Legal Definitions - simulated contract

A simulated contract is an agreement that appears to be a valid, legally binding contract on the surface, but where the parties involved secretly intend for it to have no legal effect at all, or to have a different legal effect than what the document outwardly states. Essentially, it's a contract created for show, often to mislead third parties, avoid certain legal obligations, or to conceal the parties' true intentions or a different underlying transaction.

There are two main types of simulated contracts:

• Absolute Simulation: The parties do not intend to be bound by any contract at all. The apparent contract is a complete sham.
• Relative Simulation: The parties intend to be bound by a different contract than the one they outwardly present. The apparent contract disguises their true agreement.

Here are some examples to illustrate this concept:

• Example 1 (Absolute Simulation - Hiding Assets): Imagine a business owner facing significant financial difficulties and potential lawsuits. To prevent creditors from seizing their valuable assets, the owner "sells" their luxury car to a close friend for a nominal price. However, both the owner and the friend have a secret understanding that the friend will never actually pay for the car, and the owner will continue to use it as if it were their own. The purpose of this "sale" is solely to make it appear that the owner no longer possesses the asset, thereby shielding it from creditors.

  Explanation: This is a simulated contract because, while a sale agreement exists on paper, both the owner and the friend secretly agree that the sale is not real and will not transfer actual ownership or create a genuine debt. Their true intention is to deceive creditors about the owner's assets, making the contract an absolute sham.

• Example 2 (Relative Simulation - Disguising a Gift): A wealthy grandparent wants to transfer a valuable piece of real estate to their grandchild without incurring high gift taxes or triggering certain inheritance rules. Instead of executing a straightforward deed of gift, they create a "contract of sale" for the property, stating a purchase price. However, the grandchild never actually pays the grandparent, and both parties understand that the transaction is truly a gift, disguised as a sale to achieve specific tax or legal advantages.

  Explanation: This is a simulated contract because the parties outwardly present a sale, but their true intention is to effect a gift. The "sale" is a disguise for the actual transaction they intend to carry out, which is a gratuitous transfer of property, making it a relative simulation.

• Example 3 (Relative Simulation - Different Transaction Type): Two companies want to enter into a long-term lease agreement for specialized industrial machinery. However, to take advantage of certain accounting treatments or regulatory benefits, they draft a "contract of sale" for the machinery, with a payment schedule that closely mirrors a lease. They have a separate, private agreement clarifying that the intent is a lease, not an outright transfer of ownership, and the machinery will revert to the "seller" at the end of the term.

  Explanation: Here, the contract of sale is a simulation because it does not reflect the parties' true agreement, which is a lease. The "sale" is a facade to achieve specific financial or legal advantages, while the actual relationship and obligations are those of a lessor and lessee. This is another example of a relative simulation, where one type of contract is used to mask another.