Republic of the Philippines

SUPREME COURT
Manila

G.R. No. 164205 September 3, 2009

OLDARICO S. TRAVEO, ROVEL A. GENELSA, RUEL U. VILLARMENTE, ALFREDO A.

PANILAGAO, CARMEN P. DANILA, ELIZABETH B. MACALINO, RAMIL P. ALBITO, REYNALDO
A. LADRILLO, LUCAS G. TAMAYO, DIOSDADO A. AMORIN, RODINO C. VASQUEZ, GLORIA A.
FELICANO, NOLE E. FERMILAN, JOSELITO B. RENDON, CRISTETA D. CAA, EVELYN D.
ARCENAL and JEORGE M. NONO, Petitioners,
vs.
BOBONGON BANANA GROWERS MULTI-PURPOSE COOPERATIVE, TIMOG AGRICULTURAL
CORPORATION, DIAMOND FARMS, INC., and DOLE ASIA PHILIPPINES, Respondents.

DECISION

CARPIO MORALES, J.:

By the account of petitioner Oldarico Traveo and his 16 co-petitioners, in 1992, respondent Timog
Agricultural Corporation (TACOR) and respondent Diamond Farms, Inc. (DFI) hired them to work at
a banana plantation at Bobongon, Santo Tomas, Davao Del Norte which covered lands previously
planted with rice and corn but whose owners had agreed to convert into a banana plantation upon
being convinced that TACOR and DFI could provide the needed capital, expertise, and equipment.
Petitioners helped prepare the lands for the planting of banana suckers and eventually carried out
the planting as well.1

Petitioners asseverated that while they worked under the direct control of supervisors assigned by
TACOR and DFI, these companies used different schemes to make it appear that petitioners were
hired through independent contractors, including individuals, unregistered associations, and
cooperatives; that the successive changes in the names of their employers notwithstanding, they
continued to perform the same work under the direct control of TACOR and DFI supervisors; and
that under the last scheme adopted by these companies, the nominal individual contractors were
required to, as they did, join a cooperative and thus became members of respondent Bobongon
Banana Growers Multi-purpose Cooperative (the Cooperative).2

Continued petitioners: Sometime in 2000, above-named respondents began utilizing harassment

tactics to ease them out of their jobs. Without first seeking the approval of the Department of Labor
and Employment (DOLE), they changed their compensation package from being based on a daily
rate to a pakyawan rate that depended on the combined productivity of the "gangs" they had been
grouped into. Soon thereafter, they stopped paying their salaries, prompting them to stop working.3

One after another, three separate complaints for illegal dismissal were filed by petitioners,
individually and collectively, with the National Labor Relations Commission (NLRC) against said
respondents including respondent Dole Asia Philippines as it then supposedly owned TACOR,4 for
unpaid salaries, overtime pay, 13th month pay, service incentive leave pay, damages, and attorneys
fees.5

DFI answered for itself and TACOR, which it claimed had been merged with it and ceased to exist as
a corporation. Denying that it had engaged the services of petitioners,6 DFI alleged that during the
corporate lifetime of TACOR, it had an arrangement with several landowners in Santo Tomas,
Davao Del Norte whereby TACOR was to extend financial and technical assistance to them for the
development of their lands into a banana plantation on the condition that the bananas produced
therein would be sold exclusively to TACOR; that the landowners worked on their own farms and
hired laborers to assist them; that the landowners themselves decided to form a cooperative in order
to better attain their business objectives; and that it was not in a position to state whether petitioners
were working on the banana plantation of the landowners who had contracted with TACOR.7 a1f

The Cooperative failed to file a position paper despite due notice, prompting the Labor Arbiter to
consider it to have waived its right to adduce evidence in its defense.

Nothing was heard from respondent Dole Asia Philippines.

By consolidated Decision dated October 30, 2002,8 the Labor Arbiter, found respondent Cooperative
guilty of illegal dismissal. It dropped the complaints against DFI, TACOR and Dole Asia Philippines.
Thus it disposed:

WHEREFORE, judgment is hereby rendered:

1. Declaring respondent Bobongon Banana Growers Multi-purpose Cooperative guilty of

illegal dismissal;

2. Ordering respondent Bobongon Banana Growers Multi-purpose Cooperative to pay

complainants full backwages from the time of their illegal dismissal up to this promulgation,
to be determined during the execution stage;

3. Ordering respondent Bobongon Banana Growers Multi-purpose Cooperative to reinstate

complainants to their former positions without loss of seniority rights and if not possible, to
pay them separation pay equivalent to 1/2 month pay for every year of service;

4. Ordering respondent Bobongon Banana Grower Cooperative [sic] to pay 10% of the total
award as Attorneys fees;

5. All other respondents are hereby dropped as party-respondents for lack of merit.
(Underscoring supplied)

In finding for petitioners, the Labor Arbiter relied heavily on the following Orders submitted by DFI
which were issued in an earlier case filed with the DOLE, viz: (1) Order dated July 11, 1995 of the
Director of DOLE Regional Office No. XI declaring the Cooperative as the employer of the 341
workers in the farms of its several members; (2) Order dated December 17, 1997 of the DOLE
Secretary affirming the Order dated July 11, 1995 of the Director of DOLE Regional Office No. XI;
and (3) Order dated June 23, 1998 of the DOLE Secretary denying the Cooperatives Motion for
Reconsideration.

