If a contract is of such a nature that it presupposes full disclosure non-disclosure is fraud. This has been applied to cases of suretyship and insurance. But there is difference of opinion among courts as to the operation of this rule.
It is said that certain classes of contracts are based upon the presumption of the highest good faith in making them, and this has been often said as to contracts of insurance and suretyship. But perhaps the true reason for the rule requiring full disclosure in such cases is the fact a risk is taken and the risk is determined by the actual facts and in order to cover this risk the actual facts must be known. In other words, if I ask an insurance company to insure my life, what they assume to undertake is not a sham risk which I can make them believe exists but a real risk based upon facts as we both know them. The importance of this principle is largely diminished in life insurance cases by the fact that such insurance is written only after a list of questions is an57- Grigsby v. Stapleton, 94 Mo. 423.
swered and the applicant may generally assume that the omitted questions are those whose answer the insurer does not care for. Nevertheless, even in such a case, a failure to disclose a material fact which the applicant must know is material amounts to fraud according to many cases.
Example 37. A desires insurance upon his house. He is acquainted with the fact that incendiary fires have been attempted upon his property very recently. He must inform the insurance company of his knowledge to get valid insurance.58
Example 38. A desires to obtain a bondsman for his employee, and seeks a fidelity company for that purpose. The employee has been a defaulter and is so known to A. A must so inform the company.
If one stands to another in a relationship of trust and confidence, any contract made by him with the other party must be upon full disclosure of all material facts known by him, for the reason that the other party because of such relationship is not upon his guard.
The rule that one contracting party need not acquaint the other with material facts which might affect his decision to contract were they known to him is based at least partially upon the fact that the parties are at arm's length and one owes no duty to protect the other. In those relationships in which there is a duty of protection and for that reason the party is off his guard and not at
58. Pelzer Mfg. Co. v. St. Paul Co., 41 Fed. 271. (There is a difference of opinion as to this rule and its application in the American courts.) arm's length in the bargain, the law requires full disclosure. This is true of the following relationships: principal and agent, attorney and client, guardian and ward, trustee and beneficiary, and director and corporation.
Example 39. P employs A to sell his real estate for him. A states that he will buy it himself. If he knows of any material fact that P does not know which affects the bargain he must so inform P.59
Below is a table summarizing what constitutes fraud. (For disaffirmance and ratification in cases of fraud see sections 47 and 48.)
Fraud consists in
1. Positive statements of fact or any affirmative representation by which the truth is distorted.
2. Not mere opinions and predictions.
3. Active concealment of material facts.
4. Not mere silence or nondisclosure, unless a. Facts are not discoverable by the other by reasonable diligence.
b. Contract is one assumed upon the theory of full disclosure, as insurance and suretyship.
c. Relationship of trust and confidence.
- attorney and client. - principal and agent. - guardian and ward. - trustee and beneficiary. - director and corporation.
59. Brooke v. Berry, 2 Gill (Md.) 83.
Duress consists in securing a contract from another by imprisonment or by fear induced by threats regarding his personal safety or liberty or his property whereby the free exercise of his will is overcome.
A contract must not be secured from another by threat or force. The theory of contract is that it is an obligation freely assumed by agreement. If it is forced from another, he may avoid it.
Mere persuasion, no matter how constant or unpleasant, is not duress. There must be force or fear.
Duress by Imprisonment. Actual imprisonment may be duress whether the imprisonment is lawful if procured for the purpose of extorting a contract and a contract is thereby extorted. "Though a person is arrested under a legal warrant by a proper officer, yet if one of the objects of the arrest is thereby to enforce the settlement of a civil claim, such arrest is a false imprisonment and a release and conveyance of property by means of such arrest is void." 60 But it has been held that a contract will not be set aside though procured under duress if it expresses or settles a real indebtedness.61
Duress by Threats (per Minas). It was once said that a threat would not amount to duress unless it was of such a nature that it would overcome the will of a constant and courageous man; later, that it was duress if it would overcome the will of a person of ordinary firmness; but the latest development is that it is duress if it is used for the purpose of overcoming, and actually does overcome the will of the person involved.62
