SECOND DIVISION

[G.R. No. 101883. December 11, 1992.]

SPOUSES LYDIA and VIRGILIO MELITON, *, Petitioners, v. COURT

OF APPEALS and NELIA A. ZIGA, represented by her Attorney-in-Fact
RAMON A. AREJOLA, ** respondents.

Adan Marcelo B. Botor for Petitioner.

SYLLABUS

1. REMEDIAL LAW; COMPULSORY COUNTERCLAIM, TEST OF

"COMPULSORINESS." — Considering Section 4 of Rule 9 of the Rules of
Court, a counterclaim is compulsory if (a) it arises out of, or is necessarily
connected with, the transaction or occurrence which is the subject matter of
the opposing party’s claim; (b) it does not require for its adjudication the
presence of third parties of whom the court cannot acquire jurisdiction; and
(c) the court has jurisdiction to entertain the claim. It has been postulated
that while a number of criteria have been advanced for the determination
of whether the counterclaim is compulsory or permissive, the "one
compelling test of compulsoriness" is the logical relationship between the
claim alleged in the complaint and that in the counterclaim, that is, where
conducting separate trials of the respective claims of the parties would
entail a substantial duplication of effort and time, as where they involve
many of the same factual and/or legal issues.

2. ID.; ID.; ID.; PHRASE "LOGICAL RELATIONSHIP," CONSTRUED. —

The phrase "logical relationship" is given meaning by the purpose of the
rule which it was designed to implement. Thus, a counterclaim is logically
related to the opposing party’s claim where, as already stated, separate
trials of each of their respective claims would involve a substantial
duplication of effort and time by the parties and the courts. Where multiple
claims involve many of the same factual issues, or where they are offshoots
of the same basic controversy between the parties, fairness and
considerations of convenience and of economy require that the
counterclaimant be permitted to maintain his cause of action.

3. ID.; ACTION FOR RECOVERY OF POSSESSION OF REAL PROPERTY

SUBJECT MATTER OF COUNTERCLAIM IN CASE AT BAR. — As we
have ruled, in actions for ejectment or for recovery of possession of real
property, it is well settled that the defendant’s claims for the value of the
improvements on the property or necessary expenses for its preservation
are required to be interposed in the same action as compulsory
counterclaims. In such cases, it is the refusal of the defendant to vacate or
surrender possession of the premises that serves as the vital link in the
chain of facts and events, and which constitutes the transaction upon which
the plaintiff bases his cause of action. It is likewise an "important part of the
transaction constituting the subject matter of the counterclaim" of
defendant for the value of the improvements or the necessary expenses
incurred for the preservation of the property. They are offshoots of the
same basic controversy between the parties, that is, the right of either to the
possession of the property.

4. ID.; ID.; INSTANCES WHEN COUNTERCLAIM NOT SET UP SHALL

BE BARRED UNDER SEC. 4, RULE 9, RULES OF COURT. — It is indeed
the rule, embodied in Section 4, Rule 9 of the Rules of Court, that a
counterclaim not set up shall be barred if it arises out of or is necessarily
connected with the transaction or occurrence that is the subject matter of
the opposing party’s claim and does not require for its adjudication the
presence of third parties of whom the court cannot acquire jurisdiction.

5. ID.; RES JUDICATA; REQUISITES. — In order that a prior judgment will

constitute a bar to a subsequent case, the following requisites must concur:
(1) the judgment must be final; (2) the judgment must have been rendered
by a court having jurisdiction over the subject matter and the parties; (3)
the judgment must be on the merits; and (4) there must be between the first
and second actions, identity of parties, of subject matter, and of causes of
action.

6. ID.; DISMISSAL OF CASE WITHOUT PREJUDICE; EXPLAINED. — The

dismissal of the case without prejudice indicates the absence of a decision
on the merits and leaves the parties free to litigate the matter in a
subsequent action as though the dismissal action had not been commenced.
The discontinuance of a case not on the merits does not bar another action
on the same subject matter. Evidently, therefore, the prior dismissal of
herein petitioners’ counterclaims is not res judicata and will not bar the
filing of another action based on the same causes of action.

