Generally, in contracts, there is no duty placed on a contracting party to disclose material facts which he knows will influence the other contracting party in coming to a decision about the contract. In contracts for the sale of goods, the maxim is caveat emptor, which means ‘let the buyer beware’. There is a duty on each party to inform himself of all the materials facts, which he requires before entering into a contract. What is important to note, therefore is that silence does not generally amount to misrepresentation consequently, a party to a contract need not disclose material facts within his knowledge to the other party.
However, there are exceptions to the caveat emptor rule, and in the case of certain contracts, the law casts upon the seller a duty to disclose material fact to the other party.
In other words, there are certain situations in which the circumstances are such that only one of the parties to the contract is peculiarly possessed of some material facts, and the law imposes a duty on him to disclose these facts with the utmost good faith, i.e., uberrima fides. It follows that in such contracts, a higher duty is imposed than mere abstinence from innocent misrepresentation or fraud. It is said, therefore, that in such cases, uberrima fides is demanded and the contracts are designated contracts uberrimae fidei (of the utmost good faith), and failure to disclose any material fasts constitute constructive fraud, and that will be a valid ground to rescind the contract. In these contracts, the duty of disclosure is imposed, not because of any particular relation between the parties, but because of the nature of the contract.
Referring to this class of contracts in Davies v. London and provincial Marine Insurance Co. (1878) 8 Ch. D. 469, at p.475, Foy, J. said:
Very little said which ought not to have been said and very little not said which ought to have been said, would be sufficient to prevent the contract being valid.
The following contracts come under uberrimae fidei principle, and can be rescinded unless there has been a full disclosure of material facts:
1. Contracts of insurance
2. Contracts to purchase shares in companies 3. Contracts of family arrangement
4. Contracts of sale of land
5. Contracts in which a fiduciary relationship exists between the parties.
3.4.1 Contract of insurance
Contracts of insurance provide an outstanding example of contracts uberrimae fidei. All insurance contracts, whether marine, fire, life, motor vehicle or burglary, are contracts uberrimae fidei. It is a common law rule that every contract of insurance requires full disclosure of material facts to the insurer, as are known to the assured, so that the insurer may be acquainted with the exact character of the risk which he is accepting. What this means is that the assured should not keep back any information which might influence a prudent insurer in determining whether to accept or reject the risk because the insurer undertakes to insure a person or thing only after all material facts have been disclosed. A fact is, therefore deemed to be materials if it will influence the judgment of a prudent insurer in fixing the premium or in determining whether or not to take the risk.
Generally, the insurance company gives that prospective assured a proposal form to fill and assured later signs a declaration vouching the veracity of the statements he has stated, and further agrees that they be incorporated as terms of the insurance contract. Failure to disclose a material fact renders the contract voidable at the instance of the insurer. It is upon the disclosure material facts that the insurer fixes the premium and or determines whether he will take the risk or not. The assured cannot escape liability by arguing that he did not consider, or believe that the facts were material. In a proper case, it is the duty of the court to decide whether the facts in issue are material or not.
The right if the insurer to avoid the contract for non-diclosure of material facts is not affected by the fact that the insured has no intention to conceal the facts. Thus , in Akpata and anor. v. African Alliance Insurance Co. Ltd. (1969) FNLR 111, the deceased failed to disclose in the proposal form that he was previously insured. It was held that the non-diclosure was sufficient ground for the avoidance of the contract by the insurance defendant company.
3.4.2 Contract to Purchase Shares in Companies
If a company issues a prospectus inviting the public to buy shares in the company, such prospectus must contain a full disclosure of the material circumstances of the company.
Kit should be accompanied by, and is in fact usually accompanied by statements of the company’s financial position, the value of their assets, the state of the company’s business, the profits and the dividends declared, etc. Thus, all the material facts which can help the public in deciding whether or not to buy a share are peculiarly within the knowledge of the company’s board and officials. It is therefore imperative that the company should disclose all relevant facts, if the public is not to be defrauded, particularly by promoters who set up new companies. Venezuela Railway v. Kisch (1867) LR 2. HL 99, at p.113
Statutory intervention has however strengthened and added clarity and precision to this formerly rather rebulous are of the law. Under the Companies Act, 1968, the promoters of a company who invite people to take shares in the company under a prospectus are under a duty to make full disclosure in their prospectus of material facts which will influence the decision of a subscriber to purchase the shares of the company. The Act also provides civil and criminal remedies for untrue statements in the prospectus including rescission of the contract for a misstatement as well as the payment of compensation by those who authorize the issue of such prospectus.
3.4.3 Contracts of Family Arrangement
When members of a family make arrangement for the settlement of the family property, for example, as regards inheritance and succession, each member of the family must make full disclosure of every material fact within his knowledge. Thus ,in Gordon v.
Gordon (1917) 3 Swanst. 400, two brothers entered into an arrangement for the division of the family property, on the mistaken assumption that the eldest son had been born before his parents were married and was illegitimate. It was discovered 19 years later that the younger son had withheld knowledge of a marriage ceremony that had taken place between his parents before the birth of the eldest son; which meant that the eldest son had been legitimated all along. It was held that the agreement could be set aside upon the discovery of the elder brother of the true state of affairs, as the younger brother should have disclosed the true facts at the time the agreement was entered into.
However in the more recent case of Wales v. Wadham (1977)1 WLR 199 a wife was negotiating a financial settlement with her husband after divorce, and she failed to disclose the fact that she intended to remarry. It was held that she was under no duty to disclose this fact. The above decision seems to have created some uncertainty in the status of family arrangement as an exception to the non-disclosure rule. This may perhaps be explained by the particular circumstances of this case, in that the parties had been negotiating a compromise on the basis that neither party was required to make a full disclosure.
3.4.4 Contracts for the Sale of Land
Generally, contract for the sale of land is governed by the principle of caveat emptor (let the buyer beware). The vendor owes no duty to disclose latent defects to the purchaser.
But in one sense, contract for the sale of land is categorized under contract uberrimae fidei, to the extent that the vendor is under a duty to disclosure all defects in title. In other
words, although contracts for the sale of land are not strictly ones requiring uberrimae fidei (the vendor does not have to disclose all material facts), in certain circumstances, the vendor is obliged to disclose, for example, when the title is defective. If there is a misdescription of the vendor’s interest in the land or the extent of the land being offered for sale, the purchaser can avoid the contract. Thus in the Nigerian case of Bamgbala v.
Deputy Sheriff of Lagos and CFAO, Suit No. LD/568/85 of 11th April, 1967 (unreported), the plaintiff bought a piece of land in a public auction conducted by the first defendant. The property was sold in order to satisfy the money owed by one A.A.
Oshodi, a judgment debtor in Suit No. LD/4/1956, in which CFAO was the second defendant. At the auction sale, representatives of the Oshodi family cried out against the sale and warned against the futility of such sale. The plaintiff was however declared the purchaser by the auctioneer on payment of £1,050 but he was unable to prevail on the Registrar of Titles in Lagos to register the certificate of purchase and the Deed of Ratification. The plaintiff brought this action claiming an order rescission and refund of the purchase price alleging that there was misrepresentation as to the quantum of the estate pt out for sale. The defendant resisted the action and submitted that the doctrine of caveat emptor should be invoked against the plaintiff. The court rejected the defendant’s submission and gave judgment for the plaintiff.
3.4.5 Contract in which a Fiduciary Relationship Exists Between the Parties
Utmost good faith is imposed in equity on the parties to a contract where one person stands in a fiduciary or confidential relationship with another in the sense that the party in whom confidence is reposed is obliged to make full disclosure of all materials facts and also employ reasonable care in relation to the affairs of the other party. In other words, uberrimae fidei is also required to be shown in certain cases in which a fiduciary relationship exists between the parties.
In all cases of fiduciary relationship, the law assumes that one person is in a superior position to the other, and the trust and confidence of the other person is reposed in him.
The party in the superior position is therefore in a position to take advantage of the other party in a contract between the two. The court will declare the contract voidable and therefore susceptible to rescission by the other party id the terms are regarded by the court as being unfair to him. Thus, in cases of contracts between partners, principal and agent, sureties, solicitor and client, a guardian and his ward, trustee and cestui que trust (beneficiary) physician and patient, and various other cases which are not possible to enumerate, the most frank disclosure must be made by the partners, the agent, the creditor, the solicitor, the guardian, the trustee, the patient or other person in a fiduciary position.
An instance of the fiduciary duty is offered by the case of London General Omnibus Co.
v. Holloway (1912) 2 KB 72. In that case, Holloway entered into a ‘fidelity bond’ to acts as surety for the proper discharge of the duties of an employee of the plaintiff company.
Although the company was aware that the employee had previously been guilty of dishonesty, they did not inform Holloway of this fact. The employee was subsequently guilty of theft, and the company sued Holloway upon the bond. It was held that,
Holloway could avoid his liability, as the company should have disclosed the previous dishonesty of the employee.
It should be noted that tin all cases of fiduciary relationships, an absence of honesty is not essential. Failure to disclose a material fact, which would have been favourable to the second party is sufficient. Thus, in Tate v. Williamson (1886) LR 2 Ch. App. 55 and oxford undergraduate finding himself in financial difficulties, sought the advice of his tutor. The tutor advised him to sell some land belonging to him, and offered to buy it himself. He (the tutor) failed to disclose to the student that the land contained some minerals, which would have considerably enhanced its market value, and so bought it for half the price it would otherwise have fetched. After the infant had drunk himself to death at the age of 24, his executors brought an action, to challenge the validity of the agreement. It was held that, the tutor was guilty of constructive fraud, and that the agreement was voidable at the instance of the infant’s executors.
Finally, it may be added that although certain relationships in the business world, for example, principal and agent, partners, a company and its promoters, come within the class of those that involve fiduciary relationships, the fiduciary duty in these cases is not so stringent and does not go beyond the duty to disclose.
4.0 CONCLUSION
You have now completed a very important topic in the law of contract. In the business world, ‘representations’ are an integral part of the negotiating process by which the parties to a potential agreement ultimately reach decision on whether or not to proceed.
While you have seen that it is not always easy to claim that a person has made a fraudulent misrepresentation which we honestly believe to be true, but which, in fact, is wrong. With the pressures inherent in the hurly-burly of Nigeria process, Aba, Kano and Lagos commercial world, it is not uncommon to find that negligent misstatements have been made regarding, say, the attributes of a flat or been prepared for a corporate client. It is obvious that misrepresentation can vitiate a contract you now understand the different types of misrepresentation and the consequences of each on the validity of a contract.
5.0 SUMMARY
You have learnt that for a contract to be valid, it must satisfy some conditions precedent.
These precedents entail and contain essentially the embodiment of the fundamental rules of contract. Misrepresentation is an essential ingredient in contract that must be fulfilled before a contract can be declared valid.
6.0 TUTOR-MARKED ASSIGNMENT