Partnership v. Simple Contract of Loan v. Investment Contract

Case Title: Santiago v. Spouses Garcia

Date of Promulgation: G.R. No. 228356 | March 9, 2020

FACTS: In November 2000. petitioner Merian Santiago (Merian) was enticed by respondent Edna Garcia (Edna) to invest money in the latter’s lending business with a promise of a high return in terms of monthly interest ranging from 5% to 8%. The parties agreed that monthly interest shall be remitted by Edna to Merian and that the principal amount invested shall be returned to Merian upon demand. Neither of the parties, however, presented evidence to show that such agreement was reduced in writing.

Merian invested several amounts reaching an aggregate amount of Php 1,569,000.00. Subsequently, Edna defaulted in remitting to Merian the interest due from said investments. Merian sent a letter dated January 20, 2004 to Edna demanding for the return of Merian’s total investment. Later, Merian filed a complaint for sum of money against spouses Garcia.

The Regional Trial Court (RTC) found that a partnership was formed between Merian and Edna – the former as capitalist partner and the latter as industrial partner. It ruled that a person who invested in a business which incurred losses cannot convert such investment into a loan. The RTC dismissed Merian’s complaint. The Court of Appeals (CA) disagreed with the RTC and found that the money was given not as Merian’s contribution or share in Edna’s capital in the lending business, but as an investment that will earn interest in case of profit. Nevertheless, the CA found that Merian was without legal right to recover her investment in case of losses, since an investment entails business risk.

ISSUE: Whether Edna is obligated to return the principal amount to Merian upon demand.

RULING: Yes. A partnership, a simple contract of loan, and an investment contract carry peculiar definitions and are governed by pertinent laws.

The Court cannot subscribe to the view that Merian and Edna formed a partnership. By the contract of partnership two or more persons bind themselves to contribute money, property, or industry to a common fund, with the intention of dividing the profits among themselves. There must be unmistakable intention to form a partnership which is lacking in this case. Most importantly, the facts do not disclose that there is mutual agency between Merian and Edna, that is, neither party alleged that she can bind by her acts the other, and can be bound by the acts of the other in the ordinary course of business.

The facts of the instant case do not support the conclusion that the parties entered into a contract of loan either. By a contract of simple loan, one of the parties delivers to another money upon the condition that the same amount of the same kind and quality shall be paid. Merian herself testified that Edna did not borrow money from her and Merian consistently alleged that she invested money in Edna’s lending business.

The parties’ contemporaneous and subsequent acts reveal their intent to enter into an investment contract in a lending business, thus, Republic Act No. 9474 or the Lending Company Act of 2007 governs. Under the same law, only corporations authorized by the Securities and Exchange Commission can engage in the business of granting loans sourced from its own capital funds or from funds coming from not more than nineteen (19) persons. Nevertheless, since the law was passed in May 2007, the lending activities of Edna conducted from 2000 to 2003 cannot be considered unlawful.

As in all contractual relations, an investment contract is largely governed by the stipulations, clauses, terms, and conditions as the parties may deem convenient, which shall be respected as long as it is not contrary to law, morals, good customs, public order, or public policy. Here, the parties agreed that Merian will be investing capital on the lending business which shall earn 5% monthly interest; that the capital will be revolving; and that the capital shall be returned upon demand; thus, Edna is obligated to return the principal amount with legal interest until full payment.

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