Concept
Concealment and Nondisclosure
Fraud, misrepresentation, and nondisclosure
Concealment and Nondisclosure
Two sections of the Restatement (Second) of Contracts reach conduct that is not a spoken lie. Section 160 provides that action intended or known to be likely to prevent another from learning a fact is equivalent to an assertion that the fact does not exist.1 Section 161 reaches a quieter kind of conduct: a person's nondisclosure of a fact known to that person is equivalent to an assertion that the fact does not exist in the listed cases only.2 Together they show that a misrepresentation under § 159 does not require words. The definition asks only whether an assertion is out of accord with the facts, and conduct or silence can sometimes carry the assertion. The word only in § 161 marks the difference in reach: concealment counts whenever the action is intended or known to be likely to keep the other party from learning the fact, while silence counts only when one of the listed situations is present.
The difference in reach follows from what each kind of conduct does to the other party's position. A party who hides a fact defeats the ordinary protections, because the diligence that would have exposed the fact meets a surface arranged to turn it away. A party who stays silent leaves those protections intact. The other side can still ask, and the law expects an interested party to do so: a false answer to a direct question is fraud, while a refusal to answer tells the questioner a good deal anyway.3 Silence also raises a problem that concealment does not. Information often costs something to obtain, and a rule compelling every party to share whatever it knows would weaken the incentive to look. A duty to speak is therefore easier to justify when the knowledge came without a costly search and bears on a basic feature of the bargain, as a home seller's knowledge of termites usually does.4
The two sellers also face different theories of fraud, and the theories carry different elements. The same facts can support a claim of actual fraud, a claim of fraud by silence, and a claim of fraudulent concealment, and courts do not always label them consistently.5 Keeping the theories apart is the first task in any nondisclosure problem, because the rules that decide what counts as an assertion differ from one theory to the next.
The parts below follow the division that §§ 160 and 161 draw. The first takes up active concealment, in which conduct alone supplies the assertion. The next states the baseline that silence is not an assertion. The remaining parts work through the four situations in which the Restatement converts silence into one, each pairing the silent party's knowledge with a feature of the circumstances.6 Those features are an earlier statement that silence would leave misleading, a mistake the other party is making, a writing the other party misreads, and a relationship that entitles the other party to know.
Active Concealment
Restatement (Second) of Contracts § 160 supplies the plainest example of conduct that works as an assertion: action intended or known to be likely to prevent another from learning a fact is equivalent to an assertion that the fact does not exist.7 The comment describes concealment as an affirmative act that keeps another from learning something the other would otherwise have discovered, and it gives the act whatever effect a misrepresentation would have.8 The definition in § 159 completes the reasoning, because an assertion that a fact does not exist is not in accord with the facts when the fact does exist.9 The seller need not utter a word. A seller who paints over cracks in a foundation wall to hide a structural flaw has asserted through the paint that the wall is sound.10
The clause has three working parts, and each narrows its reach. The first is a positive act, and the qualifying acts are varied. In Croyle v. Moses a seller committed fraud by hitching his horse short to hide that the animal was a cribber and windsucker, and in Osborn v. Gene Teague Chevrolet Co. a verdict stood against a used-car dealer who had set an odometer back from 100,000 to 62,000 miles, with no spoken misstatement in either case.11 Packaging or camouflaging goods to hide a known defect belongs in the same group.12 Silence involves no act, so it falls under § 161, which treats nondisclosure as an assertion in the listed cases only.13
The second part is purpose or likelihood: the act must be intended to prevent discovery of the fact, or known to be likely to have that effect. That requirement separates concealment from ordinary preparation. The same repair can be a routine step before a sale or a deliberate effort to hide a serious problem, and the difference lies in what the actor knew and meant the repair to accomplish.14 A seller who freshens the paint in every room because the house shows better that way has concealed nothing about a roof leak the seller never noticed. The third part is the hidden fact itself. An actor who works to keep a fact from being learned necessarily knows the fact exists, and that knowledge is why concealment ordinarily produces a fraudulent misrepresentation under § 162(1)(a) and not one that matters only if it is material.15 The concealer also acts to bring about the other party's assent, so the intent to induce is present as well.16
Section 160 needs no separate duty to disclose, because of what the act itself does. Silence is tolerated in bargaining because each party can usually protect itself by looking and asking, and a party who holds back what it knows leaves the other side's means of discovery intact. A positive act destroys those means. The buyer inspects the attic or the basement precisely to learn what the seller already knows, and a seller who has arranged for the inspection to turn up nothing has made the buyer's own diligence the instrument of the deception: the buyer looks, finds nothing, and reaches the conclusion the seller planned. The law treats positive action designed to hide the truth or to stymie the other party's investigation as misfeasance that can support avoidance, a different matter from a passive failure to speak.17 The distinction survives even in the minority of jurisdictions where caveat emptor, the buyer-beware principle, still reigns: a seller there owes no duty to volunteer defects, yet may not actively conceal them or misrepresent them.18
The bat infestation in Jablonski v. Rapalje shows the rule on a full set of facts. Bats had inhabited the attic of the house during the 36 years the sellers lived there, and they returned after every attempt to get rid of them. While the buyer inspected the house, the sellers used mothballs and floodlights to keep the bats away and cleaned up droppings and urine, and the court refused summary judgment and let the buyer go to trial on fraudulent concealment.19 The case also contained a spoken lie, because the sellers called droppings the buyer noticed bird droppings. The mothballs, lights, and cleanup are the concealment, and the remark about birds is an ordinary affirmative misrepresentation.20 Weintraub v. Krobatsch involved a cockroach infestation, and the court let the buyer go to trial on the theory that the seller had actively concealed the insects by leaving all the lights on.21
The knowledge, the bats, and the buyer's ignorance are the same here as in Jablonski. What separates the silent sellers from the Jablonski sellers is the positive act, and that single fact moves the claim out of § 160 and into § 161. A buyer in the silent sellers' position has to show that one of the listed cases required disclosure, because nondisclosure counts as an assertion in those cases only.22 An exam stem that stresses the seller never said anything invites the conclusion that only § 161 can help, and the stem may hide a repair, cleanup, or staging that makes § 160 the governing section.
