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RULE 2

G.R. No. L-21706

March 26, 1924

JOSEFINA RUBIO VDA. DE LARENA, plaintiff-appellee, vs. HERMENEGILDO VILLANUEVA, defendant-appellant. OSTRAND, J.: This action is brought by a lessor against her lessee for the rescission of the contract of lease on the ground that the lessee has violated the terms of the contract by failing to pay the rent therein specified. The plaintiff also asks judgment for overdue and unpaid rent in the sum of P6,278.68, as well as for rent which may have become due during the period between the filing of the complaint and the execution of the judgment to be rendered, together with the costs and the sum of P2,000 for attorney's fees. The defendant's amended answer denies that he has breached the contract and sets up a counterclaim in the sum of P2,051.52 for money advanced to the plaintiff in excess of the rent due under the contract. The trial court rendered judgment in favor of the plaintiff for the rescission of the lease, for the unpaid balance of the rent for the agricultural year 1920-1921 in the sum of P5,949.28, with interest from August 26, 1922, the date of the filing of the complaint, and for the rent for the agricultural year 1922-1923, with costs. From this judgment the defendant appeals to this court. The decision turns upon the interpretation of the contract in question which was executed on August 2, 1920, and which reads as follows: Este contrato de arrendamiento es sostenido por una parte por la arrendadora D.a Josefina Rubio, Viuda de Larena, duena y propietaria de la Hacienda Tacgajan, ubicada en este Municipio de Bais, Negros Oriental, I. F., y por otra parte por los arrendatarios Hermenegildo Villanueva y Mateo Montenegro, todos mayores de edad y vecinos de este municipio, con capacidad legal para contratar y otorgar el presente contrato de arrendamiento, y solemnemente manifiestan que de comun acuerdo pactan lo siguiente: 1. Que D.a Josefina Rubio, Vda. de Larena, cede en arriendo a los Sres. Hermenegildo Villanueva y Mateo Montenegro por un periodo consecutivo de cinco aos, o sea, cinco cosechas completas, su hacienda cana dulce denominada Tacgajan con todos sus terrenos, edificios, mejoras, tranvia, ganado de labor, cerros, aperos de labranza y demas implementos agricolas, especificado todo en el inventario que se acompanara a la presente escritura, incluyendo todas las siembras existentes asi como una parcela de terreno, o sea la parte de que la arrendadora es propietaria situada al lado del riachuelo que circunda la Hacienda Tacgajan. No se entiende incluidos en este contrato la tractora, huerta y cementerio. 2. Que los Sres. Hermenegildo Villanueva y Mateo Montenegro aceptan este contrato bajo el pago anual de ocho mil pesos (P8,000) pagando cada cual la parte que le corresponde, o sea cuatro mil pesos (P4,000) que paga Mateo Motenegro, y cuatro mil pesos (P4,000) Hermenegildo Villanueva, ambos se entenderan directamente con la arrendadora. 3. La duracion de este contrato sera de cinco aos o sea cinco cosechas completas, contando con la cosecha actual de 1920-1921, hasta la cosecha de 1925-1926.

4. Inmediatamente despues de firmado el presente contrato, la arrendadora dara posesion a los arrendatarios de la Hacienda libre de toda carga y gravamen, haciendose estos cargo de todas las cosas inventariadas con la obligacion de cuidarlas con la diligencia conveniente y devolverlas a la arrendadora, a la expiracion del arriendo tal como han sido recibidas, excepto aquellas cosas que por deterioro natural hiciera inutil todo esfuerzo que los arrendatarios emplearen por conservarlas, pero los referidos arrendatarios seran sin embargo responsables de la reposicion de todo ganado mayor de labor incluido en el inventario, despues de que han sido asegurados inmediatamente bajo la Ley de Seguros de Animales de Labor. 5. Los arrendatarios respetaran el contrato que la arrendadora tiene con la central como si la Hacienda Tacgajan continuara en poder de ella. Asimismo permitiran a la continuacion en sus respectivas aparcerias a D. a Agueda Somosa y Demetrio Larena. 6. Los arrendatarios no podran transpasar sus derechos de tales sin el consentimiento de la arrendadora. 7. Todas las mejoras permanentes que dejaren los arrendatarios a la expiracion del presente contrato quedaran en beneficio de la Hacienda a libre disposicion de la arrendadora D.a Josefina. 8. El incumplimiento de cualquiera de las dos partes contratantes dara derecho a la otra a la rescision del presente contrato. Asi han convenido y pactado todas las partes contratantes que firman el presente contrato con las copias necesarias para cada interesado. Subsequently to the execution of the contract quoted, the defendant, with the consent of the plaintiff, assumed the obligations of Mateo Montenegro under the lease. It will be noted that paragraph 3 of the contract contains an apparent contradiction inasmuch as it fixes the term of the contract at "five years, that is to say, five complete crops, beginning with the present crop 1920-1921 until the crop of 1925-1926." It may also be noted that the land in question is used for the cultivation of sugar cane and the years are counted by agricultural years and not by calendar years. If the duration of the lease is for five annual crops, beginning with the crop of 1920-1921, the term will expire with the crop of 1924-1925 and not with the crop of 1925-1926. The plaintiff maintains that the number of crops control in computing the term of the lease and that the insertion of the figures "1925-1926" in the third paragraph of the lease is due to a miscalculation and should read "1924-1925." It is conceded that sugar cane requires at least fourteen months from the time of planting for its full development, so that cane planted in the fall of 1920 would not be ready for harvest until in the last month of 1921 and the early part of 1922. It is also fully established that the crop of 1920-1921 on the land in question was a ratoon crop (sprout or second growth). The defendant therefor contends that this crop was not a complete crop and therefore not the kind of crop referred to in the contract of lease; that the first complete crop was that planted by him immediately after the execution of the contract in the fall of 1920 and which was harvested in 1921-1922; and that he therefore should not be required to pay rent for the agricultural year which embraces the crop of 1920. We agree with the trial court that the defendant's position is untenable. As stated, if his interpretation of the contract were adopted, the plaintiff would receive no rent for the agricultural year 1920-1921 and we cannot assume that she would have paid the taxes on the property for that year and still have allowed the defendant to use the land, including machinery, tools, work animals, etc., and to carry off the crop without any compensation whatever to her. It may well be conceded that the ratoon crop was not as valuable as a first crop after planting would have been, but the testimony of the plaintiff, as well as of the witnesses Montenegro, the defendant's original

cotenant under the lease, shows that in the fall of 1920 the crop in question was estimated at from 2,000 to 3,000 piculs. The lower court also found as a fact that in the same year sugar sold at P45 per picul. The plaintiff's estimate of the yield is probably exaggerated; the defendant testifies to a much lower figure and the mill receipts presented by him in evidence indicate that the crop actually harvested amounted to 899.27 piculs, of which he was entitled to one-half and which was sold at only P16 per picul. But as against the plaintiff's estimate, it appears that after taking possession of the land he destroyed a large portion of the ratoon crop by constructing a road through the cane fields and by taking ratoons for seeds for another hacienda. It is therefore safe to suppose that at the time of entering into the contract the parties had in mind prospects of a yield considerably greater than that actually obtained and that they did not at that time foresee the violent decline in the price of sugar. Taking into consideration that the ratoon crop did not involve any expense for planting and that it was ready for harvest within a few months after the execution of the contract, we may reasonably conclude that the parties considered that the rental value of the property for the year 1920-1921 would easily amount to P8,000. The fact that the defendant paid the plaintiff P4,000 in January, 1921, and another P4,000 in November of the same year, materially strengthens the plaintiff's contention. The defendant's explanation that these payments were advances on the rent for the year 1921-1922 is flatly contradicted by Exhibit E, a letter written by him to the plaintiff on August 7, 1921, and which reads as follows: Sra. JOSEFINA R. VDA. DE LARENA, MI APRECIABLE PINANG: No tengo inconveniente en pagar con el arriendo tu cta. con la Tabacalera como son los deseos pero debe ser de acuerdo con las fechas del vencimiento que hemos estipulado. Por ejemplo, yo pagare a la Compaia los 4,000 pesos que tengo que pagar por el arriendo correspondiente al mes de junio pasado, arriendo perteneciente al ano 1920 y 1921. Con respeto al arriendo que corresponde al ano 1922 yo pagare a la Compaia 4,000 pesos el plazo que corresponde al mes de noviembre proximo como pago del primer plazo del arriendo que pertenece a dicho ano 1922 y para junio de 1922 el ultimo pago del arriendo del mismo ano, y asi sucesivamente. Solo espero tu aviso para escribar a la Tabacalera. Dodong esta algo mejor pero es una enfermedad cuya curacion es lenta. Ascion y yo le enviamos nuestros afectos. (Sgd.) "BINDOY" Considering further the admitted fact that the lease was prepared by the defendant, or under his direction, and therefore must be construed in favor of the plaintiff, there can be no question but that the judgment appealed from is entirely in conformity with the law and the established facts. Said judgment is therefor affirmed, with the costs against the appellant. So ordered.

G.R. No. L-32958

November 8, 1930

BLOSSOM AND COMPANY, INC., plaintiff-appellant, vs. MANILA GAS CORPORATION, defendant-appellee. STATEMENT In its complaint filed March 3, 1927, the plaintiff alleges that on September 10, 1918, it entered into a contract with the defendant in which the plaintiff promised and undertook to purchase and receive from the defendant and the defendant agreed to sell and deliver to the plaintiff, for a period of four years, three tons of water gas tar per month from September to January 1, 1919 and twenty tons per month after January 1, 1919, for the remaining period of the contract; one-half ton of coal gas tar a month from September to January 1, 1919, and six tons per month after January 1, 1919, for the remainder of the contract, delivery to be made at the plant of the defendant in the City of Manila, without containers and at the price of P65 per ton for each kind of gas tar, it being agreed that this price should prevail only so long as the raw materials coal and crude oil used by the defendant in the manufacture of gas should cost the defendant the same price as that prevailing at the time of the contract, and that in the event of an increase or decrease in the cost of raw material there would be a corresponding increase or decrease in the price of the tar. That on January 31, 1919, this contract was amended so that it should continue to remain in force for a period of ten years from January 1, 1919, and it was agreed that the plaintiff should not be obliged to take the qualities of the tars required during the year 1919, but that it might purchase tars in such quantities as it could use to advantage at the stipulated price. That after the year 1919 the plaintiff would take at least the quantities specified in the contract of September 10, 1918, to be taken from and after January 1, 1919, and that at its option it would have the right to take any quantity of water gas tar in excess of the minimum quantity specified in that contract and up to the total amount of output of that tar of defendant's plant and also to take any quantity of coal gas tar in excess of the minimum quantity specified in that contract and up to 50 per cent of defendant's entire output of coal gas tar, and that by giving the defendant ninety days' notice, it would have the right at its option to take the entire output of defendant's coal gas tar, except such as it might need for its own use in and about its plant. That in consideration of this modification of the contract of September 10, 1918, plaintiff agreed to purchase from the defendant of certain piece of land lying adjacent to its plant at the price of P5 per square meter, the proof of which is evidenced by Exhibit C. That pursuant to Exhibit C, defendant sold and conveyed the land to the plaintiff which in turn executed a mortgage thereon to the defendant for P17,140.20, to secure the payment of the balance of the purchase price. It is then alleged: VIII. That about the last part of July, 1920 the defendant herein, the Manila Gas Corporation willfully, and deliberately breached its said contract, Exhibit C, with the plaintiff by ceasing to deliver any coal and water gas tar to it thereunder solely because of the increased price of its tar products and its desire to secure better prices therefor than plaintiff was obliged to pay to it, notwithstanding the frequent and urgent demands made by the plaintiff upon it to comply with its aforesaid contract by continuing to deliver the coal and water gas tar to the plaintiff thereunder, but the said defendant flatly refused to make any deliveries under said contract, and finally on November 23, 1923, the plaintiff was forced to commence action against the defendant herein in the Court of First Instance of Manila, being case No. 25352, of that court entitled 'Blossom & Co., plaintiff, vs. Manila Gas Corporation, defendant,' to recover the damages which it had up to that time suffered by reason of such flagrant violation of said contract on the part of the defendant herein, and to obtain the specific performance of the said contract and after due trial of that action, judgment was entered therein in favor of the plaintiff herein and against the said defendant, the Manila Gas Corporation, for the sum of P26,119.08, as the damages suffered by this plaintiff by the defendant's breach of said contract from July, 1920, up to and including September, 1923, with legal interest thereon from November 23, 1923, and for the costs but the court refused to order the said defendant to resume the delivery of the coal and water gas tar to the plaintiff under

