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 definition of constructive fraud here given includes a special relation between the parties to the contract as an essential element. Probably constructive fraud in the accurate sense of the term does not exist between persons of normal status, who repose no especial trust and confidence in each other and deal with each other at arm's length. Where relations of special trust and confidence exist, however, facts which do not amount to actual fraud may have its legal effect.1 "A breach of duty is 'constructive fraud.' "2 If A occupies a fiduciary relation to B,3 and engages in a transaction with B which is prejudicial to B, such transaction is presumptively fraudulent;4 and if it appears that B did not have full knowledge of his legal rights,5 or even if it does not appear affirmatively that B had such knowledge,6 such transaction will be set aside for constructive fraud. In such cases it is for A to show affirmatively that such a transaction is fair and honest or it will be presumed fraudulent.7 The relations between the parties which make constructive fraud possible are of two different kinds. -The trust and confidence reposed may be general, as in relations between husband and wife, parent and child, and the like. In other cases, as between principal and agent, partners, directors and the corporation or the stockholders, the trust and confidence may be reposed as to a certain limited subject-matter, while as to other matters the same parties may occupy no relation of trust and confidence. Further, the relations of trust and confidence may be technical ones, such as those between principal and agent, and the like, or actual trust and confidence may be reposed, though no technical relations of trust and confidence exist.
2Pomeroy Equit. Juris. (4th ed.), Sec. 020 to 942.
3Lagrone v. Timmerman, 46 S. Car. 372, 24 S. E. 290; see also Clay v. Thomas, 178 Ky. 199, 198 S. W. 762.
1 Alabama. Harraway v. Harraway, 136 Ala. 499, 34 So. 836.
California. Robins v. Hope, 57 Cal. 493; Brison v. Brison, 75 Cal. 525, 7 Am. St. Rep. 189, 17 Pac. 689; Alaniz v. Casenave, 91 Cal. 41, 27 Pac. 521.
Colorado. Sears v. Hicklin, 13 Colo. 143, 21 Pac. 1022; Meldrum v. Meldrum, 15 Colo. 478, 11 L. R. A. 65, 24 Pac. 1083.
Georgia. Evans v. Evans, 118 Ca. 890, 98 Am. St. Rep. 180, 45 S. E. 612.
Illinois. Stone v. Wood, 85 111. 603; Thomas v. Whitney, 186 111. 225, 57 N. E. 808 [affirming 83 111. App. 247]; Hursen v. Hursen, 212 111. 377, 103 Am. St. Rep. 230, 72 N. E. 391; Brixel v. Brixel, 230 111. 441, 82 N. E. 651.
Indiana. Basye v. Basye, 152 Ind. 172, 52 N. E. 797.
Iowa. Curtis v. Armagast, 158 la. 507, 138 N. W. 873.
Maryland. Highberger v. Stiffier, 21 Md. 338, 83 Md. Dec. 593.
Mississippi. Field v. Banking Co., 77 Miss. 180, 26 So. 365.
Missouri. Turner v. Turner, 44 Mo. 535.
Nebraska. Dickerson. v. Dickerson, 24 Neb. 530, 8 Am. St. Rep. 213, 39 N. W. 429.
New York. Boyd v. De La Montagnie, 73 N. Y. 498, 29 Am. Rep. 197; Smith v. Smith, 134 N. Y. 62, 30 Am. St. Rep. G17, 31 N. E. 258; Barnard v. Gantz, 140 N. Y. 249, 35 N. E. 430.
North Carolina. Warlick v. White, 86 N. Car. 139, 41 Am. Rep. 453.
Ohio. Chittenden v. Chittenden, 22 Ohio C. C. 498, 12 Ohio C. D. 526.
Oklahoma. Thomas v. Thomas, 27 Okla. 784, 35 L. R. A. (N.S.) 124, 109 Pac. 825, 113 Pac. 1058.
Pennsylvania. Kline v. Kline, 57 Pa. St. 120, 98 Am. Dec. 206; Darlington's Appeal, 86 Pa. St. 512, 27 Am. Rep. 726.
"Constructive fraud often exists where the parties to the contract have a special confidential or fiduciary relation, which affords the power and means to one to take undue advantage of, or exercise undue influence over, the other. Wherever, from such relation, considerable authority or influence necessarily exists on the one side, and a corresponding reliance and confidence is placed on the other, a party will not be suffered to abuse this authority or influence by extracting any advantage to himself. A transaction between persons so situated is watched with extreme jealousy and solicitude, and if there be found the slightest trace of undue influence or unfair advantage, redress will be given to the injured party. Owing to the near connection between the parties, in many relations, the transaction in itself is considered bo suspicious as to cast the burden of proof upon the person who seeks to support it, to show that he has taken no advantage of his influence or knowledge, and that the arrangement is fair and conscientious." Darlington's Appeal, 86 Pa. St. 512, 27 Am. Rep. 726 [quoted in Thomas v. Thomas, 27 Okla. 784, 35 L. R. A. (N.S.) 124, 109 Pac. 825, 113 Pac. 1058]; see Purchaser at Sheriff's Sale: When a Trustee, by Roland R. Foulke, 46 American Law Register (N.S.) 147.
2 Baker v. Humphrey, 101 U. S. 494,
25 L. ed. 1065.
3Field v. Banking Co., 77 Miss. 180,
26 So. 365.
4 Thomas v. Whitney, 186 111. 225, 57 N. E. 808 [affirming 83 111. App. 247].
"It is well settled that where it appears that a fiduciary or confidential relation existed between the parties at the time of the transaction alleged to be fraudulent, such as trustee and cestui que trust, principal and agent, attorney and client, husband and wife, guardian and ward, or where one of the parties for any other reason possesses influence or power over the other, the law raises a presumption of fraud whenever the party in whom the confidence is reposed obtains from the other a contract to his own profit." Schneider v. Schneider, 125 la. 1, 98 N. W. 159.
5 Field v. Banking Co., 77 Miss. 180, 26 So. 365.
6 Thomas v. Whitney, 186 111. 225, 57 N. E. 808 [affirming 83 111. App. 247].