Concealment also changes how a buyer's failure to investigate is weighed. A concealer who argues that the buyer could have looked harder asks the court to blame the buyer for failing to defeat an arrangement built to defeat looking. Courts balance the victim's neglect against the other side's deliberate dishonesty, and purposeful concealment can outweigh a buyer's failure to inquire.23 Where the buyer did inspect and the concealment was designed to defeat that very inspection, as with floodlights burning in the attic, the buyer's diligence leaves the concealer little to argue. Justified reliance under § 164(1) remains a required element, however, and a buyer who skipped any inspection at all stands on weaker ground on that element.24
The No-Duty Baseline
Restatement (Second) of Contracts § 161 opens by limiting its own reach: a person's nondisclosure of a fact known to that person is equivalent to an assertion that the fact does not exist in the listed cases only.27 That sentence sets the baseline for every nondisclosure problem. Concealment is an act, and § 160 treats the act as an assertion.28 Silence involves no act, so a party who merely keeps a fact to itself has asserted nothing, and there is no misrepresentation under § 159 to set beside the facts unless the situation fits one of the listed cases.29 The word only closes the list. A student cannot reach a duty to speak by showing that the silent party knew something important, because importance is not itself a listed case, and the starting point remains that bargaining parties need not volunteer what they know.
The leading illustration is Laidlaw v. Organ, decided in 1817 and still cited for the general rule.30 The British blockade had depressed the American price of tobacco. The treaty of peace signed at Ghent, which ended the war and the blockade, had not yet become known to the public in New Orleans when the buyer called on the seller soon after sunrise and contracted for a large quantity of tobacco.31 The buyer's agent knew of the treaty and the seller's agent did not. When the seller's agent asked whether there was any news that might raise the value of the tobacco, the buyer's agent stayed silent, although the news could lift the price by as much as half.32 Within hours the news became public, the price rose, and the seller tried to avoid the sale. Chief Justice Marshall held that the buyer was not bound to communicate circumstances outside the commodity that only the buyer knew, since a contrary rule would be hard to confine within workable limits.33 The Court did return the case for trial on whether the buyer had committed actual fraud, so the decision protects silence and leaves any positive misstatement or maneuver to the ordinary rules.34
Two reasons support the baseline, and they do different work. The first is self-reliance. Parties who contract are treated as free agents acting from self-interest, so a party may use an advantage in information and need not reveal the facts that make the deal attractive to it. A buyer who has studied the market carefully need not tell the seller that the property is underpriced, and a commodity buyer whose research predicts a price surge need not share the forecast.35 Self-reliance is tolerable because the other party keeps the means of protecting itself, which is to ask. A false answer to a direct question about a material matter is fraud, and a refusal to answer tells the questioner a good deal anyway.36 The second reason is incentive. Information is often costly to gather, and a rule forcing the discoverer to hand it over before every deal would let the other side collect the benefit without paying for the search, which weakens the reason for anyone to search.37
The incentive reason also marks where the baseline gives way. A buyer of land who has paid for geological research pointing to oil need not report it, because forced disclosure would penalize the very investment that produced the knowledge. A home seller who knows of termites usually learned of them without any costly search, so a duty to speak costs little and discourages nothing.38 In Hill v. Jones the buyers of a house claimed rescission over termite damage the seller had not disclosed, and the Arizona court of appeals held that a seller has a duty to disclose termite damage that materially affects the property's value.39 The seller knew a fact bearing on a basic assumption of the sale, the buyers could not see it, and silence about it fell short of good faith and reasonable standards of fair dealing, which is the situation § 161(b) describes.40 An exam stem that stresses how much the silent party knew, or how valuable the information was, therefore settles nothing by itself. The oil-hunting buyer and the termite-knowing seller each held a material fact the other side lacked, and the answer turns on whether the silence fits a listed case.