7. ID.; DISMISSAL OF ACTIONS AFTER FILING OF ANSWER;

GOVERNING RULE. — As laid down in Rule 17 of the Rules of Court,
which is summarized as follows: An action shall not be dismissed at the
request of the plaintiff after the service of the answer, except by order of
the court and upon such terms and conditions as the court deems proper.
The trial court has the judicial discretion in ruling on a motion to dismiss at
the instance of the plaintiff. It has to decide whether the dismissal of the
case should be allowed, and if so, on what terms and conditions.

8. CIVIL LAW; ACTION FOR DAMAGES FOR VIOLATION OF LEASE

AGREEMENT; CASE AT BAR. — Specifically applicable in a lessor-lessee
relationship is authorized in Article 1659 of the Civil Code which provides
that: "Art. 1659. If the lessor or the lessee should not comply with the
obligations set forth in articles 1654 and 1657, the aggrieved party may ask
for the rescission of the contract and indemnification for damages, or only
the latter, allowing the contract to remain in force." The act of private
respondent in demolishing the structures introduced by petitioners on the
property leased and the improvements therein during the existence of the
lease contract is a clear violation by her, as lessor, of her obligation
mandated by paragraph 3, Article 1654 of the Civil Code. The said
violation gave rise to a cause of action for damages in favor of herein
petitioners.

9. REMEDIAL LAW; DISMISSAL OF COUNTERCLAIM FOR NON-

PAYMENT OF DOCKET FEES; RULING IN MANCHESTER CASE
APPLIES TO PERMISSIVE COUNTERCLAIMS ONLY. — The court a quo
dismissed petitioners’ counterclaims for non-payment of docket fees
pursuant to our then ruling in Manchester Development Corporation, Et
Al., v. Court of Appeals, Et Al., before its modification. The failure of
petitioners to seek reconsideration of or to take an appeal from the order of
dismissal of the counterclaim should not prejudice their right to file their
claims in a separate action because they were thereby made to understand
and believe that their counterclaims were merely permissive and could be
the subject of a separate and independent action. Under the Rules, there is
no need to pay docket fee for a compulsory counterclaim. The ruling in
Manchester applies specifically to permissive counterclaims only, thereby
excluding compulsory counterclaims from its purview, and that was the
ruling of the court below to which the litigants therein submitted. Had the
trial court correctly specified that petitioners’ counterclaims were
compulsory, petitioners could have objected to the dismissal sought by
private respondent on the ground that said counterclaims could not remain
pending for independent adjudication.

10. ID.; RULES ON PROCEDURE; SHOULD BE LIBERALLY

CONSTRUED TO THE END THAT NO PARTY SHOULD BE DEPRIVED
OF HIS DAY IN COURT ON TECHNICALITIES. — This, is one case where
it is necessary to heed the injunction that the rules of procedure are not to
be applied in a rigid and technical sense. After all, rules of procedure are
used only to help secure substantial justice. They cannot be applied to
prevent the achievement of that goal. Form cannot and should not prevail
over substance. Absent a specific requirement for stringent application, the
Rules of Court are to be liberally construed to the end that no party shall be
deprived of his day in court on technicalities. The courts in our jurisdiction
are tribunals both of law and equity. Hence, under the antecedents of this
case, we are persuaded that even if only to approximate that desirable
measure of justice we are sworn to dispense, this controversy should be
resolved on the merits.

DECISION
REGALADO, J.:

In its judgment in CA-G.R. No. 25091 1 promulgated on August 9, 1991,

respondent Court of Appeals annulled and set aside the orders dated
February 22, 1991 and March 18, 1991 of the Regional Trial Court of Naga
City, Branch 27, in Civil Case No. RTC 89-1942 thereof and ordered the
dismissal of petitioner’s complaint filed therein, hence this appeal
by certiorari.