said contract, but left the plaintiff with its remedy for damages against said defendant for the subsequent breaches of said contract, which said decision, as shown by the copy attached hereto as Exhibit G, and made a part hereof, was affirmed by our Supreme Court on March 3, 1926; IX. That after the defendant had willfully and deliberately violated its said contract as hereinbefore alleged, and the plaintiff suffered great damage by reason thereof, the plaintiff claimed the right to off- set its damages against the balance due from it to said defendant on account of the purchase of said land from the defendant, and immediately thereupon and notwithstanding said defendant was justly indebted to the plaintiff at that time as shown by the judgment of the Court Exhibit G, in more that four times the amount due to it from the plaintiff, the said defendant caused to be presented against the plaintiff a foreclosure action, known as the Manila Gas Corporation versus Blossom & Company, No. 24267, of the Court of First Instance of Manila, and obtained judgment therein ordering that Blossom & Company pay the last installment and interest due on said land or else the land and improvements placed thereon by the plaintiff would be sold as provided by law in such cases to satisfy the same, and the said defendant proceeded with the sale of said property under said judgment and did everything in its power to sell the same for the sole purpose of crushing and destroying the plaintiff's business and thus rendering it impossible for the plaintiff herein to continue with its said contract in the event that said defendant might in the future consider it more profitable to resume performance of the same, but fortunately the plaintiff was able to redeem its property as well as to comply with its contract and continued demanding that the defendant performed its said contract and deliver to it the coal and water gas tar required thereby. That the defendant made no deliveries under its contract, Exhibit C, from July, 1920 to March 26, 1926, or until after the Supreme Court affirmed the judgment of the lower court for damages in the sum of 1 P26, 119.08. It is then alleged that: . . . On March 26, 1926 the said defendant offered to resume delivery to the plaintiff from that date of the minimum monthly quantities of tars stated in its contract ,and the plaintiff believing that the said defendant was at least going to try to act in good faith in the further performance of its said contract, commenced to accept deliveries of said tars from it, and at once ascertained that the said defendant was deliberately charging it prices much higher than the contract price, and while the plaintiff accepted deliveries of the minimum quantities of tars stated in said contract up to and including January, 1927, (although it had demanded deliveries of larger quantities thereunder, as hereinafter alleged) and paid the increased prices demanded by the defendant, in the belief that it was its duty to minimize the damages as much as possible which the defendant would be required to pay to it by reason of its violation of said contract, it has in all cases done so under protest and with the express reservation of the right to demand from the said defendant an adjustment of the prices charged in violation of its contract, and the right to the payment of the losses which it had and would suffer by reason of its refusal to make additional deliveries under said contract, and it also has continuously demanded that the said defendant furnish to it statements supported by its invoices showing the cost prices if its raw materials coal and crude oil upon which the contract price of the tars in question is fixed, which is the only way the plaintiff has to calculate the true price of said tars, but said defendant has and still refuses to furnish such information, and will continue to refuse to do so, unless ordered to furnish such information to the plaintiff by the court, and the plaintiff believes from the information which it now has and so alleges that the said defendant has overcharged it on the deliveries of said tars mentioned in the sum of at least P10,000, all in violation of the rights of the plaintiff under its said contract with the defendant. That on January 31, 1926 and pursuant to Exhibit C. plaintiff notified the defendant in writing that commencing with the month of August, 1926 it desired to take delivery of 50 per cent of defendant's coal tar production for that month and that on November 1, 1926, it desired to take the entire output of

defendant's coal gas tar, but that the defendant refused and still refuses to make such deliveries unless plaintiff would take all of its water gas tar production with the desired quantity of coal gas tar which refusal was a plain violation of the contract. That on January 29, 1927, and in accord with Exhibit C, plaintiff notified the defendant in writing that within ninety days after the initial delivery to it of its total coal gas tar production or in February, 1927, it would require 50 per cent of its total water gas tar production and that in April 1927, it would require the total output of the defendant of both coal and water gas tars, and that it refused to make either of such deliveries. It is then alleged: XIV. That as shown by the foregoing allegations of this complaint, it is apparent that notwithstanding the plaintiff in this case has at all times faithfully performed all the terms and conditions of said contract, Exhibit C, on its part of be performed, and has at all times and is now ready, able and willing to accept and pay for the deliveries of said coal and water gas tars required by said contract and the notices given pursuant thereto, the said defendant, the Manila Gas Corporation, does not intend to comply with its said contract, Exhibit C, and deliver to the plaintiff at the times and under the terms and conditions stated therein the quantities of coal and water gas tars required by said contract, and the several notices given pursuant thereto, and that it is useless for the plaintiff to insist further upon its performance of the said contract, and for that reason he only feasible course for the plaintiff to pursue is to ask the court for the rescission of said contract and for the full damages which the plaintiff has suffered from September, 1923, and will suffer for the remainder of said contract by reason of the defendant's failure and refusal to perform the same, and the plaintiff has so notified the said defendant. That since September, 1923, by reason of the bad faith of the defendant, the plaintiff has been damaged in the sum of P300,000, for which it prays a corresponding judgment, and that the contract, Exhibit C, be rescinded and declared void and without force and effect. After the filing and overruling of its demurrer, the defendant filed an answer in the nature of a general and specific denial and on April 10, 1928, and upon stipulation of the parties, the court appointed W. W. Larkin referee, "to take the evidence and, upon completion of the trial, to report his findings of law and fact to the court." July 18, 1928, the defendant filed an amended answer in which it alleged as an affirmative defense, first, that the complaint does not state facts sufficient to constitute cause of action the reason that a prior adjudication has been had of all the issues involved in this action, and, second, "that on or about the 16th day of June, 1925, in an action brought in the Court of First Instance of the City on Manila, Philippine Islands, before the Honorable Geo. R. Harvey, Judge, by Blossom & Company, plaintiff, vs. Manila Gas Corporation, defendant, being civil case No. 25353, of said court, for the same cause of action as that set fourth in the complaint herein, said plaintiff recovered judgment upon the merits thereof, against said defendant decreeing a breach of the contract sued upon herein, and awarding damages therefor in the sum of P26,119.08 with legal interest from November 23, 1923, and costs of suit, which judgment was upon appeal affirmed by the Supreme Court of the Philippine Islands, in case G. R. No. 24777 of said court, on the 3d day of March, 1926 and reported in volume 48 Philippines Reports at page 848," and it prays that plaintiff's complaint be dismissed with costs. After the evidence was taken the referee made an exhaustive report of sixty-pages in which he found that the plaintiff was entitled to P56,901.53 damages, with legal interest from the date of the filing on the complaint, to which both parties filed numerous exceptions In its decision the court says: Incidental references have been made to the referee's report. It was admirably prepared. Leaving aside the question of damages and the facts upon which the referee assessed them, the

facts are not in dispute at least not in serious dispute. They appear in the documentary evidence and this decision is based upon documents introduced into evidence by plaintiff. If I could have agreed with the referee in respect to the question of law, I should have approved his report in toto. If defendant is liable for the damages accruing from November 23, 1923, the date the first complaint was filed, to April 1st, 1926, the date of resumption of relations; and if defendant, after such resumption of relations, again violated the contract, the damages assessed by the referee, are, to my way of thinking, as fair as could be estimated. He went to tremendous pains in figuring out the details upon which he based his decision. Unfortunately, I cannot agree with his legal conclusions and the report is set aside except wherein specifically approved. It is unnecessary to resolve specifically the many exceptions made by both partied to the referee's report. It would take much time to do so. Much time has already been spent in preparing this decision. Since both parties have informed me that in case of adverse judgment ,and appeal would be taken, I desire to conclude the case so that delay will be avoided. Let judgment be entered awarding damages to plaintiff in the sum of P2,219.60, with costs. From which plaintiff only appealed and assigns twenty-four different errors, of which the following are material to this opinion: I. The trial court erred in holding that this suit in so far as the damages from November, 1923, to March 31, 1926, are concerned , is res adjudicata. II. The trial court erred in holding that the defendant repudiated the contract in question as a whole, and that the plaintiff when it brought its first suit to collect damages had already elected and consented to the dissolution of the contract, and its choice once made, being final, it was estopped to claim that the contract was alive when that suit was brought. xxx xxx xxx

VII. The trial court erred in refusing to sustain plaintiff's third exception to the legal interpretation placed on the contract in this case by the referee with reference to quantity of tars and his conclusion with respect to the terms thereof that: "1. Plaintiff must take and defendant must deliver either the minimum or maximum quantity of water gas tar and not any quantity from the minimum to the maximum and/or "2. Plaintiff must take either the minimum and any quantity up to fifty per cent of entire output of coal gas tar. "3. With ninety days' notice by plaintiff to defendant the former must take and the latter must deliver total output of both tars, except such as might be needed by defendant for use in and about its plants and not any quantity from the minimum up to total output of both tars." (See page 47, Referee's report.) And in holding that the option contained in said contract, taking into consideration the purposes of both parties in entering into the contract, was a claimed by defendant: all the water gas tar and 50 per cent of the coal gas tar upon immediate notice and all tars upon ninety day's notice. VIII. The trial court erred in refusing to sustain plaintiff's fourth exception to the finding and conclusion of the referee that from the correspondence between the parties it was apparent that plaintiff did not make a right use of its option, and that the letter of June 25, 1926, and the

subsequent demands, with exception of the letter of July 31, 1926, were not made in pursuance to the terms of the contract, and that defendant had no liability in refusing to comply therewith, and in allowing plaintiff damages only for the failure of the defendant to deliver quantities shown in Exhibits Ref. 21 and 22. (See pages 51, 52, Referee's report.) IX. The trial court erred in finding and holding that the demands of plaintiff for additional tars under its contract with the defendant were extravagant and not made in good faith, and that when it wrote to defendant that it desired maximum quantities of coal gas tars and only minimum of water gas tars, but with the reservation of going back to minimum quantities of both at any time it chose, it announced its intention f breaching the contract, and defendant was under no obligation to deliver maximum quantities of either tars, and since this was the efficient cause of the failure of defendant to deliver or plaintiff to accept tars, the blame is attribute to plaintiff, and it cannot recover for a rescission. xxx xxx xxx

