Distinction between fraudulent acquisition of possession and of title where

Silence as to quality of goods sold may be fraudulent.

1498

Warranty may be, but need not be based on contract.

1505

§ 1486. Nature of invalidating circumstances.

Agreements may lack none of the essentials of a contract, and, if within the Statute of Frauds, may be in the form that the law requires, but, nevertheless, be subject to affirmative defences which render them unenforceable. Such defences may be divided into two classes-those which operate as soon as they arise to prevent any legal obligation from arising, and those which enable one or both parties to avoid their obligations by appropriate manifestation of intention. The division cannot be made wholly exact. Illegal agreements for instance cannot be placed as a whole in any one category, but for purpose of dividing the chapters of a treatise, the classification is sufficiently accurate, and such defences as do not ordinarily of their own force immediately deprive a contract of legal validity or even prevent an agreement from having legal force, will first be considered. Perhaps the most important of these is fraud.

$1487. Definition of fraud.

Fraud may become important either for the purpose of giving the defrauded party a right to sue the fraudulent person for damages in an action of deceit, or its equivalent, or to enable the defrauded person to rescind the transaction. The requirements of the law for these two purposes are not always identical. It is undoubtedly true that wherever the circumstances are such as to warrant an action for deceit for inducing a person to enter into a contract, they will certainly warrant avoidance or rescission of the contract. The converse is not, however, true. There are cases where the belief of the deceived person is not

due to such a positive or such a fraudulent misrepresentation as would justify an action of deceit; 1 and a claim to relief if it exists must be based on the law governing mistake. The essential element of fraud that must exist in any case properly brought within that designation is a mistake of one party as to a material fact, induced by the other in order that it might be acted upon, or (in cases where there is a duty of disclosure) at least taken advantage of with knowledge of its falsity to secure action. Generally all of the requirements of the action of deceit will be found to exist. These are: (1) A false representation of material facts. (2) Knowledge of the falsity of the representations by the person making them.2 (3) Ignorance of the falsity on the part of the person to whom the representations were made. (4) Intent or at least reason to expect that the representations will be acted on by the person to whom they were made. (5) Action by such person to his damage. If the mistake of one party is induced by the other with neither knowledge of the error nor wilful indifference in regard to it there is misrepresentation but not fraud. And there is simply mistake if the erroneous belief was not induced by the other party.

1In Peek v. Gurney, L. R. 6 H. L. 377, 403, Lord Cairns said: "Mere nondisclosure of material facts, however morally censurable, however that nondisclosure might be a ground in a proper proceeding at a proper time for setting aside an allotment or a purchase of shares, would in my opinion form no ground for an action in the nature of an action for misrepresentation. There must, in my opinion, be some active misstatement of fact, or, at all events, such a partial and fragmentary statement of fact, as that the withholding of that which is not stated makes that which is stated absolutely false." And, in Derry v. Peek, 14 A. C. 337, 359, Lord Herschell said: "Where rescission is claimed it is only necessary to prove that there was misrepresentation; then, however honestly it may have been made, however

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free from blame the person who made it, the contract, having been obtained by misrepresentation, cannot stand. In an action of deceit, on the contrary, it is not enough to establish misrepresentation alone; it is conceded on all hands that something more must be proved to cast liability upon the defendant, though it has been a matter of controversy what additional elements are requisite. I lay stress upon this because observations made by learned judges in actions for rescission have been cited and much relied upon at the bar by counsel for the respondent. Care must obviously be observed in applying the language used in relation to such actions to an action of deceit."

2 This is not requisite in all jurisdictions. See infra, § 1509.

Bigelow, Torts, § 110.

1488. When fraud renders a transaction void.

Fraud may induce a person to assent to do something which he would not otherwise have done, or it may induce him to believe that the act which he does is something other than it actually is. In the first case the act of the defrauded person is effectual though voidable; in the second case the act of the defrauded person is void. This distinction most commonly arises in the law of negotiable paper. It originated, however, in the law of sealed instruments; and is still of general application.1 Where a person is fraudulently induced to sign or indorse a bill or note in the reasonable belief that he is signing something else, he cannot really be said to have made or indorsed the bill or note. If, however, the signer has been negligent a holder in due "In Pollock & Maitland's History (2d ed.), II, 536, it is said: "Taking the execution of a charter as the typical 'act in the law,' we are warranted in believing that the person whose seal it bore might defend himself by alleging that he was tricked into sealing an instrument of one kind while he though that it was an instrument of another kind." Citing Bracton, fol. 396 b; Fleta, p. 424; Y. B. 30 Edw. III, f. 31; and for later law, Thoroughgood's Case, 2 Coke, 9a.

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Foster v. McKinnon, L. R. 4 C. P. 704, is the leading case for this doctrine. In this case the defendant signed a bill of exchange under the belief fraudulently induced that he was signing a guaranty. It was held that the instrument was void even in the hands of a bona fide purchaser, Byles, J., saying: "The defendant never intended to indorse a bill of exchange at all, but intended to sign a contract of an entirely different nature." Numerous other decisions bring out the same principle. Burroughs v. Pacific Guano Co., 81 Ala. 255, 1 So. 212; Folmar v. Siler, 132 Ala. 297, 31 So. 719; Wenzel v. Shulz, 78 Cal. 221, 20 Pac. 404; Wood v. Cincinnati, etc., Co., 96 Ga. 120, 22 S. E. 909; Vanbrunt v. Singley,

85 Ill. 281; Auten v. Gruner, 90 Ill. 300; Cline v. Guthrie, 42 Ind. 227, 13 Am. Rep. 357; Webb v. Corbin, 78 Ind. 403; Mitchell v. Tomlinson, 91 Ind. 167; Lindley v. Hofman, 22 Ind. App. 237, 53 N. E. 471; Hopkins v. Insurance Co., 57 Ia. 203, 10 N. W. 605; Green v. Wilkie, 98 Ia. 74, 66 N. W. 1046, 36 L. R. A. 434, 60 Am. St. Rep. 184; Freedley v. French, 154 Mass. 339, 28 N. E. 272; Gibbs v. Linabury, 22 Mich. 479, 7 Am. Rep. 675; Anderson v. Walter, 34 Mich. 113; Soper v. Peck, 51 Mich. 563, 17 N. W. 57; Aultman v. Olson, 34 Minn. 450, 26 N. W. 451; Briggs v. Ewart, 51 Mo. 245, 11 Am. Rep. 445; Martinv. Smylee, 55 Mo. 577; First Nat. Bank v. Lierman, 5 Neb. 247; Willard v. Nelson, 35 Neb. 651, 53 N. W. 572, 37 Am. St. Rep. 455; Alexander v. Brogley, 62 N. J. L. 584, 41 Atl. 691, 63 N. J. L. 307, 43 Atl. 888; Marden v. Dorthy, 160 N. Y. 39, 54 N. E. 726, 46 L. R. A. 694; Porter v. Hardy, 10 N. Dak. 551, 88 N. W. 458; DeCamp v. Hamma, 29 Ohio St. 467; Walker v. Ebert, 29 Wis. 194, 9 Am. Rep. 548; Griffiths v. Kellogg, 39 Wis. 290, 20 Am. Rep. 48; Lord v. American Assoc., 89 Wis. 19, 61 N. W. 293, 26 L. R. A. 741, 46 Am. St. Rep. 815; Keller v. Ruppold, 115 Wis. 636, 92 N. W. 364, 95 Am. St.