Other torts - Claims based on misrepresentations, and defens...

Learning Outcomes

This article examines tort liability for misrepresentations on the MBE, including:

• Identifying and distinguishing intentional misrepresentation (fraud/deceit) and negligent misrepresentation, with their respective elements and required mental states.
• Recognizing what counts as a “misrepresentation,” including affirmative statements, concealment, nondisclosure when there is a duty to speak, and when opinions, predictions, or statements of law become actionable.
• Analyzing scienter, intent to induce reliance, actual and justifiable reliance, and the limited scope of duty and foreseeable plaintiffs in negligent misrepresentation.
• Evaluating causation and available damages, contrasting benefit-of-the-bargain and out-of-pocket measures, and spotting when pure economic loss is recoverable.
• Applying key defenses such as truth, absence of a material misstatement, lack of scienter or duty, failure of justifiable reliance, and applicable privileges.
• Spotting common MBE traps involving puffery, “half-truths,” fiduciary or professional relationships, disclaimer or no-reliance clauses, and overlap with contract doctrines and warranty theories.
• Practicing exam-style reasoning by working through short hypotheticals that test how far misrepresentation liability extends in business, professional, and transactional settings.

MBE Syllabus

For the MBE, you are required to understand torts arising from misrepresentations, with a focus on the following syllabus points:

• Identify the elements of intentional misrepresentation (fraudulent misrepresentation or deceit).
• Distinguish intentional misrepresentation from negligent misrepresentation.
• Analyze the element of scienter (knowledge of falsity or reckless disregard for truth) in intentional misrepresentation.
• Assess justifiable reliance by the plaintiff, including when reliance is not justified.
• Determine causation and damages in misrepresentation claims, including pure economic loss.
• Recognize defenses such as truth and privilege.
• Understand the limited duty and class of plaintiffs in negligent misrepresentation.
• Distinguish misrepresentation tort claims from contract doctrines (e.g., fraud in the inducement) and from warranty theories in products cases.

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. Which of the following states of mind is required for intentional misrepresentation (fraud)?
   1. Negligence as to the truth or falsity of the statement.
   2. Strict liability for any false statement made.
   3. Scienter (knowledge of falsity or reckless disregard for the truth).
   4. Intent to cause emotional distress.
2. A plaintiff's reliance on a misrepresentation is generally NOT justified if:
   1. The plaintiff could have discovered the truth through reasonable investigation.
   2. The statement was one of opinion rather than fact.
   3. The defendant did not intend for the plaintiff specifically to rely.
   4. The misrepresentation was not the sole factor inducing the plaintiff's action.
3. In an action for negligent misrepresentation, to whom does the defendant typically owe a duty of care?
   1. Any person who foreseeably might rely on the misrepresentation.
   2. Only those persons with whom the defendant is in contractual privity.
   3. Only the person to whom the misrepresentation was directly made.
   4. Persons whom the defendant knows will rely on the information in a specific transaction.
4. In a fraud action, which of the following is most accurate regarding damages?
   1. Only physical injury damages are recoverable.
   2. Only emotional distress damages are recoverable.
   3. Pure economic loss is recoverable if all elements are met.
   4. Punitive damages are never available.
5. A real estate broker says to a buyer, “In my opinion, this house will double in value in two years,” knowing that the local zoning change will sharply decrease values. Buyer relies and purchases. Which is most accurate?
   1. No fraud, because the statement is pure opinion.
   2. Possible fraud, because the “opinion” implies undisclosed false facts.
   3. Only negligent misrepresentation, never intentional misrepresentation.
   4. No liability, because buyer had a duty to investigate future prices.

Introduction

Beyond negligence and intentional torts involving physical harm, the MBE tests liability for misrepresentations that cause pecuniary loss. These claims center on false statements made by a defendant upon which a plaintiff relies to their detriment. The law distinguishes:

• Intentional misrepresentation (fraud/deceit) – an intentional tort requiring scienter and intent to induce reliance.
• Negligent misrepresentation – a species of negligence, usually limited to business or professional contexts and to a narrow class of foreseeable plaintiffs.

Both torts often involve pure economic loss, which is normally not recoverable in ordinary negligence. Misrepresentation is one of the major exceptions to the “no recovery for pure economic loss” rule.

