G.R. No. 185592 - Fong vs. Duenas

November 1996: Verbal agreement to form Alliance Holdings, Inc., capitalized at ₱65 million; Fong to contribute ₱32.5 million in cash, DueAas to contribute his Danton and Bakcom shares valued at ₱32.5 million.
Fong remitted ₱5 million in tranches between November 1996 and June 1997, expecting these advances to apply toward his 50% shareholding in Alliance.
DueAas failed to produce share‐valuation documents and did not incorporate Alliance with the SEC.

June 13, 1997: Fong notified DueAas he would limit his total contribution to ₱5 million due to personal and business constraints.
October 30, 1997: Fong formally cancelled the joint venture and demanded refund of ₱5 million.
March 25, 1998: Final written demand warning of judicial action.
April 24, 1998: Fong filed a complaint for collection of sum of money and damages.

June 27, 2006 decision: Treated the pleading as an action for rescission under Article 1191, Civil Code.
Found DueAas failed to apply Fong’s advances to Alliance, invested them instead in Danton and Bakcom, and failed to deliver valuation documents.
Ordered return of ₱5 million with 10% attorney’s fees and litigation costs.
October 30, 2006 order granted 6% per annum interest from extrajudicial demand.

September 16, 2008 decision and December 8, 2008 resolution: Annulled the trial court’s judgment.
Held Fong’s June 13, 1997 letter converted his advances into investments in Danton and Bakcom, consistent with the original agreement.
Concluded that Fong knowingly accepted delay and could not seek rescission or collection.

The body of the complaint manifests Fong’s claim for rescission: allegations focus on DueAas’s failure to provide valuation documents and incorporate Alliance.
Under Article 1191, reciprocal obligations imply the power to rescind if one party fails to perform.
Rescission “unmakes” the contract ab initio and requires mutual restitution of benefits.

Fong materially breached by unilaterally reducing his committed contribution from ₱32.5 million to ₱5 million without agreed valid cause.
DueAas breached by misapplying Fong’s advances to his own companies and delaying incorporation.
Article 1192: when both parties breach and it is indeterminate who defaulted first, the contract is extinguished, and each bears own damages.

Section 13 of the Corporation Code: at least 25% of authorized capital stock must be subscribed and 25% of subscription paid befor

Jose V. DueAas operates bakery and food‐manufacturing businesses through D.C. Danton, Inc. and Bakcom Food Industries, Inc.
George C. Fong and DueAas were former De La Salle University classmates.
November 1996: They entered a verbal joint venture to incorporate Alliance Holdings, Inc., with a P65 Million capitalization equally shared (P32.5 M in cash by Fong; P32.5 M in Danton and Bakcom shares by DueAas).
Fong required DueAas to furnish financial documents to substantiate his share valuation; none were provided.
From November 25, 1996 to June 13, 1997, Fong remitted P5 Million in tranches as advances, under the impression these constituted his subscription to 50% of Alliance’s shares.
June 13, 1997 letter: Fong limited his total contribution to P5 Million, citing personal factors and other business commitments.
DueAas failed to incorporate Alliance with the SEC and to deliver the requested valuation documents.
October 30, 1997: Fong rescinded the joint venture and demanded refund of P5 Million; DueAas admitted using the funds for his own companies.
Fong rejected proposed repayment schemes, issued a final demand (March 25, 1998), and filed suit for collection of a sum of money and damages (April 24, 1998).

June 27, 2006: The Regional Trial Court held the complaint to be one for rescission, not mere collection.
Found DueAas’s failure to supply share‐valuation documents and delay in incorporating Alliance justified rescission under Article 1191, Civil Code.
Held that Fong’s advances were improperly invested in Danton and Bakcom, contrary to receipts designating them as subscriptions to Alliance.
Ordered DueAas to return P5 Million, pay 10% attorney’s fees and costs.
October 30, 2006: Granted Fong’s motion for 6% annual interest from date of extrajudicial demand until full payment.