April 2005 Bar Bulletin

 

Negligent Misrepresentation: Don't Speak Foolishly

By Jaime Drozd Allen

 

False statements in a business context are actionable under Washington tort law, even if unintentional. The tort is called negligent misrepresentation and it is a close relative of its much-more-difficult-to-prove cousin, fraud.

Unlike fraud, negligent misrepresentation only requires that the defendant make a false statement negligently, i.e., without reasonable care. This lower level of proof makes negligent misrepresentation claims a popular alternative allegation to fraud. It also makes negligent misrepresentation claims all the more dangerous for an unwitting defendant.

Restatement Elements

Washington law follows the Restate-ment Second of Torts and requires that six elements be met to establish a claim for negligent misrepresentation.1

Negligent misrepresentation occurs when:

  1. in the course of business, profession, or employment, or in any other transaction in which the plaintiff has a pecuniary interest;
  2. the defendant supplies false information for the guidance of others in their business transaction;
  3. the information was such that the defendant knew or should have known was supplied to guide the plaintiff in a business transaction;
  4. the defendant was negligent, or failed to exercise reasonable care or competence in obtaining or communicating the information to the plaintiff;
  5. the plaintiff justifiably relied upon the false information given to it by defendant; and
  6. the false information supplied by defendant was the proximate cause of damage to the plaintiff.2

Falsity

A negligent misrepresentation must actually be false, and a plaintiff must prove by clear, cogent, and convincing evidence that the defendant made a false statement.3 Most often, a negligent misrepresentation is the result of a defendant misrepresenting actual facts. However, a plaintiff may also prevail when a defendant makes a promise with no intention to perform the promise and with the purpose of deceiving the plaintiff.4

False information can be conveyed in the form of a statement or an opinion. Washington courts have found that an opinion letter written by a attorney can contain negligent misrepresentations because the plaintiff justifiably relied that reasonable care would be paid to accuracy.5 The emphasis is on the defendant's duty to supply correct information rather than on the form in which that information is given.

Negligent Statements

A statement is made negligently when a defendant does not exercise reasonable care in making it.6 This can mean that a defendant might not check facts, perform research, or fully grasp the depth of the issues presented.

A negligent misrepresentation can be made without the defendant ever uttering a word. Non-disclosure can lead to a negligent misrepresentation claim when the parties have a fiduciary relationship or a "quasi-fiduciary" relationship.7 A "quasi-fiduciary" relationship occurs when "a special relationship of trust and confidence" is developed between two parties and one party is relying on the superior, specialized knowledge and experience of the other.8

Responsibility for disclosure exists in a fiduciary or quasi-fiduciary relationship only when one party knows facts that are not readily obtainable by the other party.9 For example, in a real estate transaction, the seller can have knowledge of a material fact not easily discoverable by the buyer. The seller and the buyer are in a "quasi-fiduciary" relationship where the buyer relies on the seller's superior knowledge, or knowledge of facts that the buyer could not know. If the seller does not disclose a material fact to the buyer, the seller may be liable for a negligent misrepresentation claim.

Justifiable Reliance

Even if the plaintiff and defendant are appropriate parties and a statement made was actually false and made without reasonable care, plaintiff's still must show they relied on a statement. The tort of negligent misrepresentation does not excuse a plaintiff from exercising common sense. A person relying on a negligent misrepresentation must do so justifiably.10

Justifiable reliance is that reliance that is reasonable under the surrounding circumstances.11 Washington courts interpret this requirement strictly and require that a plaintiff actually suffers some damage as a result of relying on a defendant's negligent misrepresentation. Whether or not a plaintiff justifiably relied on a defendant's misrepresentation is a question of fact.12

Additionally, just because a plaintiff justifiably relies on a defendant's misrepresentation does not mean that the plaintiff recovers completely. Like other torts in Washington, contributory negligence does not bar plaintiff's claim.13 Washing-ton departs from the Restatement of Torts position, and instead apportions fault according to RCW 4.22.050.14

Thus, even if the plaintiff could have "done something more" to avoid the consequences of a negligent misrepresentation, the plaintiff is not barred from recovering damages from the defendant.15 Instead, the plaintiff's recovery will be proportionally discounted relative to the plaintiff's culpability.

