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SECOND DIVISION G.R. No.

146595 June 20, 2003

and P1,500,000.00 on November 23, 1995 and December 23, 1995, respectively. As of November 22, 1996, petitioner failed to pay his obligation. He claimed that Kaakbay never furnished him a copy of the real estate mortgage; that, according to Kaakbay, his obligation had now reached P5,570,000.00 because the actual interest was 0.3925% for a period of less than one year instead of the agreed-upon interest of 12% per annum; and that he was made to issue two postdated checks to guarantee his obligation, namely: UCPB Check No. CBA 052985 in the amount of P5,570,000.00 postdated to November 5, 1996; and UCPB Check No. CBA 095215 in the amount of P6,175,000.00 postdated to January 31, 1997.7 Petitioner further alleged that he negotiated with Kaakbay for a further extension of time to pay his obligation, which the latter agreed to. It was agreed that petitioner and Kaakbay would sign, execute, and acknowledge a Deed of Sale Under Pacto de Retro upon the expiration of a two-year period starting January 8, 1998 to January 8, 2000. Petitioner was then given a blank Deed of Sale Under Pacto de Retro on January 8, 1998 which he signed.8 His suspicions that Kaakbay was charging him usurious rates of interest were confirmed when he obtained a Statement of Account stating that his obligation had now reached P13,333,750.00.9 On October 21, 1999, petitioner learned of the existence of an accomplished Deed of Sale Under Pacto de Retro, which appeared that the same was signed by him and his wife Maria Rosario Delmo Tan, on one hand, and private respondent Lazaro on the other, and was allegedly notarized by private respondent Atty. Roldan M. Noynay on February 5, 1998,10 when in truth and in fact, he, his wife, and their witness Charito Morales did not sign it on said date, nor did they execute it before Atty. Noynay or any other notary public on said date. On January 5, 2000, petitioner filed a complaint for Declaration of Nullity, Invalidity and Unenforceability or Annulment of the Promissory Notes purportedly attached to the Real Estate Mortgage dated November 16, 1995, the usurious and void rates of interest and other fees therein appearing, and the Deed of Sale Under Pacto De

CARLO A. TAN, petitioner, vs. KAAKBAY FINANCE CORPORATION, DENNIS S. LAZARO and ROLDAN M. NOYNAY, respondents. RESOLUTION QUISUMBING, J.: Petitioner seeks the review and reversal of the decision of the Court of Appeals, dated August 22, 2000 in CA-G.R. SP No. 58379,1 which affirmed the orders of the Regional Trial Court (RTC), Branch 37, Calamba, Laguna, dated February 8, 2000 and March 29, 2000 in Civil Case No. 2881-2000-C entitled "Carlo A. Tan v. Kaakbay Finance Corporation, Dennis S. Lazaro and Roldan M. Noynay"2 for declaration of nullity of the Promissory Note purportedly attached to the Real Estate Mortgage, the usurious and unlawful or exorbitant and unconscionable rates of interest and fees therein, and the Deed of Sale Under Pacto de Retro. Likewise, assailed is the appellate courts resolution3 dated December 20, 2000, denying petitioners motion for reconsideration. The facts, as culled from the records, are as follows: In the latter part of 1995, petitioner Carlo4 A. Tan applied for and was granted a loan of four million pesos (P4,000,000.00) by private respondent Kaakbay Finance Corporation (Kaakbay), as represented by its president, private respondent Dennis S. Lazaro. As collateral, a real estate mortgage5 on petitioner Tans parcel of land with the improvements therein all covered by Transfer Certificate Title No. T2071256 located along Rizal St., Calamba, Laguna was executed. Petitioner alleged that the stipulated interest was 12% per annum until fully paid, which amount however, was not stated in the mortgage when he signed it on November 16, 1995. The amount loaned was released to him in two installments of P2,500,000.00

Retro purportedly dated February 5, 1998, and damages, with prayer for Preliminary Injunction and/or Temporary Restraining Order against respondents Kaakbay Finance Corporation, Dennis S. Lazaro and Roldan M. Noynay,11with the RTC Calamba, Laguna, and docketed as Civil Case No. 2881-2000-C. The complaint essentially prayed that herein petitioners obligation to Kaakbay Finance Corporation in the amount of P4,000,000.00 be subject to interest of only 12% per annum from November 23, 1995; that the promissory notes attached to his Real Estate Mortgage dated November 16, 1995 be declared null and void; that the Deed of Sale Under Pacto de Retro dated February 5, 1998 be declared unenforceable; and that respondents pay moral and exemplary damages in the amount of P200,000.00 and P50,000.00, respectively, as well as attorneys fees. On the same date, petitioner filed a Notice of Lis Pendens with the Registry of Deeds of Calamba, Laguna, which was annotated on TCT No. 207125.12 On January 17, 2000, respondents, through their counsel, Atty. Roldan M. Noynay, filed their Consolidated Answer With Compulsory Counterclaim And Opposition To Temporary Restraining Order (TRO) and Preliminary Injunction.13 During the hearing of petitioners application for the issuance of a TRO, the parties agreed in open court that petitioner would withdraw his application for a TRO, while respondents in turn would hold in abeyance the registration of the Deed of Sale Under Pacto de Retro until the case was terminated. The trial court issued an order to that effect, dated January 17, 2000.14 Later, the law firm of Ortega, Del Castillo, Bacorro, Odulio, Calma, and Carbonell entered its appearance as counsel for respondents.15 Said counsel requested for an extension of time to file an Answer, and also moved for the withdrawal of the Consolidated Answer 16 filed by Atty. Noynay insofar as respondents Kaakbay and Lazaro are concerned.17 Respondents also filed a Supplemental Opposition To The Prayer For Preliminary Injunction Or To Temporary Injunction.18

On February 3, 2000, respondents, through the new counsel, filed their Answer with Counterclaim,19 praying that petitioner pay them four million pesos (P4,000,000.00) representing the principal amount of the loan, nine million three hundred thirty three thousand seven hundred fifty pesos (P9,333,750.00) representing the compounded monthly interest and annual penalty interest, two hundred fifty thousand pesos (P250,000.00) as litigation expenses, and five hundred thousand pesos (P500,000.00) as attorneys fees. In addition, respondents filed a Motion for Admission of Counterclaim Without Payment of Fees, on the ground that their counterclaim is compulsory in nature, hence it may be admitted without payment of fees.20 On February 21, 2000, petitioner filed an Urgent Motion to Expunge Motions and Pleadings Filed by Defendants Kaakbay Finance Corporation and Dennis S. Lazaro, Particularly Their Answer with Counterclaim and Motion for Admission of Counterclaim both Dated February 3, 2000 and/or Comment/Opposition (To Said Defendants Manifestation and Supplemental Opposition to their Prayer for Preliminary Injunction and to Temporary Injunction Dated January 24, 2000 and February 3, 2000 Respectively.)21 In this motion, petitioner pointed out that the respondents were being represented by their counsel, the law firm of Ortega, Del Castillo, Bacorro, Odulio, Calma, and Carbonell without stating if said law firm is in collaboration with or in substitution of their previous counsel, respondent Atty. Roldan M. Noynay. Petitioner argued that the procedure laid down in the rules concerning the change or substitution of counsel of a party litigant had not been properly complied with by the respondents, and thus the motions filed by the said law firm should be expunged. In addition, petitioner argued that respondents Answer with Counterclaim should not be admitted, as it partook of the nature of a permissive counterclaim, which required the payment of the prescribed filing fees; and since the fees were not paid, the lower court did not acquire jurisdiction over said Answer. In its order of February 8, 2000, the trial court granted respondents motion for admission of counterclaim without payment of fees.22

Petitioner then filed a "Supplemental Motion by Way of Motion for Reconsideration" but this was denied. Petitioner seasonably appealed to the Court of Appeals where he maintained that the trial court committed grave abuse of discretion in admitting the answer with counterclaim, which contains a permissive counterclaim the correct filing fees of which have not been paid by respondents Kaakbay and Lazaro to the trial court. Thus, petitioner insisted that the trial court had not acquired jurisdiction over the said answer with counterclaim. Alternatively, petitioner urged that said answer be expunged from the record of the case a quo. On August 22, 2000, the appellate court promulgated its decision, decreeing as follows: WHEREFORE, the instant petition is DENIED for lack of merit, and accordingly, DISMISSED.23 Petitioner then moved for reconsideration, but the appellate court denied it in the resolution dated December 20, 2000. Hence, this instant petition, where petitioner now contends that the Court of Appeals committed the following errors, in: (a) ITS HOLDING THAT "XXX THE LOWER COURT DID NOT COMMIT GRAVE ABUSE OF DISCRETION IN DECLARING THE COUNTERCLAIM OF PRIVATE RESPONDENTS KAAKBAY FINANCE CORPORATION AND DENNIS S. LAZARO AS COMPULSORY, REQUIRING NO PAYMENT OF LEGAL FEES XXX" WHEN EVEN THE YULIENCO VS. COURT OF APPEALS CASE (G.R. NO. 131692, JUNE 10, 1999, 308 SCRA 206) IT CITED IN ITS DECISION FAVORABLY SUPPORTS THE ASSERTION OF PETITIONER THAT THE COUNTERCLAIM IN RESPONDENTS ANSWER IN THE CASE A QUO IS A PERMISSIVE COUNTERCLAIM. (b) ITS FAILURE TO RULE IN THE ASSAILED DECISION THAT HON. JUDGE JUANITA T. GUERRERO HAS ACTED

