Republic of the Philippines be called the FEDERATION, is a non-stock corporation

SUPREME COURT duly organized and existing under and by virtue of the laws
Manila of the Philippines.

EN BANC On November 16, 1959, the NAMARCO and the

FEDERATION entered into a Contract of Sale which
  contains the following stipulations, terms and conditions:

G.R. No. L-22578 January 31, 1973 "That, WHEREAS, by virtue of

NAMARCO Board Resolution dated
November 3, 1959, the Management of
NATIONAL MARKETING CORPORATION, plaintiff-appellee, NAMARCO was authorized to import the
vs. following items with the corresponding
FEDERATION OF UNITED NAMARCO DISTRIBUTORS, INC., defendant- dollar value totalling Two Million One
appellant. Thousand Thirty One Dollars
($2,001.031.00), to wit:
Government Corporate Counsel Tomas P. Matic, Jr. and Assistant
Government Corporate Counsel Lorenzo R. Mosqueda for plaintiff-appellee. xxx xxx xxx

Gamboa and Gamboa for defendant-appellant. "That, WHEREAS, for and in

consideration of the sum of Two
Hundred Thousand Pesos
(P200,000.00) as part payment of the
ANTONIO, J.: items and/or merchandise above-
mentioned, and deposited by the
Appeal by defendant, Federation of United Namarco Distributors, Inc., from a FEDERATION with the NAMARCO
decision of the Court of First Instance of Manila in Civil Case No. 46124, upon signing of the items and/or
ordering said defendant to pay the plaintiff, National Marketing Corporation merchandise above enumerated items
the sum of P609,014.73, representing the cost of merchandise delivered to, and/or merchandise shall be paid on
and not paid for by, the defendant, with interest thereon at the legal rate from cash basis upon delivery of the duly
the date of delivery of the merchandise, until the whole obligation is paid; indorsed negotiable shipping document
and the sum of P5,000.00, for and as attorney's fees and other expenses of covering the same, the NAMARCO
litigation, plus costs. agrees to sell the said items and/or
merchandise subject to the following
terms and conditions:
The facts of this case, which are not disputed by the parties, are correctly set
forth in the appealed decision from which we reproduce hereunder, as
follows: xxx xxx xxx

The plaintiff, hereinafter to be called the NAMARCO, is a "1. That the FEDERATION shall pay the
government owned and controlled corporation duly NAMARCO the value of the goods
organized and existing under and by virtue of Republic Act equivalent to the procurement costs plus
No. 1345, as amended; and the defendant, hereinafter to 5% mark-up, provided, however, that
should there be any adjustment in the
 procurement costs the same shall be 1,000 cartons of Juicy Fruit Chewing Gums, and 500
refunded to the FEDERATION. cartons of Adams Chicklets; PNB Domestic L/C No.
600606, dated January 28, 1960, in favor of the
"2. That all handling and storage NAMARCO for the account of the FEDERATION, available
charges of the goods sold shall be for by draft up to the aggregate amount of P135,891.82,
the account of the FEDERATION. covering the full invoice value of the 168 cartons of Blue
Denims; and PNB Domestic L/C No. 600586, dated
January 28, 1960, in favor of the NAMARCO for the
"3. That the FEDERATION waives its account of the FEDERATION, available by draft up to the
right to claim for any loss or damage aggregate amount of P197,804.12, covering the full
that may be suffered due to force invoice value of the 183 bales of Khaki Twill, each to be
majeure such as war, riots, strikes, etc., accompanied by statement of account of buyer issued by
except when such incident is directly or the NAMARCO, accepted draft and duly executed trust
indirectly due to the negligence of the receipt approved by the Philippine National Bank.
NAMARCO or its representative;
Upon arrival of the goods in Manila in January, 1960, the
"4. That the items and/or merchandise NAMARCO submitted to the FEDERATION Statement of
sold by NAMARCO to the Account for P277,357.91, covering shipment of the 2,000
FEDERATION shall be distributed cartons of PK Chewing Gums, 1,000 cartons of Juicy Fruit
among its members and retailers in Chewing Gums, and 500 cartons of Adams Chicklets;
accordance with NAMARCO's existing Statement of Account of P135,891.32, covering shipment
rules and regulation,, governing the of the 168 cartons of Blue Denims; and Statement of
distribution of NAMARCO goods and at Account of P197,824.12, covering shipment of the 183
the wholesale and retail prices to be bales of Khaki Twill or a total of P611,053.35, for the
determined by NAMARCO. FEDERATION to pay.

