Duty to Disclose: An Unresolved (?) Issue of Illinois Law
By Dmitry N. Feofanov
The oft-cited rule of caveat emptor (“buyer beware”) is still believed by most people (including jurors) to be an accurate statement of the law. This is despite the fact that the modern trend is to abandon “buyer beware” and instead establish the regime of “seller disclose” from the Supreme Court down1. In fact, from the turn of the last century, Illinois courts have chiseled away at this venerable common-law principle.2
Admittedly though, while seemingly recognizing that the old doctrine of caveat emptor was “mostly dead,” it is not “all dead,”3 and occasionally rises from the dead. It is, in no small part, because Illinois courts have been all over the place in establishing a coherent doctrine pertaining to a duty to disclose. To fully appreciate the problem, let us consider the following, admittedly extreme, hypothetical set in a car-buying context:
Suppose Seller has a used car for sale which has a bomb under its seat, with a 30-minute timer (and, for good measure, a dead alien in the trunk, which vaporizes anyone who opens it).4 Buyer visits the Seller to discuss possibly purchasing the vehicle from Seller.
Under these circumstances, is there a duty to disclose the bomb and the alien? Is it fraud to sell this car without disclosure? It would seem that both answers should be “yes” and “yes.” The question then becomes, which legal label allows for this obvious result? The following legal theories might provide a theoretical basis for the “yes” answers.
Duty to Disclose – What Extent?
In a common-law fraud context, a duty to disclose undeniably arises at the very least in two instances: (1) a fiduciary relationship between the parties; or (2) a special relationship between the parties. However, neither of these theories allows for imposing a duty in the “bomb under the seat and a dead alien in the trunk” hypothetical.
Arguably, however, a duty to disclose arises in multiple other instances:
1. When imposed by a statute;5
2. When one party has “superior knowledge;”6
3. When one party discloses “half-truths;”7
4. When one party “suppresses material facts;”8 and
5. When non-disclosure makes goods “inherently dangerous;”9
But are any of these theories firmly established in Illinois law? To answer this question, we must first consider the question of duty in general.
A Duty Generally Under Happel v. Wal-Mart Stores, Inc.
In Happel v. Wal-Mart Stores, Inc.,10 the Supreme Court considered the issue of duty in a negligence context. The Supreme Court formulated the issue this way:
A duty to warn exists where there is unequal knowledge, actual or constructive (of a dangerous condition), and the defendant, possessed of such knowledge, knows or should know that harm might or could occur if no warning is given.
The Supreme Court then formulated the following test for establishing a duty:
In determining whether a duty exists, courts look to certain relevant factors. These include: (1) the reasonable foreseeability that the defendant’s conduct may injure another, (2) the likelihood of an
injury occurring, (3) the magnitude of the burden of guarding against such injury, and (4) the consequences of placing that burden on the defendant.11
Thus, it appears that one could reasonably state that in Illinois there exists a general duty to warn and to disclose, especially when there is an imminent danger to another (i.e., a salvage car with no brakes).
Even though Happel is a negligence case, in every case involving a dangerous product, there should be a duty to disclose, assuming the four prongs of the test are met. Thus, for example, in our hypothetical, if the four prongs are met, there must have been a duty. Under that duty, a Seller would be legally required to disclose a known danger.12
One could argue that there are different degrees of duty. In negligence cases, for example, there is a duty of care, which does not arise in fraud cases. But the general commercial law imposes obligations of good faith and fair dealings for all sales by merchants,13 which, as demonstrated below, make it a duty to disclose known dangerous conditions.
As explained in Happel, a duty exists because of potential harm to another.14 With this conceptual framework in mind, the time has come to consider whether, in our hypothetical case, the parties stood in such a relationship to each other that the law imposed upon the Seller a duty to disclose to the Buyer, in a common-law fraud context.