On June 22, 1988, private respondent Nelia Ziga, in her own behalf and as
attorney-in-fact of Alex A. Ziga and Emma A. Ziga-Siy, filed a complaint,
docketed as Civil Case No. RTC 88-1480 of the Regional Trial Court, Branch
27, Naga City, 2 against herein petitioner Lydia Meliton for rescission of a
contract of lease over a parcel of land situated at Elias Angeles Street, Naga
City. Alleged as grounds therefor were said petitioner’s failure, as lessee, to
deposit the one month rental and to pay the monthly rentals due; her
construction of a concrete wall and roof on the site of a demolished house
on the leased premises without the lessor’s written consent; and her
unauthorized sublease of the leased property to a third
party.chanrobles.com.ph : virtual law library

On July 29, 1988, petitioner Lydia Meliton filed an answer to the complaint
denying the material averments thereof and setting up three counterclaims
for recovery of the value of her kitchenette constructed on the leased parcel
of land and which was demolished by private respondent, in the amount of
P34,000.00; the value of the improvements introduced in the kitchenette to
beautify it, in the amount of P10,000.00, plus the value of the furniture and
fixtures purchased for use in the kitchenette in the amount of P23,000.00;
and moral damages in the amount of P20,000.00 aside from attorney’s fees
of P50,000.00 and P250.00 per court appearance, with litigation expenses in
the amount of P1,000.00. 3

On May 29, 1989, the trial court, on motion of private respondent

contending that her cause of action had already become moot and
academic by the expiration of the lease contract on February 7, 1989,
dismissed the complaint. The counterclaims of petitioner Lydia Meliton
were also dismissed for non-payment of the docket fees, ergo the trial
court’s holding that thereby it had not acquired jurisdiction over the same.
4

On December 6, 1989, petitioners Lydia Meliton and Virgilio Meliton filed a

complaint against private respondent for recovery of the same amounts
involved and alleged in their counterclaims in Civil Case No. RTC 88-1480,
which complaint was docketed as Civil Case No. RTC 89-1942 5 and
likewise assigned to Branch 27 of the same trial court.

On February 15, 1991, private respondent filed a motion to dismiss the

complaint on the ground that the cause of action therein was barred by
prior judgment in Civil Case No. RTC 88-1480, the order of dismissal
wherein was rendered on May 29, 1989. 6

On February 22, 1991, the court below denied private respondent’s motion
to dismiss the complaint in Civil Case No. RTC 89-1942 on the ground that
the dismissal of the petitioner’s counterclaims in Civil Case No. RTC 88-
1480 is not an adjudication on the merits as the court did not acquire
jurisdiction over the counterclaims for failure of petitioner Lydia Meliton to
pay the docket fees, hence the said dismissal does not constitute a bar to
the filing of the later complaint. 7

Private respondent’s motion for reconsideration of the foregoing order was

denied by the lower court for lack of merit in its order of March 18, 1991. 8
Dissatisfied therewith, private respondent file a petition for certiorari with
this Court. In our resolution dated April 29, 1991, we referred this case to
the Court of Appeals for proper determination and disposition pursuant to
Section 9, paragraph 1 of B.P. Blg. 129, 9 where it was docketed as CA-G.R.
SP No. 25093.

In a decision promulgated on August 9, 1991, the Court of Appeals granted

the petition, the pertinent part of which reads:chanrob1es virtual 1aw
library
x x x

"The respondents’ counterclaim against the petitioner in Civil Case No.

RTC 88-1480 (Annex E, petition) is a compulsory counterclaim, it having
(arisen) out of or being necessarily connected with the transaction or
occurrence subject matter of the petitioner’s complaint. The failure of the
respondents to seek a reconsideration of the dismissal of their counterclaim
or to take an appeal therefrom rendered the dismissal final. Such dismissal
barred the prosecution of their counterclaim by another action (Section 4,
Rule 9, Revised Rules of Court; Javier v. IAC, 171 SCRA 605).

"The respondent Court, therefore, in issuing the orders complained of

(Annexes G and I, petition), gravely abused its discretion amounting to
lack of jurisdiction.

"WHEREFORE, the petition for certiorari is GRANTED. Accordingly, the

orders complained of (Annexes G and I, petition) are annuled and set aside
and the respondents’ complaint in Civil Case No. RTC 89-1942 before the
respondent Court, DISMISSED. Costs against the respondents, except the
respondent Court." 10

Petitioners are now before us, assailing the said judgment of the Court of
Appeals and praying for the annulment thereof.

