Chapter 1-6 Fraud by Non-Disclosure

• Jurisdiction: United States

1-6 Fraud by Non-Disclosure

1-6:1 Overview

Fraud by non-disclosure is a subcategory of fraud.¹⁶⁷ Generally, a failure to disclose information does not constitute fraud unless a duty to disclose the information exists.¹⁶⁸ Circumstances giving rise to a duty to disclose include when there is a fiduciary or special relationship, when newly discovered information makes previous disclosures misleading or untrue, when a partial disclosure creates a false impression, or when voluntary disclosure of some information requires the disclosure of the entire truth. When a defendant has a duty to disclose but fails to do so, the defendant's nondisclosure is equally as actionable as an affirmative misrepresentation.

1-6:1.1 Related Causes of Action

Common Law Fraud, Statutory Fraud, Uniform Fraudulent Transfer Act (UFTA), Negligent Misrepresentation, DTPA, Breach of Warranty, Breach of Fiduciary Duty, Breach of Contract

MUST READ CASE

Schlumberger Tech. Corp. v. Swanson, 959 S.W.2d 171 (Tex. 1997)

1-6:2 Elements

(1) The defendant deliberately failed to disclose material facts.¹⁶⁹

• The fact question of deliberate conduct or intent to deceive is almost always made by circumstantial evidence, for which the jury can look to the circumstances, relationship and interests of the parties, the nature of the transaction, the failure to perform, and the nature of any efforts to perform.¹⁷⁰
• Information is considered "material" if a reasonable person would attach importance to it and would be induced to act on it in determining his choice of actions in the matter.¹⁷¹

(2) The defendant had a duty to disclose such facts to the plaintiff.¹⁷²

• The existence of a duty to disclose is a question of law.¹⁷³
• A duty to disclose arises when:

• The defendant is in a fiduciary relationship with the plaintiff;¹⁷⁴

• Formal fiduciary relationships arise as a matter of law.¹⁷⁵
• Informal fiduciary relationships are a question of fact when the evidence is disputed.¹⁷⁶

• New information is discovered that makes the defendant aware than an earlier representation was false or misleading;¹⁷⁷
• The defendant makes a partial disclosure which leaves a substantially false impression,¹⁷⁸ or voluntarily discloses some information and therefore has a duty to disclose the whole truth.¹⁷⁹

(3) The plaintiff was ignorant of the facts and did not have an equal opportunity to discover them.¹⁸⁰

• The plaintiff must prove that the defendant knew of the plaintiff's ignorance of the facts and lack of equal opportunity to discover the truth.¹⁸¹

(4) The defendant intended for the plaintiff to act or refrain from acting as a result of the non-disclosure.¹⁸²

• The defendant's intent may be shown by circumstantial evidence.¹⁸³
• Failure to perform, standing alone, is no evidence of the promisor's intent not to perform when the promise was made.¹⁸⁴ However, that fact is a circumstance to be considered with other facts to establish intent.¹⁸⁵ Because intent to defraud is not usually susceptible to direct proof, in most cases it must be proven by circumstantial evidence.¹⁸⁶ "Slight circumstantial evidence" of fraud, when considered with the breach of promise to perform, is sufficient to support a finding of fraudulent intent.¹⁸⁷ If a party denies ever having made the promise in question, that is a factor showing no intent to perform at the time the promise was made.¹⁸⁸ The fact that the defendant makes no pretense of performance may also be considered in showing a lack of intent.¹⁸⁹

(5) The plaintiff relied on the non-disclosure resulting in injury.¹⁹⁰

• The plaintiff's reliance on the non-disclosure must be justifiable.¹⁹¹
• A showing of reliance may not be required when the non-disclosure is by a fiduciary.¹⁹²
• The plaintiff must show that it suffered injury as a result of acting without knowledge of the undisclosed fact.¹⁹³

1-6:3 Damages and Remedies

1-6:3.1 Actual Damages

Actual damages are the same for fraud by non-disclosure as for common law fraud. Fraud by non-disclosure (e.g., fraud by omission) is simply a subcategory of fraud because the omission or non-disclosure may be as misleading as a positive misrepresentation of fact where a party has a duty to disclose.¹⁹⁴ See Chapter 1, Section 1-4:3.

1-6:3.1a Benefit-of-the-Bargain

Benefit-of-the-bargain damages, the difference between the value as represented and the value received, are recoverable for fraud by non-disclosure.¹⁹⁵ See Chapter 11, Section 11-2.

1-6:3.1b Out-of-Pocket

Out-of-pocket damages, the difference between the value paid and the value received, are recoverable for fraud by omission.¹⁹⁶ See Chapter 11, Section 11-3.

1-6:3.1c Damages to Personal Property

See Chapter 11, Section 11-8:2.

1-6:3.1d Mental Anguish

Mental anguish damages are recoverable.¹⁹⁷

1-6:3.2 Exemplary Damages

See Chapter 11, Section 11-12.

1-6:3.3 Equitable Remedies

1-6:3.3a Rescission

Rescission is available to avoid unjust enrichment.¹⁹⁸ See Chapter 8, Section 8-4.

1-6:3.3b Reformation

Reformation is available as an equitable remedy to conform the contract to the original intent of the parties.¹⁹⁹ See Chapter 8, Section 8.5.

1-6:3.4 Interest

See Chapter 11, Section 11-13:1.

1-6:3.5 Court Costs

Reasonable court costs are available.²⁰⁰ See Chapter 11, Section 11-13:2.

1-6:4 Defenses

1-6:4.1 Statute of Limitations

The four-year limitations period applies.²⁰¹ See Chapter 17.

1-6:4.2 Contractual Disclaimer

A defendant may avoid liability if the plaintiff's fraud...