Negligent Misrepresentation and the Economic Loss Rule
| Publication year | 1993 |
| Pages | 1689 |
1993, August, Pg. 1689. Negligent Misrepresentation and The Economic Loss Rule
The tort claim of negligent misrepresentation is an alluring companion to claims for breach of contract and fraud. The reason is that this claim may provide remedies beyond those available in contract, but does not require the heightened showings of deceitful intent required to recover for fraud. This article discusses the issues to be considered when evaluating an action based on negligent misrepresentation.
Where a claimant has suffered physical injury to person or property (as opposed to purely economic losses such as lost profits), proving negligent misrepresentation can be as simple as showing that the defendant negligently provided false information, the claimant reasonably relied on the information and the claimant suffered physical injury to person or property as a result. Even where the claimant suffers purely economic losses, the claim of negligent misrepresentation is still viable because it is not necessarily precluded by Colorado's "economic loss rule."
Generally, under the economic loss rule, one who suffers only pecuniary injury as a result of the conduct of another cannot recover for those losses through a tort theory. Instead, the claimant is limited to recovery under the law of contract. Courts in some jurisdictions that have adopted the economic loss rule nonetheless allow recovery of purely economic losses under the theory of negligent misrepresentation but only if the claimant can prove, in addition to the common elements of the claim, that: (1) the defendant was in the business of supplying information and (2) the information at issue was supplied for claimant's use with a party other than the defendant. There is authority which supports the imposition of these limitations under Colorado law, as discussed below.
In addition, Colorado case law provides that where the alleged wrongdoing is based entirely on breach of contractual duties, there may be a claim for breach of contract, but there can be no claim for negligent misrepresentation.
Accordingly, a potential claimant in Colorado seeking recovery on a theory of negligent misrepresentation should evaluate whether the damages suffered are solely economic or whether there is physical injury or property damage as well. If the damages are solely economic, the parties should determine whether (1) the claimant can make the additional showings required by the economic loss rule and (2) the conduct on which the claim is based is governed entirely by a contract between the parties.
The economic loss rule is a judicial doctrine employed to protect the risk-allocating function of contract law from the ever-encroaching tort law and its attendant uncertainties.(fn1) In the words of one court,
[a]llowing parties to circumvent their contract remedies by recovering pecuniary losses under a tort theory would frustrate the ability of contracting parties to allocate the risk of loss and, therefore, would undermine the certainty in commercial practices.(fn2)
The economic loss rule is recognized in Colorado.(fn3) In Jardel Enterprises v. Triconsultants, the Colorado Court of Appeals held that
where only economic losses are incurred by breach of a contractual duty, we reject the assertion that the non-breaching party has a negligence cause of action because to hold otherwise would permit that party to avoid the contractual limitation of remedy.(fn4)
Negligent misrepresentation is an exception to the rule which prevents recovery under a negligence theory for injuries that are exclusively pecuniary.(fn5) Courts that recognize the economic loss rule, however, have limited the use of negligent misrepresentation in order to ensure that
the set of situations where a defendant may be held liable under both [contract and negligent misrepresentation] theories are [sic] small.(fn6)
Courts have employed two methods to limit recovery. The first is to require the claimant to make the showings, in addition
One technique courts have employed to limit negligent misrepresentation is to supplement the elements of the claim. Typically, a negligent misrepresentation claimant who has suffered exclusively financial loss must establish that: (1) the defendant negligently gave false information to the claimant in the course of a transaction in which the defendant had a financial interest; (2) the defendant knew that the claimant would rely on the information; (3) the claimant did rely on the information; and (4) the claimant was injured as a result.(fn7)
Under the economic loss doctrine, courts have imposed limits on recovery under the tort by requiring a claimant to prove one or both of the following additional elements: (5) the defendant was in the business of supplying information; and (6) the information was provided to the claimant for the claimant's use in a transaction with a party other than the defendant. The courts impose these additional elements to protect the "integrity of the law of contract."(fn8)
Colorado courts have adopted § 552 of the Restatement (Second) of Torts ("Restatement") to identify the elements of negligent misrepresentation resulting in economic loss.(fn9) That section provides, in pertinent part:
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 loss caused to them by their justifiable reliance upon the information, if he fails to exercise reasonable care or competence in obtaining or...
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