Fraud in Contracts

Fraud.—Having discussed the various kinds of injustice that are committed in involuntary commutations, we now pass on to the study of those injustices that are done in voluntary transactions (see 1748). These vices can be reduced to the following:

(a) injustices perpetrated against a person who is entirely unwilling (viz., theft and robbery), as when one steals an object that had been entrusted to one as a pledge or loan, or compels another, by fear or violence, to sign a contract unfavorable to himself and which he does not wish to agree to. It is unnecessary to speak of theft and robbery in contracts, since the same principles apply to them as to theft and robbery outside of contracts (see 1890 sqq.);

(b) injustices perpetrated against a person who is partly willing, since he consents to a contract, but is also partly unwilling, since unfairness or fraud is used against him. These injuries are of two general kinds: fraud, a sin committed in buying and selling and other contracts in which payment is made for some valuable consideration; usury, a sin committed in the loan of money in which payment is made for something that is nonexistent.

Definition of Fraud.—By fraud (see 1677-1679) we here understand any unlawful conduct on the part of one party to a contract that puts the other party under a disadvantage in agreeing to the contract (e.g., misrepresentations about the excellence of merchandise), or that takes away the equality that should exist between the parties (e.g., an excessive price charged for merchandise; see 1750). The contract of sale is the type of all onerous contracts (see 1749), and to it all the others, whether certain or aleatory, can be reduced, for in every one of them there is a thing that is purchased (e.g., in aleatory contracts the hope of securing some prize), and a price that is paid for the object of purchase. Hence, it will suffice to speak of the frauds that are committed in sales, and the same principles that govern these can be applied to other kinds of contract.

C) Fraud (fraus) is an act of deliberate deception, practiced for the purpose of securing something to the prejudice of another.²⁷ Fraud is practiced in numerous forms in legal transactions and contracts, especially in sales, by deceiving the buyer as to the value, the quality or quantity of the object sold, by counterfeiting money and weights, etc. It is a very serious sin, whether regarded in its nature or in its consequences.²⁸ In its nature, because it implies deception and hypocrisy, lying, heartlessness, and injustice, all clothed in the garb of honesty and therefore difficult to discover. In its consequences, because he who commits fraud undermines the social order by destroying mutual confidence and creating distrust. Holy Scripture says that those who wrong and defraud others fall into the pit they themselves have dug, and that their iniquity will be visited upon their own heads and they will “not possess the kingdom of God.”²⁹

²⁷ St. Ambrose, De Offic., l. III, c. 11 (n. 75): “David says: ‘Like a sharp razor you have wrought deceit’ (Ps. 51, 4); reproaching the traitor’s wickedness, because an instrument of this kind is used for a man’s adornment and often wounds.” (Migne, P. L., XIV, 166).—St. Thomas, l. c., qu. 77, art. 1: “To employ fraud in order that something may be sold for more than the just price is altogether a sin, insofar as one deceives one’s neighbor to his detriment.”

²⁸ Lev. XIX, 35 sq.; Deut. XXV, 13–16; Prov. XX, 23.—Cfr. Tertullian, De Idololatria, c. 1: “The nature of fraud, I think, is that someone seize what belongs to another or deny what is owed to another, and surely fraud committed against a man is the name of the greatest crime?” (Ed. Leopold, P. I, 30).—St. Ambrose, De Offic., l. III, c. 9 (n. 65): “All fraud is shameful. Indeed, even in cheap things a deceitful balance and fraudulent measure are accursed. If fraud is punished in the marketplace of saleable things, in the practice of commerce, can it be regarded as blameless among the duties of the virtues?” (Migne, P. L., XVI, 163).

²⁹ Ps. VII, 15–17; Prov. XI, 24; XX, 17; Jer. XXII, 13; 1 Cor. VI, 8–10; 1 Thess. IV, 6; cfr. 1 Pet. II, 1.

Though minor frauds are not per se mortally sinful, yet they may become so by dint of circumstances and are to be avoided all the more because they almost invariably lead to other and more grievous acts of deception. It is this sort of iniquity which the Holy Ghost has particularly in view when He says that it is visited upon a man’s children and children’s children to the third and fourth generation.³⁰ “Those who commit frauds,” says the Angelic Doctor, “do not design anything against themselves or their own souls, but through God’s just judgment it happens that what they plot against others recoils on themselves, according to Ps. vii, 16: ‘He is fallen into the hole he made.’”³¹

³⁰ Ex. XXXIV, 7.

³¹ Cfr. St. Thomas, Summa Theol., 2a 2ae, qu. 55, art. 5, ad 3: “Those who commit frauds do not, from their intention, devise anything against themselves or against their own souls, but through God’s just judgment it happens that what they plot against others recoils upon them, according to that saying (Ps. VII, 16): ‘He has fallen into the pit that he made.’”

