Are Simulated contracts null and void?

What are simulated businesses?

We already have had the opportunity to introduce the Tax Simulations in this blog.

Simulating a business involves setting it up under a false pretense. That is, the parties to the business apparently reach an agreement. However, the reality of the business, the true will of the parties, is another.

From the abovementioned, we can confirm: for a business to be simulated, both parties have to agree to carry out such simulation. If only one of them knew about such simulation, we would be talking about the so-called mental reserve.

Contacto No te quedes con la duda, contacta con nosotros. Estaremos encantados de atenderte y ofrecerte soluciones.

Which are the characteristic notes of the simulated contracts?

1. A deliberate and malicious discrepancy between the will of the parties and its real manifestation.
2. The parties reaching an agreement under a different appearance. That is, a simulated agreement.
3. The purpose of this agreement is to mislead third parties. A simulated business is conducted in order to give a different external appearance to the truly wanted business.

Types of simulated contracts

There are several types of simulated contracts. As we have said, the will of the parties concerned is different from the one executed in front of third parties. The parties’ will can have two different intentions or purposes:

1. Absolute simulation. When the parties do not want to create any type of contract or legal relation. Therefore, behind the false contract there is no other type of legal business. For example, when the appearance of having made a contract is created but not no legal relationship has actually occurred.
2. Relative simulation. In this case, the parties appear to settle for a contract different from the one they are entering into. An example would be signing for sale that is actually a donation. The parties are trying to prevent the donation from having legal effects.

Are simulated contracts void or voidable?

From all the above, it is clear that this legal figure is fraudulent. The contracting parties of this simulation are trying to get a benefit and provoking against third parties’ detriment. And to do so, they create the already mentioned false appearance, either absolutely or relatively. However, are these simulated contracts void or voidable?

Caselaw is clear on this issue and has maintained a uniform criteria over time. More specifically, the Supreme Court itself, whose most recent resolutions are referred to previous decisions of identical pronouncement.

Si te ha interesado este artículo no dudes en leer:

Defects of consent: Brief concept, consequences.

Is there a defect of consent in the sale of a company if these financiers do not respond to the faithful image of the Company's assets? What if there was Due Diligence? What if the buyer is a professional investor? Keep reading

• Relative simulated contracts.

The Supreme Court itself recognizes the validity and effectiveness of the disguised business, not the simulated one. That is, in the example of the sale that covered up as a donation, it would be the donation that would have legal validity. Therefore, the simulated contract will disappear, being void, and only the dissimulated contract will remain in force. All this provided that, the aforementioned disguised contract has been lawfully constituted and meets the necessary requirements. However, it is important to clarify that the simulated contract cannot replace or support the dissimulated one in its defects. Regarding this, the previous example about disguised donation has been mentioned in doctrinal discussions that we will analyze later.

• Absolute simulated contracts.

In a business whose simulation has been absolute, this will result in a full or radical invalidity. This is confirmed among others, by Supreme Court’s Sentence No. 236/2008, of 18 March, which follows this jurisprudential line. The SC establishes that these simulated businesses produce an irremediable nullity. Therefore, they will not produce the intended effects, and the legal situation will remain intact. That is as it was before the birth of the contract with absolute simulation, i.s.as it has never existed.

As a result of its irremediable condition, the exercise of this action will never be subject to a time limit. This is noteworthy, given that Article 1301 of the Civil Code establishes an expiration period of 4 years for nullity actions. However, the case law is uniform in establishing that this article refers to annullability. Therefore, when we are dealing with a contract or legal transaction whose simulation is absolute, we must consider that the nullity action of the same will not expire in any way.

Real Estate: Sale contract hiding a donation

In this case we are dealing with a relative simulation. That is to say, there is an apparent (and null) contract of sale that hides an effective donation. In this case, the logical thing would be to leave the donation as valid and existing, based on what has been explained above. However, case law has been using for years the method of rendering the donation of real estate invalid.

If the disguised business can be valid, it always depends on the fact that it has been carried out in a lawful manner. In other words, in compliance with the corresponding legal requirements and formalities.

What happens then with donations of real estate? They must be done in a public deed, in accordance with article 633 CC. If the apparent sale is declared null, even if it has been made in a public deed, donation’s object is erased. The donation does not exist in a public deed, and that defect cannot be complemented. The property donation would be done without consent and cause. Therefore, the declaration of nullity of the apparent sale will irrevocably lead to the nullity of the hidden donation. In other words, in compliance with the corresponding legal requirements and formalities.

What happens with the declarations of invalidity made by the Tax Agency?

We know that the Tax Administration can declare a legal transaction null and void by considering it simulated. However, does this declaration affect all purposes? Will it also be considered null and void in civil or commercial transactions?

The Central Economic and Administrative Court answered these questions in a resolution of 19 December 2019. This case has its origin in a Regional Economic Administrative Court resolution declaring null a sale contract. Central Economic Administrative Court resolved regional resolution’s appeal.

It resolved that civil legal transactions can exclusively be declared null in civil courts. Therefore, nullity declarations made by the Tax Agency only have tax effects.

It also clarifies that the Tax Agency cannot even claim for annulment. This is because Article 1302 CC only empower to do it to those principally or subsidiary bounded by the contracts. The Tax Agency have not power beyond its scope of action for the nullity of simulated businesses.

Conclusion

Simulated contracts are bound to be declared void, regardless of their relative or absolute simulation character. The difference is that, in relative simulation, the simulated business will still be valid. With the exception, as we have seen, of the donation of hidden real estate.

It is also important to remember that the power of the Tax Agency is limited to its scope of action (Tax purposes). Therefore, any declarations of invalidity it may make have no civil or commercial effect.

If this article has been of interest, we also suggest you to read the following article published on our website:

The Termination of Bilateral Obligations (in Spanish Law)