CHAPTER VI EFFECT OF MISTAKE, FRAUD, DURESS AND UNDUE INFLUENCE SECTION 1.-INTRODUCTION The preceding chapters have presented the problems which arise out of the formation, performance, and discharge of contracts. Every agreement worthy of the dignity of a contract will ultimately be discharged, either by performance or by some one of the other methods of discharge to which reference has been made. We have surveyed, therefore, the normal life history of a contract. In the four chapters following, we are to be concerned with a group of circumstances of a special nature. Specifically, we deal, in these chapters, with such questions as the following: What effect is brought about in the relations of the parties to a contract by the existence of mistake, fraud, duress, undue influence, or illegality? What is the status of the contracts of minors or of insane persons? Finally, what kinds of contracts must be in writing, and what is the legal effect of a failure to comply with such requirements? It would be possible to classify these portions of the law of contracts under the topics heretofore treated. For example, a mistake may be of such a nature as to prevent the formation of a contract. This involves the application of the principles of law which fix the requisites of a contract. A mistake may not prevent the formation of a contract, but it may constitute such an important aspect of the transaction that justice would require that it be taken into account in fixing the rights and duties of the parties. In a sense, therefore, the mistake could be regarded as a condition, either implied in fact or in law, which would operate substantially like any other condition. This phase of the subject of mistake could therefore be treated under the head of conditions. So, also, the subject of fraud, duress, and undue influence may be examined, sometimes with a view of determining whether there was a contract, and sometimes from the standpoint of conditions. With respect to illegality, it is possible to say that one of the requisites to the existence of a contract is that it shall have a legal object. But, inasmuch as illegal contracts do produce some of the effects of a normal contract, it would seem desirable to regard an illegal contract as a real contract, and B.& B.BUS.LAW-19 then to treat the element of illegality as an independent matter, which affects materially the relations of the parties to the contract. It is sometimes said that one of the requisites of a contract is that the parties must be competent, but this is hardly correct. Minors and other persons entitled to a larger measure of protection than normal persons do make contracts, but the law gives to them certain rights and privileges which are not possessed by other persons. The rules of law prescribing that certain kinds of contracts shall be in writing are founded upon considerations of public policy. Sometimes these rules prescribe an actual requisite to the existence of a contract, as in the case of negotiable contracts; but the rules discussed in Chapter IX, for instance, are not of this. character. Failure to reduce such contracts to writing will have some effect, but this effect is not to prevent the formation of the contract. In other words, the matters treated in the next four chapters are new chiefly in the sense that the operative facts themselves are new. After it has been determined what constitutes mistake, fraud, duress, illegality, etc., the legal effect follows more or less naturally as a result of the application of principles previously developed. SECTION 2.-MISTAKE The inquiry into the nature and effect of mistake opens up a broad field of study. Mistake may project itself into any of the varied phases of individual, social, business, or political life. One may do a great many things which one would not, if one were aware of all the facts relating, in one way and another, to his conduct. We are interested here in three aspects of mistake: (1) What is a mistake? (2) What kinds of mistake are taken cognizance of by the law; that is, what kinds of mistake will so operate as to create, alter, extinguish, 'or prevent the formation of legal relations-principally contractual relations? (3) What are the legal effects of the various kinds of mistake with which the law is concerned? A mistake is a mental state, consisting in the erroneous assumption that a specified fact is presently existing or non-existing, or that, in the future, it will or will not exist. The mental state thus called mistake, instead of being an affirmative state of mind, may be a negative state of mind; that is, instead of erroneously assuming that fact X exists, one may simply fail to think about the existence or non-existence of fact X. Causes of mistake may be various. A mistake may arise as the result of careless mental habits, from the failure to follow a line of inquiry which would lead to a discovery of the truth, or from a belief induced by fraudulent representations of a third party. It is usual to treat that kind of mistake caused by the fraud of a