Particular kinds of fraud are: forging documents and dishonest bankruptcy. Both shake public confidence and tend to undermine the social order. In regard to the latter it is forbidden to conceal or remove portions of property, to falsify or destroy records, etc. If a business man incurs bankruptcy by living beyond his means, or by engaging in wild speculations, he is not guilty of fraud, but commits an injustice in not complying with his duties to his fellowmen.³²

³² J. Schwane, Die Gerechtigkeit, p. 71.

Another species of fraud is the use of dishonest means in business competition, such as misrepresenting the quality of goods or their source of production, slandering or otherwise injuring competitors, etc.³³

³³ J. Bachem and H. Roeren, Zur Bekämpfung des unlauteren Wettbewerbes, 2nd ed., Leipsic 1896; H. Mayer, Der unlautere Wettbewerb, Stuttgart 1909.

Akin to fraud is defalcation, in so far as it involves an injustice, i. e., a disadvantage to others or illegal favoring of one’s own person or business. It is committed by fraudulently appropriating money held in trust or not employing due care in the administration of property confided to one’s care, as by the executor of a will, the guardian of a minor child, the curator or administrator of an estate, etc.³⁴

³⁴ Schwane, Die Gerechtigkeit, pp. 71 sq.

458. Error and deceit are opposed to deliberation of the intellect. - Error is a false judgment; speculatively it differs from ignorance, which is the mere lack of due knowledge, but practically in the present question they are equivalent, for as to effect in contracts the same thing must be said concerning each. Error is distinguished in many ways:

A. One is antecedent, if it is the cause of the contract; another is merely concomitant or incidental, which is not the cause of the contract.

B. It is substantial, or accidental:

1. Substantial error turns about the substance of the contract, i.e., about that to which consent is principally borne, whether a) about the nature or species of contract, for example, if you take letting or commodatum for sale; or b) about the substance of the thing or object, for example, gold for copper, a gem for glass, a horse for an ox, wine for oil; or c) about the primary final motive, which is principally intended; or d) about a substantial quality (which redounds into the substance), to which consent is bound, so that it is a condition without which not and limiting the consent, for example, if someone buys new wine for old, an aged mare in place of a younger one for breeding, and intends: I buy if it is so, and I do not buy unless it is old, or younger.

2. Accidental error turns about the accessories of the contract, namely a) about the secondary or impelling motive, or b) about an accidental quality to which consent is not bound. Yet this can be the motive of the contract, if it is entered into because of that quality, without that quality itself being a condition without which not of the consent; and then it is the cause of the contract, i.e., it moves to the contract, but is not principally intended, but secondarily: for example, if someone buys a horse because he thinks it is white, or wine because he judges it to be Bordeaux, without saying: I do not buy unless it is white or Bordeaux. Then the error is antecedent; but if in no way it is the cause of the contract, it is merely concomitant.

C. It is proper to the one erring and caused by no one else, and then it is simply error; or induced by another, and then it is called deceit.

459. Principles concerning a contract entered into with error. -

1. Substantial error, even merely concomitant, renders a contract invalid, because in the case the one erring does not furnish consent concerning the thing about which the contract is (a. 1110). Whence if you buy oil for wine, the contract does not have force, even if, knowing that it was oil, you would have bought it.

2. Accidental error which is not the cause of the contract, or is merely concomitant, does not render it invalid, because it has no influence on the contract.

3. Antecedent accidental error, i.e., one which in fact gives cause to the contract, renders at least in the forum of conscience a gratuitous contract invalid: for this demands a greater fullness of the voluntary, and the common good does not prevent it from being easily rescinded. Thus, for example, a donation made to someone because he is thought to be poor, or a blood relative.

Yet in practice attention must also be given to the disposition of the contracting party; for example, someone bestows a small alms on a poor man because he thinks him sober and pious and otherwise would not bestow it; yet after the fact, generally, he does not wish the donation to be void, even if the poor man is impious and drunken.

4. Accidental error which gives cause to a contract does not invalidate an onerous contract. The reason is that in an onerous contract, since favors and burdens are mutual, because of the accidental error of one, the other ought not to suffer damage; - and besides, the common good demands this, the security of commerce: for since these contracts are most frequent, if because of accidental error they could be rescinded, the whole order would be overturned and lawsuits would be multiplied unto infinity.

Many add, however: for the forum of conscience, if the matter is still intact, the deceived party is not bound to fulfill the contract, provided he renders the other party unharmed, because the tacit mind of the contracting parties is not to oblige themselves to execute the contract if they have been deceived. But this reason does not hold, because contracting parties, on account of the necessity of the common good and the security of commerce, are judged to will to consent and to renounce rescission of the contract, if only accidental errors are present, which all cannot be attended to. Besides, so it is in the external forum.

