Does the dismissal of the complaint for nonappearance of plaintiff at the pre-trial, upon motion of defendants, carry with it the dismissal of their compulsory counterclaim?

Petitioner BA Finance Corporation brought this action as plaintiff in the court below to recover a sum of money arising from a credit accommodation in the form of a discounting line which it granted to defendant Rufino Co, and from certain suretyship agreements executed in its favor by his co-defendants Highline Mercantile, Inc., Lucita Veloso Yap, Cloverleaf Supermarket, Inc., and San Andres Commercial.

After defendants' Amended Answer to Complaint with Compulsory Counterclaim was admitted, the case was set for Pre-Trial Conference. For various reasons, however, the conference was repeatedly reset. On 19 December 1989, counsel for plaintiff, petitioner herein, failed to attend the Pre-Trial Conference. Consequently, defendants moved for dismissal of the case without prejudice. The motion was granted thus ‑

"The plaintiff's representative and counsel having failed to appear for today's setting, Atty. Luis Vera Cruz, Jr., for the defendants moved that the above-entitled case be dismissed, without prejudice. Finding merit in said motion, the same is hereby granted."

On 22 January 1990, private respondents moved to set the reception of their evidence in support of their counterclaim. Petitioner opposed the motion.

On 2 April 1990, the trial court denied the motion of private respondents, prompting them to elevate the order of denial to the Court of Appeals which, on 18 December 1991, reversed the questioned order and directed the trial court to set the reception of their evidence on their counterclaim. Its motion for reconsideration having on 2 June 1992 been denied, petitioner instituted the instant petition.

Petitioner contends that the dismissal of the complaint carries with it the dismissal of the counterclaim. Private respondents, on the other hand, claim that their compulsory counterclaim should not have been included in the dismissal.

There is merit in the petition.

The counterclaim of private respondents is not merely permissive but compulsory in nature: it arises out of, or is necessarily connected with, the transaction or occurrence that is the subject matter of the opposing party's claim; it does not require the presence of third parties of whom the court cannot acquire jurisdiction; and, the trial court has jurisdiction to entertain the claim.^[1] The counterclaim of private respondents is denominated "compulsory" and consists of claims for alleged overpayments and damages. They assert that they are no longer indebted to petitioner and are in fact entitled to reimbursement for overpayments. They ask for damages for expenses incurred and inconveniences suffered by them as a result of the filing of the present action.^[2]

Clearly, the same evidence needed to sustain the counterclaim of private respondents would also refute the cause of action in petitioner's complaint. For, if private respondents could successfully show that they actually made overpayments on the credit accomodations extended by petitioner, then the complaint must fail. The counterclaim is therefore compulsory.

The rule is that a compulsory counterclaim cannot "remain pending for independent adjudication by the court."^[3] This is because a compulsory counterclaim is auxiliary to the proceeding in the original suit and merely derives its jurisdictional support therefrom.^[4]

Thus, it necessarily follows that if the trial court no longer possesses jurisdiction to entertain the main action of the case, as when it dismisses the same, then the compulsory counterclaim being ancillary to the principal controversy, must likewise be similarly dismissed since no jurisdiction remains for the grant of any relief under the counterclaim.^[5] Indeed, as Justice Vicente Abad Santos succinctly puts it -

"x x x x The petitioner does not object to the dismissal of the civil case but nonetheless wants her counterclaim therein to subsist. Impossible. A person cannot eat his cake and have it at the same time. If the civil case is dismissed, so also is the counterclaim filed therein."^[6]

More recently, this Court ruled that the dismissal of the complaint on defendant's own motion operated likewise to dismiss the counterclaim questioning the complaint.^[7]

The Rules of Court provides a remedy to recover on defendant's counterclaim if plaintiff moves to dismiss the case. Under Sec. 2, Rule 17, defendant may raise objection to the dismissal of the complaint; in such case, the trial court may not dismiss the main action.

