SECOND DIVISION

[G.R. No. 189532. June 11, 2014.]

VIRGINIA S. DIO and H.S. EQUITIES, LTD. , petitioners, vs . SUBIC BAY

MARINE EXPLORATORIUM, INC., represented by its Chairman and
Chief Executive Officer, TIMOTHY DESMOND , respondents.

DECISION

PEREZ , J : p

This is a Petition for Review on Certiorari 1 pursuant to Rule 45 of the Revised Rules
of Court, assailing the 3 April 2009 Order 2 of the Regional Trial Court (RTC) of Balanga
City, Bataan, on pure question of law. In its assailed Order, the RTC denied the motion led
by petitioners to set their counterclaims for hearing on the ground that the main case was
already dismissed with finality by the Court of Appeals in CA-G.R. CV No. 87117.
In an Order 3 dated 26 August 2009, the RTC refused to reconsider its earlier
disposition.
The Facts
Petitioner H.S. Equities, Ltd., (HSE) is a foreign corporation duly organized and
existing under the laws of the British Virgin Islands, with registered address at Akara
Building, 24 De Castro Street, Wickhams Cay I, Road Town, Tortola, British Virgin Islands. It
entered into an isolated transaction subject of the instant case. It is represented in this
action by petitioner Virginia S. Dio (Dio).
Respondent Subic Bay Marine Exploratorium, Inc. (SBME) is a domestic corporation,
duly organized and existing under the Philippine laws and is represented in this action by
its Chief Executive Officer, respondent Timothy Desmond (Desmond).
In 2002, SBME decided to expand its business by operating a beach resort inside
the property administered by the Subic Bay Metropolitan Authority (SBMA). For the
business venture to take off, SBME needed to solicit investors who are willing to infuse
funds for the construction and operation of the beach resort project. HSE (formerly known
as Westdale Assets Limited) thru its authorized director, Dio, agreed to invest the amount
of US$2,500,000.00 with SBME by purchasing 750,000 common shares with a par value of
P100 per share from the increase in its authorized capital stock. The agreement was
reduced into writing wherein HSE, in order to protect its interest in the company, was
afforded minority protection rights such as the right to appoint a member of the board of
directors and the right to veto certain board resolutions. After HSE initially paid
US$200,000.00 for its subscription, it refused to further lay out money for the expansion
project of the SBME due to the alleged mismanagement in the handling of corporate
funds. TCIEcH

Consequently, SBME initiated an intra-corporate dispute before the RTC of Balanga

City, Bataan against petitioners HSE and Dio. 4 Before petitioners could le their answer to
the complaint, respondents impleaded its Corporate Secretary, Atty. Winston Ginez, as
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 additional defendant. In their Amended Complaint 5 docketed as Civil Case No. 7572,
SBME essentially alleged that HSE unjustly refused to pay the balance of its unpaid
subscription effectively jeopardizing the company's expansion project. Apart from their
refusal to honor their obligation under the subscription contract, it was further alleged by
SBME that Dio tried to dissuade local investors and nancial institutions from putting in
capital to SBME by imputing defamatory acts against Desmond. To protect the interest of
the corporation and its stockholders, SBME sought that petitioners be enjoined from
committing acts inimical to the interest of the company.
To refute the claims of respondents, petitioners maintained in their Answer with
Compulsory Counterclaim 6 that it would be highly preposterous for them to dissuade
investors and banks from putting in money to SBME considering that HSE and Dio are
stakeholders of the company with substantial investments therein. In turn, petitioners
countered that their reputation and good name in the business community were tarnished
as a result of the ling of the instant complaint, and thus prayed that they be indemni ed in
the amount of US$2,000,000.00 as moral damages. Constrained to litigate to protect their
rights, petitioners asked that they be indemni ed in the amount of P1,000,000.00 in
litigation expenses. Petitioners likewise sought to recover their investment of
US$1,500,000.00 since they were purportedly inveigled by Desmond into putting in money
to SBME under the pretext that they will be accorded with minority protection rights. It was
alleged that after the filing of the instant complaint, Desmond, in collusion with other Board
of Directors of SBME, managed to unjustly deny HSE and Dio their rights under the
Subscription Agreement. To curb similar socially abhorrent actions, petitioners prayed that
SBME and its Board of Directors, namely, Desmond, John Corcoran, Gaile Laule and
Gregorio Magdaraog, be jointly and severally held liable to pay exemplary damages in the
amount of US$2,000,000.00.
After petitioners led their Answer with Compulsory Counterclaim, the RTC, instead
of setting the case for pre-trial, issued an Order 7 dated 15 August 2005 motu proprio
dismissing Civil Case No. 7572. The dismissal was grounded on the defective certi cate
of non-forum shopping which was signed by Desmond without speci c authority from the
Board of Directors of SBME.
Armed with a board resolution speci cally authorizing Desmond to sign the
certi cate of non-forum shopping on behalf of SBME, respondents moved that Civil Case
No. 7572 be reinstated and further proceedings thereon be conducted. A copy of such
authority was attached by respondents to their Motion for Reconsideration.
For lack of merit, RTC denied respondents' motion and a rmed the dismissal in an
Order 8 dated 22 September 2005. In refusing to reinstate respondents' complaint, the
court a quo ruled that the belated submission of a board resolution evidencing Desmond's
authority to bind the corporation did not cure the initial defect in the complaint and
declared that strict compliance with procedural rules is enjoined for the orderly
administration of justice. AcHCED

