Lasala vs. National Food Authority

A petition for annulment of judgment under Rule 47 may be granted on the ground of extrinsic fraud when a party's counsel, through grossly negligent and deliberate mishandling of the case amounting to concerted action with the opposing party, prevents the client from fairly presenting its side — even if the same ground could have been raised in a prior petition for relief, where the counsel who drafted that petition was himself the source of the fraud. Additionally, a counterclaim for wage adjustment arising from a security service contract that pre-existed the plaintiff's complaint is permissive, not compulsory, and nonpayment of docket fees deprives the trial court of jurisdiction over it.

Lasala, through his company PSF Security Agency, provided security guard services to the NFA. In 1994, Lasala's employees deployed to the NFA filed a complaint with the NLRC for underpayment of wages and nonpayment of other monetary benefits. The NLRC ruled for the employees and held Lasala and the NFA solidarily liable, prompting the sheriff to garnish the NFA's bank deposits with the DBP amounting to ₱383,572.90. Believing it had no liability to Lasala's employees, the NFA filed a complaint for sum of money with damages and an application for a writ of preliminary attachment against Lasala, who in turn filed an answer with counterclaim.

Lasala, through his company PSF Security Agency, provided security guard services to the NFA. Sometime in 1994, Lasala's employees who were deployed to the NFA filed a complaint with the NLRC for underpayment of wages and nonpayment of other monetary benefits. The NLRC ruled for the employees and held Lasala and the NFA solidarily liable for the adjudged monetary award. Consequently, the sheriff garnished the NFA's ₱383,572.90 worth of bank deposits with the Development Bank of the Philippines.

Believing it had no liability to Lasala's employees, the NFA filed with the RTC, Branch 220, Quezon City, a complaint for sum of money with damages and an application for the issuance of a writ of preliminary attachment against Lasala. In response, Lasala filed an answer with counterclaim and opposition to the prayer for preliminary attachment. In his counterclaim, Lasala prayed for moral damages of ₱1,000,000.00, exemplary damages of ₱500,000.00, attorney's fees of ₱300,000.00, compensatory damages of ₱250,000.00, and unpaid wage differential of ₱1,500,000.00, for a total of ₱3,550,000.00. The trial court initially granted the NFA's prayer for a writ of preliminary attachment, but this writ was eventually nullified when Lasala questioned it with the CA in CA-G.R. SP No. 41124.

On May 2, 1997, the trial court dismissed the NFA's complaint for failure of the lawyer deputized by the OGCC, Atty. Rogelio B. Mendoza, to present the NFA's evidence-in-chief due to his repeated hearing absences. The NFA replaced Atty. Mendoza and administratively charged him with dishonesty, grave misconduct, conduct grossly prejudicial to the best interests of the service, and gross neglect of duty. It subsequently employed Atty. Ernesto D. Cahucom as its new counsel. Although the NFA's complaint was dismissed, Lasala's counterclaim remained, and he presented evidence to support it. Notably, Atty. Cahucom did not submit any evidence to controvert Lasala's counterclaim evidence. When asked during trial, Atty. Cahucom simply waived his right to cross-examine Lasala and did not exert any effort to counter his testimony.

In its September 2, 2002 decision, the trial court granted Lasala's counterclaim in the total amount of ₱52,788,970.50, broken down as follows: actual and compensatory damages of ₱35,165,370.50, loss of business credit of ₱10,000,000.00, moral damages of ₱5,000,000.00, exemplary damages of ₱500,000.00, litigation expenses of ₱500,000.00, and Lasala's claim for wage adjustment of ₱1,623,600.00 plus 12% interest per annum from the year 2000 until full payment. This amount was substantially higher than the ₱3,550,000.00 Lasala originally prayed for. Despite the huge award, the NFA failed to appeal. Atty. Cahucom did not inform the NFA's management about the trial court's adverse ruling, reasoning that he only discovered the decision after the lapse of the period for appeal.

Having lost its chance to appeal, the NFA filed with the trial court a petition for relief from judgment grounded on excusable negligence. Through Atty. Cahucom, the NFA attributed its failure to appeal to one of its employees who allegedly received the copy of the decision but did not inform Atty. Cahucom about it. The trial court did not accept this reasoning and denied the petition for relief for insufficiency in substance. Meanwhile, then NFA Administrator Arthur C. Yap ordered a legal audit of all NFA cases, through which the NFA management discovered that Attys. Mendoza and Cahucom had grossly mishandled the case against Lasala, causing the huge and unjust liability of ₱52,788,970.50. On the grounds of lack of jurisdiction and extrinsic fraud, the NFA, now through the OGCC, filed with the CA a petition and an amended petition for annulment of judgment of the trial court's September 2, 2002 decision.