xxx xxx xxx On January 29, 1960, the FEDERATION received from the
NAMARCO the 2,000 cartons of PK Chewing Gums, 1,000
(Annex "A" to the Complaint or Exh. "A"). cartons of Juicy Fruit Chewing Gums, and 500 cartons of
Adams Chicklets, all with a total value of P277,357.91,
Among the goods covered by the Contract of Sale were under the condition that the cost thereof would be paid in
2,000 cartons of PK Chewing Gums, 1,000 cartons of cash through PNB Domestic L/C No. 600570; and on
Juicy Fruit Chewing Gums, 500 cartons of Adams February 20, 1960, the FEDERATION received from the
Chicklets, 168 cartons of Blue Denims, and 138 bales of NAMARCO the 168 cartons of Blue Denims and 183 bales
Khaki Twill. of Khaki Twill, with a total value of P135,891.82 and
P197,804.12, respectively, under the condition that the
cost thereof would be paid in cash through PNB Domestic
To insure the payment of those goods by the L/C Nos. 600606 and 600586, respectively.
FEDERATION, the NAMARCO accepted three domestic
letters of credit, to wit: PNB Domestic L/C No. 600570,
dated January 27, 1960, in favor of the NAMARCO for the On March 2, 1960, the FEDERATION and some of its
account of the FEDERATION, available by draft up to the members filed a complaint against the NAMARCO, which
aggregate amount of P277,357.91, covering the full became Civil Case No. 42684 of this Court for specific
invoice value of the 2,000 cartons PK-5 Chewing Gums, performance and damages, alleging that after the
NAMARCO had delivered a great portion of the goods
listed in the Contract of Sale, it refused to deliver the other "On May 19, 1960, the Philippine National Bank informed
goods mentioned in the said contract. The pertinent the NAMARCO that could not negotiate and effect
allegations of the complaint in that case is, as follows: payment on the sight drafts drawn under PNB Domestic
L/C Nos. 600570, 600606 and 606586, in the amounts of
"17. That now the defendant has P277,357.91, P135,891.82 and P197,804.12, respectively,
refused and declined to accept the cash as the requirements of the covering letters of credit had
payments by the FEDERATION, in not been complied with. The common condition of the
accordance with the terms and three letters of credit is that the sight drafts drawn on them
conditions stipulated in said contract, must be duly accepted by the FEDERATION before they
Annex "A" hereof, against deliveries to it will be honored by the Philippine National Bank. But the
of the commodities listed in paragraph said drafts were not presented to the FEDERATION for
16 hereof, and has refused and declined acceptance.
to make deliveries thereof to the
FEDERATION, in accordance with such On June 7, 1960, the NAMARCO demanded from the
terms and conditions; and that the FEDERATION the payment of the total amount of
plaintiffs have always been, and still are P611,053.35, but the latter failed and refused to pay the
willing to take deliveries of the same said amount, or any portion thereof, to the NAMARCO.
commodities and to pay for them,
through the FEDERATION, in In the readjustment made on the basis of actual
accordance with the terms and expenditures, the total cost of the goods was reduced from
conditions of said contract." (Exh. "1") P611,053.35 to P609.014.73.

On March 10, 1960, the NAMARCO presented to the On October 15, 1960, the Court of First Instance of Manila
Philippine National Bank, Manila, for payment Sight Draft, promulgated its decision in Civil Case No. 42684, ordering
dated March 10, 1960, for P277,357.91, to cover the full the NAMARCO to specifically perform its obligation in the
payment of the 2,000 cartons of PK Chewing Gums, 1,000 Contract of Sale, by delivering to the FEDERATION the
cartons of Juicy Fruit Chewing Gums, and 500 cartons of undelivered goods.
Adams Chicklets, duly accompanied with supporting
papers; Sight Draft, dated March 10, 1960, for
P135,891.82, to cover the full payment of the 168 cartons On November 11, 1960, the NAMARCO appealed from
of Blue Denims, duly accompanied with supporting papers; the decision. On March 31, 1962, the Supreme Court 1
and Sight Draft, dated March 10, 1960, for P197,804.12, to rendered a decision on NAMARCO's appeal in Civil Case
cover the full payment of 183 bales of Khaki Twill, duly No. 42684, holding that the Contract of Sale was valid."
accompanied with supporting papers. (Record on Appeal, pp. 63-71, Civil Case No. 46124.)