WITHOUT OR IN EXCESS OF JURISDICTION, OR WITH GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION IN ISSUING THE ORDERS OF FEBRUARY 8, 2000 AND MARCH 29, 2000 CONSIDERING THAT THE COLLECTION OF THE TOTAL AMOUNT OF P14,083,750.00 REPRESENTING UNPAID LOAN AND ACCRUED INTEREST THEREIN BY WAY OF COUNTERCLAIM IS COMPULSORY AND THAT THE ANSWER MAY BE ADMITTED WITHOUT NECESSITY OF PAYING THE DOCKET FEES. (c) ITS FAILURE TO DECLARE IN THE ASSAILED DECISION THAT THE MOTION FOR ADMISSION OF COUNTERCLAIM WITHOUT PAYMENT OF FEES IS A MERE SCRAP OF PAPER AND VIOLATIVE OF SECTIONS 4, 5 AND 6, RULE 15 OF THE 1997 RULES OF CIVIL PROCEDURE.24 The basic issue for resolution in this case is whether the counterclaim of respondents is compulsory or permissive in nature. Petitioner assails the Court of Appeals for affirming the trial courts order that the counterclaim of respondents is compulsory in nature, thus requiring no payment of legal fees. Petitioner contends that his complaint against the respondents is predicated on the unauthorized application of usurious, unconscionable and exorbitant rates of interest and other fees by respondents Kaakbay and Lazaro to petitioners loan without the latters knowledge, as well as the approval and the falsification of the promissory note supposed to be attached to the Real Estate Mortgage and the Deed of Sale Under Pacto de Retro. According to petitioner, he did not attempt to prevent the foreclosure of the mortgage because what he questions is the validity of the promissory note and the void rates of interest. He insists that these were falsified. He likewise assails the genuineness of the deed of sale in dispute. Since the evidence to be presented by the respondents to support the genuineness and due execution of the questioned promissory note and the Deed of Sale Under Pacto de Retro as a ground for the specific performance thereof, is not the same as the

evidence to be presented by the petitioner as plaintiff in the case below to support his claim of fraud employed by respondents, petitioner asserts the counterclaim cannot be deemed compulsory. He adds that since the respondents demand the payment of the loan and the interests pursuant to the contract of loan, completely inconsistent with his claim that subject documents were a nullity, what respondents had filed is not a compulsory counterclaim. For their part, respondents contend that their counterclaims are for payment of the unpaid loan of the petitioner in the amount of P4,000,000.00, the compounded interest with annual penalty equivalent to P9,333,750.00, litigation expenses of P250,000 and attorneys fees of P500,000. The respondents say these are all compulsory and not permissive counterclaims. Petitioner admitted in his complaint his indebtedness to respondent Kaakbay Finance Corporation in the amount of P4,000,000.00 and his liability for interest at the rate of 12% per annum only. These admissions arise out of, or are necessarily connected with, or have a logical relation to the transaction or occurrence forming the subject matter of the petitioners claim. Consequently, respondents conclude that the trial court did not err in ruling that payment of the docket fees is no longer necessary as their counterclaims are compulsory in nature. In Intestate Estate of Dalisay v. Hon. Marasigan,25 we held that a counterclaim is compulsory where: (1) it arises out of, or is necessarily connected with the transaction or occurrence that is the subject matter of the opposing partys claim; (2) it does not require the presence of third parties of whom the court cannot acquire jurisdiction; and (3) the trial court has jurisdiction to entertain the claim. To determine whether a counterclaim is compulsory or not, we have devised the following tests: (1) Are the issues of fact or law raised by the claim and the counterclaim largely the same? (2) Would res judicata bar a subsequent suit on defendants claims absent the compulsory counterclaim rule? (3) Will substantially the same evidence support or refute plaintiffs claim as well as the defendants counterclaim? and (4) Is there any logical relation between the claim and the counterclaim?26 In Quintanilla v. Court of Appeals, we said a "compelling test of compulsoriness" is whether there is "a logical relationship between the claim and counterclaim, that is, where conducting separate trials of the

respective claims of the parties would entail a substantial duplication of effort and time by the parties and the court."27 Tested against the abovementioned standards, we agree with the appellate courts view that respondents counterclaims are compulsory in nature. Petitioners complaint was for declaration of nullity, invalidity or annulment of the promissory notes purportedly attached to the Real Estate Mortgage dated November 16, 1995 and the usurious and void interest rates appearing therein and the Deed of Sale Under Pacto De Retro. Respondents counterclaim was for the payment of the principal amount of the loan, compounded monthly interest and annual penalty interest arising out of the non-payment of the principal loan, litigation expenses and attorneys fees. There is no dispute as to the principal obligation of P4,000,000, but there is a dispute as to the rate and amount of interest. Petitioner insists that the amount of interest is only 12% yearly until fully paid, while respondents insist on 3.5% monthly. Also, respondents allege that petitioner owes them P9,333,750.00 representing the compounded monthly interest and annual penalty, which is disputed by petitioner. Petitioner further seeks the nullification of the Deed of Sale Under Pacto de Retro for being falsified, while respondents aver the deed is valid. It thus appears that the evidence required to prove petitioners claims is similar or identical to that needed to establish respondents demands for the payment of unpaid loan from petitioner such as amount of interest rates. In other words, petitioners claim is so related logically to respondents counterclaim, such that conducting separate trials for the claim and the counterclaim would result in the substantial duplication of the time and effort of the court and the parties. Clearly, this is the situation contemplated under the "compelling test of compulsoriness." The counterclaims of respondents herein are obviously compulsory, not permissive. As aptly held by the Court of Appeals, the issues of fact and law raised by both the claim and counterclaim are largely the same, with a logical relation, considering that the two claims arose out of the same circumstances requiring substantially the same evidence. Any decision the trial court will make in favor of petitioner will necessarily impinge on the claim of respondents, and vice versa. In this light, considering that the counterclaims of respondents are compulsory in nature, payment of docket fees is not required. The CA did not err in holding that the trial court had acquired jurisdiction on the matter.28

WHEREFORE, the petition is hereby DENIED for lack of merit, and the assailed decision of the Court of Appeals dated August 22, 2000 and its resolution dated December 20, 2000, in CA-G.R. SP No. 58379, are AFFIRMED. No pronouncement as to costs. SO ORDERED. Bellosillo, and Callejo, Austria-Martinez, J., on official leave. Sr., JJ., concur.

FIRST DIVISION

GABRIEL and AIDA BANEZ, ANASTACIO PAGOBO, DEMETRIO PAGOBO and FELIX PAGOBO, respondents.

G.R. No. 121687 October 16, 1997 HEIRS OF MARCELINO PAGOBO namely: PELAGIO PAGOBO, GONZALO PAGOBO, ANIANA PAGOBO, ALFREDO SALVADOR, SAMUEL PAGOBO, REMEDIOS PAGOBO, VALENTINA PAGOBO, JONATHAN PAGOBO, VIRGILIO PAGOBO, FELISA YAYON, SIMPLICIO YAYON, BARTOLOME, BERNARDINA YAYON, and ISIDRA YAYON; HEIRS OF HILARION PAGOBO, namely: PABLO PAGOBO, ALFREDO PAGOBO, FELIX PAGOBO, RUFINO P. DAHIL, BRIGIDA P. GODINEZ, HONORATA P. GODINEZ, MAXIMO PAGOBO, ADRIANA PAGOBO, CECILIA PAGOBO, LILIA PAGOBO, CRESCENCIO PAGOBO, ROBERTO PAGOBO, ALFONSO PAGOBO, CANDIDO PAGOBO, BARTOLOME PAGOBO, ELPIDIO PAGOBO, PEDRO PAGOBO, ROGELIO PAGOBO, SHIRLEY P. CANETE, MILAGROS PAGOBO, JUANITO PAGOBO, JR., ANTONIO PAGOBO, IRENEA PAGOBO, and ANANIANO P. WAGWAG; HEIRS OF ANTONIO PAGOBO, namely: GAUDENCIO PAGOBO, LOTITA PAGOBO, ERNESTO PAGOBO, ROMANA P. DAHIL, FELISA PAGOBO, CARMEN PAGOBO, and SALUD PAGOBO; HEIRS OF MAXIMO PAGOBO namely: PAGOBO, RODULFO PAGOBO, CRISPIN PAGOBO, and URBANO PAGOBO; HEIRS OF DONATA PAGOBO WAGWAG, namely: FELISA WAG-WAG, ANASTACIO WAGWAG, FIDEL WAGWAG and NEMESIA WAGWAG; HEIRS OF AQUILINA PAGOBO, namely: VICTOR PAGOBO; HEIRS OF JUANITO PAGOBO EYAS, namely: MARCELO P. EYAS, ROCHI P. FLORES and ORDIE P. FLORES; HEIRS OF CATALINA PAGOBO, namely: RESTITUTO PAGOBO, CARLINA P. TALINGTING, TEOFILO P. TALINGTING, and JUANITO P. TALINGTING, petitioners, vs. THE COURT OF APPEALS, HON. RUMOLDO R. FERNANDEZ, (RTC BR. 54 LAPU-LAPU CITY in his capacity as Presiding Judge in CIVIL CASE NO. 2349-L) Judge of the Regional Trial Court, 7th Judicial Region Branch 54, Lapu-Lapu City; and Spouses

DAVIDE, JR., J.: This is a petition for review on certiorari under Rule 45 of the Rules of Court to set aside the decision 1 of April 1995 of public respondent Court of Appeals in C.A.-G.R. SP No. 35389, affirming the 24 March 1994 order 2 of the Regional Trial Court of Lapu-Lapu City, Branch 54, in Civil Case No. 2349-L, denying petitioners' motion to admit their Amended Complaint. The factual and procedural antecedents are summarized by the Court of Appeals as follows: It appears that on October 12, 1990, plaintiffs Alfonso Pa[g]obo, et al. filed a complaint for "Declaration of Nullity of Documents, Reconveyances [sic] With Right of Legal Redemption, Damages & Attorney's Fees" docketed as Civil Case No. 2349-L against defendants Gabriel Baez, et al. before the respondent Regional Trial Court. On December 7, 1990, defendant[s] filed their answer thereto. On February 21, 1994, plaintiffs filed a motion to admit amended complaint. The amended complaint attached to the motion was for "Partition, Declaration of Nullity of Documents, Cancellation of Transfer Certificate of Titles, [sic] Reconveyance With Right of Legal Redemption, Damages and Attorney's Fees, and Other Reliefs. On February 28, 1994, defendants filed an opposition to the admission of the amended complaint. On March 29, 1994, plaintiffs filed a rejoinder thereto.