Hence: a) Error concerning quality of itself is accidental, unless the quality is intended as a condition without which not, to which consent is bound.

He who buys a red horse because he thinks it white buys validly, unless he has said: I do not buy unless it is white; conversely, a priest buying blue cloth for a cassock, which he thinks black, makes the purchase null.

b) Error concerning person of itself is substantial in gratuitous contracts, in which principally the person is attended to upon whom the benefice is conferred, and besides a greater liberty is required.

I say: of itself, because in fact the will of the one gratuitously conferring must also be attended to, especially in things of lesser moment, in small alms, in which often they intend to give absolutely, or at least do not wish restitution to be made. Conversely, in onerous contracts error concerning the person is generally accidental, for example, if you buy a book from Peter thinking it is from Paul: for then principally one's own advantage to be received from the contract is attended to; unless the person is a substantial quality, as in the purchase of a painting made by a famous painter. A fortiori the error will be substantial in matrimony, in which the person is the very matter of the contract (a. 1110).

c) Error concerning the impelling motive of the contract is accidental; conversely, if it is about the final motive, it is substantial.

Thus if someone buys a horse, falsely thinking that his own has died, the contract has force; conversely if he buys under the condition that it has died.

460. Principles concerning a contract entered into with deceit. - Deceit is a saying or deed employed to deceive another, which can be done by craftiness, frauds, machinations, fallacies, whether positively by lying, or negatively by being silent or concealing a hidden defect which ought to be revealed. Whence it is an action or omission posited so that the other may be induced into error. And therefore it includes error, and adds the injury of deception which lessens liberty; for if the other, detecting the fallacy, is not deceived, and nevertheless contracts, consent is in no way vitiated. Now:

1° Substantial deceit in the same way as error invalidates the contract, and moreover obliges one to repair the damage unjustly inflicted on the deceived party, for example, one selling worn garments as new.

2° Accidental deceit which is not the cause of the contract does not render it invalid.

3° Accidental deceit which is the cause of a gratuitous contract invalidates it.

4° Accidental deceit which is the cause of a dissoluble onerous contract, and is employed by the other contracting party, does not render the contract invalid, because it does not take away voluntary consent; but it makes it rescindable at the will of the deceived party (a. 1116-1117), because fraud ought to patronize no one.

5° Accidental deceit employed by a third party does not make the contract rescindable, unless the contracting party was a participant in the deceit; nevertheless the deceiver is obliged to repair the damage unjustly caused.

IT MUST BE NOTED that D. Bonaventure, in the Mirror of the Soul, chapter 2, teaches that hidden injustice is often committed in contracts in many ways, namely by frauds in number, weight, and measure; in value or in quantity; by silence about a defect, or by deceiving the simplicity of a buyer, by commending a false thing with perjuries, by asserting things with execrations, by duplicity of words — all of which are against charity, and also against justice, insofar as they are directed at deceiving and damaging one's neighbor; for they give a cause to contracts which buyers would not enter into if they knew such things. Similarly, sellers often disparage merchandise, spreading reports that such goods must be reduced to a very cheap price; by disseminating letters; by ships quickly landing, laden with the same merchandise, etc. These sometimes give a cause to contracts. About these we must see what we ought to hold.

THEREFORE, FIRST, frauds and deceits concerning the substance of things, when they give a cause to the contract, render it void, as all confess. The reason is given by D. Bonaventure in 4 dist. 27, art. 2, question 2, and elsewhere in the same distinction: because fraud and deceit make the contract itself involuntary; but without free consent a human act cannot stand. This is proven also by the others: Lessius book 2, chap. 17, dub. 5, n. 27; Fagundez book 5, chap. 42, n. 2.

I SAY secondly, that fraud and deceit which do not cause the contract, but only an increase or diminution of the price, do not void the contract, but only oblige to reducing the price to equality. See Molina t. 2, disp. 352; Less. book 2, chap. 17, dub. 5, n. 28.

I SAY thirdly. If deceit, error, or fraud gives a cause to a contract of sale, or to any other, such that the party suffering the deceit would not contract if he knew of the deceit, and the deceit itself proceeds from the other contracting party, or he shares in it, the other contracting party being in good faith, the contract is void in the forum of conscience and in the external forum; yet in the external forum, in favor of the deceived party and of the deceiver, by civil and canonical law there is given an action for rescinding the contract, or for reducing it to equality, as the deceived party may prefer, even if the deception does not go beyond the limits of the just price. So Molina T. 2, disp. 259 and 352; Couar. ad regulam Possessor, p. 2, §. 6; Medina Cod. de restit., question 35; Vallascus de iure emphyt., question 5, n. 9; Sylvest. v. culpa, question 7; Fagundez book 5, chap. 42; and it is evident ex l. si dolo C. de rescind. vendit. and ex cap. cum dilecti de empt. et vendition.