Key Term: Misrepresentation
A false assertion of fact, which may be made by an affirmative statement, active concealment, or (in limited circumstances) nondisclosure where there is a duty to speak.

Key Term: Material Fact
A fact is material if a reasonable person would consider it important in deciding whether to act, or if the defendant knows that this particular plaintiff would regard it as important.

Key Term: Pecuniary Loss
Financial or economic loss. In misrepresentation torts, the primary harm is pecuniary, not physical injury or property damage.

Understanding when a statement is actionable, when reliance is “justifiable,” and how far liability extends (especially for negligent misrepresentation) is essential for working through MBE fact patterns.

Intentional Misrepresentation (Fraud/Deceit)

Intentional misrepresentation requires the plaintiff to prove several elements:

1. A misrepresentation by the defendant of a material fact.
2. Scienter.
3. Intent to induce the plaintiff’s reliance.
4. Causation (actual reliance).
5. Justifiable reliance by the plaintiff.
6. Damages (pecuniary loss).

Misrepresentation

A misrepresentation is a false assertion of fact.

• Fact vs. Opinion: Statements of opinion are generally not actionable. However, the label “opinion” is not controlling. An “opinion” may be actionable if:

  • The speaker has superior knowledge or skill in the subject matter (e.g., a professional appraiser’s “opinion” of value).
  • The parties stand in a fiduciary or special relationship.
  • The opinion implies the existence of undisclosed facts that are false (e.g., “In my opinion the company is solvent,” when the speaker knows it is not).

• Statements of law: Typically treated like opinions and not actionable, unless the speaker is a lawyer or other professional who is expected to know the law, or is misrepresenting their own legal obligations.

• Predictions and puffery: Vague sales talk (“This is the best car in town”) and optimistic predictions about the future are usually not actionable, unless they embed or conceal false present facts.

Key Term: Material Fact
A fact is material if it would likely affect a reasonable person’s decision to act, or if the defendant knows the fact is important to this plaintiff’s decision.

• Concealment and Nondisclosure:
  While there is usually no general duty to disclose all known facts, liability can arise when:
  • The defendant actively conceals a material fact (e.g., painting over water damage, rolling back an odometer).
  • The parties are in a fiduciary or confidential relationship (attorney–client, trustee–beneficiary, business partners), imposing a duty to disclose material information.
  • The defendant makes a partial statement that would be misleading without further disclosure (a “half-truth”).
  • The defendant knows the other party is mistaken about a basic assumption, and nondisclosure would violate good faith and fair dealing in the transaction (tested more in Contracts, but sometimes appears in tort fact patterns).

Key Term: Misrepresentation
A false assertion of material fact, made by statement, concealment, or (when there is a duty) nondisclosure.

Scienter

Scienter requires that the defendant made the statement:

• Knowing it was false, or
• Without knowing whether it was true or false, in reckless disregard of the truth.

Innocent or merely negligent misstatements do not satisfy scienter for intentional misrepresentation (though they may support negligent misrepresentation or contract rescission).

Key Term: Scienter
The mental state for fraud: knowledge of falsity or reckless disregard of truth or falsity at the time of the statement.

Intent to Induce Reliance

The defendant must intend, or know it is substantially certain, that the plaintiff (or a class of persons to which the plaintiff belongs) will rely on the misrepresentation.

• The misrepresentation need not be made directly to the plaintiff; it is enough that:
  • The defendant intends or expects that the statement will be communicated to the plaintiff or a class of persons including the plaintiff, and
  • That such persons will rely in a particular type of transaction.

Examples:

• Providing false financial statements to a borrower knowing that lenders will rely on them.
• Misstating property conditions to a seller knowing the seller will pass the information to prospective buyers.

Causation (Actual Reliance)

The plaintiff must show actual reliance on the misrepresentation:

• The misrepresentation must be a substantial factor in inducing the plaintiff’s action or inaction.
• It need not be the sole cause. Multiple motives are common; the misrepresentation just has to have played a significant role.

If the plaintiff was unaware of the misrepresentation at the time of acting, there is no causation.

