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.
Where the statement is not made directly to the person who acts thereon, a question of greater difficulty arises. As a general proposition it may be said that unless the person making the false statement intends to induce action on the part of the person who in fact acts thereon, fraud does not exist.1 Generally, if A makes a false statement to C, B's agent, to induce B to act thereon, this is fraud if it would be fraud had A made the statement to B in person.2 A corporation may maintain an action for fraudulent representations made to its promoters to induce them to organize the corporation.3 This rule is not always applicable. If C knows the truth and A and C are not conspiring to defraud B, B is charged with C's knowledge.4 Thus where C asked A to insert in a written contract of sale a higher price than the real one, representing that B wished it, A is not liable to B though C makes use of such contract to mislead B into believing that such price was paid.5 If they are so conspiring B may avoid the contract.6 If A makes a fraudulent statement to B and B innocently repeats it to C, A's liability to C depends on whether A intended or should have contemplated A's communicating such statement to C. If so intended, A is liable.7 A fraudulent misrepresentation made to one joint purchaser is a defense which inures to all if it is intended to be communicated to them and to be acted upon by them.8 If A did not intend C to act thereon, as where A defrauds B in some transaction and B conveys his rights to C repeating A's representations, A is not liable to C.9 So in cases where, a corporation has been required to file sworn statements of its condition as a condition precedent to incorporation or to doing business in a foreign state, it is held that such statements are filed solely for that purpose and not being intended to induce action on the part of those dealing with the corporation are not fraud.10 If A makes a false statement to X in B's presence, intending that B should hear and act upon such statement, A is guilty of fraud toward B.11
1 United States. Marshall v. Hubbard, 117 U. S. 415, 29 L. ed. 919; Coe v. R. R., 52 Fed. 531; Lasswell Land & Lumber Co. v. Wilson, 236 Fed. 322, 149 C. C. A. 454.
Colorado. Huston v. Ohio & Colorado Smelting & Refining Co., - Colo. - , 165 Ac. 251.
Kentucky. Lebanon Steam Laundry Co. v. Dyckman (Ky.), 57 S. W. 227.
Massachusetts. Hunnewell v. Dux-bury, 154 Mass. 286, 13 L. R. A. 733, 28 N. E. 267.
Michigan. Hoeft v. Kock, 119 Mich. 458, 78 N. W. 556.
Missouri. Rawlings v. Bean, 80 Mo. 614.
Ohio. McCracken v. West, 17 Ohio 16; Wells v. Cook, 16 O. S. 67, 88 Am. Dec. 436.
Rhode Island. Butterfield v. Barber, 20 R. I. 99, 37 Atl. 532; Freese v. Pav-loski, 39 R. I. 516, 99 Atl. 81.
Texas. Gainesville National Bank v. Bamberger, 77 Tex. 48, 19 Am. St. Rep. 738, 13 S. W. 959.
Washington. Tacoma v. Water Co.,
16 Wash, 288, 47 Ac. 738; Thorp v. Smith, 18 Wash. 277, 51 Ac. 381.
2 Schofield, etc., Co. v. Schofield, 77 Conn. 1, 40 Atl. 1046; Hubbard v. Weare, 79 la. 678, 44 N. W. 915; Si-monds v. Cash. 136 Mich. 558, 99 N. W. 754.
3 Iowa, etc., Co. v. Heater Co., 32 Fed. 735; Schofield, etc., Co. v. Schofield, 71 Conn. 1, 40 Atl. 1046. But in Lebanon Steam Laundry Co. v. Dyckman (Ky.), 57 S. W. 227, representations to future stock holders whereby they are induced to buy property which they subsequently transfer to a corporation organized thereafter were held not to amount to fraud upon the corporation.
4 Thorp v. Smith, 18 Wash. 277, 51 Ac. 381.
5 Thorp v. Smith, 18 Wash. 277, 51 Ac. 381.
6 Cunningham v. Holcomb, 1 Tex. Civ. App. 331, 21 S. W. 125.
7 Chubbuck v. Cleveland, 37 Minn. 466, 5 Am. St. Rep. 804, 35 N. W. 362; Allison v. Tyson, 24 Tenn. (5 Humph.) 449.