• Res Judicata: Lasala maintained that the NFA's prior filing of a petition for relief at the trial court level should have barred the NFA from filing a subsequent petition for annulment with the CA, as res judicata had already set in.
• Waiver of Extrinsic Fraud: Lasala argued that the NFA could no longer invoke extrinsic fraud as a ground for annulment since it failed to raise this ground in its petition for relief, amounting to a waiver of the right to subsequently raise it.
• Insufficient Proof of Extrinsic Fraud: Lasala asserted that even if extrinsic fraud had been properly cognizable, the NFA still failed to prove it.
• Compulsory Counterclaim: Lasala posited that the NFA could not invoke the trial court's lack of jurisdiction over his counterclaim for nonpayment of docket fees, because his counterclaim was compulsory in nature and did not require the payment of docket fees.
• Improper Ground: Lasala argued that grave abuse of discretion is not a proper basis for granting a petition for annulment of judgment, the only grounds allowed being extrinsic fraud and lack of jurisdiction, neither of which was available to the NFA.

• No Res Judicata: The NFA argued that there was no res judicata between its petition for relief and petition for annulment of judgment, as the two reliefs were based on different grounds — excusable negligence versus extrinsic fraud and lack of jurisdiction.
• Extrinsic Fraud: The NFA contended that extrinsic fraud was employed against it when its handling lawyers allowed its complaint against Lasala to be dismissed and when they failed to question the trial court's adverse ruling through a motion for reconsideration or an appeal without any valid justification.
• Lack of Jurisdiction: The NFA asserted that the trial court lacked jurisdiction over Lasala's counterclaim because he failed to file the required docket fees.
• Propriety of Annulment: The NFA maintained that the CA did not err in annulling the trial court's September 2, 2002 decision, since the trial court ruling had no basis except Lasala's self-serving testimony.

• Res Judicata: Whether the dismissal of the NFA's petition for relief from judgment bars, on res judicata grounds, the subsequent filing of a petition for annulment of judgment with the CA.
• Extrinsic Fraud — Availability: Whether extrinsic fraud was properly raised and substantiated as a ground for annulment, notwithstanding the NFA's failure to raise it in its prior petition for relief.
• Extrinsic Fraud — Substance: Whether the grossly negligent acts of the NFA's handling lawyers constituted extrinsic fraud warranting annulment of judgment.
• Lack of Jurisdiction — Nature of Counterclaim: Whether Lasala's counterclaim, particularly the wage adjustment claim, is compulsory or permissive, and whether nonpayment of docket fees deprived the trial court of jurisdiction.
• Prescription and Refiling: Whether Lasala's permissive counterclaim may still be refiled after the annulment of the trial court's judgment.

• Res Judicata: No. The dismissal of the petition for relief did not bar the petition for annulment, there being no identity of subject matter and cause of action between the two proceedings.
• Extrinsic Fraud — Availability: Yes. The prohibition under Section 2, Rule 47 did not apply because Atty. Cahucom, who drafted the petition for relief, was himself the source of the fraud and could not be expected to incriminate himself.
• Extrinsic Fraud — Substance: Yes. The repeated and deliberate mishandling of the case by Attys. Mendoza and Cahucom amounted to concerted action with Lasala, constituting extrinsic fraud that prevented the NFA from making a fair submission.
• Lack of Jurisdiction — Nature of Counterclaim: The wage adjustment counterclaim is permissive, not compulsory. Because no docket fees were paid, the trial court never acquired jurisdiction over it.
• Prescription and Refiling: No. The counterclaim had already prescribed and may no longer be refiled, because the extrinsic fraud was attributable to Lasala's side, precluding tolling of the prescriptive period under Section 8, Rule 47.

• Res Judicata: Res judicata requires four elements: (1) a final judgment, (2) rendered on the merits, (3) by a court of competent jurisdiction, and (4) identity of parties, subject matter, and cause of action. While the first three elements were present, the fourth was absent. Applying the identity of evidence test, the Court found no identity of cause of action between the petition for relief — grounded on excusable negligence attributable to an NFA employee's failure to forward the decision — and the petition for annulment — grounded on the fraudulent acts of the NFA's own lawyers and the trial court's lack of jurisdiction. The evidence required to prove each ground was distinct, and the reliefs prayed for differed. Thus, res judicata did not bar the petition for annulment.

