Dio vs. Subic Bay Marine Exploratorium, Inc.

The dismissal of a complaint — whether at the instance of the plaintiff or due to the plaintiff's fault — does not ipso jure result in the dismissal of a compulsory counterclaim; the counterclaim may remain for independent adjudication provided it states a sufficient cause of action and does not labor under any infirmity warranting its outright dismissal. The court's jurisdiction over a counterclaim valid on its face, including the grant of relief thereunder, is not abated by the dismissal of the main action.

Petitioner H.S. Equities, Ltd. (HSE) is a foreign corporation organized under the laws of the British Virgin Islands, while respondent Subic Bay Marine Exploratorium, Inc. (SBME) is a domestic corporation operating under Philippine law. HSE subscribed to shares in SBME as part of the latter's beach resort expansion project inside the area administered by the Subic Bay Metropolitan Authority, and the subscription agreement granted HSE minority protection rights such as the right to appoint a director and to veto certain board resolutions. The dispute reached the courts as an intra-corporate controversy. The case is significant because it arises after the effectivity of the 1997 Rules of Civil Procedure, under which the Court has abandoned the prior doctrines in Metals Engineering Resources Corp. vs. Court of Appeals and BA Finance Corporation vs. Co that had treated a compulsory counterclaim as necessarily dismissed along with the complaint.

Petitioner H.S. Equities, Ltd. (HSE) is a foreign corporation organized and existing under the laws of the British Virgin Islands, with registered address at Akara Building, 24 De Castro Street, Wickhams Cay I, Road Town, Tortola, British Virgin Islands, and is represented in the action by petitioner Virginia S. Dio (Dio). Respondent Subic Bay Marine Exploratorium, Inc. (SBME) is a domestic corporation organized under Philippine law, represented by its Chairman and Chief Executive Officer, Timothy Desmond (Desmond).

In 2002, SBME decided to expand its business by operating a beach resort inside the property administered by the Subic Bay Metropolitan Authority. To launch the venture, SBME needed to solicit investors willing to infuse funds for the construction and operation of the resort. HSE, formerly known as Westdale Assets Limited, through its authorized director Dio, agreed to invest US$2,500,000.00 in SBME by purchasing 750,000 common shares with a par value of ₱100 per share from an increase in SBME's authorized capital stock. The agreement was reduced to writing and, to protect HSE's interest in the company, afforded it minority protection rights, including the right to appoint a member of the board of directors and the right to veto certain board resolutions. After HSE initially paid US$200,000.00 on its subscription, it refused to lay out further money for the expansion project, citing alleged mismanagement in the handling of corporate funds.

SBME thereupon initiated an intra-corporate dispute before the Regional Trial Court of Balanga City, Bataan against HSE and Dio. Before petitioners could file their answer, respondents impleaded SBME's Corporate Secretary, Atty. Winston Ginez, as an additional defendant. In their Amended Complaint docketed as Civil Case No. 7572, SBME essentially alleged that HSE unjustly refused to pay the balance of its unpaid subscription, thereby jeopardizing the company's expansion project. SBME further alleged that, apart from refusing to honor their obligation under the subscription contract, Dio tried to dissuade local investors and financial institutions from putting capital into SBME by imputing defamatory acts against Desmond. To protect the interest of the corporation and its stockholders, SBME sought to enjoin petitioners from committing acts inimical to the company's interest.

In their Answer with Compulsory Counterclaim, petitioners maintained that it would be highly preposterous for them to dissuade investors and banks from putting money into SBME considering that HSE and Dio were themselves stakeholders with substantial investments in the company. Petitioners countered that their reputation and good name in the business community were tarnished as a result of the filing of the complaint, and prayed for US$2,000,000.00 in moral damages. Constrained to litigate to protect their rights, they sought ₱1,000,000.00 in litigation expenses. They likewise sought to recover their US$1,500,000.00 investment, claiming they had been inveigled by Desmond into putting money into SBME under the pretext that they would be accorded minority protection rights. It was alleged that after the filing of the complaint, Desmond, in collusion with other members of SBME's Board of Directors, managed to unjustly deny HSE and Dio their rights under the Subscription Agreement. To curb similar socially abhorrent actions, petitioners prayed that SBME and its Board of Directors — Desmond, John Corcoran, Gaile Laule, and Gregorio Magdaraog — be jointly and severally held liable for US$2,000,000.00 in exemplary damages.

