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

Yes, Health Source can succeed in a suit against Medico. The basis for the suit could be fraud because Medico had a duty to disclose that the inventory was overstated as soon as Medico learned of that fact.
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. 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 when there is a certain relationship between the parties such as between partners in a partnership or when a party could not reasonably discover a fact known to the other party. An action may also be maintained if, as here, a party that misstates a material fact later learns of the misstatement but does not disclose it to the other party. This is misrepresentation by conduct.
Here, by providing financial statements, Medico made certain representations. Those representations were false, however, as Medico learned. Medico's knowledge of the overstated inventory and failure to disclose this to Health Source indicated intent to deceive. Health Source's reliance on Medico's statements was reasonable and justifiable.