XXIII. The trial court erred in refusing to sustain plaintiff's seventeenth exception to the finding and conclusion of the referee that the plaintiff is entitled to recover from the defendant only the following sums: Water gas tar (Exhibit Ref. 21) Coal gas tar (Exhibit Ref. 22) Overcharges on deliveries (Exhibit Ref. 23) or a total of P38,134.60 16,547.33 2,219.60 56,901.53

with interest, and in not awarding to the plaintiff as damages in this case the sum of P319,253.40, with legal interest thereon from the date of filing the complaint in this case, in the manner and form computed but it, and in awarding damages to the plaintiff for the sum of only P2,219.60. with costs. xxx xxx xxx

JOHNS, J.: In this action plaintiff seeks to recover damages from the defendant which it claims to have sustained after September, 1923, arising from, and growing out of, its original contract of September 10, 1918, as modified on January 1, 1919, to continue for a period of ten years from that date. In paragraph VIII of its complaint, plaintiff alleges that about the last part of July, 1920, the defendant "willfully and deliberately breached its said contract," and that it "flatly refused to make any deliveries under said contract, and finally on November 23, 1923," it was forced to commence action in the Court of First Instance against the defendant known as case No. 25352, to recover the damages which it had then sustained by reason of such flagrant violation of said contract on the part of the defendant, in which judgment was rendered in favor of the plaintiff and against the defendant for P26,1119.08, as damages suffered by this plaintiff by the defendant's breach of said contract from July 1920, up to and including September, 1923, with legal interest thereon from November 23, 1923, and for the costs," in which the court refused to order the defendant to resume the delivery of the coal and water gas tar to the plaintiff, in accord with said contract, but left it with its remedy for damages against the

defendant for any subsequent breaches of the contract. A copy of that judgment, which was later affirmed by this court, is attached to, marked Exhibit G, and made a part of, the complaint in this action. In their respective briefs, opposing counsel have much to say about the purpose and intent of the judgment, and it is vigorously asserted that it was never intended that it should be or become a bar to another action by the plaintiff to recover any damages it may have sustained after September, 1923, during the remainder of the ten-year period of that contract. Be that as it may, it must be conceded that the question as to what would be the legal force and effect of that judgment in that case was never presented to, or decided by, the lower court or this court. In the very nature of things, neither court in that case would have the power to pass upon or decided the legal force and effect of its own judgment, for the simple reason that it would be premature and outside of the issues of any pleading, and could not be raised or presented until after the judgment became final and then only by an appropriate plea, as in this case. Plaintiff specifically alleges that the defendant willfully and deliverately breached the contract and "flatly refused to make any deliveries under said contract," by reason of. which it was forced to and commenced its former action in which it was awarded P26,119.08 damages against the defendant by reason of its breach of the contract from July, 1920, to September, 1923. In the final analysis, plaintiff in this action seeks to recover damages growing out of, and arising from, other and different breaches of that same contract after November, 1923, for the remainder of the ten-year period, and the question is thus squarely presented as to whether the rendition of the former judgment is a bar to the right of the plaintiff to recover damages from and after September, 1923, arising from, and growing out of, breaches of the original contract of September 10, 1918, as modified on January 1, 1919. That is to say, whether the plaintiff, in a former action, having recovered judgment for the damages which it sustained by reason of a breach of its contract by the defendant up to September, 1923, can now in this action recover damages it may have sustained after September, 1923, arising from, and growing out of, a breach of the same contract, upon and for which it recovered its judgment in the former action. In the former action in which the judgment was rendered, it is alleged in the compliant: "7. That about the last part of July or the first part of August, 1920, the Manila Gas Corporation, the defendant herein, without any cause ceased delivering coal and water gas tar to the plaintiff herein; and that from that time up to the present date, the plaintiff corporation, Blossom & Company, has frequently and urgently demanded of the defendant, the Manila Gas Corporation, that it comply with its aforesaid contract Exhibit A by continuing to deliver coal and water gas tar to this plaintiff but that the said defendant has refused and still refuses, to deliver to the plaintiff any coal and water gas tar whatsoever under the said contract Exhibit A, since the said month of July 1920. "9. That owing to the bad faith of the said Manila Gas Corporation, defendant herein, in not living up to its said contract Exhibit A, made with this plaintiff, and refusing now to carry out the terms of the same, be delivering to this plaintiff the coal and water gas tar mentioned in the said Exhibit A, has caused to this plaintiff great and irreparable damages amounting to the sum total of one hundred twenty- four thousand eight hundred forty eight pesos and seventy centavos (P124,848,70);and that the said defendant corporation has refused, and still refuses, to pay to this plaintiff the whole or any part of the aforesaid sum. "10. That the said contract Exhibit A, was to be in force until January 1, 1929, that is to say ten (10) years counted from January 1, 1929; and that unless the defendant again commence to furnish and supply this plaintiff with coal and water gas tar, as provided for in the said contract Exhibit A, the damages already suffered by this plaintiff will continually increase and become

larger and larger in the course of years preceding the termination of the said contract on January 1, 1929." In that action plaintiff prays for judgment against the defendant: "(a) That upon trial of this this cause judgment be rendered in favor of the plaintiff and against the defendant for the sum of P124,8484.70), with legal interest thereon from November 23, 1923; "(b) That the court specifically order the defendant to resume the delivery of the coal and water gas tar to the plaintiff under the terms of the said contract Exhibit A of this complaint." In the final analysis, plaintiff must stand or fall on its own pleadings, and tested by that rule it must be admitted that the plaintiff's original cause of action, in which it recovered judgment for damages, was founded on the ten-year contract, and that the damages which it then recovered were recovered for a breach of that contract. Both actions are founded on one and the same contract. By the terms of the original contract of September 10, 1018, the defendant was to sell and the plaintiff was to purchase three tons of water gas tar per month form September to January 1, 1919, and twenty tons of water gas tar per month after January 1, 1919, one-half ton of coal gas tar per month from September to January 1, 1919, and six tons of coal gas tar per month after January 1, 1919. That from and after January 1, 1919, plaintiff would take at least the quantities specified in the contract of September 10, 1918, and that at its option, it would have the right to take the total output of water gas tar of defendant's plant and 50 per cent of the gross output of its coal gas tar, and upon giving ninety days' notice, it would have the right to the entire output of coal gas tar, except such as the defendant might need for its own use. That is to say, the contract provided for the delivery to the plaintiff from month to month of the specified amounts of the different tars as ordered and requested by the plaintiff. In other words, under plaintiff's own theory, the defendant was to make deliveries from month to month of the tars during the period of ten years, and it is alleged in both complaints that the defendant broke its contract, and in bad faith refused to make any more deliveries. In 34 Corpus Juris, p. 839, it is said: As a general rule a contract to do several things at several times in its nature, so as to authorize successive actions; and a judgment recovered for a single breach of a continuing contract or covenant is no bar to a suit for a subsequent breach thereof. But where the covenant or contract is entire, and the breach total, there can be only one action, and plaintiff must therein recover all his damages. In the case of Rhoelm vs, Horst, 178 U. U., 1; 44 Law. ed., 953, that court said: An unqualified and positive refusal to perform a contract, though the performance thereof is not yet due, may, if the renunciation goes to the whole contract, be treated as a complete breach which will entitle the injured party to bring his action at once. 15 Ruling Case Law, 966, 967, sec. 441 says: Similarly if there is a breach by the vendor of a contract for the sale of goods to be delivered and paid for in installments, and the vendee maintains an action therefor and recovers damages, he cannot maintain a subsequent action to recover for the failure to deliver later installments. In Pakas vs. Hollingshead, 184 N. Y., 211; 77 N. E., 40; 3 L. R. A. (N. S.), 1024, the syllabus says:

Upon refusal, by the seller, after partial performance, longer to comply with his contract to sell and deliver a quantity of articles in installments the buyer cannot keep the contract in force and maintain actions for breaches as they occur but must recover all his damages in one suit. And on page 1044 of its opinion, the court say: The learned counsel for the plaintiff contends that the former judgment did not constitute a bar to the present action but that the plaintiff had the right to elect to waive or disregard the breach, keep the contract in force, and maintain successive actions for time to time as the installments of goods were to be delivered, however numerous these actions might be. It is said that this contention is supported in reason and justice, and has the sanction of authority at least in other jurisdictions. We do not think that the contention can be maintained. There is not as it seems to us any judicial authority in this state that gives it any substantial support. On the contrary, we think that the cases, so far as we have been able to examine them, are all the other way, and are to the effect that, inasmuch as there was a total breach of the contract by the defendant's refusal to deliver, the plaintiff cannot split up his demand and maintain successive actions, but must either recover all his damages in the first suit or wait until the contract matured or the time for the delivery of all the goods had arrived. In other words, there can be but one action for damages for a total breach of an entire contract to deliver goods, and the fact that they were to be delivered in installment from time to time does not change the general rule. The case of L. Bucki & Son Lumber Co. vs. Atlantic Lumber Co. (109 Federal, 411), of the United States Circuit Court of Appeals for the Fifth Circuit, is very similar. The syllabus says: 1. CONTRACTS CONSTRUCTION ENTIRE CONTRACT. A contract was made for the sale of a large quantity of logs to be delivered in monthly installments during a period of eight years, payments to be made also in installments at times having relation tot he deliveries. It contained stipulations as to such payments, and guaranties as to the average size of the logs to be delivered in each installment. Held, that it was an entire contract, and not a number of separate and independent agreements for the sale of the quantity to be delivered and paid for each month, although there might be breaches of the minor stipulations and warranties with reference thereto which would warrant suits without a termination of the contract. 2. JUDGMENTS MATTERS CONCLUDED ACTION FOR BREACH OF INDIVISIBLE CONTRACT. The seller declared the contract terminated for alleged breaches by the purchaser, and brought suit for general and special damages the latter covering payments due for installments of logs delivered. By way of set-off and recoupment against this demand, the purchaser pleaded breaches of the warranty as to the size of the logs delivered during the months for which payment had not been made. Held, that the judgment in such action was conclusive as to all claims or demands or either party against the other growing out of the entire contract, and was a bar to a subsequent suit brought by the purchaser to recover for other breaches of the same warranty in relation to deliveries made in previous months. On page 415 of the opinion, the court says: When the contract was ended, the claims of each party for alleged breaches and damages therefor constituted an indivisible demand; and when the same, or any part of the same, was pleaded, litigation had, and final judgment rendered, such suit and judgment constitute a bar to subsequent demands which were or might have been litigated (Baird vs. U. S., 96 U. S., 430; 24 L. ed., 703.) In Watts vs. Weston (238 Federal, 149), Circuit Court of Appeals, Second Circuit, the syllabus says:

1. JUDGMENTS 593 JUDGMENT AS BAR MATTERS CONCLUDED. Where a continuing contract was terminated by the absolute refusal of the party whose action was necessary to further perform, a claim for damages on account of the breach constituted as indivisible demand, and when the same or any part of the same was pleaded, litigated, and final judgment rendered, such suit and judgment constitute a bar to subsequent demands which were or might have been litigated therein. And on page 150 of the opinion, the court says: It is enough to show the lack of merit in the present contention to point out as an inexorable rule of law that, when Kneval's contract was discharged by his total repudiation thereof, Watt's claims for breaches and damages therefor constituted an indivisible demand, and when the same, or any part of the same, was pleaded, litigation had and final judgment rendered, such suit and judgment constitute a bar to subsequent demands which were or might have been litigated." (Bucki, etc., Co. vs. Atlantic, etc., Co., 109 Fed. at page 415; 48 C. C. A., 459; Cf. Landon vs. Bulkley, 95 Fed., 344; 337 C. C. A., 96.) The rule is usually applied in cases of alleged or supposed successive breaches, and consequently severable demands for damages; but if the contract has been discharged by breach, if suit for damages is all that is left, the rule is applicable, and every demand arising form that contract and possessed by any given plaintiff must be presented (at least as against any given defendant) in one action; what the plaintiff does not advance he foregoes by conclusive presumption. Inn Abbott vs. 76 Land and Water Co. (118 Pac., 425; 161 Cal., 42), at page 428, the court said: In Fish vs. Folley, 6 Hill (N. Y.), 54, it was held, in accord with the rule we have discussed, that, where the defendant had covenanted that plaintiff should have a continual supply of water for his mill from a dam, and subsequently totally failed to perform for nine years, and plaintiff brought an action for the breach and recovered damages sustained by him to that time, the judgment was a bar to a second action arising from subsequent failure to perform, on the theory that, although he covenant was a continuing one in one sense, it was an entire contract, and a total breach put an end to it, and gave plaintiff the right to sue for an equivalent in damages. In such a case it is no warrant for a second action that the party may not be able to actually prove in the first action all the items of the demand, or that all the damage may not then have been actually suffered. He is bound to prove in the first action not only such damages as has been actually suffered, but also such prospective damage by reason of the breach as he may be legally entitled to, for the judgment he recovers in such action will be a conclusive adjudication as to the total damage on account of the breach. It will thus be seen that, where there is a complete and total breach of a continuous contract for a term of years, the recovery of a judgment for damages by reason of the breach is a bar to another action on the same contract for and on account of the continuous breach. In the final analysis is, there is no real dispute about any material fact, and the important and decisive question is the legal construction of the pleadings in the former case and in this case, and of the contract between the plaintiff and the defendant of January 1, 1920. The complaint on the former case specifically alleges that the defendant "has refused and still refuses, to deliver to the plaintiff any coal and water gas tar whatsoever under the said contract Exhibit A, since the said month of July, 1920." " That owing to the bad faith of the said Manila Gas Corporation, defendant herein, in not living up to its said contract Exhibit A, made with this plaintiff, and refusing now to carry out the terms of the same." That is a specific allegation not only a breach of the contract since the

month of July, 1920, but of the faith of the defendant in its continuous refusal to make deliveries of any coal and water gas tar. That amended complaint was filed on July 11, 1924, or four years after the alleged bad faith in breaking the contract. Having recovered damages against it, covering a period of four years, upon the theory that the defendant broke the contract, and in bad faith refused to make deliveries of either of the tars, how can the plaintiff now claim and assert that the contract is still in fierce and effect? In the instant case the plaintiff alleges and relies upon the ten year contract on January 11, 1920, which in bad faith was broken by the defendant. If the contract was then broken, how can it be enforced in this action? It is admitted that the defendant never made any deliveries of any tar from July, 1920, to April, 1936. Also that it made nine deliveries to plaintiff of the minimum quantities of coal and water gas tar from April 7, 1926, to January 5, 1927. Plaintiff contends that such deliveries were made under and in continuation of the old contract. March 26, 1926, after the decision of this court affirming the judgment in the original action, plaintiff wrote the defendant: . . . It is our desire to take deliveries of at least the minimum quantities set forth therein and shall appreciate to have you advise us how soon you will be in a position to make deliveries; . . . . . . In view of the fact that you have only effected settlement up to November 23, 1923, please inform us what adjustment you are willing to make for the period of time that has since elapsed without your complying with the contract. In response to which on March 31, 1926, the defendant wrote this letter to the plaintiff: In reply to your letter of March 26th, 1926, in regard to tar, we beg to advise you that we are prepared to furnish the minimum quantities of coal and water gas tars as per your letter, viz: twenty tons of water gas tar and six tons of coal gas tar. The price figured on present costs of raw materials is P39.01 ) Thirty-nine and 01/100 Pesos) per ton of water gas and P33.59 (Thirty-three and 59/100 Pesos) per ton of coal tar. We shall expect you to take delivery and pay for the above amount of tars at our factory on or before April 7th prox. Thereafter we shall be ready to furnish equal amounts on the first of each month. Kindly make your arrangements accordingly. On January 29, 1927, the plaintiff wrote the defendant that: On July 31st last, we made demand upon you, under the terms of our tar contract for 50 per cent of your total coal tar production for that month and also served notice on you that beginning 90 days from August 1st we would require you total output of coal tar monthly; this in addition to the 20 tons of water gas tar provided for in the contract to be taken monthly. xxx xxx xxx

We are here again on your for your total output of coal tar immediately and the regular minimum monthly quantity of water gas tar. In this connection we desire to advise you that within 90 days of your initial delivery to us of your total coal tar output we will require 50 per cent of your

total water gas tar output, and, further, that two months thereafter we will require your total output of both tars. February 2, 1927, the defendant wrote the plaintiff: Replying to your letter of Jan. 29, we would sat that we have already returned to you the check enclosed there with. As we have repeatedly informed you we disagree with you as to the construction of your contract and insist that you take the whole output of both tars if you wish to secure the whole of the coal tar. With regard to your threat of further suits we presume that you will act as advised. If you make it necessary we shall do the same.lawphil.net From an analysis of these letters it clearly appears that the plaintiff then sought to reply upon and enforce the contract of January 1, 1920, and that defendant denied plaintiff's construction of the contract, and insisted "that you take the whole output of both tars if you wish to secure the whole of the coal tar." February 28, 1927, the plaintiff wrote the defendant: In view of your numerous violations of and repeated refusal and failure to comply with the terms and provisions of our contract dated January 30-31, 1919, for the delivery to us of water and coal gas tars, etc., we will commence action," which it did. The record tends to show that tars which the defendant delivered after April 7, 1926, were not delivered under the old contract of January 1, 1920, and that at all times since July 1920, the defendant has consistently refused to make any deliveries of any tars under that contract. The referee found as a fact that plaintiff was entitled to P2,219.60 for and on account of overcharges which the defendant made for the deliveries of fifty-four tons of coal gas tar, and one hundred eighty tons of water gas tar after April, 1926, and upon that point the lower says: The fourth charge that plaintiff makes is meritorious. The price was to be fixed on the basis of raw materials. The charge for deliveries during 1926 were too high. In this I agree with entirely with the referee and adopt his findings of fact and calculations. ( See Referee's report, p. 83) The referee awarded for overcharge during the period aforesaid, the sum of P2,219.60. The defendant was trying to discharge plaintiff from buying tars and made the price of raw material appear as high as possible. That finding is sustained upon the theory that the defendant broke its contract which it made with the plaintiff for the sale and delivery of the tars on and after April, 1926. After careful study of the many important questions presented on this appeal in the exhaustive brief of the appellant, we are clearly of the opinion that, as found by the lower court, the plea of res judicata must be sustained. The judgment of the lower court is affirmed. It is so ordered, with costs against the appellant.

