Misrepresentation and the duty to disclose

Clearwater, Florida, February nineteen sixty one. A widow of fifty one, without family, who has a yen to be an accomplished dancer with the hopes of finding new interest in life, is brought by an acquaintance to a dance party at a franchised Arthur Murray studio. She spends a pleasant evening, sometimes in a private room, being told about her grace and poise. She leaves having bought eight half hour lessons for fourteen dollars fifty.
Over the next sixteen months she signs fourteen more contracts. Two thousand three hundred and two hours of dancing lessons, for thirty one thousand and ninety dollars and forty five cents.
Five hundred and forty five hours to earn the Bronze Medal. Nine hundred and twenty six hours, at twelve thousand five hundred dollars, for the Silver. Three hundred and forty seven hours for the Gold. Four hundred and eighty one hours, at six thousand five hundred dollars, to be a Gold Bar Member, the ultimate achievement of the dancing studio.
All the while she is told that she is rapidly improving and developing in her dancing skill, that additional lessons would make her a beautiful dancer, capable of dancing with the most accomplished dancers. In truth, her complaint says, she had no dance aptitude and in fact had difficulty in hearing the musical beat. The studio knew. She sues to cancel the contracts and recover the money for lessons not yet taken. The trial court dismisses. Puffing, it says. Opinion, not fact.
So here is the question. Nobody lied about a fact. Nobody said the lessons cost less, or that the medals were recognised anywhere. They told a lonely woman she was a wonderful dancer. Is that fraud? Think about it before I go on, because the answer depends on who was speaking, and what they knew.
And now the question I keep asking. What exactly did these people promise each other? Lessons for money. But a promise obtained by deceit is not one the deceived party chose. Today's defense is misrepresentation, and its harder cousin, silence. When must the other side tell you the truth, and when must it tell you anything at all?
Here is the first line for the board. A contract is voidable for misrepresentation where one party makes a false assertion of fact, fraudulent or material, on which the other justifiably relies in entering the bargain. Generally a misrepresentation, to be actionable, must be one of fact rather than of opinion. Puffing, the salesman's praise, is not a fact.
Second line, the qualifications. The opinion rule does not apply where there is a fiduciary relationship between the parties, or where there has been some artifice or trick employed, or where the parties do not deal at arm's length, or where the representee does not have equal opportunity to become apprised of the truth. A statement of a party having superior knowledge may be regarded as a statement of fact although it would be considered as opinion if the parties were dealing on equal terms.
Third line, silence. The old rule is that a party need not volunteer what he knows. Bare nondisclosure is not fraud.
The modern rule carves exceptions. Disclosure is required where it is needed to correct a previous assertion, where the other party is mistaken about a basic assumption and silence would be bad faith, where the other party is mistaken about the writing, or where there is a relationship of trust. And a half truth is a lie. If he undertakes to speak he must disclose the whole truth.
Now the case. Vokes against Arthur Murray, Florida District Court of Appeal, nineteen sixty eight, Judge Pierce. The court accepted the general rule and then applied the exceptions. It could be reasonably supposed here that defendants had superior knowledge as to whether plaintiff had dance potential and as to whether she was noticeably improving in the art of terpsichore.
And it drew the inference. The flowery eulogiums heaped upon her by defendants as a prelude to her contracting for nineteen hundred and forty four additional hours of instruction proceeded as much or more from the urge to ring the cash register as from any honest or realistic appraisal of her dancing prowess or a factual representation of her progress.
Then the half truth point. Even in contractual situations where a party to a transaction owes no duty to disclose facts within his knowledge or to answer inquiries respecting such facts, the law is if he undertakes to do so he must disclose the whole truth. Having chosen to tell her about her progress, the studio had to tell her the truth about it, which was that her slow and awkward progress did not justify her vast outlay of cash.
The court quoted an old Florida maxim. What is plainly injurious to good faith ought to be considered as a fraud sufficient to impeach a contract. And it sent her back to court. We repeat that where parties are dealing on a contractual basis at arm's length with no inequities or inherently unfair practices employed, the Courts will in general leave the parties where they find themselves. But this was not that. Plaintiff is entitled to her day in Court.
Now silence, and the oldest case in the course. Eighteen seventeen, the Supreme Court of the United States, Chief Justice Marshall. A buyer of a commodity had news, not yet public, that would raise its price, and bought without telling the seller. Marshall's opinion is a paragraph.
The question in this case is, whether the intelligence of extrinsic circumstances, which might influence the price of the commodity, and which was exclusively within the knowledge of the vendee, ought to have been communicated by him to the vendor?
The court is of opinion that he was not bound to communicate it. It would be difficult to circumscribe the contrary doctrine within proper limits, where the means of intelligence are equally accessible to both parties. But at the same time, each party must take care not to say or do any thing tending to impose upon the other. Laidlaw against Organ. No duty to volunteer, where each side could have found out. But no tricks.
Massachusetts, nineteen forty two, held the line for the seller too. A bank sold a house in Newton that it knew was infested with termites. The buyer could not see them, found out two years later, and sued for the cost of repairs. Swinton against Whitinsville Savings Bank, Justice Qua.
There is no allegation of any false statement or representation, or of the uttering of a half truth which may be tantamount to a falsehood. The charge is concealment and nothing more, and it is concealment in the simple sense of mere failure to reveal, with nothing to show any peculiar duty to speak.
