Short answer. The real agreement — the actual higher price you both intended — is what legally binds you, not the amount written in the document. Under Article 1346 of the Civil Code, a relative simulation binds the parties to their true agreement, as long as it does not prejudice third persons or violate the law.
What the law says
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.
Civil Code, Article 1346 — Effect of Simulation. Read the full provision →
What relative simulation means
A simulated contract is one where the written document does not reflect what the parties actually agreed. Article 1346 of the Civil Code distinguishes between two types. An absolute simulation — where there is no real agreement at all, just a fictitious document — is void. A relative simulation is different: a real transaction exists, but the parties wrote down different terms than the ones they actually agreed to. In your situation, the actual sale happened and both of you knew the real price; the document simply understated it. That is a relative simulation.
The real agreement controls — not what the paper says
Under Article 1346, a relative simulation binds the parties to their real agreement. Between the two of you, the true price — the one you both intended — is what governs. If a dispute arises about how much was owed, you cannot hide behind the lower figure in the document and claim that is the binding price. The real deal is the binding one. This cuts both ways: the buyer cannot later claim they only owe the written amount, and the seller can enforce the actual price.
The limits — it must not harm others or violate the law
The rule that the real agreement prevails applies only 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. Deliberately understating the sale price to pay less tax is a purpose that may conflict with tax law. Third parties — creditors, a tax authority, a government registry — may have legitimate interests that are harmed by the understatement. In those situations, the parties cannot invoke the real agreement to their advantage against those affected parties. The simulation may be used against them.
Practical implications
Even if the real agreement is valid between you and the other party, the act of understating the price for tax purposes carries its own legal risks. Tax authorities can assess the correct tax on the actual transaction value, impose surcharges and interest, and in serious cases pursue administrative or criminal liability for tax evasion. The fact that the Civil Code upholds the real agreement between the parties does not shield either of you from those consequences. Before relying on what the document says — or does not say — it is important to understand the full picture of your exposure.
Cases citing this provision
These Supreme Court decisions cite the provision above. We list them so you can read them yourself; the summaries of what each decided are not ours to give.
- Felix Chingkoe and Rosita Chingkoe vs. Faustino Chingkoe and Gloria Chingkoe, G.R. No. 244076, March 16, 2022 — read the decision on LawPhil →
- ATCI Overseas Corporation and Amalia G. Ikdal vs. Asset Pool A (SPV-AMC), Inc, G.R. No. 250523, June 28, 2021 — read the decision on LawPhil →
- Robert and Nenita De Leon vs. Gilbert and Analyn Dela Llana, G.R. No. 212277, February 11, 2015 — read the decision on LawPhil →
- Heirs of Dr. Mario S. Intac and Angelina Mendoza-Intac vs. Court of Appeals and Spouses Marcelo Roy, Jr. and Josefina Mendoza-Roy, et al, G.R. No. 173211, October 11, 2012 — read the decision on LawPhil →