In the instant petition, private respondents themselves moved for the dismissal of the complaint. They could have simply asked the trial court to declare petitioners to be "non-suited" on their complaint, and "as in default" on their compulsory counterclaim, for their failure to appear at the pre-trial despite due notice. But private respondents did not. Neither did they reserve their right to maintain their counterclaim. Consequently, the dismissal of the complaint carried with it the dismissal of the compulsory counterclaim.

It may also be stressed that private respondents moved to set for hearing the reception of evidence to support their counterclaim more than a month after the case was dismissed, i.e., they filed their motion after the lapse of thirty-three (33) days. By then, the order of dismissal had already become final. Thereafter, it was error for the appellate court to set it aside, there being no ground to warrant it. Only error of judgment, not error of jurisdiction, was involved.

However, we are not unaware of the seeming unfairness, if not harshness, of the application of the Rule herein enunciated -- that dismissal of the complaint for failure to prosecute automatically carries with it dismissal of the compulsory counterclaim -- to a defendant who may be compelled to hire counsel to protect him in a frivolous complaint. Equity and justice dictate that he be accorded adequate relief under the circumstances.

Henceforth, for the guidance of Bench and Bar, if any of the grounds to dismiss under Sec. 3, Rule 17, of the Rules of Court arises,^[8] the proper recourse for a defendant who desires to pursue his compulsory counterclaim in the same proceeding is not to move for the dismissal of the complaint; instead, he should only move to have plaintiff declared non-suited on the complaint so that the latter can no longer present his evidence thereon, and simultaneously move that he be declared as in default on the compulsory counterclaim, and reserve the right to present evidence ex parte on his counterclaim. This will enable defendant who was unjustly haled to court to prove his compulsory counterclaim, which is intertwined with the complaint, because the trial court retains jurisdiction over the complaint and of the whole case. The non-dismissal of the complaint, the non-suit notwithstanding, provides the basis for the compulsory counterclaim to remain active and subsisting.

But the procedure above stated, unfortunately, was not adopted by private respondents herein in the court below, hence, we reverse the Court of Appeals and sustain the trial court.

WHEREFORE, the instant petition is GRANTED. The Decision of the Court of Appeals of 18 December 1991 in CA-G.R. No. CV-28420 is REVERSED and SET ASIDE.

The Order of the Regional Trial Court of Manila, Branch 40, of 19 December 1989 dismissing Civil Case No. 84-26040 is REINSTATED and REITERATED.

SO ORDERED.

Cruz, Bidin, Griño-Aquino, Romero, Nocon, and Melo, JJ., concur.
Narvasa, C.J., join J. Regalado in his separate opinion.
Feliciano and Davide, Jr., in the result.
Padilla, J., on official leave.
Quiason, J., no part.

---

^[1] Javier v. Intermediate Appellate Court, G.R. No. 75379, 31 March 1989, 171 SCRA 605.

^[2] Rollo, p. 27.

^[3] Lim Tanbu v. Ramolete, No. L-40098, 29 August 1975, 66 SCRA 425, citing Sec. 2, Rule 17, Rules of Court.

^[4] Metals Engineering Resources Corporation v. Court of Appeals, G.R. No. 95631, 28 October 1991, 203 SCRA 273.

^[5] Ibid., citing I Moran, Comments on the Rules of Court, 1979 Ed., p. 354.

^[6] Citing Dalman v. City Court of Dipolog City, Branch II, Nos. L-63194-96, 21 January 1985, 134 SCRA 242.

^[7] International Container Terminal Services, Inc. v. Court of Appeals, G.R. No. 90530, 7 October 1992.

^[8] Sec. 3. Failure to prosecute. - If plaintiff fails to appear at the time of the trial, or to prosecute his action for an unreasonable length of time, or to comply with these rules or any order of the court, the action may be dismissed upon motion of the defendant or upon the court's own motion. This dismissal shall have the effect of an adjudication upon the merits, unless otherwise provided by the court.

-->

tags