In Minnesota, silence becomes misrepresentation only when the silent party had a duty to speak. In L & H Airco, Inc. v. Rapistan Corp., 446 N.W.2d 372 (Minn. 1989), the Minnesota Supreme Court stated the general rule that “one party to a transaction has no duty to disclose material facts to the other.” The court explained that a duty “may exist under certain circumstances, such as when a confidential or fiduciary relationship exists between the parties or when disclosure would be necessary to clarify information already disclosed, which would otherwise be misleading.” It also noted that one with “special knowledge of material facts to which the other party does not have access may have a duty to disclose these facts,” while observing that it had rarely addressed that theory. Where a duty exists and the silent party breaches it, the silence can support a fraud claim.

Key Takeaways

  • Silence becomes misrepresentation only when there is a legal or equitable obligation to disclose.
  • Minnesota’s general rule is that one party to a transaction has no duty to disclose material facts to the other.
  • A duty may arise from a confidential or fiduciary relationship, or when disclosure is needed to clarify information already given that would otherwise mislead.
  • A bank that actually knew of a depositor’s fraud had a duty to disclose it to borrowers before making the loan that furthered the fraud.

Understanding the Duty to Disclose in Contract Law

A party to a contract usually has no duty to volunteer material facts. The duty to disclose is an exception that applies only in defined circumstances. L & H Airco names a confidential or fiduciary relationship, and a partial disclosure that would mislead unless clarified. The court added that special knowledge of material facts the other party cannot access “may” create a duty, but it had rarely addressed that theory.

The legal foundation of the duty to disclose in Minnesota is a legal or equitable obligation to speak. L & H Airco states that “Nondisclosure does not constitute fraud absent a ’legal or equitable obligation’ to communicate facts to a particular person and that person is entitled to that information.” Without such an obligation, the general no-duty rule applies.

When Does Silence Amount to Misrepresentation?

Silence amounts to misrepresentation only when the silent party had a duty to disclose. L & H Airco recognizes these circumstances:

  • Confidential or fiduciary relationships between the parties
  • Partial disclosures that distort the truth if not fully clarified
  • Special knowledge of material facts the other party cannot access, a theory the Minnesota Supreme Court has rarely addressed

Distinguishing Between Silence and Active Concealment

L & H Airco separates a fraud claim based only on silence from one based on an affirmative misrepresentation or active concealment. The plaintiff there alleged that its opponent’s attorney “intentionally concealed” his knowledge of his client’s contacts with an arbitrator. The court concluded that “the fraud alleged by the complaint is based solely on nondisclosure.” It explained: “Nowhere is it claimed that Eidsness affirmatively misrepresented that his client had no prior contacts with Michaud, nor are there any facts supporting an allegation that Eidsness actively took steps to conceal the facts of the prior relationships.” A claim based solely on nondisclosure then needs a duty to disclose.

A Case Where Silence Was Fraud

In Richfield Bank & Trust Co. v. Sjogren, 244 N.W.2d 648 (Minn. 1976), a bank sued two borrowers on a promissory note, and the borrowers defended on the ground that the bank had concealed material information. The loan paid for equipment from a company whose officers, the jury found, knew it could not deliver. The bank’s loan officer was deeply involved in that company’s affairs, and the jury found he knew its financial condition. He did not tell the borrowers.

The Minnesota Supreme Court affirmed the jury’s verdict for the borrowers. It held that “under the unique and narrow ‘special circumstances’ of this case, in which the bank had actual knowledge of the fraudulent activities of one of its depositors, it had an affirmative duty to disclose those facts to the respondents before it engaged in making the loan to respondents which furthered the fraud.”

The court drew a limit: if the bank had known only that the company was insolvent, rather than irretrievably insolvent, it “would not have actual knowledge of fraud and thus would not be under a duty to disclose the financial condition of its depositor.”

Protecting Yourself: Best Practices for Disclosure in Contracts

I suggest identifying, during negotiation, each material fact that could influence the agreement and whether a duty requires disclosing it, because silence where a duty exists can support a fraud claim.

Best practices for disclosure in contracts include:

  • Conducting thorough due diligence to uncover all relevant information before negotiations begin.
  • Clearly specifying in the contract the scope and limitations of disclosed information.
  • Maintaining detailed records of disclosures made and communications exchanged throughout negotiations.
  • Seeking legal counsel to review disclosure obligations and tailor strategies to the specific contractual context.

Frequently Asked Questions

Is Silence Alone Ever Fraud in Minnesota?

Silence is fraud only when the silent party had a duty to speak. L & H Airco states that “Nondisclosure does not constitute fraud absent a ’legal or equitable obligation’ to communicate facts to a particular person and that person is entitled to that information.” In Richfield Bank, a bank that actually knew of its depositor’s fraud had that duty toward the borrowers.

Does the Other Side’s Attorney Have to Disclose What the Client Is Hiding?

Not as a basis for a fraud claim. In L & H Airco, the court held that an attorney’s “failure to disclose those contacts to his client’s adversary was not actionable fraud, because Eidsness owed no direct duty of disclosure to L & H on which civil liability could be based.” The court added that “An attorney who makes affirmative misrepresentations to an adversary, or conspires with his or her client, or takes other active steps to conceal the client’s fraud from the adversary may be liable for fraud.”