contract

Negligent vs. Fraudulent Misrepresentation: How to Prove a Claim

By John DiGiacomo

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.

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