Nondisclosure

When one party to a contract knows of a fact that has a bearing on the transaction, the failure to disclose this informa­tion to the other party is called nondisclosure.  Generally, the law does not attach any significance to nondisclosure.  The theory is that it is preferable that the party lacking the knowledge ask questions of the party with the knowledge rather than imposing some sort of duty on the party with the knowledge to volunteer the information.  Thus, generally, an agreement of the parties is not affected by the fact that one party did not disclose material information to the other party. 

Ordinarily there is no duty on a party to a contract to volunteer information to the other party.  The nondisclosure of information that is not asked for by a party does not hurt the validity of the contract.  For example, Jones wants to buy Smith’s house.  Jones, prior to signing the contract, makes an inspection of the house and sees several cracks in the roof and walls.  He assumes that these cracks are just the result of the house settling.  Smith makes no disclosure one way or another about the cracks.  Jones buys the house and later discovers that the house has severe foundation problems.  He sues Smith for the damages incurred in repairing the foundation problems.  Under the general rule, Smith would have been under no duty to disclose the foundation problems to Jones

There are some exceptions to this general rule regarding nondisclosure. In some instances, the failure to disclose information that was not requested can be regarded as fraudulent, giving the party harmed by the nondisclosure the same remedies as if a statement were fraudulently made. These exceptions fall generally into one of four categories:

  • Unknown defect or condition;
  • Confidential relationship;
  • Fine print; and
  • Active concealment.

Many courts would hold that there is a duty for one party, who knows of a defect or a harmful condition, to disclose this information to the other party if:

  • the defect or harmful condition is obviously unknown to the other party and
  • is of a nature that the other party would be unlikely to discover or inquire about the defect or condition. 

Going back to the other hypothetical about Jones buying Smith’s house, assume that Smith, while not a professional engineer or building contractor, did have some knowledge about foundations. Smith also knew that several of his neighbors had  foundation trouble due to the type of soil in their neighborhood.  He therefore had reason to know that the cracks in his wall and roof were the result of foundation problems and not the result of the house simply settling.  Assume that Jones did not know that the neighbors of Smith had foundation problems.  In this situation, Jones would have a strong argument that the contract should be rescinded or that Smith should pay Jones damages for the cost of repairs to the foundation.

If two parties have a confidential relationship, such as that of attorney and client, the attorney has a duty to reveal anything that is material to his client when dealing with this client in a business matter.  The attorney’s silence has the same legal consequences as knowingly making a false statement of a material fact to his client. 

Courts may find an intent to conceal when a printed contract contains clauses in such fine print that it is reasonable to believe that the other party will not take the time to read the provisions.  Of course, no relief will be granted if the fine print is not material.  In other words, if the provisions in fine print are such that the party reading the contract would have entered into the contract in any event, the provisions in the fine print would not cause the contract to be invalid.


Inside Nondisclosure