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Simulation

The Civil Code of Québec (“CCQ”) regime of simulation allows contracting parties to keep their agreement hidden from third parties. For example, a leasing arrangement may be disguised as a contract of sale so as to make the lessee appear to be the owner of the property.[1] The simulation of an agreement results in the creation of a secondary contract named the apparent contract while the true intent of the contracting parties is said to exist in a counter-letter.[2] In the above example, the contract of lease (represented in the counter-letter) would appear to third parties as a contract of sale (the apparent contract). Despite the historic association of simulation with either fraudulent intent, designed to trick third-parties into engaging in unfavorable transactions,[3] or attempts at circumventing prohibition against certain juridical operations,[4] the CCQ permits contracting parties to hide the true nature of their agreement, so long as they comply with rules of public order.[5]

     Simulation typically takes three forms. Most commonly, simulation entails the partial or complete misrepresentation of an agreement (e.g. the case of simulated sale above).[6] Another kind of simulation occurs when an apparent contract is drawn up between parties who have absolutely no intention of making an agreement.[7] This type of simulation is most commonly used to defraud third-party creditors.[8] Last, simulation may involve substituting one of the contracting parties, either to maintain anonymity, or to circumvent laws concerning capacity to consent.[9]

     The very nature of simulation is such that the apparent contract is designed to contradict the true nature of the parties’ agreement. Thus, the CCQ provides a regime for resolving disputes arising: (1) between contracting parties, (2) between contracting parties and third parties, and (3) between interested third parties. Disputes between contracting parties will be settled according to the counter-letter.[10] Meanwhile, third parties acting in good faith may avail themselves of either the agreement expressed in the apparent contract, or the true agreement in the counter-letter.[11] This option protects innocent third parties from being harmed by simulation. The requirement of good faith likely means that the third party was unaware of the simulation when he or she first got involved.[12] Disputes between interested third-parties will be resolved in favor of those who have relied on the terms of an apparent contract.[13] Thus, in the previous example involving a lease disguised as a sale, third-party creditors acting as if a piece of property belonged to the lessee/purchaser (based on the apparent contract of sale) will be favored over other third-party creditors acting as if the property belonged to the lessor/seller (based on the counter-letter of lease).

[1]Jean-Louis Baudouin, Les obligations, 7th ed (Cowansville, Que : Yvon Blais, 2013) at para 491 [Baudouin].
[2]Art 1451 CCQ. However, neither the apparent contract nor the counter-letter need be written. Jean-Pierre v Lubain, 2008 QCCS 346 at para 25
[3]Gerald E. Le Dain, “Security upon Movable Property in the Province of Quebec” (1956) 2 McGill LK 77.
[4]Baudouin, supra note 1 at para 492.
[5]Ibid at para 491.
[6]Ibid at para 492.
[7]Ibid at para 493.
[8]Ibid.
[9]Ibid at para 495.
[10]Art 1451 CCQ.
[11]Art 1452 CCQ.
[12]Baudouin, supra note 1 at para 501.
[13]Art 1452 CCQ.