The present petition requires the resolution of two principal issues, to wit:
(1) whether or not the counterclaims of petitioners are compulsory in
nature; and (2) whether or not petitioners, having failed to seek
reconsideration of or to take an appeal from the order of dismissal of their
counterclaims, are already barred from asserting the same in another
action.

1. Considering Section 4 of Rule 9 of the Rules of Court, a counterclaim is

compulsory if (a) it arises out of, or is necessarily connected with, the
transaction or occurrence which is the subject matter of the opposing
party’s claim; (b) it does not require for its adjudication the presence of
third parties of whom the court cannot acquire jurisdiction; and (c) the
court has jurisdiction to entertain the claim.

It has been postulated that while a number of criteria have been advanced
for the determination of whether the counterclaim is compulsory or
permissive, the "one compelling test of compulsoriness" is the logical
relationship between the claim alleged in the complaint and that in the
counterclaim, that is, where conducting separate trials of the respective
claims of the parties would entail a substantial duplication of effort and
time, as where they involve many of the same factual and/or legal issues.

The phrase "logical relationship" is given meaning by the purpose of the

rule which it was designed to implement. Thus, a counterclaim is logically
related to the opposing party’s claim where, as already stated, separate
trials of each of their respective claims would involve a substantial
duplication of effort and time by the parties and the courts. Where multiple
claims involve many of the same factual issues, or where they are offshoots
of the same basic controversy between the parties, fairness and
considerations of convenience and of economy require that the
counterclaimant be permitted to maintain his cause of action. 11

In the aforesaid Civil Case No. 88-1480, all the requisites of a compulsory
counterclaim are present. The counterclaims, as this term is now broadly
defined, are logically related to the complaint. Private respondent’s
complaint was for rescission of the contract of lease due to petitioner Lydia
Meliton’s breach of her obligations under the said contract. On the other
hand, petitioner’s counterclaims were for damages for unlawful demolition
of the improvements she introduced pursuant to her leasehold occupancy
of the premises, as well as for the filing of that civil suit which is contended
to be clearly unfounded.chanrobles law library

Both the claims therein of petitioners and private respondent arose from
the same contract of lease. The rights and obligations of the parties, as well
as their potential liability for damages, emanated from the same
contractual relation. Petitioners’ right to claim damages for the unlawful
demolition of the improvements they introduced on the land was based on
their right of possession under the contract of lease which is precisely the
very same contract sought to be rescinded by private respondent in her
complaint. The two actions are but the consequences of the reciprocal
obligations imposed by law upon and assumed by the parties under their
aforesaid lease contract. That contract of lease pleaded by private
respondent constitutes the foundation and basis relied on by both parties
for recovery of their respective claims.

The relationship between petitioners’ counterclaims and private

respondent’s complaint is substantially the same as that which exists
between a complaint for recovery of land by the owner and the claim for
improvements introduced therein by the possessor. As we have ruled, in
actions for ejectment or for recovery of possession of real property, it is
well settled that the defendant’s claims for the value of the improvements
on the property or necessary expenses for its preservation are required to
be interposed in the same action as compulsory counterclaims. In such
cases, it is the refusal of the defendant to vacate or surrender possession of
the premises that serves as the vital link in the chain of facts and events,
and which constitutes the transaction upon which the plaintiff bases his
cause of action. It is likewise an "important part of the transaction
constituting the subject matter of the counterclaim" of defendant for the
value of the improvements or the necessary expenses incurred for the
preservation of the property. They are offshoots of the same basic
controversy between the parties, that is, the right of either to the possession
of the property. 12

On the foregoing considerations, respondent Court of Appeals correctly

held that the counterclaims of petitioners are compulsory in nature.

2. Petitioners having alleged compulsory counterclaims, the next point of

inquiry is whether or not petitioners are already barred from asserting said
claims in a separate suit, the same having being dismissed in the preceding
one. The answer is in the negative.

It is indeed the rule, embodied in Section 4, Rule 9 of the Rules of Court,

that a counterclaim not set up shall be barred if it arises out of or is
necessarily connected with the transaction or occurrence that is the subject
matter of the opposing party’s claim and does not require for its
adjudication the presence of third parties of whom the court cannot acquire
jurisdiction. However, said rule is not applicable to the case at bar.