third party under the general head of fraud, and it will be so treated here. With respect to the kinds of mistake, it is possible for the mistake to concern the transaction between the parties in such a way as to prevent the formation of any contract. Some reference to this phase of the law relating to mistake was made in the chapter on Offer and Acceptance. Again, the mistake may not prevent the formation of a contract, but it may be nevertheless of so material a nature that the law will permit the rescission of the contract on the ground of mistake. Finally, there may be no misunderstanding in the making of the real contract, but, in the same case, some mistake may arise in giving the contract formal expression. In such a case, it may not be just to rescind the contract, but it may be reformed; that is, the formal expression may be made to conform to the contract actually entered into. RIEGEL v. AMERICAN LIFE INS. CO. (Supreme Court of Pennsylvania, 1893. 153 Pa. 134, 25 Atl. 1070, 19 L. R. A. 166.) Plaintiff's intestate, a creditor carrying a $6,000 policy of insurance upon the life of one Leisenring, her debtor, in order to be relieved of the burden of further premiums, surrendered the same for a paid-up policy for $2,500, under the rules of the company, subsequent to the death of the insured, both parties being ignorant of said death. Plaintiff brings a bill against the insurance company, asking the reinstatement of the surrendered policy. In the court below, a decree was rendered, sustaining a demurrer to the bill and dismissing it. Plaintiff appeals from the decree. STERRETT, J. * * [Quoting from a previous opinion in the same case:] "The case presented on these facts was that of a contract entered into under the influence of a mutual mistake, and a claim for relief from such contract. The mistake was in relation to the fact of Leisenring's death. Both parties evidently supposed and acted on the supposition that he was alive, and that the annual premiums upon his life, which had become burdensome to Mrs. Riegel, must be continued indefinitely until his death should take place. As it had become difficult for her to pay these premiums, the only way in which she could be relieved from them was to surrender her policy, and accept a paid-up policy for such smaller sum as the premiums already paid would purchase. Rather than take the risk of losing the entire amount of the policy, by her inability to keep up the annual payments, she surrendered her policy for $6,000, and accepted in lieu of it a paid-up policy for $2,500. was the contract she made while in ignorance of Leisenring's death. At the time she made it she was already relieved from the burdensome premiums, and the entire amount of the policy was honestly due her from the company. What was the effect of the mistake upon her? Simply to take from her the difference between the two policies, and give her absolutely nothing for it. She surrendered a policy for $6,000, on which the liability of the company was already fixed, and received one for $2,500, to secure relief from a burden already removed. The company parted with nothing. She secured nothing. The whole transaction was a mistake, and, if the decree of the court stands, This the result will be to take $3,500 from Mrs. Riegel and give it to the insurance company. These facts seem to us to present a clear and a strong case for equitable relief, so strong, indeed, that a mere statement of them is the only argument necessary for its support. The duty of a chancellor to relieve in cases of mutual mistake is so well settled that no citation of authorities can be needed. * * The learned judge who heard this case in the court below, and who is thoroughly familiar with the principle to which we have referred, seems to have been misled in regard to the facts set up in the bill. * * * * "" The general rule is that an act done or a contract made under a mistake of a material fact is voidable and relievable in equity. The fact must of course be material to the act or contract; for, though there may be an accidental mistake or ignorance of the fact, yet, if the act or contract is not materially affected by it, relief will not be granted. Thus, A. buys from B. an estate to which the latter is supposed to have an unquestionable title. It turns out, upon due investigation of the facts unknown at the time to both parties, that B. has no title; as, if there be a nearer heir than B., who was supposed to be dead, but is in fact living. In such a case equity would relieve the purchaser and rescind the contract. But suppose A. buys from B. an estate the location of which was well known to each of them, and they mutually believed it contained 20 acres, when in fact it contained only 1934 acres, and the difference would not have varied the purchase in the view of either party; in such a case the mistake would not be ground for rescission of the contract. * * * It makes no difference in application of the principle that the subject-matter of the contract be known to both parties to be liable to a contingency