IT IS PROVED commonly by the argument placed above of D. Bonaventure, because free consent, necessary for every contract, was lacking.

I SAY fourthly. If the deceit is brought about by some third party, the contracting parties being unaware, although the contract is valid, yet the deceived party can in the forum alone have an action against that third party for damages, as is found in cap. cum dilecti, de empt. et vendit., and Leg. eleganter, at the beginning, ff. de dolo, and ex Leg. si dolo C. de rescind. vendit.; and this is taught commonly by Molina t. 2, disp. 352; Less. cited book, chap. 17, dub. 5, n. 33; and others as gathered by Fagundez n. 16.

SOME, however, say that such a contract is null in conscience, because consent, which is the substance of the whole contract, is lacking. So Medina C. de restit., question 33; Conrad. in addit. sum., ad question 57, dicto 3 and 4. For the rest see the disput. de contractibus, question 3. Bassaeus adds at n. 13 that the contract cannot be patched up at the very lowest by an occult diminution of measure, unless he is compelled to go below the minimum.

The following case for consideration has been sent from South 'Africa:

A certain Solomon fancies that he has discovered a very rich gold mine, and in order to sell it more easily, and of course for a higher price, he " salts " it, as the saying is, i. e. he buries in his mine rich gold ore secured from other gold mines. Some capitalists test the mine, and, being highly satisfied with the result, they buy Solomon's land for an enormous price. A company is formed to work it, but the output does not come up to expectations; in fact, the mine does not even pay the cost of working it. Solomon declares that the mine was not worked properly, and that all sorts of unnecessary expenses were incurred; and this is undoubtedly true. It seems probable that under different circumstances the mine might have repaid the capital, with possibly five per cent interest. Is Solomon obliged to make restitution in full or in part? The question is one regarding the just price (pretium justum) of a thing. This can be regulated in various ways—by law (legale), by the general estimate of its value (vulgare s. naturale), by an agreement between buyer and seller in cases where the value cannot be otherwise ascertained (conventionale), and by bidding at a public auction (concursu effectum). The common price (pretium vulgare) seems fair if it corresponds to the thing's value, as usually estimated. As, however, people may judge very differently of the value of anything, we distinguish the highest, the average, and the lowest just prices (pretium justum summum, medium, infimum). Apart from special circumstances, which we need not discuss here, anything may be sold fairly for the highest, average, or lowest just price. But a sin of injustice is committed if by deception or unfair trickery the highest just price is obtained from the buyer, or if any higher price is obtained than the buyer without that trickery, would have paid.

We are now in a position to answer the question. Solomon asserts that with prudent management, and with care to avoid unnecessary expense, the capital might have been refunded and five per cent interest paid. This is merely a matter of probability, not of certainty. A res existens in spe probabili can be the subject of an agreement, and the probable profits can be assessed at a definite sum of money; but equity requires that the probable profits in an agreement shall be estimated lower than the certain profits. Even if the mine had really been as profitable as Solomon represented it to be, he deceived the purchasers by " salting " it, and so induced them to pay an enormous price for it. He is therefore bound to repay the amount by which his trickery augmented the price of the mine. He is not responsible for the loss incurred by the company by their unwise methods of exploitation and by their unnecessary expenditure, for, as matters stand, his dishonesty was not the efficient cause of this loss.—Dr. A. Goepfert

It is well known what a keen interest the high-minded and public-spirited Lord Russell of Killowen took in the question of secret commissions in trade. His wide experience at the Bar and on the Bench in England had convinced him, as he publicly acknowledged when summing up as Judge in the case of Oetzman vs. Long [1896], that “this business of corrupt bargains was a malignant canker; it was affecting honesty in all or in many details of the relations of life, and was not confined to commercial relations.” He spent much time and thought on the question in the last years of his life, and in conjunction with Sir E. Fry he drafted a Bill of which the object was to make criminal all corrupt practices by or with an agent in the exercise of his agency. As Lord Chief Justice of England he introduced his Bill into the House of Lords in 1899 and again in 1900, but he never had the satisfaction of seeing it become law. He concluded the speech by which he introduced the measure in 1899 with the following weighty words:

I feel strongly on this question, and have been led to detain the House at some length with the hope that your

Lordships will share the strong interest I feel. As a question of money, and as affecting trade, it is important; but that is not the only view presented to my mind. It is a practice that tarnishes the character of lawful commerce; it blunts the sense of honesty in the man engaged in it; it is injurious to the honest man trying to conduct his business on high and honorable principles, and has a corrupting and degrading influence in ways that I need not formulate or define. I commend the Bill as an honest attempt to deal with what I conceive to be a great and growing evil.¹

¹ R. B. O’Brien’s Life of Lord Russell of Killowen, p. 301.