Contrary to the claim of private respondent, it cannot be said that herein

petitioners failed to duly interpose their causes of action as counterclaims
in the previous action. Petitioners’ claims were duly set up as
counterclaims in the prior case but the same were dismissed by reason of
non-payment of docket fees. The ruling of respondent Court of Appeals to
the effect that the failure of petitioners to appeal or to move for
reconsideration of the said order of dismissal bars them from asserting
their claims in another action cannot be upheld.

Firstly, where a compulsory counterclaim is made the subject of a separate

suit, it may be abated upon a plea of auter action pendant or litis pendentia
and/or dismissed on the ground of res judicata, 13 depending on the stage
or status of the other suit.

Both defenses are unavailing to private respondents. The present action

cannot be dismissed either on the ground of litis pendentia since there is no
other pending action between the same parties and for the same cause, nor
on the ground of res judicata.

In order that a prior judgment will constitute a bar to a subsequent case,

the following requisites must concur: (1) the judgment must be final; (2) the
judgment must have been rendered by a court having jurisdiction over the
subject matter and the parties; (3) the judgment must be on the merits; and
(4) there must be between the first and second actions, identity of parties,
of subject matter, and of causes of action. 14

The first case, Civil Case No. RTC 88-1480, was dismissed upon motion of
private respondent, plaintiff therein, under Section 2 of Rule 17. Dismissal
thereunder is without prejudice, except when otherwise stated in the
motion to dismiss or when stated to be with prejudice in the order of the
court. 15 The order of dismissal of the first case was unqualified, hence
without prejudice and, therefore, does not have the effect of an
adjudication on the merits. On a parity of rationale, the same rule should
apply to a counterclaim duly interposed therein and which is likewise
dismissed but not on the merits thereof.chanrobles lawlibrary : rednad
Moreover, in the same order of dismissal of the complaint, the
counterclaims of herein petitioners were dismissed by reason of the fact
that the court a quo had not acquired jurisdiction over the same for non-
payment of the docket fees. On that score, the said dismissal was also
without prejudice, since a dismissal on the ground of lack of jurisdiction
does not constitute res judicata, 16 there having been no consideration and
adjudication of the case on the merits.

The dismissal of the case without prejudice indicates the absence of a

decision on the merits and leaves the parties free to litigate the matter in a
subsequent action as though the dismissal action had not been commenced.
17 The discontinuance of a case not on the merits does not bar another
action on the same subject matter. 18 Evidently, therefore, the prior
dismissal of herein petitioners’ counterclaims is not res judicata and will
not bar the filing of another action based on the same causes of action.

Secondly, a reading of the order of dismissal will show that the trial court,
in dismissing the complaint of private respondent, did not intend to
prejudice the claims of petitioners by barring the subsequent judicial
enforcement thereof. As stated therein," (t)he court in dismissing the
counterclaim(s) has taken into account the fact that a counterclaim partakes
of the nature of a complaint and/or a cause of action against the plaintiffs."
19 This is a clear indication, deducible by necessary implication, that the
lower court was aware of the fact that petitioners could avail of the causes
of action in said counterclaims in a subsequent independent suit based
thereon and that there was no legal obstacle thereto. That this was the
import and intendment of that statement in its order dismissing
petitioners’ counterclaims in Civil Case No. RTC 88-1480 was categorically
confirmed by the very same court, wherein Civil Case No. RTC 89-1942
was also subsequently filed, in its assailed orders denying private
respondent’s motion to dismiss the latter case on the ground of res judicata.

This is also concordant with the rule governing dismissal of actions by the
plaintiff after the answer has been served as laid down in Rule 17 of the
Rules of Court, which is summarized as follows: An action shall not be
dismissed at the request of the plaintiff after the service of the answer,
except by order of the court and upon such terms and conditions as the
court deems proper. The trial court has the judicial discretion in ruling on a
motion to dismiss at the instance of the plaintiff. It has to decide whether
the dismissal of the case should be allowed, and if so, on what terms and
conditions. 20

In dismissing private respondent’s complaint, the trial court could not but
have reserved to petitioners, as a condition for such dismissal, the right to
maintain a separate action for damages. Petitioners’ claims for damages in
the three counterclaims interposed in said case, although in the nature of
compulsory counterclaims but in light of the aforesaid reservation in the
dismissal order, are consequently independent causes of action which can
be the subject of a separate action against private Respondent.

