(b) R, by falsely representing himself to be the agent of B, induced S, on B's credit, to ship wool billed to B. When the wool reached its destination R induced the railroad to make delivery of it to him on his false representation that he was B's agent. Thereupon R sold and delivered the wool to B, and after receiving the cash for it, absconded. What are the rights of the parties? See Rodliff v. Dallinger, 141 Mass. 1.

(c) A's secretary, B, submitted a number of circular letters to A for the latter's signature. The writing on each letter filled almost the entire sheet, so that there was barely room for A's signature. B arranged the letters so that A saw the contents of only one letter, this letter covering all of the one underneath it, except the space at the bottom reserved for A's signature. Each of the other sheets successively covered the one underneath it in the same way. B had fraudulently substituted a promissory note payable to his own order for one of the letters. A signed all of the papers without examining the same, being assured by B that they were identical with the one on top. B indorsed the note to C, who paid full value bona fide and without notice of the fraud. Can C hold A?

(d) A made an agreement with B to buy the latter's business on the basis of an inventory. The price thus determined was $20,000, which A paid in cash. Later B discovered that items amounting to $1200 had been omitted from the inventory. What are his rights?

(e) A agreed to serve B as a watchman for one week, B promisA understood this to ing to pay "$1.50 a day and nights the same." mean $3 for twenty-four hours' service. It was B's understanding, however, that A was to have only $1.50 for that number of hours. A performed the services night and day for a week. What are the rights of the parties? See Turner v. Webster, 24 Kan. 38.

a

(f) A, a holder in due course, presented for payment to B, bank, a check containing several indorsements, one of which was forged. B paid the check and upon discovering the forgery contends Is the that it is legally entitled to recover back the amount paid A. bank's contention sound? See Corn Exchange Bank v. Nassau Bank, 91 N. Y., 74.

(g) The so-called parol evidence rule is not allowed to stand in the way of reforming a written agreement; will the Statute of Frauds prevent reformation when the prior bargain of the parties, although within the purview of the Statute, was only orally expressed? The authorities are in a state of great confusion. See Clark on Equity, sections 348-350.

$175. Fraud.-An individual's freedom of action in playing upon the motives of men in conducting negotiations with them, or in directing and supervising them, is restricted in three

directions. He must not use (1) misrepresentation and fraud, nor (2) duress or coercion, nor (3) undue influence. We shall consider first misrepresentation and fraud.

A distinguished economist has put the problem in these words: "As long as men are free to choose for themselves and act according to their own judgments, those who are shrewd and watchful will make better bargains than those who are dull and unobservant. When does one man overreach another, when does he simply leave him to judge for himself as to his own interests? The probabilities are that for the sake of securing the large general benefits that flow from private property and competitive dealings we shall always have to permit some doings that are on the line between the productive and the predatory."1

Our problems are to find out what must be shown by the injured party in order for him to make out a case of misrepresentation or fraud and what he can do about it, so far as legal remedies are concerned. Misrepresentations, whether innocent or fraudulent, may operate to prevent the making of an agreement. Cases of this kind have been dealt with under the head of mistake. Usually, however, misrepresentation is merely a ground for the granting of relief from an existing agreement— relief which is given in accordance with equitable principles. As regards the remedy of reformation it will be remembered from the discussion of the topic of mistake, that the remedy is given not only when there is a mistake common to both parties, but also when by reason of mistake on one side and knowledge of it on the other, the written agreement is an incorrect expression of the prior bargain. In the subsequent discussion it will appear that even innocent misrepresentation is a bar to the remedy of specific performance, and that there is a strong tendency in modern times to treat it as a ground for rescission. Finally, it will be pointed out under what circumstances a misrepresentation be the basis of a tort action.

may

$176. Active Misrepresentation.-It is a general principle in our system of law that one is under no duty to act for another's advantage except when he has made a binding promise

Taussig, Principles of Economics, ch. 2. §5.

so to act or is in a special relationship, such as that of parent and child, and master and servant. In accordance with this general principle there is ordinarily no duty to disclose facts of any kind to the other party of the transaction.

$177.

SMITH v. HUGHES.

Queen's Bench, 1871. [L. R. 6 Q. B. 597.]

[The plaintiff, a farmer, sold oats by sample to the defendant, who thought he was buying old oats. New oats were useless to him. In an action for the price, the jury found for the defendant, under a direction of the court that they were to find for the defendant if the plaintiff knew that the defendant believed the oats to be old oats. A new trial was ordered on the ground that this direction to the jury was not correct. BLACKBURN, J., said: "Whatever may be the case in a court of morals there is no legal obligation on the vendor to inform the court held that the instrument was a nullity even in the hands of the vendor."]

