Under Tennessee law, when a defendant has affirmatively made an untrue statement of material fact, a plaintiff may well be able to recover for intentional misrepresentation (also called “fraud”) or for negligent misrepresentation. What if, instead of making an untrue statement of fact, the defendant failed to disclose an important fact or facts? In Tennessee, in proper cases, a plaintiff can recover for the defendant’s failure to disclose a material fact (sometimes called “fraudulent concealment”).
When considering a cause of action because a party has failed to disclose important facts, a good place to start your analysis is to recognize that, under Tennessee law, in most all transactions, a party does not have a duty to disclose material facts to the other party. For that reason, among others, this cause of action is not at all easy to prove. However, in some cases, it can be successful.
There are four categories of exceptions to the rule that a party to a transaction generally does not have a duty to disclose facts to the other party to the transaction. The first exception exists where a “previous definite” fiduciary relationship existed between the parties. Examples of definitive fiduciary relationships are attorneys and clients, and trustees and beneficiaries.
The second exception exists “where it appears one or each of the parties to the contract expressly reposes trust and confidence in the other.” I have not been able to find an example, in Tennessee case law, where this exception has been found to apply. This exception would necessarily be very difficult to prove and would require something more than is present in almost all transactions, in my opinion. It might apply to a situation where, by the express language of the contract, one party acknowledged that it was in a superior position of knowledge and recognized that the other party was relying upon it and trusting it to fully disclose all relevant facts.
The third exception exists where the contract or transaction is “intrinsically fiduciary and calls for perfect good faith.” Insurance contracts and contracts between lawyers and clients would fit into this exception.
The fourth exception applies to real estate transactions. Under Tennessee law, a seller must disclose a fact of “controlling importance in determining the desirability and value” of the real estate if that fact “would not be apparent to the buyer through the exercise of ordinary care.” Perhaps the leading Tennessee case in which this exception applied involved a seller who sold a house which, unbeknownst to the buyers, did not have water service for a substantial period every day. In that case, there was no practical way for the buyers to have discovered that fact before the transaction.
To succeed on a failure to disclose cause of action, just as to succeed on an action for intentional or negligent misrepresentation, the plaintiff must prove that the fact which was concealed was material. Concealment of non-material facts will not carry the day in fraudulent concealment cases. Whether a fact is material or non-material will depend on the unique circumstances of each case.
To succeed on a fraudulent concealment claim, a plaintiff must also prove justifiable reliance on the material fact or facts which were not disclosed. If a fact is material, in my experience, proving that a plaintiff justifiably relied on it is generally pretty easy unless the omitted fact could have been discovered by the exercise of reasonable care. Some Tennessee cases address justifiable reliance from the standpoint that there is no duty to disclose a fact that the other party could find out about by the exercise of ordinary diligence. That approach does not even go as far as evaluating the plaintiff’s reliance: It cuts the plaintiff off if he or she could have discovered the fact by the exercise of ordinary care.
The tort of fraudulent concealment or failure to disclose, based on my informal observation, is raised mostly in cases involving real estate transactions, but it has certainly been raised, and can be raised, in other contexts and types of cases. For commercial lawyers who handle litigation matters, being aware that a cause of action for fraudulent concealment is recognized in Tennessee is, obviously, important even though it is not as often applicable as its related torts of intentional and negligent misrepresentation.