Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-29155 November 5, 1928

JOSEFINA RUBIO DE LARENA, plaintiff-appellant,

vs.
HERMENEGILDO VILLANUEVA, defendant-appellee.

Abad Santos, Camus and Delgado and Jose Montano for appellant.
Del Rosario and Del Rosario for appellee.

OSTRAND, J.:

The case at bar is a sequel to case G. R. No. 21706, Josefina Rubio de Larena vs.
Hermenegildo Villanueva, decided on March 26, 1924. 1 In that case we affirmed a decision of
the Court of First Instance ordering the rescission of a lease of the Tacgajan Sugar Plantation
and the payment by the defendant-lessee of the unpaid balance of the rent for the agricultural
year 1920-1922 in the sum of P5,949.28 with interest from August 26, 1922, an for P8,000 in
rent for the agricultural year 1921-1923. The decision also provided that the possession of the
leased land be delivered to the plaintiff.

Shortly after the record was returned to the court below, a writ of execution was issued, but
before levy was made the parties came to an agreement, under which the money judgment was
to be satisfied by the payment of P10,500 in cash and the transfer to the plaintiff of a dwelling
house situated in the municipality of Bais. The agreement was carried out in accordance with its
terms, and on September 30, 1924, the following document was executed by the plaintiff:

Habiendo llegado a un convenio entre la que subscribe, ejecutante, en la causa

civil No. 67 decidida por la Corte Suprema, y el ejecutado, Don Hermenegildo
Villanueva, por la presente declaro haber recibido del Sheriff Provincial de
Negros Oriental, y mi entera satisfaccion la suma de diez mil quinientos pesos
(P10,500), mas una casa residencial con su solar, situada en la plaza del
Municipio de Bais, Provincia de Negros Oriental, cuyas descripciones aparecen
an un ocumento aparte, por el importnte de la ejecusacion expidida por el
Jusgado de Negros Oriental al 14 de mayo de 1924, en vitud de una decision de
la Corte Suprema. Con este queda definitivamente cumplimentada esta
ejecucion.

Y para que asi conste, firmo la presente en el Municipio de Bais, Provincia de

Negros Oriental, I. F., ante el Sheriff Provincial de esta Provincia de Negros
Oriental y el Notario Publico Don Francisco Romero, que ratifica este
compromiso.
 (Fda.) JOSEFINA RUBIO, Vda. DE LARENA

Firmado en presencia de:

(Fdos.) BRAULIO RUBIO

FRANCISCO PINERO

(ACKNOWLEDGMENT)

In the meantime, the defendant had harvested the sugarcane crop produced in the agricultural
year 1922-1924, and after having satisfied the aforesaid money judgment, he also continued in
possession of the plantation long enough to appropriate to himself the following ratoon cane
crop.

The present action was brought on April 13, 1925, but the last amended complaint, setting forth
three causes of action, was not filed until June 17, 1927. As her first cause of action the plaintiff,
after a preliminary statement of the origin of the controversy, alleges that while case G. R. No.
21706 was on appeal to the Supreme Court, the defendant knew positively that the aforesaid
lease was declared rescinded by the Court of First Instance on September 8, 1923, and that he,
the defendant, also knew that he thereafter was not entitled to the possession of the aforesaid
hacienda; that he, nevertheless, in bad faith continued in such possession during the
agricultural year 1922-1924 and appropriated to himself the cane harvest for that year, which
after deducting the share of the sugar central, produced 1,679.02 piculs for his own benefit,
which sugar was sold by him for the sum of P13 a picul; that the plaintiff has demanded
payment to her of the total value of said 1,679.02 piculs, amounting to P21,827.26, but that the
defendant refuses to pay. The plaintiff, therefore, asks judgment for the sum of P21,827.26
upon the first cause of action.

For the second cause of action the plaintiff alleges that under the contract of lease of the
Tacgajan Hacienda, one of the obligations assumed by the defendant was that he would use
the care of a good father of the family in conserving the tools, agricultural implements, draft
animals, and other effects enumerated in an inventory made at the time the defendant entered
in possession under the lease; that he was further obligated to return said property to the
plaintiff, but that he return said property to the plaintiff, but that he returned only a part that he
returned only a part thereof and failed to returned only a part thereof and failed to return 4
carabaos, 4 vacunos, 1 corn mill, 4 wagons, 106 steel rails, 14 plows, 1 table, 1 scale, an 1
telephone, the total value of the property enumerated being P3,596 for which amount, plus
P500 in damages, the plaintiff asks judgment under her second cause of action.

As a third cause of action the plaintiff alleges that the harvest of sugar cane illegally made by
the defendant in 1924 left ratoon sugar cane in the fields of the hacienda, which sugar can was
the property of the plaintiff, and that during the year 1925, the defendant illegally harvested said
ratoon cane together with some recently planted cane, which harvested after deducting the
share of the sugar central, produced 1,613.25 piculs of sugar, which the defendant sold for his
own benefit at the price of P13 per picul, the total amount received by him being P20,962.25 for
which the plaintiff demands judgment. lawphi1.net

In his answer to the first and third causes of action, the defendants alleges that according to the
pleadings in case G. R. No. 21706, the two causes of action were included in that case and,
therefore, must be considered res adjudicata. In regard to the second cause of action the
defendant pleads the general issue and sets up as a special defense that assuming that the
property referred to in said cause of action was missing, it loss was due to its total extinction by
ordinary use, for which the defendant could not be held responsible. For all three causes of
action, the defendant sets up as a special defense the document executed by the plaintiff on
September 30, 1924, acknowledging the satisfaction of the judgment in case G. R. No. 21706.

Upon trial the Court of First Instance sustained the defendant's special defense and absolved
him from the complaint with the cost against the plaintiff, whereupon the latter appealed to this
court.

We do not think that the court below erred in absolving the defendant from liability upon the
second cause of action. It is not without significance that in her original complaint the plaintiff
claimed only 5 plows, 6 carts, 3 carabaos an 4 vacunos, the total value of which was alleged to
be P1,360; in the first amended complaint filed over two years later, the same claim was made,
but in the last amended complaint a number of other articles were included, thus increasing the
claim to P3,596. The court below found that the weight of the evidence showed that the missing
draft animals died from rinderpest and that the other personal property was turned over to the
provincial sheriff for delivery to the plaintiff before the writ of execution was returned to the court.
If so, the action would lie against the sheriff rather than against the defendant.

As to the first cause of action the defendant argues that it was included in the prayer of an
amended complaint filed in case G. R. No. 21706 and that, although no express determination
thereof was made in the decision of the case, it must, nevertheless, be regarded as res judicata.
That such is not the case is very clear. The Code of Civil Procedure says:

That only is deemed to have been so adjudged in a former judgment which appears
upon its face to have been so adjudged, or which was actually and necessarily included
therein or necessary thereto. (Sec. 307, Code of Civil Proc.)

But the defendant maintains that the plaintiff having had an opportunity to ventilate the matter in
the former case, she cannot now enforce the same cause of action in the present case. Properly
speaking, this argument does not involve the doctrine of res judicata but rests on the well-known
an, in American law, firmly established principle that a party will not be permitted to split up a
single cause of action an make it the basis for several suits. But that is not this case. The rule is
well established that when a lease provides for the payment of the rent in separate installments,
each installment is an independent cause of action, though it has been held and is good law,
that in an action upon such a lease for the recovery of rent, the installments due at the time the
action brought must be included in the complaint an that failure to o so will constitute a bar to a
subsequent action for the payment of that rent. The aforesaid action, G. R. No. 21706, was
brought on August 23, 1922, the plaintiff demanding payment of then sue rent in addition to the
rescission of the lease. On July 27, 1923, the plaintiff filed a motion for an amendment to
paragraph 6 of the complaint adding to that paragraph the following sentence:

Que tambien ha vencido ya el tercer ano el arrendamiento de la finca en cuestion y que

tampoco ha pagado el demandao el canon correspondiente a icho ano.

The plaintiff also amended the prayer of the complaint by asking judgment for rent for years
subsequent to 1922. The motion was granted, and the case came up for trial on July 30, 1923,
and on September 8, 1923, the trial court rendered its decision giving judgment for rent up to
and including the rent for the agricultural year ending in 1923. The lease did not provide for
payment of rent in advance or at any definite time, an it appears plainly from the record that the
rent for an agricultural year was not considered due until the end of the corresponding year. It
follows that the rent for the agricultural year 1922-1924 ha not become sue time of the trial of
the case and that consequently the trial court could not render judgment therefore. The action
referred to is, therefore, no bar to the first cause of action in the present litigation.

The defendant places much weigh upon the document of September 30, 1924, hereinbefore
quoted. The document speaks for itself, and it will be readily seen that it is merely a receipt for
the satisfaction of the money judgment in the case G. R. No. L-21706 and has nothing to with
the present case.

The only question in regard to the first cause of action relates to the amount of the damages.
The plaintiff contends that the defendant was a possessor in bad faith, and therefore, must pay
the value of the fruits of the land in accordance with article 455 of the Civil Code. Under the
circumstances of the case, we cannot so hold. The defendant held possession under the
contract of lease until said contract was rescinded. The contract contained no special provision
for the procedure in effecting the rescission, and it follows that it could only be accompanied by
a final judgment of the court. The judgment in case G. R. No. L-210706 did not become final
until March 27, 192, when our decision on appeal was rendered. As that must have been close
to the end of the harvest and milling of the sugar crop for the period to which the first cause of
action refers, we do not think that the defendant should be required to pay more than the
amount of the stipulated rent for the period, i. e., the sum of P8,000 with interest rent for that
period, i. e., the sum of P8,000 with interest. (Lerma vs. De la Cruz, 7 Phil., 581.)