On March 19, 1960, the NAMARCO filed in Civil Case No. On January 25, 1961, NAMARCO instituted the present action (Civil Case
42684 its answer to the complaint, alleging that the No. 46124) alleging, among others, that the FEDERATION'S act or omission
Contract of Sale was not validly entered into by the in refusing to satisfy the former's valid, just and demandable claim has
NAMARCO and, therefore, it is not bound by the compelled it to file the instant action; and praying that the FEDERATION be
provisions thereof, without setting up any counterclaim for ordered to pay the NAMARCO the sum of P611,053.35, representing the
the value of the goods which it had already delivered but cost of merchandise mentioned in the preceding paragraph, with interest
which had not yet been paid for by the FEDERATION. thereon at the legal rate from the date of delivery of the merchandise in
question, until the whole obligation is paid; P20,000.00 as attorney's fees
and other expenses of litigation, plus costs.
On February 7, 1961, the FEDERATION moved to dismiss the complaint on Manager of the NAMARCO without the knowledge, consent and approval of
the ground that the cause of action alleged therein is barred forever, the Board of Directors and that the same was not approved by the Auditor
pursuant to Section 6 of Rule 10 of the Rules of Court. In support thereof, General conformably with Administrative Order No. 290 dated February 3,
the FEDERATION alleged that on March 2, 1960, the FEDERATION and 1959 of the President of the Philippines and therefore it would have been
some of its members instituted Civil Case No. 42684 against NAMARCO for inconsistent for NAMARCO to avail itself of the contract the validity of which
specific performance to enforce compliance with the contract of sale; that it was impugning, to enforce its claim; and that the present claim is not
said contract, basis of Civil Case No. 42684, is also the basis of necessarily connected with the transaction or occurrence that is the subject
NAMARCO's present complaint in Civil Case No. 46124; that when matter of Civil Case No. 42684, as the same evidence would not support or
NAMARCO filed, on March 19, 1960, its answer to the complaint in Civil refute both.
Case No. 42684, it did not set up any counterclaim therein; that on October
15, 1960, the Court of First Instance of Manila promulgated the decision in On February 18, 1961, the FEDERATION filed a rejoinder reiterating that the
said Civil Case No. 42684, ordering, among others, the NAMARCO to requirements on the rule of compulsory counterclaim are present; that the
specifically perform its obligation under the contract of sale by delivering to first requirement — that the counterclaim arises out of or is necessarily
the FEDERATION the goods subject-matter of the contract as are involved connected with the contract of sale subject-matter of NAMARCO's cause of
in the complaint; that the claim of NAMARCO against the FEDERATION action — is evident from the face of the complaint itself.
matured either on May 19, 1960 when the Philippine National Bank, Manila,
informed the NAMARCO that it could not effect payment on the sight drafts,
or on June 7, 1969 when NAMARCO demanded payment of the sum of On June 3, 1961, the lower court issued an order holding "in abeyance"
P611,053,35; that the FEDERATION refused to pay said amount; that action on the motion to dismiss till after the trial on the merits.
NAMARCO's claim in the present case, Civil Case No. 46124, against the
FEDERATION alone, being a compulsory counterclaim against the latter, in On June 14, 1961, the FEDERATION filed its answer to the NAMARCO's
that it arose out of or is necessarily connected with the transaction or complaint admitting some material averments of the complaint, specifically
occurrence that is the subject-matter of the action of the FEDERATION in denying other allegations and consistently with its position averred as
Civil Case No. 42684 against the NAMARCO and therefore it must have affirmative defense that NAMARCO's failure to assert its claim against the
been set up in said Civil Case No. 42684 in the manner prescribed by FEDERATION before judgment in Civil Case No. 42684 on October 15,
section 4, Rule 10 of the Rules of Court, and within the time between March 1960 constituted a bar to the institution of the present action. By way of
19, 1960, the date of filing, in Civil Case No. 42684, of the answer of counterclaim, the FEDERATION sought P50,000.00 as attorney's fees and
NAMARCO, and October 15, 1960, the date of the decision in that case; and other expenses of litigation, as well as P17,000.00 as damages for improper
that the failure of NAMARCO to set up, in said Civil Case No. 42684, such a issuance of a writ of attachment which writ, evidently had been issued earlier
counterclaim, precludes NAMARCO from raising it as an independent action, by the court.
pursuant to Section 6 of Rule 10 of the Rules of Court.
On June 21, 1961, NAMARCO filed an answer to the FEDERATION'S
On February 11, 1961, NAMARCO interposed its opposition to said motion counterclaim specifically denying the material averments thereof and
to dismiss contending that its claim for the recovery of the cost of maintaining that the present action is not barred by Civil Case No. 42684.
merchandise delivered to the FEDERATION on January 29 and February
20, 1960 is not necessarily connected with the suit in Civil Case No. 42684 On January 13, 1964, after due hearing, the lower court rendered its
for specific performance and, therefore, does not fall under the category of aforementioned decision. Hence, the present appeal.
compulsory counterclaim; that NAMARCO's failure to set it up as a
counterclaim in its answer in Civil Case No. 42684 does not constitute res
judicata; that the deliveries of the merchandise were effected through the In this appeal, the FEDERATION contends that:
fault or negligence of one of its personnel, Juan T. Arive, who was
administratively charged therefor, found guilty and accordingly dismissed; I
that the issue in Civil Case No. 42684, was the genuineness and due
execution of said contract as the same was entered into by the General
 The lower court erred in failing to hold that the complaint occurrence depends in part on whether
does not state a cause of action against the defendant- the same evidence would support or
appellant; refute both. (Williams v. Robinson, 3
Federal Rules Service, 174). These
II terms are broader than the term
"contract", and authorize matters to be
counter-claimed which could not be
The lower court erred in holding that the plaintiff-appellee's counter-claimed as arising out of the
claim is not a compulsory counterclaim as defined and contract sued upon by the plaintiff. This
governed by section 6, Rule 10 of the old Rules of Court is obvious, for while a contract is a
(Section 4, Rule 9 of the new); transaction, a transaction is not
necessarily a contract. One of the
III definitions of the term "transaction" is, "a
matter or affair either completed or in
The lower court erred in entering judgment in favor of the course of completion." (Story, etc.,
plaintiff-appellee and ordering defendant-appellant to pay Commercial Co. v. Story, 100 Cal. 35,
the former the sum of P609,014.73 with interest thereon at 34 Pac. 671).
the legal rate from the date of delivery of the merchandise,
and the sum of P5,000.00 for and as attorney's fees and "Mr. Pomeroy defines the term as "that
other expenses of litigation, with costs. combination of acts and events,
circumstances and defaults which
We shall first proceed because of its decisive significance, with the issue viewed in one aspect results in the
posed by appellant in its second assignment of error ... whether or not this plaintiff's right of action, and viewed in
action of NAMARCO for the collection of the payment of the merchandise another aspect results in the defendant's
delivered to, but not yet paid by, the FEDERATION, is already barred as a right of action. ... As these two opposing
consequence of the failure of NAMARCO to set it up as a counterclaim in the rights cannot be the same, it follows that
previous case, (Civil Case No. 42684). there may be, and generally must be,
acts, facts, events, and defaults in the
transaction as a whole which do not
In ruling that the present claim of NAMARCO is not compulsory enter into each cause of action." Every
counterclaim, that should have been asserted in the previous case the lower transaction is more or less complex,
court had the following to say: consisting of various facts and acts done
by the respective parties and it
As to the meaning of the terms "transactions" and frequently happens that one or more of
"occurrence" used in Section 6, Rule 10, Rules of Court, these acts, if viewed by itself, may be
Francisco in his annotations and commentaries on the such a violation of duty as to give to the
Rules of Court, Vol, I, p. 577, cites the following: other a right of action; but the obligation
thus created may be so counter-
balanced by other matters growing out
"The terms "transaction" and
of the same transaction that no
"occurrence" used in the section now
compensation ought to be made
under consideration include the facts
therefor. Insuch a case, simple equity
and circumstances out of which a claim
requires that the respective causes of
may arise, and whether two claims arise
action in behalf of each be adjusted in a
out of the same transaction or
 single suit." (Story, etc., Commercial Co. made on the property during the time
v. Story, 100 Cal. 35, 34 Pac. 671). she had possession of the same.
Defendant pleaded res
What is the "transaction or occurrence that is the subject- adjudicata alleging that B should have
matter of the opposing party's (FEDERATION'S) claim' in made a counterclaim in the first
Civil Case No. 42684? It must consist in "the facts and action. Held: That the former suit was a
circumstances out of which a claim may arise", or it must petition for the inheritance and the
be "that combination of acts and events, circumstances present one being a claim for
and defaults which viewed in one aspect results in the improvement is in no wise connected
plaintiff's right of action, and viewed in another aspect with the principal object of the former
results in defendant's right of action. litigation and that a counterclaim could
not properly have been presented in the
first action (Bautista v. Jimenez, 24 Phil.
The complaint of the FEDERATION against the 111).
NAMARCO in Civil Case No. 42684 was predicated on the
refusal of the latter to perform its obligation under the
Contract of Sale. The refusal of the NAMARCO to perform "2. Mariano executed an instrument
its obligation under the Contract of Sale is the act or the purporting to be a deed of conveyance
event, the circumstance or default, which constitutes the of two parcels of land in favor of Maclan.
transaction or the occurrence. About a year later, Mariano instituted an
action (Civil Case No. 106) against
Maclan for the annulment of the said
The FEDERATION contends that NAMARCO's claim instrument on the ground of fraud and
arose out of that transaction or occurrence, or was the recovery of the property. Judgment
necessarily connected with that transaction or occurrence, was rendered in favor of Mariano. About
because the cause of action of the FEDERATION in Civil two years later, Maclan filed a complaint
Case No. 42684 and the cause of action of the NAMARCO against Garcia who acquired the
in this case are based on the same Contract of Sale. property by inheritance from Mariano,
for the purpose of recovering the sum of
But it will be noted that one of the requisites for the P5,200.00 as necessary expenses
application of the rule on compulsory counterclaim is that allegedly incurred in the preservation of
the counterclaim should at least be connected with or must said property prior to the
arise out of the transaction or occurrence which gave rise commencement of case No. 106, Held:
to the opposing party's claim. It is clear that the claim for repairs or
necessary expenses allegedly made by
To illustrate the meaning of that requisite, the following Maclan in the property in dispute in case
cases are cited: No. 106, is necessarily connected with
the action of the plaintiff therein to
recover said property from Maclan. Said
"1. In a former suit, B claimed realty connection is substantially identical with
under a will of her deceased husband that which exists between an action for
and L claimed the same as a forced recovery of a land and the claim for
heir. After judgment dividing the property improvements therein made by the
and requiring B to turn over a part of the defendant in said case. It is well settled
same to L, this suit was brought by B to that such claim for improvements is
recover the value of the improvements
 barred unless set up by recovery of the Since the cause of action of the FEDERATION in Civil
land (Bautista v. Jimenez, 24 Phil. 111; Case No. 42684 is such that the claim of the NAMARCO
Berses v. Villanueva, 25 Phil. 473; in this case could not properly be pleaded as a compulsory
Lopez v. Gloria, 40 Phil. 76; Beltran v. counter-claim in that case, the NAMARCO is not
Valbuena, 53 Phil. 697; Calit v. Giness precluded from bringing this present action. Section 6,
and Hernandez, 62 Phil. 451). Rule 10, Rules of Court, is not applicable.  (Emphasis
2