Sir E. Fry explains the words of Ecclesiasticus 27: 2, concerning “ the sin that sticks fast in the midst of selling and buying” as a reference to secret commissions.²

² The sin that sticks between buying and selling, by the Right Honorable Sir E. Fry, p. 1.

The Judge’s exegesis may be somewhat too narrow, but in all probability secret commissions were given and taken in trading communities long before the days of the Preacher.

The London [England] Chamber of Commerce appointed a special Committee to inquire into the matter, and in 1898 this Committee issued a Report which contains a great deal of valuable information of which I have made large use in my paper.

Under No. 5 the Report says: ‘“ Your Committee conclude from the evidence before them that secret commissions in various forms are prevalent in almost all trades and professions to a great extent, and that in some trades the practice has increased and is increasing, and they are of opinion that the practice is producing great evil, alike to the morals of the commercial community and to the profits of honest traders.”

The Committee expresses its opinion that much good might be done by written papers, or oral addresses, or by public meetings directing attention to the “heinousness of the system of secret commissions and its detrimental effect upon morals and business,” p. 6.

Evidently it is a question which concerns the moralist and the priest, as well as the lawyer and the merchant, and no apology is needed for treating the subject in the pages of the Ecclesiastical Review. My instances will be taken from English sources, but I have no doubt that they could be paralleled from across the water.

The fundamental principle which should be kept in mind throughout this discussion is that an agent of whatever kind is bound by the nature of his agreement to act for his principal and not for himself. He is engaged by his principal to buy or sell or do something for him, and he receives compensation from the principal for what he does. He is bound to use ordinary care and diligence in the matter entrusted to him, or at any rate such care and diligence as the circumstances and the nature of the work to be done require. In consideration for this he receives, as we suppose, a reasonable and just salary. Besides his salary he cannot claim any additional payment for what he does.

However, as we have seen, it is a very common practice for agents of all kinds to receive something over and above the salary or wages which their principal pays them. Indeed some railway porters, hotel waiters, and others, are said not to be paid at all by their employers, but to gain their living from the tips given them by customers. Cases are mentioned where such employees actually pay their employers for their posts. There can be no moral difficulty about such arrangements, unless they involve hardship or extortion, which need not necessarily be present. The tips are freely given, as is here supposed, and they are reckoned on by employers and employed alike. Such practices may be objectionable, but in themselves they are not morally wrong.

Somewhat different from these are cases in which the giving and taking of commissions are not equally reckoned on by the parties concerned. As an example I will take the case of the Great Western Insurance Company vs. Cunliffe [1874] from the Report of the London Chamber of Commerce, p. 17. In this case the plaintiffs, a marine insurance company in New York, appointed the defendants their agents for settling claims and effecting re-insurances. There was a fixed percentage payable for settling claims, but no remuneration for re-insuring. The agents were allowed by the underwriters, in accordance with custom, 5 per cent. on each re-insurance, and on the general balance of the year’s accounts 12 per cent. on the year’s profits, if there were any. The agents, in their accounts sent to the company, mentioned the 5 per cent. commission, but not the 12 per cent. on the year’s profits. When the company became aware of this they claimed an account of sums received in respect of such 12 per cent. commission. The action was successful in the first instance, but was defeated on appeal. In the Court of Appeal, Lord Justice James said:

Whether you call him a broker or not, the person who is the agent for the merchant or anybody else, by a well-established practice obtains the insurances, and receives a discount of 5 per cent. which he puts into his own pocket. He is paid by the underwriter, instead of by the principal. And then, by a practice quite as well known, recognized by everybody connected with the business, recognized by the Courts of Law of this country, referred to over and over again, there is another thing—there is a gratuity which the broker receives upon the settlement of the accounts, being 12 per cent. upon the balance, if the balance should happen to be a favorable one; that is, if the underwriter finds it to be a profitable account, he gives 12 per cent. upon it to the broker who brought the business to him. The plaintiffs have never disputed that the defendants were entitled to retain in their pockets the 5 per cent. They say, ‘‘We knew that, but we did not know of the other.’’ But they never inquired.

