Spouses Meliton vs. Court of Appeals

A compulsory counterclaim dismissed without prejudice for lack of jurisdiction over it due to non-payment of docket fees, and without adjudication on the merits, does not constitute res judicata and does not bar its prosecution in a subsequent separate action where the dismissal order reserved its refiling and strict application of the bar rule would defeat substantial justice.

Nelia A. Ziga, acting in her own behalf and as attorney-in-fact of Alex A. Ziga and Emma A. Ziga-Siy, stood as lessor of a parcel of land on Elias Angeles Street, Naga City, with Lydia Meliton as lessee under a contract of lease. The lease imposed reciprocal obligations of peaceful enjoyment and compliance under Articles 1654 and 1659 of the Civil Code. The parties' respective rights to rescission, possession, improvements and damages all depended on that same lease relationship.

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 for rescission of a contract of lease over a parcel of land on Elias Angeles Street, Naga City, against petitioner Lydia Meliton, docketed as Civil Case No. RTC 88-1480 in Branch 27 of the Regional Trial Court of Naga City. According to private respondent, petitioner had failed as lessee to deposit the one month rental and to pay monthly rentals due, had constructed a concrete wall and roof on the site of a demolished house without written consent, and had made an unauthorized sublease to a third party. On July 29, 1988, petitioner filed an answer denying the material averments and setting up three counterclaims for P34,000.00 as value of her kitchenette demolished by private respondent, P10,000.00 as value of improvements to beautify it plus P23,000.00 as value of furniture and fixtures therein, and P20,000.00 moral damages aside from P5,000.00 attorney's fees and P250.00 per court appearance with P1,000.00 litigation expenses.

Thereafter, on motion of private respondent contending that her cause of action had become moot and academic by expiration of the lease contract on February 7, 1989, the RTC on May 29, 1989 dismissed the complaint. In the same order the RTC also dismissed petitioner Lydia Meliton's counterclaims for non-payment of docket fees, holding it had not acquired jurisdiction over them. Because no adjudication of those damage claims followed, petitioners Lydia Meliton and Virgilio Meliton on December 6, 1989 filed a complaint to recover the same amounts alleged in the counterclaims, docketed as Civil Case No. RTC 89-1942 and likewise assigned to Branch 27 of the same RTC.

On February 15, 1991, private respondent moved to dismiss the new complaint on the ground that the cause of action was barred by prior judgment in Civil Case No. RTC 88-1480 rendered May 29, 1989. The RTC denied the motion on February 22, 1991 on the ground that dismissal of the counterclaims for failure to pay docket fees was not an adjudication on the merits for lack of jurisdiction and did not bar the later complaint, then denied reconsideration for lack of merit on March 18, 1991. Private respondent then filed a petition for certiorari, which the SC in its resolution dated April 29, 1991 referred to the CA for disposition pursuant to Section 9, paragraph 1 of B.P. Blg. 129, where it was docketed as CA-G.R. SP No. 25093. In its decision promulgated August 9, 1991, the CA granted the petition, annulled the two RTC orders for grave abuse of discretion, and dismissed Civil Case No. RTC 89-1942, holding the counterclaim was compulsory and failure to seek reconsideration or appeal rendered its dismissal final and a bar under Section 4, Rule 9 of the Revised Rules of Court.

• Mootness: Respondent argued that her rescission cause of action in Civil Case No. RTC 88-1480 had become moot and academic by expiration of the lease contract on February 7, 1989.
• Bar by Prior Judgment: Respondent countered that petitioners' complaint in Civil Case No. RTC 89-1942 was barred by prior judgment, the May 29, 1989 dismissal in Civil Case No. RTC 88-1480, and that failure to seek reconsideration of or appeal from dismissal of the counterclaims rendered it final.

• Nature of Counterclaims: Whether petitioners' counterclaims for demolished structures, improvements, furniture and damages were compulsory in nature.
• Bar to Subsequent Action: Whether petitioners, having failed to seek reconsideration of or appeal from the dismissal of their counterclaims, are barred from asserting the same claims in another action.

• Nature of Counterclaims: Yes. The counterclaims are compulsory because they arise out of and are logically related to the same lease transaction as the rescission complaint under Section 4, Rule 9 of the Rules of Court.
• Bar to Subsequent Action: No. The claims are not barred because the prior dismissal was without prejudice, without jurisdiction, and not on the merits, so res judicata does not apply.

• Nature of Counterclaims: The SC applied the three requisites under Section 4, Rule 9 and the one compelling test of compulsoriness, which is logical relationship where separate trials would entail substantial duplication of effort and time involving many of the same factual and legal issues. Both sides' claims arose from the same contract of lease, with rights, obligations and potential liability emanating from the same contractual relation, and petitioners' demolition-damages claim rested on possessory rights under the very lease sought to be rescinded. The SC likened the relation to recovery-of-land versus possessor's improvements cases, where value of improvements must be interposed as compulsory counterclaims, since both are offshoots of the same basic controversy.
• Bar to Subsequent Action: The SC held Section 4, Rule 9 barring unpleaded compulsory counterclaims inapplicable because petitioners duly interposed the claims but they were dismissed for non-payment of docket fees. Res judicata requires final judgment by a court with jurisdiction, on the merits, with identity of parties, subject matter and causes of action, and none of the merits and jurisdiction elements existed since the May 29, 1989 dismissal under Section 2, Rule 17 was unqualified and therefore without prejudice, and dismissal for lack of jurisdiction is not on the merits. The SC further found an implied reservation in the dismissal order treating the counterclaim as in the nature of a complaint, confirmed by the same RTC's later refusal to dismiss, plus an independent damages action under Article 1659 for breach of Article 1654, paragraph 3, and relaxed the bar under Manchester because petitioners relied on the then-rule requiring fees only for permissive counterclaims.