Seven Sources of Duty in Fraudulent Concealment Cases
1. Fiduciary Duty
It is beyond dispute that one such relationship is a fiduciary relationship between the parties.15 As a matter of law, such fiduciary relationship arises once an agency relationship is formed.16 Absent a fiduciary
relationship between the Seller and the Buyer, the duty would not arise.17
2. Duty Arising from a Special Relationship
A duty to disclose may also arise out of a situation where plaintiff places trust and confidence in defendant, thereby placing defendant in a position of superiority over plaintiff, such as an agency relationship.18 Again, absent any unusual facts, a duty would not arise.19
3. Statutory Duty
In Abazari v. Rosalind Franklin University of Medicine and Science,20 one of the claims was fraudulent concealment. Plaintiff claimed a medical school concealed from him certain material facts in order to induce him to enroll in the school.21 Defendants claimed they had no duty to disclose. However, the appellate court, in dicta, stated that even the Illinois Administrative Code (which had provisions regarding descriptions of school programs) could support plaintiff’s fraudulent concealment claims.22 Another case of note is Bauer v. Giannis,23 in which a seller’s duty under the Residential Property Disclosure Act supported a fraudulent concealment claim, a fact pointedly noted in Abazari.24
Statutory provisions applicable to the hypothetical
There are at least three bases for a duty in statutory law applicable to our hypothetical: (1) the Illinois Vehicle Code (“IVC”); (2) Article Two of Illinois Uniform Commercial Code (“UCC”); and (3) the Consumer Fraud and Deceptive Business Practices Act (“CFA”).
625 ILCS 5/12-101(a)
Section 12-101 of the IVC states, in relevant part:
It is unlawful for any person to drive or move or for the owner to cause or knowingly permit to be driven or moved on any highway any vehicle or combination of vehicles which is in such unsafe
condition as to endanger any person or property.25
As demonstrated above, the IVC makes it illegal “to permit to be driven” an unsafe car. How would a dealer know? Reasonably inferred from this statutory requirement is a duty of reasonable inspection. A car with a ticking bomb or poisonous alien is unsafe by definition. It is not a big stretch to conclude that, to prevent such a dangerous instrumentality from being driven, a seller must make at least a minimal inquiry as to the vehicle’s condition.
A second reasonable inference from the law is a duty to advise the buyer regarding the finding. Thus, it appears that the law imposes a gate-keeper obligation upon car sellers to assure that unreasonably unsafe vehicles are not sold and driven by the motoring public. (I hasten to add that there are no cases so holding.)
Moreover, if the law makes it illegal “to permit to be driven” an unsafe car, then a dealer shall not sell an unsafe car in the first place. Selling an unsafe car would be, in the words of section 12-101, “unlawful.” Thus, one could argue, (and it again does not take a big stretch of imagination to conclude) that a duty to disclose is inferred from the IVC. This is an independent source of duty, in addition to whatever duties the UCC imposes on sellers of goods.
Official Comment 3 to section 2-314 of the UCC states, in relevant part:
A person making an isolated sale of goods is not a “merchant” within the meaning of the full scope of this section and, thus, no warranty of merchantability would apply. His knowledge of any defects not apparent on inspection would, however, without need for express agreement and in keeping with the underlying reason of the present section and the provisions on good faith, impose an obligation that known material but hidden defects be fully disclosed.26
Consistent with the provisions on good faith, the UCC imposes a duty to disclose in all sales of goods – not just cars. A seller’s “knowledge of any defects not apparent on inspection would, however, without need for express agreement and in keeping with the underlying reason of the present section and the provisions on good faith, impose an obligation that known material but hidden defects be fully disclosed.” The Seller in our hypothetical knows of the bomb and knows it is hidden from sight. Thus, it would appear that the Seller has a UCC-imposed duty to disclose it. Moreover, while all sellers must act in good faith, for merchants the standard is even higher.27 If our Seller is a merchant, there would be a higher quantum of duty imposed on him.