On March 24, 1994, the respondent court issued the assailed Order denying the motion to admit amended complaint. On March 25, 1994, plaintiffs filed an urgent motion for reconsideration to which an opposition thereto was filed on April 13, 1994. A rejoinder thereto was filed by the plaintiffs on April 28, 1994. On May 11, 1994, defendants filed comment/reply to rejoinder to the opposition. On May 20, 1994, the respondent court issued an Order denying the motion for reconsideration. On June 10, 1994, plaintiffs filed an omnibus motion praying that the Orders of March 24, 1994 and May 20, 1994 be reconsidered and that the Motion to Admit the Amended Complaint dated February 21, 1993 be, granted. On June 23, 1994, the respondent court issued an Order denying the omnibus motion. Hence, this petition. Petitioner maintains that the respondent Regional Trial Court committed grave abuse of discretion tantamount to lack or excess of jurisdiction in denying their motions to admit amended complaint and the omnibus motion it appearing that: (a) there is no intention to reimplead the defendants already ordered dropped as shown by the fact that their names had not been underscored, hence, it is but a clerical error; (b) pre-trial is yet to be conducted;

(c) the three (3) day notice rule was observed in filing the motion; (d) the salient points namely: (1) the impleading of the Register of Deeds; (2) the void sale to Edward Short who is a foreigner; the prohibition to alienate a homestead lot; and that they were continuous, peaceful, open, and adverse possession of the lots in the concept of owners prior to the entry of defendants do not change the cause of action nor theory of the case. Rather, it [sic] merely amplify, enlarge and fortify the cause of action originally alleged; and (e) that the amendments clearly conforms [sic] with Section 3, Rule 10 of the Revised Rules of Court. Private respondents, however, submit that the instant petition be dismissed for the following reasons, to wit: (1) Petitioners deliberately failed to state in their certification of non-forum shopping the fact that there existed a terminated civil case No. 124-L involving the same parties and/or their predecessors or successors-in-interest and involving the same lot in litigation;

(2) The respondent trial court did not commit grave abuse of discretion when it denied petitioners' motion to admit amended complaint, their motion for reconsideration, and their omnibus motion: (a) the trial court correctly denied admission of the amended complaint because the admission thereof will prejudice the rights of defendants; (b) there is no necessity to implead the Register of Deeds in Civil Case No. 2349-L; (c) the amended complaint violates Section 3, Rule 10 of the Revised Rules of Court; (d) the amendments sought to be admitted would further delay the early resolution of the case at bars [sic]. 3 The challenged order of 24 March 1994 of the trial court reads as follows: The MOTION TO ADMIT AMENDED COMPLAINT filed by plaintiffs is hereby denied. A perusal of the records would show that as early as September 15, 1993, this court ordered the dismissal of this case as against defendants Damasa and Candido both surnamed Pagobo, Olimpia Tampus, Salud Maloloy-on and Adriana Mahusay, yet these very same defendants were again

named in plaintiff's amended complaint attached to its Motion to Admit Amended Complaint. In view thereof, and for the reasons adduced by counsel for defendant spouses in its opposition, the Motion to Admit Amended Complaint is hereby denied. 4 The opposition of defendants-spouses Gabriel and Aida Baez 5 to the motion to admit the Amended Complaint, which the trial court took into account, was anchored on the following grounds: (1) the 3-day notice rule for motions was not observed as they received a copy of the motion in question only on 21 February 1994, the date of said motion; (2) the Amended Complaint violated Section 3 of Rule 10 of the Rules of Court by substantially altering the original cause of action; besides it was filed late viz, three years after the filing of the original complaint; and (3) the motion to amend was dilatory. The Court of Appeals ruled that the trial court was correct in not admitting the amended complaint and held, to wit: To determine whether a different cause of action is introduced by amendments to the complaint, what is ascertained is whether the defendant is being required to answer for a liability or legal obligation completely different from that stated in the original complaint. A closer scrutiny of the original complaint shows that the original action was for "declaration of nullity of documents, reconveyance with right of legal redemption, damages and attorney's fees" while the amended complaint is for "partition, declaration of nullity of documents, cancellation of transfer certificate of titles [sic], reconveyance with right of legal redemption, damages and attorney's fee[s], and other reliefs." Further, it was alleged in the amended complaint that petitioners are the absolute and legal owners of the land in question and that: All of the defendants entered into transactions of the lands subject matter of this case, without the knowledge of plaintiffs and their predecessors-in-interest, and defendant[s] did

so despite full knowledge that ownership of said lands belonged to the plaintiffs and their predecessor[s]-in-interest; and also despite full knowledge that Edward Short, being a foreigner, had no legal capacity to buy or own said lots; and despite full knowledge that plaintiffs and their predecessors-in-interest had been in continuous, peaceful, open, and adverse possession of said lot in concept of the owner prior to the entry by defendants in to the premises. Moreover, petitioners, in the amended complaint, also prayed that they be declared absolute and legal owners of the subject lots, that it be partitioned among them in accordance with the law on hereditary succession, and that the transfer certificates of title in the name[s] of the private respondents be cancelled and a new title be issued in their names. A scrutiny of abovementioned amendment shows that there are additional causes of action which necessitates the private respondents to file an amended answer in order to controvert the new allegations contained in the amended complaint. Incidentally, it appears that petitioners took sometime before filing the amended complaint albeit, courts are liberal in allowing a plaintiff to amend complaint so long as there is no departure from the original cause of action. We find, however, that the amendments in the case at bar introduced new issues and materially altered the grounds of relief, thus, the respondent court did not err in denying the motion to admit amended complaint. The granting of leave to file amended pleadings is a matter [particularly] within the sound discretion of the trial court. This discretion will not be disturbed on appeal, except in case of an evident abuse thereof. Such abuse does not appear in the case at bench. 6 Petitioners submit to us that their Amended Complaint did not substantially depart from their cause of action set forth in the original complaint and proffered four "special and important reasons" for the allowance of their petition,viz:

FIRST. [They] will be precluded from impleading the Register of Deeds for Lapu-Lapu City who is an indispensable party because the trial court cannot order the said Register of Deeds to cancel the void Transfer Certificate of Titles [sic] and issue new Transfer Certificate of Titles [sic] unless said Register of Deeds is impleaded. SECOND. [They] would be forever barred from invoking their right of redemption as co-owner under Article 1620 in relation to Article 1623 of the New Civil Code and as heirs of the homestead patentee under Commonwealth Act No. 141, as amended. THIRD. [They] would be forced to breach the principle against multiplicity of suits by filing a separate suit for partition against other appellees who are co-heirs of appellants in the event that the land is ultimately awarded in favor of plaintiffs and against appellees-Spouses Gabriel Baez and Aida Baez. FOURTH. The controversies between the parties will never

be fully presented before the trial court and their rights will not be completely determined, and that the case will not be fully tried on the merits. In his Comment on the petition, private respondent Gabriel Baez points out that the mode of review interposed by petitioners is erroneous, as redress should have been sought under Rule 65 since the challenged decision of the Court of Appeals was on a petition for certiorari under said Rule. He further maintains that the denial of the admission of the Amended Complaint was proper since the latter substantially altered petitioners' original cause of action and was clearly dilatory. In their Reply, petitioners assert that the remedy they availed of is sanctioned by jurisprudence, citing several cases wherein "to avoid delay and to thwart the commission of injustice, a special civil action filed with the Appellate Court was liberally considered as an appeal, or vice-versa." 7 Private respondent filed a Motion to Expunge Appellants' Reply to Comment since no leave of court was secured before said reply was filed. In a Resolution dated 8 July 1996, we noted private respondent Baez' Motion to Expunge the Reply, gave due course to the petition and required the petitioners and private respondent Gabriel Baez to file their respective memoranda, which they subsequently did. Parenthetically, as the other private respondents did not file their comments or memoranda, they are deemed to have waived the filing thereof. As earlier adverted to, the trial court's principal reasons for refusing to admit the Amended Complaint were the inclusion of the names of some of the defendants against whom the case was already ordered dismissed and the grounds relied upon by defendants Gabriel and Aida Baez in their opposition. However, the Court of Appeals

considered only one ground, i.e., the Amended Complaint substantially changed or altered the cause of action in the original complaint. The ultimate issue then in this petition for review is whether the trial court committed grave abuse of discretion in denying the motion to admit the Amended Complaint on the ground that the Amended Complaint substantially changed or altered, the cause of action in the original complaint. Upon this issue the parties have focused their arguments. Section 3 of Rule 10 of the Rules of Court is the law on the matter. Prior to the 1997 amendments, the section read as follows: Sec. 3. Amendments by leave of court. After the case is set for hearing, substantial amendments may be made only upon leave of court. But such leave may be refused if it appears to the court that the motion was made with intent to delay the action or that the cause of action or defense is substantially altered. Orders of the court upon the matters provided in this section shall be made upon motion filed in court, and after notice to the adverse party, and an opportunity to be heard. As amended, it now reads: Sec. 3. Amendments by leave of court. Except as provided in the next preceding section, substantial amendments may be made only by leave of court. But such leave may be refused if it appears to the court that the motion was made with intent to delay. Orders of the court upon the matters provided in this section shall be made upon motion filed in court, and after notice to the adverse party, and an opportunity to be heard. (3a) Since this case was decided by the Court of Appeals under the old law, we resolve it in that light. Thereunder, while substantial amendments were allowed even after the case had been set for hearing, such could only be done upon leave of court. That leave could be refused if the court found that: (a) the motion was made with intent to delay the action; or (b) the cause of action or defense was substantially altered. The first ground is no longer an issue in this case. Even if it were, it had to be resolved in the negative since there

