GEORGE C. FONG, PETITIONER, VS. JOSE V. DUEÑAS, RESPONDENT.

Fong versus Dueñas

The Case

This is a petition for review on certiorari brought by George C. Fong against his former schoolmate and business acquaintance Jose V. Dueñas. The two men had entered into a verbal joint venture to incorporate a holding company for a food business, and Fong advanced five million pesos toward his share of the capital. When the corporation was never formed, Fong sued to recover his money. The case matters because it teaches two enduring lessons: that the body of the complaint, not its title, determines the nature of the action, and that when both parties to a reciprocal contract are in breach and the first infractor cannot be determined, the contract is deemed extinguished and each side bears its own damages.

Procedural History

Fong filed a complaint for collection of a sum of money and damages before the Regional Trial Court of Makati. The trial court ruled in his favor, treating the action as one for rescission, ordering Dueñas to return the five million pesos, and awarding attorney's fees and costs. On Fong's partial motion for reconsideration, the trial court added a six percent annual interest from extrajudicial demand until full payment. Dueñas appealed to the Court of Appeals, which reversed the trial court and annulled its ruling, holding that Fong's letter showed he had consented to the investment of his money in Dueñas' two companies and that the action must fail whether viewed as collection or rescission. Fong then came to the Supreme Court by petition for review on certiorari.

Facts

Dueñas ran a bakery and food manufacturing business through two companies, Danton and Bakcom. In November 1996, he and Fong verbally agreed to engage in the food business and to incorporate a holding company called Alliance Holdings, with a capitalization of sixty five million pesos to be contributed in equal parts. Fong would put in thirty two million and five hundred thousand pesos in cash, while Dueñas would contribute all his Danton and Bakcom shares, which he valued at the same amount. Fong asked for the financial documents supporting that valuation.

Beginning in November 1996, Fong remitted his contribution in tranches, under the impression that the money would be applied to his subscription to fifty percent of Alliance's shares. By June 1997 his advances totaled five million pesos. On June 13, 1997, he wrote Dueñas limiting his contribution to five million pesos, citing personal and business constraints, and asking to be a modest silent investor instead. Dueñas never furnished the valuation documents, and Alliance was never incorporated or registered with the Securities and Exchange Commission.

On October 30, 1997, Fong cancelled the joint venture and demanded a refund. Dueñas admitted he could not immediately return the money because he had used it for the business expenses of Danton and Bakcom. He proposed several payment schemes, all rejected. After a final demand in March 1998 went unheeded, Fong sued in April 1998.

Issues

• Whether or not the allegations in the body of Fong's complaint, rather than its title as an action for a sum of money, show that it is really an action for rescission.
• Whether or not Dueñas committed a breach of the reciprocal obligations under the joint venture agreement that entitled Fong to rescind it under Article 1191 of the Civil Code.
• Whether or not Fong himself breached the same agreement by reducing his contribution from thirty two million and five hundred thousand pesos to five million pesos, and if so, what the consequence is under Article 1192 of the Civil Code.

Applicable Provisions

Article 1191 of the Civil Code provides:

The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not comply with what is incumbent upon him.

This is the basis of Fong's right to rescind the joint venture when Dueñas failed to deliver the valuation documents and to incorporate Alliance.

Article 1192 of the Civil Code provides:

In case both parties have committed a breach of the obligation, the liability of the first infractor shall be equitably tempered by the courts. If it cannot be determined which of the parties first violated the contract, the same shall be deemed extinguished, and each shall bear his own damages.

This governs because both parties substantially breached the agreement and the record does not show whose obligation was to be performed first.

Ruling

On the first issue, the Court held that the allegations in the body of the complaint, not its title, determine the nature of the action. Fong's allegations that Dueñas failed to submit the valuation and failed to incorporate Alliance, and his prayer to revoke his subscription and recover his advances, show that he sought rescission. The prayer for a refund did not convert the action into one for a sum of money, because mutual restitution is merely the necessary consequence of rescission.

On the second issue, the Court held that the verbal joint venture created reciprocal obligations. Dueñas bound himself to contribute his shares and to process the incorporation, yet he invested Fong's money in his own companies, failed to deliver the valuation documents, and delayed the incorporation. The Court stressed that Fong's contributions were indispensable to the incorporation, since the Corporation Code requires that at least twenty five percent of the authorized capital stock be subscribed and at least twenty five percent of the subscription be paid upon subscription. Dueñas' breach justified rescission under Article 1191.

On the third issue, the Court found that Fong also breached the agreement by unilaterally reducing his contribution to five million pesos, a substantial breach committed before he rescinded. Because the agreement was never reduced to writing, the Court could not determine whose obligation came first. Applying the second sentence of Article 1192, the Court deemed the joint venture extinguished through rescission, ordered Dueñas to return the five million pesos as mutual restitution, and awarded no damages to either party.

Doctrine

First, the nature of an action is determined by the allegations in the body of the complaint, not by its title. Second, rescission under Article 1191 is available when a party to a reciprocal obligation substantially fails to do what he bound himself to perform, and its effect is to restore the parties to their original status, creating the obligation to return what each received. Third, when both parties have breached and the first infractor cannot be determined, Article 1192 deems the contract extinguished and each party bears his own damages, although restitution of contributions is still due to prevent unjust enrichment.

Disposition

The petition was granted, the Court of Appeals decision and resolution were reversed, and Dueñas was ordered to return five million pesos to Fong with six percent annual interest from finality of judgment until fully paid, with each party bearing his own damages.

Remember This

Memorize this line: when both parties breach a reciprocal contract and the first infractor cannot be determined, the contract is deemed extinguished and each bears his own damages, but contributions must still be returned. Examiners use this case to test the body-of-the-complaint rule and the application of Articles 1191 and 1192 on mutual breach.