• Extrinsic Fraud — Availability: Under Section 2, Rule 47, extrinsic fraud shall not be a valid ground if it was availed of, or could have been availed of, in a motion for new trial or petition for relief. However, the Court found this prohibition inapplicable under the unique circumstances. Atty. Cahucom, who himself drafted and filed the petition for relief, was part of the extrinsic fraud against the NFA. It could not be expected that he would raise his own negligence as a ground and incriminate himself. Moreover, it was only through the legal audit ordered by NFA Administrator Yap in 2002 that the NFA's management discovered the mishandling. The NFA was fraudulently precluded from raising the ground earlier, and thus did not waive its right to invoke extrinsic fraud in the petition for annulment.

• Extrinsic Fraud — Substance: Extrinsic fraud refers to any fraudulent act of the prevailing party committed outside the trial, where the defeated party is prevented from fully exhibiting his side. While a lawyer's mere mistake or gross negligence generally does not amount to extrinsic fraud — and the negligence of counsel ordinarily binds the client — the Court recognized an exception, following Bayog vs. Natino, where the lawyer's negligence was so unconscionable and deliberate that it amounted to connivance with the prevailing party. The Court found the exceptional circumstances present here: the NFA, as a government agency, relied solely on its legal officers, who were not just counsel but employees tasked to advance the agency's legal interests. Attys. Mendoza and Cahucom acted negligently several times — Atty. Mendoza caused dismissal of the complaint by repeated absences and had a prior record of prejudicing the NFA in a 1993 case; Atty. Cahucom waived cross-examination, presented no controverting evidence, and failed to appeal. Their actions demonstrated unreasonable disregard and obvious indifference, leading to the conclusion of concerted action with Lasala.

• Lack of Jurisdiction — Nature of Counterclaim: A compulsory counterclaim arises out of or is necessarily connected with the same transaction or occurrence that is the subject matter of the plaintiff's complaint. The four tests are: (a) whether the issues of fact and law raised by the claim and counterclaim are largely the same; (b) whether res judicata would bar a subsequent suit absent the compulsory counterclaim rule; (c) whether substantially the same evidence supports or refutes both; and (d) whether there is a logical relation between the claim and counterclaim. A positive answer to all four indicates a compulsory counterclaim. Applying these tests, the Court ruled that Lasala's wage adjustment counterclaim was permissive: the cause of action already existed before the NFA's complaint was filed, as it arose from the security service contract executed in 1989. It did not arise out of, nor was it connected with, the NFA's complaint for sum of money and preliminary attachment. Because it was permissive, docket fees were required. Lasala never paid them, even beyond the 10-year prescriptive period under Article 1144 of the Civil Code. The trial court therefore never acquired jurisdiction over the wage adjustment counterclaim.

• Prescription and Refiling: Under Section 7, Rule 47, an annulment renders the assailed judgment null and void, without prejudice to the original action being refiled in the proper court. Under Section 8, the prescriptive period for refiling is suspended from the filing of the original action until the finality of the judgment of annulment — except where the extrinsic fraud is attributable to the plaintiff in the original action. The "original action" contemplated was Lasala's counterclaim against the NFA. Because the extrinsic fraud was attributable to Lasala's side — through the concerted action of his opponents' own lawyers — the prescriptive period was not suspended. Lasala's cause of action accrued in 1989, the prescriptive period was 10 years, and no docket fee was paid even after the lapse of that period. The counterclaim had therefore prescribed and could no longer be refiled.

• Annulment of Judgment as Equitable and Exceptional Relief — A petition for annulment of judgment under Rule 47 is an equitable remedy available only in exceptional circumstances where no other adequate remedy is available through no fault of the petitioner. It is subject to stringent requirements: (1) ordinary remedies (new trial, appeal, petition for relief) must no longer be available without the petitioner's fault; (2) it may only be based on extrinsic fraud or lack of jurisdiction; (3) extrinsic fraud is not a valid ground if it was availed of or could have been availed of in a motion for new trial or petition for relief; (4) if based on extrinsic fraud, the petition must be filed within four years from discovery, and if based on lack of jurisdiction, before it is barred by laches or estoppel. The Court applied these requisites strictly, finding that the NFA satisfied them despite the prior filing of a petition for relief.