The action for terminating the lease was brought under article 1124 of the Civil Code, an it may,
perhaps, he said that properly speaking, the subject matter of the action was a resolution of the
contract an not a rescission. That may be true, but it is a distinction without a difference; in their
case a judicial declaration would be necessary for the cancellation of the contract in the
absence of a special agreement.

Very little need be said in regard to the third cause of action. It relates to a period subsequent to
the complete termination of the lease by final judicial order. The defendant had then no right
whatever to the possession of the land or to the fruits thereof, and in removing the fruits, he
acted in bad faith. This being the case, he must pay for the fruits received by him, less the
necessary expenses of production. (Arts. 455 and 453 of the Civil Code.) As his bad faith
commence long before the fruits in question were produced, he is not entitled to any part of the
net proceeds of the crop. The evidence shows that the net ratoon crop of the year 1924-1925
was 1,613.25 piculs of sugar, and according to the defendant's own statement, the market value
of the sugar was in the neighborhood of P11 per picul an the costs of production about P4.50.
The net result is that under the third cause of action, the defendant must pay to the plaintiff the
sum of P10,486.13 with interest.

For the reason stated, the judgment of the court below is affirmed in regard to the second cause
of action. It is reversed as to the first and third causes of action, and it is hereby ordered that the
plaintiff have and recover from the defendant the sum of P18,486.13 with interest at the rate of 6
per cent per annum from April 13, 1925, the date of the filing of the complaint. No costs will be
allowed. So ordered.

Avanceña, C. J., Johnson Street, Malcolm, Villamor, Romualdez, an Villa-Real, JJ., concur.
 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-32958 November 8, 1930

BLOSSOM AND COMPANY, INC., plaintiff-appellant,

vs.
MANILA GAS CORPORATION, defendant-appellee.

Harvey and O'Brien for appellant.

Ross, Lawrence and Selph and John B. Miller for appellee.

STATEMENT

In its complaint filed March 3, 1927, the plaintiff alleges that on September 10, 1918, it entered
into a contract with the defendant in which the plaintiff promised and undertook to purchase and
receive from the defendant and the defendant agreed to sell and deliver to the plaintiff, for a
period of four years, three tons of water gas tar per month from September to January 1, 1919
and twenty tons per month after January 1, 1919, for the remaining period of the contract; one-
half ton of coal gas tar a month from September to January 1, 1919, and six tons per month
after January 1, 1919, for the remainder of the contract, delivery to be made at the plant of the
defendant in the City of Manila, without containers and at the price of P65 per ton for each kind
of gas tar, it being agreed that this price should prevail only so long as the raw materials — coal
and crude oil —used by the defendant in the manufacture of gas should cost the defendant the
same price as that prevailing at the time of the contract, and that in the event of an increase or
decrease in the cost of raw material there would be a corresponding increase or decrease in the
price of the tar. That on January 31, 1919, this contract was amended so that it should continue
to remain in force for a period of ten years from January 1, 1919, and it was agreed that the
plaintiff should not be obliged to take the qualities of the tars required during the year 1919, but
that it might purchase tars in such quantities as it could use to advantage at the stipulated price.
That after the year 1919 the plaintiff would take at least the quantities specified in the contract of
September 10, 1918, to be taken from and after January 1, 1919, and that at its option it would
have the right to take any quantity of water gas tar in excess of the minimum quantity specified
in that contract and up to the total amount of output of that tar of defendant's plant and also to
take any quantity of coal gas tar in excess of the minimum quantity specified in that contract and
up to 50 per cent of defendant's entire output of coal gas tar, and that by giving the defendant
ninety days' notice, it would have the right at its option to take the entire output of defendant's
coal gas tar, except such as it might need for its own use in and about its plant. That in
consideration of this modification of the contract of September 10, 1918, plaintiff agreed to
purchase from the defendant of certain piece of land lying adjacent to its plant at the price of P5
per square meter, the proof of which is evidenced by Exhibit C. That pursuant to Exhibit C,
defendant sold and conveyed the land to the plaintiff which in turn executed a mortgage thereon
to the defendant for P17,140.20, to secure the payment of the balance of the purchase price.

It is then alleged:
 VIII. That about the last part of July, 1920 the defendant herein, the Manila Gas
Corporation willfully, and deliberately breached its said contract, Exhibit C, with the
plaintiff by ceasing to deliver any coal and water gas tar to it thereunder solely because
of the increased price of its tar products and its desire to secure better prices therefor
than plaintiff was obliged to pay to it, notwithstanding the frequent and urgent demands
made by the plaintiff upon it to comply with its aforesaid contract by continuing to deliver
the coal and water gas tar to the plaintiff thereunder, but the said defendant flatly refused
to make any deliveries under said contract, and finally on November 23, 1923, the
plaintiff was forced to commence action against the defendant herein in the Court of First
Instance of Manila, being case No. 25352, of that court entitled 'Blossom & Co.,
plaintiff,vs. Manila Gas Corporation, defendant,' to recover the damages which it had up
to that time suffered by reason of such flagrant violation of said contract on the part of
the defendant herein, and to obtain the specific performance of the said contract and
after due trial of that action, judgment was entered therein in favor of the plaintiff herein
and against the said defendant, the Manila Gas Corporation, for the sum of P26,119.08,
as the damages suffered by this plaintiff by the defendant's breach of said contract from
July, 1920, up to and including September, 1923, with legal interest thereon from
November 23, 1923, and for the costs but the court refused to order the said defendant
to resume the delivery of the coal and water gas tar to the plaintiff under said contract,
but left the plaintiff with its remedy for damages against said defendant for the
subsequent breaches of said contract, which said decision, as shown by the copy
attached hereto as Exhibit G, and made a part hereof, was affirmed by our Supreme
Court on March 3, 1926;

IX. That after the defendant had willfully and deliberately violated its said contract as
herein-before alleged, and the plaintiff suffered great damage by reason thereof, the
plaintiff claimed the right to off- set its damages against the balance due from it to said
defendant on account of the purchase of said land from the defendant, and immediately
thereupon and notwithstanding said defendant was justly indebted to the plaintiff at that
time as shown by the judgment of the Court Exhibit G, in more that four times the
amount due to it from the plaintiff, the said defendant caused to be presented against the
plaintiff a foreclosure action, known as the Manila Gas Corporation versus Blossom &
Company, No. 24267, of the Court of First Instance of Manila, and obtained judgment
therein ordering that Blossom & Company pay the last installment and interest due on
said land or else the land and improvements placed thereon by the plaintiff would be
sold as provided by law in such cases to satisfy the same, and the said defendant
proceeded with the sale of said property under said judgment and did everything in its
power to sell the same for the sole purpose of crushing and destroying the plaintiff's
business and thus rendering it impossible for the plaintiff herein to continue with its said
contract in the event that said defendant might in the future consider it more profitable to
resume performance of the same, but fortunately the plaintiff was able to redeem its
property as well as to comply with its contract and continued demanding that the
defendant performed its said contract and deliver to it the coal and water gas tar
required thereby.

That the defendant made no deliveries under its contract, Exhibit C, from July, 1920 to March
26, 1926, or until after the Supreme Court affirmed the judgment of the lower court for damages
in the sum of P26, 119.08. 1

It is then alleged that:

 . . . On March 26, 1926 the said defendant offered to resume delivery to the plaintiff from
that date of the minimum monthly quantities of tars stated in its contract ,and the plaintiff
believing that the said defendant was at least going to try to act in good faith in the
further performance of its said contract, commenced to accept deliveries of said tars
from it, and at once ascertained that the said defendant was deliberately charging it
prices much higher than the contract price, and while the plaintiff accepted deliveries of
the minimum quantities of tars stated in said contract up to and including January, 1927,
(although it had demanded deliveries of larger quantities thereunder, as hereinafter
alleged) and paid the increased prices demanded by the defendant, in the belief that it
was its duty to minimize the damages as much as possible which the defendant would
be required to pay to it by reason of its violation of said contract, it has in all cases done
so under protest and with the express reservation of the right to demand from the said
defendant an adjustment of the prices charged in violation of its contract, and the right to
the payment of the losses which it had and would suffer by reason of its refusal to make
additional deliveries under said contract, and it also has continuously demanded that the
said defendant furnish to it statements supported by its invoices showing the cost prices
if its raw materials — coal and crude oil — upon which the contract price of the tars in
question is fixed, which is the only way the plaintiff has to calculate the true price of said
tars, but said defendant has and still refuses to furnish such information, and will
continue to refuse to do so, unless ordered to furnish such information to the plaintiff by
the court, and the plaintiff believes from the information which it now has and so alleges
that the said defendant has overcharged it on the deliveries of said tars mentioned in the
sum of at least P10,000, all in violation of the rights of the plaintiff under its said contract
with the defendant.

That on January 31, 1926 and pursuant to Exhibit C. plaintiff notified the defendant in writing
that commencing with the month of August, 1926 it desired to take delivery of 50 per cent of
defendant's coal tar production for that month and that on November 1, 1926, it desired to take
the entire output of defendant's coal gas tar, but that the defendant refused and still refuses to
make such deliveries unless plaintiff would take all of its water gas tar production with the
desired quantity of coal gas tar which refusal was a plain violation of the contract. That on
January 29, 1927, and in accord with Exhibit C, plaintiff notified the defendant in writing that
within ninety days after the initial delivery to it of its total coal gas tar production or in February,
1927, it would require 50 per cent of its total water gas tar production and that in April 1927, it
would require the total output of the defendant of both coal and water gas tars, and that it
refused to make either of such deliveries.

