CHAPTER 1 CHOOSING BETWEEN AN HONEST BARGAIN AND NO BARGAIN: INFORMATION DISCLOSURE TO POTENTIAL LESSORS

• Jurisdiction: United States

Mining Agreements II
(May 1981)
CHAPTER 1
CHOOSING BETWEEN AN HONEST BARGAIN AND NO BARGAIN: INFORMATION DISCLOSURE TO POTENTIAL LESSORS
Kenneth E. Barnhill, Jr.
and Rodrick J. Enns
Lohf & Barnhill, P.C.
Denver, Colorado

Mineral exploration companies regularly attempt to obtain mineral rights from landowners who know much less about their property than the parties seeking to acquire it. The land may have been obtained by the owner for an entirely different purpose, such as farming or grazing, without thought for its mineral potential, or the owner may simply lack the expertise or financial resources intelligently to evaluate the mineral value of his property. In these situations, even if the company makes no representations as to mineral values whatsoever, it may have an affirmative duty to disclose its information or the fact that such information exists to the uninformed landowner. The mineral exploration company may thus find itself in the uncomfortable position of deciding whether the sensitive mineral information which it has acquired should be disclosed to protect the future enforceability of its agreement with the landowner, even though such disclosure could surrender its most significant bargaining advantage.

This paper is intended as a guide to assist mining companies and others in determining whether and to what extent information should be disclosed to the prospective lessee or seller of mineral interests during negotiation of the lease or purchase. Specifically, we will consider whether a company must volunteer information to an uninformed landowner even in the absence of any request for information, how a company might respond to specific information requests, and the nature and extent of required disclosures of proprietary information.¹

[Page 1-2]

DUTY TO DISCLOSE

The acquisition of mineral rights at a bargain price is an understandable goal, particularly at the very early stages of exploration when little may be known about the true value of the minerals present in a particular area. Those mineral rights become much less of a bargain if, after the purchaser has expended time and money in developing the area, the lessor finds that he has a legitimate basis for rescinding the lease. This basis could be found in any one of three principal legal doctrines: fraud, mistake or unconscionability.

Fraud

Fraud is most often thought of as affirmative misrepresentations made by one contracting party to another. Such affirmative fraud is based on five elements: that a representation was made; that the representation was, in fact, false; that the representation was material to the contract; that the representation was made with the intent to deceive another, so as to induce him to enter into a contract; and that the representation did in fact induce the other to enter into the contract.² If these five elements are present in a given transaction, then the transaction is voidable at the option of the defrauded party.³

Making any false or possibly false statement while negotiating a lease or purchase is fraught with danger, for if a court later finds that the statement was material and induced the other party's agreement, the agreement will be voidable at the option of the owner. Moreover, affirmative fraud need not await the declaration of an outright falsehood by the vendee or lessee.

"A single word, or even a nod, or a wink, or a shake of the head, or a smile from the purchaser, intended to induce the vendor to believe the existence of a non-existing fact which might influence the price of the subject to be sold, is a fraud at law."^3.1

Even where all representations are meticulously accurate and all deceptions are scupulously avoided, however, liability

[Page 1-3]

for fraud is still a possibility; where there are circumstances which give rise to a duty to disclose, nondisclosure may itself be equivalent to an affirmative misrepresentation.⁴

The circumstances which have been held to support a duty of disclosure are numerous, although most involve situations in which one reasonably assumed that the other party would have spoken had he known material facts.⁵ If a party conceals a fact material to the transaction, knowing that the other party is acting on the presumption that no such fact exists, it is as much a fraud as if the existence of such fact had been expressly denied or the reverse of it expressly stated.⁶ For example, where a party asks a specific question, there is a duty to make full and complete disclosure if any responsive information is furnished at all.⁷ A negotiating party may not respond evasively or with partial answers, because by doing so he creates the misleading impression (the affirmative misrepresentation) that he has no other material information.⁸ Consider, for example, a

[Page 1-4]

party who, in the course of attempting to purchase minerals states that the purchaser has no present intention of reselling the minerals. In fact, the prospective purchaser has received a lucrative offer to lease the minerals and wishes to purchase for such purpose. While the representation made by the offeror was strictly true, it also was misleading if the landowner valued his mineral estate on the assumption that no other parties had expressed an interest in developing it.