supplied.)
The right of the NAMARCO to the cost of the goods
existed upon delivery of the said goods to the This ruling of the court a quo is now assigned as error by the FEDERATION
FEDERATION which, under the Contract of Sale, had to for it is its position that the previous action which it filed against NAMARCO,
pay for them. Therefore, the claim of the NAMARCO for for specific performance to compel NAMARCO to deliver the goods, was
the cost of the goods delivered arose out of the failure of predicated upon the contract of sale of November 16, 1959 executed by the
the FEDERATION to pay for the said goods, and not out FEDERATION and NAMARCO who are the same parties, both in the
of the refusal of the NAMARCO to deliver the other goods previous case as well as in the present case, (Civil Case No. 46124) and
to the FEDERATION. The action of the FEDERATION in therefore this action must be considered as having arisen out of or is
Civil Case No. 42684, based on the refusal of the necessarily connected with the transaction or occurrence that was the
NAMARCO to deliver the other goods, had nothing to do subject matter of the previous case. It is the theory of the FEDERATION that
with the latter's claim for the cost of the goods delivered the applicable guiding principle is "that there be a logical relationship
and, hence, such claim was not necessarily connected between" plaintiff's claim and defendant's counterclaim. It insists that "logical
therewith. ... relationship" exists between the previous action for specific performance
(Civil Case No. 42684) and NAMARCO's present action for the payment of
The claim of the NAMARCO in this case could have been the goods delivered as (a) both actions are derived from the same contract
a permissive counterclaim, but is not a compulsory of sale; and (b) the two actions are but the consequences of the reciprocal
counterclaim, in Civil Case No. 42684. . obligation imposed by law  upon the parties by virtue of the aforesaid
3