On partial appeal to the NLRC, petitioners questioned the Labor Arbiters denial of their money
claims and the dropping of their complaints against TACOR, DFI, and Dole Asia Philippines.

By Resolution dated July 30, 2003,9 the NLRC sustained the Labor Arbiters ruling that the employer
of petitioners is the Cooperative, there being no showing that the earlier mentioned Orders of the
DOLE Secretary had been set aside by a court of competent jurisdiction. It partially granted
petitioners appeal, however, by ordering the Cooperative to pay them their unpaid wages, wage
differentials, service incentive leave pay, and 13th month pay. It thus remanded the case to the
Labor Arbiter for computation of those awards.
Their Motion for Reconsideration having been denied by Resolution of September 30,
2003,10 petitioners appealed to the Court of Appeals via certiorari.11

By Resolution dated February 20, 2004,12 the appellate court dismissed petitioners petition for
certiorari on the ground that the accompanying verification and certification against forum shopping
was defective, it having been signed by only 19 of the 22 therein named petitioners. Their Motion for
Reconsideration having been denied by Resolution of May 13, 2004,13 petitioners lodged the present
Petition for Review on Certiorari.

Petitioners posit that the appellate court erred in dismissing their petition on a mere technicality as it
should have, at most, dismissed the petition only with respect to the non-signing petitioners.

Dwelling on the merits of the case, petitioners posit that the Labor Arbiter and the NLRC disregarded
evidence on record showing that while the Cooperative was their employer on paper, the other
respondents exercised control and supervision over them; that the Cooperative was a labor-only
contractor; and that the Orders of the DOLE Secretary relied upon by the Labor Arbiter and the
NLRC are not applicable to them as the same pertained to a certification election case involving
different parties and issues.14

DFI, commenting for itself and TACOR, maintains that, among other things, it was not the employer
of petitioners; and that it cannot comment on their money claims because no evidence was
submitted in support thereof.15

It appears that respondent Cooperative had been dissolved.16

As respondent Dole Asia Philippines failed to file a comment, the Court, by Resolution of November
29, 2006,17required it to (1) show cause why it should not be held in contempt for its failure to heed
the Courts directive, and (2) file the required comment, within 10 days from notice.

Dole Philippines, Inc. (DPI) promptly filed an Urgent Manifestation18 stating that, among other things,
while its division located in Davao City received the Courts Resolution directing Dole Asia
Philippines to file a comment on the present petition, DPI did not file a comment as the directive was
addressed to "Dole Asia Philippines", an entity which is not registered at the Securities and
Exchange Commission.

Commenting on DPIs Urgent Manifestation, petitioners contend that DPI cannot be allowed to take
advantage of their lack of knowledge as to its exact corporate name, DPI having raised the matter
for the first time before this Court notwithstanding its receipt of all pleadings and court processes
from the inception of this case.19

Upon review of the records, the Court finds that DPI never ever participated in the proceedings
despite due notice. Its posturing, therefore, that the court processes it received were addressed to
"Dole Asia Philippines," a non-existent entity, does not lie. That DPI is the intended respondent,
there is no doubt.

Respecting the appellate courts dismissal of petitioners appeal due to the failure of some of them to
sign the therein accompanying verification and certification against forum-shopping, the Courts
guidelines for the bench and bar in Altres v. Empleo,20 which were culled "from jurisprudential
pronouncements," are instructive:
For the guidance of the bench and bar, the Court restates in capsule form the jurisprudential
pronouncements already reflected above respecting non-compliance with the requirements on, or
submission of defective, verification and certification against forum shopping:

1) A distinction must be made between non-compliance with the requirement on or

submission of defective verification, and non-compliance with the requirement on or
submission of defective certification against forum shopping.

2) As to verification, non-compliance therewith or a defect therein does not necessarily

render the pleading fatally defective. The court may order its submission or correction or act
on the pleading if the attending circumstances are such that strict compliance with the Rule
may be dispensed with in order that the ends of justice may be served thereby.

3) Verification is deemed substantially complied with when one who has ample knowledge to
swear to the truth of the allegations in the complaint or petition signs the verification, and
when matters alleged in the petition have been made in good faith or are true and correct.

4) As to certification against forum shopping, non-compliance therewith or a defect therein,

unlike in verification, is generally not curable by its subsequent submission or correction
thereof, unless there is a need to relax the Rule on the ground of "substantial compliance" or
presence of "special circumstances or compelling reasons."

