“As-Is” Contracts Part IV: Avoiding Claims of Fraudulent Concealment

In this article, we discuss another aspect of “as-is” contracts here in San Diego and in California. In previous companion articles, we discussed two necessary components of well-drafted “as is” contracts, namely language with respect to a buyer’s due diligence/inspection requirements, and waivers for active fraud/false statements of fact. There is one additional issue that is important to address – claims by the buyer of fraudulent concealment. Concealment is related to active fraud/false statements, but claims of concealment implicate California legal principles with respect to the duty to disclose and whether fiduciary duties and/or special relationships exist creating or heightening the duty to disclose. Getting an “as-is” contract “right” requires an experienced corporate attorney. Here is a quick discussion.

San Diego Business Law: Legal Principles With Respect to the Duty to Disclose

As noted, fraud via concealment is similar to active fraud (making a false statement), but it is legally distinct.

Under California law, in general, for a plaintiff to succeed with a claim for fraudulent concealment, the plaintiff must prove the following elements:

• The accused party — most often, the seller — concealed or suppressed a material fact
• The seller was under a duty to disclose the fact to the buyer
• The seller intentionally concealed or suppressed the fact with the intent to defraud the buyer
• The buyer was unaware of the fact
• The buyer would not have entered into the contract/bought the goods/otherwise acted as he/she/it did had the concealed or suppressed fact been know
• The buyer suffered damage as a result

See Kaldenbach v. Mutual of Omaha Life Ins. Co., 178 Cal.App.4th 830 (Cal. App. 4th Dist. 2009); Cal. Civil Code, § 1572.

The duty to disclose arises in four circumstances:

• When the seller/defendant is in a fiduciary relationship with the buyer
• When the seller had exclusive knowledge of material facts not known or knowable to the buyer
• When the seller takes active steps to conceal a material fact from the buyer — actions to prevent the buyer from leaning the fact
• When the seller makes a partial representation but also suppresses some material fact or facts

As discussed in our companion articles, in general, when selling something “as-is,” it is best for the seller to make no representations regarding the condition of the goods/property and if the buyer asks questions, it is just best to respond that the goods/property is being sold “as-is.” Doing this avoids making a false statement; if you make no representations, there can be no false statement. Not making any representations also avoids a partially true statement, but one that suppresses or conceals.

San Diego Business Law: “As-Is” Contract Language

To avoid ending up in litigation over allegations of concealment, a seller should not engage in any of the above-listed behavior. As noted, say nothing. Further, take no actions that might be seen as preventing the buyer from engaging in the buyer’s due diligence.

In addition, strong contract language can help. For example, a good “as-is” contract will have a section making it clear that the seller is not in a fiduciary relationship OR a special relationship with the buyer. Further, the contract should provide that buyer waives any right to sue for alleged concealment.

Contact San Diego Corporate Law Today

If you would like more information with respect to business contracts in general, contact attorney Michael Leonard, Esq., of San Diego Corporate Law. Mr. Leonard can be reached at (858) 483-9200 or via email.

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