contract. The alleged failure of the FEDERATION to pay for goods delivered
should therefore have been raised by NAMARCO as a defense or
While the Contract of Sale created reciprocal obligations counterclaim in the previous case notwithstanding the fact that said claim
between the FEDERATION and the NAMARCO, the only accrued after NAMARCO's answer was filed in said Civil Case No.
refusal of the latter to deliver the other goods was not due 42684 because NAMARCO could have set it up as a counterclaim in a
to the failure of the FEDERATION to pay for the goods supplemental pleading pursuant to section 4 of Rule 1 of the old Rules of
delivered, but rather to the fact that it believed, as alleged Court.4

in its answer in Civil Case No. 42684, that the Contract of

Sale was not validly entered into by it. Such being the
case, the failure of the FEDERATION to pay for the goods On the other hand, NAMARCO insists that the same evidence or substantial
delivered could not have been properly raised by the identity in the evidence criterion should be applied in determining whether or
NAMARCO as a defense or pleaded as a compulsory not its claim is compulsory, ... and on the basis of such test its claim could
counterclaim in Civil Case No. 42684. However, had the not be considered compulsory, because: (a) the evidence presented to
NAMARCO alleged its present claim in Civil Case No. support the genuineness and due execution of the contract of sale as ground
42684, the Court would have permitted it. A permissive for specific performance in Civil Case No. 42684, is not the same as the
counterclaim is one which does not arise out of, or is not evidence presented to support NAMARCO's claim for recovery of the cost of
necessarily connected with, the transaction or occurrence the merchandise received by the FEDERATION, subject of the instant
that is the subject-matter of the opposing party's claim. appeal; (b) for NAMARCO in Civil Case No. 42684 to interpose its claim for
the payment of the goods delivered pursuant to the contract of sale, and
thus seek in effect the enforcement of said contract, would have been
inconsistent with its defense that the same contract was a nullity and (c) in
any event, such claim could neither have been asserted as a counterclaim 1. Are the issues of fact and law raised by the claim and
by NAMARCO in its answer, filed on March 19, 1960, to the complaint in counterclaim largely the same?
Civil Case No. 42684, for it had no cause of action as yet against the
FEDERATION as, under the rule, a claim to be available as a counterclaim 2. Would res judicata bar a subsequent suit on defendant's
to an action must be due and owing at the time of the commencement of the claim absent the compulsory counterclaim rule?
action, nor could NAMARCO file it as a counterclaim based on a contingent
demand for the same cannot be allowed.
3. Will substantially the same evidence support or refute
plaintiff's claim as well as defendant's counter-claim?
I
4. Is there any logical relation between the claim and the
1. The rule on compulsory counterclaim contained the section 6 of Rule 10 of counter-claim?
the old Rules of Court,  is taken from section 97 of Act No. 190.  This rule is
5 6

substantially the same as Rule 13 (a) of the Federal Rules of Civil

Procedure.  This rule is "mandatory" because the failure of the corresponding
7 An affirmative answer to each of the foregoing questions suggests that the
party to set it up will bar his right to interpose it in a subsequent counterclaim is compulsory. These tests or standards have been the object
litigation.  Under this Rule, counterclaim not set up shall be barred if the
8 of extensive analysis and criticisms, as follows:
following circumstances are present: (1) that it arises out of, or is necessarily
connected with, the transaction or occurrence that is the subject matter of The first test ... identity of issues,   had been considered of doubtful utility for
15

the opposing party's claim (2) that it does not require for its adjudication the it assumes that, in order to protect himself from inadvertently losing the right
presence of third parties of whom the court cannot acquire jurisdiction; and to present his claim in a later action, defendant will be both motivated and
(3) that the court has jurisdiction to entertain the claim.  Conversely, a
9
able to determine before answering whether his claim must be asserted as a
counterclaim is merely permissive and hence is not barred if not set up, compulsory counterclaim. ... Yet, no one can be certain what the issues are
where it has logical relation with the transaction or occurrence that is the until after the pleadings are closed and discovery is underway, and in many
subject matter of the opposing party's claim, or even where there is such instances the issues are not really formulated until the pre-trial conference.
connection, the court has no jurisdiction to entertain the claim or it requires
for its adjudication the presence of third persons of whom the court cannot The second test ... that the counterclaim is compulsory if it would be barred
acquire jurisdiction. 10

by res judicata,   has been judicially recognized by some courts as "the acid
16

test" for distinguishing compulsory from permissive counterclaim. As aptly

The first requisite that the claim should arise out of or is necessarily stated by Judge Frank in a dissenting opinion:
connected with the transaction or occurrence that is the subject matter of the
opposing party's claim, may give rise to the critical question: What ... Everyone agrees, too, that, if a counterclaim is not
constitutes a "transaction" or "occurrence"? On this point the lower court has "compulsory"' it is "permissive" and that the following is the
conveniently embodied in its decision, quoted elsewhere herein, the acid test in distinguishing the two: If a defendant fails to
meaning of the terms "transaction" or "occurrence", as defined in Williams v. set up a "compulsory" counterclaim, he cannot in a later
Robinson,  and in Pomeroy's Treatise on Remedies and Remedial
11

suit assert it against the plaintiff, since it is barred by res

Rights.   The formulation in Williams v. Robinson shows the futility of
12

judicata; but if it is "permissive", then it is not thus barred.

attempting to reduce the term "transaction" or "occurrence" within the To put it differently, if a counterclaim is the kind not thus
context of an all-embracing definition. Such formulation does not adequately barred, it is "permissive." We can have recently employed
answer every question whether a particular claim is compulsory in character. that test; see Claim v. Kastar, 2 Cir., 138 F. 2d 828, 830;
As a matter of fact most courts, rather than attempting to define the key See also Moore, Federal Practice, 682; Clark, Code
terms of the rule on compulsory counterclaim,   have preferred to suggest
13