In such a case as this of course conscience follows the law; a well-recognized and legitimate custom is the agent’s title to keep the commission. Sometimes indeed there is a difficulty in such cases about the existence of a recognized and legitimate custom. This is illustrated by the case of Hippesley vs. Knee Brothers, an appeal case decided in the High Court of Justice on October 27, 1904. The appeal was from the decision of the County Court Judge sitting at Bristol. The following is the report of the case from the Times, October 28, 1904: —

It appeared that the plaintiff, Mr. Hippesley, a solicitor practising at Bristol, was desirous of selling a portion of his collection of bric-a-brac and also certain pictures which he had bought from Messrs. Frost and Reed, but which, not having been paid for, were still in the possession of that firm. With that object in view the plaintiff interviewed the manager of the defendants’ firm, who carry on the business of auctioneers, and as a result of negotiations between the parties it was agreed that the defendant firm should sell the plaintiff’s goods on the terms set out in two documents dated July 25, 1903. The terms of the defendants’ employment, so far as they are material to this case, were as follows: In order to enable the plaintiff to obtain possession of the pictures purchased from Messrs. Frost and Reed the defendants were to advance to the plaintiff a sum of £200, which sum, with interest at 5 per cent., was to be charged on the goods entrusted to them. The defendants were to sell the goods by auction, and were to be paid commission of 5 per cent. on all lots sold, the minimum commission to be £20. The defendants were also to be paid all out-of-pocket expenses in addition, which included ‘‘ advertisements, printing and posting bills, printing catalogues, posters, time, and postages.’’ The defendants instructed a firm of printers to print the posters and catalogues. The printers did the work, and in their ledger debited the account of the defendants with the sum of £13 9s., being the price which they would have charged to any ordinary customer, but, on payment, they allowed to the defendants, because they were auctioneers, the trade discount of 10 per cent., which they would not allow to any ordinary customers. The defendants in the account sent to the plaintiff charged him with the full amount of £13 9s. and did not make any rebate in respect of the trade discount allowed to them. In the same manner the defendants received a discount of £1 8s. 7d. on the newspaper advertising account, but charged the plaintiff with the full amount of the account. The sale of the plaintiff’s goods took place in September, 1903. The plaintiff, being dissatisfied with

the result of the sale, brought this action in the County Court, claiming from the defendants £1 6s. 8d., the discount the defendants had received from the printers, on the ground that that sum was a secret commission which had been received by the defendants whilst acting as agents for the plaintiff, and £1 8s. 7d., the discount received by the defendants on the advertising account, on the ground that the defendants had expressly agreed with the plaintiff to allow him that rebate on the account. He further claimed that, inasmuch as the defendants, whilst acting as agents for him, had received a secret commission, he was entitled to the return of the £20 commission paid by him to the defendants. The defendants called evidence to prove, and did prove to the satisfaction of the learned Judge, that there was a long-established usage or practice amongst auctioneers to act as the defendants had acted with regard to the discounts on the accounts, and that it was the usual practice for the printers to deal with the auctioneers as principals, and to allow them as trade customers the trade discount off the retail price, the whole of the retail price being charged by the auctioneers against the vendors. It was admitted that no mention of the discount was made by the defendants to the plaintiff; and the plaintiff swore that he did not know of any usage or practice under which the defendants might claim such discount, though he admitted that he knew there was such a practice with regard to the bills sent in by newspapers for advertising. The County Court Judge was of the opinion that the defendants had acted honestly, and that, inasmuch as they took no secret commission from any person with whom they were negotiating a contract to be made between that person and the plaintiff, and inasmuch as the plaintiff was not in fact damnified, the plaintiff’s claim failed, and that he was not entitled to recover from the defendants the amount of the trade discount allowed to the defendants, nor the amount of the commission earned by the defendants on the sale of the plaintiff’s goods.

The Court of Appeal set aside the decision of the County Court Judge, and after delivering judgment the Lord Chief Justice said:

He must say that he thought that the law which had been applied in the cases referred to should be applied in all cases where an agent employed to do certain work received a secret commission in relation to the performance of his duty to his employer from any one other than his employer. He only wished to add that he thought it was highly probable that there did prevail, unfortunately, in commercial circles in which perfectly honorable men played a perfectly honorable part, a most extraordinary laxity in the view which was placed on these proceedings. If a principal employed an agent for a given remuneration to do work for him, and employed him upon those terms, that agent was not allowed to make secret profit for himself out of that transaction. The sooner that was recognized, and the sooner that these secret commissions were made to be disapproved of by men in an honorable profession, the better it would be for trade and commerce in all its branches. He said that not because for one moment he thought that these gentlemen were acting otherwise than in what they believed to be in accordance with their rights, but the argument of Mr. Duke had led the Court—indeed, it had invited them—to say that the Court should allow those commissions to these gentlemen as against their principal because the principal knew, or ought to have known, that something of the kind was going on. Of course, if it was brought to the knowledge of the principal that such things were being paid, it ceased to be secret, and then, of course, the question did not arise; but when there was no knowledge, the agent ought to account, and it was only honest that he should carry on his business on the principle that he should account. The two authorities Mr. Duke cited were authorities in which it was perfectly obvious that the employer knew that the agent was being remunerated by third parties; therefore they in no way affected the principle which he had endeavored to lay down. For the reasons which he had stated the appellant was entitled to judgment for the two sums which the respondents had received by way of discount, but was not entitled to recover the commission which he had paid to them.