5) The certification against forum shopping must be signed by all the plaintiffs or petitioners
in a case; otherwise, those who did not sign will be dropped as parties to the case. Under
reasonable or justifiable circumstances, however, as when all the plaintiffs or petitioners
share a common interest and invoke a common cause of action or defense, the signature of
only one of them in the certification against forum shopping substantially complies with the
Rule.

6) Finally, the certification against forum shopping must be executed by the party-pleader,
not by his counsel. If, however, for reasonable or justifiable reasons, the party-pleader is
unable to sign, he must execute a Special Power of Attorney designating his counsel of
record to sign on his behalf. (Emphasis and underscoring supplied)

The foregoing restated pronouncements were lost in the challenged Resolutions of the appellate
court. Petitioners contention that the appellate court should have dismissed the petition only as to
the non-signing petitioners or merely dropped them as parties to the case is thus in order.

Instead of remanding the case to the appellate court, however, the Court deems it more practical to
decide the substantive issue raised in this petition so as not to further delay the disposition of this
case.21 And it thus resolves to deviate as well from the general rule that factual questions are not
entertained in petitions for review on certiorari of the appellate courts decisions in order to write finis
to this protracted litigation.

The sole issue is whether DFI (with which TACOR had been merged) and DPI should be held
solidarily liable with the Cooperative for petitioners illegal dismissal and money claims.

The Labor Code and its Implementing Rules empower the Labor Arbiter to be the trier of facts in
labor cases.22Much reliance is thus placed on the Arbiters findings of fact, having had the
opportunity to discuss with the parties and their witnesses the factual matters of the case during the
conciliation phase.23 Just the same, a review of the records of the present case does not warrant a
conclusion different from the Arbiters, as affirmed by the NLRC, that the Cooperative is the
employer of petitioners.

To be sure, the matter of whether the Cooperative is an independent contractor or a labor-only

contractor may not be used to predicate a ruling in this case. Job contracting or subcontracting
refers to an arrangement whereby a principal agrees to farm out with a contractor or subcontractor
the performance of a specific job, work or service within a definite or predetermined period,
regardless of whether such job, work or service is to be performed or completed within or outside the
premises of the principal.24 The present case does not involve such an arrangement.

DFI did not farm out to the Cooperative the performance of a specific job, work, or service. Instead, it
entered into a Banana Production and Purchase Agreement25 (Contract) with the Cooperative, under
which the Cooperative would handle and fund the production of bananas and operation of the
plantation covering lands owned by its members in consideration of DFIs commitment to provide
financial and technical assistance as needed, including the supply of information and equipment in
growing, packing, and shipping bananas. The Cooperative would hire its own workers and pay their
wages and benefits, and sell exclusively to DFI all export quality bananas produced that meet the
specifications agreed upon.

To the Court, the Contract between the Cooperative and DFI, far from being a job contracting
arrangement, is in essence a business partnership that partakes of the nature of a joint
venture.26 The rules on job contracting are, therefore, inapposite. The Court may not alter the
intention of the contracting parties as gleaned from their stipulations without violating the autonomy
of contracts principle under Article 1306 of the Civil Code which gives the contracting parties the
utmost liberality and freedom to establish such stipulations, clauses, terms and conditions as they
may deem convenient, provided they are not contrary to law, morals, good custom, public order or
public policy.

Petitioners claim of employment relationship with the Cooperatives herein co-respondents must be
assessed on the basis of four standards, viz: (a) the manner of their selection and engagement; (b)
the mode of payment of their wages; (c) the presence or absence of the power of dismissal; and (d)
the presence or absence of control over their conduct. Most determinative among these factors is
the so-called "control test."27

There is nothing in the records which indicates the presence of any of the foregoing elements of an
employer-employee relationship.

The absence of the first requisite, which refers to selection and engagement, is shown by DFIs total
lack of knowledge on who actually were engaged by the Cooperative to work in the banana
plantation. This is borne out by the Contract between the Cooperative and DFI, under which the
Cooperative was to hire its own workers. As TACOR had been merged with DFI, and DPI is merely
alleged to have previously owned TACOR, this applies to them as well. Petitioners failed to prove
the contrary. No employment contract whatsoever was submitted to substantiate how petitioners
were hired and by whom.

On the second requisite, which refers to the payment of wages, it was likewise the Cooperative that
paid the same. As reflected earlier, under the Contract, the Cooperative was to handle and fund the
production of bananas and operation of the plantation.28 The Cooperative was also to be responsible
for the proper conduct, safety,benefits, and general welfare of its members and workers in the
plantation.29
As to the third requisite, which refers to the power of dismissal, and the fourth requisite, which refers
to the power of control, both were retained by the Cooperative. Again, the Contract stipulated that
the Cooperative was to be responsible for the proper conduct and general welfare of its members
and workers in the plantation.