G.R. No. 161135. April 8, 2005 SWAGMAN HOTELS AND TRAVEL, INC., Petitioners, vs. HON. COURT OF APPEALS, and NEAL B. CHRISTIAN, Respondents. DECISION DAVIDE, JR., C.J.: May a complaint that lacks a cause of action at the time it was filed be cured by the accrual of a cause of action during the pendency of the case? This is the basic issue raised in this petition for the Courts consideration. Sometime in 1996 and 1997, petitioner Swagman Hotels and Travel, Inc., through Atty. Leonor L. Infante and Rodney David Hegerty, its president and vice-president, respectively, obtained from private respondent Neal B. Christian loans evidenced by three promissory notes dated 7 August 1996, 14 March 1997, and 14 July 1997. Each of the promissory notes is in the amount of US$50,000 payable after three 1 years from its date with an interest of 15% per annum payable every three months. In a letter dated 16 December 1998, Christian informed the petitioner corporation that he was terminating the loans and demanded from the latter payment in the total amount of US$150,000 plus unpaid interests in the total 2 amount of US$13,500. On 2 February 1999, private respondent Christian filed with the Regional Trial Court of Baguio City, Branch 59, a complaint for a sum of money and damages against the petitioner corporation, Hegerty, and Atty. Infante. The complaint alleged as follows: On 7 August 1996, 14 March 1997, and 14 July 1997, the petitioner, as well as its president and vice-president obtained loans from him in the total amount of US$150,000 payable after three years, with an interest of 15% per annum payable quarterly or every three months. For a while, they paid an interest of 15% per annum every three months in accordance with the three promissory notes. However, starting January 1998 until December 1998, they paid him only an interest of 6% per annum, instead of 15% per annum, in violation of the terms of the three promissory notes. Thus, Christian prayed that the trial court order them to pay him jointly and solidarily the amount of US$150,000 representing the total amount of the loans; US$13,500 representing unpaid interests from January 1998 until December 1998; P100,000 for moral damages; P50,000 for attorneys fees; and the 3 cost of the suit. The petitioner corporation, together with its president and vice-president, filed an Answer raising as defenses lack of cause of action and novation of the principal obligations. According to them, Christian had no cause of action because the three promissory notes were not yet due and demandable. In December 1997, since the petitioner corporation was experiencing huge losses due to the Asian financial crisis, Christian agreed (a) to waive the interest of 15% per annum, and (b) accept payments of the principal loans in installment basis, the amount and period of which would depend on the state of business of the petitioner corporation. Thus, the petitioner paid Christian capital repayment in the amount of US$750 per month from January 1998 until the time the complaint was filed in February 1999. The petitioner and its co-defendants then prayed that the complaint be dismissed and that Christian be ordered to pay P1 million as moral damages; P500,000 as exemplary damages; and P100,000 as 4 attorneys fees. In due course and after hearing, the trial court rendered a decision on 5 May 2000 declaring the first two promissory notes dated 7 August 1996 and 14 March 1997 as already due and demandable and that the interest on the loans had been reduced by the parties from 15% to 6% per annum. It then ordered the petitioner corporation to pay Christian the amount of $100,000 representing the principal obligation covered by the promissory notes dated 7 August 1996 and 14 March 1997, "plus interest of 6% per month
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thereon until fully paid, with all interest payments already paid by the defendant to the plaintiff to be deducted therefrom." The trial court ratiocinated in this wise: (1) There was no novation of defendants obligation to the plaintiff. Under Article 1292 of the Civil Code, there is an implied novation only if the old and the new obligation be on every point incompatible with one another. The test of incompatibility between the two obligations or contracts, according to an imminent author, is whether they can stand together, each one having an independent existence. If they cannot, they are incompatible, and the subsequent obligation novates the first (Tolentino, Civil Code of the Philippines, Vol. IV, 1991 ed., p. 384). Otherwise, the old obligation will continue to subsist subject to the modifications agreed upon by the parties. Thus, it has been written that accidental modifications in an existing obligation do not extinguish it by novation. Mere modifications of the debt agreed upon between the parties do not constitute novation. When the changes refer to secondary agreement and not to the object or principal conditions of the contract, there is no novation; such changes will produce modifications of incidental facts, but will not extinguish the original obligation. Thus, the acceptance of partial payments or a partial remission does not involve novation (id., p. 387). Neither does the reduction of the amount of an obligation amount to a novation because it only means a partial remission or condonation of the same debt. In the instant case, the Court is of the view that the parties merely intended to change the rate of interest from 15% per annum to 6% per annum when the defendant started paying $750 per month which payments were all accepted by the plaintiff from January 1998 onward. The payment of the principal obligation, however, remains unaffected which means that the defendant should still pay the plaintiff $50,000 on August 9, 1999, March 14, 2000 and July 14, 2000. (2) When the instant case was filed on February 2, 1999, none of the promissory notes was due and demandable. As of this date however, the first and the second promissory notes have already matured. Hence, payment is already due. Under Section 5 of Rule 10 of the 1997 Rules of Civil Procedure, a complaint which states no cause of action may be cured by evidence presented without objection. Thus, even if the plaintiff had no cause of action at the time he filed the instant complaint, as defendants obligation are not yet due and demandable then, he may nevertheless recover on the first two promissory notes in view of the introduction of evidence showing that the obligations covered by the two promissory notes are now due and demandable. (3) Individual defendants Rodney Hegerty and Atty. Leonor L. Infante can not be held personally liable for the obligations contracted by the defendant corporation it being clear that they merely acted in representation of the defendant corporation in their capacity as General Manager and President, respectively, when they signed the promissory notes as evidenced by Board Resolution No. 1(94) passed 6 by the Board of Directors of the defendant corporation (Exhibit "4"). In its decision of 5 September 2003, the Court of Appeals denied petitioners appeal and affirmed in toto the decision of the trial court, holding as follows: In the case at bench, there is no incompatibility because the changes referred to by appellant Swagman consist only in the manner of payment. . . . Appellant Swagmans interpretation that the three (3) promissory notes have been novated by reason of appellee Christians acceptance of the monthly payments of US$750.00 as capital repayments continuously even after the filing of the instant case is a little bit strained considering the stiff requirements
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of the law on novation that the intention to novate must appear by express agreement of the parties, or by their acts that are too clear and unequivocal to be mistaken. Under the circumstances, the more reasonable interpretation of the act of the appellee Christian in receiving the monthly payments of US$750.00 is that appellee Christian merely allowed appellant Swagman to pay whatever amount the latter is capable of. This interpretation is supported by the letter of demand dated December 16, 1998 wherein appellee Christian demanded from appellant Swagman to return the principal loan in the amount of US$150,000 plus unpaid interest in the amount of US$13,500.00 ... Appellant Swagman, likewise, contends that, at the time of the filing of the complaint, appellee Christian ha[d] no cause of action because none of the promissory notes was due and demandable. Again, We are not persuaded. ... In the case at bench, while it is true that appellant Swagman raised in its Answer the issue of prematurity in the filing of the complaint, appellant Swagman nonetheless failed to object to appellee Christians presentation of evidence to the effect that the promissory notes have become due and demandable. The afore-quoted rule allows a complaint which states no cause of action to be cured either by evidence presented without objection or, in the event of an objection sustained by the court, by an amendment of 8 the complaint with leave of court (Herrera, Remedial Law, Vol. VII, 1997 ed., p. 108). Its motion for reconsideration having been denied by the Court of Appeals in its Resolution of 4 9 December 2003, the petitioner came to this Court raising the following issues: I. WHERE THE DECISION OF THE TRIAL COURT DROPPING TWO DEFENDANTS HAS BECOME FINAL AND EXECUTORY, MAY THE RESPONDENT COURT OF APPEALS STILL STUBBORNLY CONSIDER THEM AS APPELLANTS WHEN THEY DID NOT APPEAL? ii. Where there is no cause of action, is the decision of the lower court valid? III. MAY THE RESPONDENT COURT OF APPEALS VALIDLY AFFIRM A DECISION OF THE LOWER COURT WHICH IS INVALID DUE TO LACK OF CAUSE OF ACTION? IV. Where there is a valid novation, may the original terms of contract which has been novated still 10 prevail? The petitioner harps on the absence of a cause of action at the time the private respondents complaint was filed with the trial court. In connection with this, the petitioner raises the issue of novation by arguing that its obligations under the three promissory notes were novated by the renegotiation that happened in December 1997 wherein the private respondent agreed to waive the interest in each of the three promissory notes and to accept US$750 per month as installment payment for the principal loans in the total amount of US$150,000. Lastly, the petitioner questions the act of the Court of Appeals in considering Hegerty and Infante as appellants when they no longer appealed because the trial court had already absolved them of the liability of the petitioner corporation. On the other hand, the private respondent asserts that this petition is "a mere ploy to continue delaying the payment of a just obligation." Anent the fact that Hegerty and Atty. Infante were considered by the Court of Appeals as appellants, the private respondent finds it immaterial because they are not affected by the assailed decision anyway.

Cause of action, as defined in Section 2, Rule 2 of the 1997 Rules of Civil Procedure, is the act or omission by which a party violates the right of another. Its essential elements are as follows: 1. A right in favor of the plaintiff by whatever means and under whatever law it arises or is created; 2. An obligation on the part of the named defendant to respect or not to violate such right; and 3. Act or omission on the part of such defendant in violation of the right of the plaintiff or constituting a breach of the obligation of the defendant to the plaintiff for which the latter may maintain an action for 11 recovery of damages or other appropriate relief. It is, thus, only upon the occurrence of the last element that a cause of action arises, giving the plaintiff the right to maintain an action in court for recovery of damages or other appropriate relief. It is undisputed that the three promissory notes were for the amount of P50,000 each and uniformly provided for (1) a term of three years; (2) an interest of 15 % per annum, payable quarterly; and (3) the repayment of the principal loans after three years from their respective dates. However, both the Court of Appeals and the trial court found that a renegotiation of the three promissory notes indeed happened in December 1997 between the private respondent and the petitioner resulting in the reduction not waiver of the interest from 15% to 6% per annum, which from then on was payable monthly, instead of quarterly. The term of the principal loans remained unchanged in that they were still due three years from the respective dates of the promissory notes. Thus, at the time the complaint was filed with the trial court on 2 February 1999, none of the three promissory notes was due yet; although, two of the promissory notes with the due dates of 7 August 1999 and 14 March 2000 matured during the pendency of the case with the trial court. Both courts also found that the petitioner had been religiously paying the private respondent US$750 per month from January 1998 and even during the pendency of the case before the trial court and that the private respondent had accepted all these monthly payments. With these findings of facts, it has become glaringly obvious that when the complaint for a sum of money and damages was filed with the trial court on 2 February 1999, no cause of action has as yet existed because the petitioner had not committed any act in violation of the terms of the three promissory notes as modified by the renegotiation in December 1997. Without a cause of action, the private respondent had no right to maintain an action in court, and the trial court should have therefore dismissed his complaint. Despite its finding that the petitioner corporation did not violate the modified terms of the three promissory notes and that the payment of the principal loans were not yet due when the complaint was filed, the trial court did not dismiss the complaint, citing Section 5, Rule 10 of the 1997 Rules of Civil Procedure, which reads: Section 5. Amendment to conform to or authorize presentation of evidence. When issues not raised by the pleadings are tried with the express or implied consent of the parties, they shall be treated in all respects as if they had been raised in the pleadings. Such amendment of the pleadings as may be necessary to cause them to conform to the evidence and to raise these issues may be made upon motion of any party at any time, even after judgment; but failure to amend does not affect the result of the trial of these issues. If evidence is objected to at the trial on the ground that it is not within the issues made by the pleadings, the court may allow the pleadings to be amended and shall do so with liberality if the presentation of the merits of the action and the ends of substantial justice will be subserved thereby. The court may grant a continuance to enable the amendment to be made. According to the trial court, and sustained by the Court of Appeals, this Section allows a complaint that does not state a cause of action to be cured by evidence presented without objection during the trial. Thus, it ruled that even if the private respondent had no cause of action when he filed the complaint for a sum of money and damages because none of the three promissory notes was due yet, he could

nevertheless recover on the first two promissory notes dated 7 August 1996 and 14 March 1997, which became due during the pendency of the case in view of the introduction of evidence of their maturity during the trial. Such interpretation of Section 5, Rule 10 of the 1997 Rules of Civil Procedure is erroneous. Amendments of pleadings are allowed under Rule 10 of the 1997 Rules of Civil Procedure in order that the actual merits of a case may be determined in the most expeditious and inexpensive manner without regard to technicalities, and that all other matters included in the case may be determined in a single 12 proceeding, thereby avoiding multiplicity of suits. Section 5 thereof applies to situations wherein evidence not within the issues raised in the pleadings is presented by the parties during the trial, and to conform to such evidence the pleadings are subsequently amended on motion of a party. Thus, a complaint which fails to state a cause of action may be cured by evidence presented during the trial. However, the curing effect under Section 5 is applicable only if a cause of action in fact exists at the time the complaint is filed, but the complaint is defective for failure to allege the essential facts . For example, if a complaint failed to allege the fulfillment of a condition precedent upon which the cause of action depends, evidence showing that such condition had already been fulfilled when the complaint was filed 13 may be presented during the trial, and the complaint may accordingly be amended thereafter. Thus, 14 in Roces v. Jalandoni, this Court upheld the trial court in taking cognizance of an otherwise defective complaint which was later cured by the testimony of the plaintiff during the trial. In that case, there was in fact a cause of action and the only problem was the insufficiency of the allegations in the complaint. This 15 ruling was reiterated in Pascua v. Court of Appeals. It thus follows that a complaint whose cause of action has not yet accrued cannot be cured or remedied by an amended or supplemental pleading alleging the existence or accrual of a cause of action while the 16 case is pending. Such an action is prematurely brought and is, therefore, a groundless suit, which should be dismissed by the court upon proper motion seasonably filed by the defendant. The underlying reason for this rule is that a person should not be summoned before the public tribunals to answer for complaints which are immature. As this Court eloquently said in Surigao Mine Exploration Co., Inc. v. 17 Harris: It is a rule of law to which there is, perhaps, no exception, either at law or in equity, that to recover at all there must be some cause of action at the commencement of the suit . As observed by counsel for appellees, there are reasons of public policy why there should be no needless haste in bringing up litigation, and why people who are in no default and against whom there is yet no cause of action should not be summoned before the public tribunals to answer complaints which are groundless. We say groundless because if the action is immature, it should not be entertained, and an action prematurely brought is a groundless suit. It is true that an amended complaint and the answer thereto take the place of the originals which are thereby regarded as abandoned (Reynes vs. Compaa General de Tabacos [1912], 21 Phil. 416; Ruyman and Farris vs. Director of Lands [1916], 34 Phil., 428) and that "the complaint and answer having been superseded by the amended complaint and answer thereto, and the answer to the original complaint not having been presented in evidence as an exhibit, the trial court was not authorized to take it into account." (Bastida vs. Menzi & Co. [1933], 58 Phil., 188.) But in none of these cases or in any other case have we held that if a right of action did not exist when the original complaint was filed, one could be created by filing an amended complaint. In some jurisdictions in the United States what was termed an "imperfect cause of action" could be perfected by suitable amendment (Brown vs. Galena Mining & Smelting Co., 32 Kan., 528; Hooper vs. City of Atlanta, 26 Ga. App., 221) and this is virtually permitted in Banzon and Rosauro vs. Sellner ([1933], 58 Phil., 453); Asiatic Potroleum [sic] Co. vs. Veloso ([1935], 62 Phil., 683); and recently in Ramos vs. Gibbon (38 Off. Gaz., 241). That, however, which is no cause of action whatsoever cannot by amendment or supplemental pleading be converted into a cause of action: Nihil de re accrescit ei qui nihil in re quando jus accresceret habet.

