Claims for intentional and negligent misrepresentation are two potential legal causes of action that can be used in court to sue for money damages if a person or business has been the victim of fraud. The two causes of action are different and have different legal requirements with respect to proof. Sometimes, both legal theories can be alleged in the lawsuit; other times, depending on the facts of the case, only one will be available. Here is a quick summary of what proof is necessary for each.

Fraudulent Misrepresentation

To succeed in a claim for fraudulent misrepresentation, the party initiating the lawsuit, the plaintiff, must demonstrate seven legal elements:

• At least one false statement was made
• That the false statement was material
• The person making the false statement knew the statement was false
• The false statement was made to induce the other party, the plaintiff, to act in a certain manner (such as, to sign the contract)
• It was justifiable or reasonable for the party to rely on the false statement
• The party to whom the false statement was made would not have acted but for the false statement, and
• The party acting in reliance suffered injury

Fraudulent inducement can also be based on omitted facts or information. If the case is based on fraudulent omission, then an extra legal element must be proven — that the defendant had a duty to provide the information.

Let’s take an example involving the purchase of a business. During the negotiations, the owner claims that the business generates $1 million in revenue a year. Certainly, the statement is material — important — and certainly the statement was made to induce the buyer to consummate the purchase. As it turns out, in our hypothetical, the statement was false: The business only generates $100,000 in revenue per year. Clearly, the buyer would not have bought the business had it been known that revenue was so meager. The reliance element is often a tricky legal element when it comes to proving fraud. Imagine, in our example, that the seller provided financial documents clearly and obviously showing that the business only generated $100,000 in annual revenue. Under those circumstances, it may not have been reasonable or justifiable for the buyer to rely on the false statement that the deal involved a million-dollar business.

Negligent Misrepresentations

In some states, like California and Michigan, fraudulent misrepresentation can be based on a negligent statement of fact. The same legal elements must be shown, but instead of proving that the false statement was knowingly false, the plaintiff must show that the person making the statement was negligent in making the statement. Michigan courts have phrased the legal elements as follows: “A negligent misrepresentation claim requires the plaintiff to prove that a party justifiably relied to his detriment on information provided without reasonable care by one who owed the relying party a duty of care.” See United States Fidelity & Guaranty Co. v. Black, 412 Mich. 99 (Mich. Sup. Court 1981). Often, negligence is defined as the defendant making a statement without having any reasonable grounds for believing the statement was true.

Some states, like Michigan, also require an extra legal element: That the parties be engaged in some sort of contractual arrangement or negotiation to execute a contract. See M&D, Inc. v. McConkey, 585 NW 2d 33 (Mich. Court of Appeals 1998).

In many other jurisdictions, like Illinois, a claim for negligent misrepresentation is limited to circumstances where the defendant is engaged in the business of supplying information for the guidance of others in their business transactions. Such persons or businesses tend to be professionals like accountants, engineers, architects, and others.

For more information or if you need legal assistance with mergers, acquisitions or other business matters, contact the business lawyers at Revision Legal at 231-714-0100.

The Role of Scienter: Intent vs. Negligence

The most fundamental distinction between fraudulent and negligent misrepresentation is the defendant’s state of mind. To establish fraudulent misrepresentation, the plaintiff must prove that the defendant made the false statement knowing it was false or with reckless disregard for its truth or falsity. This demanding standard typically requires circumstantial evidence showing the defendant possessed information contradicting their statement. By contrast, negligent misrepresentation requires only that the defendant lacked reasonable grounds for believing the statement was true at the time it was made—a lower bar that is often easier to satisfy, particularly in commercial transactions involving asymmetric information. In practice, plaintiffs frequently plead both theories in the alternative, which preserves the ability to recover under whichever theory resonates more strongly with the factfinder.

Duty of Care in Negligent Misrepresentation Claims

Negligent misrepresentation is not available against every person who makes a careless false statement. Michigan courts—following the Restatement (Second) of Torts § 552—impose the tort only on defendants who are in the business of providing information and who supply false information for the guidance of others in their business transactions. This means the claim is most commonly asserted against accountants, lawyers, engineers, financial advisors, appraisers, and other professionals whose core function is providing information on which others rely. California takes a somewhat broader approach, allowing negligent misrepresentation claims against any defendant who has a duty of care toward the plaintiff—a duty that can arise from a special relationship, the defendant’s superior knowledge, or the vulnerability of the plaintiff.

Damages: What Can a Plaintiff Recover?

Damages in fraudulent misrepresentation cases are typically measured by the benefit of the bargain rule—the difference between the value of what was promised and the value of what was received. Some jurisdictions permit recovery of consequential damages and, in egregious cases, punitive damages. Michigan permits punitive damages in fraud cases where the conduct was particularly reprehensible. See M.C.L. § 600.2907. In negligent misrepresentation cases, courts typically award only out-of-pocket damages—the actual economic loss suffered—rather than the full benefit of the bargain. Punitive damages are generally not available for negligent misrepresentation absent additional statutory authority. This damages differential is one of the practical reasons why plaintiffs with strong facts prefer to prove fraud rather than mere negligence.

Fraud in the Inducement vs. Fraud in the Execution

Fraud in the inducement—where a party is tricked into entering a contract by a false representation—is distinguished from fraud in the execution—where a party is tricked about the nature of the document they are signing. Both render a contract voidable at the election of the defrauded party. Fraud in the inducement generally allows the defrauded party to elect between rescission (undoing the contract) and affirming the contract while suing for damages. This election of remedies is important: a party who affirms the contract after learning of the fraud may be found to have waived the right to rescission.

Reliance: A Common Battleground

The reliance element—whether the plaintiff’s reliance on the false statement was reasonable or justifiable under the circumstances—is frequently the most contested issue in misrepresentation litigation. Courts assess reliance in light of the parties’ sophistication, the nature of the transaction, and whether the plaintiff had access to information that would have revealed the falsity. A sophisticated commercial party who has access to all relevant financial records may be found to have unreasonably relied on a seller’s oral representations that were contradicted by those records. Documenting the information available to both parties at the time of the representation is therefore critical to both proving and defending misrepresentation claims.

Get Legal Help for Fraud and Misrepresentation Claims

Commercial disputes involving misrepresentation are fact-intensive and require experienced legal counsel to navigate the distinct elements of each theory, gather the necessary evidence, and calculate damages accurately. The business litigation attorneys at Revision Legal have successfully prosecuted and defended misrepresentation claims across a range of industries. Contact us at 231-714-0100.