Article 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.
Artikulo 1346. Ang gawa-gawa o kathang isip lamang na kontrata ay walang bisa. Ang medyo gawa-gawa, kapag hindi nito naapektuhan ang karapatan ng ibang tao at ang dahilan ng paggawa ay hindi salungat sa batas, moralidad, mabuting kaugalian, pampublikong kaayusan at pampublikong patakaran, ay binibigkis ang mga partido sa kanilang tunay na napagkasunduan.
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.
KINDS OF SIMULATION
- Absolute simulation is one where the parties do not intend to be bound by the contract. It is not really intended to produce any legal effect, nor does it alter the juridical situation of the parties.
EXAMPLE:
Danny is indebted to Cathy. Upon learning that Cathy is going to enforce his credit, Danny pretended to sell his land to Fredo, his father-in-law. Danny did not receive a single centavo for the deed of sale he executed and he continued in possession of the land as the contract was merely simulated or fictitious. There is no contract of sale in this case.
2. Relative simulation or when the contract entered into by the parties is different from their true agreement or the parties state a false cause in the contract to conceal their real agreement. The parties are bound by their real agreement, provided, it does not prejudice a third person and is not intended for a purpose contrary to law, morals, good customs, public order, or public policy.
EFFECTS OF SIMULATION TO THIRD PERSONS
- If he is prejudiced, he may invoked the nullity of the simulated contracts.
- If he acted in good faith, nullity cannot be invoked against them.
EXAMPLE:
A donor is donating a property to a donee. Instead of executing a deed of donation, the donor instead executed a deed of sale to conceal the donation intended.
Reason for the invalidity of absolutely simulated contracts- lack of true consent, and its prejudice to a third person and is generally fraudulent.
OBLIGATIONS AND CONTRACTS 