Sham contracts, concealed agreements and simulated transactions

In the settled case law of the Supreme Court of Cassation, a sham contract is an agreement by which the parties do not intend to be bound on its stated terms. If they intend only to create the appearance of legal obligations they do not want, the simulation is absolute. If they intend to be bound on different terms, it is relative. The apparent transaction is void in both cases. Where the parties intend a different arrangement, the concealed agreement binds them under Article 17(1) of the Obligations and Contracts Act if it meets the requirements for validity.

The Court regards a contract as simulated when the parties who made it do not intend it to bind them. It is void whether it conceals no other transaction (absolute simulation) or conceals another transaction (relative simulation). Judgment No. 492 of 12.07.2010 in civil case No. 1904/2009 requires unequivocal proof that the parties did not intend to be bound and contracted only to create the appearance of legal effects they did not want. A contract is also a sham where the parties agreed that neither would owe the performance specified in it (judgment No. 163 of 15.06.2011 in civil case No. 1536/2009). If they agreed to owe nothing, the simulation is absolute; if they agreed to owe something else, it is relative.

In court, the party alleging simulation must prove it. The party alleging a concealed agreement must prove its terms. In principle, the simulated act is void and produces no legal effects. Anyone with an interest may therefore rely on the true position without a time limit: revealing the simulation is not a separate right subject to limitation, but a direct consequence of the actual state of affairs. The concealed agreement takes effect only if it meets the requirements for validity. Transactions whose legal effects the parties do not intend are simulated. Relative simulation in fact involves two transactions: the apparent one, whose effects are not intended, and the concealed one, whose effects the parties actually want.

Claims under Articles 26 and 17 of the Act have different subject matters: the former concerns the nullity of the apparent transaction, the latter the binding force of the concealed agreement.

This article does not provide a legal opinion or advice about any particular person or situation. For assistance with an individual case, consult a lawyer.