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Kaloti Enterprises7/8/2005
nsaction between a sophisticated seller and an unsophisticated buyer new to the area. The buyer made an offer to purchase a vacant lot on which the buyer planned to build a residence, and the seller, a real estate development corporation, knew that an underground well was on the property but failed to disclose that information to the buyer. When the excavation started, the well was uncapped and water released. The released water added costs to the construction of the residence and caused other damage. The buyer sued for intentional misrepresentation; the defendant argued that it had no duty to disclose the existence of the well on the property.
The court in Ollerman discussed § 551 of the Restatement (Second) of Torts as the embodiment of several situations in which courts, at the time of adoption of the Restatement (Second) in 1976, were withdrawing from the traditional rule of caveat emptor (let the buyer beware). Ollerman concluded that subsection (1) of § 551 restated the traditional rule "that one who fails to disclose a fact that he knows may induce reliance in a business transaction is subject to the same liability as if he had represented the nonexistence of the matter that he failed to disclose if, and only if, he is under a duty to exercise reasonable care to disclose the matter in question."
The Ollerman court then discussed subsection (2) of § 551 of the Restatement (Second) of Torts setting forth the conditions under which a seller has a duty to disclose certain information. The court was careful to highlight subsection (2)(e), noting that the provision "states that a party to a transaction is under a duty to exercise reasonable care to disclose to the other 'facts basic to the transaction, if he knows that the other is about to enter into it under a mistake as to them, and that the other, because of the relationship between them, the customs of the trade or other objective circumstances, would reasonably expect a disclosure of those facts.'" The Ollerman court acknowledged that this provision was limited to disclosure of "basic facts" to the transaction and that the Restatement differentiated between "basic" facts and "material" facts as follows:
A basic fact is a fact that is assumed by the parties as a basis for the transaction itself. It is a fact that goes to the basis, or essence, of the transaction, and is an important part of the substance of what is bargained for or dealt with. Other facts may serve as important and persuasive inducements to enter into the transaction, but not go to its essence. These facts may be material, but they are not basic.
The Ollerman court expanded § 551(2)(e) to encompass a duty on the part of a sophisticated real estate vendor selling to an unsophisticated consumer to disclose material facts, writing:
Where the vendor is in the real estate business and is skilled and knowledgeable and the purchaser is not, the purchaser is in a poor position to discover a condition which is not readily discernible, and the purchaser may justifiably rely on the knowledge and skill of the vendor. Thus, in the instant case a strong argument for imposing a duty on the seller to disclose material facts is this "reliance factor." The buyer portrayed in this complaint had a reasonable expectation of honesty in the marketplace, that is, that the vendor would disclose material facts which it knew and which were not readily discernible. Under these circumstances the law should impose a duty of honesty [disclosure] on the seller.
Based on the existence of the duty to disclose in the narrow circumstances presented by Ollerman, the court allowed the buyer's intentional misrepresentation claim to go forward.
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