• Jeff Vail

Fraudulent Concealment and Nondisclosure

Updated: Sep 6, 2020

This article is part of Vail Law’s open-source litigation and legal risk management checklist. Connect with me on LinkedIn.

Nondisclosure and fraudulent concealment are two of the most important business torts for the simple reason that they provide remedies when a party is harmed because someone didn’t tell them critical information prior to entering into a business relationship.

Fraudulent nondisclosure or concealment is very similar to the tort of fraudulent misrepresentation, the key difference being that nondisclosure/concealment involves not communicating a fact in order to deceive, rather than affirmatively communicating a false fact. Likewise, there is a subtle but important internal difference between fraudulent nondisclosure and fraudulent concealment: fraudulent concealment requires proof the defendant actively concealed information in order to deceive the plaintiff (malfeasance); fraudulent nondisclosure, in contrast, requires only passive nondisclosure of important information—but this passive nonfeasance can only be sufficient to constitute fraud where the non-disclosing party had a duty to disclose the information. Because proof of active concealment has traditionally been very difficult to obtain, the tort of fraudulent nondisclosure is by far the more useful business cause of action (indeed, most claim that use the words "fraudulent concealment" actually state a claim for fraudulent nondisclosure).

Therefore, the question of whether a duty to disclose exists will determine whether there is a valid claim for fraudulent nondisclosure. Courts generally look to the Restatement (Second) of Torts, Section 551 to determine whether a party has a duty to disclose. See Level 3 Comm’s, LLC v. Liebert Corp., 535 F.3d 1146 (10th Cir. 2008). Section 551 states:

(1) One who fails to disclose to another a fact that he knows may justifiably induce the other to act or refrain from acting in a business transaction is subject to the same liability to the other as though he had represented the nonexistence of the matter that he has failed to disclose, if, but only if, he is under a duty to the other to exercise reasonable care to disclose the matter in question.

(2) One party to a business transaction is under a duty to exercise reasonable care to disclose to the other before the transaction is consummated,

(a) matters known to him that the other is entitled to know because of a fiduciary or other similar relation of trust and confidence between them; and

(b) matters known to him that he knows to be necessary to prevent his partial or ambiguous statement of the facts from being misleading; and

(c) subsequently acquired information that he knows will make untrue or misleading a previous representation that when made was true or believed to be so; and

(d) the falsity of a representation not made with the expectation that it would be acted upon, if he subsequently learns that the other is about to act in reliance upon it in a transaction with him; and

(e) facts basic to the transaction, if he knows that the other is about to enter into it under a mistake as to them, and that the other, because of the relationship between them, the customs of the trade or other objective circumstances, would reasonably expect a disclosure of those facts.

This fight over whether a duty existed to disclose the information in question is normally the crux of the battle in a fraudulent nondisclosure claim – otherwise this tort is essentially the same as fraud.

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