Parties to a Negligent Misrepresentation Claim

Defendants

Most defendants in negligent misrepresentation actions are corporations or other businesses or professionals and their speaking agents. Colonial Imports, 121 Wash.2d at 733. Negligent misrepresentation is not meant to punish people for statements made to their friends, family, or casual acquaintances. Only statements made in the course of business, or where a plaintiff has a pecuniary interest, are actionable. See Restatement of Torts (Second) 552(1) (1997).

These claims arise in pure business contexts, such as in a attorney-client relationship (in which case RPCs on this subject also apply), during a real estate transactions (in which real estate regulations may also apply), in dealings with an accountant, or in other business transactions.

Plaintiffs

Not just anyone can recover for negligent misrepresentation. A cause of action "does not extend to every person who becomes aware" of a misstatement.16 A defendant does not need to have a particular person in mind as the intended or probable recipient of the information, but a defendant must know that the information is going to be used for a certain purpose and must intend to supply it for that purpose.17

Additionally, a defendant should at least know that the plaintiff is relying on the representation; or, that the plaintiff is a member of a group that the defendant seeks to influence with the representation; or, that the plaintiff is a member of a group that is going to rely on the representation.18 By limiting the sphere of potential plaintiffs in this manner, the law prevents rumor, gossip, or misunderstandings from becoming the subjects of negligent misrepresentation lawsuits. The limited sphere also protects a defendant from the "telephone game" where a statement is repeated so many times that its substance is morphed into something that was not initially said.

Practical Considerations and Suggestions

Now that you feel like you are walking on a tightrope every time you say something in a business relationship, what can you do?

Draft carefully. Defendants are vulnerable to defending statements they make to those they deal with in business, and possibly to others. Washington follows the "economic loss rule, " which allows parties to allocate the risk of negligent misrepresentation in their contracts.19 Under the economic loss rule, a professional can limit its liability for purely economic losses and damages to entities with whom it has no contractual privity.20

Don't speak foolishly. In business relationships, avoid making statements, opinions, guarantees, or anything of the like about matters which you are unsure. It is better to be safe than sorry and verify the correct information before negligently providing a false statement that might come back to haunt you.


Jaime Drozd Allen is an associate in the Litigation Department at Ogden Murphy Wallace P.L.L.C. She can be reached at jallen@omwlaw.com. The information in this article is not intended as legal advice, nor is it something you should rely on.

1 See e.g. Schaaf v. Highfield, 127 Wn.2d 17, 22, 896 P.2d 665 (1995); Restatement (Second) of Torts 522(1) (1997).

2i ESCA Corp. v. KPMG Peat Marwick, 135 Wn. 2d 820, 827-28, 959 P.2d 651 (1998).

3 Elliot Bay Seafoods, Inc. v. Port of Seattle, 124 Wn. App. 5, 7, 98 P.3d 491, 495 (2004).

4 Sprague v. Sumitomo Forestry Co., Ltd., 104 Wn.2d 751, 762, 709 P.2d 1200 (1985).

5 Lawyers Title Ins. Co. v. Baik, 147 Wn.2d 536, 549, 55 P.3d 619 (2002).

6 See ESCA, 135 Wn.2d at 826.

7 Colonial Imports, Inc. v. Carleton Northwest, Inc., 121 Wn.2d 726, 732, 853 P.2d 913 (1993).

8 Id.

9 Id.

10 ESCA, 131 Wn.2d at 828.

11 Id.

12 Schaff, 127 Wn.2d at 30.

13 ESCA, 135 Wn.2d at 829-30.

14 Id.; cf. Restatement (Second) of Torts 552A (1997) (contributory negligence bars negligent misrepresentation claims).

15 Lawyers Title, 147 Wn.2d at 551.

16 Haberman v. Washington Pub. Power Supply Sys., 109 Wn.2d 107, 163, 744 P.2d 1032 (1987).

17 Id.

18 Id.

19 Griffith v. Centex Real Estate Corp., 93 Wn. App. 202, 211, 969 P.2d 486 (1998).

20 Id.

 

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