Misrepresentation

Terms:


Material Misrepresentation: 
A false statement that is likely to induce a reasonable person to assent or that the speaker of the false statement knows is likely to induce assent.

Intentional Misrepresentation:
A statement made by the defendant, with the intent to deceive, that is known to be false or made recklessly and without regard to whether it is true or not.

Negligent Misrepresentation:
A careless or inadvertent false statement in circumstances where care should have been taken.


The following four chapters deal with torts that establish liability for the defendant’s actions that directly effect the plaintiff’s economic dealings and well-being.

While misrepresentation represents a tort in and of itself, liability can be established on the basis of intentional torts, negligence and strict liability.

However, the elements required for a prima facie case of misrepresentation, and the scope of liability, will hinge on which of the three basis of liability is used to establish misrepresentation.

Generally, to prove a prima facie case of intentional misrepresentation, the plaintiff must prove that:

  1. The defendant made a material misrepresentation
  2. The defendant had knowledge of the misrepresentation
  3. The defendant intended for the plaintiff to rely on his misrepresentation
  4. There was actual and justifiable reliance on the part of the plaintiff
  5. There were damages sustained by plaintiff

First, the plaintiff must prove material misrepresentation. This means that the plaintiff must prove that there was a misrepresentation of a past or present fact and that the misrepresentation was of the kind that would influence a reasonable person in the plaintiff’s position in the type of business dealing plaintiff is involved in.

Any misrepresentation of a present state of mind or intention is considered a material misrepresentation. For example:

Ori is the owner of a cookie company. Ori is negotiating with Nesley, a chocolate chip manufacturer, to supply Ori with the chocolate chips he needs at $1 per hundred chips. Before Nesley can finalize the deal, Tollhouse tells Ori that Nesley has no intention of entering a deal with Ori for $1 per hundred chips but that Tollhouse will offer the same deal to Ori if Ori signs now. Ori signs a deal with Tollhouse. Since Nesley was about to finalize the deal with Ori, Tollhouse has made a material misrepresentation.

Further, a promise made by someone who has no authority to make a promise is also considered a misrepresentation. Thus, in our above example, if Tollhouse had made the deal with Ori without the authority to do so, Ori could bring a cause of action against Tollhouse as well.

In addition, a fraudulent concealment of facts will also be considered a material misrepresentation. Thus, in our above example, had Tollhouse agreed to supply Ori with chocolate chips that were 25% coco butter when his chips were only 15% coco butter, Tollhouse can be sued for a material misrepresentation.

The exception to this rule is where a bill of sale is marked “as is” and where the plaintiff is charged with some knowledge for the concealed facts.

However, the defendant is not required to disclose facts. Please note that there is a difference between nondisclosure and active concealment. Thus, in our above example, had there been no agreement as to what percentage of coco butter was required by X, D would not be liable for not disclosing that his chips are only 15% coco butter.

However, there are five exceptions to the nondisclosure requirement. The defendant must disclose if:

  1. The plaintiff and defendant have a fiduciary relationship, for example a trustee-beneficiary relationship.
  2. The defendant sells property to the plaintiff and there are certain material facts that the defendant knows and are unknown and not readily accessible to the plaintiff. See Silva v. Stevens, 589 A.2d 852 (Vt. 1991).
  3. The defendant has made ambiguous statements that are misleading to the plaintiff.
  4. The defendant makes true statements to the plaintiff that are later proved false.
  5. The defendant knowingly makes false statements without thinking that anyone will rely on them and then finds out that the plaintiff has, in fact, relied on them.

See Hart v. Browne, 103 Cal. App. 3d 947 (1980).

In the last two cases when the defendant learns that the misrepresentation has taken place, he must disclose the true facts to the plaintiff in order to avoid liability.

Second, the defendant must know that the misrepresentation he made was false or that he had an insufficient basis for deciding that the misrepresentation was true.

If the defendant honestly believes the truth of his statement he will not be held liable for the misrepresentation, no mater how unreasonable his belief in the truth of the statement is.