is at all no showing that the amendment was intended to delay the action. The trial court had not even set Civil Case No. 2349-L, for hearing. We cannot also agree with both the trial court and respondent Court of Appeals that petitioners' Amended Complaint substantially changed or altered their original cause of action. A cause of action is an act or omission of one party in violation of the legal rights of the other. 8 It is the reason why the litigation has come about. 9 Its essential elements are a legal right of the plaintiff, a correlative obligation on the part of the defendant to respect the right and an act or omission of the defendant violative of such right. 10 A perusal of petitioners' original complaint 11 shows that essentially, petitioners' cause of action is founded on the fact that as grandchildren and great-grandchildren of the late Juan Pagobo, who was the registered owner of Lot No. 6727 of the Opon Cadastre, they are entitled to a share therein by virtue of hereditary succession; that after it was subdivided into thirty-four (34) lots, one Juana Pagobo sold sublot No. 6727-0 on 5 May 1964 to Edward Short, Jr., and thereafter, Short sold Lots Nos. 6727-0-1, 6727-0-2 and 6727-CC to defendants Gabriel and Aida Baez to whom certificates of title were issued. 12 Petitioners alleged that the sale was void because the mother lot, Lot 6727, has not yet been extrajudicially settled by and among the heirs of Juan Pagobo. They then prayed that the deeds of sale executed by Juana Pagobo and Edward Short be declared null and void; that defendants Gabriel and Aida Baez be ordered to reconvey to petitioners the lots sold to them; and that petitioners be allowed to exercise their right of redemption under Article 1620 in relation to Article 1623 of the Civil Code in respect of said lots. In their Amended Complaint, petitioners impleaded the Register of Deeds; specifically alleged that Lots Nos. 6727-0-1, 6727-0-2 and 6727-CC, being parts of Lot No. 6727 owned by Juan Pagobo, belonged to them as heirs of the latter; that demands for partition had been made; that the sales made by Juana Pagobo were void not only because of defendants' full knowledge that petitioners owned the lots in question, but also because Edward Short, being a foreigner, was disqualified from acquiring the lots; further, that since the lots were covered by homestead patents, they could not be alienated for 25

years; and that petitioners had been in continuous, peaceful, open and adverse possession thereof. Plainly, these allegations do not constitute substantial amendments. If anything, they merely strengthen petitioners' original cause of action by providing a more detailed account thereof, which then puts in clearer perspective the second element of a cause of action. Under Section 2 of Rule 8, a party may even set forth two or more statements of a claim or defense alternatively or hypothetically, either in one cause of action or defense or in separate causes of action or defenses. Anent the claim for partition, we hold the same to be incidental to the allegation in the original complaint that the property had not been extrajudicially settled and was thus intended to obtain complete relief in one action. We likewise find that allowance of the Amended Complaint would cause no prejudice to private respondents since their defenses of lack of cause of action, prescription, laches and res judicata 13 would neither be diminished nor impaired. Hence, the trial court should have granted the motion to admit the Amended Complaint on the principle that amendments of pleadings are favored and should be liberally allowed in the furtherance of justice in order to determine every case as far as possible on its merits without regard to technicalities, to speed up trial and save party litigants from incurring unnecessary expense, so that a full hearing on the merits of every case may be had and multiplicity of suits avoided. 14 It must be pointed out that the new Section 3 of Rule 10 of the Rules of Court relaxes further the rule on amendment of pleadings. Refusal to allow amendments other than those which may be made as a matter of right under Section 2, 15 may be based only on the ground that the motion was made with intent to delay. The other ground, viz., the amendment substantially alters the original cause of action or defense, has been dropped from the Rule. This simply means then that amendments may substantially alter the cause of action or defense. 16 In closing, we address the argument of private respondents Baez that as what the petitioners filed with respondent Court of Appeals was a special civil action for certiorari under Rule 65 of the Rules of Court, then redress from an adverse decision therein should likewise have been sought under said Rule. We disagree. Rule 45 of the Rules of

Court is clear that decisions, final orders or resolutions of the Court of Appeals in any case, i.e., regardless of the nature of the action or proceedings involved, may be appealed to us by filing a petition for review, which would be but a continuation of the appellate process over the original case. On the other hand, a special civil action under Rule 65 is an independent action based on the specific grounds therein provided and, as a general rule, cannot be availed of as a substitute for the lost remedy of an ordinary appeal, 17 including that under Rule 45. 18 WHEREFORE, the petition is hereby GRANTED. The decision of 28 April 1995 of the Court of Appeals in CA-G.R. SP No. 35389 and the Order of the Regional Trial Court of Lapulapu, Branch 54, of 24 March 1994 in Civil Case No. 2349-L are SET ASIDE and said Regional Trial Court of Cebu is directed to admit petitioners' Amended Complaint. No pronouncement as to costs. SO ORDERED. Bellosillo, Vitug, Kapunan and Hermosisima, Jr., JJ., concur.

FIRST DIVISION G.R. No. 133657 May 29, 2002

No. 44529. Respondent claimed therein that the complaint did not contain a single averment that respondent committed any act or is guilty of any omission in violation of petitioners legal rights. Apart from the allegation in the complaints "Jurisdictional Facts" that: 1.05. Defendants British Steel (Asia) Ltd. and Ferro Trading Gmbh, while understood by the plaintiff as mere suppliers of goods for defendant ISL, are impleaded as party defendants pursuant to Section 13, Rule 3 of the Revised Rules of Court.7 no other reference was made to respondent that would constitute a valid cause of action against it. Since petitioner failed to plead any cause of action against respondent as alternative defendant under Section 13, Rule 3,8 the trial court should have ordered the dismissal of the complaint insofar as respondent was concerned. Meanwhile, petitioner sought to amend its complaint by incorporating therein additional factual allegations constitutive of its cause of action against respondent. Pursuant to Section 2, Rule 109 of the Rules of Court, petitioner maintained that it can amend the complaint as a matter of right because respondent has not yet filed a responsive pleading thereto.10 Subsequently, petitioner filed a Manifestation and Motion11 in CA-G.R. SP No. 44529 stating that it had filed a Motion to Admit Amended Complaint together with said Amended Complaint before the trial court. Hence, petitioner prayed that the proceedings in the special civil action be suspended. On January 29, 1998, the trial court ruled on petitioners Motion to Admit Amended Complaint thus: WHEREFORE, the Amended Complaint is NOTED and further proceedings thereon and action on the other incidents as aforementioned are hereby held in abeyance until final resolution by the Honorable Court of Appeals (Special 6th Division) of the petition for certiorari and prohibition of petitioner (defendant British) and/or Manifestations and Motions of therein private respondent, herein plaintiff.

REMINGTON INDUSTRIAL SALES CORPORATION, petitioner, vs. THE COURT OF APPEALS and BRITISH STEEL (ASIA), LTD., respondents. YNARES-SANTIAGO, J.: Before us is a petition for review under Rule 45 of the Rules of Court assailing the decision of the Court of Appeals in CA-G.R. SP No. 44529 dated February 24, 19981, which granted the petition for certiorari filed by respondent British Steel Asia Ltd. (British Steel) and ordered the dismissal of petitioner Remington Industrial Sales Corporations (Remington) complaint for sum of money and damages. Also assailed in this petition is the resolution2 of the Court of Appeals denying petitioners motion for reconsideration. The facts of the case, as culled from the records, are as follows: On August 21, 1996, petitioner filed a complaint3 for sum of money and damages arising from breach of contract, docketed as Civil Case No. 96-79674, before the sala of Judge Marino M. De la Cruz of the Regional Trial Court of Manila, Branch 22. Impleaded as principal defendant therein was Industrial Steels, Ltd. (ISL), with Ferro Trading GMBH (Ferro) and respondent British Steel as alternative defendants. ISL and respondent British Steel separately moved for the dismissal of the complaint on the ground that it failed to state a cause of action against them. On April 7, 1997, the RTC denied the motions to dismiss,4 as well as the ensuing motion for reconsideration.5 ISL then filed its answer to the complaint. On the other hand, respondent British Steel filed a petition for certiorari and prohibition before the Court of Appeals,6 docketed as CA-G.R. SP

SO ORDERED.12 Thereafter, on February 24, 1998, the Court of Appeals rendered the assailed decision in CA-G.R. SP No. 44529 as follows: WHEREFORE, this Court grants the writ of certiorari and orders the respondent judge to dismiss without prejudice the Complaint in Civil Case No. 96-79674 against petitioner British Steel (Asia) Ltd. Costs against private respondent. SO ORDERED.13 In the same decision, the Court of Appeals addressed petitioners prayer for suspension of proceedings in this wise: The incident which transpired after the filing of the instant petition for certiorari and prohibition are immaterial in the resolution of this petition. What this Court is called upon to resolve is whether the lower court committed grave abuse of discretion when it denied petitioners motion to dismiss the complaint against it. The admission or rejection by the lower court of said amended complaint will not, insofar as this Court is concerned, impinge upon the issue of whether or not said court gravely abused its discretion in denying petitioners motion to dismiss.14 Petitioner filed a motion for reconsideration of the appellate courts decision, which was denied in a resolution dated April 28, 1998. Hence, this petition, anchored on the following grounds: -ITHE HON. COURT OF APPEALS ERRED IN ORDERING THE DISMISSAL OF THE COMPLAINT AGAINST THE PRIVATE RESPONDENT FOR LACK OF CAUSE OF ACTION UNDER THE ORIGINAL COMPLAINT EVEN AS SAID COMPLAINT WAS ALREADY AMENDED AS A MATTER OF RIGHT AND SUFFICIENT CAUSES OF