After petitioners filed their Answer with Compulsory Counterclaim, the RTC, instead of setting the case for pre-trial, issued an Order dated 15 August 2005 motu proprio dismissing Civil Case No. 7572. The dismissal was grounded on the defective certificate of non-forum shopping, which had been signed by Desmond without specific authority from SBME's Board of Directors. Armed with a board resolution specifically authorizing Desmond to sign the certificate of non-forum shopping on SBME's behalf, respondents moved to reinstate the complaint and to conduct further proceedings, attaching a copy of the authority to their Motion for Reconsideration. The RTC denied the motion for lack of merit and affirmed the dismissal in an Order dated 22 September 2005, ruling that the belated submission of a board resolution evidencing Desmond's authority did not cure the initial defect in the complaint and that strict compliance with procedural rules is enjoined for the orderly administration of justice.

Aggrieved, respondents elevated the matter to the Court of Appeals via Petition for Review, docketed as CA-G.R. CV No. 87117. For failure of respondents to file their appellants' brief, the appellate court dismissed the petition and considered the case closed and terminated in a Resolution dated 2 January 2007. Because respondents failed to seasonably move for reconsideration, the dismissal became final and executory, as shown by the Entry of Judgment dated 3 May 2007. With the procedural incidents before the appellate court resolved with finality, petitioners returned to the RTC to file a motion to set their counterclaims for hearing, which respondents opposed on the ground that the filing of the compulsory counterclaims was not accompanied by payment of the required docket fees, precluding the court from acquiring jurisdiction over them. The RTC granted respondents' motion and directed the dismissal of the counterclaims, but not on the ground of non-payment of docket fees; it held that, in view of the dismissal of the main case affirmed with finality by the appellate court, it had lost jurisdiction to act on the counterclaim, the compulsory counterclaim being merely ancillary to the principal controversy. The RTC refused reconsideration in an Order dated 26 August 2009.

• Independent Adjudication of the Counterclaim: Petitioners argued that despite the dismissal of the main case, the counterclaim may still remain for independent adjudication under Section 6, Rule 16 of the Revised Rules of Court.
• Absence of Fault on Petitioners' Part: Petitioners pointed out that while the dismissal of respondents' complaint confirmed Desmond's lack of legal personality to file the case, this did not mean that petitioners also lacked the qualification to pursue their counterclaim; to fault petitioners for the fatal infirmity in respondents' complaint would work injustice upon them and result in the absurd situation where the fate of their counterclaims is placed entirely in the hands of the respondents.

• Erroneous Remedy / Judicial Hierarchy: Respondents posited that, in directly assailing the adverse RTC Orders before the Supreme Court, petitioners erroneously availed themselves of the wrong remedy, arguing that the petition should have been initially filed with the appellate court; by seeking relief directly from the Court, petitioners ignored the judicial hierarchy warranting the peremptory dismissal of their petition.
• Absence of Special and Important Reasons: Respondents argued that unless special and important reasons were clearly and specifically set out in the petition — which, in this case, they were not — a direct invocation of the Supreme Court's original jurisdiction may not be allowed.

• Propriety of Direct Recourse to the Supreme Court: Whether petitioners properly filed their petition directly with the Supreme Court notwithstanding the established policy of strict observance of the judicial hierarchy of courts.
• Dismissal of the Compulsory Counterclaim: Whether the trial court erred in refusing to set petitioners' counterclaims for hearing on the ground that the case was deemed "closed and terminated" by the Court of Appeals after the latter dismissed respondents' appeal for failure to file their appellants' brief.

• Propriety of Direct Recourse to the Supreme Court: Yes. A strict application of the rule on judicial hierarchy is unnecessary when the case brought before the appellate courts involves not factual but purely legal questions, and Rule 41, Section 2(c) of the Revised Rules of Court permits a decision or order of the RTC to be appealed to the Supreme Court by petition for review on certiorari under Rule 45 provided only questions of law are raised.
• Dismissal of the Compulsory Counterclaim: No. The dismissal of the complaint does not ipso jure result in the dismissal of the counterclaim; the latter may remain for independent adjudication provided it states a sufficient cause of action and does not labor under any infirmity warranting its outright dismissal.

