Other torts - Claims based on misrepresentations, and defenses

Learning Outcomes

This article examines tort claims based on misrepresentations and related defenses. It distinguishes intentional misrepresentation (fraud) from negligent misrepresentation, detailing the elements required for each claim. It also covers common defenses. Upon completion, you will be able to identify the elements of misrepresentation torts and analyze relevant defenses, preparing you to tackle MBE questions on this topic.

MBE Syllabus

For the MBE, you must be familiar with torts arising from misrepresentations. This includes understanding the different levels of culpability and the elements required for liability, as well as applicable defenses. You should be prepared to:

• Identify the elements of intentional misrepresentation (fraudulent misrepresentation or deceit).
• Distinguish intentional misrepresentation from negligent misrepresentation.
• Analyze the element of scienter (knowledge of falsity or reckless disregard for truth) in intentional misrepresentation.
• Assess justifiable reliance by the plaintiff.
• Determine causation and damages in misrepresentation claims.
• Recognize defenses such as truth and privilege.

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. Which of the following states of mind is required for intentional misrepresentation (fraud)?
   1. Negligence as to the truth or falsity of the statement.
   2. Strict liability for any false statement made.
   3. Scienter (knowledge of falsity or reckless disregard for the truth).
   4. Intent to cause emotional distress.
2. A plaintiff's reliance on a misrepresentation is generally NOT justified if:
   1. The plaintiff could have discovered the truth through reasonable investigation.
   2. The statement was one of opinion rather than fact.
   3. The defendant did not intend for the plaintiff specifically to rely.
   4. The misrepresentation was not the sole factor inducing the plaintiff's action.
3. In an action for negligent misrepresentation, to whom does the defendant typically owe a duty of care?
   1. Any person who foreseeably might rely on the misrepresentation.
   2. Only those persons with whom the defendant is in contractual privity.
   3. Only the person to whom the misrepresentation was directly made.
   4. Persons whom the defendant knows will rely on the information in a specific transaction.

Introduction

Beyond negligence and intentional torts involving physical harm, the MBE tests liability for misrepresentations that cause pecuniary loss. These claims center on false statements made by a defendant upon which a plaintiff relies to their detriment. The key distinction lies in the defendant's state of mind: intentional misrepresentation (also known as fraud or deceit) requires scienter, while negligent misrepresentation requires only a breach of a duty of care in making the statement, typically within a business or professional context. Understanding the distinct elements and defenses for each is critical for MBE success.

Intentional Misrepresentation (Fraud/Deceit)

Intentional misrepresentation requires the plaintiff to prove several elements: (i) a misrepresentation by the defendant, (ii) scienter, (iii) intent to induce the plaintiff's reliance, (iv) causation (actual reliance), (v) justifiable reliance by the plaintiff, and (vi) damages.

Misrepresentation

A misrepresentation is a false assertion of fact.

• Fact vs. Opinion: Statements of opinion are generally not actionable unless made by someone with superior skill or judgment in the subject matter, or where the parties stand in a fiduciary relationship. However, an opinion implying knowledge of facts can be actionable if the implied facts are false.
• Concealment and Nondisclosure: While generally there is no duty to disclose facts, active concealment of a material fact can constitute a misrepresentation. Nondisclosure can also be actionable where there is a fiduciary relationship or where a party knows the other is mistaken about a basic assumption and nondisclosure would violate good faith and fair dealing.

Key Term: Misrepresentation A false assertion of fact. Can be affirmative (a false statement) or arise from active concealment or, in limited circumstances, nondisclosure.

Scienter

Scienter requires that the defendant made the statement knowing it to be false or with reckless disregard as to its truth or falsity. Innocent or negligent misstatements do not meet the scienter requirement for fraud.

Key Term: Scienter The state of mind required for intentional misrepresentation; specifically, knowledge that a statement is false, or reckless disregard for its truth or falsity.

Intent to Induce Reliance

The defendant must have intended that the plaintiff (or a class of persons to whom the plaintiff belongs) act or refrain from acting in reliance upon the misrepresentation. Intent may be found even if the representation was not made directly to the plaintiff, if the defendant knew the plaintiff was likely to rely on it (e.g., providing false financial information to a credit agency knowing potential lenders will rely on it).

Causation (Actual Reliance)

The plaintiff must show that they actually relied on the misrepresentation. It need not be the sole factor inducing the action, but it must have been a substantial factor.

