Legal Definitions - relative simulated contract

A relative simulated contract occurs when parties outwardly create one type of contract (the "simulated" contract) but secretly intend to be bound by a different, hidden contract (the "disguised" or "true" contract). In essence, the apparent contract is a façade, designed to mislead third parties about the true nature of the transaction, while the actual legal relationship between the parties is governed by their secret, true agreement. The simulated contract is generally considered void, but the disguised contract can be valid if it meets all legal requirements and does not violate any laws or public policy.

Here are some examples to illustrate this concept:

• Example 1: Disguising a Gift as a Sale

  Imagine a parent wants to transfer ownership of a valuable piece of land to their child as a gift, but they wish to avoid the higher taxes or transfer fees often associated with direct donations in their jurisdiction. To achieve this, they draw up a formal "sale" contract, publicly stating that the child is purchasing the land for a very low, nominal price. However, both the parent and the child secretly agree that no money will actually change hands, and their true intention is for the land to be a gift.

  How it illustrates the term: The "sale" contract is the simulated contract – it's the outward appearance designed to mislead tax authorities or other third parties about the nature of the transaction. The actual, secret agreement between the parent and child for the land to be a gift is the disguised contract. The parties intended a transfer of ownership (a gift), but they used the form of a sale to achieve a different financial outcome.

• Example 2: Transferring Property to Avoid Creditors

  Consider a business owner facing severe financial difficulties and fearing that their creditors will seize their valuable assets, such as a commercial building. To protect the building, the owner enters into a "sale" agreement with a trusted friend, publicly transferring ownership of the building for a seemingly legitimate price. However, the owner and the friend have a secret, private understanding that the friend will merely hold the property in their name temporarily and will transfer it back to the owner once the financial troubles have passed. No actual payment for the "sale" occurs, and the owner continues to manage the property.

  How it illustrates the term: The public "sale" of the commercial building is the simulated contract, intended to create the impression that the owner no longer possesses the asset, thus shielding it from creditors. The private agreement between the owner and the friend, where the friend acts as a temporary custodian of the property with an obligation to return it, is the disguised contract. The parties intended a temporary safekeeping arrangement, but they disguised it as a sale to protect the asset from third-party claims.