• Propriety of Direct Recourse to the Supreme Court: The established policy of strict observance of the judicial hierarchy of courts, as a rule, requires that recourse must first be made to the lower-ranked court exercising concurrent jurisdiction with a higher court; petitions for the issuance of extraordinary writs against first-level courts should be filed in the RTC, and those against the latter should be filed in the Court of Appeals. The rule is not iron-clad, however, and admits of exceptions. A strict application is unnecessary when cases brought before the appellate courts do not involve factual but purely legal questions. Rule 41, Section 2(c) of the Revised Rules of Court provides that a decision or order of the RTC may be appealed to the Supreme Court by petition for review on certiorari under Rule 45, provided the petition raises only questions of law. A question of law exists when the doubt or controversy concerns the correct application of law or jurisprudence to a certain set of facts, or when the issue does not call for an examination of the probative value of the evidence presented, the truth or falsehood of facts being admitted; a question of fact exists when the doubt or difference arises as to the truth or falsehood of facts, or when the query invites calibration of the whole evidence considering mainly the credibility of witnesses, the existence and relevancy of specific surrounding circumstances, their relation to each other and to the whole, and the probability of the whole situation. The test is not the appellation given by the party raising the question but whether the appellate court can determine the issue raised without reviewing or evaluating the evidence. Petitioners raised the solitary issue of the propriety of the dismissal of their counterclaim on the basis of the lower court's reasoning that the counterclaim derives its jurisdictional support from the complaint, which had already been dismissed. Resolving this issue required only a look into the pleadings, depositions, admissions, and affidavits submitted by the parties without going into the truth or falsity of such documents. The remedy for assailing the correctness of the dismissal of the counterclaims, involving as it does a pure question of law, therefore lies with the Supreme Court.

• Dismissal of the Compulsory Counterclaim: The dismissal of the complaint resulted from respondents' failure to append to the complaint a copy of the board resolution authorizing Desmond to sign the certificate of non-forum shopping on SBME's behalf. The subsequent dismissal of the counterclaim erroneously proceeded from the ratio that, since the main action had already been dismissed with finality by the appellate court, the lower court had lost jurisdiction to grant any relief under the counterclaim. In Pinga vs. Heirs of German Santiago, the Court, speaking through Justice Dante Tinga, resolved whether the dismissal of the complaint carries with it the dismissal of the counterclaim. Putting to rest the confusion occasioned by Metals Engineering Resources Corp. vs. Court of Appeals and BA Finance Corporation vs. Co, the Court articulated that, in light of the effectivity of the 1997 Rules of Civil Procedure, the correct and prevailing doctrine is that the dismissal of a complaint due to the fault of the plaintiff is without prejudice to the right of the defendant to prosecute any pending counterclaims of whatever nature in the same or separate action, and that BA Finance and all previous rulings inconsistent with this holding are abandoned. The present rule embodied in Sections 2 and 3 of Rule 17 ordains a more equitable disposition of counterclaims by ensuring that any judgment thereon is based on the merit of the counterclaim itself and not on the survival of the main complaint; if the counterclaim is palpably without merit or suffers jurisdictional flaws independent of the complaint, the trial court is not precluded from dismissing it, provided the judgment or order is premised on those defects, but if the counterclaim is justified, the amended rules protect it from peremptory dismissal by reason of the dismissal of the complaint. In Metals Engineering Resources Corp., severance of causes of action was not permitted in order to prevent circuity of suits and avert inconsistent rulings based on the same set of facts, on the theory that a compulsory counterclaim is auxiliary to the original suit and derives its jurisdictional support therefrom, so that if the court does not have jurisdiction to entertain the main action and dismisses it, the compulsory counterclaim must likewise be dismissed. In BA Finance Corporation, the Court likewise refused to entertain the compulsory counterclaim after the trial court lost jurisdiction in the main case. As the rule now stands, however, the nature of the counterclaim notwithstanding, the dismissal of the complaint does not ipso jure result in the dismissal of the counterclaim, and the latter may remain for independent adjudication provided it states a sufficient cause of action and does not labor under any infirmity that may warrant its outright dismissal. The jurisdiction of the court over a counterclaim that appears valid on its face, including the grant of any relief thereunder, is not abated by the dismissal of the main action; the court's authority to proceed with the disposition of the counterclaim independent of the main action is premised on the fact that the counterclaim, on its own, raises a novel question that may be aptly adjudicated based on its own merits and evidentiary support. In Perkin Elmer Singapore Pte Ltd. vs. Dakila Trading Corporation, a case on all fours with the present one, the Court expounded on Pinga and pointed out that the dismissal of the counterclaim due to the fault of the plaintiff is without prejudice to the right of the defendant to prosecute any pending counterclaims of whatever nature in the same or separate action; if the dismissal of the complaint somehow eliminates the cause of the counterclaim, then the counterclaim cannot survive, but conversely, if the counterclaim itself states a sufficient cause of action, it should stand independently of and survive the dismissal of the complaint. The Court ruled in the affirmative, emphasizing that the petitioner's counterclaim for damages and attorney's fees arising from the unfounded suit may prosper even if the main complaint had been dismissed, since the petitioner may have already incurred damages and litigation expenses such as attorney's fees after being forced to engage legal representation in the Philippines to protect its rights and assert the lack of jurisdiction of the courts over its person by virtue of the improper service of summons. Accordingly, the counterclaim of the petitioners was allowed to proceed independently of the complaint of the respondents.