Section 161 names four situations in which silence is treated as an assertion. Each pairs the silent party's knowledge with a feature of the circumstances that makes the silence misleading or makes the other side's ignorance unfair to exploit. The four, taken up in turn in the parts that follow, are these:
- Correcting a prior assertion, § 161(a). Disclosure is necessary to keep an earlier assertion from being a misrepresentation, or from being fraudulent or material.41
- Mistake about a basic assumption, § 161(b). Disclosure would correct the other party's mistake about a basic assumption of the contract, and silence fails the test of good faith and reasonable standards of fair dealing.42
- Mistake about a writing, § 161(c). Disclosure would correct the other party's mistake about the contents or effect of a writing that embodies the agreement.43
- Trust and confidence, § 161(d). The other party is entitled to know the fact because of a relation of trust and confidence between them.44
The four differ in breadth. Paragraphs (a), (c), and (d) describe narrow situations that the facts make easy to spot: a statement already made, a writing, or a relationship.45 Paragraph (b) is the open-ended one, because it depends on good faith and fair dealing and so on the circumstances of each case.46 The factors courts weigh under it track the two reasons for the baseline: whether the information is the silent party's own property because it took cost and effort to obtain, and whether the other party could have found it by diligent inquiry.47 Paragraphs (a) and (d) also line up with the exceptions courts recognized early, which require a speaker to cure a half-truth, to correct a statement later found false, and to disclose within a fiduciary relationship.48
Statutes form a separate source of disclosure duties and sit outside § 161. Legislatures have required disclosure in particular fields, among them securities, consumer credit under Truth-in-Lending, interstate land sales, and home sales under state statutes protecting buyers.49 These statutes tend to govern transactions in which one party holds information that the other could get, if at all, only at great expense, which is the setting in which the self-reliance reason is weakest because asking cannot realistically close the gap.50 Where such a statute applies, nondisclosure counts as a misrepresentation, and the statute may prescribe its own relief.51 A residential disclosure statute creates a claim distinct from the common-law claim, with its own elements, and it may exempt facts that many buyers would care about.52 Real property sales also vary by jurisdiction. In a minority of states the buyer-beware principle still governs, so a seller owes no duty to disclose even latent defects absent a fiduciary relationship, though even there the seller may not lie about a defect or actively conceal it.53 Most states have moved the other way, and a trend among courts requires sellers and brokers to disclose latent defects that the seller knows of and the buyer could not readily discover.54
A claimant who finds a listed case or a statutory duty has shown only that the silence counts as an assertion that the fact does not exist. That assertion must still be fraudulent or material, must have induced assent, and must have been justifiably relied on before the contract is voidable.56
Correcting Prior Assertions
Restatement (Second) of Contracts § 161(a) supplies the first of the four situations in which silence counts as an assertion: a person's nondisclosure of a known fact is equivalent to an assertion that the fact does not exist where the person knows that disclosure of the fact is necessary to prevent some previous assertion from being a misrepresentation, or from being fraudulent or material.58 The no-duty baseline holds that a party who merely keeps quiet has asserted nothing, so a claimant ordinarily has to find a reason why silence should count. Here the reason is already on the table, because the silent party spoke earlier and the listener took that statement as a premise of the bargain. The clause therefore turns on three questions: whether there was a previous assertion, whether the silent party knew a fact that undermines it, and whether disclosure was necessary to keep it from misleading the listener. Two situations satisfy those questions, a statement that was true when made but later became false and a half-truth that misled from the start, and each is taken up below once the reason for the rule is clear.
A statement made during negotiations does not expire when it is spoken. The listener carries it forward and keeps bargaining on the strength of it until the contract is concluded, so the statement is still at work at every later point in the negotiation. A speaker who learns that the statement has become untrue, and who watches the listener go on relying on it, is no longer declining to volunteer anything. Each moment of silence maintains a belief that the speaker created and now knows to be false. The usual excuse for silence also falls away, since the baseline tolerates it on the footing that the other side can protect itself by asking, and a listener who has already received an answer has no reason to ask again. Only the speaker knows the answer has gone stale, and correcting it costs one sentence while sparing the listener a contract built on a premise that has disappeared.
The first situation arises when an assertion that was accurate when made becomes inaccurate because circumstances change before the contract is concluded. A duty to disclose is recognized where disclosure is necessary to correct a previous assertion that was not misleading when made but has become inaccurate.59 The same duty arises when a speaker who stated a fact in good faith later gets information showing that the statement was untrue when made, provided the speaker knows the other party is still relying on it.60
The duty to correct stops at a fixed point, the formation of the contract. Courts applying the idea to insurance applications treat each answer as a continuing affirmation of its truth until the policy is delivered, and they expect the applicant to use diligence in reporting material facts that arise between the application and delivery.61 Delivery is the line because it is the moment of assent, and the clause exists to protect that assent from a premise the speaker knows is gone. A misrepresentation is measured against the facts as they stand when the contract is made, so a change that comes afterward leaves the earlier statement accurate as to the only time that counts.62 Had the applicant in the example above quit only after the loan agreement was signed, the application would have matched the facts at formation, and § 161(a) would impose no continuing duty to report the resignation. Whether the loan agreement itself requires later reports is a separate question about that agreement's own terms.