The crucial element of control refers to the authority of the employer to control the employee not only
with regard to the result of the work to be done, but also to the means and methods by which the
work is to be accomplished.30 While it suffices that the power of control exists, albeit not actually
exercised, there must besome evidence of such power. In the present case, petitioners did not
present any.

There being no employer-employee relationship between petitioners and the Cooperatives co-
respondents, the latter are not solidarily liable with the Cooperative for petitioners illegal dismissal
and money claims.

While the Court commiserates with petitioners on their loss of employment, especially now that the
Cooperative is no longer a going concern, it cannot simply, by default, hold the Cooperatives co-
respondents liable for their claims without any factual and legal justification therefor. The social
justice policy of labor laws and the Constitution is not meant to be oppressive of capital.

En passant, petitioners are not precluded from pursuing any available remedies against the former
members of the defunct Cooperative as their individual circumstances may warrant.

WHEREFORE, the petition is DISMISSED.

SO ORDERED.

CONCHITA CARPIO MORALES

Associate Justice

WE CONCUR:
 Republic of the Philippines
SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 158401 January 28, 2008

PHILIPPINE PORTS AUTHORITY, petitioner,

vs.
WILLIAM GOTHONG & ABOITIZ (WG&A), INC., respondent.

DECISION

AUSTRIA-MARTINEZ, J.:

This resolves the Petition for Review on Certiorari filed by the Philippine Ports Authority (petitioner)
seeking the reversal of the Decision1 of the Court of Appeals (CA) promulgated on October 24, 2002
and its Resolution dated May 15, 2003.

The antecedent facts are accurately narrated by the CA as follows:

Petitioner William Gothong & Aboitiz, Inc. (WG&A for brevity), is a duly organized domestic
corporation engaged in the shipping industry. Respondent Philippine Ports Authority (PPA for
brevity), upon the other hand, is a government-owned and controlled company created and
existing by virtue of the provisions of P.D. No. 87 and mandated under its charter to operate
and administer the country's sea port and port facilities.

After the expiration of the lease contract of Veterans Shipping Corporation over the Marine
Slip Way in the North Harbor on December 31, 2000, petitioner WG&A requested
respondent PPA for it to be allowed to lease and operate the said facility. Thereafter, then
President Estrada issued a memorandum dated December 18, 2000 addressed to the
Secretary of the Department of Transportation and Communication (DOTC) and the General
Manager of PPA, stating to the effect that in its meeting held on December 13, 2000, the
Economic Coordinating Council (ECC) has approved the request of petitioner WG&A to
lease the Marine Slip Way from January 1 to June 30, 2001 or until such time that
respondent PPA turns over its operations to the winning bidder for the North Harbor
Modernization Project.

Pursuant to the said Memorandum, a Contract of Lease was prepared by respondent PPA
containing the following terms:

1. The lease of the area shall take effect on January 1 to June 30, 2001 or until such
time that PPA turns over its operation to the winning bidder for the North Harbor
modernization;

2. You shall pay a monthly rental rate of P12.15 per square meter or an aggregate
monthly rental amount of P886,950.00;

3. All structures/improvements introduced in the leased premises shall be turned

over to PPA;
 4. Water, electricity, telephone and other utility expenses shall be for the account of
William, Gothong & Aboitiz, Inc.;

5. Real Estate tax/insurance and other government dues and charges shall be borne
by WG&A.

The said contract was eventually conformed to and signed by the petitioner company,
through its President/Chief Executive Officer Endika Aboitiz, Jr. Thereafter, in accordance
with the stipulations made in the lease agreement, PPA surrendered possession of the
Marine Slip Way in favor of the petitioner.

However, believing that the said lease already expired on June 30, 2001, respondent PPA
subsequently sent a letter to petitioner WG&A dated November 12, 2001 directing the latter
to vacate the contested premises not later than November 30, 2001 and to turnover the
improvements made therein pursuant to the terms and conditions agreed upon in the
contract.

In response, petitioner WG&A wrote PPA on November 27, 2001 urging the latter to
reconsider its decision to eject the former. Said request was denied by the PPA via a letter
dated November 29, 2001.

On November 28, 2001, petitioner WG&A commenced an Injunction suit before the Regional
Trial Court of Manila. Petitioner claims that the PPA unjustly, illegally and prematurely
terminated the lease contract. It likewise prayed for the issuance of a temporary restraining
order to arrest the evacuation. In its complaint, petitioner also sought recovery of damages
for breach of contract and attorney's fees.

On December 11, 2001, petitioner WG&A amended its complaint for the first time. The
complaint was still denominated as one for Injunction with prayer for TRO. In the said
amended pleading, the petitioner incorporated statements to the effect that PPA is already
estopped from denying that the correct period of lease is "until such time that the North
Harbor Modernization Project has been bidded out to and operations turned over to the
winning bidder. It likewise included, as its third cause of action, the additional relief in its
prayer, that should the petitioner be forced to vacate the said facility, it should be deemed as
entitled to be refunded of the value of the improvements it introduced in the leased property.

