The Counter-Deed in the Light of the Egyptian Civil Code and the Civil Transactions Law

Two parties may agree to conceal a contractual relation between them and cast it in an apparent form differing from what they agreed: casting a contract of gift, for instance, in the form of a contract of sale. This is known as simulation. What appears before the world is the agreement in which the contractual relation is cast — the sale — known as the simulated agreement, and it is the apparent contract; while what the parties mean to conceal is another contractual relation — the gift — and this is the real or concealed contract, known in practice as the counter-deed.

The counter-deed is governed by Article 190 of the Civil Transactions Law, which provides that "where the contracting parties conceal a real contract by an apparent one, the contract that takes effect between them and their universal successors is the real contract". The Egyptian Civil Code complies with the same sense and the same wording in Article 245.

What a counter-deed is

It is a complete contract meeting every legal condition the law requires of a contract; it has a real existence between its parties, whose will is directed to concealing it, and their dealings are governed by it. As to proof, it is subject to the general rules of evidence in the manner set out in Articles 244 and 245 of the Egyptian Civil Code and Articles 189 and 190 of the Civil Transactions Law. Such a deed appears where the contracting parties mean to conceal the truth of what they have contracted upon. There is then a real contract, to all the effects of which the parties' will has consented, but which for some reason they do not wish to show, so that it remains a concealed contract — the counter-deed here under examination — and another, apparent contract, which the parties display before the world and which, not expressing their true will, remains a simulated contract in the eyes of others.

The compass of the counter-deed

In principle a counter-deed may bear upon every contract and legal disposition, so that it is the real contract between the parties and their successors and their contractual relation is governed by it. This principle may, however, be restricted by a legislative text, in which case the apparent contract becomes the real one and the concealed contract is left out of account. An example is Article 91 of the Egyptian Companies Law of 1981, which provides that "counter-deeds issued by reason of the application of the provisions of this article are void and of no effect".

The situations of the counter-deed

One: between the contracting parties themselves and their successors

As between the contracting parties themselves and those who succeed them as heirs, the rule is plain under Article 245 of the Egyptian Civil Code and Article 190 of the Civil Transactions Law: the real contract — what is known in practice as the counter-deed — is given effect, the apparent contract having no effect at all. For the intention of the parties was directed to that very result, namely to be bound by the concealed contract, and it alone therefore used to be taken into account. By successors here is meant universal successors: the heir and the legatee of an undivided share.

It may happen, however, that a party enters who does not know the truth of the contract between its parties — a creditor of a contracting party, or a particular successor. What then is the rule as against them?

Two: creditors of a contracting party, and particular successors

Simulation is not a ground of nullity; in principle the concealed contract is given effect rather than the apparent one. For the essence of a legal disposition is that the will be directed to producing a legal effect, from which it follows that what counts is what the will seriously — not simulatedly — intends. What counts, then, is what the two parties agreed and whose effect they meant to bring about, not what they displayed before the world. Hence as against the parties and their successors it is the real, concealed agreement that takes effect, and not the other, apparent before the world, which conceals the truth of the dealing.

Since there may be parties who do not know the truth of the contract, and in the interest of the stability of dealings, the civil codes have laid down a particular rule for a creditor of a contracting party and for a particular successor where they are in good faith: they have the right to rely on the concealed contract, or on the simulation of the contract, where their interest so requires; and they may prove by every means the simulation of the contract that has harmed them. A particular successor and a creditor of a contracting party thus have the choice between relying on the apparent contract and relying on the concealed one, provided they are:

a. in good faith;

b. that their interest so requires; and

c. that they are able to prove the truth of the contract.

This is the text of Article 244 of the Egyptian Civil Code and Article 189 of the Civil Transactions Law, which provides that "creditors of the contracting parties and the particular successor, where they are in good faith, may rely on the concealed contract"; the Civil Transactions Law adds the phrase "the simulated contract", unlike the Egyptian Civil Code, whose sense is gathered from the tenor of the text rather than its wording, and from its explanatory memorandum.

It is enough that the third party was unaware of the simulation at the time of their dealing, even if they came to know of it afterwards. Good faith — that is, ignorance of the concealed contract — is presumed in a third party, and whoever alleges the contrary must prove it. Where they fail to prove the simulation, the apparent terms of the contract must be given effect and stand against them, according to the settled rulings of the Court of Cassation.

Three: where the interests of third parties conflict, some relying on the apparent contract and others on the concealed one

In this case preference is given to the former — those relying on the apparent contract — for reasons affecting the stability of dealings. By a third party in simulation is meant anyone who was not a party, in person or through a representative, to the simulated disposition, or who acquires their right on a ground other than that disposition. Cassation, 17 January 1978, appeal 779, year 43; and cassation, 29 November 1981, appeal 489, year 48. The Court of Cassation has likewise held that a third party in simulation — according to the settled rulings of this Court — is anyone with an interest, even if not a party to the relation impugned for simulation; and such a third party is entitled to prove its simulation as prejudicial to their rights, by every lawful means of proof. Cassation, 18 July 1990, appeal 3618, year 59; cassation, 26 March 1980, appeal 191, year 46.

The legal form of the counter-deed

The law requires no particular form in which a counter-deed must be cast, it being the real contract the parties have consented to as governing their relation. Its provisions therefore apply whatever its form, even where the apparent contract is in official form; for officiality does not purge a contract of the defects attaching to it, and a simulated contract remains simulated even after registration or the conferring of official form upon it. Yet although the law binds the parties to no particular form in which a counter-deed is to be concluded, the deed must meet the substantive — not the formal — legal conditions of a contract, or the contract is void. Thus if a contract of gift is cast in a counter-deed, the substantive conditions of gift must be met: the donor must be capable of gratuitous disposition and the donee must accept the gift, and all the provisions governing gift apply to that deed. It has nothing to do with the real deed that will appear before the world.

A moral impediment to obtaining a counter-deed

There is no fixed criterion for the moral impediment that may prevent contracting parties from agreeing a counter-deed between them; each case stands on its own according to the circumstances and the relation binding them. It falls to the trial judge to draw the existence or absence of a moral impediment from the facts and evidence before them.

On this the Egyptian Court of Cassation has held that a tie of kinship or of affinity, whatever its degree, is not a moral impediment preventing the obtaining of a written instrument; the matter turns rather on the circumstances of the case, as assessed by the trial court without review, so long as that assessment rests on acceptable grounds. Cassation, 21 December 1976, year 27, p. 1801.