The clause also reaches only a fact that the silent party knows. The duty to report a change is understood to cover information the applicant reasonably perceives to involve an actual change, and an applicant who has no knowledge of the change breaches nothing by saying nothing.63 A second limit comes from the character of the earlier statement. In Hord v. Environmental Research Institute of Michigan the court held that an accurate 1991 operating summary of a firm's prospects created no implicit duty to update when conditions changed afterward, and it rejected the claim that the plaintiff could treat the summary as a picture of the next fiscal year without some additional inquiry or affirmative representation by the defendant.64 A dated report describes a past period and stays true as a description of that period, so nothing in it invites the listener to read it as a running account. The analysis shifts when the speaker knows that the other party is relying on the old statement as if it were current, because the duty to correct attaches once the speaker knows of that reliance.65
The closing words of the clause extend it beyond simple falsity. Disclosure may be necessary to keep an earlier assertion from being fraudulent or material, as well as from being a misrepresentation at all. A speaker who made an honest statement and then discovers it was wrong knows from that point that the assertion is not in accord with the facts, and a speaker who stays silent while the listener keeps relying has the knowledge that § 162(1)(a) requires for a fraudulent misrepresentation.66 An innocent misstatement that would have mattered only if material thereby becomes one that supports avoidance even when the misstated fact was minor.67 The materiality prong shifts in the same way. A statement made with no expectation that anyone would act on it becomes material under § 162(2) once the speaker learns that the listener is about to rely on it, because the maker then knows the statement is likely to induce the recipient.68
The second situation involves no change at all. A half-truth is a statement that is literally true as to the fact it states but produces a false implication about other facts, and silence about those other facts leaves the false implication standing, so disclosure is necessary to keep the statement from being a misrepresentation.69 A dog seller who says the dog ate well last night has said something true, yet the sentence suggests the dog is healthy. The statement is a half-truth, and so a misrepresentation, if the dog turns out to have been sick enough that a veterinarian had to pump its stomach. If the seller spoke before the dog became ill, the illness is a change of circumstances that creates a duty to disclose before the sale closes.70
A half-truth can mislead more effectively than an outright lie. A used-car buyer asks about the brakes, and a seller whose technician warned last week that the brakes were dangerous and urgently needed repair answers that they were just checked last week. The answer is accurate, and it does more damage than a claim of ignorance would have done, because a claim of ignorance might at least send the buyer off to investigate, while the half-truth answers the question the buyer would have used to start looking.71 The same logic condemns a seller who says a car was driven only by a little old grandmother and leaves out that she drove it in stock car races, since the seller who speaks must say enough to prevent the statement from being incomplete and misleading.72
The decided cases locate the line between a half-truth and bare silence. In the Swinton case, predatory insects threatened the structure that was sold, and with no representation of any kind from the seller the court found no duty to disclose.73 In Kannavos v. Annino, by contrast, the vendors' advertising and statements conveyed that the property was multi-family housing suitable for investment and that it could continue to be used that way, although the premises had a defect under the zoning and building ordinances. The Massachusetts court allowed rescission, reasoning that vendors who did as much as they did were bound to do more, and it distinguished Swinton as involving much more than bare nondisclosure.74 Vokes v. Arthur Murray, Inc. states the same principle in general terms: a party who owes no duty to volunteer facts may stay silent, but one who undertakes to speak must disclose the whole truth.75 Whether the seller spoke first decided the pair, and the seriousness of the hidden fact did not, since the insect infestation in Swinton was grave. An exam stem that reveals a seller's knowledge of a hidden defect therefore invites the conclusion that disclosure was required, and the clause applies only if the seller said or did something earlier that the defect makes misleading. A seller who never spoke on the subject is analyzed under the baseline and the other three listed cases.
Mistake and Good Faith
Restatement (Second) of Contracts § 161(b) is the broadest of the four listed cases in which silence counts as an assertion. A person's nondisclosure of a known fact is equivalent to an assertion that the fact does not exist where the person knows that disclosure would correct a mistake of the other party as to a basic assumption on which that party is making the contract, and where nondisclosure amounts to a failure to act in good faith and in accordance with reasonable standards of fair dealing.78 The clause therefore stacks two conditions on the knowledge that § 161 already demands: the other party must be mistaken about something central to the deal, and the silence must be unfair in the circumstances. Paragraphs (a), (c), and (d) tie the duty to a prior statement, a writing, or a relationship, each of which a court can identify from the facts. Paragraph (b) ties it to a judgment about fairness, which makes it the most general and open-ended of the four and explains why courts apply it by weighing circumstances instead of applying a formula.79
The clause borrows its vocabulary from the law of mistake, and the connection shows why it is needed. When a seller knows that a home's foundation is defective and the buyer does not, a claim of mutual mistake fails, because the seller was not mistaken about the foundation and so the mistake was not shared. The buyer can still avoid the contract, because the seller had a duty to disclose.80 In its essence the rule creates a duty to speak where one party knows the other is operating under a mistake and basic norms of honesty and fairness call for disclosure.81 The other party's mistake supplies the harm, and the good-faith condition explains why the law places the burden of correcting it on the party who knows.
