any judgment thereon is based on the merit oI
the counterclaim itselI and not on the survival oI the main complaint. Certainly, iI the
counterclaim is palpably without merit or suIIers jurisdictional Ilaws which stand independent
oI the complaint, the trial court is not precluded Irom dismissing it under the amended rules,
provided that the judgment or order dismissing the counterclaim is premised on those deIects.
At the same time, iI the counterclaim is justiIied, the amended rules now unequivocally protect
such counterclaim Irom peremptory dismissal by reason oI the dismissal oI the complaint.

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

SO ORDERED.


KOREA EXCHANGE BANK, petitioner, vs. HON. ROGELIO C. GONZALES, in his
capacity as Presiding Judge of Branch 50 of the RegionaI TriaI Court of
Pampanga, PHI-HAN DEVELOPMENT, INC., LOURDES DE MESA
MENDOZA, MENELEO MENDOZA, ANTUSA DE MESA MAGNO,
FRANCISCO MAGNO, TEODORO DE MESA, FIRMO DE MESA and
MERCEDES DE MESA, respondents.
D E C I S I O N
CALLEJO, SR., J.:
For review in these consolidated petitions is the Joint Decision
[1]
of the Court of
Appeals (CA) in CA-G.R. SP Nos. 46194 and 46436, as well as its Order
[2]
dated
February 28, 2000 denying the motion for reconsideration thereof.
The Antecedents
The Phi-Han Development, nc. (PHD) is a domestic corporation organized
primarily for the purpose of engaging in the real estate business.
[3]
Teodoro de Mesa
and his siblings, namely, Antusa de Mesa Magno and Lourdes de Mesa Mendoza,
were among its original incorporators and members of its board of directors. Jae l
Aum, a Korean national, was the president of the corporation, while Lourdes
Mendoza served as its corporate secretary and treasurer.
[4]

On September 5, 1996, or barely a year after its operations began, the PHD,
together with Teodoro de Mesa, Antusa Magno and Lourdes Mendoza, filed a
complaint in the Regional Trial Court (RTC) of Guagua, Pampanga, against Jae l
Aum and the Korea Exchange Bank (KEB), a foreign banking corporation licensed to
do business in the Philippines.
The plaintiffs alleged therein that through the machination of Jae l Aum, KEB
granted a loan to the PHD in the amount of US$500,000.00, with the condition that
the said loan be deposited with the KEB in the name of PHD. Thereafter, the
plaintiffs executed a real estate mortgage over their properties located in Lubao,
Pampanga. As security for the said loan, PHD deposited the said amount under its
name with the KEB in two accounts, namely, Dollar Account No. 5311000486 and
Peso Account No. 5311000487. Per Resolution No. 12-10-95 of the PHD Board of
Directors, the only authorized signatories to all applications for withdrawals from the
said accounts were Jae l Aum and Lourdes Mendoza. Jae l Aum withdrew
US$160,000.00 from the said account on February 15, 1996 by forging the signature
of Lourdes Mendoza. He was again able to withdraw from the separate accounts,
leaving US$163,000.00 as the balance thereof. t was further alleged that Jae l Aum
could not have withdrawn the said deposits without the connivance of the KEB.
Moreover, the defendants' failure to heed demands for an accounting of the said
withdrawals and for the restitution of the said amounts constituted large
scale estafa for which they are liable for exemplary and moral damages.
[5]
The case
was docketed as Civil Case No. G-3012 and raffled to Branch 49 of the court.
On September 13, 1996, the KEB filed a Motion to Dismiss
[6]
the complaint on
the ground,
[7]
among others, that the case was within the exclusive jurisdiction of the
Securities and Exchange Commission (SEC). On December 5, 1996, the trial court
issued an Order denying the motion. The KEB filed a motion for reconsideration of
the court's decision which was, however, denied.
The KEB filed a petition for certiorari and prohibition with the CA for the
nullification of the orders of the RTC. The case was docketed as CA-G.R. SP No.
43363.
[8]
On March 17, 1999, the CA dismissed the petition. The KEB filed a motion
for reconsideration, which was denied by the appellate court on July 22, 1999. t then
filed a petition for review oncertiorari in this Court, docketed as G.R. No. 139460.
[9]

Meanwhile, on April 2, 1997, the KEB filed a Complaint
[10]
against Lourdes
Mendoza, Meneleo Mendoza, Antusa Magno, Francisco Magno, Teodoro de Mesa,
Firmo de Mesa, Mercedes de Mesa Magno and the PHD (PHD, et al.) before the
RTC of Guagua, Pampanga, for sum of money and reformation of real estate
mortgage executed by PHD in its favor. The case was docketed as Civil Case No.
G-3119 and was raffled to Branch 50 of the court.
The KEB alleged therein that on January 15, 1996, it extended a loan to the
PHD in the sum of US$500,000.00, payable within one year, with interest at "3
months London nterbank Offering Rate (LBOR) + 2% per annum, evidenced by a
promissory note executed by Jae l Aum and Lourdes Mendoza, president and
treasurer, respectively, for and in behalf of the PHD, with Antusa Magno and
Teodoro de Mesa acting as witnesses. Jae l Aum and Lourdes Mendoza were
authorized by resolution of the Board of Directors of PHD to sign documents and
other papers and mortgage corporate assets. To secure the payment of the said loan,
Lourdes Mendoza and her siblings, Antusa de Mesa Magno, Firmo de Mesa,
Meneleo Mendoza and Mercedes de Mesa, executed a real estate mortgage over 14
parcels of land they owned in common, under a Special Power of Attorney executed
by them in favor of Teodoro, Lourdes and Antusa. However, the real estate mortgage
failed to express the true intent and agreement of the parties therein because the
debtors appearing therein were Lourdes de Mesa Mendoza, Antusa de Mesa Magno,
Mercedes de Mesa and Firmo de Mesa, whereas the true agreement was to bind only
PHD as the debtor. t was further alleged that PHD, et al. had not paid the loan of
US$500,000.00 and the increment thereof despite demands therefor.
The KEB prayed that, after due proceedings, judgment be rendered in its favor,
ordering the reformation of the said real estate mortgage by designating the PHD as
the debtor; ordering PHD, et al., jointly and severally, to pay US$500,000.00, with
interest thereon at the rate of the LBOR for a three-month loan plus 2%,
compounded monthly; 10% of the total amount due as interest as withholding tax on
the interest; 20% of the total amount due as attorney's fees; and costs of suit. The
KEB, likewise, prayed that the properties mortgaged be foreclosed and sold in case of
failure to pay the said loan and its increment within 90 days from notice of the
judgment.
[11]
The KEB appended to its complaint a copy of the real estate mortgage
and the secretary's certificate containing the resolution of the Board of Directors.
The PHD, et al. filed a motion to dismiss
[12]
the complaint on the ground of
forum shopping, asserting that the KEB should have filed its counterclaim for the
reformation of the real estate mortgage and the collection of US$500,000.00,
including increment and damages in Civil Case No. G-3012. They averred that since
the KEB sought the collection of the US$500,000.00 loan which was referred to in
paragraphs 2 and 3 of their complaint in Civil Case No. G-3012, the essential
elements of litis pendentia were present; hence, the trial court should dismiss the
complaint.
The KEB opposed
[13]
the motion, contending that the complaint in Civil Case No.
G-3012 involved corporate fraud; hence, the RTC had no jurisdiction over the action
in the said case, and as such, could not interpose any counterclaims therein. The
KEB, likewise, averred that litis pendentia may be involved only when the RTC had
jurisdiction over the action in Civil Case No. G-3012. Moreover, the actions in Civil
Case Nos. G-3012 and G-3119 were unrelated.
On July 23, 1997, the RTC issued an Order
[14]
denying the motion to dismiss,
holding that the essential requirements of litis pendentia were not present, and that
the grounds invoked therein were not indubitable.
Thereafter, PHD, et al. filed, in due course, their answer
[15]
with counterclaims
in Civil Case No. G-3119 where they denied being indebted to the KEB. By way of
special and affirmative defenses, they alleged that they were deceived by Jae l Aum,
in connivance with the KEB, into agreeing to secure a loan of US$500,000.00 from
the latter with their properties as security therefor to be used for the development of
their properties into a housing project; the US$500,000.00 loan of the PHD was
deposited in Account No. 5311000487 and Account No. 5311000486 with the KEB.
Jae l Aum was able to withdraw the amount of US$160,000.00 from the dollar
account of PHD based on an application for withdrawal bearing the forged signature
of Lourdes Mendoza. Believing that Jae l Aum could not validly withdraw from the
said account without her presence, Lourdes de Mesa Mendoza signed applications
for the withdrawals from the said accounts, authorizing Jae l Aum to make the said
withdrawals. Jae l Aum was then able to withdraw the rest of the deposits of the
PHD. t was thus alleged that the acts of the plaintiff and Jae l Aum constituted
large scale estafa, and that he had been charged with large scale estafa in Criminal
Case Nos. 4085 and 4092 in the RTC of Pampanga. The aforementioned
unauthorized withdrawals could not have been made possible without the
indispensable cooperation of the authorized and/or responsible officer/s of the
KEB.
[16]
Moreover, the loan of the PHD should be extinguished under the principle of
set-off or compensation. By way of counterclaims, PHD, et al., repleaded by
reference all the allegations in their special and affirmative defenses as part thereof,
and alleged that by reason of the foregoing acts of the KEB and Jae l Aum, they
suffered shame and humiliation.
The PHD, et al., prayed that the complaint be dismissed and, by way of
counterclaim, that the KEB be ordered to pay P500,000.00 as moral
damages, P500,000.00 as exemplary damages to deter like-minded foreigners from
victimizing Filipinos, and P100,000.00 as attorney's fees, plus the cost of suit.
[17]

On September 12, 1997, the KEB filed two motions: (1) a motion in Civil Case
No. G-3119 to dismiss the counterclaims of the PHD, et al. for their failure to attach
in their answer with counterclaims a certification of non-forum shopping as mandated
by Supreme Court Administrative Circular No. 04-94 (now Section 5, Rule 7 of the
Rules of Court);
[18]
and (2) a motion in Civil Case No. G-3012 to dismiss the complaint
for forum shopping.
[19]

n its motion to dismiss the counterclaims in Civil Case No. G-3119, the KEB
alleged that the causes of action of the PHD, et al. as plaintiffs in Civil Case No. G-
3012 for the collection of US$160,000.00 and damages, and their claim in Civil Case
No. G-3119 for the set-off of the said amount against its claim of US$500,000.00
were identical; hence, their counterclaims should be dismissed for forum shopping
and, consequently, their complaint in Civil Case No. G-3012 should likewise be
dismissed.
The PHD, et al. opposed the motion to dismiss their complaint in Civil Case No.
G-3012 alleging that the KEB failed to include forum shopping as a ground in its
motion to dismiss their complaint; hence, is bound by the omnibus motion rule. They
further alleged that their complaint could not be dismissed on the ground of forum
shopping based on their counterclaims in their answer to the complaint, since they
filed their answer and counterclaim after filing their complaint in Civil Case No. G-
3012.
[20]
Besides, the trial court had already denied their motion to dismiss the
complaint in Civil Case No. G-3119 on its finding that there was no litis pendentia.
The PHD, et al. also opposed the motion to dismiss
[21]
their counterclaims in
Civil Case No. G-3119, on the ground that the causes of action in Civil Case No. G-
3012 and their counterclaims in Civil Case No. G-3119 were unrelated. They
asserted that the subject matter, causes of action and the issues in the two cases
were different.
On October 14, 1997, the trial court issued an Order
[22]
in Civil Case No. G-3012
denying the KEB's motion to dismiss the complaint, on its finding that the causes of
action of the PHD in Civil Case No. G-3012 were different from those in their
counterclaim in Civil Case No. G-3119. The trial court also denied the motion (in Civil
Case No. G-3119) to dismiss the counterclaims of the PHD, et al., on its finding that
the reliefs prayed for by the latter did not include the collection of US$160,000.00
from the KEB; hence, there was no forum shopping. The KEB's respective motions
for reconsideration of the orders of dismissal in Civil Case Nos. G-3119 and G-3012
were denied by the trial courts, per the Orders dated October 24, 1997
[23]
and
November 14, 1997.
[24]

