What is simulation of contracts?

Articles 1345 and 1346 of the Civil Code provide:
ART. 1345. Simulation of a contract may be absolute or relative. The former takes place when the parties do not intend to be bound at all; the latter, when the parties conceal their true agreement. (n) 

ART. 1346. An absolutely simulated or fictitious contract is void. A relative simulation, when it does not prejudice a third person and is not intended for any purpose contrary to law, morals, good customs, public order or public policy binds the parties to their real agreement. (n)
Simulation is the declaration of a fictitious will, deliberately made by agreement of the parties, in order to produce, for the purposes of deception, the appearances of a judicial act which does not exist or is different with that which was really executed.[1] There exists an instrument, but there is no contract. In Tongoy v. CA,[2] the Supreme Court held that simulation of a contract is the act of deliberately deceiving others, by feigning or pretending by agreement, the appearance of a contract which is either non-existent or concealed or is different from that which was really executed. 

There is simulation if: a) there is an outward declaration of will different from the will of the parties; b) false appearance must have been intended by mutual agreement; and c) the purpose is to deceive third persons.[3]


[1] Nautica Canning Corporation v. Yumul, G.R. No. 164588 (2005).

[2] Tongoy vs. Court of Appeals, 123 SCRA 99 (1993); Villaflor vs. Court of Appeals, 280 SCRA 297 (1997); Mendozana vs. Ozamiz, 376 SCRA 482 (2002).

[3] Penalosa v. Santos, G.R. No. 133749 (2001).

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