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 elements of constructive fraud may best be understood from a discussion of their applications to the particular relations existing between the parties. An agent who makes a contract on his principal's behalf with himself, is guilty of constructive fraud if he does not disclose to the principal the fact that the agent is the adversary party to the contract, even if it is a matter of indifference to the principal with whom he contracts.1 Thus the agent of an insurance company can not issue a policy to himself.2 An agent can not buy his principal's property without disclosing his identity and getting his principal's assent.3 Equity will not give specific performance when an agent has sold his principal's property to one in partnership with the agent, without disclosing these facts to the principal.4 The existence of constructive fraud is especially clear where the agent has prevented others from attempting to purchase his principal's property.5 While an agent can not by the use of the name of a third person conceal his identity and buy his principal's property, yet if the agent sells property for his principal to a third person by a bona fide contract, the agent may subsequently purchase such property from such vendee.6 The test of the validity of the contract in such cases is whether the vendee had at the time of making the purchase an understanding with the agent for a reconveyance to the latter, in which case the contract is fraudulent; or whether the agreement between the vendee and the agent for a reconveyance was entered into after such sale, in which case the contract is valid. Where the principal knows that the agent is representing an adverse interest as well as the interest of the principal,7 the fact that the alleged agent has concealed his identity and that he is really the adverse party to the contract does not avoid it. An agent in dealing with his principal as adversary party or in making contracts on behalf of his principal with third persons, must make full and fair disclosure to his principal of all material facts known to the agent which could affect the willingness of the principal to enter into the contract.8 Thus an agent must disclose to his principal facts known to the agent which increase the value of the property which he is selling for the principal, such as mineral deposits,9 or offers larger than the one he makes himself.10 If the agent makes a sale for his principal and does not disclose the fact that a more advantageous sale could have been made, he forfeits his right to commissions, as where the agent is effecting a loan to the principal for a commission.11 On this principle a broker can not recover commissions where he refuses to give his principal the name of the real party to whom he has sold,12 especially where the principal would have insisted upon a higher price had he known who the real party was.13
4Witham v. Walsh, 156 Mich. 582, 121 N. W. 309.
5 Rogers v. Brightman, 189 Ala. 228, 66 So. 71.
6In re Spann (Okla.), 152 Pac. 68.
1 United States. Robertson v. Chapman, 152 U. S. 673, 38 L. ed. 592 (obiter).
Iowa. Wahl v. Taylor, 176 la. 353, 157 N. W. 867.
Kansas. Kurt v. Moscript, 101 Kan. 540, 167 Pac. 1065. Schuhmacher v. Lebcck, 103 Kan. 458, L. R. A. 1918F, 788, 173 Pac. 1072.
Missouri. McLain v. Parker, 229 Mo. 68, 129 S. W. 500.
New Mexico. McBridgev. Campre-don, - N. M. - , L. R. A. 1918D, 407, 171 Pac. 140.
New York. Dutton v. Willner, 52 N. Y. 312.
North Dakota. Clendenning v. Hawk, 10 N. D. 90, 86 X. W. 114.
Ohio. Peckham Iron Co. v. Harper, 41 O. S. 100.
2 Wildberger v. Ins. Co., 72 Miss. 338, 48 Am. St. Rep. 558, 28 L. R. A. 220, 17 So. 282.
3 Dodge v. Black (Ky.), 53 S. W. 1039.
The fact that the agent was authorized to sell at a fixed price, and to receive as commission everything over, and such price does not render valid his purchase without disclosing his identity to his principal. Schuhmacher v. Lebeck, 103 Kan. 458, L. R. A. 1918F, 788, 173 Pac. 1072.
4 Fry v. Platt, 32 Kan. 62, 3 Pac. 781.
5 Quinn v. Le Due (N. J. Eq.), 51 Atl. 199.
6 Robertson v. Chapman, 152 U. S. 673, 38 L. ed. 592; Walker v. Carring-ton, 74 111. 446; Oberlin College v. Blair, 45 W. Va. 812, 32 S. E. 203.
7 Michigan. Moore v. Mandelbaum, 8 Mich. 434.
Minnesota. Hegenmyer v. Marks, 37 Minn. 6, 5 Am. St. Rep. 808, 32 N. W. 785; Tilleny v. Wolverton, 46 Minn. 256, 48 N. W. 908.
New Jersey. Porter v. Woodruff, 36 N. J. Eq. 174.
Pennsylvania. Devall v. Burbridge, 4 Watts & S. (Pa.) 305.
Wisconsin. Vanasse v. Reid, 111 Wis. 303, 87 N. W. 192.
