This section is from the book "The Law Of Contracts", by William Herbert Page. Also available from Amazon: Commercial Contracts: A Practical Guide to Deals, Contracts, Agreements and Promises.
It may be observed before beginning a discussion of the topics of fraud, misrepresentation, mistake and non-disclosure, that if such terms are properly used they all apply to facts which are not carried into the contract by the express stipulation of the parties, and made terms thereof. The validity of the contract may, of course, be expressly conditioned upon the existence or non-existence of specific facts.1 In such cases, no enforceable contract can be said to exist if the fact is not as stipulated, even though no mistake is made as to the identity of the adversary party, or the subjectmatter or the terms of the contract.2 Thus where A agreed to make a flouring mill for B, and as both A and B assumed that X's mill produced fifty-five per cent. flour, they agreed that taking X's mill as a basis, the mill to be furnished by A should produce flour five per cent. better than the fifty-five percent. flour produced by X's mill. Since X's mill did not produce fifty-five percent. flour, and he refused to convert it so as to make that grade, the court held that the contract between A and B was based on a mistake and was unenforceable.3 When the existence of a certain fact is made a term of the contract, certain results follow which show that false statements concerning such fact can not amount to fraud and the like. The fact that the parties have conditioned the validity of such contract on the existence of such fact shows that the party to whom such representation is made does not rely upon the truth of such statement; for if he had, he would not have stipulated for the event of its proving false. Accordingly, even if the other elements of fraud are present it is held in many jurisdictions that a false statement of this sort can not be fraud, since it is not relied upon.4 So it is' held in many jurisdictions that exacting a warranty upon a matter concerning which a prior representation has been made, merges such representation, and prevents it, even if false, from amounting to fraud or misrepresentation.5 Thus a warranty as to the speed of a steamboat, inserted in a contract, prevents a prior false representation as to its speed from amounting to fraud.6 Other courts treat a false warranty as fraud.7 Whether the reliance was solely on the warranty, or in part on the warranty and in part on the fraudulent representation is treated as a question of fact.8 If a contract is conditioned on the existence of a given fact, the contract is discharged if such fact is not as stipulated; or if made a condition precedent, the contract never takes effect, even if all the elements of operative fraud, mistake, misrepresentation, or non-disclosure, may be lacking. In the technically correct use of the term, misrepresentation concerns a matter which though material is not made one of the terms of the contract. If the false statement is carried into the contract and becomes one of the terms thereof, as a condition precedent,9 or a warranty,10 different questions arise from those found in mere misrepresentation. It is rather a case of breach, failure of a condition precedent, and the like. However, such cases are often explained on the theory of misrepresentation. Thus a contract for the sale of realty expressly conditioned to be void if vendor's representations concerning it should prove untrue, may be avoided in that case, even though such representations were made in good faith.11 Among the most prominent examples of misrepresentations which are made terms of contracts are warranties in insurance contracts. A warranty in insurance is in effect a clause providing that the policy shall not be binding unless the statements warranted are literally true.12 To enable a statement to amount to a warranty, the policy must contain a stipulation to that effect. It must not merely be made in the application.13 A warranty may be created by a clause expressly providing that the policy shall not take effect unless such facts are as stated,14 or by a clause warranting the truth of certain statements.15 Such a warranty, if made a part of the policy becomes a condition precedent.16 The effect of such warranties is to permit the insurance company to avoid the policy if the statement thus warranted is untrue, irrespective of other questions that would be important in fraud, misrepresentation, or mistake.17 A warranty in an insurance policy if broken avoids the contract by reason solely of the non-existence of the fact warranted, without any reference to the fraud of the insured.18 That he believes in good faith
1 Sterricker v. McBride, 157 III. 70, 41 N. E. 744; Leonard v. Assurance Co., 24 R. I. 7, 96 Am. St. Rep. 606,
51 Atl. 1040; Harran v. Klaus, 70 Wis. 383, 48 N. W. 479.
2 "It is an attempted contract, assuming the existence of. an essential fact which does not exist, and therefore there has been no meeting of the minds in reality and no contract": Nordyke & Marmon Co. v. Kehlor, 155 Mo. 643, 655, 78 Am. St. Rep. 600, 56 S. W. 287 [citing Gardner v. Lane, 91 Mass. (9 All.) 492].
3 Koontz v. Bank, 51 Mo. 275; Third National Bank v. Allen, 59 Mo. 310; Nordyke, etc., Co. v. Kehlor, 155 Mo. 643, 78 Am. St. Rep. 600, 56 S. W. 287 [citing Griffith v. Townley, 69 Mo. 13, 33 Am. Rep. 476; Kingston Bank v. Eltinge, 40 N. Y. 391, 100 Am. Dec. 516].
4 St. Vrain Stone Co. v. R. R. Co., 18 Colo. 211, 32 Ac. 827; Elphick v. Hoffman, 49 Conn. 331; Holdom v.
Ayer, 110 11l. 448; Lillienthal v. Brewing Co., 154 Mass. 185, 26 Am. St. Rep. 234, 12 L. R. A. 821, 28 N. E. 151. 5 Andrus v. Refining Co., 130 U. S. 643, 32 L. ed. 1054; Wright v. Phipps, 90 Fed. 556. See Sec. 295 et seq.
6 Williams Transportation Line v. Cole Co., 129 Mich. 209, 56 L. R. A. 939, 88 N. W. 473.
7 Iowa. Kimball v. Saguin, 86 la. 186, 53 N. W. 116.
Kentucky. Breeding v. Flannery, 14 S. W. 907.
Rhode Island. Piche v. Robbins, 24 R. I. 325, 53 Atl. 92.
Texas. Rhode v. Alley, 27 Tex. 443. See Sec. 295 et seq.