Aggrieved by the lower court's refusal to reinstate their complaint, respondents

elevated the matter before the Court of Appeals assailing the propriety of the 15 August
2005 and 22 September 2005 RTC Orders via Petition for Review which was docketed as
CA-G.R. CV No. 87117.
For failure of the respondents to le their appellants' brief, the appellate court
proceeded to dismiss CA-G.R. CV No. 87117 and considered the case closed and
terminated in its Resolution 9 dated 2 January 2007.
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 After respondents failed to seasonably move for the reconsideration of the
aforementioned Resolution, the dismissal of CA-G.R. CV No. 87117 became nal and
executory, as shown in the Entry of Judgment 10 dated 3 May 2007.
The procedural incidents before the appellate court having been resolved with
nality, petitioners went back to the RTC to le a motion to set their counterclaims for
hearing 1 1 which was opposed by the respondents on the ground that the ling of the
compulsory counterclaims was not accompanied by payment of the required docket fees
precluding the court from acquiring jurisdiction over the case. 12
Acting on the motions led by the opposing parties, the RTC, in an Order 13 dated 3
April 2009 granted the motion of the respondents, thereby directing the dismissal of
petitioners' counterclaims but not on the ground of non-payment of docket fees. In
disallowing petitioners' counterclaims to proceed independently of respondents'
complaint, the lower court pointed out that in view of the dismissal of the main case, which
has already been a rmed with nality by the appellate court, it has already lost its
jurisdiction to act on petitioners' counterclaim, the compulsory counterclaim being merely
ancillary to the principal controversy. ICTcDA

In an Order 14 dated 26 August 2009, the RTC refused to reconsider its earlier
disposition.
Petitioners led this instant Petition for Review on Certiorari 15 on pure question of
law seeking the reversal of the 3 April 2009 and 26 August 2009 RTC Orders on the ground
that:
THE TRIAL COURT COMMITTED AN ERROR OF LAW WHEN IT REFUSED
TO SET [PETITIONERS'] COUNTERCLAIMS FOR HEARING ON THE GROUND THAT
THE CASE WAS DEEMED "CLOSED AND TERMINATED" BY THE COURT OF
APPEALS AFTER THE LATTER DISMISSED RESPONDENTS' APPEAL BECAUSE
OF THEIR FAILURE TO FILE THEIR APPELLANTS' BRIEF. 16

