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.
The legislatures of England and of many of the states of the Union have enacted statutes which prevent recovery for fraudulent representations as to the credit of another person, which are made with the intention of procuring an extension of credit to such third person, unless such representation is in writing and signed by the party to be charged therewith.1
This statute is ordinarily construed strictly.2 It does not apply to representations concerning the party who makes such representations or concerning his property.3 It is enacted "to prevent fraud and not to shield the perpetrators thereof."4 It has no application to A's fraudulent representation to C as to the quality and value of B's land, upon which B is attempting to borrow money from
Atlas Shoe Co. v. Bechard, 102 Me. 197, 10 L. R. A. (N.S.) 245, 66 Atl. 390.
2 See Sec. 1218 et eeq.
3 Kemp v. Bank, 109 Fed. 48, 48 C. C. A. 213.
4 Caples v. Morgan, 81 Or. 692, 160 Ac. 1154.
1 England. Hirst v. West Riding Union Banking Co. , 2 K. B. 560; Banbury v. Bank of Montreal , 1 K. B. 409.
Kentucky. Vertrees v. Head, 138 Ky. 83, 127 S. W. 523.
Maine. Brown v. Kimball, 84 Me. 280, 24 Atl. 847; Hunter v. Randall, 62 Me. 423, 16 Am. Rep. 490.
Massachusetts, Wells v. Prince, 81 Maes. (15 Gray) 562; McKinney v. Whiting, 90 Mass. (8 All.) 207.; St.
Johns National Bank v. Steel, 135 Mich. 165, 97 N. W. 704; Bates v. Youngerman, 142 Mass. 120, 7 N. E. 549.
Michigan. Hicks v. Steel, 142 Mich. 292, 4 L. R. A. (N.S.) 279, 105 N. W. 767.
Missouri. McKee v. Rudd, 222 Mo. 344, 121 S. W. 312.
See, however, Pearson v. Wallace (Mich.), 170 N. W. 72.
2 Huntress v. Blodgett, 206 Mass. 318, 92 N. E. 427.
3 Culbreth v. Allgood, 143 Ga. 551, 85 S. E. 758; Huntress v. Blodgett, 206 Mass. 318, 92 N. E. 427; Hubbard v. Long, 105 Mich. 442, 63 N. W. 644.
4 Stauffer v. Hulwick, 176 Ind. 410, 96 N. E. 154.
C,5 such a representation does not involve the character or credit of any other person, but concerns specific property. It has no application to a representation by a vendor of stock as to the solvency of the corporation,6 or as to his representation as to the solvency of the persons who guaranty the vendee of such stock,7 since his representation concerns his own property primarily and involve the solvency of others only as affecting the value of such property. Such statute does apply, however, to a false representation made by an officer or incorporator as to the ability of the corporation to perform its contract.8
Under the Indiana statute, no action can be maintained to charge a person by reason of any representation made concerning the "character, conduct, credit, ability, trade or dealings of any other person," unless such representation is in writing and signed by the party to be charged thereby or some one legally authorized by him.9 Thus an oral representation by the president of a corporation as to its solvency,10 or by the agent of a natural person as to his principal's solvency,11 is not actionable.
The term "person" in the statute applies to a corporation; and accordingly a corporation is not liable for a fraudulent representation as to the credit of another person unless such representation is in writing and duly signed.12
Such statutes do not apply where the party who makes such false representations does so for his own advantage without procuring the extension of credit to the person whose credit is in question.13 Thus an oral representation that a given corporation has paid large dividends, made by a stockholder therein for the purpose of selling his stock is actionable fraud.14 So a fraudulent conspiracy between A and X, whereby A misrepresents to B the utility of an alleged patent right owned by X, and A induces B to purchase such patent right by pretending to execute the contract as joint maker with B, is not within the statute.15 If the personal advantage to accrue to the party making the false representation is to come solely through extension of credit to such third person, the statute applies. Thus where the person making the false representation gains advantage as an officer of a corporation, to which he procures the extension of credit by false representations,16 or as a stockholder, where by fraud he induces a sale of stock by the corporation to a third person,17 or where he receives a commission for making the contract on behalf of his principal, which he induces by false representations,18 the statute applies.
5 Stauffer v. Hulwick, 176 Ind. 410, 96 N. E. 154.
6 Hubbard v. Oliver, 173 Mich. 337, 139 N. W. 77.
7 Howard v. Allgood, 143 6a. 550, 85 S. E. 757.
8 McKee v. Rudd, 222 Mo. 344, 121 S. W. 312.
9 Heintz v. Mueller, 19 Ind. App. 240, 49 N. E. 293 (holding that "any other person" includes a private corporation).
10 Brown v. Kimball, 84 Me. 280, 24 Atl. 847.
11 Hunter v. Randall, 62 Me. 423, 16 Am. Rep. 490. Even if money is paid to such agent and by him transmitted to his principal.
12 Hirst v. West Riding Union Banking Co. (1901), 2 K. B. 560.
13 Hess v. Culver, 77 Mich. 598, 18 Am. St. Rep. 421, 6 L. R. A. 498, 43 N W. 994.
14 Hubbard v. Long, 105 Mich. 442, 63 N. W. 644 (opinion substituted for 60 N. W. 50).
This statute undoubtedly applies to innocent misrepresentations,19 but whether it applies to actual fraud or not is a question upon which there has been a conflict of authority. In some jurisdictions it has been held that this statute has no application to actual fraud;20 while in other jurisdictions it has been held that this statute applies to actual fraud,21 and to representations made in pursuance of a conspiracy to defraud.22