G.R. No. L-28764. November 29, 1973.
GENERAL INSURANCE AND SURETY CORPORATION, petitioner, vs. HON. HONORATO B. MASAKAYAN, Judge of the Court of First Instance of Rizal, Branch V, Quezon City; LEANDRO E. CASTELO and JOSEFA PAYUMO CASTELO, respondents.

FACTS

This petition stemmed from two interrelated cases concerning a lot. In 1959, petitioner General Insurance filed an unlawful detainer case (Civil Case No. 6743) against respondents Castelos. The Castelos, in turn, filed a separate action (Civil Case No. Q-4795) in the Court of First Instance (CFI) to declare a “Deed of Sale with Right of Repurchase” over the same lot as an equitable mortgage and to secure reconveyance of title. The unlawful detainer case was ultimately dismissed for lack of jurisdiction. The CFI decided Civil Case Q-4795 in favor of the Castelos, ordering reconveyance. On appeal, the Court of Appeals set aside the CFI decision and remanded the case for further proceedings, finding that the trial court had abused its discretion in denying the petitioner a chance to present its evidence.
After remand, petitioner moved to file an amended answer to include a counterclaim for damages, specifically for the Castelos’ use and occupation of the lot from 1952 onwards, alleging deprivation of its enjoyment. The respondent judge denied the motion for leave to amend, prompting this petition for certiorari.

ISSUE

Whether the respondent judge committed a grave abuse of discretion in denying the petitioner’s motion for leave to file an amended answer with a counterclaim for damages arising from the respondents’ use and occupation of the property.

RULING

Yes. The Supreme Court granted the petition, setting aside the challenged orders. The Court held that the respondent judge gravely abused his discretion in denying the amendment. The proposed counterclaim for damages due to deprivation of use was compulsory in nature. It arose out of, and was necessarily connected with, the same transaction or occurrence—the ownership and possession of the lot—that was the subject matter of the Castelos’ complaint for reconveyance. Allowing the amendment would prevent multiplicity of suits, as the issue of possession and its monetary consequences were intrinsically linked to the core issue of ownership being litigated. Disallowing it would force the petitioner to file a separate action, contravening the policy of settling all related controversies in a single proceeding to expedite litigation and avoid unnecessary delay.
The Court emphasized the settled rule of liberal allowance of amendments to pleadings to ensure that the real controversies between parties are fully presented and decided on the merits. The amendment did not introduce a new cause of action but pertained to a claim that was the subject of the previously dismissed ejectment case, which was dismissed on jurisdictional, not merits, grounds. Therefore, the lower court was ordered to admit the amended answer with counterclaim and proceed with the case.