The two conditions exist for different reasons. The first screens out the ordinary informational gaps that every bargain contains. The no-duty baseline tolerates silence because each party is expected to look after its own interests, and a duty to correct every gap would dissolve that baseline. The clause therefore reaches only a mistake about a basic assumption, meaning a fact on which the mistaken party's decision to contract rests. The comment to § 161 gives the working test for property sales: a seller is ordinarily expected to disclose a known latent defect of quality or title that would probably prevent the buyer from buying at the contract price.82 A defect with that power would have changed the buyer's decision, so the buyer's ignorance of it is a mistake about the core of the bargain.
The second condition does subtler work, because knowing that someone else is mistaken is not wrongful by itself. An informational advantage is sometimes earned: a party who paid for research has a legitimate interest in keeping the results, and a party who could have found the fact through ordinary inquiry has not been wronged by being left to do so. Good faith and fair dealing therefore ask whether keeping the fact back was fair, and courts begin with two questions that separate a hidden defect from an earned or discoverable advantage. One is whether the information should be treated as the property of the party who holds it because that party spent cost and effort to obtain it, and the other is whether the information is readily available on diligent inquiry.83 The decided cases add further considerations, and because no single one decides the outcome, they are best held as a list to be weighed together:
- How the information was acquired. Facts that came to the silent party by chance or without costly effort, as a homeowner's knowledge of termites usually does, weigh toward disclosure, while facts produced by research or special expertise weigh against it.84
- Whether the fact is readily discoverable. A fact the other party could have found through ordinary inquiry or inspection weighs against disclosure, and a fact reachable only through the silent party weighs toward it.85
- How important the fact is. The more a fact bears on the value or desirability of what is sold, the stronger the claim to hear it.86
- The parties and the contract. Wide differences in sophistication, a relationship that invites reliance, and contracts such as insurance that customarily call for full disclosure all weigh toward a duty.87
- Active concealment. Efforts to keep the other side from learning the fact weigh heavily toward disclosure, and conduct of that kind can also be an assertion in its own right under § 160.88
The first two items do the most work, because they track the reasons for the baseline itself. A duty to disclose a fact that arrived without costly effort discourages no one from searching, so it costs little, whereas a duty to disclose the product of an expensive search would reduce the incentive to search at all.89 A fact the other side could readily check, by contrast, leaves that side holding a means of self-protection it chose not to use. The remaining items adjust the weight, and the cases below show the combinations that tip a court toward a duty or away from one.
Hill v. Jones, which the baseline discussion used to show where the no-duty rule gives way, is the fullest illustration of the clause at work. The buyers agreed to pay $72,000 for a house with a parquet teak floor, noticed a small ripple on the step up to the dining room, and asked whether it was termite damage, and Mrs. Jones answered that it was water damage. After closing, the buyers found a pamphlet on termites in a drawer, learned from a neighbor of past infestation, and had an exterminator confirm termite damage to the floor, steps, and columns, with repair of the floor alone estimated at about $5,000.90 The Arizona Court of Appeals held that a seller of a residence must disclose termite damage that the seller knows of, the buyer does not, and that materially affects the property's value, and it followed the Florida formulation requiring disclosure of facts that materially affect value and are not readily observable.91 Every item on the list points toward disclosure here. A homeowner comes to know of termites without a costly search, the damage was not readily observable to buyers whose only clue was a ripple, and structural damage bears directly on value. The court still sent the case to a jury, because materiality and the buyers' own diligence are factual questions, and the sellers disputed that they knew of existing damage at all.92
The Florida decision behind that formulation, Johnson v. Davis, explains why this duty belongs in the same family as affirmative misstatement. Where a failure to disclose a material fact is calculated to induce a false belief, the line between concealment and an affirmative representation is thin, because both come from the same motives, produce the same consequences, and offend the same principles of fair dealing.93 The Florida court applied the duty to all forms of real property, new and used, when the seller knows of facts materially affecting value that are not readily observable and are unknown to the buyer.94
The same factors operate on a defect that no inspector could find. In Stambovsky v. Ackley the seller had helped build the house's reputation as haunted by including it in tours of haunted homes and reporting apparitions in the press, and the buyer, who did not claim to have met any ghost, objected to the reputation itself. The majority let the buyer go to trial on nondisclosure: a buyer must inspect for structural and physical defects, but nothing alerted this buyer to the reputation, so he could not reasonably be expected to inquire into it, and the seller who fostered it had a duty in good faith to disclose it.95 The dissent would have denied relief, because the reputation had been widely publicized and a reasonable inquiry would have turned it up.96 Majority and dissent weighed the same considerations and differed on how discoverable the fact was, which shows how much the open-ended standard depends on a court's view of what a careful buyer would check. A condition that no professional inspection can reveal, such as a haunting, pushes toward disclosure for that reason.97
The clause reaches commercial parties as well. In Kaloti Enterprises, Inc. v. Kellogg Sales Co. the court held that Kellogg's failure to tell its long-time customer that Kellogg planned to sell directly to the customer's own buyers made out a case for nondisclosure, as an alternative to affirmative fraud.98 A party ordinarily need not reveal its business plans or marketing strategy, so the result rests on two features that tilt the factors: the plan would undermine the customer's expectations under the very contract being formed, and the information lay solely within Kellogg's knowledge and could not be reached through diligent inquiry.99
The buyers in DePrince v. Starboard Cruise Services, Inc. show the other pole. Sales staff at a cruise-ship jewelry shop, inexperienced with large diamonds, mistook a per-carat price of $235,000 for the total price of a 20-carat stone and sold it for one-twentieth of its retail value. The buyers realized that the price was far below the stone's worth and went ahead without saying anything, and the court held that their silence was not fraud, because the store could readily have discovered the diamond's retail value through due diligence.100 The buyers knew of the store's mistake, so the first condition may well have been met, and the case turned on the second: silence about a fact the store could easily have checked did not violate good faith. What separates DePrince from Kaloti is reach. The price of the diamond sat within the store's own records and expertise, while Kellogg's plan existed only in Kellogg's head. A buyer who commissions geological research suggesting that a seller's home sits over a valuable deposit is protected for a different reason, because the information is the fruit of the buyer's own expenditure and forcing its disclosure would penalize the search that produced it.101 An exam stem that stresses that the silent party knew something valuable therefore settles only the knowledge requirement. The clause still demands a basic-assumption mistake and a lapse of fair dealing, and a knowing buyer can escape on the second.
