Negligent Misrepresentation Examples and Legal Consequences

Key Takeaways

• Negligent misrepresentation occurs when someone unknowingly makes a false statement without reasonable grounds to believe it is true, leading another party to suffer harm.
• This type of misrepresentation is one of three legally recognized types, alongside innocent and fraudulent misrepresentation.
• Courts typically require proof of reliance on the false statement and subsequent harm to award damages.
• Common examples include real estate misrepresentations, business contract disputes, and financial misstatements.
• The remedies for negligent misrepresentation may include rescission of a contract or monetary damages.
• Negligent misrepresentation differs from fraudulent misrepresentation, which involves intentional deception, and innocent misrepresentation, which occurs without negligence.
• Businesses and professionals in certain fields (e.g., real estate, finance, and law) have a heightened duty of care to ensure the accuracy of their statements.
• If you've suffered damages due to negligent misrepresentation, seeking legal guidance can help determine the best course of action.

Negligent misrepresentation occurs when someone makes a statement without regard to the true facts. For instance, if you tell a person that a stereo system is brand new when it is four-years-old and has been used heavily, then this can be considered negligent misrepresentation. This form of misrepresentation is one of the three legally recognized types of misrepresentation under contract law. Negligent misrepresentation is when a person does not lie directly (saying something knowing it to be untrue), but has made a statement about a subject with no reason to believe it to be fact.

Another example is a real estate agent attempting to sell a home to a buyer who wishes to get a home surrounded by peace and quiet. This prompts the agent to claim the house in question is in a peaceful atmosphere. However, a house next door is undergoing construction, causing heavy noise. With that, the agent made the claim without any reason to believe that the atmosphere surrounding the house was not going to be peaceful.

A judgment can be rendered in an agreement misrepresentation case that involves false statements that convinced one party to enter into the agreement. Statements regarding the future do not matter, neither do opinions or salesman-type phrases. For instance, the following phrases are not an example of agreement misrepresentation:

• This is an excellent car
• This car is the real deal

The statement must be made with an intent to get another party to rely on the statement as reasons to enter into an agreement. Also, the opposite party must believe the claims, and it must be a primary reason to enter into the contract.

Most judges remain hesitant to protect buyers if it is unreasonable to rely on any information that a seller disclosed.

For example, a seller tells a buyer that a car runs a billion miles per hour, and the buyer ends up believing the claim.

The buyer should also rely in part on a misrepresentation when deciding to proceed with the transaction in question. Stemming from the reliance of the misrepresentation, the opposite party suffered a degree of damage, meaning that the buyer must be harmed by the final phase of the transaction, or no liability can be levied.

Malicious Misrepresentation

There are more serious forms of misrepresentations that include:

• Fraud
• Fraudulent misrepresentation

The two are nearly the same, but there is a fine line between the two. The sole difference is that fraudulent misrepresentation entails a disregard in a reckless capacity in regards to the truth of a subject. On the other hand, negligent disregard does not require a reasonable ground in assuming that something is the truth, so it essentially boils down to a matter of degrees.

For example, if a buyer says that he is lethally allergic to pine wood and asks if a house he wishes to buy is made of pine, the seller should answer truthfully by stating he is unaware if the home is made out of pine wood. If the seller states that the home is not made of pine wood, when in fact it is, this would constitute a reckless disregard of the truth, especially when considering the dire consequences.

Key Elements of Negligent Misrepresentation

To establish a claim of negligent misrepresentation, a plaintiff must typically prove the following elements:

1. False Statement of Fact – The defendant made a statement that was untrue.
2. Lack of Reasonable Basis – The defendant had no reasonable grounds to believe the statement was true.
3. Intent for Reliance – The false statement was made with the intention that the plaintiff would rely on it.
4. Actual Reliance – The plaintiff reasonably relied on the false information.
5. Harm or Loss – The plaintiff suffered financial or other damages as a result of the reliance.

These elements differentiate negligent misrepresentation from fraud, where the false statement is made knowingly or recklessly.

