§ 6.1.3 NEGLIGENT MISREPRESENTATION

• Jurisdiction: Arizona

§ 6.1.3 Negligent Misrepresentation

It might be thought that negligent misrepresentation is simply common-law fraud without scienter. Matters are not that simple. The law has approached liability for negligent misstatement with hesitancy.¹⁹²⁶ While the need to deter deliberate fraud through tort remedies is obvious, the argument for imposing liability for negligent words and information is less compelling.¹⁹²⁷ As a result, tort liability for negligent misrepresentation has evolved with limitations not found when the plaintiff sues for fraudulent misrepresentation.¹⁹²⁸

Arizona has recognized liability for negligent misrepresentation since 1971,¹⁹²⁹ adopting § 552 of the Restatement (Second) of Torts¹⁹³⁰ as a guidepost for the elements of the tort.¹⁹³¹ Under § 552 a person who negligently gathers or supplies false information for the use of another is liable for pecuniary loss caused by justifiable reliance upon the information.¹⁹³²

Ordinarily the misrepresentation will precede an investment or some other business transaction about which the recipient was misled. But in some instances the misrepresentation is made after the plaintiff's investment or contract. Examples are where the plaintiff is induced to retain an investment or is persuaded through false information to put more money into a business.¹⁹³³

Several limitations on negligent misrepresentation exist. First, the tort applies only to commercial transactions,¹⁹³⁴ not casual advice.¹⁹³⁵ Second, while privity is not required,¹⁹³⁶ the defendant must owe a duty of care to the plaintiff; thus, the speaker is liable only to those whom the speaker intends to supply the information or to the wider class of persons to whom the speaker knows the recipient intends to provide the information.¹⁹³⁷ Third, the defendant must have a pecuniary interest in the transaction, which is implied, regardless of consideration, if the information is given in the course of the defendant's business.¹⁹³⁸ Fourth, the injured party must rely upon the representation.¹⁹³⁹ Fifth, the reliance must be justified, which is inferred if the misstatement is material.¹⁹⁴⁰ Sixth, the plaintiff must prove out-of-pocket or consequential damages,¹⁹⁴¹ but the defendant's misrepresentation need not be the sole cause of the plaintiff's damage.¹⁹⁴² Seventh, a false promise of future conduct will not support a claim of negligent misrepresentation.¹⁹⁴³

Negligent misrepresentation claims are often asserted against professionals.¹⁹⁴⁴ The Court of Appeals has held that negligence by professionals is controlled by the Restatement's rules for negligent misrepresentation.¹⁹⁴⁵ The Restatement's limitations cannot be circumvented by relying on the general law of negligence.¹⁹⁴⁶

--------

Notes:

^[1926] Epstein, supra note 1889, § 20.13, at 570.

^[1927] Restatement (Second) of Torts § 552 cmt. a (1977) (explaining that it is unreasonable to expect every speaker to assume a duty of care in what is said); cf. Standard Chartered PLC v. Price Waterhouse, 190 Ariz. 6, 30-31, 945 P.2d 317, 341-42 (Ct. App. 1996) (explaining that where a duty of care in supplying information exists, it embraces responsibility for gathering relevant information).

^[1928] See W. Techs., Inc. v. Sverdrup & Parcel, Inc., 154 Ariz. 1, 3, 739 P.2d 1318, 1320 (Ct. App. 1986) (referencing the "relatively restrictive view" of the tort).

^[1929] See Ariz. Title Ins. & Trust Co. v. O'Malley Lumber Co., 14 Ariz. App. 486, 491, 484 P.2d 639, 644 (1971). The first Supreme Court decision to recognize the tort is Van Buren v. Pima Cmty. Coll. Dist. Bd., 113 Ariz. 85, 87, 546 P.2d 821, 823 (1976).

^[1930] Section...