Liability under Negligent Misrepresentation

Negligent Misrepresentation

Negligent misrepresentation is an interesting cause of action that allows third parties to sue professionals outside privity of contract. Privity of contract exists between the actual parties to a transaction. While the law requires that parties have privity of contract for liability to be possible under claims like breach of contract, contractual privity is not necessary when claiming negligent misrepresentation. This blog addresses the requirements of negligent misrepresentation and discusses various professionals who potentially face liability (the list of professionals is not exhaustive).

To succeed on a claim of negligent misrepresentation, the plaintiff must prove the following elements:

  • The defendant made a representation in the course of his business or in a transaction where he has a pecuniary interest;
  • The defendant “supplies false information for the guidance of others in their business transactions”;
  • The defendant “fails to exercise reasonable care or competence in obtaining or communicating the information”;
  • The plaintiff justifiably relied on said representation; and
  • The negligent misrepresentation of the defendant proximately caused the plaintiff’s injury.

 

McCamish v. F.E. Appling Interests, 991 S.W.2d 787, 791 (Tex. 1999).

These elements derive from the Restatement (Second) of Torts § 552 (1977), which Texas has adopted. See id. In adopting, Texas recognized that a professional owes a duty of care even to a nonclient; this duty requires the professional to use reasonable care to provide the nonclient with accurate information. See In re Enron Corp. Secs., 235 F. Supp. 549, 607 (S.D. Tex. Dec. 20, 2002).

The case Cook Consultants, Inc. v. Larson is illustrative of the need for this duty of care. 700 S.W.2d 231, 233-36 (Tex. App.—Dallas 1985). Cook Consultants is a case initiated by a homebuyer against a surveyor, although the surveyor had a contract with the homebuilder. Id. at 233. The court addressed why privity was not required for liability to the nonclient: “The closeness of the connection between the negligent act and the injury validates the inference that the injury was reasonably foreseeable, irrespective of contractual privity.” Id. at 236. In that case, the homebuilder hired the surveyor to survey the lot where the buyer was building a house. Id. at 233. The surveyor represented that the house fell within the lot lines, although it did not. Id. This was discovered after the plaintiff’s neighbor hired his own surveyor, who discovered the error. Id. A lawsuit ensued between the neighbor and homebuyer, upon which the homebuyer had to demolish the entire structure. Id. The court held that the surveyor owed a duty of care to the homebuyer as the resulting injury was foreseeable. Id. The court stated: “[W]e hold that since the very purpose of the survey was, ultimately, to facilitate purchase of the house, the injury was foreseeable, and public policy dictates imposition of a duty of care to the purchaser.” Id. at 236.

Cook Consultants presents just one example of a professional who has been held liable for negligent misrepresentation. There have been many other professionals held liable: “The Texas Supreme Court observed that other courts, both state and federal, under Texas and other states’ laws, have applied § 552 to . . . auditors, physicians, securities placement agents, accountants, real estate brokers, title insurers, as well as other types of evaluations issued by the professional, e.g., warranty deeds, title certificates, offering statements, offering memoranda, placement memoranda, deeds of trust, annual reports, and opinion letters.” In re Enron, 235 F. Supp. at 607.

Section 552 also extends to lawyers as negligent misrepresentation creates an independent duty to nonclients apart from the professional duty lawyers owe their clients; thus, a negligent misrepresentation claim is distinct from a legal malpractice claim. See McCamish, 991 S.W.2d at 792. In McCamish, the Court also addressed the intent required to hold the professional liable for negligent misrepresentation. Id. at 794. The professional has to intend to provide the information for the benefit and guidance of the third party, or at least know that the recipient of the information intends to provide it. Id. Thereafter, the third party has to rely upon the information in a transaction that the professional intends for the information to influence or in a transaction that the professional at least knows the recipient so intends. Id. The Court summarized this by stating: “This formulation limits liability to situations in which the attorney who provides the information is aware of the nonclient and intends that the nonclient rely on the information.” Id.

Negligent misrepresentation is a broad encompassing cause of action that extends to various professionals in many realms. While professionals should be cognizant of this cause of action, recognizing that they can be sued outside their contractual obligations, potential plaintiffs can raise negligent misrepresentation as a viable cause of action when facing damages as a third party to a transaction.
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