Perfected Contract of Sale When a Preliminary Agreement Becomes Binding

The Supreme Court, in Far East Bank and Trust Company v. Philippine Deposit Insurance Corporation (G.R. No. 172983, July 22, 2015), clarified an important point in Philippine civil law: a contract of sale may be perfected even before the parties sign the final deed of sale. The case involved the purchase of a failed bank's assets, but its ruling applies to ordinary sales as well.

The Facts of the Case

When Pacific Banking Corporation (PBC) was placed under receivership in 1985, the Central Bank invited banks to bid for PBC's assets and franchise. Far East Bank and Trust Company (FEBTC) submitted a bid covering both non-fixed assets (like loans and receivables) and fixed assets (real properties enumerated in an Asian Appraisal Report).

The Monetary Board accepted FEBTC's bid. On April 16, 1986, FEBTC, PBC, and the Central Bank executed a Memorandum of Agreement (MOA) that adopted the terms of FEBTC's bid. The MOA stated that the parties "shall execute an absolute purchase agreement" covering all of PBC's assets.

Later that year, the parties executed a Purchase Agreement (PA)—but it covered only the non-fixed assets. The fixed assets were left out. When the Philippine Deposit Insurance Corporation (PDIC) took over as liquidator, it refused to sell the fixed assets to FEBTC, claiming they were excluded because they had been mortgaged to the Central Bank. The PDIC instead planned to sell them to third parties at higher prices.

The Issue

Could the liquidator be compelled to execute deeds of sale over the disputed fixed assets? This depended on whether a contract of sale over those assets had already been perfected.

The Ruling: Perfection Happened at the MOA

The Supreme Court ruled in favor of FEBTC. A contract of sale is perfected by mutual consent—when the seller obligates himself, for a price certain, to deliver and transfer ownership of a determinate thing to the buyer. Perfection requires only three elements: consent, object, and consideration.

All three were present in the MOA:

• Object: The fixed assets were specifically identified in the Asian Appraisal Report, which the MOA incorporated by reference.
• Consideration: The price was certain—the sound values from the appraisal, less depreciation and a 5% discount—plus P260 million as additional consideration.
• Consent: The MOA embodied the parties' meeting of the minds on these terms.

The Court emphasized that a sale is perfected by the meeting of minds regardless of whether it was reduced to writing. The fact that the parties still had to execute a separate "absolute purchase agreement" did not mean no contract existed. That later agreement fell under the consummation stage, not the perfection stage.

The Court also noted that FEBTC's P5 million downpayment was earnest money—proof of a perfected contract under Article 1482 of the Civil Code. FEBTC took possession of the properties and made improvements, and the liquidator even delivered the titles to FEBTC, all confirming that the sale had been perfected.

The PA Did Not Modify the MOA

The Court rejected the argument that the PA was the "final repository" of the parties' agreement. The PA expressly acknowledged that other assets covered by the MOA were not yet included, and gave the parties 90 days to execute another purchase agreement. This provision made sense only if the fixed assets were already sold under the MOA. FEBTC's demand letter, sent within the 90-day period, confirmed its timely enforcement of the perfected sale.

The Mortgage Defense Failed

The Court also rejected the claim that the fixed assets were excluded because they were mortgaged to the Central Bank. After trial, the RTC found the mortgage deeds were of doubtful authenticity, were not notarized as represented, and were never annotated on the titles. Unregistered mortgages bind only the parties to them, not third persons like FEBTC.

Notably, the Court clarified that a ruling denying a preliminary injunction is based only on a "sampling" of evidence and does not bind the court in its final decision on the merits.

Practical Takeaways

• A preliminary agreement can be a binding contract. If the parties agree on the object and the price, a contract of sale may already be perfected—even if they plan to sign a more formal document later.
• Earnest money is powerful evidence. Under Article 1482 of the Civil Code, earnest money given upon the perfection of a sale is proof of the contract's existence.
• A deed of sale is not the contract itself. It is the written evidence of a contract that may have been perfected earlier by the parties' meeting of minds.
• Delivery of possession and improvements by the buyer, with the seller's knowledge, strongly indicates a perfected sale.
• Preliminary injunction rulings are not final. Findings made in a hearing for a provisional remedy do not bind the court in deciding the main case.

This article is general information and not legal advice. For your specific situation, consult a lawyer or ask ASG Legal AI.