The Tort of "Negligent Misrepresentation" is very much akin to ordinary "Negligence," in that it imposes liability upon the defendant for negligently making a statement upon which the plaintiff has relied to his or her detriment. Of course, since "Negligent Misrepresentation" is really based upon the concept of "Negligence," before any liability can be imposed for a negligently made "misrepresentation," it must first be determined (by the court) that the defendant actually owes some DUTY to the plaintiff who in fact relied upon that statement. Thus, if the defendant, during a lunch conversation with some co-workers, states that "I just heard that stock in XYZ Corp. could be purchased for half their value ...." and one of the co-workers to whom the statement was made subsequently rushes out and purchases shares in XYZ Corporation just before the corporation goes bankrupt, the defendant will NOT be liable because there was NO DUTY owed to the co-worker to convey a correct statement about the XYZ Corp. (or to refrain from communicating an incorrect one). However, if the defendant happens to be the CEO of XYZ Corp. and he communicates the very same "mis"information to other officers at a corporate board meeting, the defendant MAY now be liable if that statement was negligently made. The DUTY in the latter scenario arises by virtue of a "special fiduciary relationship" between the CEO and the other officers of the Corporation that simply did not exist between one worker and a co-worker. Thus, in "Negligent Misrepresentation" questions of DUTY are resolved just as they are in cases involving ordinary common law "Negligence." Likewise, once a duty is established in cases involving the Tort of "Negligent Misrepresentation," the additional elements pertaining to breach, causation and damages must also be proven in order to present a prima facie case of liability.

The Common Law of "FRAUD" (a.k.a "Deceit") in certain situations does allow for liability to be extended to third parties (i.e., persons who do not deal directly with the defendant but who are, nonetheless, harmed as a direct and proximate result of the defendant's "misrepresentation.") However, such third party liability is greatly limited by legal principles relating to the general concept of "foreseeability." Thus, in Bily v. Arthur Young & Co., 834 P.2d 745 (Cal. 1992), the California Supreme Court did permit an action based upon the Tort of "Deceit" to be maintained by members of a class of persons whom the defendant either intended or at least reasonably should have foreseen might rely upon its representations.

Likewise, in actions based upon the Tort of "Negligent Misrepresentation" liability may also be imposed against the defendant who negligently misrepresents some fact upon which a third person reasonably relies to their detriment. Just as with the Tort of "Fraud," before any such liability can be extended to third parties (i.e., persons not otherwise in "privity" with the defendant) these same requirements of foreseeability must be satisfied. In the context of "Negligent Misrepresentation" questions of foreseeability are generally considered within the scope of the prima facie requirement known as "proximate cause." The most significant obstacle which this "proximate cause" requirement imposes in a "Negligent Misrepresentation" case typically relates to questions that seek to define (or to restrict) the size of the class of potential (third party) plaintiffs to whom the defendant's "duty" may reasonably be expected to extend. In an effort to articulate the specific parameters of such a "class" of potential plaintiffs in "Negligent Misrepresentation" cases, courts have usually imposed rather severe restrictions. Thus, in Credit Alliance Corp. v. Arthur Andersen & Co.,, 483 N.E.2d 110 (N.Y. Ct. App. 1985), the New York Court of Appeals, relying upon restrictions imposed by earlier cases [Ultramares and Glanzer, both of which are discussed in the Bily case], held that:

"Before accountants may be held liable in negligence to noncontractual parties who rely to their detriment on inaccurate financial reports, certain prerequisites must be satisfied: (1) the accountants must have been aware that the financial reports were to be used for a particular purpose or purposes; (2) in the furtherance of which a known party or parties was intended to rely; and (3) there must have been some conduct on the part of the accountants linking them to that party or parties, which evinces the accountants' understanding of that party or parties' reliance...." (Emphasis supplied).

The legal effect of such restrictions regarding the general applicability of the Tort of "Negligent Misrepresentation" in those actions brought by third parties who are not in privity with the defendant, however, does tend to "blur" the distinction between "Negligent Misrepresentation" and "Fraud." Apart from establishing the ordinary basis for recognizing a "duty" of care owed by the defendant to such foreseeable third parties, the approach taken by Credit Alliance Corp. also requires some additional level of culpable conduct which, at least arguably, extends beyond mere "negligence" in supplying the underlying information.

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READ and study the following cases:

Bily v. Arthur Young & Co., 3 Cal. 4th 370, 11 Cal. Rptr. 2d 51, 834 P.2d 745 (1992),

and Justice Kennard's DISSENT in Bily.

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ANSWER QUESTIONS ABOUT THE TORT OF NEGLIGENT MISREPRESENTATION.

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