Following the first amendment in the petitioner's complaint, respondent PPA submitted its
answer on January 23, 2002. Meanwhile, the TRO sought by the former was denied by the
trial court by way of an order dated January 16, 2002.

Petitioner later moved for the reconsideration of the said Order on February 11, 2002.
Shortly thereafter, petitioner filed a Motion to Admit Attached Second Amended Complaint.
This time, however, the complaint was already captioned as one for Injunction with Prayer for
Temporary Restraining Order and/or Writ of Preliminary Injunction and damages and/or for
Reformation of Contract. Also, it included as its fourth cause of action and additional relief in
its prayer, the reformation of the contract as it failed to express or embody the true intent of
the contracting parties.

The admission of the second amended complaint met strong opposition from the respondent
PPA. It postulated that the reformation sought for by the petitioner constituted substantial
amendment, which if granted, will substantially alter the latter's cause of action and theory of
the case.
 On March 22, 2002, the respondent judge issued an Order denying the Admission of the
Second Amended Complaint. Petitioner filed a motion for reconsideration of the aforesaid
order but the same was again denied in an order dated April 26, 2002.2

Herein respondent WG&A then filed a petition for certiorari with the CA seeking the nullification of
the aforementioned RTC orders.

In its Decision dated October 24, 2002, the CA granted respondent's petition, thereby setting aside
the RTC orders and directing the RTC to admit respondent's second amended complaint pursuant to
Section 3, Rule 10 of the 1997 Rules of Civil Procedure. Petitioner moved for reconsideration but the
same was denied per Resolution dated May 15, 2003.

Hence, the present petition where the only issue raised is whether the CA erred in ruling that the
RTC committed grave abuse of discretion when it denied the admission of the second amended
complaint.

The Court finds the petition without merit.

The CA did not err in finding that the RTC committed grave abuse of discretion in issuing the Order
dated March 22, 2002 denying the admission of respondent's second amended complaint.

The RTC applied the old Section 3, Rule 10 of the Rules of Court:

Section 3. Amendments by leave of court. after the case is set for hearing, substantial
amendments may be made only upon leave of court. But such leave may be refused if it
appears to the court that the motion was made with intent to delay the action or that the
cause of action or defense is substantially altered. Orders of the court upon the matters
provided in this section shall be made upon motion filed in court, and after notice to the
adverse party, and an opportunity to be heard.

instead of the provisions of the 1997 Rules of Civil Procedure, amending Section 3, Rule 10, to wit:

SECTION 3. Amendments by leave of court. Except as provided in the next preceding

section, substantial amendments may be made only upon leave of court. But such
leave may be refused if it appears to the court that the motion was made with intent to
delay. Orders of the court upon the matters provided in this section shall be made upon
motion filed in court, and after notice to the adverse party, and an opportunity to be heard.

The Court has emphasized the import of Section 3, Rule 10 of the 1997 Rules of Civil Procedure
in Valenzuela v. Court of Appeals,3 thus:

Interestingly, Section 3, Rule 10 of the 1997 Rules of Civil Procedure amended the former
rule in such manner that the phrase "or that the cause of action or defense is substantially
altered" was stricken-off and not retained in the new rules. The clear import of such
amendment in Section 3, Rule 10 is that under the new rules, "the amendment may
(now) substantially alter the cause of action or defense." This should only be true,
however, when despite a substantial change or alteration in the cause of action or defense,
the amendments sought to be made shall serve the higher interests of substantial justice,
and prevent delay and equally promote the laudable objective of the rules which is to secure
a "just, speedy and inexpensive disposition of every action and proceeding."4
The application of the old Rules by the RTC almost five years after its amendment by the 1997
Rules of Civil Procedure patently constitutes grave abuse of discretion.

WHEREFORE, the petition is DENIED for lack of merit. The Decision of the Court of Appeals
promulgated on October 24, 2002 and its Resolution dated May 15, 2003 are hereby AFFIRMED in
toto.

SO ORDERED.
 FIRST DIVISION

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

SWAGMAN HOTELS AND TRAVEL, INC., petitioner, vs. HON. COURT

OF APPEALS, and NEAL B. CHRISTIAN, respondents.