The first condition also requires a mistake that disclosure would actually correct.
The Hill buyers stood in the opposite position, because they learned of the past infestation only after closing, and the seller's answer about the ripple had pointed them away from it.
The Restatement (Third) of Torts: Liability for Economic Harm § 13(c) states a parallel duty where the actor knows the other party is mistaken about a basic assumption and, because of the relationship, the customs of the trade, or other circumstances, the other party would reasonably expect disclosure, and its illustrations pair two home sales that differ mainly on discoverability.102 In the first, the seller knew of serious foundation defects, knew they were of great importance, and knew that a reasonable inspection would not find them; the buyer obtained a customary, competent inspection, and the seller is liable for fraud. In the second, the seller knew that the driveway encroached on a neighbor's land, but a survey or a search of public records, neither of which the buyer performed, would have revealed it, so the seller had no duty to disclose. The commentary supplies the mechanism. If the foundation seller could stay silent, future buyers would pay for ever more expensive inspections that would rarely be worth the cost, so it is more efficient to make the seller reveal what the seller knows. The encroachment is cheap for each side to check, and expecting a buyer to inform itself or put direct questions to the seller fits real-estate custom.103
A direct question changes the analysis, because the claim then stops depending on § 161(b) at all. A party with no duty to volunteer a fact must still answer honestly when asked about it, and a deliberately misleading answer is affirmative fraud. In Lerner v. DMB Realty, LLC, sellers who were leaving because a convicted sex offender lived next door had no duty under an Arizona statute to disclose that fact, and the deed told buyers to investigate the subject themselves. When the buyers asked why they were moving, the sellers said they wanted to be closer to friends, and the court of appeals reinstated the fraud claim, reasoning that a person asked a question that fairly calls for disclosure commits fraud by answering in a way calculated to mislead, even though the question was not about sex offenders in particular.104 A credit applicant who leaves out requested information about outstanding judgments, knowing that disclosure would sink the application, is in the same position.105 The Hill buyers had also asked a question, and Arizona recognizes that a buyer's inquiry can create a duty to disclose what the seller knows whether or not the fact is material.106 Proving the duty does not finish the case, however. A lender who barely glanced at a form and could have checked public records for the judgments may still fail to show that the omission induced the contract or that its reliance was justified.107
Statutes can move the common-law line in either direction. Some states require home sellers to disclose known defects unless the property is sold as is, as Virginia's statute does.108 In Lerner, the Arizona statute excused sellers from volunteering the presence of a nearby offender, which removed the duty to speak without permitting a deceptive answer to a question.109 A residential-sale problem therefore calls for a check on any governing statute before the reasoning turns to § 161(b), since a statute may add to or limit the duty the common law would otherwise impose.
The fifth step resolves quickly on one point. A silent party who knows the fact also knows that the implied assertion that the fact does not exist is untrue, which satisfies § 162(1)(a) and makes the misrepresentation fraudulent.111 The contested elements are inducement and justified reliance, which later sections develop.