• Compulsory counterclaim — logical relationship test — A counterclaim is compulsory if (a) it arises out of or is necessarily connected with the opposing party's transaction, (b) it needs no third parties beyond jurisdiction, and (c) the court has jurisdiction to entertain it, with compulsoriness determined by whether separate trials would substantially duplicate effort and time on the same factual or legal issues. The SC applied it to hold demolition-damages claims logically related to the lessor's rescission suit over the same lease.
• Res judicata — Requires (1) final judgment, (2) by a court with jurisdiction over subject matter and parties, (3) on the merits, and (4) identity of parties, subject matter and causes of action. The SC found elements (2) and (3) absent where counterclaims were dismissed for lack of jurisdiction and without prejudice.
• Dismissal without prejudice under Rule 17 — Dismissal at plaintiff's instance after answer, unless stated with prejudice, is without prejudice and leaves parties free to litigate again as if no action had commenced. The SC applied it to the unqualified May 29, 1989 dismissal and, by parity, to the counterclaims dismissed therein.
• Manchester doctrine on docket fees — Applies specifically to permissive counterclaims only, excluding compulsory counterclaims from payment under Sec. 5, Rule 141, and its defect cannot be cured by amendment. The SC held petitioners justifiably believed their claims could be refiled separately after the RTC dismissed them under Manchester before its modification.
• Lessor's obligation and lessee's damages remedy — Under Article 1654, paragraph 3 of the Civil Code the lessor must maintain the lessee in peaceful and adequate enjoyment, and under Article 1659 the aggrieved party may ask rescission with damages or damages only. The SC held demolition during the lease violated that obligation and gave an independent damages cause of action.

• "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." — States the compelling test for compulsory counterclaims and why the lease and demolition claims had to be tried together.
• "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." — Defines the effect of without-prejudice dismissal supporting refiling of the dismissed counterclaims.
• "rules of procedure are used only to help secure substantial justice." — Justifies liberal construction and relaxation of the compulsory-counterclaim bar under the peculiar Manchester-reliance circumstances.
• "Form cannot and should not prevail over substance." — Rejects rigid technical application that would deprive petitioners of their day in court on the merits.

• National Marketing Corporation vs. Federation of United Namarco Distributors, Inc., 49 SCRA 238 — Followed as source of logical-relationship test for compulsory counterclaims.
• Berses vs. Villanueva, 25 Phil. 473; Carpena, et al. vs. Manalo, et al., 1 SCRA 1060; Castro vs. Montes, et al., 107 Phil. 533 — Cited as settled rule requiring improvements claims in ejectment or recovery actions to be compulsory counterclaims.
• Javier vs. IAC, 171 SCRA 605 — Cited by the CA for bar under Section 4, Rule 9; not sustained by the SC on these facts.
• Visayan Packing Corporation vs. Reparations Commission, et al., 155 SCRA 542 — Followed on abatement by auter action pendant or litis pendentia versus dismissal by res judicata, and on liberal procedure.
• Filipinas Investment and Finance Corporation vs. Intermediate Appellate Court, et al., 179 SCRA 728; Sta. Monica Industrial and Development Corporation vs. Court of Appeals, et al., 189 SCRA 792; Suarez vs. Court of Appeals, et al., 193 SCRA 183 — Followed for requisites of res judicata.
• Manchester Development Corporation, et al. vs. Court of Appeals, et al., 149 SCRA 562 — Applied as then-governing docket-fee rule, clarified to cover permissive counterclaims only.
• Metals Engineering Resources Corporation vs. Court of Appeals, et al., 203 SCRA 273 — Followed to limit Manchester to permissive counterclaims.
• Lim Tanhu, et al. vs. Ramolete, et al., 66 SCRA 425 — Followed on compulsory counterclaims not remaining pending for independent adjudication under Sec. 2, Rule 17.

• Section 4, Rule 9, Revised Rules of Court — Bars a compulsory counterclaim not set up when arising from the same transaction without need for outside third parties; held inapplicable because claims were set up but dismissed without jurisdiction.
• Section 2, Rule 17, Rules of Court — Governs dismissal by plaintiff after answer only by court order on proper terms, unqualified dismissal being without prejudice; applied to sustain implied reservation for separate damages suit.
• Section 5, Rule 141, Rules of Court — Requires docket fees for permissive but not compulsory counterclaims; explains why petitioners relied on refiling after Manchester-based dismissal.
• Article 1654, paragraph 3, Civil Code — Obliges lessor to maintain lessee in peaceful and adequate enjoyment for the contract duration; held violated by demolition during the lease.
• Article 1659, Civil Code — Gives aggrieved lessor or lessee rescission with indemnification or damages only; supports independent damages action for lessor's breach.