It is then alleged:

XIV. That as shown by the foregoing allegations of this complaint, it is apparent that
notwithstanding the plaintiff in this case has at all times faithfully performed all the terms
and conditions of said contract, Exhibit C, on its part of be performed, and has at all
times and is now ready, able and willing to accept and pay for the deliveries of said coal
and water gas tars required by said contract and the notices given pursuant thereto, the
said defendant, the Manila Gas Corporation, does not intend to comply with its said
contract, Exhibit C, and deliver to the plaintiff at the times and under the terms and
conditions stated therein the quantities of coal and water gas tars required by said
contract, and the several notices given pursuant thereto, and that it is useless for the
plaintiff to insist further upon its performance of the said contract, and for that reason he
only feasible course for the plaintiff to pursue is to ask the court for the rescission of said
 contract and for the full damages which the plaintiff has suffered from September, 1923,
and will suffer for the remainder of said contract by reason of the defendant's failure and
refusal to perform the same, and the plaintiff has so notified the said defendant.

That since September, 1923, by reason of the bad faith of the defendant, the plaintiff has been
damaged in the sum of P300,000, for which it prays a corresponding judgment, and that the
contract, Exhibit C, be rescinded and declared void and without force and effect.

After the filing and overruling of its demurrer, the defendant filed an answer in the nature of a
general and specific denial and on April 10, 1928, and upon stipulation of the parties, the court
appointed W. W. Larkin referee, "to take the evidence and, upon completion of the trial, to report
his findings of law and fact to the court."

July 18, 1928, the defendant filed an amended answer in which it alleged as an affirmative
defense, first, that the complaint does not state facts sufficient to constitute cause of action the
reason that a prior adjudication has been had of all the issues involved in this action, and,
second, "that on or about the 16th day of June, 1925, in an action brought in the Court of First
Instance of the City on Manila, Philippine Islands, before the Honorable Geo. R. Harvey, Judge,
by Blossom & Company, plaintiff, vs. Manila Gas Corporation, defendant, being civil case No.
25353, of said court, for the same cause of action as that set fourth in the complaint herein, said
plaintiff recovered judgment upon the merits thereof, against said defendant decreeing a breach
of the contract sued upon herein, and awarding damages therefor in the sum of P26,119.08 with
legal interest from November 23, 1923, and costs of suit, which judgment was upon appeal
affirmed by the Supreme Court of the Philippine Islands, in case G. R. No. 24777 of said court,
on the 3d day of March, 1926 and reported in volume 48 Philippines Reports at page 848," and
it prays that plaintiff's complaint be dismissed with costs.

After the evidence was taken the referee made an exhaustive report of sixty-pages in which he
found that the plaintiff was entitled to P56,901.53 damages, with legal interest from the date of
the filing on the complaint, to which both parties filed numerous exceptions

In its decision the court says:

Incidental references have been made to the referee's report. It was admirably prepared.
Leaving aside the question of damages and the facts upon which the referee assessed
them, the facts are not in dispute — at least not in serious dispute. They appear in the
documentary evidence and this decision is based upon documents introduced into
evidence by plaintiff. If I could have agreed with the referee in respect to the question of
law, I should have approved his report in toto. If defendant is liable for the damages
accruing from November 23, 1923, the date the first complaint was filed, to April 1st,
1926, the date of resumption of relations; and if defendant, after such resumption of
relations, again violated the contract, the damages assessed by the referee, are, to my
way of thinking, as fair as could be estimated. He went to tremendous pains in figuring
out the details upon which he based his decision. Unfortunately, I cannot agree with his
legal conclusions and the report is set aside except wherein specifically approved.

It is unnecessary to resolve specifically the many exceptions made by both partied to the
referee's report. It would take much time to do so. Much time has already been spent in
preparing this decision. Since both parties have informed me that in case of adverse
 judgment ,and appeal would be taken, I desire to conclude the case so that delay will be
avoided.

Let judgment be entered awarding damages to plaintiff in the sum of P2,219.60, with
costs.

From which plaintiff only appealed and assigns twenty-four different errors, of which the
following are material to this opinion:

I. The trial court erred in holding that this suit in so far as the damages from November,
1923, to March 31, 1926, are concerned , is res adjudicata.

II. The trial court erred in holding that the defendant repudiated the contract in question
as a whole, and that the plaintiff when it brought its first suit to collect damages had
already elected and consented to the dissolution of the contract, and its choice once
made, being final, it was estopped to claim that the contract was alive when that suit was
brought.

xxx xxx xxx

VII. The trial court erred in refusing to sustain plaintiff's third exception to the legal
interpretation placed on the contract in this case by the referee with reference to quantity
of tars and his conclusion with respect to the terms thereof that:

"1. Plaintiff must take and defendant must deliver either the minimum or maximum
quantity of water gas tar and not any quantity from the minimum to the maximum and/or

"2. Plaintiff must take either the minimum and any quantity up to fifty per cent of entire
output of coal gas tar.

"3. With ninety days' notice by plaintiff to defendant the former must take and the latter
must deliver total output of both tars, except such as might be needed by defendant for
use in and about its plants and not any quantity from the minimum up to total output of
both tars." (See page 47, Referee's report.)

And in holding that the option contained in said contract, taking into consideration the
purposes of both parties in entering into the contract, was a claimed by defendant: all the
water gas tar and 50 per cent of the coal gas tar upon immediate notice and all tars upon
ninety day's notice.

VIII. The trial court erred in refusing to sustain plaintiff's fourth exception to the finding
and conclusion of the referee that from the correspondence between the parties it was
apparent that plaintiff did not make a right use of its option, and that the letter of June 25,
1926, and the subsequent demands, with exception of the letter of July 31, 1926, were
not made in pursuance to the terms of the contract, and that defendant had no liability in
refusing to comply therewith, and in allowing plaintiff damages only for the failure of the
defendant to deliver quantities shown in Exhibits Ref. 21 and 22. (See pages 51, 52,
Referee's report.)
 IX. The trial court erred in finding and holding that the demands of plaintiff for additional
tars under its contract with the defendant were extravagant and not made in good faith,
and that when it wrote to defendant that it desired maximum quantities of coal gas tars
and only minimum of water gas tars, but with the reservation of going back to minimum
quantities of both at any time it chose, it announced its intention f breaching the contract,
and defendant was under no obligation to deliver maximum quantities of either tars, and
since this was the efficient cause of the failure of defendant to deliver or plaintiff to
accept tars, the blame is attribute to plaintiff, and it cannot recover for a rescission.

xxx xxx xxx

XXIII. The trial court erred in refusing to sustain plaintiff's seventeenth exception to the
finding and conclusion of the referee that the plaintiff is entitled to recover from the
defendant only the following sums:

Water gas tar (Exhibit Ref. 21) P38,134.60

Coal gas tar (Exhibit Ref. 22) 16,547.33
Overcharges on deliveries (Exhibit Ref.
2,219.60
23)

or a total of 56,901.53

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

xxx xxx xxx

JOHNS, J.:

In this action plaintiff seeks to recover damages from the defendant which it claims to have
sustained after September, 1923, arising from, and growing out of, its original contract of
September 10, 1918, as modified on January 1, 1919, to continue for a period of ten years from
that date.

In paragraph VIII of its complaint, plaintiff alleges that about the last part of July, 1920, the
defendant "willfully and deliberately breached its said contract," and that it "flatly refused to
make any deliveries under said contract, and finally on November 23, 1923," it was forced to
commence action in the Court of First Instance against the defendant known as case No.
25352, to recover the damages which it had then sustained by reason of such flagrant violation
of said contract on the part of the defendant, in which judgment was rendered in favor of the
plaintiff and against the defendant for P26,1119.08, as damages suffered by this plaintiff by the
defendant's breach of said contract from July 1920, up to and including September, 1923, with
legal interest thereon from November 23, 1923, and for the costs," in which the court refused to
order the defendant to resume the delivery of the coal and water gas tar to the plaintiff, in
accord with said contract, but left it with its remedy for damages against the defendant for any
subsequent breaches of the contract. A copy of that judgment, which was later affirmed by this
court, is attached to, marked Exhibit G, and made a part of, the complaint in this action.

In their respective briefs, opposing counsel have much to say about the purpose and intent of
the judgment, and it is vigorously asserted that it was never intended that it should be or
become a bar to another action by the plaintiff to recover any damages it may have sustained
after September, 1923, during the remainder of the ten-year period of that contract. Be that as it
may, it must be conceded that the question as to what would be the legal force and effect of that
judgment in that case was never presented to, or decided by, the lower court or this court. In the
very nature of things, neither court in that case would have the power to pass upon or decided
the legal force and effect of its own judgment, for the simple reason that it would be premature
and outside of the issues of any pleading, and could not be raised or presented until after the
judgment became final and then only by an appropriate plea, as in this case.

Plaintiff specifically alleges that the defendant willfully and deliverately breached the contract
and "flatly refused to make any deliveries under said contract," by reason of. which it was forced
to and commenced its former action in which it was awarded P26,119.08 damages against the
defendant by reason of its breach of the contract from July, 1920, to September, 1923.

In the final analysis, plaintiff in this action seeks to recover damages growing out of, and arising
from, other and different breaches of that same contract after November, 1923, for the
remainder of the ten-year period, and the question is thus squarely presented as to whether the
rendition of the former judgment is a bar to the right of the plaintiff to recover damages from and
after September, 1923, arising from, and growing out of, breaches of the original contract of
September 10, 1918, as modified on January 1, 1919. That is to say, whether the plaintiff, in a
former action, having recovered judgment for the damages which it sustained by reason of a
breach of its contract by the defendant up to September, 1923, can now in this action recover
damages it may have sustained after September, 1923, arising from, and growing out of, a
breach of the same contract, upon and for which it recovered its judgment in the former action.