Justifiable Reliance

The plaintiff's reliance must have been justifiable. Reliance is generally justifiable on representations of fact. Reliance on opinions is usually not justifiable, subject to exceptions (e.g., superior knowledge of defendant). Plaintiff is generally not required to investigate the truthfulness of the defendant’s statement.

Key Term: Justifiable Reliance Reliance is justifiable if a reasonable person in the plaintiff's position would have relied on the misrepresentation. It is typically found for statements of fact but not opinion (subject to exceptions).

Damages

The plaintiff must prove actual pecuniary loss. Most courts allow recovery of "benefit-of-the-bargain" damages (value as represented minus actual value received). Some courts limit recovery to out-of-pocket losses. Punitive damages may be available if malice is shown.

Worked Example 1.1

Seller owned a car with a known engine defect that would cause intermittent stalling. When Buyer asked about the car's condition, Seller said, "It runs great, never had a problem with it." Buyer, relying on this statement, purchased the car. The car stalled frequently, requiring expensive repairs. Buyer sued Seller for intentional misrepresentation. Will Buyer likely prevail?

Answer: Yes. Seller made a misrepresentation of fact (about the car's condition) with scienter (knowing it was false). The statement was intended to induce Buyer's reliance, Buyer actually relied, the reliance was justifiable (Buyer isn't expected to independently verify Seller's statement about the car's history), and Buyer suffered pecuniary damages (repair costs).

Negligent Misrepresentation

Negligent misrepresentation occurs when the defendant breaches a duty of care by providing false information in a business or professional context, upon which the plaintiff justifiably relies, causing pecuniary loss.

Duty and Breach

A duty typically arises only when the defendant has a pecuniary interest in the transaction or is acting within a business or professional capacity. The defendant breaches this duty by failing to exercise reasonable care in ascertaining the accuracy of the information provided.

Limited Scope of Liability

Liability for negligent misrepresentation is typically confined to the persons or limited group of persons for whose benefit and guidance the defendant intends to supply the information or knows the recipient intends to supply it. Foreseeability of reliance by a broader group is generally insufficient.

Key Term: Negligent Misrepresentation A misrepresentation made carelessly, in breach of a duty owed, typically in a business or professional setting, causing justifiable reliance and pecuniary loss to a limited group to whom the duty was owed.

Causation, Reliance, and Damages

Actual and justifiable reliance, and pecuniary damages, must be shown, similar to intentional misrepresentation. Reliance damages (out-of-pocket loss) are typically awarded.

Worked Example 1.2

Accountant negligently prepares financial statements for Client Corp, knowing Client Corp will show them to Bank to obtain a loan. The statements materially overstate Client Corp's assets. Bank relies on the statements and issues the loan. Client Corp defaults. Can Bank sue Accountant for negligent misrepresentation?

Answer: Yes. Accountant, acting in a professional capacity, breached a duty of care in preparing the financials. Bank was a known recipient whom Accountant knew would rely on the information for a specific transaction (the loan). Bank justifiably relied and suffered pecuniary loss.

Defenses to Misrepresentation Claims

Truth

Truth is a complete defense to any misrepresentation claim. If the statement was factually accurate, there can be no liability.

Privilege

Statements made under circumstances creating an absolute or qualified privilege (similar to defamation privileges) may be protected. For example, statements made during judicial proceedings are absolutely privileged.

Exam Warning

Distinguishing between intentional and negligent misrepresentation is essential. Focus on the defendant's state of mind: scienter (knowledge or recklessness) is required for intentional misrepresentation, while mere lack of reasonable care suffices for negligent misrepresentation (but only in specific contexts, usually business/professional). Remember that liability for negligent misrepresentation is typically narrower regarding the class of potential plaintiffs.

Key Point Checklist

This article has covered the following key knowledge points:

• Misrepresentation torts address pecuniary loss caused by false statements.
• Intentional Misrepresentation (Fraud/Deceit) requires: (1) Misrepresentation of material fact, (2) Scienter, (3) Intent to induce reliance, (4) Causation (actual reliance), (5) Justifiable reliance, (6) Damages.
• Scienter means the defendant knew the statement was false or acted with reckless disregard for its truth.
• Negligent Misrepresentation requires: (1) Misrepresentation in a business/professional capacity, (2) Breach of duty of care, (3) Causation, (4) Justifiable reliance, (5) Damages, (6) Plaintiff is within limited group defendant intended to reach.
• Reliance is justifiable on facts, generally not opinions (unless exceptions apply).
• Truth is a complete defense.

Key Terms and Concepts

• Misrepresentation
• Scienter
• Justifiable Reliance
• Negligent Misrepresentation