Mistakes About a Writing
Restatement (Second) of Contracts § 161(c) supplies the third of the four listed cases in which silence counts as an assertion. A person's nondisclosure of a known fact is equivalent to an assertion that the fact does not exist where the person knows that disclosure would correct a mistake of the other party as to the contents or effect of a writing, evidencing or embodying an agreement in whole or in part.113 The clause has three working parts. A writing must embody the agreement, either completely or only in part. The other party must be mistaken about what the writing says or about what it legally accomplishes. And the silent party must know that a few words of disclosure would correct that mistake. The fact left unsaid is the gap between the text and the other side's understanding of it, so silence treats the gap as if it did not exist. When the gap is real, that assertion is not in accord with the facts, so it is a misrepresentation.114 Because the silent party knows the truth, the misrepresentation is also fraudulent under § 162(1)(a).115 Hill v. Jones, which dealt with termite damage, set out the four § 161 situations as the modern view of a vendor's duty to disclose, and this clause is the third of them.116
The reason for the clause lies in what the ordinary expectation that signers read their papers assumes. That expectation lets both sides treat a signed writing as the settled record of the deal, and it assigns the checking to the person holding the paper. The assignment makes sense only when the paper is what it is presented to be. A drafter who sends a document as the text the parties agreed on, having altered it, has invited the signer to skip the check and is profiting from the signer's trust. Each of the two reasons behind the no-duty baseline fails here. The incentive reason protects information that cost effort to gather, but the drafter learned what the document says by writing it, so a duty to disclose discourages no search. The self-reliance reason leaves the other side to protect itself by looking, but the drafter's own presentation of the paper as the agreed text has drained the point from looking, and the only way the signer can find the change is to reread a document the signer had every reason to think was settled. The cost of correcting the mistake is a sentence from the person who made the change.
The clearest decided illustration is Bonnco Petrol, Inc. v. Epstein. The parties negotiated a lease of a home to a commercial entity, with an option to buy the property on a specified date, and the owner trusted the other side to revise the written drafts so that they matched the oral agreement. The other side included a term that varied from what had been agreed. The owner skimmed the documents and signed, relying on the other side's assurance that the papers had been amended to match the parties' understanding.117 The New Jersey Supreme Court found that the other side had misrepresented, by its silence, that the signed agreement conformed with the earlier drafts, and it concluded that “Silence in the face of an obligation to disclose amounts to equitable fraud.”118 The owner's failure to read carefully did not rescue the drafter. Justice Garibaldi explained that “[o]ne who engages in fraud . . . may not urge that one's victim should have been more circumspect or astute.”119 Reliance was justifiable because the owner had entrusted the drafting to the other side, so the court's reasoning follows the path that § 161(c) marks out: the duty to read gives way when the person who wrote the text knows that the signer has been led to misunderstand it.
The same duty falls on lawyers, which shows how little the rule depends on the parties being sophisticated. A lawyer who changes a document the parties have already approved, or one sent to the lawyer for the client's signature, must disclose to the opposing side that changes were made, and a failure to disclose can bring professional discipline and civil liability.120 A lawyer who quietly rewrites an approved draft knows what the text says and knows what the other side believes it says, so every part of the clause is met. When the duty is breached, the injured party is not confined to avoiding the contract. Because the defect lies in the record itself, the court may also reform the writing to state the agreement the parties actually reached, since nondisclosure is treated as the equivalent of misrepresentation where one party knows that the record does not express the other's intention and knows what that intention is.121
The first scene fails the mistake requirement and the second fails the knowledge requirement. The clause needs both, along with a writing. An exam stem that stresses a signer's failure to read therefore settles nothing by itself. The question is what the other side knew about the signer's belief, and the facts that matter are an unflagged change, an assurance that the paper matches the deal, or a drafting job entrusted to the other side.
A neighboring doctrine covers a different deception. Section 163 makes conduct that appears to be assent ineffective when a misrepresentation about the character or essential terms of a proposed contract induces it and the signer neither knows nor has reasonable opportunity to know of them.122 The clause discussed here covers a signer who knows what kind of document is being signed and is mistaken about what it contains, while § 163 reaches a signer who has been deceived about the nature of the paper itself.
The last step matters because § 161(c) supplies only the assertion. The signer must still show that the silence substantially contributed to the decision to sign and that reliance on the drafter was justified, and in Bonnco the entrusting of the drafting did that work.
Trust and Confidence
Restatement (Second) of Contracts § 161(d) supplies the last of the four listed cases in which silence counts as an assertion: a person's nondisclosure of a known fact is equivalent to an assertion that the fact does not exist where the other person is entitled to know the fact because of a relation of trust and confidence between them.125 The first three cases locate the reason to speak in something that happened during the bargaining, namely a prior statement, a mistake paired with a lapse of fair dealing, or a writing the other side misreads.126 Clause (d) locates it in the parties' relationship itself. When the relationship entitles the other person to the fact, silence is treated as saying the fact is not so, and that assertion is a misrepresentation under § 159 if the fact in truth exists.127 The silent party knows the fact, so the misrepresentation is also fraudulent under § 162(1)(a).128
A relationship can carry this duty because of what supports the no-duty baseline. Silence is tolerated between bargainers because each is expected to look after its own interests and can protect itself by asking, and because a rule forcing everyone to share what they know would weaken the incentive to find things out. Both supports weaken between parties in trust and confidence. A confidential relationship exists where one person does not look out for his or her own interests because that person justifiably places trust in the judgment of the other.129 A rule that tells such a person to ask first protects little, since not asking is what the relationship consists of. Parties in that position are not true antagonists, and the law expects the person trusted to deal in the utmost good faith and to make full and fair disclosure of all material facts.130 The incentive concern also carries little weight here, because what a lawyer or trustee learns about the matter entrusted is learned in the course of serving the other person, so a duty to pass it along discourages no costly search.
