BAR EXAM HACK: DETERMINING WHETHER A COUNTERCLAIM IS COMPULSORY OR PERMISSIVE

A compulsory counterclaim is one which arises out of or is connected with the transaction or occurrence constituting the subject matter of the complaint.  A permissive counterclaim is one which is not a compulsory counterclaim.  The subject of compulsory/permissive counterclaims is a Bar FAQ.

Almost all of the compulsory counterclaims which are asked in the bar are either (a) a counterclaim for damages against the plaintiff because of the latter’s baseless suit, or (b) in an action for recovery of land by the plaintiff, a counterclaim by the defendant for reimbursement of necessary and useful improvements made on the land.  When you encounter these kinds of counterclaims, you will immediately know that they are compulsory counterclaims. 

Remedial law bar examiners are fond of testing whether an examinee can distinguish between a compulsory and a permissive counterclaim.

The conventional test in this regard is the “compelling test of compulsoriness” which involves asking the question whether there is a “logical relationship between the claim and the counterclaim, that is, where conducting separate trials would entail a substantial duplication of effort and time by the parties and the court.”   If there is such a logical relationship, then the claim is compulsory.   (Tan v. Kaakbay Finance Corp., 404 SCRA 158 [2003]).

Another test is the “same evidence test.”  Will substantially the same evidence support or refute the plaintiff’s claim as well as the defendant’s counterclaim?  If the answer is in the affirmative, the counterclaim is compulsory; if in the negative, the counterclaim is permissive.

There is also the “res judicata test.”  Would res judicata bar a subsequent suit on defendant’s claim, absent the compulsory counterclaim rule? (Lasala v. NFA, 767 SCRA 430 [2015]).

The above tests appear good in theory but applying them in practice, especially in the bar exam, is quite difficult.  For example, the question of whether there is a “logical relationship” between the complaint and the counterclaim is a highly subjective one which could lead to disparate conclusions.  The same goes with the “res judicata test.”  Moreover, the test appears to be faulty.  Absent the compulsory counterclaim rule, res judicata would necessarily not bar the subsequent suit because there is no identity of causes of action between the complaint and the counterclaim.  The “same evidence test” also seems defective.  Clearly the evidence to support a complaint and that to support a counterclaim are different.

An actionable test or rule of thumb I have devised, using an inductive analysis of Supreme Court cases, is the test of opposition or inconsistency: may the trial court grant both the complaint and the counterclaim at the same time?  If the answer is no (since the complaint and counterclaim are inconsistent with each other), then the counterclaim is compulsory; if yes, then the counterclaim is permissive.   

Thus in a complaint for damages arising from tort and a counterclaim for litigation expenses and moral damages arising from the baseless filing of the suit, the trial court obviously cannot grant both the complaint and the counterclaim at the same time.

Illustration

”Q      Fe filed a suit for collection of ₱387,000 against Ramon in the RTC of Davao City. Aside from alleging payment as a defense, Ramon in his answer set up counterclaims for ₱100,000 as damages and ₱30,000 as attorney’s fees as a result of the baseless filing of the complaint, as well as for ₱350,000 as the balance of the purchase price of the 30 units of air conditioners he sold to Fe. Is the counterclaim for ₱350,000 a compulsory or permissive counterclaim? (2008 Remedial Law Bar Question No. 2, edited).” 

As we have seen, the counterclaim for damages and attorney’s fees arising from the baseless filing of the complaint is a compulsory counterclaim.  How about the counterclaim for the balance of the purchase price of the air conditioners? 

Applying the opposition test, we can easily determine that such counterclaim is permissive.  The trial court may grant at the same time both the complaint for collection and the counterclaim for the balance of the air conditioners as these are based on unrelated transactions.

This example is fairly easy.  A more challenging problem is the following: 

Illustration

“D borrowed ₱1,000,000 from P secured by a real estate mortgage executed by D in P’s favor.  D defaulted in the payment of the loan.  D filed an action against P to nullify the real estate mortgage on the ground that his wife did not give her consent thereto.   Judgment nullifying the mortgage was rendered in favor of D.  After the judgment had become final and executory, P filed an action to collect the loan against D.  Is the action barred?”

The answer to the question would hinge on whether P’s action to collect the loan is in the nature of a compulsory counterclaim which should have been set up in the action for nullification of the real estate mortgage.  If the answer is yes, then P’s action for collection is barred by res judicata.  If no, then P’s action is not so barred.

Application of the logical relation test to the problem would lead to the plausible conclusion that the action for collection is in the nature of a compulsory counterclaim.  After all the loan was the principal obligation secured by the real estate mortgage.  However if we apply the opposition test, we can see that such action is in the nature of a permissive counterclaim.   The trial court can grant at the same time both the nullification of the real estate mortgage and the counterclaim for collection.  The reason is that the nullity of the accessory obligation does not lead to the nullity of the principal obligation.

Let us tweak the facts of the prior hypothetical.

Illustration

“D borrowed ₱1,000,000 from P secured by a real estate mortgage executed by D in P’s favor.  D defaulted in the payment of the loan. D filed an action against P to annul the loan contract on the ground that D’s consent to the contract was vitiated.   Judgment nullifying the loan contract was rendered in favor of D.  After the judgment had become final and executory, P filed an action to foreclose on the real estate mortgage.  Is the action barred?”

The answer now would be different.  The action to foreclose on the mortgage would be barred since such action should have been set up in the first case as a compulsory counterclaim.   If we apply the opposition test, we can see that the trial court cannot at the same time grant both the annulment of the loan contract and the action to foreclose on the mortgage.  The annulment of the principal contract would necessarily lead to the annulment of the accessory obligation.

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