Our Property professor told us on Tuesday that the reason why we are taught Torts, Contracts, and Property all in the same semester is that these are the substantive law courses, and we are encouraged to see the connections between these legal classifications. Torts and Contracts have just intersected at Informed Consent Street and Non-Disclosure Avenue.
"The doctrine of informed consent requires a physician to warn a patient of the risks and consequences of a medical procedure." Michigan Court of Appeals, 2005
"In a bargaining transaction there is generally no duty to disclose information." Calamari & Perillo, Contracts
Of course, this Contracts text notes that informed consent in medicine is an exception to this general principle. But I believe it may be valuable to examine the different perspectives that Torts and Contracts bring to this disclosure table.
When two parties are negotiating a contract for a business contract, information and beliefs about that information are driving forces. One party to the transaction has knowledge and beliefs about the subject matter of the bargain that induce it to offer something in exchange that that party believes to be of lesser value. The other party either has different knowledge, different beliefs, or both about the same subject matter, or else neither party would agree to a bargain. Put more simply, each party must believe that they are offering something less valuable than what they are receiving, or else neither party would agree to the transaction. Two people who had the exact same knowledge and valuation of the objects in the universe would never be able to bargain with one another.
Thus, it often happens that one party, through superior knowledge and value-analysis, is able to obtain something valuable by offering something that is less valuable. For example, if I have good reason to believe that Apple stock is underpriced, and I offer the market price, then the person who sells me the Apple stock will suffer a loss if my information is accurate. Am I obligated to inform the owner of the Apple stock of whatever superior financial analysis led me to my accurate belief that Apple is underpriced? Of course not! Now, if I had insider information, this transaction would be fraud. Note where the lines are drawn in financial transactions between acceptable and criminal non-disclosure.
In the field of medicine, there is also a line between acceptable and malfeasant non-disclosure. "The extent to which [a doctor] must share . . . information with his patient depends upon what information he should reasonably recognize is material to the plaintiff's decision. 'Materiality may be said to be the significance a reasonable person, in what the physician knows or should know is his patient's position, would attach to the disclosed risk or risks in deciding whether to submit or not to submit to surgery or treatment.'" Basically, a doctor must disclose any medical information that might induce a reasonable patient to accept or decline treatment. The doctor does not need to disclose information about what he will be wearing during the operation, or a possible 3 minute hiccup side effect, or the risk that one of the nurses will be rude.
This line is certainly not the line used in contract negotiations. Imagine if an real estate broker was obligated to tell a seller of land in Texas the name and telephone number of a Colombian family that was willing to pay double the asking price to use the land for a supermarket? The broker's hard work in locating the Colombian entrepeneur and seller and arranging the transaction would all be for naught. Is there any chance that there is a similar infringement of the doctor's right to retain the economic benefits of his non-disclosure? After all, if a doctor were allowed to stay silent about unlikely risks of catastrophic side effects, then that doctor might find more patients willing to undergo expensive procedures.
But "NO!" exclaims the concerned consumer. Not so fast. There is a societal benefit to doctors informing their patients of the risks of surgery. Patients have a right to autonomy which is undermined when they are not given the information necessary to make decisions affecting their health.
Fair enough. But consider a second argument: It would be unconscionable for a doctor to become enriched at the cost of his patients' health; the doctor would be unjustly enriched by his non-disclosure. This seems reasonable as well, does it not? But why not extend this reasoning to the case of the real estate broker. Isn't it unjust that the seller in Texas would miss out on double his profits by selling directly to the Colombian? And isn't it unjust that the Colombian should pay twice what the seller is offering for the land in Texas? Both of these parties are hurt economically by the broker's non-disclosure, and the economic detriment has health consequences. What if the sellers in Texas are unable to afford a needed operation because they needlessly sold their land at a lower price?
One solution to this conflict is that the difference between the doctor and the broker is distinguishable by the special relationship between the doctor and the patient that does not exist between the broker and the seller. A doctor has a duty to "do no wrong." The doctor has a conflict of interest, whereas the broker has no conflict of interest. The broker has only one interest: economic selfishness.
We'll see if my future studies shed any new light on this conflict.
Showing posts with label duty to disclose. Show all posts
Showing posts with label duty to disclose. Show all posts
Wednesday, November 4, 2009
Friday, October 30, 2009
Misrepresentation, Mistake, Fraud, Etc.
Hypotheticals of the day:
1) S is an amateur gem collector at a gem collectors' convention who has a basket full of stones with a sign in front saying "$15 each." B is a professional jeweler with years of experience. As B rummages through the basket, he finds a stone, looks at it closely, and says, "$15??!" S thinks to himself, "oh shit, this asshole is going to try to bargain with me."
"Well, that's not the nicest looking stone in the basket. I'll give it to you for $10," says S.
B takes out two wrinkled $5 bills and pays. The stone turns out to have been the world's largest sapphire and is worth 3 million dollars. Can S get the stone back?
What if S and B both thought that the stone was a diamond worth $1,000, but it turned out to be a topaz worth only $5. Or it turned out to be a flawed diamond? Can B get his money back after he's paid for it?
Some rules/principles to guide us:
Sherwood v. Walker: If there is a mistake about a material fact and both parties are mistaken at the time the contract is executed, then the contract may be avoided. If there is a mistake about the value of the item, then there is no relief, so long as value is a subjective belief about what the price should be given all the facts that either are known or could be known.
Lawson v. Citizens & Southern Nat'l Bank: "Where material facts are accessible to the vendor only, and he knows them not to be within the reach of the diligent attention, observation and judgment of the purchaser, the vendor [of real estate] is bound to disclose such facts and make them known to the purchaser."
Whenever there is a fraudulent transaction under which the aggrieved party would have a tort action for deceit, the aggrieved party may elect to avoid the transaction and claim restitution. However, even if there is no viable tort action for deceit, the transaction may still be voidable if certain elements of misrepresentation or non-disclosure are proved. In other words, there are lower standards for voiding the contract than there are for recovering damages on a tort claim for fraud.
In an unintentional misrepresentation, voidability usually requires that the misrepresentation be about a material fact. A fact is material whenever the misrepresentation would be likely to affect the conduct of a reasonable person or if "the maker of the representation knows that the recipient is likely to regard the fact as important" although a reasonable person would not.
Where the misrepresentation is intentional, the misrepresented fact does not need to be objectively material; rather, it is a subjective standard that has more to do with whether the deceived party was induced by the misrepresentation, rather than whether any reasonable third party would have been induced by the misrepresentation. In this way, it is much easier to satisfy the materiality element for an intentional misrepresentation.
UCC: An affirmation, statement, opinion or commendation as to the value of the goods does not create a warranty on the seller.
An opinion does not count as a representation, but there are a number of exceptions/factors that make this principle less powerful: "1) where there is a relationship of trust and confidence between the parties, 2) the representor is or claims to be an expert 3) the representor has superior access to knowledge."
Laidlaw v. Organ: In a bargaining transaction there is generally no duty to disclose information.
Exceptions to this rule:
1) statutory regulations (specific situations in which the information can only be obtained by extremely expressive means and the non-disclosure took the form of false or misleading statements).
2) Concealment: intentional hiding of the truth through positive action is not allowed.
3) partial disclosure: leaving out important details of a disclosure is fraudulent.
4) When a true statement becomes no longer true, there is a duty to disclose that the statement is no longer true.
-Historical view: "A sound price warrants a sound commodity." (implied warranty if the item sold doesn't end up reflecting its price)
-Less historical view: caveat emptor
-Modern view: Older view prevails for "latent defects in consumer transactions and single family housing," whereas caveat emptor remains in place for commercial realty and transactions between merchants.
5) Nature of the transaction: Suretyship and insurance require broad duties of disclosure.
6) Relationship between the parties: "Whenever one party to a transaction justifiably believes the other is looking out for his or her interests, a duty of disclosure arises."
2) S owns a tract of land that has a market value of $50,000. B has private knowledge that a developer plans to build a mall across the street that will make the land worth $500,000. B makes a contract to buy the land from S, to be closed on November 15th. On November 14th, the plans to develop the mall are made public. Can S rescind the contract?