In the former action in which the judgment was rendered, it is alleged in the compliant:

"7. That about the last part of July or the first part of August, 1920, the Manila Gas
Corporation, the defendant herein, without any cause ceased delivering coal and water
gas tar to the plaintiff herein; and that from that time up to the present date, the plaintiff
corporation, Blossom & Company, has frequently and urgently demanded of the
defendant, the Manila Gas Corporation, that it comply with its aforesaid contract Exhibit
A by continuing to deliver coal and water gas tar to this plaintiff — but that the said
defendant has refused and still refuses, to deliver to the plaintiff any coal and water gas
tar whatsoever under the said contract Exhibit A, since the said month of July 1920.

"9. That owing to the bad faith of the said Manila Gas Corporation, defendant herein, in
not living up to its said contract Exhibit A, made with this plaintiff, and refusing now to
carry out the terms of the same, be delivering to this plaintiff the coal and water gas tar
mentioned in the said Exhibit A, has caused to this plaintiff great and irreparable
damages amounting to the sum total of one hundred twenty- four thousand eight
hundred forty eight pesos and seventy centavos (P124,848,70);and that the said
 defendant corporation has refused, and still refuses, to pay to this plaintiff the whole or
any part of the aforesaid sum.

"10. That the said contract Exhibit A, was to be in force until January 1, 1929, that is to
say ten (10) years counted from January 1, 1929; and that unless the defendant again
commence to furnish and supply this plaintiff with coal and water gas tar, as provided for
in the said contract Exhibit A, the damages already suffered by this plaintiff will
continually increase and become larger and larger in the course of years preceding the
termination of the said contract on January 1, 1929."

In that action plaintiff prays for judgment against the defendant:

"(a) That upon trial of this this cause judgment be rendered in favor of the plaintiff and
against the defendant for the sum of P124,8484.70), with legal interest thereon from
November 23, 1923;

"(b) That the court specifically order the defendant to resume the delivery of the coal and
water gas tar to the plaintiff under the terms of the said contract Exhibit A of this
complaint."

In the final analysis, plaintiff must stand or fall on its own pleadings, and tested by that rule it
must be admitted that the plaintiff's original cause of action, in which it recovered judgment for
damages, was founded on the ten-year contract, and that the damages which it then recovered
were recovered for a breach of that contract.

Both actions are founded on one and the same contract. By the terms of the original contract of
September 10, 1018, the defendant was to sell and the plaintiff was to purchase three tons of
water gas tar per month form September to January 1, 1919, and twenty tons of water gas tar
per month after January 1, 1919, one-half ton of coal gas tar per month from September to
January 1, 1919, and six tons of coal gas tar per month after January 1, 1919. That from and
after January 1, 1919, plaintiff would take at least the quantities specified in the contract of
September 10, 1918, and that at its option, it would have the right to take the total output of
water gas tar of defendant's plant and 50 per cent of the gross output of its coal gas tar, and
upon giving ninety days' notice, it would have the right to the entire output of coal gas tar,
except such as the defendant might need for its own use. That is to say, the contract provided
for the delivery to the plaintiff from month to month of the specified amounts of the different tars
as ordered and requested by the plaintiff. In other words, under plaintiff's own theory, the
defendant was to make deliveries from month to month of the tars during the period of ten
years, and it is alleged in both complaints that the defendant broke its contract, and in bad faith
refused to make any more deliveries.

In 34 Corpus Juris, p. 839, it is said:

As a general rule a contract to do several things at several times in its nature, so as to

authorize successive actions; and a judgment recovered for a single breach of a
continuing contract or covenant is no bar to a suit for a subsequent breach thereof. But
where the covenant or contract is entire, and the breach total, there can be only one
action, and plaintiff must therein recover all his damages.

In the case of Rhoelm vs, Horst, 178 U. U., 1; 44 Law. ed., 953, that court said:
 An unqualified and positive refusal to perform a contract, though the performance
thereof is not yet due, may, if the renunciation goes to the whole contract, be treated as
a complete breach which will entitle the injured party to bring his action at once.

15 Ruling Case Law, 966, 967, sec. 441 says:

Similarly if there is a breach by the vendor of a contract for the sale of goods to be
delivered and paid for in installments, and the vendee maintains an action therefor and
recovers damages, he cannot maintain a subsequent action to recover for the failure to
deliver later installments.

In Pakas vs. Hollingshead, 184 N. Y., 211; 77 N. E., 40; 3 L. R. A. (N. S.), 1024, the syllabus
says:

Upon refusal, by the seller, after partial performance, longer to comply with his contract
to sell and deliver a quantity of articles in installments the buyer cannot keep the contract
in force and maintain actions for breaches as they occur but must recover all his
damages in one suit.

And on page 1044 of its opinion, the court say:

The learned counsel for the plaintiff contends that the former judgment did not constitute
a bar to the present action but that the plaintiff had the right to elect to waive or disregard
the breach, keep the contract in force, and maintain successive actions for time to time
as the installments of goods were to be delivered, however numerous these actions
might be. It is said that this contention is supported in reason and justice, and has the
sanction of authority at least in other jurisdictions. We do not think that the contention
can be maintained. There is not as it seems to us any judicial authority in this state that
gives it any substantial support. On the contrary, we think that the cases, so far as we
have been able to examine them, are all the other way, and are to the effect that,
inasmuch as there was a total breach of the contract by the defendant's refusal to
deliver, the plaintiff cannot split up his demand and maintain successive actions, but
must either recover all his damages in the first suit or wait until the contract matured or
the time for the delivery of all the goods had arrived. In other words, there can be but
one action for damages for a total breach of an entire contract to deliver goods, and the
fact that they were to be delivered in installment from time to time does not change the
general rule.

The case of L. Bucki & Son Lumber Co. vs. Atlantic Lumber Co. (109 Federal, 411), of the
United States Circuit Court of Appeals for the Fifth Circuit, is very similar.

The syllabus says:

1. CONTRACTS — CONSTRUCTION —ENTIRE CONTRACT. —A contract was made

for the sale of a large quantity of logs to be delivered in monthly installments during a
period of eight years, payments to be made also in installments at times having relation
tot he deliveries. It contained stipulations as to such payments, and guaranties as to the
average size of the logs to be delivered in each installment. Held, that it was an entire
contract, and not a number of separate and independent agreements for the sale of the
quantity to be delivered and paid for each month, although there might be breaches of
 the minor stipulations and warranties with reference thereto which would warrant suits
without a termination of the contract.

2. JUDGMENTS — MATTERS CONCLUDED —ACTION FOR BREACH OF

INDIVISIBLE CONTRACT. — The seller declared the contract terminated for alleged
breaches by the purchaser, and brought suit for general and special damages the latter
covering payments due for installments of logs delivered. By way of set-off and
recoupment against this demand, the purchaser pleaded breaches of the warranty as to
the size of the logs delivered during the months for which payment had not been
made. Held, that the judgment in such action was conclusive as to all claims or demands
or either party against the other growing out of the entire contract, and was a bar to a
subsequent suit brought by the purchaser to recover for other breaches of the same
warranty in relation to deliveries made in previous months.

On page 415 of the opinion, the court says:

When the contract was ended, the claims of each party for alleged breaches and
damages therefor constituted an indivisible demand; and when the same, or any part of
the same, was pleaded, litigation had, and final judgment rendered, such suit and
judgment constitute a bar to subsequent demands which were or might have been
litigated (Baird vs. U. S., 96 U. S., 430; 24 L. ed., 703.)

In Watts vs. Weston (238 Federal, 149), Circuit Court of Appeals, Second Circuit, the syllabus
says:

1. JUDGMENTS — 593 — JUDGMENT AS BAR — MATTERS CONCLUDED. —

Where a continuing contract was terminated by the absolute refusal of the party whose
action was necessary to further perform, a claim for damages on account of the breach
constituted as indivisible demand, and when the same or any part of the same was
pleaded, litigated, and final judgment rendered, such suit and judgment constitute a bar
to subsequent demands which were or might have been litigated therein.

And on page 150 of the opinion, the court says:

It is enough to show the lack of merit in the present contention to point out as an
inexorable rule of law that, when Kneval's contract was discharged by his total
repudiation thereof, Watt's claims for breaches and damages therefor constituted an
indivisible demand, and when the same, or any part of the same, was pleaded, litigation
had and final judgment rendered, such suit and judgment constitute a bar to subsequent
demands which were or might have been litigated." (Bucki, etc., Co. vs. Atlantic, etc.,
Co., 109 Fed. at page 415; 48 C. C. A., 459; Cf. Landon vs. Bulkley, 95 Fed., 344; 337
C. C. A., 96.)

The rule is usually applied in cases of alleged or supposed successive breaches, and
consequently severable demands for damages; but if the contract has been discharged
by breach, if suit for damages is all that is left, the rule is applicable, and every demand
arising form that contract and possessed by any given plaintiff must be presented (at
least as against any given defendant) in one action; what the plaintiff does not advance
he foregoes by conclusive presumption.
Inn Abbott vs. 76 Land and Water Co. (118 Pac., 425; 161 Cal., 42), at page 428, the court said:

In Fish vs. Folley, 6 Hill (N. Y.), 54, it was held, in accord with the rule we have
discussed, that, where the defendant had covenanted that plaintiff should have a
continual supply of water for his mill from a dam, and subsequently totally failed to
perform for nine years, and plaintiff brought an action for the breach and recovered
damages sustained by him to that time, the judgment was a bar to a second action
arising from subsequent failure to perform, on the theory that, although he covenant was
a continuing one in one sense, it was an entire contract, and a total breach put an end to
it, and gave plaintiff the right to sue for an equivalent in damages.