which may destroy it immediately; for, if the contingency has, unknown to the parties, already happened, the contract will be avoided, as founded on a mutual mistake of a matter constituting the basis of the contract. * * * The principle is illustrated by familiar examples, employed by text writers, thus: A. agrees to buy a certain horse from B. It turns out that the horse is dead at the time of the bargain, though neither party was then aware of the fact. The agreement is void. A. agrees to buy a house belonging to B. The house was previously destroyed by fire, but the parties dealt in ignorance of that fact. The contract not being for sale of the land on which the house stood, was not enforceable. So, too, A., being entitled to an estate for the life of B., agreed to sell it to C. B. was dead but both parties were ignorant of the fact. The agreement was avoided. For similar reasons, a life insurance cannot be revived by payment of a premium within the time allowed for that purpose by the original contract, but after the life had dropped, unknown to both insurer and assured, although it was in existence when the premium became due, and although the insurer has waived proof of the party's health, which, by the terms of the renewal, it might have required. The waiver applies to the proof of health, not to the fact of his being alive. * Mr. Pollock, in his excellent treatise on the Principles of Contract (page *441), states the general principle thus: "An agreement is void if it relates to a subject-matter (whether a material subject of ownership, or a particular title or right) contemplated by the parties as existing, but which in fact did not exist." * * * * * It cannot be doubted that in exchanging the old for the new policy both parties acted on the basis that Leisenring was then alive. * * In view of the undisputed facts as to the acts of both parties, and everything connected with the transaction, it would be wholly unreasonable and unwarranted to hold that the parties treated upon the basis that the fact which was the subject of their agreement was doubtful, or that the contract was made "in view of doubtful facts, and because of the doubtful facts." * * * It is therefore adjudged that the decree of the court of common pleas be reversed and set aside, and exceptions to master's report dismissed; and it is now adjudged and decreed that the contract under which said exchange of insurance policies was made be rescinded; that the paidup policy for $2,500 be surrendered and canceled; and that the original policy of insurance be reinstated, as of date of its surrender; and it is further adjudged and decreed that the defendant company pay to the plaintiff the sum of $6,000, with interest from October 4, 1889, and also all the costs of this proceeding. PAXSON, C. J. I dissent, and would affirm the decree, upon the clear and able opinion of the learned judge below. MITCHELL, J. I concur with the chief justice in his dissent. WOOD v. BOYNTON et al. (Supreme Court of Wisconsin, 1885. 64 Wis. 265, 25 N. W. 42, TAYLOR, J. This action was brought in the circuit court for Milwaukee county to recover the possession of an uncut diamond of the alleged value of $1,000. The case was tried in the circuit court, and after hearing all the evidence in the case, the learned circuit judge directed the jury to find a verdict for the defendants. The plaintiff excepted to such instruction, and, after a verdict was rendered for the defendants, moved for a new trial upon the minutes of the judge. The motion was denied, and the plaintiff duly excepted, and after judgment was entered in favor of the defendants, appealed to this court. The defendants are partners in the jewelry business. On the trial it appeared that on and before the twenty-eighth of December, 1883, the plaintiff was the owner of and in the possession of a small stone of the nature and value of which she was ignorant; that on that day she sold it to one of the defendants for the sum of one dollar. Afterwards it was ascertained that the stone was a rough diamond, and of the value of about $700. After hearing this fact the plaintiff tendered the defendants the one dollar, and ten cents as interest, and demanded a return of the stone to her. The defendants refused to deliver it, and therefore she commenced this action. The plaintiff testified as follows: * * * "Before I sold the stone I had no knowledge whatever that it was a diamond. I told him that I had been advised that it was probably a topaz, and he said probably it was. * * *", She also testified that before this action was commenced she tendered the defendants $1.10, and demanded the return of the stone, which they refused. The evidence on the part of the defendant is not very different from the version given by the plaintiff, and certainly is not more favorable to the plaintiff. * * * * * * * * * The only question in the case is whether there was anything in the sale which entitled the vendor (the appellant) to rescind the sale and so revest the title in her. The only reasons we know of for re |