Opinion ID: 2604223
Heading Depth: 1
Heading Rank: 1

Heading: scope of liability for negligent misrepresentation

Text: While the majority recognizes that the tort of negligent misrepresentation exists in Oregon, the closest the majority comes to explaining what it involves is its statement that [t]he rule stated in Restatement (Second) of Torts  552    is close to the mark. 315 Or. at 159, 843 P.2d at 896. I believe that, in recognizing a new tort, the court should define it, that the majority misunderstands and misapplies the difference between duty and foreseeability, and that the majority incorrectly denies liability as a matter of law under the facts of this case. Essentially three different standards, with variations, have been adopted by the American courts to define the scope of liability for the tort of negligent misrepresentation: (1) the Ultramares rule, which was stated in Ultramares v. Touche, 255 N.Y. 170, 174 N.E. 441 (1931). [2] The Ultramares rule extends liability for economic loss only to those persons with whom defendant is in a relationship akin to privity; [3] (2) the Restatement (Second) of Torts  552(2)(a) rule (Restatement rule), under which a defendant is liable for the economic loss suffered by the person or one of a limited group of persons for whose benefit and guidance he intends to supply the information or knows will receive and rely on the information; [4] and (3) the foreseeability rule under which liability for negligent misrepresentation extends to include all reasonably foreseeable plaintiffs who, as a result of their actual and justifiable reliance on negligently made misrepresentations, suffer economic damages. [5] The Ultramares rule is essentially based on the contract principle of privity. It defines and limits the scope of duty according to the defendant's state of mind and the agreed-upon expectations of the parties to an underlying contractual relation. In Martini v. Beaverton Ins. Agency, Inc., 314 Or. 200, 838 P.2d 1061 (1992), this court declined to apply contract principles to a negligence claim, recognizing that rules that may be proper for a contract action are not proper for a negligence action. The majority departs from this principle in its analysis of contract principles in this tort case. 315 Or. at 160-62, 843 P.2d at 896-98. Negligent misrepresentation is a separate and distinct tort, a species of the tort of deceit. Bily v. Arthur Young and Co., 11 Cal.Rptr.2d 51, 74, 834 P.2d 745, 768 (1992). Where a person makes false statements, honestly believing that they are true, but without reasonable ground for such belief, I believe that the person should be liable, under certain circumstances, for negligent misrepresentation, a form of deceit. In contract law, liability is determined and limited by the knowledge and intention of the parties. Plaintiffs' complaint in this case neither asserts a breach of contract nor attempts to enforce any promise made by defendants. Negligence liability, on the other hand, is based on a paradigm which is fundamentally different than that on which contract liability is predicated. In negligence law, the scope of liability is not determined by a contractual relationship, but by the reasonably foreseeable [6] consequences of one's actions and by considerations of policy that at times limit the scope of the liability. Tort obligations are in general obligations that are imposed by law on policy considerations to avoid some kind of loss to others. They are obligations imposed apart    from any manifested intention of parties to a contract or other bargaining transaction. Prosser and Keeton, Torts 656,  92 (5th ed 1984). The majority states that [o]ur precedents establish that a negligence claim for the recovery of economic losses caused by another must be predicated on some duty of the negligent actor to the injured party beyond the common law duty to exercise reasonable care to prevent foreseeable harm. 315 Or. at 159, 843 P.2d at 896 (footnote omitted). The majority misunderstands and misapplies our precedents in two respects. First, the majority misunderstands the distinction between duty and foreseeability. Second, the majority misapplies the limitation on economic damages. In Fazzolari v. Portland School Dist. No. 1 J, 303 Or. 1, 17, 734 P.2d 1326 (1987), quoted and discussed by the majority in footnote 13, 315 Or. at 165, 843 P.2d at 900 (slip op at 20-21), this court stated: In short, unless the parties invoke a status, a relationship, or a particular standard of conduct that creates, defines, or limits the defendant's duty, the issue of liability for harm actually resulting from the defendant's conduct properly depends on whether that conduct unreasonably created a foreseeable risk to a protected interest of the kind of harm that befell the plaintiff. This language has become critical in understanding Oregon negligence principles. The majority claims that this language does not dictate a different result than that reached by the majority, but the majority's analysis proceeds from the first part of the statement without regard for the last part of the statement. That is, the first part of the statement suggests that special relationships giving rise to a duty can create liability. Thus, the majority asserts that it must search for a special duty: Having recognized the existence of the tort, the central question in the present case becomes whether, during the parties' arm's-length negotiations, in addition to a duty of honesty, defendants owed plaintiffs a duty to exercise reasonable care in communicating factual information to prevent economic losses to plaintiffs. 315 Or. at 160, 843 P.2d at 896. Then the majority painstakingly discusses a series of cases involving duty, concluding that, in arm's-length negotiations, economic losses arising from a negligent misrepresentation are not actionable. 