Limaco vs. Shonan Gakuen Children's House Philippines, Inc.

A compulsory counterclaim cannot be dismissed over the defendant's objection when the plaintiff moves to dismiss the complaint, as a compulsory counterclaim cannot remain pending for independent adjudication. Additionally, parties to a void contract who received the down payment are liable to return it under the principle against unjust enrichment, even if they claim to have transferred the funds to third parties not privy to the contract.

Petitioners, registered owners of agricultural land in Bay, Laguna, entered into a Contract of Sale with respondent corporation for ₱12,531,720.00. Respondent paid a ₱1,200,000.00 down payment. The sale fell through because DAR clearance was not obtained. Respondent demanded substitution of the property or a refund. Petitioners proposed a DAR scheme (donation to municipality, then to respondent), which respondent rejected due to legal and operational concerns, proposing instead a direct sale or substitution with untenanted land. Petitioners did not respond, leading respondent to demand a refund and eventually file a rescission case.

• Contract of Sale: On May 19, 1988, petitioners, as registered owners and vendors, and respondent, as vendee, executed a Contract of Sale over three parcels of agricultural land in Bay, Laguna, for ₱12,531,720.00. Respondent paid a down payment of ₱1,200,000.00 upon signing, with the balance payable in seven equal installments. The parties stipulated that if the transfer failed, all paid-in amounts would be applied to another similar property owned by the vendors.
• Failure of the Sale: Respondent refused to remit the installments due to petitioners' failure to secure DAR clearance. Respondent demanded that petitioners either resolve the tenant issue or substitute the lots with untenanted land. Petitioners proposed a scheme based on a DAR legal opinion requiring the tenant farmers to donate the land to the municipality of Bay, which would then donate it to respondent. Respondent rejected this, citing concerns over municipal influence and donor scrutiny, and reiterated its demand for substitution with untenanted land or a direct sale. Petitioners did not reply.
• Procedural Maneuvering and Compromise: Respondent demanded a refund of the down payment and, upon petitioners' refusal, filed a complaint for rescission in Makati. Petitioners subsequently filed a complaint for specific performance in Laguna. During the pendency of the Laguna case, the parties agreed to a compromise where petitioners would return 50% of the down payment (₱600,000.00). Petitioners remitted only ₱487,000.00, leaving a balance of ₱113,000.00. The compromise agreement was never signed by petitioners.
• Attempted Dismissal: On July 9, 1996, petitioners filed a Motion to Withdraw Complaint, arguing that respondent's special defense rendered specific performance impossible and that the compulsory counterclaim would fall with the complaint. The trial court denied the motion. After the tenant farmers were dismissed from the case, petitioners refused to present evidence, and respondent proceeded with its evidence.

• Compulsory Counterclaim Dismissal: Petitioners argued that respondent's compulsory counterclaim should have been dismissed upon their motion to withdraw the complaint, contending that the counterclaim was inextricably linked to the complaint and could not remain pending for independent adjudication.
• Liability for Down Payment: Petitioners maintained that they should not be held liable for the ₱713,000.00 balance because the tenant farmers, not the landowners, actually received the ₱1,200,000.00 down payment. They argued respondent should suffer the consequences of withdrawing its counterclaim against the tenant farmers.
• Grave Abuse of Discretion: Petitioners contended that the Court of Appeals willfully disregarded evidence on record concerning the down payment and committed reversible error in holding petitioners liable for the balance.

• Objection to Dismissal: Respondent countered that under the Rules of Court, an action should not be dismissed against the defendant's objection if a counterclaim has been pleaded, unless the counterclaim can remain pending for independent adjudication. Dismissal would cause extreme prejudice, as the Makati rescission case had already been dismissed to give way to the Laguna case, and respondent had incurred substantial litigation expenses.
• Restitution and Unjust Enrichment: Respondent argued that petitioners must return the balance of the down payment to prevent unjust enrichment, as the contract was void and the compromise agreement was cancelled due to petitioners' breach and failure to sign.