• Extrinsic Fraud — Extrinsic fraud refers to any fraudulent act of the prevailing party in litigation committed outside the trial of the case, where the defeated party is prevented from fully exhibiting his side by fraud or deception practiced on him by his opponent, including instances where an attorney fraudulently or without authority connives at his defeat. As a general rule, a lawyer's mistake or gross negligence does not amount to extrinsic fraud, and the negligence of counsel binds the client. However, where the lawyer's negligence is so unconscionable and deliberate as to amount to collusion with the prevailing party, it qualifies as extrinsic fraud. The Court applied this exception, finding that the NFA's lawyers' repeated, deliberate mishandling — including waiving cross-examination, presenting no evidence, failing to appeal, and concealing the adverse decision — amounted to concerted action with Lasala.

• Lack of Jurisdiction vs. Grave Abuse of Discretion — The concept of lack of jurisdiction as a ground to annul a judgment under Rule 47 does not embrace grave abuse of discretion amounting to lack or excess of jurisdiction. Jurisdiction is the authority to decide a cause, not the decision rendered therein. Where a court has validly acquired jurisdiction over the person and the subject matter, errors committed in the exercise of jurisdiction are merely errors of judgment proper for appeal, not annulment. The lack of jurisdiction envisioned under Rule 47 is the total absence of jurisdiction over the person of a party or over the subject matter. The Court clarified that the CA erred in annulling the RTC decision on the basis of grave abuse of discretion, but sustained the annulment on the proper grounds of extrinsic fraud and lack of jurisdiction over the permissive counterclaim.

• Compulsory vs. Permissive Counterclaim — A compulsory counterclaim is any claim that a defending party may have against an opposing party which, at the time of suit, arises out of or is necessarily connected with the same transaction or occurrence that is the subject matter of the plaintiff's complaint. The four tests are: (a) Are the issues of fact and law raised by the claim and counterclaim largely the same?; (b) Would res judicata bar a subsequent suit absent the compulsory counterclaim rule?; (c) Will substantially the same evidence support or refute both?; and (d) Is there any logical relation between the claim and counterclaim? A positive answer to all four indicates a compulsory counterclaim; otherwise, it is permissive. The Court applied these tests and held that Lasala's wage adjustment counterclaim was permissive because its cause of action pre-existed the NFA's complaint and arose from a separate security service contract.

• Nonpayment of Docket Fees and Jurisdiction over Permissive Counterclaims — Nonpayment of docket fees for a permissive counterclaim prevents the trial court from acquiring jurisdiction over it. The court may allow payment within a reasonable time, but in no case beyond the prescriptive period for the filing of the permissive counterclaim. The Court held that because Lasala's wage adjustment claim was permissive and no docket fees were paid even beyond the 10-year prescriptive period under Article 1144 of the Civil Code, the trial court never acquired jurisdiction over it.

• Suspension of Prescriptive Period under Section 8, Rule 47 — The prescriptive period for refiling an annulled original action is suspended from the filing of the original action until the finality of the judgment of annulment, except where the extrinsic fraud is attributable to the plaintiff in the original action. The Court held that since the extrinsic fraud was attributable to Lasala's side — through the concerted action of the NFA's own lawyers — the prescriptive period was not suspended, and Lasala's counterclaim had already prescribed.

• "Annulment of judgment is a recourse equitable in character, allowed only in exceptional cases as where there is no available or other adequate remedy." — This passage defines the fundamental nature of annulment of judgment under Rule 47 and explains why the remedy is narrowly circumscribed, serving as the doctrinal foundation for the stringent requirements the Court applied.

• "the concept of lack of jurisdiction as a ground to annul a judgment does not embrace grave abuse of discretion amounting to lack or excess of jurisdiction" — This formulation distinguishes jurisdiction from its exercise and clarifies that errors of judgment committed by a court that validly acquired jurisdiction are not a basis for annulment under Rule 47, correcting the CA's erroneous rationale while sustaining its disposition on proper grounds.

• "Jurisdiction is not the same as the exercise of jurisdiction. As distinguished from the exercise of jurisdiction, jurisdiction is the authority to decide a cause, and not the decision rendered therein." — Quoted from Republic vs. G Holdings, this passage articulates the canonical distinction between jurisdiction and the exercise of jurisdiction, frequently cited in Philippine remedial law jurisprudence.

• "the unconscionable failure of a lawyer to inform his client of his receipt of the trial court's order and the motion for execution, and to take the appropriate action against either or both to protect his client's rights amounted to connivance with the prevailing party, which constituted extrinsic fraud." — This passage, drawn from Bayog vs. Natino, establishes the exception to the general rule that negligence of counsel binds the client, and was the controlling precedent the Court applied to find extrinsic fraud in the NFA's lawyers' conduct.