ACTION ARE AVERRED IN THE AMENDED COMPLAINT, IN GROSS VIOLATION OF SEC. 2, RULE 10 OF THE 1997 RULES OF CIVIL PROCEDURE. -IITHE HON. COURT OF APPEALS ERRED IN HOLDING THAT IF THE PETITIONER WANTS TO PURSUE ITS CASE AGAINST THE PRIVATE RESPONDENT, IT HAS TO REFILE THE COMPLAINT, THUS PRE-EMPTING THE RIGHT OF THE LOWER COURT TO RULE ON THE AMENDED COMPLAINT AND COMPELLING THE PETITIONER TO LITIGATE ITS CAUSES OF ACTION AGAINST THE PRIVATE RESPONDENT AS AN ALTERNATIVE DEFENDANT IN A SEPARATE ACTION, THEREBY ABETTING MULTIPLICITY OF SUITS.15 The basic issue in this case is whether or not the Court of Appeals, by granting the extraordinary writ of certiorari, correctly ordered the dismissal of the complaint for failure to state a cause of action, despite the fact that petitioner exercised its right to amend the defective complaint under Section 2, Rule 10 of the Rules of Court. Stated differently, the query posed before us is: can a complaint still be amended as a matter of right before an answer has been filed, even if there was a pending proceeding for its dismissal before the higher court? Section 2, Rule 1016 of the Revised Rules of Court explicitly states that a pleading may be amended as a matter of right before a responsive pleading is served. This only means that prior to the filing of an answer, the plaintiff has the absolute right to amend the complaint whether a new cause of action or change in theory is introduced.17 The reason for this rule is implied in the subsequent Section 3 of Rule 10 18. Under this provision, substantial amendment of the complaint is not allowed without leave of court after an answer has been served, because any material change in the allegations contained in the complaint could prejudice the rights of the defendant who has already set up his defense in the answer.

Conversely, it cannot be said that the defendants rights have been violated by changes made in the complaint if he has yet to file an answer thereto. In such an event, the defendant has not presented any defense that can be altered19 or affected by the amendment of the complaint in accordance with Section 2 of Rule 10. The defendant still retains the unqualified opportunity to address the allegations against him by properly setting up his defense in the answer. Considerable leeway is thus given to the plaintiff to amend his complaint once, as a matter of right, prior to the filing of an answer by the defendant. The right granted to the plaintiff under procedural law to amend the complaint before an answer has been served is not precluded by the filing of a motion to dismiss20 or any other proceeding contesting its sufficiency. Were we to conclude otherwise, the right to amend a pleading under Section 2, Rule 10 will be rendered nugatory and ineffectual, since all that a defendant has to do to foreclose this remedial right is to challenge the adequacy of the complaint before he files an answer. Moreover, amendment of pleadings is favored and should be liberally allowed in the furtherance of justice in order to determine every case as far as possible on its merits without regard to technicalities. This principle is generally recognized to speed up trial and save party litigants from incurring unnecessary expense, so that a full hearing on the merits of every case may be had and multiplicity of suits avoided.21 In this case, the remedy espoused by the appellate court in its assailed judgment will precisely result in multiple suits, involving the same set of facts and to which the defendants would likely raise the same or, at least, related defenses. Plainly stated, we find no practical advantage in ordering the dismissal of the complaint against respondent and for petitioner to re-file the same, when the latter can still clearly amend the complaint as a matter of right. The amendment of the complaint would not prejudice respondents or delay the action, as this would, in fact, simplify the case and expedite its disposition. The fact that the other defendants below has filed their answers to the complaint does not bar petitioners right to amend the complaint as against respondent. Indeed, where some but not all the defendants

have answered, the plaintiff may still amend its complaint once, as a matter of right, in respect to claims asserted solely against the nonanswering defendant, but not as to claims asserted against the other defendants.22 Furthermore, we do not agree with respondents claim that it will be prejudiced by the admission of the Amended Complaint because it had spent time, money and effort to file its petition before the appellate court.23 We cannot see how the result could be any different for respondent, if petitioner merely re-filed the complaint instead of being allowed to amend it. As adverted to earlier, amendment would even work to respondents advantage since it will undoubtedly speed up the proceedings before the trial court. Consequently, the amendment should be allowed in the case at bar as a matter of right in accordance with the rules. WHEREFORE, the petition is GRANTED. The assailed decision and resolution of the Court of Appeals in CA-G.R. SP No. 44529 dated February 24, 1998 and April 28, 1998, respectively, are REVERSED and SET ASIDE. The Regional Trial Court of Manila, Branch 22 is further ordered to ADMIT petitioners Amended Complaint in Civil Case No. 96-79674 and to conduct further proceedings in said case. SO ORDERED. Davide, Jr., C.J., Puno, Kapunan, and Austria-Martinez, JJ., concur.

SECOND DIVISION

G.R. No. L-38866 November 29, 1974 KERAMIK INDUSTRIES INC., petitioner, vs. HONORABLE BUENAVENTURA J. GUERRERO in his official capacity as the Presiding Judge of the Court of First Instance of Rizal, Branch XXIV and GOVERNMENT SERVICE INSURANCE SYSTEM, respondents.

On August 17, 1972 Keramik sued the GSIS. It asked for the nullification of the extrajudicial foreclosure due to supposed irregularities. In the alternative, it prayed that the GSIS be ordered to pay to it the sum of P1,668,006.91 which amount allegedly constitutes the difference between the GSIS bid of P5,129,145 at the foreclosure sale and the actual mortgage debt of P3,461,138.09. Other minor reliefs were sought. The GSIS answered the complaint. No pre-trial has as yet been held. On March 26, 1974 Keramik filed a motion for the admission of its amended complaint. The amendment refers to the insurance in the sum of P2,400,000 which Keramik had allegedly secured from the GSIS for the mortgaged buildings, machineries and equipment. The insurance was an additional security for the loan. Keramik alleged that through inadvertence it failed to mention in its original complaint the insurance and the circumstance that the typhoon Yoling totally damaged the insured properties. Its alternative contention was that the proceeds of the insurance and the excess premiums paid should be deducted from its indebtedness because the GSIS was in effect both the insurer and the insured. The GSIS opposed the admission of the amended complaint on the ground that the amendment altered the plaintiff's causes of action by supposedly injecting "new, distinct and entirely foreign causes of action". The lower court, in its minute order dated May 31, 1974, sustained the opposition and denied the admission of the amended complaint. Keramik then filed the instant special civil action of certiorari. It contends that the lower court acted with grave abuse of discretion in not admitting its amended complaint. We hold that the trial court committed a grave abuse of discretion in not allowing Keramik to amend its complaint. Keramik's alternative cause of action is predicated on the major premise that the GSIS, as mortgagee, should not enrich itself unjustly at its expense. Although not so explicitly and succinctly spelled out in its complaint, Keramik's theory is that the mortgaged properties and the proceeds of the

AQUINO, J.:p Keramik Industries, Inc. (Keramik for short), in this special civil action for certiorari, seeks to annul the order dated May 31, 1974 of the Court of First Instance of Rizal, Pasig Branch XXIV, denying its motion to file an amended complaint in Civil Case No. 16540. The certiorari action is based on the following salient allegations of the petition and its annexes: On October 7, 1964, Keramik obtained a loan of two million four hundred thousand pesos (P2,400,000) from the Government Service Insurance System (GSIS). As security, it mortgaged to the GSIS certain lands, buildings, machineries and equipment used in its ceramic business. After Keramik's default, the GSIS extrajudicially foreclosed the real and chattel mortgages. The mortgaged properties were sold at public auction on March 2, 1971 to satisfy the claim of the GSIS amounting to P3,461,138.09. The GSIS, as the highest bidder, bought them for P5,129,145.

insurance were more than sufficient to cover its aggregate debt to the GSIS and, therefore, the latter, as bidder at the foreclosure sale, should refund to the mortgagor the excess or "the difference between the price at which the foreclosed property was bought and the actual indebtedness of defendant" (should be plaintiff). (Par. 3 of prayer of original and amended complaints, Annexes A and C of the petition). The allegations in the amended complaint regarding the insurance for the mortgaged properties did not change at all Keramik's theory of the case and did not introduce a new cause of action. As may be seen from the original and amended complaints, the causes of action remained the same. The prayers of the two complaints are identicalverbatim et literatim. The new matter concerning the insurance merely reinforced, amplified or enlarged Keramik's alternative cause of action for the recovery of the surplus or excess (See sec. 4, Rule 68 of the Rules of Court). Whether Keramik's theory is sustainable would depend on the evidence and the applicable substantive law. To deny the admission of Keramik's amended complaint would constrain it to bring a separate action for the purpose of compelling the GSIS to credit the proceeds of the insurance against its mortgage debt. That remedy would be repugnant to the rule which discourages multiplicity of suits. A separate action for that purpose would amount to splitting a cause of action. "It is a cherished rule of procedure that a court should always strive to settle the entire controversy in a single proceeding leaving no root or branch to bear the seeds of future litigation" (Marquez vs. Marquez, 73 Phil. 74, 78). The allowance of the amendment would be in the furtherance of justice and would not prejudice at all the GSIS or place it at a disadvantage since it could controvert the new matters constituting the amendment in an amended answer and during the trial (See Shaffer vs. Palma, L-24115, March 1, 1968, 22 SCRA 934; Rubio vs. Mariano, L-30404, January 31, 1973, 49 SCRA 319).

WHEREFORE, the trial court's order of May 31, 1974 is set aside and it is directed to admit petitioner's amended complaint dated March 20, 1974. No costs. SO ORDERED. Fernando (Chairman), Barredo, Antonio and Fernandez, JJ., concur.

FIRST DIVISION G.R. No. L-45234 May 8, 1985 R and B SURETY & INSURANCE CO., INC., and TOWERS ASSURANCE CORPORATION, petitioners, vs. HON. VICTORINO A. SAVELLANO, as Presiding Judge, Branch XIX, Court of First Instance of Manila, and INVESTORS' FINANCE CORPORATION, doing business under the name and style "FNCB FINANCE",respondents. Redento R. Silvestre for petitioners. Benigno A. Mariano, Sr. for Rassagi Transport Corp.