315 Or. at 161-62, 843 P.2d at 897. However, all that the majority's analysis has thus far established is that there is no special relationship or duty. But this is only the first part of the Fazzolari analysis, and the peripheral part at that. Fazzolari stated that unless  the parties invoke a relationship that creates, defines, or limits defendant's duty (which the majority concludes they have not), the issue of liability for harm actually resulting from defendant's conduct properly depends on whether that conduct unreasonably created a foreseeable risk to a protected interest of the kind of harm that befell the plaintiff. Fazzolari v. Portland School Dist. No. 1J, supra, 303 Or. at 17, 734 P.2d 1326. Thus, the majority has seized on the exception and ignored the rule. That rule suggests that foreseeability is the proper inquiry regarding negligence actions. It is true that the rules of foreseeability have at times been subject to limitations in situations in which, for policy reasons, the damage is too remote to support liability. The Fazzolari opinion foreshadowed a more direct statement in Hale v. Groce, 304 Or. 281, 744 P.2d 1289 (1987), which was decided less than eight months after Fazzolari, when it stated, in the context of limiting harm which was foreseeable but remote, that one example of a predictable but remote harm limited by common-law negligence is solely economic harm. Fazzolari v. Portland School Dist. No. 1J, supra, 303 Or. at 7, 734 P.2d 1326. [7] In Hale v. Groce, supra, 304 Or. at 284, 744 P.2d 1289, the court stated that, when economic loss alone is suffered, [s]ome source of a duty outside the common law of negligence is required, i.e., that foreseeability alone is not enough to establish liability. Apparently the majority seizes on its duty analysis because of statements like this which suggest that a duty is required when purely economic damages are involved. The majority fails to recognize that this extra special duty requirement arises in the context of economic damages which are, by definition, very remote, such that the special duty would create or expand liability. The precedents suggest a limitation on remote damages in the context where economic damages were remote, not a limitation on economic damages per se. In Hale v. Groce, supra , the context was a claim against an attorney for negligence in drafting a will which failed to provide for a gift to plaintiff intended by the testator. The tort was only cognizable because of a duty arising from the plaintiff's status as the intended beneficiary of the defendant's conduct. The court reasoned that, absent the contractual undertaking in that case, plaintiff's tort claim would confront the rule that one ordinarily is not liable for negligently causing a stranger's purely economic loss without injuring his person or property. Id. at 284, 744 P.2d 1289. The basis for the rule stated in Hale v. Groce that one ordinarily is not liable for negligently causing a stranger's purely economic loss without injuring his person or property was not a distinction between economic loss and injury to person or property. Rather, the basis for the rule, alluded to in Fazzolari v. Portland School Dist. No. 1J, supra, 303 Or. at 7, 734 P.2d 1326, was a distinction between direct and remote harm; where the direct harm is to the person or property of one person, resulting economic harm to a third person is too remote, as a policy matter, to be cognizable in negligence. Hale v. Groce, supra, 304 Or. at 284, 744 P.2d 1289, cited two cases to support this proposition. In Ore-Ida Foods v. Indian Head, 290 Or. 909, 627 P.2d 469 (1981), which involved a claim by decedent's employer against the person accused of causing decedent's death and thus of causing harm to employer who then had to pay death benefits, this court stated: We believe that the denial by other courts of claims for economic loss arising from injury to third persons, although phrased in terms of lack of foreseeability, duty and proximate cause, actually reflects their policy decision to limit recovery of such damages. The number of economic interests which could be damaged from an act are, in some cases, practically limitless   . Id. at 917, 627 P.2d 469. In the other case, Snow v. West, 250 Or. 114, 440 P.2d 864 (1968), this court did not allow an employer to recover lost profits based on the loss of services of his employees caused by defendant, whose negligent driving caused an accident killing one and injuring six employees. Likewise, in Hale v. Groce , the basis for statement of the rule preventing the recovery of economic damages alone was the remoteness of the economic injury to a third person, which in that case was overridden by plaintiff's contractual status as a third party beneficiary. Thus, in these cases involving economic harm, foreseeability was not enough to establish liability: It does not suffice that the harm is a foreseeable consequence of negligent conduct that may make one liable to someone else   . Hale v. Groce, supra, 304 Or. at 284, 744 P.2d 1289. The majority fails to recognize that this was true not because the harm alleged was economic, but because it was too remote. As such, the majority's discussion of duty, 315 Or. at 160-61, 843 P.2d at 896-97, is applicable to a case involving economic damage to secondary, remote plaintiffs, but that is not this case. [8] Thus, economic damage to a third party based on some other underlying injury, while it is foreseeable, is too remote to be actionable as a general rule. Where the underlying injury is itself economic, however, the same rationale supports liability for direct economic harm, with limitations for more remote economic harm. Those principles are consistent with the recognition of the tort of negligent misrepresentation for economic loss alone where that economic harm is the primary harm caused by defendant's negligence and is foreseen, either because the defendant intended the information for their benefit or because defendant knew that it would be used by them, and who, as a result of their actual and justifiable reliance on negligently-made representations, suffer economic loss. The damage is not so remote as to prevent a claim for negligent misrepresentation when a person represents something to be true and actually foresees, or even expects, that identifiable persons will rely on the statement or information (to their detriment if the information is wrong, which is another way of saying that the reliance on the statement caused harm because the statement was false). If the situation is such that the plaintiff's reliance is not only reasonably foreseen by defendant, but is also justified, defendant should be liable to plaintiff if he fails to use reasonable care in imparting information, i.e., if he does so negligently. Defendant's failure to meet the standard should give rise to liability for plaintiff's