In this case, I think law is somewhat stricter than conscience need be. The principal had his work done for him by the agent according to the contract, and on the usual trade terms; the commission was not intended for the principal, but was allowed to the auctioneer as such, by what seems to be a particular or local custom, much in the same way as booksellers deal with each other on more favorable terms than they grant to the outside public. There is no hint that the interests of the principal suffered in consequence of the agent receiving the commission from those whom he employed. In such circumstances there seems no reason why, as a matter of conscience and before the sentence of a competent authority, the commission received by the agent should be handed over to the principal. In conscience such a transaction may be looked upon as similar to the Christmas boxes which are given to postmen, or the little presents which are made to servants and others by tradesmen with whom they habitually deal. Unless debarred by special agreement or command, the agent will be safe in conscience if he retain such presents.

The line between these and a large class of more or less objectionable practices is not easy to draw. The difficulty is touched upon by the Report of a strong committee of business men appointed to consider the question on behalf of the Rochester [England] Diocesan Conference of the Church of England, 1903:

The Committee is convinced [we read in the Report, p. 2) that what modern times and modern ways most require, in order to make the nation clean and true, is faithfulness in Christian people to Christian duty and to Christian ideals. At the same time it is not infrequently difficult to discover which is the path of duty. The Committee had before them two clergymen of experience with the view of obtaining in confidence an account of their methods of dealing with cases of conscience in matters of Commercial Morality. The answers to a series of questions which the Committee put, showed a considerable difference of opinion; and it was abundantly manifest that there is a need for some guidance in the application of moral principles to individual cases of difficulty.

As a type of the cases which I am here considering I select the following from the Report of the London Chamber of Commerce, p. 10:

A representative of a lubricating oil firm sent a copy of a letter which he had received from an engine driver: “Sir, having used your cylinder oil for going on eight years, I now take the liberty of asking you if you cannot allow me and my mate something for using the same. A gentleman came to our mill and asked me whose cylinder oil we were using, and how much a cask you were allowing me. I told him we were using your oil. He asked me if I would give their oil a trial and he would allow me a good discount. I said it was no use of him bothering as we were quite satisfied with what we were using at the present time. Hoping you will oblige us by return of post. I remain, etc.’

If the oil of the rival firm in this case was equally cheap and equally good, so that the employer would suffer no damage by its use, there would seem to be no injustice done if the driver gave it a trial in consideration of the discount promised him. The rival firm must be supposed to be ready to share part of their profits with those who use their oil, and this they have a right to do. No injustice is done by leaving the firm with which business has been done for eight years, though naturally such conduct is resented by tradesmen. It cannot be denied, however, that there is danger in such practices. If the engine driver receives a commission on the oil he uses, he is exposed to great temptation to waste it, so as to increase his earnings; if he finds that in course of time an inferior article is supplied, or if the invoice shows a greater quantity than he actually took, he is hardly in a position to defend the interests of his employer. In the great majority of cases he would hold his tongue, pocket his discount, and fail in his duty to his master. On this ground Sir E. Fry absolutely condemns such transactions.

Another, and less genuine line of defense, [he says] * is the assertion that the gift is not made with any intention to bias the recipient, or that the recipient is not biased by it, and does his duty to his master in spite of it. This ignores the real point of the matter. To say whether a bribe has or has not operated on the mind of the recipient is a metaphysical inquiry which it is difficult for the man himself, and often impossible for others, to answer; to say what is the tendency of a bribe is a matter of no difficulty; and in all transactions of this sort, often obscured and embarrassed by the complications of modern commercial life, the true inquiry is, has the payment (made under whatever name it may be, of gratuity, of Christmas box, of discount, of percentage, of capitation fee), has it a tendency to blind the eyes of the receiver, to make him less vigilant for his master than he ought to be—to look with more favor on the giver than on others who are not givers of like gifts? If this tendency be found to exist, the transaction is to be condemned—however innocent may have been the intentions of the donor, however untainted may have remained the mind of the recipient.

8 The sin that sticks, p. 7.

This is indeed the legal attitude toward such transactions, especially if a positive law already exists which forbids them on account of the presumption of fraud. But the moralist must not confound things so different as the tendency to produce evil and evil itself, especially as the strength of the tendency may vary almost indefinitely according to character and other circumstances. However, if this be allowed for, the moralist’s attitude toward such transactions will not differ widely from the lawyer’s, for he will recognize them as full of danger, and to be avoided by all who wish to escape the snares of sin. The confessor then will dissuade his penitents from such transactions in the future, but, unless it is clear that injustice has been done by them in the past, he will abstain from imposing any obligation to make restitution to the employer.