Justifiable Reliance

The plaintiff’s reliance must be justifiable in the circumstances.

• Reliance is usually justifiable on statements of fact made by someone who appears to know what they are talking about.
• The plaintiff is not required to investigate the truthfulness of the defendant’s statement as a general rule. There is no duty to verify every representation.

However, reliance will generally not be justifiable when:

• The falsity of the statement is obvious or patent (e.g., buying “gold” that is plainly painted wood).
• The plaintiff has equal or superior knowledge and no reason to rely on the other’s assertion.
• The plaintiff deliberately ignores clear warning signs (“closing eyes to the obvious”).

Key Term: Justifiable Reliance
Reliance is justifiable if, in light of the circumstances and the plaintiff’s knowledge and experience, it is not wholly unreasonable to accept the statement as true. There is no routine duty to investigate, but reliance fails when the falsity is obvious.

Importantly, the standard is justifiable, not purely “reasonable.” Courts are somewhat more forgiving than in negligence, especially where the defendant intends to deceive.

Damages

The plaintiff must prove actual pecuniary loss caused by the misrepresentation.

• Type of harm:

  • Pure economic loss is recoverable (e.g., overpaying for an asset, entering an unprofitable deal).
  • Consequential economic losses proximately caused by the misrepresentation are also recoverable (e.g., lost profits).

• Measures of damages: Two main measures appear in questions:

  • Benefit-of-the-bargain damages (majority in fraud):
    Value as represented minus actual value received. This gives the plaintiff what they would have had if the statement were true.

  • Out-of-pocket damages (minority rule and common for negligent misrepresentation):
    Price paid minus actual value received. This restores the plaintiff to the pre-transaction position.

Key Term: Benefit-of-the-bargain Damages
A damages measure in fraud: the difference between the value the plaintiff was promised (as represented) and the actual value received.

Key Term: Out-of-pocket Damages
A damages measure: the difference between what the plaintiff paid and the actual value received, restoring the status quo ante.

• Punitive damages:
  Available in many jurisdictions for intentional misrepresentation when the defendant’s conduct is malicious, oppressive, or particularly egregious. They are not typical for negligent misrepresentation.

Key Term: Pecuniary Loss
Monetary loss suffered as a result of relying on the misrepresentation; required for recovery in misrepresentation torts.

Worked Example 1.1

Seller owned a car with a known engine defect that would cause intermittent stalling. When Buyer asked about the car's condition, Seller said, "It runs great, never had a problem with it." Buyer, relying on this statement, purchased the car. The car stalled frequently, requiring expensive repairs. Buyer sued Seller for intentional misrepresentation. Will Buyer likely prevail?

Answer:
Yes. Seller made a misrepresentation of material fact (about the car's condition) with scienter (knowing it was false). The statement was intended to induce Buyer's reliance, Buyer actually relied, the reliance was justifiable (Buyer is not expected to tear down the engine or obtain independent records), and Buyer suffered pecuniary damages (repair costs and diminished value). Buyer can likely recover at least out-of-pocket loss and, in many jurisdictions, benefit-of-the-bargain damages.

Worked Example 1.2

Investor asks Promoter whether a venture is already fully subscribed. Promoter, who knows only half the needed funds have been raised, says, “All the capital is in place; you’re getting in with a full group.” Investor, who is worried about being the only contributor, invests. The venture fails, and Investor sues for fraud. Promoter argues Investor could have demanded to see bank records. Is that a good defense?

Answer:
No. Promoter made an affirmative false statement of material fact with scienter and clearly intended to induce Investor’s reliance. Investor actually and justifiably relied; there is no general duty to investigate bank records before relying on a specific factual representation. Investor can recover pecuniary loss caused by the misrepresentation.

Negligent Misrepresentation

Negligent misrepresentation occurs when the defendant, in a business or professional context, supplies false information in breach of a duty of care, causing justifiable reliance and pecuniary loss to a limited class of persons.

Key Term: Negligent Misrepresentation
A misrepresentation made without reasonable care in obtaining or communicating the information, in a business or professional setting, to a person (or limited group) to whom the defendant owes a duty, causing justifiable reliance and economic loss.