Pleading, 447; Big Cola Corp. v. World Bottling Co., 6 Cir.,

certain criteria or tests by which the compulsory or permissive nature of 134 F. 2d 718.  17

specific counterclaims can be determined. Wright & Miller in their Federal

Practice and Procedure   summarize them as follows:
14
This criterion has however been found inadequate as an overall standard. occurrences, depending not so much upon the immediateness of their
connection as upon their logical relationship. The refusal to furnish the
The  third test ... same evidence or substantial identity in the evidence quotations is one of the links in the chain which constitutes the transaction
relating to the claim and counterclaim   has been considered satisfactory if
18
upon which appellant here bases its cause of action. It is an important part of
used with caution. A test based on similarity of evidence appears reasonable the transaction constituting the subject-matter of the counterclaim. It is the
considering that the very purpose of making certain types of counterclaims one circumstance without which neither party would have found it necessary
compulsory is to prevent the relitigation of the same set of fact. However, it to seek relief. Essential facts alleged by appellant enter into and constitute in
has been shown that some counterclaims may be compulsory even if they part the cause of action set forth in the counterclaim. That they are not
do not meet this test. For instance in an action to void an insurance policy on precisely identical, or that the counterclaim embraces additional allegations,
the ground of fraud, in which there is a counterclaim for the amount of the as for example, that appellant is unlawfully getting the quotations, does not
loss covered by the policy, the evidence of fraud is apt to be entirely different matter. To hold otherwise would be to rob this branch of the rule of all
from the evidence as to the loss suffered by the insured (Mercury Ins. Co. v. serviceable meaning, since the facts relied upon by the plaintiff rarely, if
Verea Ruegg, D.C.N.Y. 1949, 12 F.R. Serv. 13a.11 case 2) or an action for ever, are, in all particulars, the same as those constituting the defendant's
earned freight with counterclaims for damages to cargo, demurrage and counterclaim. Compare Xenia Branch Bank v. Lee, 7 Abb. Pr. 372, 390-394.
expenses due to the unseaworthiness of the vessel (Eastern Transp. Co. v. And see generally, Cleveland Engineering Co. v. Galion Dynamic Motor
U.S., C.A. 2d. 1947, 159 F. 2d. 349). Truck Co. supra, p. 408 [243 Fed.] Champion Spark Plug Co. v. Champion
Ignition Co. (D.C.) 247 Fed. 200, 203-205.
The fourth test ... the logical relationship between the claim and counterclaim
has been called "the one compelling test of compulsoriness"   It was
19
So close is the connection between the case sought to be
enunciated in the leading case of Moore v. New York Cotton stated in the bill and that set up in the counterclaim, that it
Exchange.   Under this test, any claim a party has against an opposing party
20
only needs the failure of the former to establish a
that is logically related to the claim being asserted by the opposing party and foundation for the latter; but the relief afforded by the
that is not within the exceptions to the rule, is a compulsory counterclaim. Its dismissal of the bill is not complete without an injunction
outstanding quality is its flexibility. On the other hand this flexibility restraining appellant from continuing to obtain by stealthy
necessarily entails some uncertainty in its application because of its appropriation what the court had said it could not have by
looseness and potentially over broad scope. This difficulty notwithstanding, judicial
of the four judicially formulated criteria it has by far attained the widest compulsion.  21

acceptance among the courts.

It must be observed that in Moore, the important link which established that
An examination of the cases on compulsory counterclaims may help clarify "logical relation" between plaintiff Moore's claim and defendant New York
and illuminate the judicial application of the "logical relation test". In the Cotton Exchange's counterclaim, is the refusal of the latter to furnish to the
leading case of Moore v. New York Cotton Exchange (1926, 46 S.Ct 367, former cotton price quotations because of its belief that Moore was
371, 270 U.S. 593, 70 L.Ed 750, 45 A.L.R. 1370) the logical relation or purloining or otherwise illegally obtaining its cotton price quotations and
connection between the defendant's counterclaim and the plaintiff's claim distributing them to bucketshops. As the Court pointed out "It is an important
has been explained thus: part of the transaction constituting the subject matter of the counterclaim. It
is the one circumstance without which neither party could have found it
necessary to seek relief. ... So close is the connection between the case
The bill sets forth the contract with the Western Union and the refusal of the sought to be stated in the bill and that set up in the counterclaim, that it only
New York Exchange to allow appellant to receive the continuous cotton needs the failure of the former to establish a foundation for the latter; but the
quotations, and asks a mandatory injunction to compel appellees to furnish relief afforded by the dismissal of the bill is not complete without an
them. The answer admits the refusal and justifies it. The counterclaim sets injunction restraining appellant from continuing to obtain by stealthy
up that, nevertheless, appellant is purloining or otherwise illegally obtaining appropriation what the court held it could not have by judicial compulsion."
them, and asks that this practice be enjoined. "Transaction" is a word of
flexible meaning. It may comprehend a series of many
A review of decided cases in this jurisdiction on compulsory counterclaims "We have indicated that a counterclaim is compulsory if it
likewise demonstrates the nexus between plaintiff's claim and defendant's bears a "logical relationship" to an opposing party's
counterclaim showing the "logical relation" between the two. Thus in actions claim. Zion v. Sentry Safety Control Corp., 3 Cir., 1959.
for ejectment,   or for the recovery of possession of real property,   it is well
22 23
258 F. 2d 31. See also United Artists Corp. v. Masterpiece
settled that the defendant's claims for value of the improvements on the Productions, Inc. 2 Cir., 1955, 221 F. 2d 213, 216. The
property or necessary expenses for its preservation are required to be phrase "logical relationship" is given meaning by the
interposed in the same action as compulsory counterclaims. In such cases it purpose of the rule which it was designed to implement.
is the refusal of the defendant to vacate or surrender possession of the Thus, a counterclaim is logically related to the opposing
premises that serves as the vital link in the chain of facts and events, that party's claim where separate trials of each of their
constitutes the transaction upon which the plaintiff bases his cause of action. respective claims would involve a substantial duplication of
It is likewise an "important part of the transaction constituting the subject effort and time by the parties and the courts. Where
matter of the counterclaim" of defendant for the value of the improvements multiple claims involve many of the same factual issues, or
or the necessary expenses incurred for the preservation of the property. For the same factual and legal issues, or where they are off-
they are off-shoots of the same basic controversy between the parties which shoots of the same basic controversy between the parties,
is the right of either to the possession of the property. fairness and considerations of convenience and of
economy require that the counterclaimant be permitted to
While the refusal of NAMARCO to deliver the remainder of the goods maintain his cause of
contracted for in its "trade assistance agreement" with FEDERATION, is the action. ... 
24

