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.
Offers in outward form are often made, but the real understanding of the offeror and of the offeree is that no contract is to be entered into by such transaction. It is intended, as between certain or all of the parties thereto, to be a mere form, and never to take effect under any circumstances. Such a simulated contract has no legal effect. It creates no rights and imposes no duties.1 If A, B and C enter into a contract by which A and B are to retire from the business in which all were engaged, and as between A and C it was agreed that such contract should have no effect, but it was entered into solely for the purpose of inducing B to believe that A was also retiring from such business, such simulated contract is inoperative as between A and C.2 A written contract of sale, which was not intended by the parties as an actual obligation, but which was entered into in order that the vendor might mislead the monopoly from whom he had purchased goods as to the price at which he was selling such goods, has no legal effect.3 A contract for the sale of realty may be shown not to have been intended by the parties as an actual obligation, but to have been entered into "for selling purposes only.,,4 A written contract of sale may be shown to be really intended as a gift; and the consideration may be shown to have been inserted to avoid bad feeling on the part of the grantor's children other than the grantee.5 A mortgage given for the same purpose, is not operative.6 It may be shown that a written contract which fixes compensation for collecting a claim was never intended to take effect, but that it was signed to avoid the debtor's disinclination to pay the debt so that any of the proceeds should go "to enrich the creditor.7 Where A had signed a contract agreeing to take a certain amount of street-car advertising from B at certain rates, and had delivered it to B's agent, A could show in an action on the contract that the real contract was an oral agreement for a less amount at a lower rate, and that A signed the written contract merely to enable B to show A's order to other prospective customers, and yet conceal the fact that B had been given an especially low rate.8
9 Bruce v. Bishop, 43 Vt. 161.
1 Higgins v. Lessig, 49 111. App. 459; Stamper v. Temple, 25 Tenn. (6 Hump.) 113.
2 Stamper v. Temple, 25 Tenn. (6 Hump.) 113. [The person who made the arrest was an officer who was legally bound to make such arrest. and accordingly such arrest was not a consideration for such offer. See Sec. 5S5 and 586].
3 Higgins v. Lessig, 48 III. App. 459.
1 United States. Olmstead v. Michels, 36 Fed. 455 [sub nomine, Olmstead v. Michaels, ILRA. 840].
If a written instrument is executed after an oral contract is entered into and it is not intended by the parties to be a substitute therefor, the right of the parties to the instrument to show that such written instrument was not intended to take effect, is clearer than in the case in which there is no prior valid oral contract.9 If an oral contract of sale is entered into between the parties, the subsequent execution of a blank form of a written contract which contains terms different from the oral agreement and which is not intended by the parties as a. substitute therefor, does not operate as a new contract.10 If A and B enter into a written contract and sometime thereafter, at B's request, A gives to him a written memorandum setting forth different terms from those agreed upon in order that B may show such memorandum to his banker, the existence of such memorandum does not prevent oral evidence of the actual contract.11 The general principle that simulated contracts impose no legal duty is clear. The difficulties arise out of the application of the parol evidence rule to written contracts.12 The weight of authority is in favor of the proposition that such instrument never had any legal effect and that extrinsic evidence is admissible to prove that fact.13 In Some jurisdictions, however, it is held that extrinsic evidence of this sort is inadmissible, and that if a simulated contract is reduced to writing, neither party thereto can attack its validity.14 Besides the parol evidence rule, it has been suggested that the instrument was intended as a fraud upon third persons and that for this reason the parties ought not to be allowed to set up their fraud.15 A contract of agency between A and B, in which B's compensation is fixed, can not under this theory be shown to have been intended as a simulated contract for the purpose of deceiving A's other agents and of making them believe that they were receiving as great a compensation as B.16 If A and B enter into a contract by which A is to secure land for B from the United States Government for a certain sum, and by which the receipt of a part of such sum is recited and A agrees to repay such amount if he can not secure title, and B has paid such amount in part in cash and in part in services in securing other locators, A can not, in an action by A, to recover such amount on failure of A to secure such title, show that such contract was not intended to take effect as between A and B, and that the real purpose was to defraud third persons by making them believe that A had paid cash.17 Such a contract may be upheld if it would violate the established policy of the state to enforce the transaction in the form in which it would stand if such contract were not enforced.18
Maryland. Birely v. Dodson, 107 Md. 229, 68 Atl. 48S.
Michigan. Woodard v. Walker, 192 Mich. 188, 158 N. W. 846.
Nebraska. Coffman v. Malone, 08 Neb. 810, L. R. A. 1917B, 258, 154 N. W. 726.
Hew Jersey. Oak Ridge Co. v. Toole, 82 N. J. Eq. 541, 88 Atl. S27.
Wisconsin. Lepley v. Anderson, 142 Wis. 668, 33 L. R. A. (N.S.) 836, 125 N. W. 433.
2 Coman v. Maloneff, 08 Neb. 819, L. R. A. 1917B. 258. 154 N. W 726.
3 Birely v. Dodson, 107 Md. 229, 68 Atl. 488.
4 Oak Ridge Co. v. Toole, 82 N. J. Eq. 541, 88 Atl. 827.
5 Woodward v. Walker, 192 Mich. 188, 158 N. W. 846.
6 Church v. Case, 110 Mich. 621, 68 N. W. 424.
7 Lepley v. Anderson, 142 Wis. 668, 33 L. R. A. (N.S.) 836, 125 N. W. 433.
8 Southern Street Ry. Advertising Co., v. Metropole Shoe Mfg. Co., 91 Md. 61, 46 Atl. 513.
9 Boucnet v. Oregon Motor Car Co., 78 Or. 230, 152 Ac. 888; In re Crim's Estate, 89 Wash. 395, 154 Ac. 811.
10 Rittenhouse-Winterson Auto Co. v. Kissner, 129 Md. 102, 98 Atl. 361; Bouchet v. Oregon Motor Car Co., 78 Or. 230, 152 Ac. 888.
11 In re Crim'g Estate, 89 Wash. 395, 154 Ac. 811.
12 See Sec. 1029;
13 See ch. LXIX.
14 Graham v. Savage, 110 Minn. 510, 13P Am. St. Hop. 527, 19 Am. & Eng, Ann. Cas. 1022, 126 N. W. 394.
15 Graham v. Savage, 110 Minn. 510, 136 Am. St. Rep. 527, 19 Am. & Eng. Ann. Cas. 1022, 126 N. W. 394.
16 Graham v. Savage, 110 Minn. 510, 136 Am. St. Rep. 527, 19 Am. & Eng. Ann. Cas. 1022, 126 N. W. 394.