Fraud. Few principles of law are oftener or more emphatically asserted than that fraud avoids every contract tainted with it, and annuls every transaction. It is seldom that this is not true; but there are certain rules and qualifications which must be known for the understanding of the practical application of the principle. Thus, fraud does not so much make the contract tainted with it void, as voidable. This is an important practical distinction, for a void contract has, and can have, no efficacy whatever, being simply nothing; whereas he who is defrauded in a contract or transaction may still be on the whole benefited by it, and he may certainly waive his right to avoid it for the fraud; and if he does so, the fraudulent party cannot insist that his own fraud has liberated him from his own engagements, and annulled his obligations. It is very difficult to give a legal definition of fraud; but it may be said to be any deception by which another person is injured. This definition leaves it necessary to explain how far such deception may be carried, and what its character must be, before the law recognizes it as fraud, and will permit a party injured by it to find legal redress, either by annulling his engagements or otherwise. For it is certain that not all deception is fraud in law.
The Roman civil law used the phrase dolus malus, evil deceit, to express the fraud which the law dealt with. We have no similar phrase in our law, but we have an exactly similar distinction, although it is difficult to define or even to illustrate it. The law of morality and of religion is plain and simple: Do unto others as you would have them do unto you;" and any craft or cunning, any concealment or prevarication, or consent to self-deception, by which one may make gain over another, is clearly a violation of this law. But it is certain that there is a large amount of craft, and a very cunning kind of deception, active or passive, of which the law takes no cognizance, and which characterize a very large proportion of the common transactions of society. Somewhere the law draws a line between that measure and that manner of deception against which it directs men to protect themselves by their own caution, under the penalty of suffering without remedy any mischiefs which may result from their want of skill or care, and that larger or deeper or more important kind of deception which it considers it unreasonable to require that men should guard themselves from without its aid. But where this line is drawn it would be impossible to declare by any formula.
Indeed, there are whole classes of cases in which it may be considered as not yet settled what the law is in this respect. Thus, the law of warranty has been expressly founded in England and the United States upon the rule caveat emptor, or, let the buyer beware; and it was once applied almost to the extent of holding that if a buyer did not choose to obtain an express warranty of the thing sold, he was remediless, whatever might be the amount of deception practised upon him, or rather whatever might be the degree or the way in which he was permitted to deceive himself. But in the article Warranty we shall show that there has been an important modification of the law in this respect.-While it is impossible to state precisely by definition what frauds the law will recognize and treat as such, and what it will not, some leading principles run through the adjudication on this subject, and may help to a just understanding of the matter. One is, that the fraud must be material to the contract or transaction, and as it were enter into its very essence and substance; and the best test of this may be found in the question, would the transaction have taken place if the fraud had not been practised ? For if it would not, the fraud was material.
Another is, that the fraud must work an actual and substantial injury, for mere intention or expectation is not enough. Another is, that the defrauded party must not only have believed in point of fact the false statement, but must have had a rational right to believe it, because he cannot call upon the law to protect him from the consequences of his own neglect or folly. Here the law looks carefully at the injured person's ability to protect himself; and it is far more liberal in its suppression of fraud, or in remedying its consequences, when that fraud was practised against one who from age, infirmity of mind or body, or the confidence arising from a fiduciary relation, has a right to call on the law for its protection. Another distinction which the law makes is founded on practical reasons, which amount indeed to a necessity, but is scarcely sustained by principles of morality; it is that between concealment and misrepresentation. In some branches of the law, as that of insurance, the distinction is of little value, but generally it has much force. Thus, if one buys goods on credit who is at the time insolvent, but says nothing about his affairs, the sale is valid, and the property passes to the buyer, leaving the seller only his claim for the price.
But if the buyer, being insolvent, falsely represents himself to the seller as having sufficient resources to justify the sale or credit, this is a fraud which permits the seller to avoid the sale, and to reclaim the goods. (See False Pretences.) The question how far one is bound to communicate to another any special facts which he knows, or indeed any information which he possesses, has often passed under adjudication. That a sale is not voidable merely because one party knew what the other did not, and bought or sold because of his better knowledge, is both certain and obvious; and perhaps it is equally certain and obvious that if the law annulled all transactions of this kind, a very large proportion of all the buying and selling, of all that goes under the name of speculation, must come to an end. The courts of the United States have held that a buyer is not bound to communicate to a seller extrinsic circumstances which were very material to the price, and were known to the buyer alone. Still, while the law is so in general, there are cases in which the concealment of special knowledge invalidates a transaction founded upon that concealment.
If one injures another by such fraud as the law recognizes, he is responsible although not interested in the transaction, and not himself gaining by the fraud; as, for example, when one knowingly gives false recommendations of a person seeking employment.-It may be proper to mention the doctrine of constructive fraud, or that by which the law treats as fraudulent certain acts which have, or which are adapted to have, the effect of fraud, although none be intended; as, for example, if one buys a chattel, and leaves it, however honestly, in the possession of the seller, this is a void sale as against a third party who buys of the seller not knowing the previous sale. This not taking away what one buys is held in some courts to be conclusive evidence of constructive fraud, and in others to be only what is called a badge of fraud, or a very suspicious circumstance indicating fraud, but open to explanation. (See Sale.)