important link in the chain of facts and events that constituted the transaction
upon which Federation's cause of action was based in Civil Case No. 42684, II
it is not even a part of the transaction constituting the subject matter of
NAMARCO's present suit. For the action of FEDERATION on March 2, But even assuming for the nonce that NAMARCO's present claim is logically
1960, to compel NAMARCO to recognize the validity of their agreement and related to the claim of the FEDERATION in the previous case, NAMARCO's
deliver the remainder of the goods to be paid "on cash basis" in no way claim having accrued or matured after the service of its answer in the earlier
involved the payment of the merchandise worth P609,014.73, already case is in the nature of an after-acquired counterclaim which under the rules
delivered and paid for in cash by means of the domestic letters of credit. is not barred even if it is not set up in the previous case as a counterclaim.
When the domestic letters of credit were subsequently dishonored by the An after-acquired counterclaim, is one of the recognized exceptions to the
Philippine National Bank on May 19, 1960 compelling NAMARCO to send on general rule that a counterclaim is compulsory and must be asserted if it
June 7, 1960 a letter of demand for payment to FEDERATION which the arises out of the same transaction as the opposing party's claim.
latter received on July 5, 1960, but which it apparently ignored and because
of such inaction NAMARCO therefore sued FEDERATION for payment on
January 25, 1961, such non-payment by FEDERATION was a matter which Although the claim arises out of the transaction or
was distinct and separate from and had no logical relationship with the occurrence three exceptions are made to the compulsory
subject matter of FEDERATION's own suit. These two claims are separate requirement that it be pleaded. They are:
and distinct, as they involve totally different factual and legal issues and do
not represent the same "basic controversy". (1) Time of Filing. The claim which is the basis of the
counterclaim must be in existence at the time of "counter-
A counterclaim has been held to be compulsory if there is claimant" files his pleading. Thus if P sues A and A does
a logical relationship between it and the main claim. Thus, not have a claim arising out of the transaction or
in Great Lakes Rubber Corporation v. Herbert Cooper Co., occurrence of P's suit at the time A files his answer A is
286 F. 2d 631 (1961), Judge Biggs speaking for the Third not obliged to plead such a claim, although one arises
Circuit Court said this: subsequent to the filing of his answer. 
25
Wright & Miller, Federal Practice and Procedure,   explain this exception to
26
construction placed upon it by the courts of that state or country before its
the compulsory counterclaim requirement thus: adoption. Such construction is regarded as of great weight, or at least
persuasive and will generally be followed if sound and reasonable, and in
The first exception is that the party need not assert a harmony with justice and public policy, and with other laws of the adopting
counterclaim that has not matured at the time he serves jurisdiction on the subject.   And while the construction of a statute by courts
32

his pleading. This is derived from the language in the rule of the original state after its adoption by another, may have no controlling
limiting its application to claims the pleader has "at the effect on the adopting state, it may be strongly persuasive and will be
time of serving the pleading." A counterclaim acquired by followed when it is considered to give true force and effect to the statute." 33

defendant after he has answered will not be considered

compulsory, even if it arises out of the same transaction as We find no cogent reason why such uniform and settled construction of Rule
does plaintiff's claim. Similarly, a counterclaim acquired by 13 of the Federal Rules should not be applied in the interpretation of the
plaintiff after he has replied to a counterclaim by defendant aforesaid sections of Rule 10 of the old Rules of Court. Thus while Section 6
is not compulsory under Rule 13(a). However, if a party of Rule 10 of the old Rules defines a compulsory counterclaim as a claim
should acquire a matured counterclaim after he has that "arises out of or is necessarily connected with, the transaction or
pleaded, Rule 13(e) provides that he may obtain the occurrence that is the subject-matter of the opposing party's claim," Section
court's permission to include it in a supplemental pleading 3 of the same rule, requires that such counterclaim must be in existence "at
under Rule 15(d).  27
the time" the counter-claimant files his answer.