Another possibility involves representations which, while believed true when made, are subsequently shown to be false and misleading through new information. A party who induces another to rely on his representations is under a continuing duty to inform of later events which make the statement unworthy of reliance.⁹

Each of these situations are actually no more than forms of affirmative misrepresentations, since they all involve a representation which is misleading, or becomes so, even though not literally false when made. Often, however, a duty to disclose information can arise even when a party has not assumed that duty by answering questions or making other affirmative statements, incomplete or otherwise. The most prominent situation involves the existence of a fiduciary or other relationship of trust and confidence between the parties. Not surprisingly, if one party is a true fiduciary to the other, as in the case of an agency relationship, his general fiduciary duties include the duty to make a complete and unreserved disclosure of all material facts and circumstances when entering into any transaction with the principal.¹⁰ Such a duty is not limited, however, to those circumstances in which a formal fiduciary relationship is present.

Whenever two persons stand in such a relation that, while it continues, confidence is necessarily reposed by one, and the influence which naturally grows out of that confidence is possessed by the other, and this confidence is abused, or the influence is exerted to obtain an advantage at the expense of the confiding party, the person so availing himself of his position will not be permitted to retain the advantage, although the transaction could not have been impeached if no such confidential relation had existed.¹¹

[Page 1-5]

The existence of such a confidential relationship is a factual question, to be answered by consideration of all the facts and circumstances and the entire course of dealing between the parties.¹² The relationship has been held to arise between a bank and its borrower,¹³ between a stock broker and his customer,¹⁴ and between long-time friends.¹⁵ While some courts appear to rely primarily on whether one party in fact reposed his trust in another,¹⁶ it is usually held that mere subjective trust is insufficient to create the relation, absent additional circumstances which make it reasonable for one party to vest another with his confidence.¹⁷ Thus, pure business relationships, even extremely cordial ones, will not generally form an adequate basis for a relationship of trust.¹⁸

Clinkenbeard v. Central Southwest Oil Corp.¹⁹ considers the relationship between a vendor and purchaser of mineral interests. Central Southwest Oil Corporation advised that it would assist individuals in entering the monthly lottery for non-competitive federal oil and gas leases by selecting tracts, entering the individual's name in the lottery and handling the necessary paperwork. Clinkenbeard accepted this offer, and used Central's services for roughly 14 consecutive months. In the ninth month, Central contacted Clinkenbeard, informing him that he had won a lease, and offering to buy the lease. Central stated that relatively few filings had been made for the lands and that the lease was not particularly valuable; in fact, however, numerous offers had been filed and the lease was worth several times what Central offered to pay for it. Central also failed to disclose that there were producing wells in the vicinity of the leased lands. After some hesitation, Clinkenbeard agreed to sell the lease to Central.

[Page 1-6]

The district court held that, at the time of the contract of sale, Central was still Clinkenbeard's agent, and therefore granted rescission of the sale due to Central's failure to make full disclosure as to the value of the lease. The Fifth Circuit reversed, holding that the formal agency relationship between the parties had ended when Clinkenbeard was informed of his success in the lottery. The Court went on to consider whether, even absent a formal fiduciary relationship, there was such a confidential relationship between the parties as to require Central to make disclosures.²⁰ After reviewing the substantive law, the court concluded:

[w]e can find under the evidence in this record no relationship which would fall within the principles of [Texas cases on confidential relationships].... [F]rom the wary questioning of [Central's president] by Clinkenbeard during their phone conversation, we would find it difficult to determine that even the subjective trust mentioned in Thigpen v. Locke, 363 S.W.2d 247 (Tex. 1962)] existed. Certainly there was no...