Consumer Fraud Act
Section 2 of the CFA states, in relevant part that:
concealment, suppression or omission of any material facts… are hereby declared unlawful.28
The CFA imposes a general obligation not to conceal, omit, or suppress material facts.29 One could argue that, under the CFA, the duty that applies across the board, in all transactions subject to the CFA. Just as the duty imposed by the Residential Property Disclosure Act is sufficient to state a claim for fraudulent concealment, similarly the duty imposed – across the board – by the CFA should be sufficient to state a claim for fraudulent concealment. After all, under Illinois common law, “intentional concealment of a material fact is the equivalent of a false statement of material fact.”30
4. Duty Arising from Superior Knowledge
It is the majority view in the United States that “superior knowledge” leads to a duty to disclose,31 and the same rule applies in Illinois.32 The Seller in our hypothetical has superior knowledge – he knows about the ticking bomb and alien – so he would have a duty to disclose under Illinois law. In fact, at least with respect to dangerous instrumentalities, Illinois law imposes a duty of reasonable inspection (and disclosure) upon every seller.33
5. Half-Truths as Leading to a Duty to Disclose
Closely related to the concept of “superior knowledge” is the concept of “half-truth.” It is black-letter law that stating a half-truth imposes a duty of full disclosure.34 In a car buying context, one of the classic examples would be selling a previously-returned car as “new” and describing it as such in sales documents.35 There hardly can be envisioned a transaction in which a seller says absolutely nothing about the goods being sold. Therefore, if, in our hypothetical, the Seller makes any representations about the car, there seems to be a duty to disclose the ticking bomb.
Assuming, however, that our Seller sells the car under a written contract, the contract could make certain representations about the car – such as make, model, price, etc. The proverbial elephant, of course, would be the ticking thing under the seat.
All in all, if a Seller makes any representations during the transaction, under the “half-truth” theory, he then should have a duty to disclose known material facts. That is why when a salesman knows, a corporation also “knows.”36 And, vice versa, if the corporation knows, but keeps its sales force in the dark, to create plausible deniability, this does not get the corporation off the hook.37
6. Duty Arising from Suppression of Material Facts
Another related concept to the above is “suppression of material facts.” As early as 1888, the United States Supreme Court observed, in Stewart v. Wyoming Cattle Ranche Co., “a suppression of the truth may amount to a suggestion of falsehood.”38 Not surprisingly, under Illinois law, suppression of the truth (which, arguably, is more intentional, as compared to “mere” superior knowledge) also supports a claim of fraudulent concealment.39
It would seem beyond dispute that the Seller in the hypothetical “suppressed,” meaning “ke[pt] secret,” or “stop[ed] … [the] revelation of”40 the ticking bomb. Thus, because the Seller “suppressed” a material fact, he had a legal duty to disclose it, and, absent such disclosure, the Buyer would be entitled to claim common-law fraudulent concealment against the Seller.
7. Duty Arising from Inherently Dangerous Nature of the Goods
Another related concept of Illinois law is that a vendor is legally obligated to disclose conditions that make goods dangerous. The test is worth reiterating:
We believe a fair rule to be applied in such a situation is that if the article, being defective, thereby becomes a dangerous instrument, the seller is required to discover such defects as may be discovered by reasonable inspection and to disclose such defects to the buyer.41
If our Seller knows about the bomb, but wants to make the sale anyway, the inherently dangerous nature of the car would require disclosure because the vehicle would become a dangerous instrumentality when on the public streets. Under these facts, the Seller has a duty “to disclose such defects to the buyer.”
A duty to disclose in our hypothetical arises because the goods sold were dangerous and the Seller knew about it (“superior knowledge”). The duty to disclose also arises from several statutory obligations, including that of inspection requirements under the IVC, as well as under the provisions mandating good faith and fair dealings. Thus, it appears that, far from being limited to the instances of fiduciary relationship or special relationships, Illinois, at least implicitly, recognizes a much broader reach of duty that enforces honesty and fair dealings in commercial transactions.
1. Mourning v. Family Publications Service, Inc., 411 U.S. 356, 377 (1973).
2. Reval v. Miller, 178 Ill. App. 208 (1st Dist. 1913) (caveat emptor not applicable if fraud or warranty); cf. Sutter v. St. Clair Motors, Inc., 44 Ill. App. 2d 318, 323-24, 194 N.E.2d 674 (4th Dist. 1963) (caveat emptor should not apply in cases of modern complex machinery, such as automobiles).