The KEB filed a petition for certiorari, prohibition and mandamus against the
PHD, et al., in the CA, assailing the October 13 and 24, 1997 Orders of the trial court
in Civil Case No. G-3119. The case was docketed as CA-G.R. SP No. 46194.
The KEB also filed a petition for certiorari, prohibition and mandamus with the
CA on January 6, 1998, assailing the RTC's Orders dated October 24 and November
14, 1997 in Civil Case No. G-3012. The case was docketed as CA-G.R. SP No.
46436. The two petitions were consolidated.
Meanwhile, the KEB filed its answer to the counterclaims of the PHD, et al., in
Civil Case No. G-3119 for moral and exemplary damages.
[25]
t alleged, inter alia, that
only the consent of the PHD, through its signatories, was required for any withdrawal,
and that all such withdrawals were made with the knowledge and consent of Lourdes
de Mesa Mendoza, with her genuine signatures;
[26]
that the trial court had no
jurisdiction over the counterclaims for moral and exemplary damages since the
controversy involved corporate fraud which, under Subsection (a), Section 5 of
Presidential Decree No. 902-A, was within the exclusive jurisdiction of the SEC; and
that the counterclaims for moral and exemplary damages should be dismissed
because of the pendency of Civil Case No. G-3012 which involved the same parties,
the same rights, the same reliefs, the same issues, and the same causes of action,
insofar as the complaint in Civil Case No. G-3012 and the counterclaim in this case
were concerned. Moreover, there was no certification against forum shopping as
required by Section 3, Rule 7 of the Rules of Court. They further insisted that all the
withdrawals were authorized and made on the basis of genuine signatures; that
PHD, being a corporation and an artificial person, had no feelings, and, as such,
moral damages could not be recovered from it; that it had all along acted in good
faith; and that if PHD, et al., hired the services of counsel, the attorney's fees should
be for their own account, since they unjustifiably refused to pay.
[27]

On January 27, 2000, the CA rendered a Joint Decision
[28]
in CA-G.R. SP Nos.
46194 and 46436. The CA affirmed the assailed orders of the RTC in Civil Case No.
G-3012, dismissing the petition in CA-G.R. SP No. 46436 but partially giving due
course to and granting the petition in CA-G.R. SP No. 46194, by dismissing the
counterclaims of the respondents for moral and exemplary damages in Civil Case No.
G-3119 on the ground of forum shopping. The CA declared that the counterclaims of
the PHD, et al., for moral and exemplary damages in Civil Case No. G-3119, were
merely permissive; hence, they were mandated to append thereto a certification of
non-forum shopping.
The CA anchored its decision on the rulings of this Court in Santo Tomas
University Hospital v. Surla
[29]
and Valencia v. Court of Appeals.
[30]
However, the CA
did not order the dismissal of the complaint in Civil Case No. G-3012, on its finding
that the RTC did not commit grave abuse of its discretion in not ordering the dismissal
of the same. Besides, the trial court had already dismissed the counterclaims of the
PHD, et al., for moral and exemplary damages in Civil Case No. G-3119.
[31]

Following the denial of its motion for reconsideration, the KEB, now the
petitioner, filed with this Court, a consolidated petition for review on certiorari against
PHD, et al., the respondents, alleging that the CA erred (a) in not ordering the
dismissal of the counterclaim of the latter in Civil Case No. G-3119 for their failure to
append a certificate of non-forum shopping, and (b) in not dismissing the complaint in
Civil Case No. G-3012 for forum shopping.
[32]

As the issues in this case are interrelated, the Court shall delve into and resolve
them simultaneously.
The petitioner avers that the respondents are guilty of forum shopping because
they sought to recover US$160,000.00 by way of set-off in their counterclaims in Civil
Case No. G-3119, pending in Branch 50 of the RTC of Guagua, Pampanga, the same
amount they sought to recover in their complaint in Civil Case No. G-3012 pending in
Branch 49 of the said court. The petitioner asserts that the respondents also sought
to recover P500,000.00 in moral damages, and P500,000.00 as exemplary damages
in Civil Case No. G-3012, which are the same amounts the respondents sought to
collect from the petitioner in their counterclaims in Civil Case No. G-3119. The
petitioner notes that although the respondents alleged set-off of the US$160,000.00 in
their special and affirmative defenses, they, however, repleaded and incorporated, by
way of reference, the said allegations in their counterclaims for moral and exemplary
damages and attorney's fees; hence, the claim of set-off or compensation of the
respondents was a counterclaim. The respondents were, thus, mandated to append
a certificate of non-forum shopping to their counterclaims as mandated by Section 5,
Rule 7 of the Rules of Court, but failed to do so. The petitioner avers that there is
identity of causes of action, issues and reliefs prayed for in the complaint of the
respondents in Civil Case No. G-3012, and their counterclaims for set-off or
compensation of the US$160,000.00, moral damages of P500,000.00
and P500,000.00 as exemplary damages in Civil Case No. G-3119. As such, the
petitioner insists that the respondents were guilty of forum shopping, for which reason
their complaint in Civil Case No. G-3012 should be dismissed.
The respondents, for their part, refute the contentions of the petitioner and
maintain that their claim for set-off or compensation
[33]
in Civil Case No. G-3119 is a
counterclaim but is compulsory in nature; hence, there was no need for them to
append a certificate of non-forum shopping. The respondents also allege that the
petitioner itself is guilty of forum shopping because instead of filing counterclaims
against them in Civil Case No. G-3012, it filed a complaint for reformation of the real
estate mortgage and for the collection of US$500,000.00 and, in case of refusal or
failure of the respondents to pay the said amount of US$500,000.00 for the judicial
foreclosure of the real estate mortgage, docketed as Civil Case No. G-3119. The
respondents assert that, by praying for the dismissal of their complaint in Civil Case
No. G-3012 and their counterclaims in Civil Case No. G-3119, the petitioner could win
in both instances without due process of law.
The Court's RuIing
A counterclaim, as now used and understood, includes both set-off and
recoupment and is broader than both; it includes equitable demands and secures to
the defendant full relief which is a separate action at law and would have secured him
on the same state of facts being substantially a cross-action by the defendant against
the plaintiff.
[34]