GUTIERREZ, JR., J.: This petition for review on certiorari seeks to set aside the partial summary judgment rendered by the respondent court. The petitioners state that their answer raised genuine and valid issues. The petitioners also seek to compel the respondent court to allow their amended answer on the ground that the same does not alter the theory of their defense nor delay the proceedings of the trial. Private respondent Investors' Finance Corporation doing business under the name "FNCB Finance" (FNCB) filed an action for a sum of money against petitioners R & B Surety and Insurance Co., Inc. (R& B) and Towers Assurance Corporation (Towers) in their capacity as sureties and against one Rassagi Transport Corporation (Rassagi) in its capacity as principal debtor. The complaint alleged, among others, that Rassagi obtained credit facilities from Citiwide Motors, Inc. (Citiwide) duly evidenced by promissory notes in the sum of P1,273,108.06 and P1,696,969.70 or

an aggregate amount of P2,970,077.76; that Citiwide endorsed the promissory notes to plaintiff FNCB and notified defendant Rassagi that it had assigned its rights over said promissory notes and said defendant gave its conformity to the assignment; that as security for payment of the promissory notes, defendants R & B and Towers issued surety bonds in favor of Citiwide and which surety bnds were also assigned to plaintiff; that the promissory notes contained a provision that default in payment when due on any installment shall make the whole principal sums remaining unpaid immediately due and payable; that under the provisions of the surety bonds defendant R & B and Towers obligated themselves, jointly and severally with their principal, the other defendant Rassagi, to pay the latter's obligation to plaintiff; that defendant Rassagi broke the terms and conditions of said promissory notes by its failure to pay the installments thereon when the same fell due and as of April 14, 1975, said defendant owed plaintiff the sum of Two Million Eight Hundred Forty-Two Thousand Six Hundred Seventy Six Pesos and Fourteen Centavos (P2,842,676.14), plus interest thereon from said date at 14% per annum; and that notwithstanding repeated demands by plaintiff, the defendants have failed and refused and still fail and refuse to pay their matured and overdue obligation under the said promissory notes. Defendant Rassagi in turn, filed its answer, alleging that it did not obtain credit facilities from Citiwide but it had applied for a direct loan from FNCB sometime before October, 1974; that after the approval of said loan which was intended for the purchase of PUB bus trucks, Citiwide offered to supply it with the equipment and had actually delivered 14 units of Chevrolet trucks to the latter; that the amount of the equipment loan acquired by Rassagi from FNCB is P1,960,000.00 which amount was released and paid to Citiwide in payment of the fourteen (14) units with a unit price of P140,000.00 including the body building; that since the loan was already approved, there was no necessity for the deed of assignment made by Citiwide in favor of FNCB; that what FNCB did was to require Rassagi to sign blank forms, which the latter understood to be documents representing the obligation directly to the former and not to Citiwide; that after Rassagi paid the amount of P61,877.31 as amortization payments, it had requested FNCB to apply the amount of P100,000.00 which was a hold back of the proceeds of the loan which the latter favorably applied and now Rassagi had actually paid P161,877.31 as total amortization

payments and that considering that the 14 buses could only possibly earn the amount of P110.00 per unit a day and could not come up with the P210.00 per unit a day equivalent to P20,625.77 a week amortization, Rassagi requested for a restructuring of its amortization payments from weekly amortizations to monthly amortizations and a re-adjustment of the period of payment from three (3) to five (5) years, but instead of re-adjusting the same, FNCB after Rassagi failed to pay only one weekly installment tried to collect the entire obligation and to pursue its claim against the bonding company, so much so that it refused to accept the payments made by Rassagi and it was for this reason that the latter stopped its amortization payments. Rassagi also alleged usury on the part of FNCB stating that after realizing that the amount of its obligation was so excessive considering that only P1,960,000.00 was actually released and approved, it formally demanded a statement of account from FNCB and that was the only time that defendant knew that its entire obligation to said plaintiff is P3,003,231.12. Defendants R & B and Towers filed their own answer, putting up the same defenses made by Rassagi. They denied the genuineness and due execution of the promissory note alleging that Rassagi was made to sign only blank documents and that the latter obtained a direct loan from FNCB but did not obtain credit facilities from Citiwide; that FNCB had illegally and usuriously charged Rassagi excessive interest upon the loan; and that what the latter knows is that FNCB shall only charge an interest of 14% per annum diminishing balance on the P1,960,000.00 but that there was no agreement to pay three years interest in advance and surcharges for late amortization payments. Defendant sureties admitted that Rassagi had accepted delivery of the fourteen (14) Chevrolet trucks purchased out of the loan of P1,960,000.00: On July 3, 1975, FNCB filed its reply and answer to the counterclaim by defendants R & B and Towers. When the case was caged for pre-trial, the counsel for Rassagi moved that the pre-trial be postponed in order to enable the parties to try to settle the case amicably. Upon inquiry by the court as to the defense

of Rassagi, the latter's counsel informed the court that Rassagi does not deny its obligation as evidenced by the promissory notes and that it would just approach FNCB for the restructuring of said obligation. The counsel for the defendant sureties likewise manifested that the latter are willing to enter into a settlement and ready to assign collaterals in favor of FNCB. On August 8, 1975, the trial court issued an order, which partly provides: xxx xxx xxx The Court grants the motion for postponement to enable the parties to thresh out all possibilities of settlement with the warning that in view of the manifestation of counsel for defendant transport corporation, the Court may issue a summary judgment at the next schedule hearing. ... xxx xxx xxx On October 29, 1975, FNCB filed a manifestation and motion for summary judgment on the ground that no genuine issue was tendered in the pleadings. This motion was accompanied by an affidavit of Mamerto Endriga, FNCB vice-president. The defendant sureties filed their oppositions to the motion accompanied by the affidavits of their respective corporate secretaries. Rassagi likewise filed its opposition but the same was not accompanied by any affidavit. Before the trial court could rule on the motion, the defendant sureties, on March 8, 1976, filed a motion for leave to admit amended answer with special and affirmative defenses and counter-claims, alleging: 1. That in the month of February, 1976, herein defendants in their desire and anxiety to check up and investigate what further assets defendant RASSAGI

may have for the purpose of attachment or satisfaction of any judgment whatsoever, by chance, upon said investigation and check-up, discovered that the Twenty (20) units of new buses which were supposedly to be sold and delivered to RASSAGI under installment payment, the Promissory Notes of which are the subject of the instant case and covered by the Surety Bonds, have not as yet, to this day been so sold or delivered to defendant RASSAGI; 2. That confronted with such findings, RASSAGI's President and Chairman of the Board, Mr. Rodolfo Echague, confirmed such non-sale and delivery of the buses, even though they were, up to October, 1975, with the Sarmiento Engineering Corp. of Quezon City for preparation and conversion into de Luxe type passenger buses; 3. That this turn of events compels herein defendants to amend their pleadings to the complaint; 4. That in the interest of justice, and considering that the case is still in its early stages, no evidence so far having been presented by any party therein, admission of the herewith attached amended pleadings to the complaint is called for and justifiable. xxx xxx xxx In their amended answer, the defendant sureties alleged the following: xxx xxx xxx 4. Subject to the averments contained in the preceding paragraphs and the hereinafter following Special and Affirmative Defenses, they admit the allegations contained in paragraph 5 of plaintiff's complaint to the effect that they issued their Surety Bonds Nos. G (16) 0743 and G (16) 0059 in the

respective amounts appearing therein in favor of Citiwide Motors, Inc., with RASSAGI as principal. The same were to be the security for the Promissory Notes defendant RASSAGI may execute by virtue of and in consideration for credit facilities that may be extended first above alluded to. The said Surety Bonds were applied for and issued specifically for said credit accommodation and no other, and cannot be and must not be, applied as security for any other Promissory Notes executed by RASSAGI under and by virtue of another or other transactions and/or obligations or credit accommodations. 5. That they deny the allegations contained in paragraph 6 of the complaint Citiwide Motors, Inc. and plaintiff may have transacted for the assignment of the aforestated Surety Bonds, but said assignment is baseless, unjustified, and is a faceous (sic) farce and charade insofar as herein defendants are concerned, the reason being that Citiwide Motors, Inc. had no rights, title and interests over/in/ against said Surety Bonds unless it had actually made sales on installment basis of the Twenty (20) units of new buses to RASSAGI, the performance of which fact is a condition resolutory that can bind said bonds and give legal rights to Citiwide Motors, Inc. over/in/against the same. No allegation of said fact of installment sales are averred in the complaint. The averments in this paragraph are subject further to the hereinafter following Special and Affirmative Defenses. The respondent court denied the above-quoted motion on the ground that the amended answer would not only alter the answer sought to be amended but would also delay the proceedings. On May 24, 1976, the court, rendered a partial summary judgment, stating: xxx xxx xxx

Under the circumstances obtaining in the present case and pursuant to settled jurisprudence on usury and in order to render substantial justice, the patch of reason, justice and equity dictates that the Court must functionalize and breathe life into invisible justice epitomed in the precepts of equity and justice and render partial judgment on the undisputed obligation so that litigation should continue with respect to the controverted acceleration and alleged usurious interest being charged under plaintiff's financing scheme. The defendant Rassagi in its opposition to plaintiff's motion for summary judgment has attached plaintiff's official receipts for installment payments (pp. 144 to 166, record) which shows that of the amount financed under the promissory note (Annex A) secured by defendant R & B Surety's surety bond (Annex D) the amount of P141,417.24 has already been paid while under the promissory note (Annex A1) secured by defendant Tower's bond (Annex D-1) the amount of P97,251.00 has already been paid. These amounts should be deducted from Pl,960,000.00 only for the purpose of this partial judgment. At this stage, the Court will not rule on whether or not there was a holdout of P100,000.00 as defendant Rassagi claims. This must be supported by evidence during the trial because the Court considers that 14 buses at the rate of P140,000.00 per unit is Pl,960,000.00, the uncontroverted amount received by defendant Rassagi. WHEREFORE, premises considered, partial judgment at this stage is hereby rendered ordering: a. Defendants Rassagi and R&B Surety and Insurance Co., Inc. to pay plaintiff, jointly and severally, the amount of P978,582.76: b. Defendants Rassagi and Towers Assurance Corporation to pay plaintiff, jointly and severally, the amount of P742,749.00.