3. The Princess Bride, as explained by Miracle Max. https://en.wikiquote.org/wiki/The_Princess_Bride_(film).
4. As depicted in the cult classic Repo Man, https://en.wikipedia.org/wiki/Repo_Man_(film).
5. 625 ILCS 5/12-101(a); Official Comment 3 to 810 ILCS 5/2-314; 815 ILCS 505/2.
6. Illinois Central Gulf R.R. Co. v. Department of Local Gov’t Affairs, 169 Ill. App. 3d 683, 689-90, 523 N.E.2d 1048, 1052 (1st Dist. 1988) (“fraud may be found if one party with superior knowledge and access to material facts fails to disclose them.”).
7. Buechin v. Ogden Chrysler-Plymouth, Inc., 159 Ill. App. 3d 237, 247, 511 N.E.2d 1330, 1336 (2d Dist. 1987) (representation of a car as “new” without revealing that it was in possession of another for a few weeks creates a duty to disclose).
8. Mitchell v. Skubiak, 248 Ill. App. 3d 1000, 1005, 618 N.E.2d 1013, 1017 (1st Dist. 1993) (“While silence in a business transaction does not generally amount to fraud, mere silence is quite different from concealment. Silence accompanied by *** suppression of material facts results in active concealment and it then becomes the duty of a person to speak.”).
9. Kirk v. Stineway Drug Store Co., 38 Ill. App. 2d 415, 428-29, 187 N.E.2d 307, 313 (1st Dist. 1963) (“We believe a fair rule to be applied in such a situation is that if the article, being defective, thereby becomes a dangerous instrument, the seller is required to discover such defects as may be discovered by reasonable inspection and to disclose such defects to the buyer.”).
10. 199 Ill.2d 179, 186, 766 N.E.2d 1118, 1123 (2002).
11. Id. at 186.
12. Cf. Adams v. Northern Illinois Gas Co., 211 Ill.2d 32, 809 N.E.2d 1248 (2004) (gas company had a duty to warn where it was on notice that third-party connectors to a gas stove were defective; constructive notice is sufficient).
13. 810 ILCS 5/1-304, 810 ILCS 5/1-201(19), 810 ILCS 5/1-201(2), 810 ILCS 1/2-4, 810 ILCS 5/2-103(b).
14. Happel, 199 Ill.2d at 186-87 (“superior knowledge,” “the nature of the knowledge’” and “harm [that] might or could occur if no warning is given” are important factors in finding a duty).
15. Connick v. Suzuki Motor Co., Ltd., 174 Ill.2d 482, 500, 675 N.E.2d 584, 593 (1997).
16. State Security Ins. Co. v. Frank B. Hall & Co., 258 Ill. App. 3d 588, 595, 630 N.E.2d 940, 946 (1st Dist. 1994).
17. Connick, 174 Ill.2d at 500-01 (as a pleading matter, in the absence of allegation of fiduciary relationship, a fraudulent concealment claim would not lie where a car manufacturer had no duty to disclose a car’s tendency to roll-over).
18. Id. at 500-01.
19. Id. at 500-01 (as a pleading matter, in the absence of allegation of “influence and superiority,” a fraudulent concealment claim would not lie where a car manufacturer had no duty to disclose a car’s tendency to roll-over).
20. 2015 Ill. App. (2d) 140952 (2d Dist. 2015) (rev’d on other grounds).
21. Id. ¶ 26.
22. Id. ¶¶ 30, 33.
23. 359 Ill. App. 3d 897, 834 N.E.2d 952 (2d Dist. 2005).
24. Abazari, at ¶ 30 (“A party may also be subject to a statutory duty to disclose certain facts. See, e.g., Bauer, 359 Ill. App. 3d at 906 (seller’s duty under Residential Real Property Disclosure Act (765 ILCS 77/35 (West 1996)) supported fraudulent-concealment claim.”). .