A set-off (compensacion) is a money demand by the defendant against the
plaintiff arising upon contract and constituting a debt independent of and unconnected
with the cause of actions set forth in the complaint, and may be used to offset a
plaintiff's claim but not to recover affirmatively. As in the case with recoupment, set-
off may be used to offset a plaintiff's claim but not to recover affirmatively. This is
similar to the English rule which was first authorized by an English statute in 1729.
A recoupment (reconvencion) differs from a counterclaim (contrarreclamacion)
in that, under a counterclaim, the defendant may have an affirmative judgment where
he is able to prove a demand in excess of the plaintiff's demand, whereas in the case
of recoupment, whatever the damages proved by the defendant, they can go only to
reduce or extinguish the claim against him. Recoupment must arise out of the
contract or transaction upon which the plaintiff's claim is founded. Recoupment is of
French origin and means the "cutting back of the plaintiff's claim by the defendant. t
thus implies an admission of the plaintiff's claim.
n Lopez v. Gloria and Sheriff of Leyte,
[35]
the Court ruled that for set-off or
recoupment to be considered as a counterclaim, the following must concur: (1) the
same be essentially a genuine action of the defendant against the plaintiff; (2) the
same should have as its object to neutralize, wholly or partially, that which the plaintiff
is trying to obtain; (3) the same does not have for its object to destroy directly the
action of the plaintiff; and (4) the same ought not to pray for a positive remedy distinct
from the payment of money.
The Court explained that under the first requisite, independent of any other
consideration, a genuine action is constituted by the defendant which could be
employed separately against the plaintiff. On the second requisite, the Court
declared that the defendant admits the facts upon which the action of the plaintiff is
based. The second requisite is absent if the defendant bases his claim on facts
which directly destroy the action or cause of action of the plaintiff. n such a case, the
claim of the defendant would only be a special defense.
[36]
On the third requisite, set-
off or recoupment may be merely a defense and not a counterclaim if it only tends to
oppose or to destroy the action of the plaintiff.
After consideration of the material allegations of the answer of the respondents
in Civil Case No. G-3119, we believe that the respondents' claim of set-off or
compensation of the US$160,000.00 against the claim of US$500,000.00 of the
petitioner against the respondents is a counterclaim. The respondents admit in their
complaint in Civil Case No. G-3012 and in their answer in Civil Case No. G-3119 that
they secured a loan from the petitioner in the amount of US$500,000.00, but maintain
that they are not liable for the payment of the said loan because the petitioner, in
connivance with Jae l Aum, had withdrawn not only US$160,000.00 but the entire
deposit of US$500,000.00 from the peso and dollar accounts of respondent PHD
without the consent of the respondents. The latter did not seek to recover
affirmatively from the petitioner.
However, we do not agree with the contention of the respondents that their
counterclaims are compulsory in nature. Section 7, Rule 5 of the Rules of Court
reads:
Sec. 7. Compulsory counterclaim. A compulsory counterclaim is one which, being
cognizable by the regular courts oI justice, arises out oI or is connected with the transaction or
occurrence constituting the subject matter oI the opposing party`s claim and does not require
Ior its adjudication the presence oI third parties oI whom the court cannot acquire jurisdiction.
Such a counterclaim must be within the jurisdiction oI the court both as to the amount and the
nature thereoI, except that in an original action beIore the Regional Trial Court, the
counterclaim may be considered compulsory regardless oI the amount.
As correctly held by the CA, the counterclaim of the respondents for moral and
exemplary damages against the petitioner is permissive. So is the respondents' claim
of a set-off or compensation of the US$160,000.00 which they sought in Civil Case
No. G-3012 against the US$500,000.00 claimed by the petitioner against the
respondents in Civil Case No. G-3119.
As the Court held in ulienco v. Court of Appeals:
[37]