In such a case it is no warrant for a second action that the party may not be able to
actually prove in the first action all the items of the demand, or that all the damage may
not then have been actually suffered. He is bound to prove in the first action not only
such damages as has been actually suffered, but also such prospective damage by
reason of the breach as he may be legally entitled to, for the judgment he recovers in
such action will be a conclusive adjudication as to the total damage on account of the
breach.

It will thus be seen that, where there is a complete and total breach of a continuous contract for
a term of years, the recovery of a judgment for damages by reason of the breach is a bar to
another action on the same contract for and on account of the continuous breach.

In the final analysis is, there is no real dispute about any material fact, and the important and
decisive question is the legal construction of the pleadings in the former case and in this case,
and of the contract between the plaintiff and the defendant of January 1, 1920.

The complaint on the former case specifically alleges that the defendant "has refused and still
refuses, to deliver to the plaintiff any coal and water gas tar whatsoever under the said contract
Exhibit A, since the said month of July, 1920." " That owing to the bad faith of the said Manila
Gas Corporation, defendant herein, in not living up to its said contract Exhibit A, made with this
plaintiff, and refusing now to carry out the terms of the same." That is a specific allegation not
only a breach of the contract since the month of July, 1920, but of the faith of the defendant in
its continuous refusal to make deliveries of any coal and water gas tar. That amended complaint
was filed on July 11, 1924, or four years after the alleged bad faith in breaking the contract.

Having recovered damages against it, covering a period of four years, upon the theory that the
defendant broke the contract, and in bad faith refused to make deliveries of either of the tars,
how can the plaintiff now claim and assert that the contract is still in fierce and effect? In the
instant case the plaintiff alleges and relies upon the ten year contract on January 11, 1920,
which in bad faith was broken by the defendant. If the contract was then broken, how can it be
enforced in this action?

It is admitted that the defendant never made any deliveries of any tar from July, 1920, to April,
1936. Also that it made nine deliveries to plaintiff of the minimum quantities of coal and water
gas tar from April 7, 1926, to January 5, 1927.

Plaintiff contends that such deliveries were made under and in continuation of the old contract.
March 26, 1926, after the decision of this court affirming the judgment in the original action,
plaintiff wrote the defendant:

. . . It is our desire to take deliveries of at least the minimum quantities set forth therein
and shall appreciate to have you advise us how soon you will be in a position to make
deliveries; . . .

. . . In view of the fact that you have only effected settlement up to November 23, 1923,
please inform us what adjustment you are willing to make for the period of time that has
since elapsed without your complying with the contract.

In response to which on March 31, 1926, the defendant wrote this letter to the plaintiff:

In reply to your letter of March 26th, 1926, in regard to tar, we beg to advise you that we
are prepared to furnish the minimum quantities of coal and water gas tars as per your
letter, viz: twenty tons of water gas tar and six tons of coal gas tar. The price figured on
present costs of raw materials is P39.01 ) Thirty-nine and 01/100 Pesos) per ton of water
gas and P33.59 (Thirty-three and 59/100 Pesos) per ton of coal tar.

We shall expect you to take delivery and pay for the above amount of tars at our factory
on or before April 7th prox.

Thereafter we shall be ready to furnish equal amounts on the first of each month. Kindly
make your arrangements accordingly.

On January 29, 1927, the plaintiff wrote the defendant that:

On July 31st last, we made demand upon you, under the terms of our tar contract for 50
per cent of your total coal tar production for that month and also served notice on you
that beginning 90 days from August 1st we would require you total output of coal tar
monthly; this in addition to the 20 tons of water gas tar provided for in the contract to be
taken monthly.

xxx xxx xxx

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

February 2, 1927, the defendant wrote the plaintiff:

Replying to your letter of Jan. 29, we would sat that we have already returned to you the
check enclosed there with. As we have repeatedly informed you we disagree with you as
to the construction of your contract and insist that you take the whole output of both tars
if you wish to secure the whole of the coal tar.
 With regard to your threat of further suits we presume that you will act as advised. If you
make it necessary we shall do the same.lawphil.net

From an analysis of these letters it clearly appears that the plaintiff then sought to reply upon
and enforce the contract of January 1, 1920, and that defendant denied plaintiff's construction of
the contract, and insisted "that you take the whole output of both tars if you wish to secure the
whole of the coal tar."

February 28, 1927, the plaintiff wrote the defendant:

In view of your numerous violations of and repeated refusal and failure to comply with
the terms and provisions of our contract dated January 30-31, 1919, for the delivery to
us of water and coal gas tars, etc., we will commence action," which it did.

The record tends to show that tars which the defendant delivered after April 7, 1926, were not
delivered under the old contract of January 1, 1920, and that at all times since July 1920, the
defendant has consistently refused to make any deliveries of any tars under that contract.

The referee found as a fact that plaintiff was entitled to P2,219.60 for and on account of
overcharges which the defendant made for the deliveries of fifty-four tons of coal gas tar, and
one hundred eighty tons of water gas tar after April, 1926, and upon that point the lower says:

The fourth charge that plaintiff makes is meritorious. The price was to be fixed on the
basis of raw materials. The charge for deliveries during 1926 were too high. In this I
agree with entirely with the referee and adopt his findings of fact and calculations.
(See Referee's report, p. 83) The referee awarded for overcharge during the period
aforesaid, the sum of P2,219.60. The defendant was trying to discharge plaintiff from
buying tars and made the price of raw material appear as high as possible.

That finding is sustained upon the theory that the defendant broke its contract which it made
with the plaintiff for the sale and delivery of the tars on and after April, 1926.

After careful study of the many important questions presented on this appeal in the exhaustive
brief of the appellant, we are clearly of the opinion that, as found by the lower court, the plea
of res judicata must be sustained. The judgment of the lower court is affirmed.

It is so ordered, with costs against the appellant.

Johnson, Street, Malcolm, Villamor, Ostrand, Romualdez, and Villa-Real, JJ., concur.
 Republic of the Philippines
SUPREME COURT

FIRST DIVISION

G.R. No. 161135. April 8, 2005

SWAGMAN HOTELS AND TRAVEL, INC., Petitioners,

vs.
HON. COURT OF APPEALS, and NEAL B. CHRISTIAN, Respondents.

DECISION

DAVIDE, JR., C.J.:

May a complaint that lacks a cause of action at the time it was filed be cured by the accrual of a
cause of action during the pendency of the case? This is the basic issue raised in this petition
for the Court’s 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 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; ₱100,000 for moral damages; ₱50,000 for
attorney’s fees; and the cost of the suit.3

The petitioner corporation, together with its president and vice-president, filed an Answer raising
as defenses lack of cause of action and novation of the principal obligations. According to them,
Christian had no cause of action because the three promissory notes were not yet due and
demandable. In December 1997, since the petitioner corporation was experiencing huge losses
due to the Asian financial crisis, Christian agreed (a) to waive the interest of 15% per annum,
and (b) accept payments of the principal loans in installment basis, the amount and period of
which would depend on the state of business of the petitioner corporation. Thus, the petitioner
paid Christian capital repayment in the amount of US$750 per month from January 1998 until
the time the complaint was filed in February 1999. The petitioner and its co-defendants then
prayed that the complaint be dismissed and that Christian be ordered to pay ₱1 million as moral
damages; ₱500,000 as exemplary damages; and ₱100,000 as attorney’s fees.4

In due course and after hearing, the trial court rendered a decision5 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 defendant’s 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 petitioner’s 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 Swagman’s interpretation that the three (3) promissory notes have been novated by
reason of appellee Christian’s 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 Christian’s 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 respondent’s
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. Jalandoni,14 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. Compañía General de Tabacos [1912], 21
Phil. 416; Ruyman and Farris vs. Director of Lands [1916], 34 Phil., 428) and that "the complaint
and answer having been superseded by the amended complaint and answer thereto, and the
answer to the original complaint not having been presented in evidence as an exhibit, the trial
court was not authorized to take it into account." (Bastida vs. Menzi & Co. [1933], 58 Phil., 188.)
But in none of these cases or in any other case have we held that if a right of action did not exist
when the original complaint was filed, one could be created by filing an amended complaint. In
some jurisdictions in the United States what was termed an "imperfect cause of action" could be
perfected by suitable amendment (Brown vs. Galena Mining & Smelting Co., 32 Kan., 528;
Hooper vs. City of Atlanta, 26 Ga. App., 221) and this is virtually permitted in Banzon and
Rosauro vs. Sellner ([1933], 58 Phil., 453); Asiatic Potroleum [sic] Co. vs. Veloso ([1935], 62
Phil., 683); and recently in Ramos vs. Gibbon (38 Off. Gaz., 241). That, however, which is no
cause of action whatsoever cannot by amendment or supplemental pleading be converted
into a cause of action: Nihil de re accrescit ei qui nihil in re quando jus accresceret habet.

We are therefore of the opinion, and so hold, that unless the plaintiff has a valid and
subsisting cause of action at the time his action is commenced, the defect cannot be
cured or remedied by the acquisition or accrual of one while the action is pending, and a
supplemental complaint or an amendment setting up such after-accrued cause of action
is not permissible. (Emphasis ours).
Hence, contrary to the holding of the trial court and the Court of Appeals, the defect of lack of
cause of action at the commencement of this suit cannot be cured by the accrual of a cause of
action during the pendency of this case arising from the alleged maturity of two of the
promissory notes on 7 August 1999 and 14 March 2000.

Anent the issue of novation, this Court observes that the petitioner corporation argues the
existence of novation based on its own version of what transpired during the renegotiation of the
three promissory notes in December 1997. By using its own version of facts, the petitioner is, in
a way, questioning the findings of facts of the trial court and the Court of Appeals.