60. Jordan v. Beecher, L. R. A. 1915 D. 1122 (Ga.)
61. Kronmeyer v. Buck, 258 111. 586.
62. Galusha v. Sherman, 81 N. W. (Wis.) 495.
Example 40. Anna Voboril gave notes to pay her husband's indebtedness upon threat that if she would not do so her husband would be imprisoned. Being sued on the notes she claims they were obtained from her by duress. Plaintiff contends that the alleged threat, even if true, could not constitute duress as the husband had done nothing for which he could be arrested. But it appeared that Anna Voboril was an illiterate foreigner, ignorant of our laws, a mother of seven children, unversed in business affairs, and the court held that such a threat was calculated to induce in her a fear which would destroy the freedom of her will in making the contract in question.63
It was formerly held that duress by threatening injury to one's property was not duress, but this absurd view is abandoned.64
To threaten a person with arrest for a crime that he is believed to have committed is duress according to the weight of authority; except that it has been held that a promise to pay or the payment of a real indebtedness (as in case of embezzlement) will not be disturbed when so secured.65
(c) Undue influence.
Undue influence consists in an abuse of influence or power which one by reason of a fiduciary relationship or of the sickness, infirmity or necessitous distress of the other, has over that other, thereby to induce him to enter into a contract he would not have freely made. It renders the contract voidable by the other party.
63. Voboril v. International Harv. Co., 187 Fed. 973.
64. Spaids v. Barrett, 57 111. 289.
65. Kronmeyer v. Buck, 258 111. 586.
The courts will not interfere to relieve a person from his contracts merely because they are unjust or oppressive and constitute hardship upon him. Even if he were in distress or great necessity, or sick, or infirm from age, or mentally weak, his contract is not for that reason voidable, though unfair and hard, provided he exercised his own will and judgment. For, by such circumstances he is not deprived of his freedom to contract. But it must be shown in addition thereto that an advantage was taken of him, depriving him of his own mental freedom. Argument, solicitation and pleading, however strong, do not in themselves constitute undue influence.
The chief cases of undue influence arise when the parties sustain a relationship to each other which puts one of them in a position calculated to give him great advantage over the other in directing his conduct and acts. Under such circumstances, the parties may still contract with each other; yet if after a contract is made, the party at a disadvantage, in apt time, avers that he was imposed upon, the court will presume in his behalf that such was the case, casting the burden upon the other of showing that such was not the case.
The chief relationships in which the law will presume undue influence are: (i) family relationships in which one party stands in an influentially superior position; (2) the relationship of guardian and ward; (3) that of attorney and client; and (4) that of physician and patient.
It is, however, not necessary that there be any technical relationship. "Courts have refused to set any bounds to the circumstances out of which a fiduciary relation may spring. * * * it extends to every possible case in which a fiduciary relation exists in fact, and in which there is confidence reposed on one side and resulting domination and influence on the other." 66
(d) Disaffirmance and ratification of contracts voidable for foregoing reasons.
A party wishing to disaffirm on the ground of fraud, duress or undue influence must do so with reasonable promptness under the circumstances after he has discovered the fraud, or after the undue influence or duress has been removed; and he must put the other party in statu quo. In cases of fraud he may either disaffirm or sue for damages.
Contracts obtained by means of fraud, duress or undue influence are voidable, not void. Until avoided they have the status of contracts. The injured party may not care to disaffirm. It is for him to do so after discovering the fraud, or after the duress and undue influence have ceased to operate.
This he must do, if at all, within a reasonable time, and what is a reasonable time depends on all of the circumstances.67
He must also give back what he has received under the contract. Unless he has done so, or made a tender of doing so, he cannot rescind.68
A contract avoidable for the causes considered in this chapter may be ratified by undue delay and by express affirmation, or by any acts that are inconsistent with disaffirmance.
66. Mors v. Peterson, 261 111. 532.
67. Mortimer v. McMullen, 202 111. 413, 67 N. E. 20.
68. Burwash v. Ballou, 230 111. 34.
The contract being voidable only, and not void, may be ratified. This may be by mere delay;70 or by language affirmative of the contract; or by conduct which is inconsistent with the idea of disaffirmance, as selling the property,71 or in any way dealing with it in a manner which shows affirmance. One cannot affirm and then disaffirm, he must do one or the other.
Of course nothing said or done before the fraud is discovered or before the duress or undue influence has ceased to operate can be considered ratification.
70. Burwash v. Ballou, 230 111. 34.
71. Tarkington v. Purvis, 128 Ind. 182.