A counterclaim is deIined as any claim Ior money or other relieI which a deIending party may
have against an opposing party. A counterclaim is compulsory iI (a) it arises out oI, or is
necessarily connected with, the transaction or occurrence which is the subject matter oI the
opposing party`s claim; (b) it does not require Ior its adjudication the presence oI third parties
oI whom the court cannot acquire jurisdiction; and (c) the court has jurisdiction to entertain
the claim. In other words, a compulsory counterclaim cannot be made the subject oI a
separate action but should be asserted in the same suit involving the same transaction or
occurrence giving rise to it.
The criteria or tests by which the compulsory or permissive nature oI speciIic counterclaims
can be determined are as Iollows:
(1) Are the issues oI Iact and law raised by the claim and counterclaim largely the same?
(2) Would res fudicata bar a subsequent suit on deIendant`s claim absent the compulsory
counterclaim rule?
(3) Will substantially the same evidence support or reIute plaintiII`s claim as well as
deIendant`s counterclaim?
(4) Is there any logical relation between the claim and the counterclaim?
[38]

n the present case, the issues of fact and law raised by the petitioner in its
complaint in Civil Case No. G-3119, and in the counterclaims of the respondents for
the set-off of not only the US$160,000.00 but the entirety of the deposits of the
respondent PHD of US$500,000.00, and for moral and exemplary damages, are not
identical or even largely the same. n the complaint of the petitioner in Civil Case No.
G-3119, the issue is whether the loan of US$500,000.00 was secured by respondent
PHD from the petitioner, and whether the respondents failed to pay the same and its
increment despite the petitioner's demands. On the other hand, the issues in the
respondents' counterclaims for set-off of the amount of US$160,000.00 are the
following: whether the signature of respondent Lourdes Mendoza appearing on the
said withdrawal application was forged; whether the petitioner connived with Jae l
Aum when the latter withdrew the said amount from the accounts of respondent
PHD; whether the petitioner and Jae l Aum are obliged to pay the said amount to the
respondent PHD; and whether the obligations of the respondent to pay their loan of
US$500,000.00 is extrajudicial pro tanto. Any judgment of the court on the complaint
of the petitioner in Civil Case No. G-3119 would not bar any suit on the respondents'
counterclaim. The evidence of the petitioner on its claim in its complaint, and that of
the respondents on their counterclaims are thus different. There is, likewise, no
logical relation between the claim of the petitioner and the counterclaim of the
respondents. Hence, the counterclaim of the respondents is an initiatory pleading,
which requires the respondents to append thereto a certificate of non-forum
shopping. Their failure to do so results to the dismissal of their counterclaim without
prejudice.
[39]

The general rule is that compliance with the certificate of forum shopping is
separate from and independent of the avoidance of the act of forum shopping itself.
Forum shopping is a ground for summary dismissal of both initiatory pleadings
without prejudice to the taking of appropriate action against the counsel or party
concerned.
[40]

Case law has it that there is forum shopping when, between an action pending
before the court and another one, there exist:
. (a) identity oI parties, or at least such parties as represent the same interests in both
actions; (b) identity oI rights asserted and relieI prayed Ior, the relieI being Iounded on the
same Iacts; and (c) the identity oI the two preceding particulars is such that any judgment
rendered in the other action will, regardless oI which party is successIul, amount to res
fudicata in the action under consideration. .
[41]