A counterclaim may be asserted under Rule 13(e) only by The counterclaim must be existing at the time of filing the answer, though not
leave of court, which usually will be granted in order to at the commencement of the action for under Section 3 of the former Rule
enable the parties to litigate all the claims that they have 10, the counterclaim or cross-claim which a party may aver in his answer
against each other at one time thereby avoiding multiple must be one which he may have "at the time" against the opposing party.
actions. However, Rule 13(e) is  permissive in character. That phrase can only have reference to the time of the answer. 34 Certainly
An after-acquired counterclaim, even if it arises out of the a premature counterclaim cannot be set up in the answer. This construction
transaction or occurrence that is the subject matter of the is not only explicit from the language of the aforecited provisions but also
opposing party's claim, need not be pleaded serves to harmonize the aforecited sections of Rule 10, with section 4 of the
supplementally; the after-acquired claim is not considered same rule which provides that "a counterclaim ... which either matured or
a compulsory counterclaim under Rule 13(a) and a failure was acquired by a party after serving his pleading may, with the permission
to interpose it will not bar its assertion in a later suit. of the court, be presented as a counterclaim ... by supplemental pleading
before judgment."
The decision to grant or deny a motion to serve a
supplemental counterclaim is totally within the trial court's Thus a party who fails to interpose a counterclaim although arising out of or
discretion. 28
is necessarily connected with the transaction or occurrence of the plaintiff's
suit but which did not exist or mature at the time said party files his answer is
The provisions of Rule 13 of the Federal Rules of Civil Procedure, adverted not thereby barred from interposing such claim in a future litigation. However
to in the preceding commentaries and decisions of the federal courts, have such claim may with the court's permission be included in the same case by
been engrafted into our procedural rules. Thus section 3 of Rule 10   of the
29
way of supplemental pleading before judgment under Section 4 of the former
former Rules of Court was taken from Rule 13 (a) and (g) of the Federal Rule 10 of the Rules (now Sec. 9 of Rule 6). And the same may be allowed
Rules of Civil Procedure, while sections 4 and 6 of same Rule 10,   were
30
unless the case has progressed so far that it may be inconvenient or
taken, respectively, from Rule 13(e) and (a) of the said Federal Rules.  31
confusing to allow the additional claim to be pleaded.  35

It is a rational rule of statutory construction that a statute adopted from We therefore rule that NAMARCO's present action, is not barred by its
another state or country will be presumed to have been adopted with the failure to assert it as a counterclaim in the previous case.
III the case at bar it is not even pretended that the negotiable character of the
sight drafts was impaired as a result of the fault of NAMARCO. The fact that
The FEDERATION also contends that it has incurred no liability, as NAMARCO attempted to collect from the Philippine National Bank on the
NAMARCO has neither alleged nor proved that it has complied with the sight drafts on March 10, 1960, is of no material significance. As heretofore
conditions contained in the three domestic letters of credit, that the sight stated they were never taken, in the first instance as payment. There was no
drafts drawn upon them be presented to FEDERATION for acceptance agreement that they should be accepted as payment. The mere fact that
before they can be honored by the Bank. It is the theory of the NAMARCO proceeded in good faith to try to collect payments thereon, did
FEDERATION in its brief that the failure of NAMARCO to present the sight not amount to an appropriation by it of the amounts mentioned in the sight
drafts to the former for acceptance, pursuant to the requirements of the drafts so as to release its claims against the FEDERATION. A mere attempt
letters of credit deprives NAMARCO of a cause of action against to collect or enforce a bill or note from which no payment results is not such
FEDERATION. It must be noted however that such purported discharge from an appropriation of it as to discharge the debt. 40

its obligation to NAMARCO due to the failure of the latter to comply with the
requirements of the domestic letters of credit, was never invoked by We note however, that the lower court erred in imposing interest at the legal
FEDERATION as a basis for its "Motion to Dismiss" of February 7, 1961   or36
rate on the amount due, "from the date of delivery of the merchandise", and
as an affirmative defense in its "answer" to the complaint on June 14, 1961 not from the date of the extra-judicial demand. In the absence of any
in Civil Case No. 46124.   There is no showing that this question was raised
37
stipulations on the matter, the rule is that the obligor is considered in default
as an issue during the trial. As a matter of fact such matter was neither only from the time the obligee judicially or extrajudicially demands fulfillment
discussed nor mentioned in the appealed judgment since the entire theory of of the obligation and interest is recoverable only from the time such demand
the FEDERATION in its defense is that the claim of NAMARCO being a is made.   There being no stipulation as to when the aforesaid payments
41

"compulsory counterclaim", is now barred, NAMARCO having failed to set it were to be made, the FEDERATION is therefore liable to pay interest at the
up on a counterclaim in the previous case. Well settled is the rule that legal rate only from June 7, 1960, the date when NAMARCO made the
questions which were not raised in the lower court cannot be raised for the extra-judicial demand upon said party. We likewise fail to find any factual or
first time on appeal.   Defendant-appellant therefore is now precluded from
38
legal basis for the award of attorney's fees.
raising that question.
ACCORDINGLY, with the modifications above indicated, the appealed
In any event NAMARCO's action is not based on the domestic letters of judgment is hereby affirmed, with costs against defendant-appellant.
credit, but on its legal right to the cost of the goods delivered to the
FEDERATION the correlative obligation of the latter to pay for the same, and
its default or refusal to make such payments.

Furthermore the mere delivery by the FEDERATION of the domestic letters

of credit to NAMARCO did not operate to discharge the debt of the
FEDERATION. As shown by the appealed judgment NAMARCO accepted
the three letters of credit "to insure the payment of those goods by the
FEDERATION ... ." It was given therefore as a mere guarantee for the
payment of the merchandise. The delivery of promissory notes payable to
order, or bills of exchange or drafts or other mercantile document shall
produce the effect of payment only when realized, or when by the fault of the
creditor, the privileges inherent in their negotiable character have been
impaired. (Art. 1249 New Civil Code.) The clause of Article 1249 relative to
the impairment of the negotiable character of the commercial paper by the
fault of the creditor, is applicable only to instruments executed by third
persons and delivered by the debtor to the creditor, and does not apply to
instruments executed by the debtor himself and delivered to the creditor.   In
39