25. 625 ILCS 5/12-101(a) (emphasis added).
26. Official Comment 3 to 810 ILCS 5/2-314 (emphasis added).
27. Libertyville Toyota v. U.S. Bank, 371 Ill. App. 3d 1009, 1016, n.3, 864 N.E.2d 850, 856 (1st Dist. 2007) (“The standard of good faith to which a merchant is held is higher than that of a non-merchant.”).
28. 815 ILCS 505/2.
29. Miller v. William Chevrolet/Geo, Inc., 326 Ill. App. 3d 642, 659, 762 N.E.2d 1, 15 (1st Dist. 2001) (CFA imposed an obligation to disclose prior rental history of a car that was sold as “executive driven”).
30. Zimmerman v. Northfield Real Estate, Inc., 156 Ill. App. 3d 154, 161, 510 N.E.2d 409, 545 (1st Dist. 1987).
31. TVT Records v. The Island Def Jam Music Group, 412 F.3d 82, 91 (2d Cir. 2005) (“In the context of a business transaction, the duty to disclose arises where *** one party possesses superior knowledge, not readily available to the other, and knows that the other is acting on the basis of mistaken knowledge).
32. Heider v. Leewards Creative Crafts, Inc., 245 Ill. App. 3d 258, 269, 613 N.E.2d 805, 814 (2d Dist. 1993) (“[S]ilence accompanied by deceptive conduct or suppression of material facts gives rise to active concealment; it is then the duty of the party which has concealed information to speak. *** Illinois law supports the notion that fraudulent concealment may be found in the absence of an affirmative misrepresentation. That is, silence accompanied by deceptive conduct results in an act of concealment, and at that point a duty to disclose arises.”); Washington Corte Condominium Ass’n v. Washington-Golf Corp., 267 Ill. App. 3d 790, 815, 643 N.E.2d 199, 216 (1st Dist. 1994) (“A seller has a duty to disclose facts which materially affect the value or desirability of the property, are known or accessible only to him, and that he knows are not known or accessible to a diligent buyer. *** Similarly, an omission of a material fact has been found to constitute fraud.”)
33. Kirk, 38 Ill. App. 2d at 428-29.
34. Tan v. Boyke, 156 Ill. App. 3d 49, 54-55, 508 N.E.2d 390, 393 (1st Dist. 1987) (representation of the numbers of units in a building, when some of those units were not legal, created a duty to reveal the discrepancy).
35. Buechin, 159 Ill. App. 2d at 247 (representation of a car as “new” without revealing that it was in possession of another for a few weeks creates a duty to disclose); Maxcy v. Frontier Ford, Inc., 29 Ill. App.3d 867, 871, 331 N.E.2d 858, 861 (2d Dist. 1975) (same).
36. United States v. Ladish Malting Co., 135 F.3d 484, 492 (7th Cir. 1998) (corporation knows what is in its computer records as a matter of law).
37. Id. (“Corporations do not record knowledge in neural pathways; they record it in file cabinets (and increasingly on computer disks). File cabinets do not ‘forget.’”).
38. 128 U.S. 383, 388, 9 S.Ct. 101, 103 (1888).
39. Heider, 245 Ill. App. 3d at 269 (“[S]ilence accompanied by *** suppression of material facts gives rise to active concealment”); Mitchell, 248 Ill. App. 3d at 1005 (“While silence in a business transaction does not generally amount to fraud, mere silence is quite different from concealment. Silence accompanied by *** suppression of material facts results in active concealment and it then becomes the duty of a person to speak.”).
40. https://www.merriam-webster.com/dictionary uppress (last visited Sept. 1, 2018).
41. Kirk, 38 Ill. App. 2d at 428-29 (emphasis added).Dmitry Feofanov is a 1994 graduate of Chicago-Kent College of Law. Upon graduation, he clerked for Iowa Supreme Court and Illinois Appellate Court. He is the principal of Chicago LemonLaw.com, P.C. Before establishing ChicagoLemonLaw.com, he was a partner in Brooks, Adams & Tarulis in Naperville.