Comment by Leon H. Rittenberg III
Mr. and Mrs. Watermeier had never owned a business before a real estate agent suggested that they purchase a retail liquor store from a Mr. Mansueto. Mansueto provided the Watermeiers with a number of profit and loss statements, which the Watermeiers relied upon in deciding to purchase the store. The Watermeiers requested to see the vendor's tax returns in order to confirm the store's financial stability. They also asked to spend several hours observing the business. Mansueto and his real estate agent, however, persuaded them that these precautionary measures were unnecessary, and the Watermeiers purchased the store. Shortly after purchasing the business, the Watermeiers discovered the store's state sales tax returns for the two prior years. The tax returns revealed that past sales were significantly lower than the data shown to them before the sale. After the Watermeiers purchased the store, sales were far below the estimates, and consequently, the Watermeiers were soon forced out of business. They brought an action for fraudulent misrepresentation against the vendor. The court denied relief, finding that the plaintiffs' losses were not caused directly by the defendant's conveyance of the misleading information. Should Mansueto have given the Watermeiers this information? The facts of Watermeier raise the broader question of whether parties to a contract should have a duty to voluntarily disclose information or, when they do voluntarily disclose information, whether they have a duty to disclose correct information. The “duty to inform” question has confronted commercial societies since the Roman era. Today, the issue is a practical one that regularly affects parties to sales, leases, insurance contracts, franchise agreements, and numerous other contracts. In drafting and negotiating these agreements, parties need to take steps to avoid the risks associated with breaching the duty to inform. The best way to avoid liability is to exercise due care when furnishing information, to ensure the accuracy of the information, and to err on the side of disclosure rather than concealment. Exercising due care is especially important because courts may impose delictual liability for withholding information, even when the other party is equally able to discover the information.
Neither civil- nor common-law jurisdictions use one single theory, rule, or cause of action to address situations in which one party to a contract believes that the other party has, through misrepresentations or omissions, breached its “duty to inform.” Instead, most American jurisdictions enforce the duty to inform through a variety of actions. None of these solutions, however, is specifically tailored to the peculiarities of the duty-to-inform problem, and none of them respond directly to a philosophical model.
Louisiana recognizes at least eleven actions which can be used to seek compensation for a breach of the duty to inform in the confection of a contract. These include: 1) contractual fraud; 2) delictual fraud; 3) negligent misrepresentation; 4) detrimental reliance (delictual and quasi-contractual); 5) redhibition; 6) breach of contract; 7) breach of warranty; 8) error; 9) lesion; 10) breach of a fiduciary duty; and 11) breach of the duty of good faith. Additionally, the duty to inform may be enforced through Louisiana's unfair competition law, as well as federal statutes and regulations such as SEC rules 14a-9 and 10b-5 and FTC franchise disclosure provisions. These causes of action differ in their elements, prescriptive and peremptive periods, remedies, and defenses. These differences have profound effects upon the standard of disclosure required and upon a party's ability to seek relief. For example, because the prescriptive period for delictual fraud is one year, as opposed to ten years for contractual fraud, a party is limited after the one-year period has expired to bringing an action in contract. Another difference lies in the burdens of proof required for the various actions. For example, a fraud claim requires burdensome proof of fraudulent intent. Actions for negligent misrepresentation, on the other hand, do not require proof of intent, but only proof of a breach of duty or a negligent breach of duty. As a result of this plethora of actions, conduct that may satisfy one standard may fail to satisfy another.
The fact-pleading system established by the Louisiana Code of Civil Procedure provides even more legal flexibility for plaintiffs bringing actions for failure to disclose. Under the Code of Civil Procedure, parties need only allege facts in their pleadings that give rise to a remedy under substantive law; they need not plead a legal basis for relief. Although the parties may suggest a legal basis of recovery, judges may base recovery on a cause of action not alleged by the parties. This system of fact-based pleadings, together with the abundance of actions available to address the duty to inform, creates an opportunity for plaintiffs to choose strategically which actions to plead. Of course, the question of which action to plead is compounded by the judge's ability to fashion a remedy based on any appropriate action, regardless of whether it was alleged.
This Comment will present three theoretical models of the duty to inform and discuss whether the Louisiana scheme yields consistent moral, economic, and practical results. This Comment will then explore methods by which plaintiffs, defendants, and judges may use to their advantage the elements, remedies, and defenses of the various causes of action. In this context, the Comment will attempt to clarify certain confusing aspects of the law, such as the distinctions between delictual and contractual fraud. Finally, this Comment will address the cumulation of these actions as a whole.
About the Author
Leon H. Rittenberg III.
Citation
66 Tul. L. Rev. 151 (1991)