What is negligent misrepresentation, and when can it be claimed?

Negligent misrepresentation refers to a false statement made by one party to another without reasonable grounds for believing the statement is true, leading to harm or financial loss for the party who relied on the false information. Unlike fraudulent misrepresentation, negligent misrepresentation does not involve intentional deception, but rather a lack of due diligence or care in making the statement.

Key Elements of Negligent Misrepresentation

To successfully claim negligent misrepresentation, the following elements must generally be proven:

• False Statement: There must be a false representation of a material fact. The statement can be made verbally, in writing, or through conduct, but it must be objectively false or misleading.
• Duty of Care: The party making the statement must owe a duty of care to the person who is harmed by the misrepresentation. This duty often arises in situations where there is a relationship of trust or reliance, such as between a professional and a client, a seller and a buyer, or an employer and an employee.
• Failure to Exercise Reasonable Care: The person making the statement must have failed to exercise reasonable care in ensuring the accuracy of the information. This means that they did not take adequate steps to verify the truthfulness of the statement or were negligent in their inquiry or investigation.
• Reliance on the Statement: The party receiving the statement must have reasonably relied on it. The person harmed must have believed the false statement and acted upon it in a way that caused them harm.
• Harm or Damage: The party who relied on the false statement must have suffered some form of damage as a result of the misrepresentation. This harm could be financial, emotional, or reputational, and must be directly linked to the reliance on the false information.

Legal Basis for Claiming Negligent Misrepresentation

A claim for negligent misrepresentation is often based on the theory that the defendant’s failure to act with reasonable care in making the statement caused foreseeable harm to the plaintiff. The plaintiff can seek damages to compensate for financial losses or other harm directly resulting from their reliance on the false information.

When Can Negligent Misrepresentation Be Claimed?

Business Transactions

Negligent misrepresentation is frequently claimed in business transactions where one party provides false information to induce another to enter into a contract or make a financial decision. For example, if a seller provides inaccurate financial information about a business to a buyer, and the buyer relies on this information to their detriment, a claim of negligent misrepresentation could arise.

Professional Settings

Professionals, such as accountants, lawyers, real estate agents, or financial advisors, may be liable for negligent misrepresentation if they provide incorrect advice or information to clients. These professionals owe a duty of care to their clients and can be held accountable if their advice leads to financial loss or other harm due to negligence.

Real Estate Transactions

A common situation in which negligent misrepresentation arises is in real estate transactions. If a seller or real estate agent makes false claims about the condition of a property, and the buyer relies on this information when purchasing the property, the buyer may be entitled to claim negligent misrepresentation.

Financial or Investment Advice

Negligent misrepresentation can also occur in the context of financial or investment advice. If a financial advisor provides incorrect or misleading information about an investment opportunity and the client suffers financial loss as a result, a claim for negligent misrepresentation may be pursued.

Example of Negligent Misrepresentation

Imagine a company is selling a piece of industrial equipment. The salesperson makes a statement that the equipment has never been used, when in fact it has been in service for several years. The buyer, relying on the salesperson’s statement, purchases the equipment at a high price. Later, the buyer discovers that the equipment is not as described, and the buyer suffers financial loss due to repairs and a decrease in the equipment’s value.

In this case, the buyer could claim negligent misrepresentation against the company or salesperson. They would need to prove that:

• The false statement was made.
• The salesperson owed them a duty to provide accurate information.
• The salesperson failed to verify the truth of the claim.
• The buyer relied on the false statement in deciding to purchase the equipment.
• The buyer suffered financial loss as a result of the reliance.

Damages in Negligent Misrepresentation Claims

The damages available in a negligent misrepresentation claim typically include compensation for actual financial losses incurred as a result of relying on the false statement. In some cases, damages for emotional distress may also be claimed if the misrepresentation caused significant personal harm.

Unlike fraudulent misrepresentation, which may also lead to punitive damages (to punish the wrongdoer), negligent misrepresentation typically only results in compensatory damages to make the plaintiff whole again.