DECISION
DAVIDE, JR., C.J.:

May a complaint that lacks a cause of action at the time it was filed be
cured by the accrual of a cause of action during the pendency of the case?
This is the basic issue raised in this petition for the Courts consideration.
Sometime in 1996 and 1997, petitioner Swagman Hotels and Travel, Inc.,
through Atty. Leonor L. Infante and Rodney David Hegerty, its president and
vice-president, respectively, obtained from private respondent Neal B.
Christian loans evidenced by three promissory notes dated 7 August 1996, 14
March 1997, and 14 July 1997. Each of the promissory notes is in the amount
of US$50,000 payable after three years from its date with an interest of 15%
per annum payable every three months. In a letter dated 16 December 1998,
[1]

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; P100,000 for moral damages;P50,000 for attorneys fees;
and the cost of the suit. [3]

The petitioner corporation, together with its president and vice-president,

filed an Answer raising as defenses lack of cause of action and novation of
the principal obligations. According to them, Christian had no cause of action
because the three promissory notes were not yet due and demandable. In
December 1997, since the petitioner corporation was experiencing huge
losses due to the Asian financial crisis, Christian agreed (a) to waive the
interest of 15% per annum, and (b) accept payments of the principal loans in
installment basis, the amount and period of which would depend on the state
of business of the petitioner corporation. Thus, the petitioner paid Christian
capital repayment in the amount of US$750 per month from January 1998
until the time the complaint was filed in February 1999. The petitioner and its
co-defendants then prayed that the complaint be dismissed and that Christian
be ordered to pay P1 million as moral damages; P500,000 as exemplary
damages; and P100,000 as attorneys fees. [4]

In due course and after hearing, the trial court rendered a decision on 5 [5]

May 2000 declaring the first two promissory notes dated 7 August 1996 and
14 March 1997 as already due and demandable and that the interest on the
loans had been reduced by the parties from 15% to 6% per annum. It then
ordered the petitioner corporation to pay Christian the amount of $100,000
representing the principal obligation covered by the promissory notes dated 7
August 1996 and 14 March 1997, plus interest of 6% per month thereon until
fully paid, with all interest payments already paid by the defendant to the
plaintiff to be deducted therefrom.
The trial court ratiocinated in this wise:

(1) There was no novation of defendants obligation to the plaintiff. Under Article
1292 of the Civil Code, there is an implied novation only if the old and the new
obligation be on every point incompatible with one another.

The test of incompatibility between the two obligations or contracts, according to an

imminent author, is whether they can stand together, each one having an independent
existence. If they cannot, they are incompatible, and the subsequent obligation novates
the first (Tolentino, Civil Code of the Philippines, Vol. IV, 1991 ed., p. 384).
Otherwise, the old obligation will continue to subsist subject to the modifications
agreed upon by the parties. Thus, it has been written that accidental modifications in
an existing obligation do not extinguish it by novation. Mere modifications of the debt
agreed upon between the parties do not constitute novation. When the changes refer to
secondary agreement and not to the object or principal conditions of the contract,
there is no novation; such changes will produce modifications of incidental facts, but
will not extinguish the original obligation. Thus, the acceptance of partial payments or
a partial remission does not involve novation (id., p. 387). Neither does the reduction
of the amount of an obligation amount to a novation because it only means a partial
remission or condonation of the same debt.

In the instant case, the Court is of the view that the parties merely intended to change
the rate of interest from 15% per annum to 6% per annum when the defendant started
paying $750 per month which payments were all accepted by the plaintiff from
January 1998 onward. The payment of the principal obligation, however, remains
unaffected which means that the defendant should still pay the plaintiff $50,000 on
August 9, 1999, March 14, 2000 and July 14, 2000.

(2) When the instant case was filed on February 2, 1999, none of the promissory notes
was due and demandable. As of this date however, the first and the second promissory
notes have already matured. Hence, payment is already due.

Under Section 5 of Rule 10 of the 1997 Rules of Civil Procedure, a complaint which
states no cause of action may be cured by evidence presented without objection. Thus,
even if the plaintiff had no cause of action at the time he filed the instant complaint, as
defendants obligation are not yet due and demandable then, he may nevertheless
recover on the first two promissory notes in view of the introduction of evidence
showing that the obligations covered by the two promissory notes are now due and
demandable.

(3) Individual defendants Rodney Hegerty and Atty. Leonor L. Infante can not be held
personally liable for the obligations contracted by the defendant corporation it being
clear that they merely acted in representation of the defendant corporation in their
capacity as General Manager and President, respectively, when they signed the
promissory notes as evidenced by Board Resolution No. 1(94) passed by the Board of
Directors of the defendant corporation (Exhibit 4). [6]

In its decision of 5 September 2003, the Court of Appeals denied

[7]

petitioners appeal and affirmed in toto the decision of the trial court, holding as
follows:

In the case at bench, there is no incompatibility because the changes referred to by

appellant Swagman consist only in the manner of payment. . . .