• Antonino vs. Register of Deeds of Makati, G.R. No. 185663, June 20, 2012 — Cited to explain the nature of annulment of judgment as an equitable and exceptional recourse available only when no other adequate remedy exists, reinforcing the stringent requirements of Rule 47.

• Bayog vs. Natino, 327 Phil. 1019 (1996) — The controlling precedent for the exception to the general rule that negligence of counsel does not constitute extrinsic fraud. The Court found the exceptional circumstances in Bayog present in this case, where the NFA's lawyers' unconscionable and deliberate failures amounted to connivance with the prevailing party.

• Tan vs. Court of Appeals, 524 Phil. 752 (2006) — Distinguished from Bayog; the Court noted that in Tan, the petitioner's failure to file a notice of appeal was partly his own fault, and only a single act of negligence was presented, unlike the repeated and deliberate mishandling in the present case.

• Republic vs. G Holdings, Inc., G.R. No. 141241, November 22, 2005 — Cited for the canonical distinction between jurisdiction and the exercise of jurisdiction, used to clarify that the lack of jurisdiction ground under Rule 47 refers to total absence of jurisdiction, not grave abuse of discretion.

• GSIS vs. Heirs of Fernando F. Caballero, G.R. No. 158090, October 4, 2010 — Cited for the four-part test to determine whether a counterclaim is compulsory or permissive, which the Court applied to classify Lasala's wage adjustment claim as permissive.

• Sun Insurance vs. Asuncion, G.R. Nos. 79937-38, February 13, 1989 — Cited for the rule that a court may allow payment of docket fees for a permissive counterclaim within a reasonable time, but in no case beyond the prescriptive period, which the Court applied to conclude the trial court never acquired jurisdiction.

• Taganas vs. Emuslan, G.R. No. 146980, September 2, 2003 — Cited for the elements of res judicata, which the Court applied to find that the fourth element — identity of parties, subject matter, and cause of action — was absent between the petition for relief and the petition for annulment.

• Section 2, Rule 47, Rules of Court — Provides that annulment of judgment may be based only on extrinsic fraud and lack of jurisdiction, and that extrinsic fraud shall not be a valid ground if it was availed of or could have been availed of in a motion for new trial or petition for relief. The Court held this prohibition inapplicable because Atty. Cahucom, who drafted the petition for relief, was himself the source of the fraud and could not be expected to incriminate himself.

• Section 1, Rule 47, Rules of Court — Provides that annulment is available only when ordinary remedies are no longer available through no fault of the petitioner. The NFA satisfied this requirement because its prior petition for relief was denied and the period for appeal had lapsed due to its lawyers' fraudulent concealment.

• Section 3, Rule 47, Rules of Court — Provides the prescriptive periods: if grounded on extrinsic fraud, within four years from discovery; if based on lack of jurisdiction, before barred by laches or estoppel. The Court noted the NFA's petition was filed within the allowed periods.

• Section 7, Rule 47, Rules of Court — Provides that a judgment of annulment sets aside the questioned judgment and renders it null and void, without prejudice to the original action being refiled in the proper court. The Court applied this provision but held that refiling was barred by prescription.

• Section 8, Rule 47, Rules of Court — Provides that the prescriptive period for refiling is suspended from the filing of the original action until the finality of the judgment of annulment, except where the extrinsic fraud is attributable to the plaintiff in the original action. The Court held that since the extrinsic fraud was attributable to Lasala's side, the prescriptive period was not suspended, and the counterclaim had prescribed.

• Article 1144, Civil Code — Provides that an action based on a written contract must be brought within 10 years from the time the right of action accrues. The Court applied this provision to determine that Lasala's wage adjustment counterclaim, based on the security service contract, prescribed 10 years after the cause of action accrued in 1989.

Antonio T. Carpio (Chairperson), Presbitero J. Velasco, Jr., Mariano C. del Castillo, and Marvic M.V.F. Leonen concurred. No separate concurring opinions at the Supreme Court level were noted in the text. The decision references a concurring opinion by CA Associate Justice Rosmari Carandang, who communicated the sense of the CA majority's ruling that the trial court committed an error of judgment and acted beyond its lawful jurisdiction when it relied solely on Lasala's self-serving testimony — a view the Supreme Court corrected as an improper basis for annulment while sustaining the result on different grounds.