Civil Matter

Misrepresentation is a civil offense, which means that the case can only be heard in civil court. The criminal counterpart to misrepresentation would be a false pretense. A court acts as if the transaction had never existed in the first place, otherwise known as rescission, and this remedy is usually the most common solution. Negligent misrepresentation is appropriately named because it entails negligence, which is a separate civil offense within itself in regard to the offender. Therefore, it is considered a more serious offense than a simple innocent misrepresentation, and it can have its own remedies under negligence cases.

Fraudulent and negligent misrepresentation constitutes a serious offence, but they can be hard to prove in a court of law. Proving intent or past actions can be a tricky feat because most people can simply tell a judge that they did not know it was a lie when he or she made a fraudulent statement. Each has its own laws in dealing with such an issue, which is why you should contact an attorney to know the best course of action.

Negligent Misrepresentation vs. Fraudulent Misrepresentation

While both fraudulent and negligent misrepresentation involve false statements, they differ in intent and burden of proof:

A party accused of fraudulent misrepresentation faces more severe legal consequences, including potential punitive damages.

Common Negligent Misrepresentation Examples

Negligent misrepresentation can arise in various industries and transactions. Here are some common scenarios:

1. Real Estate Transactions
   • A real estate agent claims a property has never had structural damage without verifying it, leading a buyer to purchase a home with severe foundation issues.
   • A seller fails to disclose known zoning restrictions that prevent the buyer from using the property as intended.
2. Business Contracts
   • A company misstates financial records during a merger, causing the acquiring party to overvalue the business.
   • A supplier misrepresents the specifications of a product, leading to a costly dispute when the delivered goods do not meet contractual obligations.
3. Financial and Investment Advice
   • A financial advisor provides misleading information about an investment's risk, resulting in a significant loss for the investor.
   • A bank misrepresents the terms of a mortgage, leading a borrower to take on an unsustainable loan.
4. Employment Agreements
   • A recruiter falsely claims a job position includes certain benefits that are later found to be unavailable.

These examples highlight the broad impact of negligent misrepresentation and the importance of verifying information before making financial or contractual decisions.

Legal Remedies for Negligent Misrepresentation

If a plaintiff successfully proves negligent misrepresentation, they may be entitled to various legal remedies, including:

• Contract Rescission – The contract is nullified, restoring both parties to their pre-contract positions.
• Compensatory Damages – The injured party is awarded monetary compensation for losses incurred due to reliance on the false statement.
• Consequential Damages – Additional damages for financial losses stemming from the misrepresentation, such as lost business opportunities.

The appropriate remedy depends on the severity of the misrepresentation and the extent of harm suffered by the plaintiff.

How to Prevent Negligent Misrepresentation

Individuals and businesses can take proactive steps to avoid liability for negligent misrepresentation:

• Verify Information – Always fact-check before making statements, especially in business transactions.
• Use Disclaimers – Clearly state when information is based on estimates or subject to verification.
• Document Representations – Keep records of statements made during negotiations to reduce disputes.
• Seek Legal Advice – Consult with legal professionals when making contractual representations.

By exercising due diligence, companies and professionals can minimize the risk of legal disputes related to negligent misrepresentation.

Frequently Asked Questions

1. What is the main difference between negligent and fraudulent misrepresentation?

Negligent misrepresentation occurs when someone makes a false statement without reasonable verification, while fraudulent misrepresentation involves intentional deception.

2. Can I sue for negligent misrepresentation if I did not suffer financial loss?

Generally, a claim requires proof of harm, typically financial damages, resulting from reliance on the false statement.

3. What is an example of negligent misrepresentation in real estate?

A seller stating that a home is free from water damage without properly inspecting it, leading the buyer to purchase a property with hidden mold issues.

4. What are the legal consequences of negligent misrepresentation?

Consequences may include rescission of a contract and compensatory damages for losses incurred due to the misrepresentation.

5. How can businesses protect themselves from negligent misrepresentation claims?

Businesses can implement verification processes, use disclaimers in contracts, and maintain records of representations made in transactions.

If you need help with negligent misrepresentation, post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.