Contract of Compromise and Its Types

Contract of Compromise and Its Types

The term compromise refers to agreement, reconciliation, and settlement. In legal doctrine, a contract of compromise is recognized as a specific and defined contract with particular conditions and characteristics stipulated by law. Pursuant to Article 752 of the Civil Code, a compromise may be concluded either to prevent a potential dispute or to resolve an existing dispute, whether related to a transaction or otherwise.

Compromise is one of the legal methods by which individuals may resolve their disputes, either before the courts or before notary public offices. In some cases, a contract of compromise is used as a substitute for other contracts, such as a sale, with its own advantages and disadvantages. One of its advantages is the avoidance of numerous complex conditions required in other contracts, including contracts of sale. However, in certain cases, parties may lose the legal protections and benefits afforded to other contracts due to a lack of awareness.

For example, if parties replace a revocable contract, such as a gratuitous loan, with a contract of compromise, which is generally binding, they will no longer benefit from the right of unilateral termination available under the original revocable contract. Like all contracts, a contract of compromise must meet the general requirements for contract validity, and its subject matter must be lawful.

Elements and Conditions for Validity of a Contract of Compromise

Types of Compromise

• Compromise for Settlement of a Dispute: In this type of compromise, the parties to a dispute mutually agree to resolve and terminate their dispute.
• Compromise for the Purpose of Concluding a Transaction: This type of compromise may replace other contracts, such as a lease, a sale, a gift, a gratuitous loan, or a discharge of obligation. In such cases, the rules and conditions governing a contract of compromise shall apply.

Concept of Gratuitous Compromise

A gratuitous compromise is one made without consideration. In this type of compromise, either no consideration exists, or the consideration is not equivalent in value to the subject of the compromise.

Concept of Lifetime Compromise

Pursuant to Article 41 of the Civil Code, a lifetime usufruct right is a right granted by the owner to another person for the duration of the owner’s lifetime or the lifetime of a third party, who may also be the beneficiary. For example, a person may transfer ownership of property through a contract of compromise while reserving a lifetime usufruct right for themselves, their spouse, or their parents.

In such cases, the beneficiary retains the right to use and benefit from the property for the duration of their lifetime. Ownership may pass to another party, but the lifetime usufruct right remains in force even if the property is sold.

Concept of Conditional Compromise

A conditional compromise is one in which the right to revoke the contract is reserved for the party transferring the property. The period for exercising this right of revocation may be a fixed duration, such as five years, or may extend for the lifetime of a specified person. Upon the death of that person, the contract of compromise shall be terminated.

Concept of Compromise With Consideration and Without Consideration

In a compromise with consideration, the beneficiary is obligated to pay the transferor a specified price or amount. In a compromise without consideration, no payment is made, or the consideration paid is negligible in comparison with the value of the subject matter of the compromise.

Compromise Agreement

By means of a written instrument known as a compromise agreement, the transferor conveys property to the beneficiary. Such an agreement may be drafted as a private document or as an official instrument. Private compromise agreements may be prepared by the parties themselves, their legal representatives, or intermediaries. Official compromise agreements are executed before a notary public office.

These agreements may relate to inheritance shares, goodwill rights, real property, movable property, or other assets.

Grounds for Invalidation of a Compromise Agreement

• Lack of legal capacity of one or more parties.
• Simulated or fictitious nature of the compromise.
• Unlawfulness of the subject matter.
• Lack of ownership or authority of the transferor.
• Mistake regarding the subject matter or the parties.
• Non-existence of the subject matter or lack of capacity for use.
• Forgery, denial, or challenge of authenticity where proven.

Compromise Before the Court

A compromise concluded before a court is valid and binding upon the parties, their legal successors, and their heirs. Such a compromise is enforceable in the same manner as a judicial judgment, results in termination of court proceedings, and has the legal effect of an enforceable instrument.

Frequently Asked Questions About the Contract of Compromise and Its Types