harm even if the harm is economic where the harm is not remote. I believe that this standard is consistent with the Restatement (Second) of Torts  552: (1) One who, in the course of his business, profession or employment, or in any other transaction in which he has a pecuniary interest, supplies false information for the guidance of others in their business transactions, is subject to liability for pecuniary loss caused to them by their justifiable reliance upon the information, if he fails to exercise reasonable care or competence in obtaining or communicating the information. (2) Except as stated in Subsection (3), the liability stated in Subsection (1) is limited to loss suffered (a) by the person or one of a limited group of persons for whose benefit and guidance he intends to supply the information or knows that the recipient intends to supply it; and (b) through reliance upon it in a transaction that he intends the information to influence or knows that the recipient so intends or in a substantially similar transaction. (3) The liability of one who is under a public duty to give the information extends to loss suffered by any of the class of persons for whose benefit the duty is created, in any of the transactions in which it is intended to protect them. That is, the liability under the Restatement rule extends not to all persons who could rely on the information, but to only those persons, or groups of persons, who were foreseen, either because the defendant intended the information for their benefit or because the defendant knew that it would be used by them. Restatement (Second) of Torts  552(2)(a). Under the Restatement rule, liability is imposed on the supplier of information to a person or to third persons who are intended recipients of the information. The scope of the tort of negligent misrepresentation should be limited in one other significant respect: The pecuniary loss must be caused by justifiable reliance on the information. Restatement (Second) of Torts  552(1). It may be that, in a particular arm's-length transaction between sophisticated parties, reliance on the information provided by the other party or on the other party's interpretation of contract language is not justified. Normally this is a question for the jury. In this case, the jury answered it, and I would not disturb their finding. The majority suggests that its analysis is consistent with the Restatement (Second) of Torts  552. 315 Or. at 164, 843 P.2d at 899. I disagree. First, the majority states its rule with respect to nongratuitous suppliers of information to clients or employers or to intended third-party beneficiaries. 315 Or. at 165, 843 P.2d at 899. The Restatement is not so limited, however, and is not based solely on a contractual relationship. Rather, the Restatement is based on negligence principles of foreseeability, limited to exclude remote plaintiffs, and does not require compensation giving rise to a contractual obligation: [9] [Liability is limited to loss suffered] by the person or one of a limited group of persons for whose benefit and guidance he intends to supply the information or knows that the recipient intends to supply it   . Restatement (Second) of Torts  552(2)(a). I believe that the facts of this case present a prime example of the type of relationship in a commercial transaction contemplated by the Restatement rule. Plaintiffs are the persons for whose benefit and guidance defendants intended to supply the information in order to secure a monetary gain through plaintiffs' reliance on that information. Plaintiffs purchased from defendants real estate parcels with the intent of subdividing them and reselling the parcels at a profit. As previously stated, the scope of liability for tort should not be determined by contract principles. Second, the majority suggests that liability for negligent misrepresentation can only arise in relationships other than the relationship between persons negotiating at arm's length. 315 Or. at 164, 843 P.2d at 899. [10] While it may be that, in practice, some courts have not extended liability based on  552 to parties in an adversarial negotiating relationship, as some authorities cited by the majority suggest, neither those courts nor those authorities have suggested that such a result is a per se rule based on the language of  552. I believe that the majority has misconstrued  552 to per se prohibit liability arising from an adversarial negotiating relationship. Rather, the proper inquiry under  552(1) is whether plaintiffs' reliance on defendants' representation was foreseen by defendants and whether such reliance was justified. That should be a factual question. Perhaps as between some sophisticated adversaries with equal access to the critical information, a party would not be justified to rely on a representation from the adversary. It is not clear whether this is the situation contemplated by the majority's reference to persons negotiating at arm's length, or whether that term encompasses more. Having failed to define the components of arm's-length negotiations, it is unclear how the majority can summarily decide that the parties to this transaction were negotiating at arm's length. Perhaps they were, but we are not told how that is to be determined. I believe that, rather than introducing the extraneous concept of arm's-length negotiations to determine the applicability of  552, we should examine the terms of  552. For reasons stated above, I disagree with the majority's restrictive view of the scope of liability for the tort of negligent misrepresentation. Under the majority's rule, there would be no liability in an action based on the tort of negligent misrepresentation unless defendants and their representative    owe[d a]    duty to plaintiffs during the negotiations by virtue of a contractual, professional, or employment relationship or as a result of any fiduciary or similar relationship implied in the law. 315 Or. at 165, 843 P.2d at 899. In sum, I would hold that negligent misrepresentation liability extends to persons or groups of persons who were foreseen either because the supplier of the information intended the information for their benefit or because the supplier of the information knew it would be used by them, and who, as a result of their actual and justifiable reliance on negligently-made representations, suffer economic loss.