• Dismissal of Complaint Does Not Ipso Jure Dismiss the Counterclaim — Under the 1997 Rules of Civil Procedure, the dismissal of a complaint — whether at the instance of the plaintiff or due to the plaintiff's fault — does not automatically result in the dismissal of a compulsory counterclaim. The counterclaim may remain for independent adjudication provided that (a) it states a sufficient cause of action, and (b) it does not labor under any infirmity that may warrant its outright dismissal. The court's jurisdiction over a counterclaim valid on its face, including the grant of any relief thereunder, is not abated by the dismissal of the main action. The Court applied this doctrine in reversing the RTC's dismissal of petitioners' counterclaim, holding that the counterclaim could proceed independently even after the main complaint had been dismissed with finality.
• Abandonment of the Metals Engineering and BA Finance Doctrines — The prior doctrines in Metals Engineering Resources Corp. vs. Court of Appeals and BA Finance Corporation vs. Co — that a compulsory counterclaim is merely ancillary to the principal controversy, derives its jurisdictional support from the complaint, and must necessarily be dismissed when the complaint is dismissed — were implicitly abandoned upon the effectivity of the 1997 Rules of Civil Procedure on 1 July 1997, and were expressly confirmed as abandoned in Pinga vs. Heirs of German Santiago. The Court relied on this abandonment in holding that the RTC's ratio — that it lost jurisdiction over the counterclaim upon the final dismissal of the main case — was erroneous.
• Question of Law vs. Question of Fact — A question of law exists when the doubt or controversy concerns the correct application of law or jurisprudence to a certain set of facts, or when the issue does not call for an examination of the probative value of the evidence presented, the truth or falsehood of facts being admitted. A question of fact exists when the doubt or difference arises as to the truth or falsehood of facts, or when the query invites calibration of the whole evidence considering mainly the credibility of witnesses, the existence and relevancy of specific surrounding circumstances, their relation to each other and to the whole, and the probability of the whole situation. The test is not the appellation given by the party but whether the appellate court can determine the issue raised without reviewing or evaluating the evidence. The Court applied this test to hold that the petition raised a pure question of law and properly lay with the Supreme Court under Rule 45.
• Judicial Hierarchy of Courts and Its Exceptions — The established policy of strict observance of the judicial hierarchy of courts requires, as a rule, that recourse must first be made to the lower-ranked court exercising concurrent jurisdiction with a higher court; petitions for extraordinary writs against first-level courts should be filed in the RTC, and those against the latter in the Court of Appeals. The rule is not iron-clad and admits of exceptions, one of which is that strict application is unnecessary when the case brought before the appellate courts involves not factual but purely legal questions. The Court applied this exception to justify petitioners' direct recourse to the Supreme Court.

• "the dismissal of a complaint due to fault of the plaintiff is without prejudice to the right of the defendant to prosecute any pending counterclaims of whatever nature in the same or separate action. We confirm that BA Finance and all previous rulings of the Court that are inconsistent with this present holding are now abandoned." — This passage, quoted by the Court from Pinga vs. Heirs of German Santiago, states the controlling rule and expressly abandons the contrary doctrines in BA Finance and Metals Engineering; it is the doctrinal core on which the disposition rests.
• "As the rule now stands, the nature of the counterclaim notwithstanding, the dismissal of the complaint does not ipso jure result in the dismissal of the counterclaim, and the latter may remain for independent adjudication of the court, provided that such counterclaim, states a sufficient cause of action and does not labor under any infirmity that may warrant its outright dismissal." — This is the Court's own canonical formulation of the prevailing rule, supplying the two conditions under which a counterclaim survives the dismissal of the complaint.
• "if the dismissal of the complaint somehow eliminates the cause of the counterclaim, then the counterclaim cannot survive. Conversely, if the counterclaim itself states sufficient cause of action then it should stand independently of and survive the dismissal of the complaint." — Quoted from Perkin Elmer Singapore Pte Ltd. vs. Dakila Trading Corporation, which the Court described as a case "on all fours" with the present one; the passage supplies the test for determining whether a counterclaim survives the dismissal of the main action.
• "A question of law exists when the doubt or controversy concerns the correct application of law or jurisprudence to a certain set of facts; or when the issue does not call for the examination of the probative value of the evidence presented, the truth or falsehood of facts being admitted." — This passage states the definition of a question of law that grounded the Court's ruling that petitioners properly filed their petition directly with the Supreme Court under Rule 45.