We are therefore of the opinion, and so hold, that unless the plaintiff has a valid and subsisting cause of action at the time his action is commenced, the defect cannot be cured or remedied by the acquisition or accrual of one while the action is pending, and a supplemental complaint or an amendment setting up such after-accrued cause of action is not permissible. (Emphasis ours). Hence, contrary to the holding of the trial court and the Court of Appeals, the defect of lack of cause of action at the commencement of this suit cannot be cured by the accrual of a cause of action during the pendency of this case arising from the alleged maturity of two of the promissory notes on 7 August 1999 and 14 March 2000. Anent the issue of novation, this Court observes that the petitioner corporation argues the existence of novation based on its own version of what transpired during the renegotiation of the three promissory notes in December 1997. By using its own version of facts, the petitioner is, in a way, questioning the findings of facts of the trial court and the Court of Appeals. As a rule, the findings of fact of the trial court and the Court of Appeals are final and conclusive and 18 cannot be reviewed on appeal to the Supreme Court as long as they are borne out by the record or are 19 based on substantial evidence. The Supreme Court is not a trier of facts, its jurisdiction being limited to reviewing only errors of law that may have been committed by the lower courts. Among the exceptions is when the finding of fact of the trial court or the Court of Appeals is not supported by the evidence on 20 record or is based on a misapprehension of facts. Such exception obtains in the present case. This Court finds to be contrary to the evidence on record the finding of both the trial court and the Court of Appeals that the renegotiation in December 1997 resulted in the reduction of the interest from 15% to 6% per annum and that the monthly payments of US$750 made by the petitioner were for the reduced interests. It is worthy to note that the cash voucher dated January 1998 states that the payment of US$750 represents "INVESTMENT PAYMENT." All the succeeding cash vouchers describe the payments from 22 February 1998 to September 1999 as "CAPITAL REPAYMENT." All these cash vouchers served as receipts evidencing private respondents acknowledgment of the payments made by the petitioner: two of which were signed by the private respondent himself and all the others were signed by his representatives. The private respondent even identified and confirmed the existence of these receipts 23 during the hearing. Significantly, cognizant of these receipts, the private respondent applied these payments to the three consolidated principal loans in the summary of payments he submitted to the 24 court. Under Article 1253 of the Civil Code, if the debt produces interest, payment of the principal shall not be deemed to have been made until the interest has been covered. In this case, the private respondent would not have signed the receipts describing the payments made by the petitioner as "capital repayment" if the obligation to pay the interest was still subsisting. The receipts, as well as private respondents summary of payments, lend credence to petitioners claim that the payments were for the principal loans and that the interests on the three consolidated loans were waived by the private respondent during the undisputed renegotiation of the loans on account of the business reverses suffered by the petitioner at the time. There was therefore a novation of the terms of the three promissory notes in that the interest was waived and the principal was payable in monthly installments of US$750. Alterations of the terms and conditions of the obligation would generally result only in modificatory novation unless such terms and conditions are 25 considered to be the essence of the obligation itself. The resulting novation in this case was, therefore, of the modificatory type, not the extinctive type, since the obligation to pay a sum of money remains in force.
21

Thus, since the petitioner did not renege on its obligation to pay the monthly installments conformably with their new agreement and even continued paying during the pendency of the case, the private respondent had no cause of action to file the complaint. It is only upon petitioners default in the payment of the monthly amortizations that a cause of action would arise and give the private respondent a right to maintain an action against the petitioner. Lastly, the petitioner contends that the Court of Appeals obstinately included its President Infante and Vice-President Hegerty as appellants even if they did not appeal the trial courts decision since they were found to be not personally liable for the obligation of the petitioner. Indeed, the Court of Appeals erred in referring to them as defendants-appellants; nevertheless, that error is no cause for alarm because its ruling was clear that the petitioner corporation was the one solely liable for its obligation. In fact, the Court of Appeals affirmed in toto the decision of the trial court, which means that it also upheld the latters ruling that Hegerty and Infante were not personally liable for the pecuniary obligations of the petitioner to the private respondent. In sum, based on our disquisition on the lack of cause of action when the complaint for sum of money and damages was filed by the private respondent, the petition in the case at bar is impressed with merit. WHEREFORE, the petition is hereby GRANTED. The Decision of 5 September 2003 of the Court of Appeals in CA-G.R. CV No. 68109, which affirmed the Decision of 5 May 2000 of the Regional Trial Court of Baguio, Branch 59, granting in part private respondents complaint for sum of money and damages, and its Resolution of 4 December 2003, which denied petitioners motion for reconsideration are hereby REVERSED and SET ASIDE. The complaint docketed as Civil Case No. 4282-R is hereby DISMISSED for lack of cause of action

G.R. No. 182435

August 13, 2012

LILIA B. ADA, LUZ B. ADANZA, FLORA C. BA YLON, REMO BA YLON, JOSE BA YLON, ERIC BA YLON, FLORENTINO BA YLON, and MA. RUBY BA YLON, Petitioners, vs. FLORANTE BA YLON, Respondent. DECISION REYES, J.: Before this Court is a petition for review on certiorari under Rule 45 of the Rules of Court seeking to annul 1 and set aside the Decision dated October 26, 2007 rendered by the Court of Appeals (CA) in CA-G.R. 2 CV No. 01746. The assailed decision partially reversed and set aside the Decision dated October 20, 2005 issued ~y the Regional Trial Court (RTC), Tan jay City, Negros Oriental, Branch 43 in Civil Case No. 11657. The Antecedent Facts This case involves the estate of spouses Florentino Baylon and Maximina Elnas Baylon (Spouses 3 Baylon) who died on November 7, 1961 and May 5, 1974, respectively. At the time of their death, Spouses Baylon were survived by their legitimate children, namely, Rita Baylon (Rita), Victoria Baylon (Victoria), Dolores Baylon (Dolores), Panfila Gomez (Panfila), Ramon Baylon (Ramon) and herein petitioner Lilia B. Ada (Lilia).

Dolores died intestate and without issue on August 4, 1976. Victoria died on November 11, 1981 and was survived by her daughter, herein petitioner Luz B. Adanza. Ramon died intestate on July 8, 1989 and was survived by herein respondent Florante Baylon (Florante), his child from his first marriage, as well as by petitioner Flora Baylon, his second wife, and their legitimate children, namely, Ramon, Jr. and herein petitioners Remo, Jose, Eric, Florentino and Ma. Ruby, all surnamed Baylon. On July 3, 1996, the petitioners filed with the RTC a Complaint for partition, accounting and damages against Florante, Rita and Panfila. They alleged therein that Spouses Baylon, during their lifetime, owned 5 43 parcels of land all situated in Negros Oriental. After the death of Spouses Baylon, they claimed that Rita took possession of the said parcels of land and appropriated for herself the income from the same. Using the income produced by the said parcels of land, Rita allegedly purchased two parcels of land, Lot 6 7 No. 4709 and half of Lot No. 4706, situated in Canda-uay, Dumaguete City. The petitioners averred that Rita refused to effect a partition of the said parcels of land. In their Answer, Florante, Rita and Panfila asserted that they and the petitioners co-owned 22 out of the 43 parcels of land mentioned in the latters complaint, whereas Rita actually owned 10 parcels of 10 land out of the 43 parcels which the petitioners sought to partition, while the remaining 11 parcels of 11 12 13 land are separately owned by Petra Cafino Adanza, Florante, Meliton Adalia, Consorcia 14 15 16 Adanza, Lilia and Santiago Mendez. Further, they claimed that Lot No. 4709 and half of Lot No. 4706 were acquired by Rita using her own money. They denied that Rita appropriated solely for herself the income of the estate of Spouses Baylon, and expressed no objection to the partition of the estate of Spouses Baylon, but only with respect to the co-owned parcels of land. During the pendency of the case, Rita, through a Deed of Donation dated July 6, 1997, conveyed Lot No. 4709 and half of Lot No. 4706 to Florante. On July 16, 2000, Rita died intestate and without any issue. Thereafter, learning of the said donation inter vivos in favor of Florante, the petitioners filed a 17 Supplemental Pleading dated February 6, 2002, praying that the said donation in favor of the respondent be rescinded in accordance with Article 1381(4) of the Civil Code. They further alleged that Rita was already sick and very weak when the said Deed of Donation was supposedly executed and, thus, could not have validly given her consent thereto. Florante and Panfila opposed the rescission of the said donation, asserting that Article 1381(4) of the Civil Code applies only when there is already a prior judicial decree on who between the contending parties 18 actually owned the properties under litigation. The RTC Decision On October 20, 2005, the RTC rendered a Decision, Wherefore judgment is hereby rendered: (1) declaring the existence of co-ownership over parcels nos. 1, 2, 3, 5, 7, 10, 13, 14, 16, 17, 18, 26, 29, 30, 33, 34, 35, 36, 40 and 41 described in the complaint; (2) directing that the above mentioned parcels of land be partitioned among the heirs of Florentino Baylon and Maximina Baylon; (3) declaring a co-ownership on the properties of Rita Baylon namely parcels no[s]. 6, 11, 12, 20, 24, 27, 31, 32, 39 and 42 and directing that it shall be partitioned among her heirs who are the plaintiffs and defendant in this case; (4) declaring the donation inter vivos rescinded without prejudice to the share of Florante Baylon to the estate of Rita Baylon and directing that parcels nos. 1 and 2 paragraph V of the complaint
19 8 9 4

the decretal portion of which reads:

be included in the division of the property as of Rita Baylon among her heirs, the parties in this case; (5) excluding from the co-ownership parcels nos. 20, 21, 22, 9, 43, 4, 8, 19 and 37. Considering that the parties failed to settle this case amicably and could not agree on the partition, the parties are directed to nominate a representative to act as commissioner to make the partition. He shall immediately take [his] oath of office upon [his] appointment. The commissioner shall make a report of all the proceedings as to the partition within fifteen (15) days from the completion of this partition. The parties are given ten (10) days within which to object to the report after which the Court shall act on the commissioner report. SO ORDERED.
20

(Emphasis ours)

