Fraud by Nondisclosure: When Silence Becomes Fraud in Texas

The rule in one paragraph

Texas does not impose a general duty of candor between businesses negotiating at arm's length. A seller who knows the roof leaks and is never asked has, in most commercial settings, committed no fraud by saying nothing. Silence becomes fraud only when the law imposes a duty to speak, and the Texas Supreme Court confirmed in Bombardier Aerospace Corp. v. SPEP Aircraft Holdings (Tex. 2019) that without evidence of a confidential or fiduciary relationship, or one of a few recognized triggers, there is no duty to disclose. The whole claim turns on finding the duty.

The five elements

In Bombardier the court listed what a plaintiff must show for fraud by nondisclosure:

1. the defendant deliberately failed to disclose material facts;
2. the defendant had a duty to disclose those facts to the plaintiff;
3. the plaintiff was ignorant of the facts and did not have an equal opportunity to discover them;
4. the defendant intended the plaintiff to act or refrain from acting based on the nondisclosure; and
5. the plaintiff relied on the nondisclosure, which resulted in injury.

Three of these are familiar from ordinary fraud: materiality, intent and reliance causing injury. The two that decide nondisclosure cases are the duty (element two) and the equal opportunity to discover (element three). Each gets its own section below.

When does a duty to disclose exist?

Bombardier collected the recognized sources of the duty. They fall into two groups.

A relationship of trust

A fiduciary owes full disclosure as part of the duty itself. Partners, LLC managers to the company, corporate officers and directors, agents to principals, trustees and attorneys all owe it as a matter of law. The duty can also arise from an informal confidential relationship, one built on a long history of trust and reliance that existed before and apart from the transaction in dispute. Texas courts are reluctant to find informal confidential relationships between business people; a friendly commercial history is not enough, and the Texas Supreme Court has said the relationship must predate the deal. Who qualifies is covered in who owes a fiduciary duty in a Texas business.

Conduct that creates the duty

Between parties with no special relationship, three kinds of conduct create a duty to speak:

• Partial disclosure. A party who discloses some facts about a subject and thereby creates a false impression must correct it. A seller who hands over the three good customer contracts and omits the one that gave notice of termination has made a partial disclosure.
• Voluntary disclosure. A party who chooses to speak on a topic takes on a duty to tell the whole truth about it, even if it could have said nothing.
• New information. A party who learns that an earlier statement, true when made, has become untrue or misleading must correct it before the other side acts on it. The financials that were accurate in March must be updated if the largest customer leaves in May and closing is in June.

The first two are the usual route in business cases. Most sophisticated sellers say something about every important subject, and once they do, the question becomes whether what they said left out something that made it misleading.

The equal-opportunity limit

Even where a duty exists, the plaintiff must show it was ignorant of the facts and did not have an equal opportunity to discover them. This element does a lot of work in commercial cases. A buyer with full data room access, the right to inspect, and the time to do it will have trouble claiming it had no opportunity to find what a reasonable review would have shown. The element is not a diligence requirement in the strict sense; the question is whether the opportunity was equal, and a defendant who controlled the only source of the information cannot defeat the claim by saying the plaintiff should have asked.

Practically, the plaintiff's own record matters: the questions asked in diligence, the answers given, the documents requested and not produced. A party that asked the direct question and received an evasive or incomplete answer is in a strong position. A party that never asked is in a weak one unless the facts were truly hidden.

Example

Suppose an Arlington equipment dealer sells its service division to a buyer. In diligence the seller provides a customer list and three years of revenue by customer, which shows one account producing 30 percent of revenue. Two weeks before signing, that customer emails the seller's owner that it is moving its service work in-house at year end. The owner forwards the email to his CFO with the note "hold this until after closing" and says nothing to the buyer. There is no fiduciary relationship, and the purchase agreement is arm's length. But by providing revenue by customer and presenting the account as continuing, the seller made a partial disclosure that the new information rendered misleading. The buyer had no way to learn of the email. The forwarded note supplies deliberateness and intent. All five elements are in play, and the case will be fought over the reliance disclaimer in the purchase agreement, not over whether a duty existed.

How contract terms affect the claim

Fraud by nondisclosure is a species of fraud, so the contract defenses to fraudulent inducement apply to it. A clear and unequivocal disclaimer of reliance, negotiated between represented parties, can bar the claim; a merger clause alone does not. An "as is" clause in a negotiated commercial deal can negate causation unless the seller's concealment or obstruction induced it. And limitation-of-liability clauses are enforced according to their terms: in Bombardier itself, the court upheld the jury's fraud finding but held that the parties' negotiated clause barring punitive damages was enforceable even against a fraud judgment. The defenses are developed in fraudulent inducement in Texas.

Nondisclosure and the other fraud claims

The same facts often support more than one theory, and the choice affects what must be proven and what can be recovered.

• Affirmative misrepresentation. If the seller said "all major customers are current and continuing," that is a false statement and the duty analysis is unnecessary. Plaintiffs plead both because the half-truth and the omission are usually two descriptions of the same conduct.
• Statutory fraud. In a transaction involving real estate or stock in a corporation, section 27.01 of the Business and Commerce Code provides a statutory claim that reaches false representations and false promises, with attorney's fees, and that does not require proof of knowledge for actual damages. It does not expressly list omissions, so a pure nondisclosure case usually proceeds under common law. The statutory claim is explained in statutory fraud in real estate and stock transactions.
• Breach of fiduciary duty. Where the silent party was a fiduciary, the nondisclosure is also a breach of the duty of full disclosure, with the equitable remedies that follow and a lower bar on intent.

Defending a nondisclosure claim

From the other side, the first question is whether any duty existed. A defendant in an arm's-length deal who made no partial disclosure on the subject and had no relationship of trust usually wins on that point alone. The second is the equal opportunity to discover: what did the plaintiff have access to, and what did it ask. The third is the contract: disclaimers of reliance, as-is clauses and exclusive-remedy provisions. The fourth is deliberateness: an omission that was an oversight, or a fact the defendant did not know, is not fraud. A defendant who can show it did not know the fact defeats element one outright.

Deadline and evidence

Fraud by nondisclosure carries the four-year limitations period of section 16.004 of the Civil Practice and Remedies Code, and because the wrong is concealment, the discovery rule and fraudulent concealment often apply to delay accrual until the plaintiff knew or should have known. The decisive evidence is almost always internal to the defendant: who knew the fact, when, and what they said to each other about telling the buyer. That evidence comes through discovery, which is one reason these cases are rarely resolved on a demand letter alone. Tina Wysk represents buyers, sellers and partners in business fraud and nondisclosure disputes in Dallas state and federal courts.