A motion for reconsideration was filed by the defendant sureties but the same having been denied, they filed this instant petition. Defendant sureties, now as petitioners, contend that the trial court erred in denying their motion to admit the amended answer and in rendering partial summary judgment notwithstanding the fact that their answer and that of defendant Rassagi raised valid defenses, both legal and factual. According to petitioners, in view of the non-delivery of the trucks to Rassagi, no credit facilities were, therefore, extended by Citiwide Motors, Inc. to it, and in effect the promissory notes which are the principal basis of FNCB's action, are totally lacking and short of consideration, the maker thereof not having received anything of value in having signed or executed the same, and are therefore null and void, unenforceable against the petitioners. Petitioners further contend that there is absolutely no basis for the statement of the respondent judge that the admission of the amended answer would only delay the proceedings for they never resorted to dilatory tactics and all postponements were at the instance of Rassagi; and although the defenses raised in the amended answer were only discovered after the filing of the original answer, the motion to admit the same was made prior to the termination of the pre-trial. After a careful consideration of the case, we find the contentions of the petitioners impressed with merit. The instant petition, therefore, should be granted. While it is true that in their amended answer, petitioners sought to alter their own admission in their original answer by alleging that fourteen (14) Chevrolet trucks were not actually delivered to Rassagi, such allegation did not really alter the theory of their defense which is, that they are not liable to FNCB. In their original answer, petitioners and defendant Rassagi denied the fact that the latter obtained credit facilities from Citiwide, they instead alleged that Rassagi obtained a direct loan from FNCB. In essence, therefore, petitioners were already raising the defense of non-liability not on the basis of non-delivery of the subject matter of the promissory notes but on the basis of the fact that since Rassagi obtained a direct loan from FNCB, there was no longer any need for Citiwide to extend

credit facilities in favor of Rassagi as the former was paid immediately upon the release of the said loan. Thus, petitioners as sureties can no longer be bound under the contract of surety wherein they obligated themselves solidarily with Rassagi in favor of Citiwide, in consideration of the credit facilities that the latter was supposed to extend to defendant Rassagi. In essence, therefore, there was no change in the theory of herein petitioners when they tried to amend their answer by stating that they were not liable to FNCB because the fourteen (14) trucks which were the subject matter of the questioned promissory notes were never delivered by Citiwide to Rassagi although this defense was not present in their original answer where the petitioners virtually adopted the allegations made by Rassagi which however admitted the delivery of the abovementioned trucks. Although as a general rule, facts alleged in a party's pleading are deemed admissions of that party and binding upon it, this is not an absolute and inflexible rule because an answer is a mere statement of fact which the party filing it expects to prove, but it is not evidence. (See Gardner v. Court of Appeals, 131 SCRA 600). Rule 34 of the Rules of Court authorizes the rendition of a summary judgment when, on motion for the plaintiff after the answer to the complaint has been filed, it would appear, during the hearing of the motion for such judgment, from the pleadings, depositions and admissions on file, together with the affidavits that, except as to the amount of damages, "there is no genuine issue as to any material fact and that the winning party is entitled to a judgment as a matter of law." (Section 3, Rule 34, Rules of Court). Conversely, the rendition of summary judgment is not justified when the defending party tenders vital issues which call for the presentation of evidence. (Guevarra v. Court of Appeals, 124 SCRA 313). It is evident from the records that the original answer filed by the petitioners tendered a genuine issue and thus, the partial summary judgment by the respondent court should not have been rendered. And, even assuming that the amendment altered the theory of the defense, justice and equity still dictate that such amendment be allowed for if the allegations therein are proven, then the same would

altogether negate liability on the part of the petitioners, a fact which may no longer be ventilated should we uphold the propriety of the summary judgment. Surely, the right of the petitioners to be given the chance to prove that the are not liable under the questioned promissory notes is more important than the change in the theory of the defense or the possibility of delay in the proceedings which, in this case is only at its pre-trial stage. As we have held in the case of Sedeco v. Court of Appeals, (1 15 SCRA 102-103): xxx xxx xxx ... There is consequently no substantial change in the gist of petitioners' defense and, what is of more vital significance to the ends of justice, is that to admit the Second Amended Answer would serve to give the parties a full hearing on the merits of their entire controversy and avoid multiplicity of suits. Courts should be liberal in allowing amendments to pleadings at any stage on the action to avoid multiplicity of suits and in order that the real controversies between the parties are presented, their rights determined and the case decided on the merits without unnecessary delay. (Demaronsing v. Tandayag, 58 SCRA 484 11974]; Shaffer v. Palma, 22 SCRA 934 [1968]) Similarly, in the case of Paman v. Diaz (116 SCRA 129), we ruled: When the purpose of an amendment is to submit the real matter in dispute without any intent to delay the action, the court in its discretion, may order or allow the amendment upon such terms as may be just. Anything, therefore, that may preclude a party from fully representing the facts of his case should be brushed aside, if this can be done without unfairness to the other party and by the means provided for by the Rules of Court. ... WHEREFORE, the petition is GRANTED. The partial summary judgment and the order denying the motion for reconsideration are

hereby REVERSED and SET ASIDE. The Regional Trial Court of Manila is directed to admit the petitioner's Amended Answer with Affirmative and Special Defenses with Compulsory Counterclaim. SO ORDERED. Melencio-Herrera, Plana, Relova and Alampay, JJ., concur. Teehankee, Acting C.J., concur in the result. De la Fuente J., took no part.

FIRST DIVISION G.R. No. 161135. April 8, 2005 SWAGMAN HOTELS vs. HON. COURT OF 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 years from its date with an interest of 15% per annum payable every three months.1 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 amount of US$13,500.2 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 AND TRAVEL, and INC., Petitioners, NEAL B.

APPEALS,

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 cost of the suit.3 The petitioner corporation, together with its president and vicepresident, 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 attorneys fees.4 In due course and after hearing, the trial court rendered a decision 5 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 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 by the Board of Directors of the defendant corporation (Exhibit "4").6 In its decision7 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 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 the complaint with leave of court (Herrera, Remedial Law, Vol. VII, 1997 ed., p. 108).8 Its motion for reconsideration having been denied by the Court of Appeals in its Resolution of 4 December 2003,9the 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 prevail?10 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 recovery of damages or other appropriate relief.11 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 proceeding, thereby avoiding multiplicity of suits.12 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 may be presented during the trial, and the complaint may accordingly be amended thereafter.13 Thus, in Roces v. 14 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 ruling was reiterated in Pascua v. Court of Appeals.15 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 case is pending.16 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. Harris:17 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 afteraccrued 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 cannot be reviewed on appeal to the Supreme Court18 as long as they are borne out by the record or are based on substantial evidence.19 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 record or is based on a misapprehension of facts. Such exception obtains in the present case.20 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 199821 states that the payment of US$750 represents "INVESTMENT PAYMENT." All the succeeding cash vouchers describe the payments from February 1998 to September 1999 as "CAPITAL REPAYMENT."22 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 during the hearing. 23 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 court.24

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 considered to be the essence of the obligation itself.25 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. 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. No costs. SO ORDERED. Quisumbing, Ynares-Santiago, Carpio, and Azcuna, JJ., concur.

SECOND DIVISION

G.R. No. 107824 July 5, 1996 SUPERCLEAN SERVICES CORPORATION, petitioner, vs. COURT OF APPEALS and HOME DEVELOPMENT MUTUAL FUND, respondents.

The trial court thereafter set petitioner's application for preliminary injunction for hearing and in the meantime ordered private respondent to desist from conducting a rebidding. At the same time, the court granted leave to private respondent on January 4, 1990 to hire janitorial services on a month-to-month basis to insure the maintenance of its offices. On July 24, 1991, petitioner moved for the admission of a "Supplemental Complaint." 1 Petitioner alleged that because the contract of services was for the furnishing of janitorial service for the previous year 1990, the delay in the decision of the case had rendered the case moot and academic "without [petitioner] obtaining complete relief to redress the wrong committed against it by [private respondent], which relief consists in unrealized profits, exemplary damages and attorney's fees." Accordingly, instead of pursuing its prayer for a writ of mandamus, petitioner sought the payment of damages to it. On August 23, 1991, the trial court denied petitioner's motion, finding "no merit in and no basis supporting it" and set the continuation of the trial on September 19, 1991. Petitioner filed a motion for reconsideration, but its motion was likewise denied. In its order dated November 25, 1991, the trial court said that admission of the "Supplemental Complaint" would "not only radically but substantially [change] the issues" by "materially var[ying] the grounds of relief, and would operate unjustly to the prejudice of the rights of [private respondent]." Petitioner filed a petition for certiorari in the Court of Appeals which, on August 5, 1992, rendered a decision, finding no grave abuse of discretion to have been committed by the trial court in not admitting petitioner's "Supplemental Complaint" and denying the motion for reconsideration of its order. Its ruling was based on the fact that the relief sought in the "Supplemental Complaint" was different from that contained in the original complaint which sought to compel private respondent to recognize petitioner as the lowest qualifying bidder. In addition, the appellate court held that the original complaint had been rendered moot and academic by supervening events and that a

MENDOZA, J.:p The question in this case is the propriety of filing a Supplemental Complaint in order to seek a different relief in view of developments rendering the original relief impossible of attainment. The facts are as follows: On November 8, 1989, petitioner Superclean Services filed with the Regional Trial Court of Manila a complaint forMandamus/Certiorari with Preliminary Injunction And/Or Restraining Order against private respondent Home Development and Mutual Fund. Petitioner alleged that at the public bidding for janitorial services for the year 1990 it was the "lowest or best bidder," but private respondent refused without just cause to award the contract to it and instead caused the publication on October 23, 1989 of a Notice of Rebidding to be held on November 9, 1989. In its answer private respondent defended its action on the ground that not a single bid submitted complied with the terms and conditions agreed upon in the pre-bidding conference held on September 6, 1989.