The RTC held that the death of Rita during the pendency of the case, having died intestate and without any issue, had rendered the issue of ownership insofar as parcels of land which she claims as her own moot since the parties below are the heirs to her estate. Thus, the RTC regarded Rita as the owner of the said 10 parcels of land and, accordingly, directed that the same be partitioned among her heirs. Nevertheless, the RTC rescinded the donation inter vivos of Lot No. 4709 and half of Lot No. 4706 in favor of Florante. In rescinding the said donation inter vivos, the RTC explained that: However, with respect to lot nos. 4709 and 4706 which [Rita] had conveyed to Florante Baylon by way of donation inter vivos, the plaintiffs in their supplemental pleadings (sic) assailed the same to be rescissible on the ground that it was entered into by the defendant Rita Baylon without the knowledge and approval of the litigants [or] of competent judicial authority. The subject parcels of lands are involved in the case for which plaintiffs have asked the Court to partition the same among the heirs of Florentino Baylon and Maximina Elnas. Clearly, the donation inter vivos in favor of Florante Baylon was executed to prejudice the plaintiffs right to succeed to the estate of Rita Baylon in case of death considering that as testified by Florante Baylon, Rita Baylon was very weak and he tried to give her vitamins x x x. The donation inter vivos executed by Rita Baylon in favor of Florante Baylon is rescissible for the reason that it refers to the parcels of land in litigation x x x without the knowledge and approval of the plaintiffs or of this Court. However, the 21 rescission shall not affect the share of Florante Baylon to the estate of Rita Baylon. Florante sought reconsideration of the Decision dated October 20, 2005 of the RTC insofar as it 22 rescinded the donation of Lot No. 4709 and half of Lot No. 4706 in his favor. He asserted that, at the time of Ritas death on July 16, 2000, Lot No. 4709 and half of Lot No. 4706 were no longer part of her estate as the same had already been conveyed to him through a donation inter vivos three years earlier. Thus, Florante maintained that Lot No. 4709 and half of Lot No. 4706 should not be included in the properties that should be partitioned among the heirs of Rita. On July 28, 2006, the RTC issued an Order Florante.
23

which denied the motion for reconsideration filed by

The CA Decision On appeal, the CA rendered a Decision


24

dated October 26, 2007, the dispositive portion of which reads:

WHEREFORE, the Decision dated October 20, 2005 and Order dated July 28, 2006 are REVERSEDand SET ASIDE insofar as they decreed the rescission of the Deed of Donation dated July 6, 1997 and the inclusion of lot no. 4709 and half of lot no. 4706 in the estate of Rita Baylon. The

case isREMANDED to the trial court for the determination of ownership of lot no. 4709 and half of lot no. 4706. SO ORDERED.
25

The CA held that before the petitioners may file an action for rescission, they must first obtain a favorable judicial ruling that Lot No. 4709 and half of Lot No. 4706 actually belonged to the estate of Spouses Baylon and not to Rita. Until then, the CA asserted, an action for rescission is premature. Further, the CA ruled that the petitioners action for rescission cannot be joined with their action for partition, accounting and damages through a mere supplemental pleading. Thus: If Lot No. 4709 and half of Lot No. 4706 belonged to the Spouses estate, then Rita Baylons donation thereof in favor of Florante Baylon, in excess of her undivided share therein as co-heir, is void. Surely, she could not have validly disposed of something she did not own. In such a case, an action for rescission of the donation may, therefore, prosper. If the lots, however, are found to have belonged exclusively to Rita Baylon, during her lifetime, her donation thereof in favor of Florante Baylon is valid. For then, she merely exercised her ownership right to dispose of what legally belonged to her. Upon her death, the lots no longer form part of her estate as their ownership now pertains to Florante Baylon. On this score, an action for rescission against such donation will not prosper. x x x. Verily, before plaintiffs-appellees may file an action for rescission, they must first obtain a favorable judicial ruling that lot no. 4709 and half of lot no. 4706 actually belonged to the estate of Spouses Florentino and Maximina Baylon, and not to Rita Baylon during her lifetime. Until then, an action for rescission is premature. For this matter, the applicability of Article 1381, paragraph 4, of the New Civil Code must likewise await the trial courts resolution of the issue of ownership. Be that as it may, an action for rescission should be filed by the parties concerned independent of the proceedings below. The first cannot simply be lumped up with the second through a mere supplemental 26 pleading. (Citation omitted) The petitioners sought reconsideration of the Decision dated October 26, 2007 but it was denied by the 28 CA in its Resolution dated March 6, 2008. Hence, this petition. Issue The lone issue to be resolved by this Court is whether the CA erred in ruling that the donation inter vivos of Lot No. 4709 and half of Lot No. 4706 in favor of Florante may only be rescinded if there is already a judicial determination that the same actually belonged to the estate of Spouses Baylon. The Courts Ruling The petition is partly meritorious. Procedural Matters Before resolving the lone substantive issue in the instant case, this Court deems it proper to address certain procedural matters that need to be threshed out which, by laxity or otherwise, were not raised by the parties herein.
27

Misjoinder of Causes of Action The complaint filed by the petitioners with the RTC involves two separate, distinct and independent actions partition and rescission. First, the petitioners raised the refusal of their co-heirs, Florante, Rita and Panfila, to partition the properties which they inherited from Spouses Baylon. Second, in their supplemental pleading, the petitioners assailed the donation inter vivos of Lot No. 4709 and half of Lot No. 4706 made by Rita in favor of Florante pendente lite. The actions of partition and rescission cannot be joined in a single action. By a joinder of actions, or more properly, a joinder of causes of action is meant the uniting of two or more demands or rights of action in one action, the statement of more than one cause of action in a declaration. It is the union of two or more civil causes of action, each of which could be made the basis of a separate suit, in the same complaint, declaration or petition. A plaintiff may under certain circumstances join 29 several distinct demands, controversies or rights of action in one declaration, complaint or petition. The objectives of the rule or provision are to avoid a multiplicity of suits where the same parties and subject matter are to be dealt with by effecting in one action a complete determination of all matters in controversy and litigation between the parties involving one subject matter, and to expedite the disposition of litigation at minimum cost. The provision should be construed so as to avoid such 30 multiplicity, where possible, without prejudice to the rights of the litigants. Nevertheless, while parties to an action may assert in one pleading, in the alternative or otherwise, as many causes of action as they may have against an opposing party, such joinder of causes of action is subject to the condition, inter alia, that the joinder shall not include special civil actions governed by 31 special rules. Here, there was a misjoinder of causes of action. The action for partition filed by the petitioners could not be joined with the action for the rescission of the said donation inter vivos in favor of Florante. Lest it be overlooked, an action for partition is a special civil action governed by Rule 69 of the Rules of Court while an action for rescission is an ordinary civil action governed by the ordinary rules of civil procedure. The variance in the procedure in the special civil action of partition and in the ordinary civil action of rescission precludes their joinder in one complaint or their being tried in a single proceeding to avoid confusion in determining what rules shall govern the conduct of the proceedings as well as in the determination of the 32 presence of requisite elements of each particular cause of action. A misjoined cause of action, if not severed upon motion of a party or by the court sua sponte, may be adjudicated by the court together with the other causes of action. Nevertheless, misjoinder of causes of action is not a ground for dismissal. Indeed, the courts have the power, acting upon the motion of a party to the case or sua sponte, to order the severance of the 33 misjoined cause of action to be proceeded with separately. However, if there is no objection to the improper joinder or the court did not motu proprio direct a severance, then there exists no bar in the simultaneous adjudication of all the erroneously joined causes of action. On this score, our disquisition in 34 Republic of the Philippines v. Herbieto is instructive, viz: This Court, however, disagrees with petitioner Republic in this regard. This procedural lapse committed by the respondents should not affect the jurisdiction of the MTC to proceed with and hear their application for registration of the Subject Lots.

xxxx Considering every application for land registration filed in strict accordance with the Property Registration Decree as a single cause of action, then the defect in the joint application for registration filed by the respondents with the MTC constitutes a misjoinder of causes of action and parties. Instead of a single or joint application for registration, respondents Jeremias and David, more appropriately, should have filed separate applications for registration of Lots No. 8422 and 8423, respectively. Misjoinder of causes of action and parties do not involve a question of jurisdiction of the court to hear and proceed with the case. They are not even accepted grounds for dismissal thereof. Instead, under the Rules of Court, the misjoinder of causes of action and parties involve an implied admission of the courts jurisdiction. It acknowledges the power of the court, acting upon the motion of a party to the case or on its own initiative, to order the severance of the misjoined cause of action, to be proceeded with separately (in case of misjoinder of causes of action); and/or the dropping of a party and the severance of any claim against said misjoined party, also to be proceeded with separately (in case of misjoinder of 35 parties). (Citations omitted) It should be emphasized that the foregoing rule only applies if the court trying the case has jurisdiction over all of the causes of action therein notwithstanding the misjoinder of the same. If the court trying the case has no jurisdiction over a misjoined cause of action, then such misjoined cause of action has to be severed from the other causes of action, and if not so severed, any adjudication rendered by the court with respect to the same would be a nullity. Here, Florante posed no objection, and neither did the RTC direct the severance of the petitioners action for rescission from their action for partition. While this may be a patent omission on the part of the RTC, this does not constitute a ground to assail the validity and correctness of its decision. The RTC validly adjudicated the issues raised in the actions for partition and rescission filed by the petitioners. Asserting a New Cause of Action in a Supplemental Pleading In its Decision dated October 26, 2007, the CA pointed out that the said action for rescission should have been filed by the petitioners independently of the proceedings in the action for partition. It opined that the action for rescission could not be lumped up with the action for partition through a mere supplemental pleading. We do not agree. A supplemental pleading may raise a new cause of action as long as it has some relation to the original cause of action set forth in the original complaint. Section 6, Rule 10 of the Rules of Court reads: Sec. 6. Supplemental Pleadings. Upon motion of a party the court may, upon reasonable notice and upon such terms as are just, permit him to serve a supplemental pleading setting forth transactions, occurrences or events which have happened since the date of the pleading sought to be supplemented. The adverse party may plead thereto within ten (10) days from notice of the order admitting the supplemental pleading. In Young v. Spouses Sy, pleading. Thus:
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this Court had the opportunity to elucidate on the purpose of a supplemental