As a rule, the findings of fact of the trial court and the Court of Appeals are final and conclusive
and 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 respondent’s 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 respondent’s summary of payments, lend credence to petitioner’s 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
petitioner’s 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 court’s
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 latter’s 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 respondent’s complaint for
sum of money and damages, and its Resolution of 4 December 2003, which denied petitioner’s
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.

 Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 182435 August 13, 2012

LILIA B. ADA, LUZ B. ADANZA, FLORA C. BA YLON, REMO BA YLON, JOSE BA YLON,
ERIC BA YLON, FLORENTINO BA YLON, and MA. RUBY BA YLON, Petitioners,
vs.
FLORANTE BA YLON, Respondent.

VILLARAMA, JR.,*

DECISION

REYES, J.:

Before this Court is a petition for review on certiorari under Rule 45 of the Rules of Court
seeking to annul and set aside the Decision1 dated October 26, 2007 rendered by the Court of
Appeals (CA) in CA-G.R. CV No. 01746. The assailed decision partially reversed and set aside
the Decision2 dated October 20, 2005 issued ~y the Regional Trial Court (RTC), Tan jay City,
Negros Oriental, Branch 43 in Civil Case No. 11657.

The Antecedent Facts

This case involves the estate of spouses Florentino Baylon and Maximina Elnas Baylon
(Spouses Baylon) who died on November 7, 1961 and May 5, 1974, respectively.3 At the time of
their death, Spouses Baylon were survived by their legitimate children, namely, Rita Baylon
(Rita), Victoria Baylon (Victoria), Dolores Baylon (Dolores), Panfila Gomez (Panfila), Ramon
Baylon (Ramon) and herein petitioner Lilia B. Ada (Lilia).

Dolores died intestate and without issue on August 4, 1976. Victoria died on November 11,
1981 and was survived by her daughter, herein petitioner Luz B. Adanza. Ramon died intestate
on July 8, 1989 and was survived by herein respondent Florante Baylon (Florante), his child
from his first marriage, as well as by petitioner Flora Baylon, his second wife, and their
legitimate children, namely, Ramon, Jr. and herein petitioners Remo, Jose, Eric, Florentino and
Ma. Ruby, all surnamed Baylon.

On July 3, 1996, the petitioners filed with the RTC a Complaint4 for partition, accounting and
damages against Florante, Rita and Panfila. They alleged therein that Spouses Baylon, during
their lifetime, owned 43 parcels of land5all situated in Negros Oriental. After the death of
Spouses Baylon, they claimed that Rita took possession of the said parcels of land and
appropriated for herself the income from the same. Using the income produced by the said
parcels of land, Rita allegedly purchased two parcels of land, Lot No. 47096 and half of Lot No.
4706,7 situated in Canda-uay, Dumaguete City. The petitioners averred that Rita refused to
effect a partition of the said parcels of land.
In their Answer,8 Florante, Rita and Panfila asserted that they and the petitioners co-owned
229 out of the 43 parcels of land mentioned in the latter’s complaint, whereas Rita actually
owned 10 parcels of land10 out of the 43 parcels which the petitioners sought to partition, while
the remaining 11 parcels of land are separately owned by Petra Cafino
Adanza,11 Florante,12 Meliton Adalia,13 Consorcia Adanza,14 Lilia15 and Santiago
Mendez.16 Further, they claimed that Lot No. 4709 and half of Lot No. 4706 were acquired by
Rita using her own money. They denied that Rita appropriated solely for herself the income of
the estate of Spouses Baylon, and expressed no objection to the partition of the estate of
Spouses Baylon, but only with respect to the co-owned parcels of land.

During the pendency of the case, Rita, through a Deed of Donation dated July 6, 1997,
conveyed Lot No. 4709 and half of Lot No. 4706 to Florante. On July 16, 2000, Rita died
intestate and without any issue. Thereafter, learning of the said donation inter vivos in favor of
Florante, the petitioners filed a Supplemental Pleading17 dated February 6, 2002, praying that
the said donation in favor of the respondent be rescinded in accordance with Article 1381(4) of
the Civil Code. They further alleged that Rita was already sick and very weak when the said
Deed of Donation was supposedly executed and, thus, could not have validly given her consent
thereto.

Florante and Panfila opposed the rescission of the said donation, asserting that Article 1381(4)
of the Civil Code applies only when there is already a prior judicial decree on who between the
contending parties actually owned the properties under litigation.18

The RTC Decision

On October 20, 2005, the RTC rendered a Decision,19 the decretal portion of which reads:

Wherefore judgment is hereby rendered:

(1) declaring the existence of co-ownership over parcels nos. 1, 2, 3, 5, 7, 10, 13, 14, 16,
17, 18, 26, 29, 30, 33, 34, 35, 36, 40 and 41 described in the complaint;

(2) directing that the above mentioned parcels of land be partitioned among the heirs of
Florentino Baylon and Maximina Baylon;

(3) declaring a co-ownership on the properties of Rita Baylon namely parcels no[s]. 6,
11, 12, 20, 24, 27, 31, 32, 39 and 42 and directing that it shall be partitioned among her
heirs who are the plaintiffs and defendant in this case;

(4) declaring the donation inter vivos rescinded without prejudice to the share of Florante
Baylon to the estate of Rita Baylon and directing that parcels nos. 1 and 2 paragraph V
of the complaint be included in the division of the property as of Rita Baylon among her
heirs, the parties in this case;

(5) excluding from the co-ownership parcels nos. 20, 21, 22, 9, 43, 4, 8, 19 and 37.

Considering that the parties failed to settle this case amicably and could not agree on the
partition, the parties are directed to nominate a representative to act as commissioner to make
the partition. He shall immediately take [his] oath of office upon [his] appointment. The
commissioner shall make a report of all the proceedings as to the partition within fifteen (15)
days from the completion of this partition. The parties are given ten (10) days within which to
object to the report after which the Court shall act on the commissioner report.

SO ORDERED.20 (Emphasis ours)

The RTC held that the death of Rita during the pendency of the case, having died intestate and
without any issue, had rendered the issue of ownership insofar as parcels of land which she
claims as her own moot since the parties below are the heirs to her estate. Thus, the RTC
regarded Rita as the owner of the said 10 parcels of land and, accordingly, directed that the
same be partitioned among her heirs. Nevertheless, the RTC rescinded the donation inter vivos
of Lot No. 4709 and half of Lot No. 4706 in favor of Florante. In rescinding the said donation
inter vivos, the RTC explained that:

However, with respect to lot nos. 4709 and 4706 which [Rita] had conveyed to Florante Baylon
by way of donation inter vivos, the plaintiffs in their supplemental pleadings (sic) assailed the
same to be rescissible on the ground that it was entered into by the defendant Rita Baylon
without the knowledge and approval of the litigants [or] of competent judicial authority. The
subject parcels of lands are involved in the case for which plaintiffs have asked the Court to
partition the same among the heirs of Florentino Baylon and Maximina Elnas.

Clearly, the donation inter vivos in favor of Florante Baylon was executed to prejudice the
plaintiffs’ right to succeed to the estate of Rita Baylon in case of death considering that as
testified by Florante Baylon, Rita Baylon was very weak and he tried to give her vitamins x x x.
The donation inter vivos executed by Rita Baylon in favor of Florante Baylon is rescissible for
the reason that it refers to the parcels of land in litigation x x x without the knowledge and
approval of the plaintiffs or of this Court. However, the rescission shall not affect the share of
Florante Baylon to the estate of Rita Baylon.21

Florante sought reconsideration of the Decision dated October 20, 2005 of the RTC insofar as it
rescinded the donation of Lot No. 4709 and half of Lot No. 4706 in his favor.22 He asserted that,
at the time of Rita’s death on July 16, 2000, Lot No. 4709 and half of Lot No. 4706 were no
longer part of her estate as the same had already been conveyed to him through a donation
inter vivos three years earlier. Thus, Florante maintained that Lot No. 4709 and half of Lot No.
4706 should not be included in the properties that should be partitioned among the heirs of Rita.

On July 28, 2006, the RTC issued an Order23 which denied the motion for reconsideration filed
by Florante.

The CA Decision

On appeal, the CA rendered a Decision24 dated October 26, 2007, the dispositive portion of
which reads:

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

SO ORDERED.25
The CA held that before the petitioners may file an action for rescission, they must first obtain a
favorable judicial ruling that Lot No. 4709 and half of Lot No. 4706 actually belonged to the
estate of Spouses Baylon and not to Rita. Until then, the CA asserted, an action for rescission is
premature. Further, the CA ruled that the petitioners’ action for rescission cannot be joined with
their action for partition, accounting and damages through a mere supplemental pleading. Thus:

If Lot No. 4709 and half of Lot No. 4706 belonged to the Spouses’ estate, then Rita Baylon’s
donation thereof in favor of Florante Baylon, in excess of her undivided share therein as co-heir,
is void. Surely, she could not have validly disposed of something she did not own. In such a
case, an action for rescission of the donation may, therefore, prosper.

If the lots, however, are found to have belonged exclusively to Rita Baylon, during her lifetime,
her donation thereof in favor of Florante Baylon is valid. For then, she merely exercised her
ownership right to dispose of what legally belonged to her. Upon her death, the lots no longer
form part of her estate as their ownership now pertains to Florante Baylon. On this score, an
action for rescission against such donation will not prosper. x x x.

Verily, before plaintiffs-appellees may file an action for rescission, they must first obtain a
favorable judicial ruling that lot no. 4709 and half of lot no. 4706 actually belonged to the estate
of Spouses Florentino and Maximina Baylon, and not to Rita Baylon during her lifetime. Until
then, an action for rescission is premature. For this matter, the applicability of Article 1381,
paragraph 4, of the New Civil Code must likewise await the trial court’s resolution of the issue of
ownership.

