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.
Whether extrinsic evidence is admissible to show that a written contract which on its face appears to be a valid obligation was intended as between certain or all of the parties thereto to be a mere form, and never to take effect under any circumstances, is a question upon which there is some conflict of authority. If it were not for the application of the parol evidence rule it would be clear that a simulated contract which the parties did not intend to be operative and which was entered into as a joke, a mere form, and the like, is not a valid contract.1 If extrinsic evidence is to be excluded in cases of this sort, the operation of the rules which require the actual consent of the parties to the contract may be precluded by the device of putting the contract in writing. On the other hand, this would seem to be the kind of a case which most clearly calls for the application of the parol evidence rule. The outward form of the contract is conceded together with the extrinsic acts which appear to indicate execution and delivery. No claim is made that the contract is to take effect upon the happening of some event in the future.2 It is contended that in spite of its outward form, the contract should never have any effect at all. For these reasons there is a division of authority upon this question.
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.3 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, extrinsic evidence is admissible to show that as between A and C it was agreed that such contract should have no effect and that it was entered into solely for the purpose of inducing B to believe that A was also retiring from such business.4 Extrinsic evidence is admissible to show that a written contract of sale was not intended by the parties as an actual obligation, but that it 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.5 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."6 Extrinsic evidence is admissible to show that a written contract of sale was really intended as a gift and that the consideration was inserted to avoid, bad feeling on the part of the grantor's children other than the grantee,7 or that a mortgage was given for the same purpose.8 Extrinsic evidence is admissible to show 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.9 Where A had signed a contract, agreeing to take a certain amount of streetcar 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.10 If the written instrument is executed after the 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 it was not intended to take effect is clearer than in the case in which there is no prior valid oral contract.11 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, docs not prevent the use of parol evidence to show the actual agreement between the parties.12 If A and B enter into a written contract and some time 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.13
Vermont. Vermont Marble Co. v. Eastman, 91 Vt. 425, 101 Atl. 151.
5 District of Columbia v. Iron Works, 181 U. S. 453, 45 L. ed. 948 [affirming, 15 D. C. App. 198].
6 New York Life Insurance Co. v. Franklin, 118 Va. 418, 87 S. E. 584.
7 New York Life Insurance Co. v. Franklin, 118 Va. 418, 87 S. E. 584.
1 See Sec. 80.
2 See Sec. 2178.
3 United States. Olmstead v. Michaels, 36 Fed. 455, 1 L. R. A. 840.
Maryland. Southern Street Railway Advertising Co. v. Metropole Shoe Mfg.
Co., 91 Md. 61, 46 Atl. 513; Birely v. Dodson, 107 Md. 229, 68 Atl. 488.
Michigan. Wooward v. Walker, 192 Mich. 188, 158 N. W. 846.
Nebraska. Coffman v. Malone, 08 Neb. 819, L. R. A. 1917B, 258, 154 N. W. 726.
New Jersey. Oak Ridge Co. v. Toole, 82 N. J. Eq. 541, 88 Atl. 827.
Wisconsin. Lepley v. Andersen, 142 Wis. 668, 33 L. R. A. (N.S.) 836, 125 N. W. 433.
4 Coffman v. Malone, 98 Neb. 819, L. R. A. 1917B, 258, 154 N. W. 726.
5 Birely v. Dodson, 107 Md. 229, 68 Atl. 488.
6 Oak Ridge Co. v. Toole, 82 N. J. Eq. 541; 88 Atl. 827.
7 Woodward v. Walker, 192 Mich. 188, 158 N. W. 846.
8 Church v. Case, 110 Mich. 621, 68 N. W. 424.
9 Lepley v. Anderson, 142 Wis. 668, 33 L. R. A. (N.S.) 836, 125 N. W. 433.
10 Southern Street Railway Advertising Co. v. Metropole Shoe Mfg. Jo., 91 Md. 61, 46 Atl. 513.
In other jurisdictions it is held that extrinsic evidence of this sort is inadmissible.14 In addition to the reasons already given, it has been urged that in some of these cases 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 While it is true that neither party is in a position to claim any additional advantage by reason of his fraud, the suggestion that the addition of fraud to the mutual understanding of the parties that the instrument should have no legal effect, would make it operative in law, while without such added element of fraud it would be operative in law, differs radically from the ordinary effect of fraud in executory contracts which are entered into for the purpose of operating as a fraud upon third persons.16 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 sham for the purpose of deceiving A's other agents and of making them believe that they were receiving as great a compensation as B.17 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 B, 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 B had paid cash.18 The reason assigned for this result, however, is that A can not assert his own wrong as against B, who denies the legal character of the contract.19 In some of the cases in which this principle is invoked the party who is to be misled by the contract will be prejudiced if the contract is shown to be a mere sham. In cases of this sort the rights of such parties should undoubtedly be protected, whether upon the theory of estoppel,20 or upon the theory that the undisclosed intention of a party to a legal transaction, to the effect that he shall not be bound thereby, can not be considered as having any legal effect.21 Such a contract may be upheld if it would violate the established policy of the state to enforce the transaction as it would exist if such contract were not enforced.22
11 Bouchet v. Oregon Motor Car Co., 78 Or. 230. 152 Pac. 888; In re Crim's Estate, 80 Wash. 305, 154 Pac. 811.
12 Rittenhouse-Winterson Auto Co. v. Kissner, 120 Md. 102, 98 Atl. 361: Bouchet v. Oregon Motor Car Co., 78 Or. 230, 152 Pac. 888.
13 In re Crim's Estate, 80 Wash. 305, 154 Pac. 811.
14 Graham v. Savage, 110 Minn. 510, 136 Am. St. Rep. 527, 10 Am. & Eng. Ann. Cas. 1022, 126 N. W. 304.
15 Graham v. Savage, 110 Minn. 510, 136 Am. St. Rep. 527, 10 Am. & Eng. Ann. Cas. 1022, 126 N. W. 304.
16 See Sec. 873.
17 Graham v. Savage, 110 Minn. 510, 136 Am. St. Rep. 527, 10 Am. & Eng. Ann. Cas. 1022, 126 N. W. 394.