The Court's Ruling

Petitioners argue that despite the dismissal of the main case, the counterclaim may
still remain for independent adjudication under Section 6, Rule 16 of the Revised Rules of
Court. 17 Petitioners pointed out that while the dismissal of respondents' complaint is a
confirmation of Desmonds' lack of legal personality to file the case, this does not, however,
mean that they also do not have the quali cation to pursue their counterclaim. To fault
petitioners for the fatal in rmity in the respondents' complaint would not only work
injustice to the former but would result to an absurd situation where the fate of their
counterclaims is placed entirely in the hands of the respondents.
For their part, respondents posit that, in directly assailing the adverse RTC Orders
before the Court, petitioners erroneously availed themselves of an erroneous remedy
arguing that this petition should have been initially led with the appellate court. By
seeking relief directly from the Court, petitioners ignored the judicial hierarchy warranting
the peremptory dismissal of their petition. Unless special and important reasons were
clearly and speci cally set out in the petition, and in this case it was not, a direct invocation
of this Court's original jurisdiction may not be allowed. ASDTEa

The established policy of strict observance of the judicial hierarchy of courts, as a

rule, requires that recourse must rst be made to the lower-ranked court exercising
concurrent jurisdiction with a higher court. A regard for judicial hierarchy clearly indicates
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 that petitions for the issuance of extraordinary writs against rst level courts should be
filed in the RTC and those against the latter should be filed in the Court of Appeals. The rule
is not iron-clad, however, as it admits of certain exceptions. 18
Thus, a strict application of the rule is unnecessary when cases brought before the
appellate courts do not involve factual but purely legal questions. 19 In fact, Rule 41,
Section 2 (c) 2 0 of the Revised Rules of Court provides that a decision or order of the RTC
may as it was done in the instant case, be appealed to the Supreme Court by petition for
review on certiorari under Rule 45, provided that such petition raises only questions of law.
A question of law exists when the doubt or controversy concerns the correct
application of law or jurisprudence to a certain set of facts; or when the issue does not call
for the examination of the probative value of the evidence presented, the truth or falsehood
of facts being admitted. A question of fact exists when the doubt or difference arises as to
the truth or falsehood of facts or when the query invites calibration of the whole evidence
considering mainly the credibility of the witnesses, the existence and relevancy of speci c
surrounding circumstances, as well as their relation to each other and to the whole, and the
probability of the whole situation. 21 Thus, the test of whether a question is one of law or
of fact is not the appellation given to such question by the party raising the same; rather, it
is whether the appellate court can determine the issue raised without reviewing or
evaluating the evidence, in which case, it is a question of law; otherwise it is a question of
fact. 22 CacEID

Petitioners here raise the solitary issue of the propriety of the dismissal of their
counterclaim on the basis of the reasoning of the lower court that the counterclaim derives
its jurisdictional support from the complaint which has already been dismissed.
Petitioners maintain that the court a quo erred in arriving at the legal conclusion that the
counterclaim can no longer stand for independent adjudication after the main case was
already dismissed with nality. In order to resolve this issue, the Court need only to look
into the pleadings, depositions, admissions, and a davits submitted by the respective
parties without going into the truth or falsity of such documents. Consequently, the
petitioners' remedy for assailing the correctness of the dismissal of their counterclaims,
involving as it does a pure question of law, indeed lies with this Court.
Now to the issue of the propriety of the dismissal of the counterclaim.
The dismissal of the complaint resulted from respondents' failure to append to the
complaint a copy of the board resolution authorizing Desmond to sign the certi cate of
non-forum shopping on behalf of SBME. The subsequent dismissal of the counterclaim, in
turn, erroneously proceeded from the ratio that since the main action has already been
dismissed with nality by the appellate court, the lower court has lost its jurisdiction to
grant any relief under the counterclaim. AEDISC

