Generally, there is no duty for either party to a contract to disclose negative facts to the other party, even if the facts relate to the transaction. The theory here is that it is unfair 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 before entering into the contract. This is known as entering into a contract with “eyes open” or being informed as much as possible about the subject of the agreement.
However, courts in many states have held that, in the course of negotiating a contract, there is a duty for a party who knows of a defect or a harmful condition about the subject of the transaction to disclose this information to the other party under the following circumstances:
- The defect or harmful condition is unknown to the other party, and
- The defect or harmful condition is of a kind that the other party would be unlikely to discover on its own or ask about.
Therefore, in some situations, a party to a contract could be held liable for failing to disclose certain types of information to the other party to a contract. These are known as “non-disclosure violations.” (Note: This differs from a non-disclosure agreement, which is language in a contract prohibiting the parties from disclosing confidential information.)
Failure to disclose facts that are relevant and important may rise to the level of fraud. 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 had a duty to disclose certain facts to the plaintiff because, for example, the defendant created a false impression or the defendant was a fiduciary
- The defendant concealed or failed to disclose these facts to the plaintiff
- 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 and
- 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
- The plaintiff was injured as a result of acting without knowledge of the undisclosed facts
What Are Some Examples of Non-disclosure Violations (Fraud) in a Contract Claim?
There are situations in which the law expects a party to disclose information to the other party in a contract. Some examples of nondisclosure violations in a contract claim include:
- 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 and fraud (fraud is an intentionally deceptive action designed to provide the perpetrator with an unlawful gain or to deny a right to a victim). Some common examples of fraud include tax fraud, wire fraud, securities fraud, and bankruptcy fraud.
- Unknown Defect or Condition: Sometimes, 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 risks harm or injury to the buyer or the buyer’s customer.
- Regarding real estate, rules regarding disclosure of defects unknown to the seller vary from state to state. 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. Most states require at least some kind of disclosure in connection with the sale of residential real property (e.g., a history of water damage)
- Active Concealment: A court may find a non-disclosure violation where one party has taken steps to conceal vital facts from the other party actively, in essence, intending to create fraud
- Fine Print: A party may be 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.
To sum up, in general, each party to a contract is allowed to remain silent on the subject of the contract, and each has a responsibility to inform themselves about the subject. However, if the seller fails to disclose facts that it would be very difficult for the buyer to learn, or actively hides them or places them in fine print, or if the parties are in a confidential, trusting relationship, the circumstances require that the seller disclose all known negative facts about the subject of the contract. To fail to do so may amount to 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, and the injured party may still have a right to recover out-of-pocket damages from the other party.
A party to a contract that proves fraud by non-disclosure may be able to recover monetary damages for the following:
- Out-of-pocket damages, which is the difference between the amount that was 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 or punitive damages. These are large damage awards meant to punish the defendant for its actions or failure to act.
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.
An example: 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 fraudulent non-disclosure in a residential real estate case is entitled to file suit to recover damages of the following types:
- Damages for breach of contract: this would be the difference in value between what the buyer expected to receive and what the buyer received
- Specific performance: this is granted where monetary damages would not fairly compensate the plaintiff for their loss. It requires the defendant to remedy a defect rather than pay money. For example, if the seller failed to disclose that an addition to a house did not comply with building codes, they could be required to bring the addition up to code
- Rescission or 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
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 local contract lawyer. An experienced lawyer in your area will be able to provide you with legal advice and guidance concerning the state of the law in your jurisdiction.
In particular, a lawyer will be able to help you analyze the facts to see what options you have for resolving your issue. If you should file a civil lawsuit to recover damages for any losses you have suffered, you want to have an experienced lawyer representing your interests.