The agent must not buy or sell for himself what he has been engaged to buy or sell for his principal, without that principal’s knowledge and consent. Law and conscience are here almost at one. The doctrine may be illustrated from the Report of the London Chamber of Commerce, p. 13.

The leading case which illustrates the rule forbidding an agent for sale to purchase for himself, or an agent for purchase to sell his own property to his principal without full disclosure, is Brookman vs. Rothschild [1829]. There the plaintiff employed the defendant to buy and sell foreign securities, and directed him to sell 20,000 French Rentes. The defendant, without the plaintiff’s knowledge, purchased these for himself and his partners, but gave the plaintiff the market price. The defendant then pretended to purchase Prussian bonds for the plaintiff, but in fact the purchase was of the defendant’s own bonds, remaining in the hands of the defendant and his partners, the plaintiff being debited with the market price and commission. Other similar transactions took place between the parties, and finally accounts were balanced, and the plaintiff paid the balance which appeared to be due from him. Four years afterwards the plaintiff, having discovered the nature of the transactions, applied to the court to have them set aside and his money returned, and was successful.

As a general rule, at any rate, conscience should here follow law. Exceptions might be permitted where extraordinary diligence has been used by the agent to sell or buy in a better market; but even here, on account of the danger, and because the agent’s judgment can hardly be unbiased when his own advantage is in question, and he is not usually prepared to take both sides of the risk, the practice should be condemned.

There are many cases where the only course open to an honest man is, at whatever cost, to take his stand on the eternal and immutable principles of justice. In spite of the commercial corruption of our time, in such cases honesty is still the best policy. Certainly this must be the maxim to be followed in cases like that mentioned by Lord Russell in the speech by which he introduced his Bill dealing with secret commissions into the House of Lords on April 20, 1899. Lord Russell said : —

One of the most painful experiences which I have had professionally was at the Leeds Assizes, where I had to defend an old man who had been in business for something like fifty years. He was a member of the local Corporation. His son was succeeding him in business. He was charged at the Assize Court with having entered into a conspiracy with Lord Masham’s foreman dyer to defraud Lord Masham, who is the head of a silk manufactory in Bradford, by invoicing goods which were never delivered, by invoicing inferior goods and charging the price of higher-class goods, and, occasionally, when they sent the best goods, by charging an excessive price for them. When I saw my client and his solicitor, I said, ‘‘If the evidence as on the depositions comes out, the case is hopeless. How could a man holding a respectable position, and so long before the public, be a party to such transactions?’ His explanation was a very pathetic one. He said he could not help it; that he was driven to it. It began first with small commissions, but gradually the screw was turned on, and his trade profit would have disappeared altogether if he had not fallen in with the arrangement. I asked him if he could not have gone to Lord Masham and told him. He said he could, but the result would have been that the foreman would have been dismissed, and another man put in his place; and if he had not made an arrangement with the new foreman, that man, when a vat containing perhaps £220 or £300 worth of stuff was in the process of dyeing, would have put some noxious stuff into the vat, and would have said to Lord Masham, ‘‘See the kind of drugs you are using. You will have to change your drug merchant.’’ I do not believe that is at all an isolated case.⁴

⁴ R. B. O’Brien’s Life of Lord Russell of Killowen, p. 300.

The hardship endured or at any rate feared by the conscientious agent in such cases might often be mitigated or removed if only the principal would condescend to take a little trouble in his own interests and for the sake of justice. In proof of this an example taken from the Rev. J. Carter’s Commercial Morality may serve as a conclusion to this paper: —

A short time ago, a friend of mine, a veterinary surgeon, was requested by a coachman to put down half a dozen more horse-balls to his master; but he did not want any sent in, adding, ‘‘Don’t forget it is near Christmas!’’ The inference was clear. The balls were to be charged, and the money given to him. My friend consulted me about it, saying, ‘‘If I do not do it that beggar will get me out there somehow, either by complaining of the way I treat the horses or by some other cause!’’ I replied, ‘‘It is your business to go to his master and report the matter to him.’’ Now, this veterinary was a young man who had just purchased a practice in our town, and had fairly high ideals of justice and truth; but he was a Scotchman, and before all things he meant to get on. He took my advice, went to the gentleman, and told him. The gentleman was much annoyed at being bothered over such a matter. The coachman still holds his place, and my friend has ever since had the greatest difficulty in keeping the gentleman’s custom. Now, when he hears me talking about what I think is right, he sits smiling, and concludes by saying, ‘‘Yes, you’re right, but it doesn’t pay.’’⁵

⁵ Page 25.