• Pinga vs. Heirs of German Santiago, 526 Phil. 868 (2006) — Controlling precedent. The Court adopted Pinga's holding that the dismissal of a complaint due to the plaintiff's fault is without prejudice to the defendant's right to prosecute any pending counterclaim in the same or separate action, and that BA Finance and all inconsistent rulings are abandoned. The Court quoted Pinga at length as the source of the prevailing doctrine.
• Perkin Elmer Singapore Pte Ltd. vs. Dakila Trading Corporation, 556 Phil. 822 (2007) — Followed; described by the Court as "a case on all fours with the present one." The Court relied on it for the rule that a counterclaim stating a sufficient cause of action stands independently of and survives the dismissal of the complaint, and for the proposition that damages and attorney's fees incurred from an unfounded suit are not eliminated by the dismissal of the complaint.
• Metals Engineering Resources Corp. vs. Court of Appeals, G.R. No. 95631, 28 October 1991, 203 SCRA 273 — Distinguished and abandoned. The Court reviewed and rejected its holding that a compulsory counterclaim cannot remain pending for independent adjudication because it is auxiliary to the original suit and derives its jurisdictional support therefrom.
• BA Finance Corporation vs. Co, G.R. No. 105751, 30 June 1993, 224 SCRA 163 — Abandoned. The Court refused to follow its ruling that a compulsory counterclaim must likewise be dismissed once the trial court loses jurisdiction over the main case; the Court confirmed that BA Finance and all previous inconsistent rulings are now abandoned.
• Bonifacio vs. RTC of Makati, Branch 149, G.R. No. 184800, 5 May 2010, 620 SCRA 268 — Cited for the rule on the judicial hierarchy of courts and the principle that strict application of the rule is unnecessary when the case involves purely legal questions.
• Binayug vs. Ugaddan, G.R. No. 181623, 5 December 2012, 687 SCRA 260 — Cited for the definitions of a question of law and a question of fact.
• Republic vs. Malabanan, G.R. No. 169067, 6 October 2010, 632 SCRA 338 — Cited for the test of whether a question is one of law or of fact, namely, whether the appellate court can determine the issue raised without reviewing or evaluating the evidence.

• Section 6, Rule 16, Revised Rules of Court — Provides that if no motion to dismiss has been filed, any of the grounds for dismissal under the Rule may be pleaded as an affirmative defense and, in the court's discretion, a preliminary hearing may be had thereon as if a motion to dismiss had been filed; the dismissal of the complaint under this section shall be without prejudice to the prosecution in the same or separate action of the counterclaim pleaded in the answer. Petitioners invoked this provision in arguing that their counterclaim could remain for independent adjudication despite the dismissal of the main case.
• Rule 41, Section 2(c), Revised Rules of Court — Provides that in all cases where only questions of law are raised or involved, the appeal shall be to the Supreme Court by petition for review on certiorari in accordance with Rule 45. The Court cited this provision in holding that the RTC Order dismissing the counterclaim could be brought directly to the Supreme Court, since the petition raised only a question of law.
• Sections 2 and 3, Rule 17, Revised Rules of Court — Referenced in the Court's quotation from Pinga as the provisions embodying the present rule that ordains a more equitable disposition of counterclaims by ensuring that any judgment thereon is based on the merit of the counterclaim itself and not on the survival of the main complaint.
• Section 13, Article VIII, 1987 Constitution — Cited in the Certification accompanying the Decision, certifying that the conclusions in the Decision were reached in consultation before the case was assigned to the writer of the opinion of the Court's Division.

• Antonio T. Carpio (Associate Justice, Chairperson)
• Arturo D. Brion (Associate Justice)
• Mariano C. Del Castillo (Associate Justice)
• Estela M. Perlas-Bernabe (Associate Justice)