An action for damages specifically applicable in a lessor-lessee relationship

is authorized in Article 1659 of the Civil Code which provides
that:jgc:chanrobles.com.ph

"ARTICLE 1659. If the lessor or the lessee should not comply with the
obligations set forth in articles 1654 and 1657, the aggrieved party may ask
for the rescission of the contract and indemnification for damages, or only
the latter, allowing the contract to remain in force."cralaw virtua1aw
library

Paragraph 3 of Article 1654 of the same Code requires that the lessor must
"maintain the lessee in the peaceful and adequate enjoyment of the lease for
the entire duration of the contract." 21 The aggrieved party has the
alternative remedies, in case of contractual breach, of rescission with
damages, or for damages only "allowing the contract to remain in
force."cralaw virtua1aw library

The act of private respondent in demolishing the structures introduced by

petitioners on the property leased and the improvements therein during
the existence of the lease contract is a clear violation by her, as lessor, of her
obligation mandated by paragraph 3, Article 1654 of the Civil Code. The
said violation gave rise to a cause of action for damages in favor of herein
petitioners.
Lastly, even assuming arguendo that the bar under the rule on compulsory
counterclaims may be invoked, the peculiar circumstances of this case
irresistibly and justifiedly warrant the relaxation of such rule.

The court a quo dismissed petitioners’ counterclaims for non-payment of

docket fees pursuant to our then ruling in Manchester Development
Corporation, Et Al., v. Court of Appeals, Et Al., 22 before its modification.
The failure of petitioners to seek reconsideration of or to take an appeal
from the order of dismissal of the counterclaim should not prejudice their
right to file their claims in a separate action because they were thereby
made to understand and believe that their counterclaims were merely
permissive and could be the subject of a separate and independent action.
Under the Rules, there is no need to pay docket fee for a compulsory
counterclaim. 23 The ruling in Manchester applies specifically to
permissive counterclaims only, thereby excluding compulsory
counterclaims from its purview, 24 and that was the ruling of the court
below to which the litigants therein submitted. Had the trial court correctly
specified that petitioners’ counterclaims were compulsory, petitioners
could have objected to the dismissal sought by private respondent on the
ground that said counterclaims could not remain pending for independent
adjudication.25cralaw:red

Furthermore, under the Manchester doctrine, the defect cannot be cured by

an amendment of the complaint or similar pleadings, much less the
payment of the docket fee. Hence, the only remedy left for the petitioners
was to file a separate action for their claims and to pay the prescribed
docket fees therein within the applicable and reglementary period, which is
what they did in the case at bar in obedience and deference to the judicial
mandate laid down in their case. At any rate, the ambivalent positions
adopted by the lower court can be considered cured by what we have
construed as effectively a reservation in its order of dismissal for the filing
of a complaint based on the causes of action in the dismissed
counterclaims.chanrobles virtualawlibrary
chanrobles.com:chanrobles.com.ph

This, then, is one case where it is necessary to heed the injunction that the
rules of procedure are not to be applied in a rigid and technical sense. After
all, rules of procedure are used only to help secure substantial justice. They
cannot be applied to prevent the achievement of that goal. Form cannot
and should not prevail over substance. 26 Absent a specific requirement for
stringent application, the Rules of Court are to be liberally construed to the
end that no party shall be deprived of his day in court on technicalities. The
courts in our jurisdiction are tribunals both of law and equity. Hence,
under the antecedents of this case, we are persuaded that even if only to
approximate that desirable measure of justice we are sworn to dispense,
this controversy should be resolved on the merits.

WHEREFORE, the questioned judgment of respondent Court of Appeals is

hereby REVERSED and SET ASIDE. Civil Case No. RTC 89-1942 is hereby
REINSTATED and the Regional Trial Court of Naga City, Branch 27, or
wherever the case has been assigned, is directed to proceed with deliberate
dispatch in the adjudication thereof.

SO ORDERED.

Narvasa, C.J., Feliciano, Nocon, and Campos, JJ., concur.