Fraud and Duty to Disclose

Case: Hill v. Jones (1986, AZ) [pp. 507-516]

Parties: Plaintiff - Hill (buyers)

Defendant - Jones (sellers)

Facts: P buys house from D. Before the sale, P visited the house several
times. D never mentioned that they had had termite infestation in the past. P saw
something in the floor that looked like termite damage, and when asked whether it
was, D answered that it was water damage. The contract for the sale of the house
was made pursuant to a termite inspection paid for by D. The house passed the
termite inspection, and P bought the house. Afterwards, it was made apparent to P
that the house had had termite infestations, the damages caused would cost $5k to
fix (the floor). P brought suit against D that sellers made misrepresentations
concerning the termite damage (which was dismissed), and failed to disclose this
information (for which D was granted summary judgment). P appealed.

Issue : (1) Whether seller has a duty to disclose a material fact to the buyer.
Yes. (2) Whether the history of termite infestation and damages was a material
fact. TBD.

Holding: Reversed and remanded to decide whether termite history was a material
fact.

Reasoning:
(1) Where the seller knows of facts materially affecting the value or desirability
of the property which are known or accessible only to him and also knows that such
facts are not know to, or within the reach of the diligent attention and
observation of the buyer, the seller is under a duty to disclose them to the
buyer,
(2) A matter is material if it is one to which a reasonable person would attach
importance in determining his choice of action in the transaction in question.
Unless reasonable minds could not differ, materiality is a factual matter which
must be determined by a trier of facts. The termite damage in this case may or
may not be material. The buyers should be allowed to present their case to the
jury.

RULE:

• Silence as to a material fact does not in itself constitute fraud, unless there
is a duty to disclose.
○ A confidential relationship may impose a duty to disclose
§ Special relationships of trust or confidence or an agreement, express
or implied
□ In this context, a failure to disclose can constitute a
misrepresentation
○ Duty to disclose may also arise when it is necessary to correct a previous
statement or false impression

Notes

• Hill (P) knew what termite damage looked like

○ Saw ripples that looked like termite damage
§ Seller said it was water damage
• Emotional attachment: Buyer said she really wanted the house, and wasn’t really
looking for problems
• Inspection report said no visible termite damage
§ 161. When Non-Disclosure Is Equivalent To An Assertion
A person's non-disclosure of a fact known to him is equivalent to an
assertion that the fact does not exist in the following cases only:
(a) where he knows that disclosure of the fact is necessary to prevent
some previous assertion from being a misrepresentation or from being fraudulent or
material.
(b) where he knows that disclosure of the fact would correct a mistake
of the other party as to a basic assumption on which that party is making the
contract and if non-disclosure of the fact amounts to a failure to act in good
faith and in accordance with reasonable standards of fair dealing.
(c) where he knows that disclosure of the fact would correct a mistake
of the other party as to the contents or effect of a writing, evidencing or
embodying an agreement in whole or in part.
(d) where the other person is entitled to know the fact because of a
relation of trust and confidence between them.
• General rule - non-disclosure is not an assertion. Limited circumstances where
it may be:
○ Said something earlier, and then find out not true, then failure to
correct is like an assertion that the old fact is true
○ (HILL) B. where he knows that disclosure of the fact would correct a
mistake of the other party as to a basic assumption on which that party is making
the contract and
§ If non-disclosure of the fact amounts to a failure to act in good
faith (hard to figure what this is) and
§ In accordance with reasonable standards of fair dealing
• Comment A (161) - concealment to a fact may be a misrepresentation
○ Is not saying anything about termites the same as actually saying no
termites?
○ Here, you want to know if Jones did anything to keep Hill from finding out
about the termite damage
§ Suspicious - boxes there… did Jones do this on purpose? We don’t
know.
○ Non-disclosure w/o concealment is equivalent to a misrepresentation only
in special circumstances
• If Hill hadn't asked about the ripple, then probably wouldn’t have had a case
○ p. 510 - where the seller of a home knows of facts materially affecting
the value of the property which are not readily observable and are not known to
the buyer, the seller is under a duty to disclose them to the buyer.
§ Court here adopts this.
○ So there is a duty to disclose. Now must determine if it is material. This
is a jury question
○ Footnotes 2, 3 on p. 511
§ In PA, duty to disclose only on a dangerous item
§ In AZ, duty to disclose may arise if buyer makes an inquiry, even if
not material