8 Ralston v. Turpin, 129 U. S. 663, 32 L. ed. 747; McDonough v. Williams, 77 Ark. 261, 8 L. R. A. (N.S.) 452, 92 S.
W. 783; Green v. Peeso, 92 la. 261, 60 N. W. 531; Schneider v. Schneider 125 la. 1, 98 N. W. 159; Holmes v. Cath-cart, 88 Minn. 213, 97 Am. St. Rep. 513, 60 L. R. A. 734, 92 N. W. 956.
9 Slator v. Trostel (Tex. Civ. App.), 21 S. W. 285.
10 Mason v. Bauman, 62 111. 76; Green v. Peeso, 92 la. 261, 60 N. W. 531; Kurt v. Moscript, 101 Kan. 540, 167 Pac. 1065; McBridge v. Campredon, - N. M. - , L. R. A. 1918D, 407, 171 Pac. 140.
If he sells to a third person, not disclosing a better offer, he is liable to his principal for the difference between the two offers. Holmes v. Cath-cart, 88 Minn. 213, 97 Am. St. Rep. 513, 60 L. R. A. 734, 92 N. W. 956.
Even after the termination of the agency, the former agent is bound to disclose to his principal an opportunity for the resale of the subject-matter of the agency if he knows that the principal relies on him for such information;14 and if he purchases such property without disclosing such opportunity for a resale, such conduct is fraud and he may be held liable for the difference between the price which he pays for such property and its actual value.
An agent must not make any secret gain at the expense of the principal.15 Thus a city may avoid the purchase of a gas separator on learning that the agent of the city received a secret commission on such purchase.16 Thus an agent employed to do assessment work on a mining claim can not forfeit the claim for his principal by failing to do such work, and then locate the claim for his own benefit.17 So an agent authorized to buy at a certain maximum price can not buy at a lower price and charge his principal with the maximum price.18 By statute an agent who holds for collection a note of his principal's and one of his own against the same debtor must give preference to his principal's note over his own.19 An agent can act for both adversary parties if both know and consent to such doable agency,20 though even in such cases he must exercise the utmost good faith toward each.21 If both principals do not consent to the double agency, the agent can not act.22 A contract for the sale of land by which the vendee's agent receives a secret profit unknown to the vendee, gives to the vendee the right to have such transaction rescinded.23 A contract thus made is voidable, not void.24 The principal who does not know the facts may avoid without showing actual fraud.25 If A acts as the separate agent of B, C, and D, in a three-cornered exchange of land, one or more of such principals who did not know that A was representing the adversary parties may have such conveyance canceled.26 The agent can not recover his compensation from either principal, and if a principal has paid the agent his compensation in ignorance of the double agency, it may be recovered.27
11Talbott v. Manard, 106 Tenn. 60, 59 S. W. 340.
12 Holmes v. Ry., 60 Minn. 197, 62 N. W. 264; Young v. Hughes, 32 N. J. Eq. 372; Pratt v. Patterson, 112 Pa. St. 475, 3 Atl. 858.
13Hafner v. Herron, 166 111. 242, 46 N. E. 211; Wilkinson v. McCullough, 196 Pa. St. 205, 46 Atl. 357.
14McDonough v. Williams, 77 Ark. 261, 8 L. R. A. (N.S.) 452, 92 S. W. 783.
15 United States. Findlay v. Pertz, 66 Fed. 427, 29 L. R. A. 188; Donovan v. Champion, 85 Fed. 71, 29 G. C. A. 30.
Florida. Boswell v. Cunningham, 32 Fla. 277, 21 L. R. A. 54, 13 So. 354.
Illinois. Tyler v. Sanborn, 128 111. 136, 15 Am. St. Rep. 97, 4 L. R. A. 218, 21 N. E. 193.
Michigan. McNutt v. Dix, 83 Mich. 328, 10 L. R. A. 660, 47 N. W. 212; Kimball v. Ranney, 122 Mich. 160, 46 L. R. A. 403, 80 N. W. 992.
Nebraska. Jansen v. Williams, 36 Neb. 869, 20 L. R. A. 207, 55 N. W. 279.
16 Findlay v. Pertz, 66 Fed. 427, 29 L. R. A. 188. (Even if two months have elapsed since the sale.)
17 Argentine Mining Co. v. Benedict, 18 Utah 183, 55 Pac. 559.
18Kilbourn v. Sunderland, 130 U. S. 505, 32 L. ed. 1005.
19 Commercial Bank v. Bank, 8 N. D. 382, 79 N. W. 859.
If the agent makes full and fair disclosure to his principal, he may make a contract with him with reference to a subject-matter concerning which he is acting as agent.28 Thus an architect may make a contract as sub-contractor with the original contractor.29
A third person who makes a contract with the principal through the agent, knowing that the agent is exceeding his instructions, is said to be guilty of legal fraud.30