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Fraud by Non-Disclosure: The Common Claim and Defense

The Common Scenario:

A person who enters a contract gives up something (e.g., cash, property, etc.) in exchange for something else. A fraud by non-disclosure tends to occur prior to the execution of a contract – i.e., during the negotiation of the contract. The victim often finds himself or herself saying: “I would not have entered the contract (i.e., given-up something) had I known x, y or z.”

Distinction between “Fraud” and “Fraud by Non-Disclosure”

Act of Commission vs. Act of Omission:

A wrongdoer (i.e., defendant) can commit a “fraud” by affirmatively making a false representation – sometimes referred to as a “simple fraud.” A defendant can also commit a “fraud” by failing to make a statement — fraud by non-disclosure. In certain situations, the defendant MAY NOT remain silent about facts important to you in your decision to enter the subject contract.

Proving Fraud by Non-Disclosure:

To prove a Fraud by Non-disclosure, the victim (i.e., plaintiff) must generally prove that the:

1. Defendant concealed from or failed to disclose certain facts to the plaintiff;

2. Defendant had a duty to disclose the facts to the plaintiff (e.g., defendant created a false impression or defendant was a fiduciary);

3. Facts were material (i.e., important);

4. Defendant knew: (1) the plaintiff was ignorant of the facts, and (2) the plaintiff did not have an equal opportunity to discover the facts;

5. Defendant was deliberately silent when it had a duty to speak;

6. Defendant intended to induce the plaintiff to take some action or refrain from acting by failing to disclose the facts;

7. Plaintiff relied on the defendant’s nondisclosure; and

8. Plaintiff was injured as a result of acting without the knowledge of the undisclosed facts.

Fraud by Non-Disclosure by Watts Guerra

Recoverable Damages:

A plaintiff that proves a fraud by non-disclosure may be able to recover: (1) out-of-pocket damages, (2) benefit-of-the-bargain damages, (3) damages for injury to personal property or personal injury, and/or (4) exemplary damages (also known as punitive damages). Please see other articles on this website for discussion of these types of damages.

The Common Defense – Disclaimer of Reliance Clause:

Fraud by non-disclosure claims are commonly defeated by disclaimer of reliance clauses. As stated above, fraud by non-disclosure often occurs in the context of a contract’s formation. In those contracts, parties commonly (but not always) include disclaimer of reliance clauses. These clauses sometimes undermine a plaintiff’s ability to prove “that the plaintiff relied on the defendant’s nondisclosure” (as explained above). To help you determine if your contract has a disclaimer of reliance clause, I list the clauses of several contracts that courts have found to be disclaimer of reliance clauses.

Swanson v. Schlumberger Technology Corp., 895 S.W.2d 719 (Tex. App.-Texarkana 1994) rev’d. 959 S.W.2d 171 (Tex. 1997) (The clause is not published in the Supreme Court’s opinion but is contained in the opinion of the Court of Appeals).

“…[E]ach of us expressly warrants and represents … that no promise or agreement which is not herein expressed has been made to him or her in executing this release, and that none of us is relying upon any statement or representation of any agent of the parties being released hereby. Each of us is relying on his or her own judgment and each has been represented by Hubert Johnson as legal counsel in this matter. The aforesaid legal counsel has read and explained to each of us the entire contents of this Release in Full, as well as the legal consequences of this Release, and we each understand that this Release in Full shall operate as a full and complete and final release and settlement of any and all claims referred to above.”

Forest Oil Corporation v. McAllen, 268 S.W.3d 51 (Tex. 2008).

“[2] Each of the Plaintiffs and Intervenors expressly warrants and represents and does hereby state and represent that no promise or agreement which is not herein expressed has been made to him, her, or it in executing the releases contained in this Agreement, and that none of them is relying upon any statement or any representation of any agent of the parties being released hereby. Each of the Plaintiffs and Intervenors is relying on his, her or its own judgment and each has been represented by his, her, or its own legal counsel in this matter. The legal counsel for the Plaintiffs have read and explained to each of the Plaintiffs the entire contents of the releases contained in this Agreement as well as the legal consequences of the releases …”

Playboy Enters. Inc. v. Editorial Caballero S.A. de C. V, 202 S.W.3d 250 (Tex. App. – Corpus Christi, 2006, pet. denied).

“…this Agreement represents the entire understanding of the parties. None of the terms of this Agreement can be waived or modified except by an express agreement in writing signed by the parties. There are no representations, promises, warranties, covenants, or undertakings other than those contained in this Agreement.”

Yzaguirre v. KCS Resources, Inc., 47 S.W.3d 532, 542-43 (Tex. App.- Dallas, 2000).

