February 13, 2020 | By Patrick T. McCloskey
Caveat Emptor. Let the buyer beware. A fundamental legal principle that places the burden on the buyer to kick the proverbial tires before committing to a transaction. On the flip side of this coin, the seller generally (we say generally because of the exceptions explained below), has no duty to disclose information during negotiations, even if material. If the seller does make statements, however, they need to be truthful and not ambiguous or misleading (half-truths will generally trigger a duty disclose the information necessary to cleanse them), otherwise there will be grounds for a fraud claim.
With these general concepts in mind, sticky situations can arise when a seller is aware of material information unknown to the buyer which, if disclosed, could scuttle the deal.
Does the seller have the absolute right to remain silent in these situations? Not quite–at least not under New York law. There are two situations where a knowing party has a duty to volunteer information to an unknowing party during transaction negotiations. The first is when the knowing party owes a fiduciary duty to the unknowing party, such as when the parties are partners in a partnership. Although not always the case, this situation is typically easy to identify. The second situation is much less obvious. Under New York law, when (1) there are facts or information “peculiarly within the knowledge” of the knowing party, (2) the facts or information could not be learned by the unknowing party through due diligence and (3) the knowing party is aware the unknowing party is entering into the transaction on the basis of mistaken knowledge, there is a duty to disclose. Referred to as the “superior knowledge” doctrine, this legal principle is heavily dependent on the facts and circumstances, with results determined on a case-by-case basis.
The knowing party can attempt to take measures to protect itself against a fraud claim under these circumstances by inserting disclaiming language in the written contract, referred to as a so-called “big-boy” provision, but this will not provide protection when the unknowing party is “not sophisticated” or there are other indicia of fraud.
The legal analysis on this issue is fact-driven and extremely complex. Any party negotiating a transaction where this could be an issue should consult with an attorney.