Non-disclosure violations in a contract claim refers to the failure of one party to a contract to disclose facts that have a bearing on the contract to the other party. However, there is no general duty for either party to disclose facts to the other party, even if the facts relate to the subject of the transaction.
The theory here is that it is unfavorable to impose a duty on either party to disclose information. Rather, each party is expected to take their own proactive steps to learn as much as they can about a contract transaction before entering into it. This is known as entering into a contract with “eyes open”, or being informed as much as possible about the subject of the agreement.
On the other hand, there are several exceptions. A party to a contract could be held liable for failing to disclose certain types of information to the other party to a contract in some situations. These are known as “non-disclosure violations”. This is different from a non-disclosure agreement, which is language in a contract prohibiting the parties from disclosing confidential information.
Courts in many states would hold that, in the course of negotiating a contract, there is a duty for one party, who knows of a defect or a harmful condition, to disclose this information to the other party under the following circumstances:
- The defect or harmful condition is clearly unknown to the other party; and
- The defect or harmful condition is of a kind that the other party would be unlikely to discover or ask about.
Failure to disclose material that is relevant and important, facts may rise to the level of fraud by non-disclosure. In order to succeed with a claim of fraud by non-disclosure, the party who claims to have been defrauded, the plaintiff in a civil lawsuit, must prove all of the following elements:
- The defendant concealed or failed to disclose certain facts to the plaintiff;
- The defendant had a duty to disclose the facts to the plaintiff, because, for example, the defendant created a false impression or the defendant was a fiduciary;
- The undisclosed facts were material, i.e., important and relevant to the subject of the contract;
- The defendant knew that the:
- plaintiff was ignorant of the facts,
- that the plaintiff did not have an equal opportunity to discover the facts;
- The defendant was intentionally silent when they had a duty to inform;
- The defendant intended to induce the plaintiff to take action or refrain from acting by failing to disclose the facts;
- The plaintiff relied on the defendant’s nondisclosure; and
- The plaintiff was injured as a result of acting without knowledge of the undisclosed facts.
What are Some Examples of Non-disclosure Violations in a Contract Claim?
There are situations in which the law expects a party to disclose information to the other party in a contract agreement. These situations usually involve a special relationship of some kind between the parties and the circumstances surrounding the contract.
Some examples of nondisclosure violations in a contract claim include:
- Unknown Defect or Condition: In some cases a seller has a duty to disclose any defects or hidden conditions of a product known to the seller and not to the buyer. This is especially true where the hidden defect poses a risk of harm or injury to the buyer. Rules regarding defects unknown to the seller may be different when it comes to selling real estate. Some states enforce the “buyer beware” principle for real estate transactions. Other states, such as California, require sellers to make full disclosure in writing of all known facts about a property’s condition in a timely manner before the sale. Most states require some kind of disclosure in connection with the sale of residential real property;
- Confidential Relationship: If the parties have a relationship that involves confidentiality of communications between them, they may have a duty to disclose important information to one another. An example is the attorney and client relationship. If an attorney does not convey information related to the client’s case to the client, they might become liable for malpractice;
- Fine Print: A party may be held liable for non-disclosure because they tried to conceal important information in the “fine print” of a written contract. This is true especially where there’s an assumption that the other party will not read all of the fine print;
- Active Concealment: A court may find a non-disclosure violation where one party has taken steps to actively conceal vital facts from the other party, while intending to create fraud.
So, each party is generally allowed to remain silent on the subject of the contract, and each has a responsibility to inform themselves. However, the circumstances above would require that the parties disclose information to one another in order to avoid injury, an unfair agreement or later allegations of fraud.
What are the Consequences of Non-disclosure Violations in a Contract Claim?
Non-disclosure violations in a contract claim can lead to legal consequences for the party who failed to disclose facts about the subject of the contract. The party who did not disclose might have to pay damages for any losses caused by the nondisclosure. In some cases, especially those involving fraud, the contract may be rescinded, or undone. However, the injured party might still have a right to out-of-pocket damages.
A party to a contract who proves fraud by non-disclosure may be able to recover money damages for the following:
- Out-of-pocket damages, which is the difference between the amount that was actually paid for the item of value that was the subject of the contract and the actual value received;
- Benefit-of-the-bargain damages, which are damages equal to what the plaintiff would have received, including profits, if the contract had been fully performed as promised;
- Damages for injury to personal property or personal injury, if the non-disclosure resulted in damage to property or injury to people;
- Exemplary damages, or punitive damages.
The exact type of damages will depend on the law in the state that has jurisdiction over the case, as will the exact method of calculating the amount of damages.
In California, the seller of residential real property is required by law to disclose the following:
- Physical defects in the features, fixtures or appliances of the residence;
- Structural or site hazards, environmental hazards, or noncompliance with building codes and permits.
The buyer who has been harmed by non-disclosure in a residential real estate case is entitled to file suit to recover damages of the following type:
- Damages for breach of contract: this would be the difference in value between what the buyer expected to receive and what the buyer actually received;
- Specific performance: this requires the non-disclosing party to remedy a defect rather than pay money; for example, if the seller failed to disclose that an addition did not comply with building codes, they could be required to bring the addition up to code;
- Damages for fraud;
- Rescission: this is an undoing of the contract;
- Cancellation: this is the termination of a contract where the plaintiff still has a right to any remedy for breach of the whole contract or any unperformed balance.
In the case of rescission or cancellation, the plaintiff would be left without the property.
Do I Need a Lawyer if I Have Issues with Non-disclosure Violations in a Contract Claim?
If you believe you have a claim for harm caused by non-disclosure in a contract, you may wish to contact an experienced contract lawyer. An experienced lawyer in your area will be able to provide you with legal advice and guidance.
In particular, a lawyer will be able to help you analyze the facts in order to see what options you have for resolving your issue. If you should have to file a civil lawsuit to recover damages for any losses you have suffered, you definitely want to have an experienced lawyer representing your interests.