These are the same relationships that earlier supported justified reliance on an opinion, where § 169(a) allows a recipient who stands in such a relation of trust and confidence to rely on what the speaker says.131 The two rules look at one relationship from opposite sides. Section 169(a) protects the listener who acts on what the trusted person said, and § 161(d) obliges the trusted person to say what the listener needs to know. A client who may rely on a lawyer's opinion about the client's case may equally expect the lawyer to volunteer a fact bearing on the worth of property the lawyer is buying from the client, and silence about that fact is treated as an assertion.
Two kinds of relationship qualify. A fiduciary relationship is one the law treats as automatically requiring trust and protection, as with a lawyer and client or a guardian and ward.132 Trustee and beneficiary belong in the same group, and so do principal and agent, executor and estate beneficiary, physician and patient, and majority and minority shareholder, together with contracts of insurance, suretyship, and partnership.133 Restatement (Third) of Torts: Liability for Economic Harm § 13(b) states the parallel duty for an actor in a fiduciary or confidential relationship that obliges the actor to make disclosures.134 A confidential relationship, by contrast, arises as a matter of fact where one person justifiably places trust and confidence in another's judgment, and close family relations are the most common example.135 The duty reaches somewhat beyond the named relationships to any transaction in which one party justifiably believes the other is looking out for that party's interests.136 The distinction affects proof. A status relationship comes with the role already accepted, so showing the status suffices. A relationship that exists only in fact requires the claimant to show that trust was reposed and that the other side accepted and fostered it, because without an undertaking by the other side there is nothing to hold that side to.137
A fiduciary owes more than disclosure, and each added duty has its own reason. The terms of the transaction must be fair and must be fully explained to the other party under Restatement (Second) of Contracts § 173, and the fiduciary has the burden of proving compliance with those obligations.138 In Miller v. Sears an attorney bought property from his client, and the client could rescind because the attorney failed to establish that he had fully disclosed all material terms; the attorney's burden was to prove compliance by clear and convincing evidence.139 The duty of fair terms and full explanation follows from the beneficiary's position, since a person who turned to a fiduciary because the person could not judge the matter alone cannot be expected to spot an unfair term unaided. The burden rule follows from who holds the evidence. What the fiduciary said and explained lies within the fiduciary's own knowledge, and the fiduciary is also the party who gains from the transaction, so requiring the beneficiary to prove a negative about what was left unsaid would favor the party with the conflict.
Clause (d) is closely related to a separate defense, constructive fraud, which arises where a person fails to disclose a fact in breach of a fiduciary or confidential relationship.140 The word constructive marks a situation that may not satisfy the test for actual fraud but that the law treats the same way. In Odorizzi v. Bloomfield School District the court stated the California rule: actual fraud requires pleading misrepresentation, knowledge of falsity, intent to induce reliance, justifiable reliance, and damage, while constructive fraud arises on breach of a duty by one in a confidential or fiduciary relationship that induces justifiable reliance by the other to that person's prejudice.141 A claimant under the second label proves the relationship and its breach without proving the deliberate deception that actual fraud demands, so a stem describing a trusted person who stayed silent about a material fact can be analyzed under either label.
Closeness alone does not create the relationship. In Arko v. Cirou a Georgia appellate court held that a lender's close personal relationship with the borrowers did not establish a confidential relationship, and friendship standing alone is not enough to make a relationship fiduciary.142 Odorizzi reached the same result for an employer and employee. No presumption of a confidential relationship arises from the bare fact of employment, additional ties must be shown, and the absence is especially plain where the parties are negotiating the end of their relationship, because each is then expected to look after its own interests.143 Ordinary commercial dealing falls on the same side of the line, since the normal relationship between a manufacturer and its consumers is arm's-length and carries no fiduciary duty.144 Friendship, employment, and commerce each show familiarity or a shared enterprise, and none shows that one side undertook to guide the other's judgment, which is the fact the attorney in Miller v. Sears supplied by taking on the client's affairs.
The undertaking is what matters, and it can appear inside a single transaction. In a securities-fraud decision, the Supreme Court recited the common-law rule that a party who fails to disclose material information before a transaction commits fraud only when there is a duty to speak, and that the duty arises when the other party is entitled to the information because of a fiduciary or similar relation of trust and confidence.145 Corporate insiders owe that duty to shareholders, while a stock purchaser who is neither an insider nor a fiduciary has no obligation to reveal material facts.146 The bank in Affiliated Ute Citizens v. United States shows the hinge moving within one case. As a mere transfer agent it would have owed no duty, but it had also assumed a duty to act on behalf of the shareholders and the sellers relied on its personnel, so its officers could not induce sales without disclosing the higher prices in the resale market.147
An exam stem that calls the parties old friends or longtime neighbors invites the conclusion that a duty to speak exists. The facts that decide the question are whether one side handed the other its judgment and whether the other side accepted that role, which is why a recognized fiduciary label settles the matter at once and a friendship label settles nothing.