supplemental complaint was inappropriate since "supplemental pleadings are meant to supply the deficiency in aid of the original pleading, not to entirely substitute the latter." Petitioner moved for a reconsideration, but its motion was denied in a resolution of the Court of Appeals dated October 30, 1992. Hence, this petition for review on certiorari. First. The "Supplemental Complaint" appears to have been filed under Rule 10 of the Rules of Court which provides: 6 Matters Subject of 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, occurrence or events which have happened since the date of the pleading sought to be supplemented. If the court deems it advisable that the adverse party should plead thereto, it shall so order, specifying the time therefor. The transaction, occurrence or event happening since the filing of the pleading, which is sought to be supplemented, must be pleaded in aid of a party's right or defense as the case may be. 2 But in the case at bar, the supervening event is not invoked for that purpose but to justify the new relief sought. To begin with, what was alleged as a supervening event causing damage to petitioner was the fact that the year for which the contract should have been made had passed without the resolution of the case. Only incidentally was it claimed that because of the award of a contract for janitorial services, on a month-to-month basis to a third party, petitioner failed to realize profits. In its "Supplemental Complaint" petitioner alleged: 1. Supervening events not attributable to anybody which consist in the delay in the early disposition of the case within the one (1) year period life span of the contract for janitorial services, have rendered the

case moot and academic, without plaintiff obtaining complete relief to redress the wrong committed against it by defendant, which is the unjustified and/or unlawful refusal of defendant to recognize plaintiff as the lowest qualifying bidder for janitorial services for the year 1990; 2. By reason of the unjustified refusal of defendant to recognize the result of the public bidding held in September 1989 and to award to plaintiff the contract for janitorial services as the lowest qualifying bidder favorable and advantageous to the defendant for the year 1990, and by hiring another entity to perform janitorial services during the pendency of the suit, plaintiff suffered unrealized profits in the sum of P158,117.28; The supervening event was therefore cited not to reinforce or aid the original demand, which was for the execution of a contract in petitioner's favor, but to say that, precisely because of it, petitioner's demand could no longer be enforced, thus justifying petitioner in changing the relief sought to one for recovery of damages. This being the case, petitioner's remedy was not to supplement, but rather to amend its complaint. Indeed the new relief sought (payment of damages in lieu of an award of the contract for janitorial services) is actually an alternative remedy to which petitioner was entitled even before at the time of the filing of its original complaint. If petitioner was entitled to the award of the contract, as it claimed it was, it could have asked either for an award of the contract for janitorial services or for damages. The fact that it opted for the first does not preclude it from subsequently claiming damages because through no fault of its own, the year passed without an award in its favor, with the result that it could no longer demand the execution of a contract in its favor after that year. Be that as it may, the so-called Supplemental Complaint filed by petitioner should simply be treated as embodying amendments to the

original complaint or petitioner may be required to file an amended complaint. Second. But, it is contended, such an amendment of the complaint would change the theory of the case. Three reasons were cited by the Court of Appeals why it thought the trial court correctly refused to admit the so-called Supplemental Complaint of petitioner: (1) change in the reliefs prayed for; (2) change in the issues of the case; and (3) prejudice to the rights of private respondent. The contention has no merit. An amendment to change the relief sought does not change the theory of a case. What is prohibited is a change in the cause of action. Thus in Arches v. Villarruz, 3 it was held: The lower court denied the admission of the amended complaint on the ground that the plaintiff therein has changed the action alleged in the original complaint, but upon comparing the two complaints, we find that, essentially, there was no change of action for, in both the original and the amended complaints, the action was for the collection of the value of the same promissory notes and the only difference between the original and the amended complaints is with regard to the consideration of said promissory notes, for while in the original complaint it was alleged that these were executed by defendant Villarruz for money obtained from plaintiff Arches and with which the former paid for labor and materials for the construction and completion of the Ivisan Bridge, in the amended complaint it was alleged that said promissory notes were executed for materials supplied to William Villarruz and actually used in the construction of the Ivisan Bridge. While the rule allowing amendments to a pleading is subject to the general limitation that the cause of action should not be substantially changed or that the theory of the case should not be altered, in the furtherance of justice, amendments to a pleading should be favored and the rules thereon should be liberally construed. In the present case, we find justification for allowing the admission of the amended

complaint in order that the real question between the parties may be properly and justly threshed out, in a single proceeding, and thus avoid multiplicity of actions. In Vda. de Villaruel v. Manila Motor Co., Inc., 4 plaintiffs, as lessors of a property, filed an action for the rescission of the contract of lease for alleged refusal of defendants to pay rentals. While the case was pending, the buildings leased were destroyed by fire. Plaintiffs filed a supplemental complaint for the recovery of the value of the burned buildings. In holding the supplemental complaint proper, this Court held: This action was inceptionally instituted for the rescission of the contract of lease and for the recovery of unpaid rentals before and after liberation. When the leased buildings were destroyed, the plaintiffs-lessors demanded from the defendants-lessees, instead, the value of the burned premises, basing their right to do so on defendants' alleged default in the payment of post-liberation rentals (which was also their basis in formerly seeking for rescission). This cannot be considered as already altering the theory of the case which is merely a change in the relief prayed for, brought about by circumstances occurring during the pendency of the action, and is not improper. (Southern Pacific Co. vs. Conway, 115 F. 2d 746; Suburban Improvement Company vs. Scott Lumber Co., 87 A.L.R. 555, 59 F. 2d 711). The filing of the supplemental complaint can well be justified also under Section 2, Rule 17 of the Rules of Court (on amendments) "to the end that the real matter in dispute and all matters in the action in dispute between the parties may, as far as possible be completely determined in a single proceeding". It is to be noted furthermore, that the admission or rejection of this kind of pleadings is within the sound discretion of the court that will not be disturbed on appeal in the absence of abuse thereof (see Sec. 5, Rule 17, Rules of Court), especially so, as in this case, where no

substantial procedural prejudice is caused to the adverse party. 5 In this case, the original complaint for Mandamus/Certiorari With Preliminary Injunction And/Or Restraining Order alleged, as cause of action, private respondent's unjustifiable refusal to award the contract to petitioner despite the fact that the latter was the "lowest and best qualifying bidder." On the basis of this allegation, it was prayed that: 1. Upon filing [of] this Complaint, a restraining order be issued to enjoin [private respondent] from implementing [or] proceeding with its Notice of Rebidding which is scheduled on November 9, 1989 at 10:00 A.M.; 2. After trial on the merits, judgment be rendered a. ordering [private respondent] to recognize [petitioner] as the lowest qualifying responsive bidder at the public bidding held on September 22, 1989 and therefore its right to the award of the contract for janitorial services; b. declaring that [private respondent] in publishing its "Notice of Rebidding" acted with grave abuse of discretion amounting to excess and/or lack of jurisdiction; c. declaring the restraining order or temporary writ of injunction to be permanent; and d. for costs of suit.

These same allegations constitute petitioner's cause of action for damages, to wit: 1. the sum of P158,117.28 as unrealized profits; 2. the sum of P50,000.00 as exemplary damages; 3. the sum equivalent to twenty-five (25%) percent of the total amount due and demandable, plus P1,000.00 for every appearance of counsel in court; 4. the costs of suit. As already stated, the change in the relief sought was necessitated by a supervening event which rendered the first relief sought impossible of attainment. Because the cause of action on which the complaint for mandamus and injunction and the so-called Supplemental Complaint are based is one and the same, the issue raised is the same, namely, whether private respondent was justified in refusing to award the contract for janitorial services to petitioner. Nor would admission of the amended complaint prejudice the rights of private respondent as defendant in the action below, as the Court of Appeals held. Indeed neither the trial court nor the appellate court showed in what way the rights of private respondent would be prejudiced by the allowance of the amendment in question. There will be no unfairness or surprise to private respondent, because after all private respondent will have a right to file an amended answer and present evidence in support thereof. 6 Third. The Court of Appeals also held that the action for mandamus and/or injunction had become moot and academic and consequently there was no longer any complaint to be supplemented. It is true that a supplemental or an amended pleading presupposes the existence of a pleading. What was rendered moot and academic, however, was not petitioner's cause of action but only its prayer for the

writ of mandamus. There was still an alternative remedy left to petitioner of seeking damages in lieu of an award of the contract. The situation is similar to an action for illegal dismissal in labor law. If reinstatement is no longer possible, because the position has been abolished and there is no way the dismissed employee can be reinstated to a comparable position, the employee's action is not thereby rendered moot and academic. He can instead ask for separation pay. Indeed, what is important is that, as already stated, the basic allegations of fact in the original and in the amended complaints are the same, namely, that private respondent, without justification, refused to award the contract of services to petitioner. Through no fault of petitioner, the year for which janitorial services were to be rendered expired without the resolution of petitioner's case. It would be to exalt technicality over substance to require that petitioner file a new complaint. It would best serve the interests of justice if the so-called Supplemental Complaint is simply considered as embodying amendments to the original complaint. In fact it appears that the court ordered a continuation of the trial on September 19, 1991, despite petitioner's statement in its Supplemental Complaint that the original case had become moot and academic. WHEREFORE, the decision of the Court of Appeals is REVERSED and the case is REMANDED to the trial court with instructions to admit the "Supplemental Complaint" and to treat it as an amendment to the original complaint or to require petitioner to file an amended complaint, merging the relevant allegations of its original complaint and "Supplemental Complaint," and thereafter to allow private respondent to file an answer. SO ORDERED. Regalado, Romero and Puno, JJ., concur. Torres, Jr., J., took no part.