Alpha Investments, Inc., offers to buy Beta Computer Corporation. On May 1, Beta gives Alpha copies of Beta's financial statements for the previous year. The statements show an inventory of $1 million. On May 15, Beta discovers that the previous year's inventory is overstated by $500,000, but does not inform Alpha. On June 1, Alpha, relying on the financial statements, buys Beta. On June 10, Alpha discovers the inventory overstatement. Can Alpha succeed in a suit against Beta for fraud?

Question

What will be an ideal response?

Answer 1

Yes, Alpha can succeed in a suit against Beta for fraud, because Beta had a duty to disclose that the inventory was overstated as soon as Beta learned of that fact. Ordinarily, no party to a contract has a duty to come forward and disclose facts. Each party is responsible for the use of common sense and normal business sense in negotiating a contract. An action for fraud can be based on a failure to disclose material facts if there is a certain relationship between the parties such as between partners in a partnership or a party could not reasonably discover a fact known to the other party. An action may also be maintained if, as here, a party who misstates a material fact later learns of the misstatement. The elements of an action for fraud are (1) the misrepresentation of a material fact, (2) the intent to deceive, and (3) the innocent party's justifiable reliance on the misrepresentation. Here, by providing financial statements, Beta made certain representations. Those representations were false, however, as Beta learned. Beta's knowledge of the overstated inventory and failure to disclose this to Alpha evidenced intent to deceive. Alpha's reliance on Beta's statements was reasonable and justifiable.