As its very name denotes, a supplemental pleading only serves to bolster or add something to the primary pleading. A supplement exists side by side with the original. It does not replace that which it supplements. Moreover, a supplemental pleading assumes that the original pleading is to stand and that the issues joined with the original pleading remained an issue to be tried in the action. It is but a continuation of the complaint. Its usual office is to set up new facts which justify, enlarge or change the kind of relief with respect to the same subject matter as the controversy referred to in the original complaint. The purpose of the supplemental pleading is to bring into the records new facts which will enlarge or change the kind of relief to which the plaintiff is entitled; hence, any supplemental facts which further develop the original right of action, or extend to vary the relief, are available by way of supplemental 37 complaint even though they themselves constitute a right of action. (Citations omitted and emphasis ours) Thus, a supplemental pleading may properly allege transactions, occurrences or events which had transpired after the filing of the pleading sought to be supplemented, even if the said supplemental facts constitute another cause of action. Admittedly, in Leobrera v. Court of Appeals, we held that a supplemental pleading must be based on matters arising subsequent to the original pleading related to the claim or defense presented therein, and founded on the same cause of action. We further stressed therein that a supplemental pleading may not be used to try a new cause of action. However, in Planters Development Bank v. LZK Holdings and Development Corp., we clarified that, while a matter stated in a supplemental complaint should have some relation to the cause of action set forth in the original pleading, the fact that the supplemental pleading technically states a new cause of action should not be a bar to its allowance but only a matter that may be considered by the court in the exercise of its discretion. In such cases, we stressed that a broad definition of "cause of action" should be applied. Here, the issue as to the validity of the donation inter vivos of Lot No. 4709 and half of Lot No. 4706 made by Rita in favor of Florante is a new cause of action that occurred after the filing of the original complaint. However, the petitioners prayer for the rescission of the said donation inter vivos in their supplemental pleading is germane to, and is in fact, intertwined with the cause of action in the partition case. Lot No. 4709 and half of Lot No. 4706 are included among the properties that were sought to be partitioned. The petitioners supplemental pleading merely amplified the original cause of action, on account of the gratuitous conveyance of Lot No. 4709 and half of Lot No. 4706 after the filing of the original complaint and prayed for additional reliefs, i.e., rescission. Indeed, the petitioners claim that the said lots form part of the estate of Spouses Baylon, but cannot be partitioned unless the gratuitous conveyance of the same is rescinded. Thus, the principal issue raised by the petitioners in their original complaint remained the same. Main Issue: Propriety of Rescission After having threshed out the procedural matters, we now proceed to adjudicate the substantial issue presented by the instant petition. The petitioners assert that the CA erred in remanding the case to the RTC for the determination of ownership of Lot No. 4709 and half of Lot No. 4706. They maintain that the RTC aptly rescinded the said donation inter vivos of Lot No. 4709 and half of Lot No. 4706 pursuant to Article 1381(4) of the Civil Code. In his Comment, Florante asserts that before the petitioners may file an action for rescission, they must first obtain a favorable judicial ruling that Lot No. 4709 and half of Lot No. 4706 actually belonged to the estate of Spouses Baylon. Until then, Florante avers that an action for rescission would be premature.
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The petitioners contentions are well-taken. The resolution of the instant dispute is fundamentally contingent upon a determination of whether the donation inter vivos of Lot No. 4709 and half of Lot No. 4706 in favor of Florante may be rescinded pursuant to Article 1381(4) of the Civil Code on the ground that the same was made during the pendency of the action for partition with the RTC. Rescission is a remedy to address the damage or injury caused to the contracting parties or third persons. Rescission is a remedy granted by law to the contracting parties and even to third persons, to secure the reparation of damages caused to them by a contract, even if it should be valid, by means of the 41 restoration of things to their condition at the moment prior to the celebration of said contract. It is a remedy to make ineffective a contract, validly entered into and therefore obligatory under normal conditions, by reason of external causes resulting in a pecuniary prejudice to one of the contracting 42 parties or their creditors. Contracts which are rescissible are valid contracts having all the essential requisites of a contract, but by reason of injury or damage caused to either of the parties therein or to third persons are considered defective and, thus, may be rescinded. The kinds of rescissible contracts, according to the reason for their susceptibility to rescission, are the 43 following:first, those which are rescissible because of lesion or prejudice; second, those which are 44 45 rescissible on account of fraud or bad faith; and third, those which, by special provisions of law, are 46 susceptible to rescission. Contracts which refer to things subject of litigation is rescissible pursuant to Article 1381(4) of the Civil Code. Contracts which are rescissible due to fraud or bad faith include those which involve things under litigation, if they have been entered into by the defendant without the knowledge and approval of the litigants or of competent judicial authority. Thus, Article 1381(4) of the Civil Code provides: Art. 1381. The following contracts are rescissible: xxxx (4) Those which refer to things under litigation if they have been entered into by the defendant without the knowledge and approval of the litigants or of competent judicial authority. The rescission of a contract under Article 1381(4) of the Civil Code only requires the concurrence of the following: first, the defendant, during the pendency of the case, enters into a contract which refers to the thing subject of litigation; and second, the said contract was entered into without the knowledge and approval of the litigants or of a competent judicial authority. As long as the foregoing requisites concur, it becomes the duty of the court to order the rescission of the said contract. The reason for this is simple. Article 1381(4) seeks to remedy the presence of bad faith among the parties to a case and/or any fraudulent act which they may commit with respect to the thing subject of litigation. When a thing is the subject of a judicial controversy, it should ultimately be bound by whatever disposition the court shall render. The parties to the case are therefore expected, in defe rence to the courts exercise

of jurisdiction over the case, to refrain from doing acts which would dissipate or debase the thing subject of the litigation or otherwise render the impending decision therein ineffectual. There is, then, a restriction on the disposition by the parties of the thing that is the subject of the litigation. Article 1381(4) of the Civil Code requires that any contract entered into by a defendant in a case which refers to things under litigation should be with the knowledge and approval of the litigants or of a competent judicial authority. Further, any disposition of the thing subject of litigation or any act which tends to render inutile the courts impending disposition in such case, sans the knowledge and approval of the litigants or of the court, is unmistakably and irrefutably indicative of bad faith. Such acts undermine the authority of the court to lay down the respective rights of the parties in a case relative to the thing subject of litigation and bind them to such determination. It should be stressed, though, that the defendant in such a case is not absolutely proscribed from entering into a contract which refer to things under litigation. If, for instance, a defendant enters into a contract which conveys the thing under litigation during the pendency of the case, the conveyance would be valid, there being no definite disposition yet coming from the court with respect to the thing subject of litigation. After all, notwithstanding that the subject thereof is a thing under litigation, such conveyance is but merely an exercise of ownership. This is true even if the defendant effected the conveyance without the knowledge and approval of the litigants or of a competent judicial authority. The absence of such knowledge or approval would not precipitate the invalidity of an otherwise valid contract. Nevertheless, such contract, though considered valid, may be rescinded at the instance of the other litigants pursuant to Article 1381(4) of the Civil Code. Here, contrary to the CAs disposition, the RTC aptly ordered the rescission of the donation inter vivos of Lot No. 4709 and half of Lot No. 4706 in favor of Florante. The petitioners had sufficiently established the presence of the requisites for the rescission of a contract pursuant to Article 1381(4) of the Civil Code. It is undisputed that, at the time they were gratuitously conveyed by Rita, Lot No. 4709 and half of Lot No. 4706 are among the properties that were the subject of the partition case then pending with the RTC. It is also undisputed that Rita, then one of the defendants in the partition case with the RTC, did not inform nor sought the approval from the petitioners or of the RTC with regard to the donation inter vivos of the said parcels of land to Florante. Although the gratuitous conveyance of the said parcels of land in favor of Florante was valid, the donation inter vivos of the same being merely an exercise of ownership, Ritas failure to inform and seek the approval of the petitioners or the RTC regarding the conveyance gave the petitioners the right to have the said donation rescinded pursuant to Article 1381(4) of the Civil Code. Rescission under Article 1381(4) of the Civil Code is not preconditioned upon the judicial determination as to the ownership of the thing subject of litigation. In this regard, we also find the assertion that rescission may only be had after the RTC had finally determined that the parcels of land belonged to the estate of Spouses Baylon intrinsically amiss. The petitioners right to institute the action for rescission pursuant to Article 1381(4) of the Civil Code is not preconditioned upon the RTCs determination as to the ownership of the said parcels of land. It bears stressing that the right to ask for the rescission of a contract under Article 1381(4) of the Civil Code is not contingent upon the final determination of the ownership of the thing subject of litigation. The primordial purpose of Article 1381(4) of the Civil Code is to secure the possible effectivity of the

impending judgment by a court with respect to the thing subject of litigation. It seeks to protect the binding effect of a courts impending adjudication vis --vis the thing subject of litigation regardless of which among the contending claims therein would subsequently be upheld. Accordingly, a definitive judicial determination with respect to the thing subject of litigation is not a condition sine qua non before the rescissory action contemplated under Article 1381(4) of the Civil Code may be instituted. Moreover, conceding that the right to bring the rescissory action pursuant to Article 1381(4) of the Civil Code is preconditioned upon a judicial determination with regard to the thing subject litigation, this would only bring about the very predicament that the said provision of law seeks to obviate. Assuming arguendo that a rescissory action under Article 1381(4) of the Civil Code could only be instituted after the dispute with respect to the thing subject of litigation is judicially determined, there is the possibility that the same may had already been conveyed to third persons acting in good faith, rendering any judicial determination with regard to the thing subject of litigation illusory. Surely, this paradoxical eventuality is not what the law had envisioned. Even if the donation inter vivos is validly rescinded, a determination as to the ownership of the subject parcels of land is still necessary. Having established that the RTC had aptly ordered the rescission of the said donation inter vivos in favor of Florante, the issue that has to be resolved by this Court is whether there is still a need to determine the ownership of Lot No. 4709 and half of Lot No. 4706. In opting not to make a determination as to the ownership of Lot No. 4709 and half of Lot No. 4706, the RTC reasoned that the parties in the proceedings before it constitute not only the surviving heirs of Spouses Baylon but the surviving heirs of Rita as well. As intimated earlier, Rita died intestate during the pendency of the proceedings with the RTC without any issue, leaving the parties in the proceedings before the RTC as her surviving heirs. Thus, the RTC insinuated, a definitive determination as to the ownership of the said parcels of land is unnecessary since, in any case, the said parcels of land would ultimately be adjudicated to the parties in the proceedings before it. We do not agree. Admittedly, whoever may be adjudicated as the owner of Lot No. 4709 and half of Lot No. 4706, be it Rita or Spouses Baylon, the same would ultimately be transmitted to the parties in the proceedings before the RTC as they are the only surviving heirs of both Spouses Baylon and Rita. However, the RTC failed to realize that a definitive adjudication as to the ownership of Lot No. 4709 and half of Lot No. 4706 is essential in this case as it affects the authority of the RTC to direct the partition of the said parcels of land. Simply put, the RTC cannot properly direct the partition of Lot No. 4709 and half of Lot No. 4706 until and unless it determines that the said parcels of land indeed form part of the estate of Spouses Baylon. It should be stressed that the partition proceedings before the RTC only covers the properties co-owned by the parties therein in their respective capacity as the surviving heirs of Spouses Baylon. Hence, the authority of the RTC to issue an order of partition in the proceedings before it only affects those properties which actually belonged to the estate of Spouses Baylon. In this regard, if Lot No. 4709 and half of Lot No. 4706, as unwaveringly claimed by Florante, are indeed exclusively owned by Rita, then the said parcels of land may not be partitioned simultaneously with the other properties subject of the partition case before the RTC. In such case, although the parties in the case before the RTC are still co-owners of the said parcels of land, the RTC would not have the authority to direct the partition of the said parcels of land as the proceedings before it is only concerned with the estate of Spouses Baylon.

WHEREFORE, in consideration of the foregoing disquisitions, the petition is PARTIALLY GRANTED. The Decision dated October 26, 2007 issued by the Court of Appeals in CA-G.R. CV No. 01746 is MODIFIED in that the Decision dated October 20, 2005 issued by the Regional Trial Court, Tanjay City, Negros Oriental, Branch 43 in Civil Case No. 11657, insofar as it decreed the rescission of the Deed of Donation dated July 6, 1997 is herebyREINSTATED. The case is REMANDED to the trial court for the determination of the ownership of Lot No. 4709 and half of Lot No. 4706 in accordance with this Decision.