Third, the defendant must have intended to induce the reliance of the plaintiff. That is to say, the defendant must make his statement with the intent that the plaintiff will trust his statement and actually rely on it in determining his course of action. That being the case, the plaintiff must prove that the defendant’s misrepresentation played a substantial part in determining the plaintiff’s course of action. See Metric Investment, Inc. v. Patterson, 244 A.2d 311 (N.J. 1968).

Fourth, the plaintiff’s reliance must be justifiable. That is to say, it must have been reasonably foreseeable that the plaintiff would rely on the defendant’s misrepresentation. Thus, in our above example, if it was reasonably foreseeable that Ori would rely on Tollhouse’s misrepresentation to pull out of negotiations with Nesley, Tollhouse can be held liable.

However, even where reliance was reasonably foreseeable to the defendant, liability may still depend on the type of representation the defendant made to the plaintiff.

If the plaintiff relies on statements of fact, reliance will always be justified and the defendant will always be held liable unless the facts are obviously false.

However, reliance on the defendant’s statements of opinion is usually not justified, and the defendant will not be held liable, unless:

  1. The defendant has superior knowledge not available to plaintiff (for example the defendant is a dealer of special goods).
  2. The defendant has a fiduciary duty to the plaintiff.
  3. the plaintiff and defendant are affiliated or related in some way (example the plaintiff and defendant are members of the same club and the defendant has the plaintiff’s confidence).
  4. The defendant offers the plaintiff advice about a business transaction without telling the plaintiff that he has an interest in the deal.

Finally, plaintiff must prove actual damages in order to recover.

Cases involving negligent misrepresentation usually feature defendants who are in the business of supplying information to other people for guidance on business transactions.

In order to prove a prima facie case of negligent misrepresentation, the plaintiff must prove that the defendant made a negligent misrepresentation to the plaintiff, that there was actual and justifiable reliance on the misrepresentation, that the misrepresentation was the actual and proximate cause of the plaintiff determining his course of action, and that there were damages suffered. See Ritter v. Custom Chemicides, Inc., 912 S.W.2d 128 (Tenn. 1995).

The same kind of misrepresentation that forms the basis of intentional misrepresentation can form the basis for negligent misrepresentation.

If the defendant volunteers information in a noncommercial or nonprofessional setting, the defendant will be liable only if he made intentional misrepresentations to the plaintiff.

However, if the defendant provides the plaintiff with information that the defendant either knows or reasonably foresees that the plaintiff will rely on in a business transaction, the defendant has a duty to exercise reasonable care to discover the truth or falsity of the information.

Further, the defendant does not have to transmit the information directly to the plaintiff in order to be liable. If the defendant makes his representation to a third person with the knowledge that the third person will pass the information along to the plaintiff, the defendant will be held liable if the information is false.

Next, in order to have a viable cause of action, the plaintiff must prove that it was reasonably foreseeable that he would rely on the defendant’s misrepresentation.

However, while, for intentional misrepresentation, the plaintiff has no duty to investigate the truth of the defendant’s statements, the plaintiff’s failure to investigate the truth of the defendant’s statements will be considered contributory negligence in a cause of action for negligent misrepresentation.

Finally, the plaintiff will have to prove that the defendant’s negligence was the actual and proximate cause of the plaintiff’s actions and that the plaintiff suffered damages.

There are certain defenses that the defendant will be able to raise.

Contributory negligence is a valid defense to negligent misrepresentation. Assumption of the risk will be a viable defense as well.

Typically, there is no defense to intentional misrepresentations. Some states will protect the defendant from liability for intentional misrepresentation if the plaintiff signs a contract saying that he is not relying on defendant’s statements. However, most states consider these contracts void and will not protect the plaintiff from liability.

As far as damages go, most courts allow the plaintiff to recover the value of the property contracted for had the representation been true minus the actual value of the property. This is known as the "benefit of the bargain".

In addition, some jurisdictions allow the plaintiff to recover for emotional distress if emotional distress is a consequence of the misrepresentation.

Finally, punitive damages may be recovered if the misrepresentation was made intentionally.

 

See Also: