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.
To constitute fraud, the false representation must be made by the party held liable therefor or his agent. A false statement made by a third person can not be treated as the fraud of a party to the contract who is ultimately benefited thereby if he did not know that such false statement had been made, and was relied on by the adversary party, if the party who made the false representation is not the agent of such party to the contract. The party innocent of the fraud is not liable for damages nor can the contract be rescinded,1 unless it is void under the doctrines of mistake. Accordingly, if a person desiring insurance makes a truthful statement to the agent of the insurance company, and such agent, without the knowledge of the insured, forwards a false statement of facts to the company on which a policy issued, such false statement is not the fraud of the insured.2 Thus a vendee can not be held guilty of fraud on account of false statements sent out by mercantile agencies, unless
10 McGowan v. Willamette Valley Irrigated Land Co., 79 Or. 454, 155 Ac. 705.
11 Higbee v. Trumbauer, 112 la. 74, 83 N. W. 812.
12 Higbee v. Trumbauer, 112 la. 74, 83 N. W. 812.
13 Short v. Cure, 100 Mich. 418, 59 N. W. 173.
14 Mutual, etc., Association v. McGee (Tex. Civ. App.), 43 S. W. 1030.
15 Interstate, etc., Association v. Tabor, 21 Tex. Civ. App. 112, 51 S. W. 300.
16 Morrill v. Palmer, 68 Vt. 1, 33 L. R. A. 411, 33 Atl. 829.
17 Fountain v. Fuller E. Callaway Co., 144 Ga. 550, 87 S. E. 651. See, however, Sec. 308 et seq.
18 Blau v. Public Service Tire & Rubber Co., - N. J. Eq. - , 102 Atl. 664.
1 United States. The Seguranca, 70 Fed. 258. California. Schultz v. McLean (Cal.),
25 Ac. 427.
Connecticut. Strong v. Smith, 02 Conn. 39, 25 Atl. 395.
Illinois. Whitesides v. Taylor, 105 111. 496; Hayner v. Mcllwain, 53 111. App. 652.
Indiana. Jones v. Swift, 94 Ind. 516.
Iowa. Belau v. Bryan, 89 la. 348, 56 N. W. 512.
Kansas. Roach v. Karr, 18 Kan. 529,
26 Am. Rep. 788.
Kentucky. Fightmaster v. Levi (Ky.), 17 S. W. 195; Equitable Life Assur. Society v. Cosby (Ky.), 126 S. W. 142.
Louisiana. Tooke v. Burke, 141 La. 74d, 75 So. 668.
Massachusetts. Nash v. Minnesota, etc., Co., 163 Mass. 574, 47 Am. St. Rep. 489, 28 L. R. A. 753, 40 N. E. 1039; Radovsky v. Fall River Savings Bank, 196 MaBS. 557, 82 N. E. 693.
Missouri. Madison County Bank v. Graham, 74 Mo. App. 251.
Nebraska. Tecumseh National Bank v. Chamberlain Banking House, 63 Neb. 163, 57 L. R. A. 811, 88 N. W. 186.
New Jersey. Brounfield v. Denton, 72 N. J. L. 235, 61 Atl. 378.
Ohio. Trevitt v. Converse, 31 O. S. 60; Kingsland v. Pryor, 33 O. S. 19.
Oklahoma. J. R. Watkins Medical Co. v. Coombes, - Okla. - ,166 Ac. 1072.
Tennessee. Cason v. Cason, 116 Tenn. 173, 93 S. W. 89.
Texas. Kuhn v. Foster, 16 Tex. Civ. App. 465, 41 S. W. 716; American National Bank v. Cruger (Tex. Civ. App.), 44 S. W. 1057; Atkinson v. Reed (Tex. Civ. App.), 49 S. W. 260.
2Alabama. Triple Link, etc., Association v. Williams, 121 Ala. 138, 77 Am. St. Rep. 34, 26 So. 19.
Colorado. German Ins. Co. v. Hay-den, 21 Colo. 127, 52 Am. St. Rep. 206, 40 Ac. 453.
Illinois. Royal Neighbors v. Roman, 177 III. 27, 69 Am. St. Rep. 201, 52 N. E. 264.
Indiana. Continental Ins. Co. v. Chew, 11 Ind. App. 330, 54 Am. St. Rep. 506, 38 N. E. 417.
Minnesota. Otte v. Ins. Co., 88 Minn. 423, 97 Am. St. Rep. 532, 93 N. W. 608.
New York. Sternaman v. Ins. Co., 170 N. Y. 13, 88 Am. St. Rep. 625, 57 L. R. A. 318, 62 N. E. 763.