• Compulsory Counterclaim: Whether respondent's compulsory counterclaim should be dismissed upon the attempted withdrawal of petitioners' complaint.
• Liability for Restitution: Whether petitioners are liable to respondent for the balance of the down payment.
• Extent of Liability: If liable, the extent of petitioners' liability.

• Compulsory Counterclaim: The dismissal of the complaint was properly denied. Under Section 2, Rule 17 of the old Rules of Court, an action shall not be dismissed against the defendant's objection if a counterclaim has been pleaded, unless the counterclaim can remain pending for independent adjudication. A compulsory counterclaim, by its nature, requires simultaneous adjudication with the complaint and cannot remain for independent adjudication, unlike a permissive counterclaim.
• Liability for Restitution: Liability for the down payment was correctly imposed on the petitioners. Both lower courts found that the down payment was remitted to the petitioners-landowners, a finding supported by the contract's express terms. The stipulation that paid-in amounts would apply to another property owned by the vendors contradicts the claim that the payment was for the tenant farmers. Petitioners' reliance on the cross-examination of petitioner Rogelio, Jr. was rejected; the testimony was elicited by a misleading question and unsupported by receipts, which is implausible for a family of lawyers handling a substantial amount.
• Extent of Liability: The balance of ₱713,000.00 must be returned pursuant to the principle against unjust enrichment. The prior compromise agreement to return only ₱600,000.00 was invalidated by the petitioners' failure to sign the agreement and their breach of the obligation to remit the full amount. Deducting the ₱487,000.00 already returned from the ₱1,200,000.00 down payment leaves a balance of ₱713,000.00.

• Dismissal of Action with Compulsory Counterclaim — Under the Rules of Court, if a defendant has pleaded a counterclaim prior to the service of the plaintiff's motion to dismiss, the action shall not be dismissed against the defendant's objection unless the counterclaim can remain pending for independent adjudication. A compulsory counterclaim cannot remain for independent adjudication because it inherently requires simultaneous adjudication with the main complaint.
• Principle Against Unjust Enrichment — No one should enrich himself at the expense of another. When a contract is void and the sale fails to materialize, the party who received the down payment must return it to avoid unjust enrichment. A compromise agreement that is unsigned and breached by the payor cannot diminish the full restitution required under this principle.

• "What may invariably remain for independent adjudication are permissive counterclaims as compared to compulsory counterclaims which generally necessitate a simultaneous adjudication with the complaint itself."
• "With respect to the amount paid by the appellant as [down payment] for the subject land, its return must be decreed. This is in view of the rule that no one should enrich himself at the expense of another."
• "The absence of receipts lays serious doubt on petitioners' claim. If they really gave the money to the tenant farmers as they claim, it is hard to believe that a family of lawyers would be less than zealous in protecting their interests by not demanding proof of payment, especially since the amount at stake is quite substantial."

• City of Manila vs. Ruymann, 37 Phil. 421 (1918) — Followed as controlling precedent for the proposition that the effect of dismissal upon the rights of the defendant should always be taken into consideration, requiring court authority for dismissal after an answer has been served.

• Section 21, Article II, 1987 Constitution — Declares the state policy of promoting comprehensive agrarian reform. The Court of Appeals held this provision is not self-executing and cannot be the sole basis for nullifying the contract.
• Section 6, Comprehensive Agrarian Reform Law (CARL) — Decrees that sales of private agricultural lands prior to its effectivity are valid only if registered with the Register of Deeds within three months. The subject contract was declared void for non-compliance with this provision.
• Article 1479, Civil Code — Relates to the enforceability of unilateral promises to buy or sell. The trial court invoked it to rule the substitution provision was not demandable as the substitute property was not ascertained.
• Sections 1 and 2, Rule 17, old Rules of Court — Govern the dismissal of actions by the plaintiff. Section 2 requires a court order for dismissal after an answer is filed and prohibits dismissal over a defendant's objection if a counterclaim cannot remain for independent adjudication.

Austria-Martinez, Callejo, Sr., Tinga, and Chico-Nazario, JJ.