“It is understood and agreed that this Settlement Agreement contains the entire agreement between the parties relating to all issues involving the Fantina Yzaguirre leases. No oral understandings, statements, promises or inducements contrary to this Settlement Agreement exist. This Settlement Agreement cannot be changed or terminated orally, and any modifications shall be recognized by the parties only if they are in writing and executed by the appropriate parties.”

1900 SJ, Inc. v. Washington National Insurance Company, 1998 W.L. 386407 (Tex. App. – Houston [1” Dist.] 1998, pet. denied).

“(C) PURCHASER AGREES THAT PURCHASER WILL EXAMINE AND INVESTIGATE THE PROJECT PRIOR TO THE EXPIRATION OF THE FEASIBILITY PERIOD AND THAT PURCHASER SHALL RELY SOLELY UPON SUCH EXAMINATIONS AND INVESTIGATION IN PURCHASING THE PROJECT AND IT IS EXPRESSLY UNDERSTOOD AND AGREED THAT SELLER IS MAKING NO REPRESENTATIONS OR WARRANTIES, WHETHER EXPRESS OR IMPLIED, BY OPERATION OF LAW OR OTHERWISE, WITH RESPECT TO (i) ENVIRONMENTAL MATTERS OF ANY NATURE OR KIND WHATSOEVER RELATING TO THE PROPERTY OR ANY PORTION THEREOF; … (x) THE COMPLIANCE OR NON-COMPLIANCE OF ANY OF THE PROPERTY TO ANY APPLICABLE MUNICIPAL OR GOVERNMENTAL BUILDING CODES, ORDINANCES, RULES OR REGULATIONS; (xi) THE HABITABILITY OF THE PROJECT; AND (xii) THE VALUE, COMPLIANCE WITH SPECIFICATIONS, LOCATION, USE, MERCHANTABILITY, HABITABILITY, DESIGN, QUALITY, DESCRIPTION, DURABILITY, OPERATION OR CONDITION OF THE PROJECT OR ANY PORTION THEREOF FOR PURCHASER’S PURPOSES OR FITNESS FOR ANY USAGE OR PURPOSE WHATSOEVER. PURCHASER HEREBY AGREES THAT PURCHASER IS ACCEPTING THE PROJECT IN ITS “AS IS, WHERE IS, WITH ALL FAULTS” PRESENT CONDITION, SUBJECT TO ALL DEFICIENCIES OR OTHER MATTER, WHETHER KNOWN OR UNKNOWN … No representations or warranties have been made by Seller relating to the presence of hazardous substances in or on the Property, or that the condition or use of the Property is in compliance with any or all Federal, State or local ordinances, rules, regulations or laws, building or zoning ordinances, or other similar laws …”

RAS Group, Inc. v. Rent-A-Center East, Inc., S.W.3d _, 2010 W.L. 4400511 (Tex. App.- Dallas, 2010).

“Buyer has relied solely on it own investigation and it has not relied upon any oral or written information provided by Seller and/or Advisor or its personnel or agents and acknowledges that no employee or representative of Seller and/or Advisor has been authorized to make, and that Buyer has not relied upon, any written statements other than those specifically contained in this Agreement.”

Prudential Insurance Company v. Italian Cowboy Partners, Ltd., 270 S.W.3d 192 (Tex. App.­ Eastland, 2008, pet. granted March 10, 2010).

“14.18 Representations. Tenant acknowledges that neither Landlord nor Landlord’s agents, employees or contractors have made any representations or promises with respect to the Site, the Shopping Center or this Lease except as expressly set forth herein.”

Note that defendants tend to claim that an “integration clause” or “merger clause” constitutes a “disclaimer of reliance clause.” Courts have rejected that proposition. Please see an article regarding same on this website.

In Conclusion

You should consult with an attorney regarding your specific situation. We have experience and methodologies for prosecuting fraud by non-disclosure claims. These methods require detailed examination of the applicable contractual documents and communications between the parties.

Written by:*

Mark A. Fassold
Watts Guerra LLP
4 Dominion Drive, Bldg 3, Suite 100
San Antonio, TX 78257
Office (210) 447-0500

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*This information is provided to supply relevant information concerning the subject matter of this article, and should not be received as legal advice.  Legal advice is only given to persons or entities with whom Watts Guerra LLP has established an attorney-client relationship. Available causes of action and remedies vary from case to case and depend on the underlying facts of each.  If you have another lawyer, you should consult with your own attorney, and rely upon his or her advice, rather than the information contained herein.
© Watts Guerra LLP 2015