Rhode Island. Leonard v. Assurance Co., 24 R. I. 7, 96 Am. St. Rep. 698, 51 Atl. 1049.
it can be shown that he made the statement to the agency.3 Thus where A agreed with B to convey realty to such person as B should designate, and B designates C, B's fraud does not affect C's rights,4 nor where A by fraud induces B to join with him in contracting with C,5 nor where A by fraud induces B to sell goods to C.6 A false statement made by X, one of the stockholders of an insolvent corporation, with reference to the property of the corporation and the debts which it owed, by which B is induced to buy the plant of the corporation from the assignee of the corporation, is not ground for which B may avoid such sale.7 A misrepresentation which is made to A by A's agent, X, is not a ground of avoiding a contract made between A and B, although A has entered into it upon reliance of such false statement.8 If X promises to A, in order to procure a loan, that X will deposit certain securities as collateral, and X thus secures a check from A for the amount of such loan, X not having such securities to deposit, the fact that B knew of such representations but did not know of their falsity does not make him a party to the fraud; and if such check is endorsed by X to B for value, B may recover upon such check against A.9 Where A by fraud induces B to act as surety for him to C, A's fraud is not a defense to B against C.10 A false statement by X, a principal, whereby B is induced to become surety for X is not a defense to B as against the obligee A, even if A was informed of such fraud after he had accepted such bond but before he had acted thereunder.11 The fact that a judgment debtor induced a surety to exact a bond or undertaking with him by fraudulent representations, does not render such bond invalid as against the judgment creditor who did not know of such fraudulent representations.12 A false statement made by a physician employed by the railway company, which he was not authorized to make and which was not known to the railway company or to its claim agent, is not the fraud of the railway company.13 A's false statement to B, who subsequently agrees to join with A in buying property upon which he has an option as to the price for which such property is to be sold, by which B is induced to give to the vendor X a note greatly in excess of the proportion of the price which B has agreed with A to pay, is not fraud which affects B's liability to X if X is acting in good faith.14 Where A sold goods to B by fraudulent representations and C acquires A's interests in ignorance of the fraud and made a new contract with B, A's fraud can not be imputed to C.15 But a grantee who assumes certain claims on the land may interpose the defense of his grantor's fraud on grantee, when sued by the holder of such claims, no transfer of them having been made since grantee acquired the land.16 If a stockholder in a corporation is induced to take stock by fraudulent representations of the officers of the corporation he can not avoid his double liability to creditors of the corporation whose claims have arisen after he acquired his stock.17 But where he repudiates his subscription promptly he has been allowed to defend against an action to recover his subscription for the benefit of the creditors of the corporation.18
3 Hiller v. Ellis, 72 Miss. 701, 41 L. R. A. 707, 18 So. 95; Cream City Hat Co. v. Tollinger, 62 Neb. 98, 86 N. W. 921; Dorman v. Weakley (Tenn. Ch. App.), 39 S. W. 890.
4 Belau v. Bryan, 89 la. 348, 56 N. W. 512.
5 Anderson v. Warne, 71 111. 20, 22 Am. Rep. 83.
6 Nash v. Minnesota, etc., Co., 163 Mass. 574, 47 Am. St. Rep. 480, 28 L. R. A. 753, 40 N. E. 1039.
7 Trevitt v. Converse, 31 O. S. 60.
8 Roe v. National Life Ins. Association, 137 la. 696, 115 N. W. 500; Leonard v. King (Tex. Civ. App.), 164 S. W. 1110.
9 Nelson v. Hudgel, 23 Idaho 327, 130 Ac. 85.
10 Indiana. Jones v. Swift, 94 Ind. 516. Louisiana. Tooke v. Burke, 141 La.
746, 75 So. 668.
Massachusetts. Martin v. Campbell, 120 Mass. 126; Hudson v. Miles, 185 Mass, 582, 71 N. E. 63.
Ohio. Kingsland v. Pryor, 33 O. S. 19.
Oklahoma. J. R. Watkins Medical Co. v. Coombes, - Okla. - , 166 Ac. 1072.
Rhode Island. Shepard Land Co. v. Banigan, 36 R. I. 1, 87 Atl. 531.
Wisconsin. Wilkinson v. Guaranty Co., 119 Wis. 226, 96 N. W. 560.
11 A. S. Ripley Bldg. Co. v. Coors, 37 Colo. 78, 84 Ac. 817.
Still less can a contract be avoided for a statement made by the agent of the party who is misled, if such statement is made without collusion with the adversary party.19
12 Wilkinson v. United States Fidelity & Guaranty Co., 119 Wis. 226, 96 N. W. 660.
13 Gulf, C. &, S. F. Ry. Co. v. Huyett, 99 Tex. 630, 92 S. W. 454.
14 Hays v. Bostick, 96 Miss. 794, 51 So. 462.
15 Griffith v. Strand, 19 Wash. 686, 54 Ac. 613.
16 Saunders v. McClintock, 46 Mo. App. 216.
17 Bissell v. Heath, 98 Mich. 472, 57 N. W. 585 (he had received dividends on his stock for several years).
See, Effect of Fraud on Subscriptions to Stock, by Seymour D. Thompson, 14 American Law Review 177.
Can a Subscriber to Stock of a Corporation not Yet Formed Rescind His Subscription on the Ground of Fraud? by Albert Cabell Ritchie, 36 American Law Review 855.
18 Savage v. Bartlett, 78 Md. 561, 28 Atl. 414.
19 Merkel v. Merkel, 87 N. J. Eq. 154, 99 Atl. 924.