Appellant Swagmans interpretation that the three (3) promissory notes have been
novated by reason of appellee Christians acceptance of the monthly payments of
US$750.00 as capital repayments continuously even after the filing of the instant case
is a little bit strained considering the stiff requirements of the law on novation that the
intention to novate must appear by express agreement of the parties, or by their acts
that are too clear and unequivocal to be mistaken. Under the circumstances, the more
reasonable interpretation of the act of the appellee Christian in receiving the monthly
payments of US$750.00 is that appellee Christian merely allowed appellant Swagman
to pay whatever amount the latter is capable of. This interpretation is supported by the
letter of demand dated December 16, 1998 wherein appellee Christian demanded from
appellant Swagman to return the principal loan in the amount of US$150,000 plus
unpaid interest in the amount of US$13,500.00

...

Appellant Swagman, likewise, contends that, at the time of the filing of the complaint,
appellee Christian ha[d] no cause of action because none of the promissory notes was
due and demandable.

Again, We are not persuaded.

...

In the case at bench, while it is true that appellant Swagman raised in its Answer the
issue of prematurity in the filing of the complaint, appellant Swagman nonetheless
failed to object to appellee Christians presentation of evidence to the effect that the
promissory notes have become due and demandable.

The afore-quoted rule allows a complaint which states no cause of action to be cured
either by evidence presented without objection or, in the event of an objection
sustained by the court, by an amendment of the complaint with leave of court
(Herrera, Remedial Law, Vol. VII, 1997 ed., p. 108). [8]

Its motion for reconsideration having been denied by the Court of Appeals
in its Resolution of 4 December 2003, the petitioner came to this Court
[9]

raising the following issues:

I. WHERE THE DECISION OF THE TRIAL COURT DROPPING TWO

DEFENDANTS HAS BECOME FINAL AND EXECUTORY, MAY THE
RESPONDENT COURT OF APPEALS STILL STUBBORNLY CONSIDER THEM
AS APPELLANTS WHEN THEY DID NOT APPEAL?

II. WHERE THERE IS NO CAUSE OF ACTION, IS THE DECISION OF THE

LOWER COURT VALID?
III. MAY THE RESPONDENT COURT OF APPEALS VALIDLY AFFIRM A
DECISION OF THE LOWER COURT WHICH IS INVALID DUE TO LACK OF
CAUSE OF ACTION?

IV. WHERE THERE IS A VALID NOVATION, MAY THE ORIGINAL TERMS

OF CONTRACT WHICH HAS BEEN NOVATED STILL PREVAIL? [10]

The petitioner harps on the absence of a cause of action at the time the
private respondents complaint was filed with the trial court. In connection with
this, the petitioner raises the issue of novation by arguing that its obligations
under the three promissory notes were novated by the renegotiation that
happened in December 1997 wherein the private respondent agreed to waive
the interest in each of the three promissory notes and to accept US$750 per
month as installment payment for the principal loans in the total amount of
US$150,000. Lastly, the petitioner questions the act of the Court of Appeals in
considering Hegerty and Infante as appellants when they no longer appealed
because the trial court had already absolved them of the liability of the
petitioner corporation.
On the other hand, the private respondent asserts that this petition is a
mere ploy to continue delaying the payment of a just obligation. Anent the fact
that Hegerty and Atty. Infante were considered by the Court of Appeals as
appellants, the private respondent finds it immaterial because they are not
affected by the assailed decision anyway.
Cause of action, as defined in Section 2, Rule 2 of the 1997 Rules of Civil
Procedure, is the act or omission by which a party violates the right of
another. Its essential elements are as follows:
1. A right in favor of the plaintiff by whatever means and under whatever law it arises or
is created;
2. An obligation on the part of the named defendant to respect or not to violate such
right; and
3. Act or omission on the part of such defendant in violation of the right of the plaintiff
or constituting a breach of the obligation of the defendant to the plaintiff for which
the latter may maintain an action for recovery of damages or other appropriate
relief.[11]

It is, thus, only upon the occurrence of the last element that a cause of
action arises, giving the plaintiff the right to maintain an action in court for
recovery of damages or other appropriate relief.
It is undisputed that the three promissory notes were for the amount of
P50,000 each and uniformly provided for (1) a term of three years; (2) an
interest of 15 % per annum, payable quarterly; and (3) the repayment of the
principal loans after three years from their respective dates. However, both
the Court of Appeals and the trial court found that a renegotiation of the three
promissory notes indeed happened in December 1997 between the private
respondent and the petitioner resulting in the reduction not waiver of the
interest from 15% to 6% per annum, which from then on was payable monthly,
instead of quarterly. The term of the principal loans remained unchanged in
that they were still due three years from the respective dates of the
promissory notes. Thus, at the time the complaint was filed with the trial court
on 2 February 1999, none of the three promissory notes was due yet;
although, two of the promissory notes with the due dates of 7 August 1999
and 14 March 2000 matured during the pendency of the case with the trial
court. Both courts also found that the petitioner had been religiously paying
the private respondent US$750 per month from January 1998 and even
during the pendency of the case before the trial court and that the private
respondent had accepted all these monthly payments.
With these findings of facts, it has become glaringly obvious that when the
complaint for a sum of money and damages was filed with the trial court on 2
February 1999, no cause of action has as yet existed because the petitioner
had not committed any act in violation of the terms of the three promissory
notes as modified by the renegotiation in December 1997. Without a cause of
action, the private respondent had no right to maintain an action in court, and
the trial court should have therefore dismissed his complaint.
Despite its finding that the petitioner corporation did not violate the
modified terms of the three promissory notes and that the payment of the
principal loans were not yet due when the complaint was filed, the trial court
did not dismiss the complaint, citing Section 5, Rule 10 of the 1997 Rules of
Civil Procedure, which reads:

Section 5. Amendment to conform to or authorize presentation of evidence. When

issues not raised by the pleadings are tried with the express or implied consent of the
parties, they shall be treated in all respects as if they had been raised in the pleadings.
Such amendment of the pleadings as may be necessary to cause them to conform to
the evidence and to raise these issues may be made upon motion of any party at any
time, even after judgment; but failure to amend does not affect the result of the trial of
these issues. If evidence is objected to at the trial on the ground that it is not within the
issues made by the pleadings, the court may allow the pleadings to be amended and
shall do so with liberality if the presentation of the merits of the action and the ends of
substantial justice will be subserved thereby. The court may grant a continuance to
enable the amendment to be made.
 According to the trial court, and sustained by the Court of Appeals, this
Section allows a complaint that does not state a cause of action to be cured
by evidence presented without objection during the trial. Thus, it ruled that
even if the private respondent had no cause of action when he filed the
complaint for a sum of money and damages because none of the three
promissory notes was due yet, he could nevertheless recover on the first two
promissory notes dated 7 August 1996 and 14 March 1997, which became
due during the pendency of the case in view of the introduction of evidence of
their maturity during the trial.
Such interpretation of Section 5, Rule 10 of the 1997 Rules of Civil
Procedure is erroneous.
Amendments of pleadings are allowed under Rule 10 of the 1997 Rules of
Civil Procedure in order that the actual merits of a case may be determined in
the most expeditious and inexpensive manner without regard to technicalities,
and that all other matters included in the case may be determined in a single
proceeding, thereby avoiding multiplicity of suits. Section 5 thereof applies to
[12]

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. Thus, in Roces v.
[13]

Jalandoni, this Court upheld the trial court in taking cognizance of an

[14]

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. Such an action is prematurely brought and is, therefore, a
[16]

groundless suit, which should be dismissed by the court upon proper motion
seasonably filed by the defendant. The underlying reason for this rule is that a
person should not be summoned before the public tribunals to answer for
complaints which are immature. As this Court eloquently said in Surigao Mine
Exploration Co., Inc. v. Harris: [17]

It is a rule of law to which there is, perhaps, no exception, either at law or in equity,
that to recover at all there must be some cause of action at the commencement of
the suit. As observed by counsel for appellees, there are reasons of public policy why
there should be no needless haste in bringing up litigation, and why people who are in
no default and against whom there is yet no cause of action should not be summoned
before the public tribunals to answer complaints which are groundless. We say
groundless because if the action is immature, it should not be entertained, and an
action prematurely brought is a groundless suit.

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

We are therefore of the opinion, and so hold, that unless the plaintiff has a valid and
subsisting cause of action at the time his action is commenced, the defect cannot
be cured or remedied by the acquisition or accrual of one while the action is
pending, and a supplemental complaint or an amendment setting up such 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
Court as long as they are borne out by the record or are based on
[18]

substantial evidence. The Supreme Court is not a trier of facts, its jurisdiction
[19]

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 1998 states that
[21]

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. All these cash vouchers
[22]

served as receipts evidencing private respondents acknowledgment of the

payments made by the petitioner: two of which were signed by the private
respondent himself and all the others were signed by his representatives. The
private respondent even identified and confirmed the existence of these
receipts during the hearing. Significantly, cognizant of these receipts, the
[23]

private respondent applied these payments to the three consolidated principal

loans in the summary of payments he submitted to the court. [24]

Under Article 1253 of the Civil Code, if the debt produces interest,
payment of the principal shall not be deemed to have been made until the
interest has been covered. In this case, the private respondent would not have
signed the receipts describing the payments made by the petitioner as capital
repayment if the obligation to pay the interest was still subsisting. The
receipts, as well as private respondents summary of payments, lend credence
to petitioners claim that the payments were for the principal loans and that the
interests on the three consolidated loans were waived by the private
respondent during the undisputed renegotiation of the loans on account of the
business reverses suffered by the petitioner at the time.
There was therefore a novation of the terms of the three promissory notes
in that the interest was waived and the principal was payable in monthly
installments of US$750. Alterations of the terms and conditions of the
obligation would generally result only in modificatory novation unless such
terms and conditions are considered to be the essence of the obligation
itself. The resulting novation in this case was, therefore, of the modificatory
[25]

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