$178. Exceptions to Rule Requiring Active Misrepresentation. There are, however, certain exceptions to the general rule. In contracts of marine insurance even the innocent nondisclosure of any fact affecting the risk is a ground for avoiding the contract. This duty of disclosure embraces not only such facts as are known to the insured, but also those which he ought to have known about. This special rule is said to be based on the ground that such contracts are peculiar in that one of the parties usually has means of knowledge which are not available to the other, and that hence it would be unfair to treat the parties as though they were bargaining upon an equal footing. Further, whenever parties stand in a special fiduciary relation to each other, a full disclosure of every material fact affecting the transaction is invariably required by the law. Typical illustrations of such fiduciary relations are those existing between partners, principal and agent, lawyer and client, guardian and ward, trustee and beneficiary, and promoters and the corporation. These are all cases in which the parties are not supposed to be

'With respect to contracts of fire and life insurance, most American courts hold that only a fraudulent concealment is fatal to the contract.

dealing with each other at arm's length. Finally, it is to be noted that in certain situations non-disclosure has been held fatal to a suit for specific performance of the contract, while not constituting a defense to an action at law for breach of contract, or even a ground for rescission in equity. It has been so held in the case of an expert's contract to buy land from an ignorant farmer who did not know the mineral value of his land, and in the case of an improvident contract with a woman who was inexperienced in business. In cases like this a court of equity invokes the equitable maxim, that he who comes into equity must come with clean hands,—a rule of elastic, and not always predictable application.

Even as to ordinary transactions between strangers, there is one further comment to make. If an offeree receives what he knows to be an erroneous expression of the offer, he cannot, even by a categorical acceptance, hold the offeror to the terms of the erroneously expressed offer. When a person knows that his promise is misunderstood by the other party, the consequences may be even more unfavorable to him, for he will probably be precluded from denying that his promise has the meaning attached to it by the other party. In the case of Smith v. Hughes, to which attention was previously directed, Mr. Justice Hannen said: "If, in the present case, the plaintiff knew that the defendant, in dealing with him for oats, did so on the assumption that the plaintiff was contracting to sell him old oats, he was aware that the defendant apprehended the contract in a different sense to that in which he meant it, and he is hereby deprived of the right to insist that the defendant shall be bound by that which was only the apparent, and not the real, bargain."

$179. The Elements of Injury and Reliance.-Even an active misrepresentation must be the cause of injury to another before it becomes a matter of legal consequence. "An action can

An

German Fruit Co. v. W. U. Tel. Co. (1902), 137 Cal. 598. offer to sell Riverside oranges of a standard grade was wrongly transmitted by telegraph so as to read $1.60 a box instead of $2.60. It was held that the offeree had notice on the face of the telegram of the error and therefore could not accept the offer in the form in which it was delivered.

Smith v. Hughes, §177, supra.

not be supported for telling a bare, naked lie." No relief is granted to a man who disregarded a misrepresentation and acted on his own judgment. He need not show, however, that the misrepresentation was the sole, or even the predominant, inducement for entering into the agreement. It is enough if it formed a material inducement. In this respect fraud differs markedly from mistake as a ground for relief on equitable principles. A mistake as to some matter of inducement is insufficient to avoid an agreement-there must be a mutual error regarding a matter actually contracted about.

If the misrepresentation has actually induced action it is generally held, and very properly, too, that extreme credulity, or failure to investigate, or even negligence on the part of the injured party is immaterial. Massachusetts is one of the very few jurisdictions in which this doctrine is not fully accepted. Even in Massachusetts, however, the defrauded party is not deprived of his remedy if he has been reasonably cautious. In a recent Massachusetts decision it was said: "It is too late in the history of law to argue successfully that reasonable reliance upon representations which turn out to be fraudulent must go without relief because the sharpest distrust might have discerned the wrong. It is no ground for not affording relief to the plaintiffs that it would have been possible for them by constant and suspicious watching to have discovered that they were being defrauded. So long as they acted reasonably they have a right to protection."'*

The next question which naturally arises is, Who is entitled to rely upon the misrepresentation? Not every Tom, Dick, and Harry is entitled to act upon a representation. This right belongs only to those who may fairly claim that the statement was made with the intent that it should influence their conduct.

House of Lords, 1873. [L. R. 6 H. L. 377.]

[Plaintiff bought shares in the open market upon faith of a prospectus containing misrepresentations of fact. The prospec

'Buller, J., in Pasley v. Freeman (1789), 3 T. R. 51, 56.

Forbes v. Thorpe (1911), 209 Mass. 570, 577, 578, per Rugg, C. J.