What if the plans are made public on November 16th. Can S recover the land?
1) S is an amateur gem collector at a gem collectors' convention who has a basket full of stones with a sign in front saying "$15 each." B is a professional jeweler with years of experience. As B rummages through the basket, he finds a stone, looks at it closely, and says, "$15??!" S thinks to himself, "oh shit, this asshole is going to try to bargain with me."
"Well, that's not the nicest looking stone in the basket. I'll give it to you for $10," says S.
B takes out two wrinkled $5 bills and pays. The stone turns out to have been the world's largest sapphire and is worth 3 million dollars. Can S get the stone back?
What if S and B both thought that the stone was a diamond worth $1,000, but it turned out to be a topaz worth only $5. Or it turned out to be a flawed diamond? Can B get his money back after he's paid for it?
Some rules/principles to guide us:
Sherwood v. Walker: If there is a mistake about a material fact and both parties are mistaken at the time the contract is executed, then the contract may be avoided. If there is a mistake about the value of the item, then there is no relief, so long as value is a subjective belief about what the price should be given all the facts that either are known or could be known.
Lawson v. Citizens & Southern Nat'l Bank: "Where material facts are accessible to the vendor only, and he knows them not to be within the reach of the diligent attention, observation and judgment of the purchaser, the vendor [of real estate] is bound to disclose such facts and make them known to the purchaser."
Whenever there is a fraudulent transaction under which the aggrieved party would have a tort action for deceit, the aggrieved party may elect to avoid the transaction and claim restitution. However, even if there is no viable tort action for deceit, the transaction may still be voidable if certain elements of misrepresentation or non-disclosure are proved. In other words, there are lower standards for voiding the contract than there are for recovering damages on a tort claim for fraud.
In an unintentional misrepresentation, voidability usually requires that the misrepresentation be about a material fact. A fact is material whenever the misrepresentation would be likely to affect the conduct of a reasonable person or if "the maker of the representation knows that the recipient is likely to regard the fact as important" although a reasonable person would not.
Where the misrepresentation is intentional, the misrepresented fact does not need to be objectively material; rather, it is a subjective standard that has more to do with whether the deceived party was induced by the misrepresentation, rather than whether any reasonable third party would have been induced by the misrepresentation. In this way, it is much easier to satisfy the materiality element for an intentional misrepresentation.
UCC: An affirmation, statement, opinion or commendation as to the value of the goods does not create a warranty on the seller.
An opinion does not count as a representation, but there are a number of exceptions/factors that make this principle less powerful: "1) where there is a relationship of trust and confidence between the parties, 2) the representor is or claims to be an expert 3) the representor has superior access to knowledge."
Laidlaw v. Organ: In a bargaining transaction there is generally no duty to disclose information.
Exceptions to this rule:
1) statutory regulations (specific situations in which the information can only be obtained by extremely expressive means and the non-disclosure took the form of false or misleading statements).
2) Concealment: intentional hiding of the truth through positive action is not allowed.
3) partial disclosure: leaving out important details of a disclosure is fraudulent.
4) When a true statement becomes no longer true, there is a duty to disclose that the statement is no longer true.
-Historical view: "A sound price warrants a sound commodity." (implied warranty if the item sold doesn't end up reflecting its price)
-Less historical view: caveat emptor
-Modern view: Older view prevails for "latent defects in consumer transactions and single family housing," whereas caveat emptor remains in place for commercial realty and transactions between merchants.
5) Nature of the transaction: Suretyship and insurance require broad duties of disclosure.
6) Relationship between the parties: "Whenever one party to a transaction justifiably believes the other is looking out for his or her interests, a duty of disclosure arises."
2) S owns a tract of land that has a market value of $50,000. B has private knowledge that a developer plans to build a mall across the street that will make the land worth $500,000. B makes a contract to buy the land from S, to be closed on November 15th. On November 14th, the plans to develop the mall are made public. Can S rescind the contract?
What if the plans are made public on November 16th. Can S recover the land?
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