Here is the reasoning, and it is honest about what it costs. If this defendant is liable on this declaration every seller is liable who fails to disclose any nonapparent defect known to him in the subject of the sale which materially reduces its value and which the buyer fails to discover. The law has not yet, we believe, reached the point of imposing upon the frailties of human nature a standard so idealistic as this.
And a line for the ages. The law cannot provide special rules for termites.
Forty four years later, Arizona did provide a rule for termites. Nineteen eighty two. A couple buy a house for seventy two thousand dollars. Its central feature is a parquet teak floor. On a visit, the husband, a school maintenance supervisor, notices a ripple in the wood on the step to the dining room and asks whether it could be termite damage.
The seller's wife answers that it was water damage. There had been water damage, years before. The contract requires a termite report. The report finds no visible evidence of infestation.
After they move in, the buyers find a pamphlet in a drawer, Termites, the Silent Saboteurs. A neighbour tells them about the past infestation. The steps start to crumble. The floor alone will cost about five thousand dollars to repair. Discovery shows the sellers had held termite guarantees since they bought the house, going back to treatment in nineteen sixty three, had paid for annual boosters, and had twice had live termites treated in the entry floor while they were away.
The Court of Appeals of Arizona, in Hill against Jones, nineteen eighty six, Judge Meyerson, asked the Swinton question and gave the other answer. Must the seller of a residence disclose to the buyer facts pertaining to past termite infestation? This is not the place to trace the history of the doctrine of caveat emptor. Suffice it to say that its vitality has waned during the latter half of the twentieth century.
The court set out the modern view, the Restatement's four cases where a vendor has an affirmative duty to disclose. Where disclosure is necessary to prevent a previous assertion from being a misrepresentation. Where it would correct the other party's mistake about a basic assumption and silence would be bad faith. Where it would correct a mistake about the writing. Where there is a relationship of trust and confidence. And it adopted Florida's rule for houses.
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. Materiality is for the jury. 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. Termite damage, past or present, may be.
Two more points from the case. The contract had an integration clause saying the buyers had investigated and released the seller from any representation not written in. Any provision in a contract making it possible for a party thereto to free himself from the consequences of his own fraud in procuring its execution is invalid.
And the buyers' own question mattered. The inquiry by buyers whether the ripple was termite damage imposed a duty upon sellers to disclose what information they knew concerning the existence of termite infestation in the residence. Water damage, when you know about the termites, is a half truth.
Put the cases side by side. Marshall in eighteen seventeen. No duty to share your information advantage, where both could have learned it. Massachusetts in nineteen forty two. No duty to disclose a hidden defect, because the law cannot make special rules for termites.
Arizona in nineteen eighty six. A duty to disclose material hidden facts about a home, and a duty to answer a question truthfully. Florida in nineteen sixty eight. Praise from someone who knows better is a statement of fact, and a half truth is a lie. The trend is toward disclosure. The old rule survives between equals.
Now let's change one fact. The dance studio had told the widow only that she was a delightful pupil and that they hoped to see her at the next party, and she had bought the fourteen courses after asking for them herself. Choose an answer before I go on.
Now the studio probably wins. The Florida court relied on specific representations about her progress and ability, made by people with superior knowledge, as a prelude to each sale. Delightful pupil is puffing of the purest kind. Nobody with a superior knowledge of dancing is asserting anything about her dancing. Take away the assertions and the half truths, and the contracts are improvident but not fraudulent.
Change one fact again. The Arizona buyers never asked about the ripple, the sellers never said water damage, and the termite report was clean. Choose.
Then the half truth is gone and the case rests on the duty to disclose alone. Under the rule Arizona adopted, the sellers still had to reveal what they knew, past infestation, treatments, and unrepaired damage, because those are facts materially affecting the value of the property, not readily observable and not known to the buyer. Under Swinton, in a state that still follows it, the sellers would win. That is the split, and it is a real one.
Change one fact a third time. The Louisiana buyer in eighteen seventeen, asked directly by the seller whether he had any news that would affect the price, had said no. Choose.
Now he loses, even under Marshall. The privilege was silence. Each party must take care not to say or do any thing tending to impose upon the other. A false answer to a direct question is an imposition, a false assertion of fact, and the seller may avoid the sale. Marshall sent the case back for the jury to decide exactly whether any imposition was practised by the vendee upon the vendor.
Here is what people get wrong here, and why it is tempting. The first mistake is treating every sales pitch as opinion. Praise from someone who knows the truth and has a reason to hide it is a statement of fact.
The second mistake is treating silence as always safe. Silence in the face of a direct question is a lie, a half answer is a lie, and for a home seller, silence about a hidden material defect is a breach of duty in most states now.
The third mistake is the reverse. Thinking every information advantage must be shared. Marshall's rule still holds for the buyer who did his homework. Diligence is rewarded. Deceit is not.
Here is the rule, in one breath. A contract is voidable where a party is induced by a false assertion of fact, which includes an opinion from someone with superior knowledge, a half truth, and a false answer to a question, and by silence where the other party is mistaken about a basic assumption, where there is a relationship of trust, or where a home seller knows a material fact the buyer cannot see. Bare nondisclosure between equals is still not fraud. Now, five questions.