Otherwise stated, there is forum shopping where a litigant sues the same party
against whom another action or actions for the alleged violation of the same right and
the enforcement of the same relief is/are still pending. The defense of litis
pendentia in one case is a bar to the other/others; and, a final judgment is one that
would constitute res judicata and thus would cause the dismissal of the rest.
Absolute identity of parties is not required. t is enough that there is substantial
identity of parties.
[42]
t is enough that the party against whom the estoppel is set up is
actually a party to the former case.
[43]
There is identity of causes of action if the same
evidence will sustain the second action. The principle applies even if the relief sought
in the two cases may be different.
[44]
Forum shopping consists of filing multiple suits
involving the same parties for the same cause of action, either simultaneously or
successively, for the purpose of obtaining a favorable judgment.
[45]

What is truly important to consider, the Court ruled in Golangco v. Court of
Appeals,
[46]
is the vexation caused the courts and parties-litigants who ask different
courts and/or administrative agencies to rule on the same or restated causes and/or
grant the same or substantially the same reliefs, in the process creating the possibility
of conflicting decisions being rendered by the different courts upon the same issues.
n upangco Cotton Mills, Inc. v. Court of Appeals,
[47]
the Court ruled that for forum
shopping to exist, both actions must involve the same transactions, the same
circumstances; and the actions must also raise identical causes of actions, subject
matter and issues. Forum shopping is an act of malpractice that is prohibited and
considered as trifling with the court. t is an improper conduct which tends to degrade
the administration of justice. But there is no forum shopping where two different
orders or questions, two different causes of action and issues are raised, and two
objectives are sought.
[48]

n this case, in interposing their counterclaim for set-off of the US$160,000.00
against their loan of US$500,000.00 in Civil Case No. G-3119, as well as the
counterclaims forP500,000.00 as moral damages, and P500,000.00 as exemplary
damages, the respondents thereby engaged in forum shopping. As gleaned from the
material averments of their complaint in Civil Case No. G-3012, the respondents, who
are the plaintiffs therein, claimed that Jae l Aum, who was the president of
respondent PHD, withdrew US$160,000.00 from the deposit accounts of the said
respondent with the petitioner; that such withdrawal application bore the forged
signature of respondent Lourdes Mendoza; and that the authorized office/officers of
the petitioner connived with Jae l Aum in consummating the withdrawal. The
respondents prayed that the petitioner and Jae l Aum be ordered to pay, jointly and
severally, the said amount, plus P500,000.00 as moral damages and P500,000.00 as
exemplary damages based on their claim that the petitioner, a corporation
incorporated in Korea, and Jae l Aum, a Korean national, victimized the respondents,
who are Filipinos. The respondents merely restated and repleaded the same
allegations in their counterclaims in Civil Case No. G-3119, and prayed that the
aforesaid amount of US$160,000.00 be set-off against their loan of US$500,000.00
which was being claimed by the petitioner in the said case, in addition to awards
for P500,000.00 as moral damages, and P500,000.00 as exemplary damages against
the petitioner for allegedly victimizing Filipinos in their country. The threshold issues
common to and decisive of the complaint in Civil Case No. G-3012 and the
counterclaim for set-off in Civil Case No. G-3119 are whether the signature of
respondent Lourdes Mendoza on the application for withdrawal of US$160,000.00
was forged, and whether the petitioner connived with Jae l Aum in the alleged
fraudulent withdrawal of the said amount. The evidence of the respondents as
plaintiffs in Civil Case No. G-3012 is the same evidence that they will have to adduce
as plaintiffs on their counterclaim for set-off in Civil Case No. G-3119. Any judgment
of the RTC of Guagua, Pampanga, Branch 49, in Civil Case No. G-3012 will, likewise,
resolve the threshold issue in the respondents' counterclaim for set-off in Civil Case
No. G-3119. That Jae l Aum is not a party in Civil Case No. G-3119 is not important;
that the respondents did not pray in their counterclaim that the petitioner pay to them
the US$160,000.00 withdrawn by Jae l Aum is, likewise, not a bar to the application
of the principle of litis pendentia.
t must be stressed, however, that the dismissal of the complaint of the
respondents against the petitioner in Civil Case No. G-3012 is without prejudice to the
continuation of the case against Jae l Aum.
IN LIGHT OF ALL THE FOREGOING, the petition is GRANTED. The complaint
of the respondents against the petitioner in Civil Case No. G-3012 is DSMSSED
without prejudice to the continuation thereof against the defendant Jae l Aum. No
costs.
SO ORDERED.