Duty and Breach

A duty typically arises when:

• The defendant is in the business of supplying information for the guidance of others in their business transactions (e.g., accountants, lawyers, surveyors, real estate brokers, financial advisers), or
• The defendant has a pecuniary interest in the transaction (e.g., a seller providing data to induce a sale).

The defendant breaches this duty by failing to exercise reasonable care or competence in:

• Ascertaining the accuracy of the information, or
• Communicating the information.

Casual social statements rarely create a duty for negligent misrepresentation on the MBE. The context should be business or professional.

Limited Scope of Liability

Liability for negligent misrepresentation is narrower than for fraud.

• The duty is owed to:

  • The person or limited class of persons for whose benefit and guidance the defendant intends to supply the information, or
  • Persons the defendant knows the recipient intends to supply the information to for a particular transaction or type of transaction.

• Mere foreseeability of reliance by an unlimited group (e.g., “anyone who reads this”) is generally insufficient.

This often arises with accountants and other professionals. Most courts do not allow every foreseeable investor or lender to sue; only those in the identified or known group can recover.

Causation, Reliance, and Damages

As with fraud, the plaintiff must show:

• Actual reliance on the misrepresentation,
• Justifiable reliance (similar standard as for intentional misrepresentation), and
• Pecuniary loss caused by the reliance.

However, damages are usually limited to reliance-type or out-of-pocket damages, not benefit-of-the-bargain.

Key Term: Out-of-pocket Damages
In negligent misrepresentation, the usual measure: the difference between what the plaintiff paid (or gave up) and the actual value received, plus consequential losses proximately caused.

Worked Example 1.3

Accountant negligently prepares financial statements for Client Corp, knowing Client Corp will show them to Bank to obtain a loan. The statements materially overstate Client Corp's assets. Bank relies on the statements and issues the loan. Client Corp defaults. Can Bank sue Accountant for negligent misrepresentation?

Answer:
Yes. Accountant, acting in a professional capacity, breached a duty of care in preparing the financials. Bank was within the limited class of persons Accountant knew would rely on the information in a specific transaction (the loan). Bank justifiably relied and suffered pecuniary loss. Accountant is liable for Bank’s out-of-pocket loss caused by the misstatement.

Worked Example 1.4

Same facts as Worked Example 1.3, except Accountant also posts the overstated financials on Client Corp’s public website. Investor X, an individual member of the public whom Accountant did not know about, sees the statements, buys shares, and loses money when the company collapses. Can X recover from Accountant for negligent misrepresentation?

Answer:
Probably not. For negligent misrepresentation, most jurisdictions confine liability to the persons or limited group for whose benefit and guidance Accountant intended the information or knew it would be used. Accountant intended the statements for Client Corp and Bank in connection with the loan. Investor X is a member of the general public, outside the limited class. Foreseeability of public reliance alone is insufficient.

Defenses to Misrepresentation Claims

Truth

Truth is a complete defense to any misrepresentation claim. If the challenged statement was factually accurate in context, there is no misrepresentation.

Note that minor inaccuracies may still support liability if the overall impression was materially false. Conversely, trivial errors that do not affect materiality will not suffice.

Lack of Misrepresentation, Scienter, or Duty

Defendants can always argue that one or more elements is missing:

• The statement was not about a material fact (e.g., pure puffery or non-actionable opinion).
• In fraud, the defendant lacked scienter (at most negligently mistaken).
• In negligent misrepresentation, there was no duty because:
  • The defendant was not in a business or professional role,
  • The statement was purely social, or
  • The plaintiff was outside the limited class to whom the duty was owed.

No Justifiable Reliance

Another common defense is that the plaintiff’s reliance was not justifiable, for example:

• The falsity was obvious on its face.
• The plaintiff expressly disclaimed reliance in a way that is given effect (e.g., sophisticated parties with a strong “no-reliance” clause; this is more often contract-focused, but can affect reliance analysis).
• The plaintiff knew the statement was false at the time of acting.

Remember: ordinary failure to investigate does not bar recovery, but deliberately ignoring clear red flags can.

Privilege

Statements made under certain privileges may be protected even if inaccurate. The misrepresentation torts borrow some concepts from defamation privileges.