Be that as it may, an action for rescission should be filed by the parties concerned independent
of the proceedings below. The first cannot simply be lumped up with the second through a mere
supplemental pleading.26 (Citation omitted)

The petitioners sought reconsideration27 of the Decision dated October 26, 2007 but it was
denied by the CA in its Resolution28 dated March 6, 2008.

Hence, this petition.

Issue

The lone issue to be resolved by this Court is whether the CA erred in ruling that the donation
inter vivos of Lot No. 4709 and half of Lot No. 4706 in favor of Florante may only be rescinded if
there is already a judicial determination that the same actually belonged to the estate of
Spouses Baylon.

The Court’s Ruling

The petition is partly meritorious.

Procedural Matters

Before resolving the lone substantive issue in the instant case, this Court deems it proper to
address certain procedural matters that need to be threshed out which, by laxity or otherwise,
were not raised by the parties herein.
 Misjoinder of Causes of Action

The complaint filed by the petitioners with the RTC involves two separate, distinct and
independent actions – partition and rescission. First, the petitioners raised the refusal of their
co-heirs, Florante, Rita and Panfila, to partition the properties which they inherited from
Spouses Baylon. Second, in their supplemental pleading, the petitioners assailed the donation
inter vivos of Lot No. 4709 and half of Lot No. 4706 made by Rita in favor of Florante pendente
lite.

The actions of partition and

rescission cannot be joined in a
single action.

By a joinder of actions, or more properly, a joinder of causes of action is meant the uniting of
two or more demands or rights of action in one action, the statement of more than one cause of
action in a declaration. It is the union of two or more civil causes of action, each of which could
be made the basis of a separate suit, in the same complaint, declaration or petition. A plaintiff
may under certain circumstances join several distinct demands, controversies or rights of action
in one declaration, complaint or petition.29

The objectives of the rule or provision are to avoid a multiplicity of suits where the same parties
and subject matter are to be dealt with by effecting in one action a complete determination of all
matters in controversy and litigation between the parties involving one subject matter, and to
expedite the disposition of litigation at minimum cost. The provision should be construed so as
to avoid such multiplicity, where possible, without prejudice to the rights of the litigants.30

Nevertheless, while parties to an action may assert in one pleading, in the alternative or
otherwise, as many causes of action as they may have against an opposing party, such joinder
of causes of action is subject to the condition, inter alia, that the joinder shall not include special
civil actions governed by special rules.31

Here, there was a misjoinder of causes of action. The action for partition filed by the petitioners
could not be joined with the action for the rescission of the said donation inter vivos in favor of
Florante. Lest it be overlooked, an action for partition is a special civil action governed by Rule
69 of the Rules of Court while an action for rescission is an ordinary civil action governed by the
ordinary rules of civil procedure. The variance in the procedure in the special civil action of
partition and in the ordinary civil action of rescission precludes their joinder in one complaint or
their being tried in a single proceeding to avoid confusion in determining what rules shall govern
the conduct of the proceedings as well as in the determination of the presence of requisite
elements of each particular cause of action.32

A misjoined cause of action, if not

severed upon motion of a party or
by the court sua sponte, may be
adjudicated by the court together
with the other causes of action.

Nevertheless, misjoinder of causes of action is not a ground for dismissal. Indeed, the courts
have the power, acting upon the motion of a party to the case or sua sponte, to order the
severance of the misjoined cause of action to be proceeded with separately.33 However, if there
is no objection to the improper joinder or the court did not motu proprio direct a severance, then
there exists no bar in the simultaneous adjudication of all the erroneously joined causes of
action. On this score, our disquisition in Republic of the Philippines v. Herbieto34 is instructive,
viz:

This Court, however, disagrees with petitioner Republic in this regard. This procedural lapse
committed by the respondents should not affect the jurisdiction of the MTC to proceed with and
hear their application for registration of the Subject Lots.

xxxx

Considering every application for land registration filed in strict accordance with the Property
Registration Decree as a single cause of action, then the defect in the joint application for
registration filed by the respondents with the MTC constitutes a misjoinder of causes of action
and parties. Instead of a single or joint application for registration, respondents Jeremias and
David, more appropriately, should have filed separate applications for registration of Lots No.
8422 and 8423, respectively.

Misjoinder of causes of action and parties do not involve a question of jurisdiction of the court to
hear and proceed with the case. They are not even accepted grounds for dismissal thereof.
Instead, under the Rules of Court, the misjoinder of causes of action and parties involve an
implied admission of the court’s jurisdiction. It acknowledges the power of the court, acting upon
the motion of a party to the case or on its own initiative, to order the severance of the misjoined
cause of action, to be proceeded with separately (in case of misjoinder of causes of action);
and/or the dropping of a party and the severance of any claim against said misjoined party, also
to be proceeded with separately (in case of misjoinder of parties).35 (Citations omitted)

It should be emphasized that the foregoing rule only applies if the court trying the case has
jurisdiction over all of the causes of action therein notwithstanding the misjoinder of the same. If
the court trying the case has no jurisdiction over a misjoined cause of action, then such
misjoined cause of action has to be severed from the other causes of action, and if not so
severed, any adjudication rendered by the court with respect to the same would be a nullity.

Here, Florante posed no objection, and neither did the RTC direct the severance of the
petitioners’ action for rescission from their action for partition. While this may be a patent
omission on the part of the RTC, this does not constitute a ground to assail the validity and
correctness of its decision. The RTC validly adjudicated the issues raised in the actions for
partition and rescission filed by the petitioners.

Asserting a New Cause of Action in a Supplemental Pleading

In its Decision dated October 26, 2007, the CA pointed out that the said action for rescission
should have been filed by the petitioners independently of the proceedings in the action for
partition. It opined that the action for rescission could not be lumped up with the action for
partition through a mere supplemental pleading.

We do not agree.

A supplemental pleading may raise

a new cause of action as long as it
has some relation to the original
cause of action set forth in the
original complaint.

Section 6, Rule 10 of the Rules of Court reads:

Sec. 6. Supplemental Pleadings. – Upon motion of a party the court may, upon reasonable
notice and upon such terms as are just, permit him to serve a supplemental pleading setting
forth transactions, occurrences or events which have happened since the date of the pleading
sought to be supplemented. The adverse party may plead thereto within ten (10) days from
notice of the order admitting the supplemental pleading.

In Young v. Spouses Sy,36 this Court had the opportunity to elucidate on the purpose of a
supplemental pleading. Thus:

As its very name denotes, a supplemental pleading only serves to bolster or add something to
the primary pleading. A supplement exists side by side with the original. It does not replace that
which it supplements. Moreover, a supplemental pleading assumes that the original pleading is
to stand and that the issues joined with the original pleading remained an issue to be tried in the
action. It is but a continuation of the complaint. Its usual office is to set up new facts which
justify, enlarge or change the kind of relief with respect to the same subject matter as the
controversy referred to in the original complaint.

The purpose of the supplemental pleading is to bring into the records new facts which will
enlarge or change the kind of relief to which the plaintiff is entitled; hence, any supplemental
facts which further develop the original right of action, or extend to vary the relief, are available
by way of supplemental complaint even though they themselves constitute a right of
action.37 (Citations omitted and emphasis ours)

Thus, a supplemental pleading may properly allege transactions, occurrences or events which
had transpired after the filing of the pleading sought to be supplemented, even if the said
supplemental facts constitute another cause of action.

Admittedly, in Leobrera v. Court of Appeals,38 we held that a supplemental pleading must be

based on matters arising subsequent to the original pleading related to the claim or defense
presented therein, and founded on the same cause of action. We further stressed therein that a
supplemental pleading may not be used to try a new cause of action.

However, in Planters Development Bank v. LZK Holdings and Development Corp.,39 we clarified
that, while a matter stated in a supplemental complaint should have some relation to the cause
of action set forth in the original pleading, the fact that the supplemental pleading technically
states a new cause of action should not be a bar to its allowance but only a matter that may be
considered by the court in the exercise of its discretion. In such cases, we stressed that a broad
definition of "cause of action" should be applied.

Here, the issue as to the validity of the donation inter vivos of Lot No. 4709 and half of Lot No.
4706 made by Rita in favor of Florante is a new cause of action that occurred after the filing of
the original complaint. However, the petitioners’ prayer for the rescission of the said donation
inter vivos in their supplemental pleading is germane to, and is in fact, intertwined with the
cause of action in the partition case. Lot No. 4709 and half of Lot No. 4706 are included among
the properties that were sought to be partitioned.

The petitioners’ supplemental pleading merely amplified the original cause of action, on account
of the gratuitous conveyance of Lot No. 4709 and half of Lot No. 4706 after the filing of the
original complaint and prayed for additional reliefs, i.e., rescission. Indeed, the petitioners claim
that the said lots form part of the estate of Spouses Baylon, but cannot be partitioned unless the
gratuitous conveyance of the same is rescinded. Thus, the principal issue raised by the
petitioners in their original complaint remained the same.

Main Issue: Propriety of Rescission

After having threshed out the procedural matters, we now proceed to adjudicate the substantial
issue presented by the instant petition.

The petitioners assert that the CA erred in remanding the case to the RTC for the determination
of ownership of Lot No. 4709 and half of Lot No. 4706. They maintain that the RTC aptly
rescinded the said donation inter vivos of Lot No. 4709 and half of Lot No. 4706 pursuant to
Article 1381(4) of the Civil Code.

In his Comment,40 Florante asserts that before the petitioners may file an action for rescission,
they must first obtain a favorable judicial ruling that Lot No. 4709 and half of Lot No. 4706
actually belonged to the estate of Spouses Baylon. Until then, Florante avers that an action for
rescission would be premature.

The petitioners’ contentions are well-taken.