In the signi cant case of Pinga v. Heirs of German Santiago , 23 this Court speaking
through Justice Dante Tinga, resolved the nagging question as to whether or not the
dismissal of the complaint carries with it the dismissal of the counterclaim. Putting to rest
the remaining confusion occasioned by Metals Engineering Resources Corp. v. Court of
Appeals 24 and BA Finance Corporation v. Co , 25 the Court articulated that, in light of the
effectivity of the 1997 Rules of Civil Procedure, the correct and prevailing doctrine is as
follows:
To be certain, when the Court promulgated the 1997 Rules of Civil
Procedure, including the amended Rule 17, those previous jural doctrines that
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 were inconsistent with the new rules incorporated in the 1997 Rules of Civil
Procedure were implicitly abandoned insofar as incidents arising after the
effectivity of the new procedural rules on 1 July 1997. BA Finance, or even the
doctrine that a counterclaim may be necessarily dismissed along with the
complaint, clearly con icts with the 1997 Rules of Civil Procedure. The
abandonment of BA Finance as doctrine extends as far back as 1997, when the
Court adopted the new Rules of Civil Procedure. If, since then, such abandonment
has not been a rmed in jurisprudence, it is only because no proper case has
arisen that would warrant express con rmation of the new rule. That opportunity
is here and now, and we thus rule that the dismissal of a complaint due to fault of
the plaintiff is without prejudice to the right of the defendant to prosecute any
pending counterclaims of whatever nature in the same or separate action. We
confirm that BA Finance and all previous rulings of the Court that are inconsistent
with this present holding are now abandoned.

xxx xxx xxx

Thus, the present rule embodied in Sections 2 and 3 of Rule 17 ordains a
more equitable disposition of the counterclaims by ensuring that any judgment
thereon is based on the merit of the counterclaim itself and not on the survival of
the main complaint. Certainly, if the counterclaim is palpably without merit or
suffers jurisdictional aws which stand independent of the complaint, the trial
court is not precluded from dismissing it under the amended rules, provided that
the judgment or order dismissing the counterclaim is premised on those defects.
At the same time, if the counterclaim is justi ed, the amended rules now
unequivocally protect such counterclaim from peremptory dismissal by reason of
the dismissal of the complaint. 26

Reviewing the vacated position, in Metals Engineering Resources Corp., severance of

causes of action was not permitted in order to prevent circuity of suits and to avert the
possibility of inconsistent rulings based on the same set of facts, viz.: SCEDaT

For all intents and purposes, such proposition runs counter to the nature of
a compulsory counterclaim in that it cannot remain pending for independent
adjudication by the court. This is because a compulsory counterclaim is auxiliary
to the proceeding in the original suit and derives its jurisdictional support
therefrom, inasmuch as it arises out of or is necessarily connected with the
transaction or occurrence that is the subject matter of the complaint. It follows
that if the court does not have jurisdiction to entertain the main action of the case
and dismisses the same, then the compulsory counterclaim, being ancillary to the
principal controversy, must likewise be dismissed since no jurisdiction remained
for any grant of relief under the counterclaim.

The aforementioned doctrine is in consonance with the primary objective

of a counterclaim which is to avoid and prevent circuity of action by allowing the
entire controversy between the parties to be litigated and nally determined in one
action, wherever this can be done with entire justice to all parties before the court.
The philosophy of the rule is to discourage multiplicity of suits. It will be observed
that the order of the trial court allowing herein private respondent to proceed with
the presentation of his evidence in support of the latter's counterclaim is
repugnant to the very purpose and intent of the rule on counterclaims. 27

In BA Finance Corporation, we likewise refused to entertain the compulsory

counterclaim after the trial court lost its jurisdiction in the main case, thus:

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

Thus, it necessarily follows that if the trial court no longer possesses

jurisdiction to entertain the main action of the case, as when it dismisses the
same, then the compulsory counterclaim being ancillary to the principal
controversy, must likewise be similarly dismissed since no jurisdiction remains for
the grant of any relief under the counterclaim. 28 HEDSCc

As the rule now stands, the nature of the counterclaim notwithstanding, the
dismissal of the complaint does not ipso jure result in the dismissal of the counterclaim,
and the latter may remain for independent adjudication of the court, provided that such
counterclaim, states a su cient cause of action and does not labor under any in rmity
that may warrant its outright dismissal. Stated differently, the jurisdiction of the court over
the counterclaim that appears to be valid on its face, including the grant of any relief
thereunder, is not abated by the dismissal of the main action. The court's authority to
proceed with the disposition of the counterclaim independent of the main action is
premised on the fact that the counterclaim, on its own, raises a novel question which may
be aptly adjudicated by the court based on its own merits and evidentiary support.
In Perkin Elmer Singapore Pte Ltd. v. Dakila Trading Corporation , 29 a case on all
fours with the present one, we expounded our ruling in Pinga and pointed out that the
dismissal of the counterclaim due to the fault of the plaintiff is without prejudice to the
right of the defendant to prosecute any pending counterclaims of whatever nature in the
same or separate action, thus: STcADa