Key Term: Privilege (Misrepresentation)
A limited protection for statements made in contexts where public policy favors free communication, such as judicial proceedings or some governmental reports. A privilege may bar tort liability even when a statement is false, depending on the context and the speaker’s state of mind.

• Absolute privilege:
  Statements made in the course of judicial proceedings (pleadings, testimony) by parties, witnesses, and lawyers are absolutely privileged if reasonably related to the proceeding. There is no misrepresentation liability for such statements, even if knowingly false (though perjury and sanctions are possible).

• Qualified privilege:
  Some contexts (e.g., statements to law enforcement, internal corporate communications, credit reports) may be conditionally privileged, lost if the speaker acts with malice or abuses the privilege. Misrepresentation liability may be limited or barred where such privileges apply and there is no malice.

Comparative Fault and Mitigation

Because intentional misrepresentation is an intentional tort, traditional comparative negligence concepts do not directly apply. However, the reasonableness of the plaintiff’s conduct feeds into justifiable reliance and proximate cause:

• A plaintiff who unreasonably enhances their damages after learning of the fraud may face a mitigation argument.
• In negligent misrepresentation, some jurisdictions may reduce damages based on the plaintiff’s negligence in relying.

Exam Warning

Distinguishing between intentional and negligent misrepresentation is essential:

• Focus on the defendant's state of mind:

  • Did the defendant know the statement was false or act with reckless disregard? → Intentional misrepresentation.
  • Did the defendant simply fail to exercise reasonable care in a business/professional context? → Negligent misrepresentation.

• For negligent misrepresentation, always ask:

  • Is the defendant in a business or professional role?
  • Did the defendant have a pecuniary interest in the information?
  • Was the plaintiff within the limited class of intended or specifically known users?

• On damages:

  • Fraud questions often use benefit-of-the-bargain.
  • Negligent misrepresentation questions usually use out-of-pocket or reliance loss.

• Do not confuse:

  • Tort misrepresentation with contract doctrines like fraud in the inducement (which may lead to rescission) or with express warranties in products cases, even though the same facts can sometimes support both types of claims.

Key Point Checklist

This article has covered the following key knowledge points:

• Misrepresentation torts address pecuniary loss caused by false statements.
• Intentional misrepresentation (fraud/deceit) requires:
  • Misrepresentation of a material fact.
  • Scienter (knowledge of falsity or reckless disregard).
  • Intent to induce reliance.
  • Causation (actual reliance).
  • Justifiable reliance.
  • Damages (pecuniary loss).
• Misrepresentations can be made by affirmative statements, active concealment, or (in limited situations) nondisclosure where there is a duty to speak.
• Opinions, predictions, and puffery are generally not actionable unless:
  • The speaker has superior knowledge or a fiduciary relationship, or
  • The “opinion” implies undisclosed false facts.
• Scienter distinguishes fraud from negligent misrepresentation; it requires knowledge or reckless disregard, not mere carelessness.
• Justifiable reliance does not impose a general duty to investigate but fails when the falsity is obvious or the plaintiff has superior knowledge.
• Damages in fraud often follow a benefit-of-the-bargain measure; negligent misrepresentation typically uses out-of-pocket or reliance damages.
• Negligent misrepresentation requires:
  • A misrepresentation in a business/professional capacity.
  • A duty of care in supplying information, often for a pecuniary purpose.
  • Breach of that duty (lack of reasonable care).
  • Causation.
  • Justifiable reliance.
  • Pecuniary loss.
  • A plaintiff within the limited group the defendant intended to reach or knew would rely.
• Liability for negligent misrepresentation is usually narrower than for fraud; foreseeability alone is not enough—there must be an intended or specifically known class.
• Truth is a complete defense; lack of a misrepresentation, lack of scienter, lack of duty, or lack of justifiable reliance each independently defeat liability.
• Privileges (absolute or qualified) may bar or limit misrepresentation claims in certain contexts, especially judicial proceedings.

Key Terms and Concepts

• Misrepresentation
• Material Fact
• Scienter
• Justifiable Reliance
• Pecuniary Loss
• Benefit-of-the-bargain Damages
• Out-of-pocket Damages
• Negligent Misrepresentation
• Privilege (Misrepresentation)