The resolution of the instant dispute is fundamentally contingent upon a determination of

whether the donation inter vivos of Lot No. 4709 and half of Lot No. 4706 in favor of Florante
may be rescinded pursuant to Article 1381(4) of the Civil Code on the ground that the same was
made during the pendency of the action for partition with the RTC.

Rescission is a remedy to address

the damage or injury caused to the
contracting parties or third
persons.

Rescission is a remedy granted by law to the contracting parties and even to third persons, to
secure the reparation of damages caused to them by a contract, even if it should be valid, by
means of the restoration of things to their condition at the moment prior to the celebration of
said contract.41 It is a remedy to make ineffective a contract, validly entered into and therefore
obligatory under normal conditions, by reason of external causes resulting in a pecuniary
prejudice to one of the contracting parties or their creditors.42

Contracts which are rescissible are valid contracts having all the essential requisites of a
contract, but by reason of injury or damage caused to either of the parties therein or to third
persons are considered defective and, thus, may be rescinded.

The kinds of rescissible contracts, according to the reason for their susceptibility to rescission,
are the following: first, those which are rescissible because of lesion or prejudice;43 second,
those which are rescissible on account of fraud or bad faith;44 and third, those which, by special
provisions of law,45 are susceptible to rescission.46

Contracts which refer to things

subject of litigation is rescissible
pursuant to Article 1381(4) of the
Civil Code.

Contracts which are rescissible due to fraud or bad faith include those which involve things
under litigation, if they have been entered into by the defendant without the knowledge and
approval of the litigants or of competent judicial authority. Thus, Article 1381(4) of the Civil Code
provides:

Art. 1381. The following contracts are rescissible:

xxxx

(4) Those which refer to things under litigation if they have been entered into by the defendant
without the knowledge and approval of the litigants or of competent judicial authority.

The rescission of a contract under Article 1381(4) of the Civil Code only requires the
concurrence of the following: first, the defendant, during the pendency of the case, enters into a
contract which refers to the thing subject of litigation; and second, the said contract was entered
into without the knowledge and approval of the litigants or of a competent judicial authority. As
long as the foregoing requisites concur, it becomes the duty of the court to order the rescission
of the said contract.

The reason for this is simple. Article 1381(4) seeks to remedy the presence of bad faith among
the parties to a case and/or any fraudulent act which they may commit with respect to the thing
subject of litigation.

When a thing is the subject of a judicial controversy, it should ultimately be bound by whatever
disposition the court shall render. The parties to the case are therefore expected, in deference
to the court’s exercise of jurisdiction over the case, to refrain from doing acts which would
dissipate or debase the thing subject of the litigation or otherwise render the impending decision
therein ineffectual.

There is, then, a restriction on the disposition by the parties of the thing that is the subject of the
litigation. Article 1381(4) of the Civil Code requires that any contract entered into by a defendant
in a case which refers to things under litigation should be with the knowledge and approval of
the litigants or of a competent judicial authority.

Further, any disposition of the thing subject of litigation or any act which tends to render inutile
the court’s impending disposition in such case, sans the knowledge and approval of the litigants
or of the court, is unmistakably and irrefutably indicative of bad faith. Such acts undermine the
authority of the court to lay down the respective rights of the parties in a case relative to the
thing subject of litigation and bind them to such determination.

It should be stressed, though, that the defendant in such a case is not absolutely proscribed
from entering into a contract which refer to things under litigation. If, for instance, a defendant
enters into a contract which conveys the thing under litigation during the pendency of the case,
the conveyance would be valid, there being no definite disposition yet coming from the court
with respect to the thing subject of litigation. After all, notwithstanding that the subject thereof is
a thing under litigation, such conveyance is but merely an exercise of ownership.

This is true even if the defendant effected the conveyance without the knowledge and approval
of the litigants or of a competent judicial authority. The absence of such knowledge or approval
would not precipitate the invalidity of an otherwise valid contract. Nevertheless, such contract,
though considered valid, may be rescinded at the instance of the other litigants pursuant to
Article 1381(4) of the Civil Code.

Here, contrary to the CA’s disposition, the RTC aptly ordered the rescission of the donation inter
vivos of Lot No. 4709 and half of Lot No. 4706 in favor of Florante. The petitioners had
sufficiently established the presence of the requisites for the rescission of a contract pursuant to
Article 1381(4) of the Civil Code. It is undisputed that, at the time they were gratuitously
conveyed by Rita, Lot No. 4709 and half of Lot No. 4706 are among the properties that were the
subject of the partition case then pending with the RTC. It is also undisputed that Rita, then one
of the defendants in the partition case with the RTC, did not inform nor sought the approval from
the petitioners or of the RTC with regard to the donation inter vivos of the said parcels of land to
Florante.

Although the gratuitous conveyance of the said parcels of land in favor of Florante was valid, the
donation inter vivos of the same being merely an exercise of ownership, Rita’s failure to inform
and seek the approval of the petitioners or the RTC regarding the conveyance gave the
petitioners the right to have the said donation rescinded pursuant to Article 1381(4) of the Civil
Code.

Rescission under Article 1381(4) of

the Civil Code is not preconditioned
upon the judicial determination as
to the ownership of the thing
subject of litigation.

In this regard, we also find the assertion that rescission may only be had after the RTC had
finally determined that the parcels of land belonged to the estate of Spouses Baylon intrinsically
amiss. The petitioners’ right to institute the action for rescission pursuant to Article 1381(4) of
the Civil Code is not preconditioned upon the RTC’s determination as to the ownership of the
said parcels of land.

It bears stressing that the right to ask for the rescission of a contract under Article 1381(4) of the
Civil Code is not contingent upon the final determination of the ownership of the thing subject of
litigation. The primordial purpose of Article 1381(4) of the Civil Code is to secure the possible
effectivity of the impending judgment by a court with respect to the thing subject of litigation. It
seeks to protect the binding effect of a court’s impending adjudication vis-à-vis the thing subject
of litigation regardless of which among the contending claims therein would subsequently be
upheld. Accordingly, a definitive judicial determination with respect to the thing subject of
litigation is not a condition sine qua non before the rescissory action contemplated under Article
1381(4) of the Civil Code may be instituted.
Moreover, conceding that the right to bring the rescissory action pursuant to Article 1381(4) of
the Civil Code is preconditioned upon a judicial determination with regard to the thing subject
litigation, this would only bring about the very predicament that the said provision of law seeks
to obviate. Assuming arguendo that a rescissory action under Article 1381(4) of the Civil Code
could only be instituted after the dispute with respect to the thing subject of litigation is judicially
determined, there is the possibility that the same may had already been conveyed to third
persons acting in good faith, rendering any judicial determination with regard to the thing subject
of litigation illusory. Surely, this paradoxical eventuality is not what the law had envisioned.

Even if the donation inter vivos is

validly rescinded, a determination
as to the ownership of the subject
parcels of land is still necessary.

Having established that the RTC had aptly ordered the rescission of the said donation inter
vivos in favor of Florante, the issue that has to be resolved by this Court is whether there is still
a need to determine the ownership of Lot No. 4709 and half of Lot No. 4706.

In opting not to make a determination as to the ownership of Lot No. 4709 and half of Lot No.
4706, the RTC reasoned that the parties in the proceedings before it constitute not only the
surviving heirs of Spouses Baylon but the surviving heirs of Rita as well. As intimated earlier,
Rita died intestate during the pendency of the proceedings with the RTC without any issue,
leaving the parties in the proceedings before the RTC as her surviving heirs. Thus, the RTC
insinuated, a definitive determination as to the ownership of the said parcels of land is
unnecessary since, in any case, the said parcels of land would ultimately be adjudicated to the
parties in the proceedings before it.

We do not agree.

Admittedly, whoever may be adjudicated as the owner of Lot No. 4709 and half of Lot No. 4706,
be it Rita or Spouses Baylon, the same would ultimately be transmitted to the parties in the
proceedings before the RTC as they are the only surviving heirs of both Spouses Baylon and
Rita. However, the RTC failed to realize that a definitive adjudication as to the ownership of Lot
No. 4709 and half of Lot No. 4706 is essential in this case as it affects the authority of the RTC
to direct the partition of the said parcels of land. Simply put, the RTC cannot properly direct the
partition of Lot No. 4709 and half of Lot No. 4706 until and unless it determines that the said
parcels of land indeed form part of the estate of Spouses Baylon.

It should be stressed that the partition proceedings before the RTC only covers the properties
co-owned by the parties therein in their respective capacity as the surviving heirs of Spouses
Baylon. Hence, the authority of the RTC to issue an order of partition in the proceedings before
it only affects those properties which actually belonged to the estate of Spouses Baylon.

In this regard, if Lot No. 4709 and half of Lot No. 4706, as unwaveringly claimed by Florante,
are indeed exclusively owned by Rita, then the said parcels of land may not be partitioned
simultaneously with the other properties subject of the partition case before the RTC. In such
case, although the parties in the case before the RTC are still co-owners of the said parcels of
land, the RTC would not have the authority to direct the partition of the said parcels of land as
the proceedings before it is only concerned with the estate of Spouses Baylon.
WHEREFORE, in consideration of the foregoing disquisitions, the petition is PARTIALLY
GRANTED. The Decision dated October 26, 2007 issued by the Court of Appeals in CA-G.R.
CV No. 01746 is MODIFIED in that the Decision dated October 20, 2005 issued by the Regional
Trial Court, Tanjay City, Negros Oriental, Branch 43 in Civil Case No. 11657, insofar as it
decreed the rescission of the Deed of Donation dated July 6, 1997 is hereby REINSTATED.
The case is REMANDED to the trial court for the determination of the ownership of Lot No. 4709
and half of Lot No. 4706 in accordance with this Decision.

SO ORDERED.