Based on the aforequoted ruling of the Court, if the dismissal of the

complaint somehow eliminates the cause of the counterclaim, then the
counterclaim cannot survive. Conversely, if the counterclaim itself states
su cient cause of action then it should stand independently of and survive the
dismissal of the complaint. Now, having been directly confronted with the
problem of whether the compulsory counterclaim by reason of the unfounded suit
may prosper even if the main complaint had been dismissed, we rule in the
affirmative .

It bears to emphasize that petitioner's counterclaim against respondent is

for damages and attorney's fees arising from the unfounded suit. While
respondent's Complaint against petitioner is already dismissed, petitioner may
have very well already incurred damages and litigation expenses such as
attorney's fees since it was forced to engage legal representation in the
Philippines to protect its rights and to assert lack of jurisdiction of the courts over
its person by virtue of the improper service of summons upon it. Hence, the cause
of action of petitioner's counterclaim is not eliminated by the mere dismissal of
respondent's complaint. 3 0 (Emphasis theirs).

Once more, we allow the counterclaim of the petitioners to proceed independently

of the complaint of the respondents.
WHEREFORE , premises considered, the petition is GRANTED . The assailed RTC
Orders dated 3 April 2009 and 26 August 2009 are hereby REVERSED and SET ASIDE .
The case is REMANDED to the Regional Trial Court of Balanga City, Bataan for further
proceedings, on the matter of petitioners Virginia S. Dio and H.S. Equities, Ltd.'s
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 counterclaims. No pronouncement as to costs.
SO ORDERED .
Carpio, Brion, Del Castillo and Perlas-Bernabe, JJ., concur.

Footnotes
1. Rollo, pp. 36-51.

2. Presided by Judge Remigio M. Escalada, Jr. Id. at 55-57.

3. Id. at 80-81.
4. Id. at 82-87.
5. Id. at 88-96.
6. Id. at 116-161.

7. Id. at 162-163.
8. Id. at 164-166.
9. Id. at 179-180.
10. Id. at 197.

11. Id. at 11-24.

12. Id. at 181-184.
13. Id. at 55-57.
14. Id. at 80-81.
15. Id. at 36-51.

16. Id. at 43.

17. Section 6. Pleading grounds as affirmative defenses. — If no motion to dismiss has been
filed, any of the grounds for dismissal provided for in this Rule may be pleaded as an
affirmative defense in the answer and, in the discretion of the court, a preliminary
hearing may be had thereon as if a motion to dismiss had been filed.
The dismissal of the complaint under this section shall be without prejudice to the prosecution
in the same or separate action of the counterclaim pleaded in the answer.
18. Bonifacio v. RTC of Makati, Branch 149, G.R. No. 184800, 5 May 2010, 620 SCRA 268, 277.
19. Id.

20. Section 2. Modes of Appeal. — . . . (c) Appeal by certiorari. — In all cases where only
questions of law are raised or involved, the appeal shall be to the Supreme Court by
petition for review on certiorari in accordance with Rule 45.
21. Binayug v. Ugaddan, G.R. No. 181623, 5 December 2012, 687 SCRA 260, 271-272.
22. Republic v. Malabanan, G.R. No. 169067, 6 October 2010, 632 SCRA 338, 345.

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 23. 526 Phil. 868 (2006).
24. G.R. No. 95631, 28 October 1991, 203 SCRA 273.

25. G.R. No. 105751, 30 June 1993, 224 SCRA 163.

26. Pinga v. Heirs of German Santiago, supra note 23 at 887-893.
27. Supra note 24 at 282-283.
28. Supra note 25 at 167.
29. 556 Phil. 822 (2007).

30. Id. at 850-851.

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