Is misrepresentation a tort or a breach?

Question

I am confused by the provisions in tort and contract law for damages in the case of misrepresentation. I am reading specifically in New York law and it seems unambiguous that the only damages allowed for a claim of negligent misrepresentation are "out-of-pocket losses" which can be zero even when a plaintiff has suffered measurable losses.

Consider this scenario: Bob is an excavator. Alice approaches Bob and says that she has buried $1000 in a particular location. They enter a contract for Alice to provide the location of the money, Bob to excavate it, and the parties to split it 50/50. Bob takes his shovel and spends a week digging at the location and to the depth specified by Alice, but finds nothing. Alice says that she honestly believed the money was there, but agrees that Bob performed the excavation properly and that nothing was found.

In this case, Bob has a cause of action for "negligent misrepresentation" by Alice. But Bob has no "out-of-pocket damages" because the only thing he spent in performance was his time and labor. (This understanding is detailed here.) It doesn't seem equitable for a tort to be recognized but offer no real remedy.

I'm wondering if the problem is that I'm looking at a tort when there is another cause of action under contract law? Contract law appears to offer "benefit of the bargain" as a remedy for breach of contract, and in this scenario it does look like Alice breached the contract ... except that the breach was a negligent misrepresentation. Is there a cause of action for that under contract law even though it's explicitly a cause of action in tort?

Answer 1

What misrepresentation?

Alice said she buried the money there. That the money is not there now is not evidence that she didn’t. it’s evidence that something happened to it between then and now.

However, let’s not let the flawed example obscure the question. Let’s pretend instead that Alice said the money was there now.

Misrepresentation

Pre-contractural false statements of fact by one party that induce the other to enter the contract give a cause of action in contract law; they are not a tort. There are torts that are similar like deceit and negligent misstatement.

The link provided is talking about fraud - the criminal equivalent of deceit (and the word fraud is often used when technically it’s talking about the tort of deceit). The out-of-pocket rule applies to torts so Bob can recover his losses. Personal time invested is not an out-of-pocket loss as it represents an opportunity cost, so, Bob cannot recover what he or his excavator might have earned instead. He can recover his fuel costs and depreciation on the excavator as those are “real” out of pocket expenses. If Bob had been an employee of a plaintiff company, they could recover his wages but not what they might have sold his time for. That’s just how it is with torts.

Misrepresentation is a different beast. It’s a contractural claim so the damages are the “benefit of the bargain”, in this case $500. However, this is only available if the misrepresentation was fraudulent (Alice knew the money wasn’t there), Alice had no reasonable grounds for believing the statement to be true, or at the court’s discretion. Further Bob must prove that it was this statement that caused him to enter the contract and that he would not have entered it otherwise.

Alice’s statement may give Bob more than one cause of action and it’s up to him which he chooses to pursue. If he spent less than $500 on fuel he stands to get more with a misrepresentation claim but if his out of pockets are more than $500 he’s better off with a negligent misstatement claim. In either case, these are tough causes to prove.

Answer 2

Alice says that she honestly believed the money was there, but agrees that Bob performed the excavation properly and that nothing was found.

Alice didn't make a negligent misrepresentation, or at least nothing in the facts of the question support that conclusion.

A negligent misrepresentation is an erroneous representation made in the course of one's business or occupation upon which you intend that a third-party rely which is false, in a context when you would have made a true representation if you had taken ordinary care.

One classic negligent misrepresentations are an attorney telling a non-client that the statute of limitations for a certain kind of case is three years when it is really two years, causing the person to delay filing and having their case dismissed.

Another classic negligent misrepresentation is when a testing laboratory alerts you of a test result requiring surgery for you cat (which was actually perfectly healthy), which you have done, when actually it was the cat of someone else with a similar name that took the test and a person exercising reasonable care to check the cat owner's ID number and address would have realized that the test result was sent to the wrong person.

In this case, there is no reason to think that Alice actually knew the correct place to dig but miscommunicated it to Bob due to her failure to exercise ordinary care. This is one of the reasons that the remedies for negligent misrepresentation don't seem to make sense in this case.

A good rule of thumb is that if someone who was sincere and truthful about what they did wouldn't say "oops" I made a mistake, it probably isn't negligence.

Answer 3

Misrepresentation is a branch of the law of contract. A statement which induces a person to enter into a contract is known as a representation, and, if false, as a misrepresentation.

In the law of torts, there is no action in misrepresentation.

A tort does exist which is known as negligent mis-statement, which is similar but is not the same. Negligent mis-statement is a branch of the tort of negligence. An attorney who told his client that the time limit for suing was 3 years, when it was actually 2 years, would be guilty of simple negligence. There is no real distinction between negligence and negligent mis-statement, for they both merely require the presence of negligence, i.e. the breach of a duty of care.

The attorney might not tell his client what the time limit is, or he might not tell the client that there is any time limit. In those instances, the attorney has made no statement of any kind, and, accordingly, he cannot be sued for negligent mis-statement, since he has made no statement at all. He would still be guilty of negligence, if the time limit was missed; i.e. negligence can arise out of an omission.

Negligent mis-statement is an example of negligence arising out of an action, whereas negligence in general can occur as a result of either an action or an omission to act. In the law of contract, no legal consequence arises from an omission: for there to be a misrepresentation, there must be a representation made, in some manner. Silence (i.e. omission) has no consequences in the law of contract.

If you believe that Alice has made a pre-contract statement which is false, i.e. that it is a representation which is untrue, you might face grave evidential problems in attempting to prove (a) that Alice knew the statement to be false, or to prove (b) that she had no reasonable grounds for believing it to be true. How do you prove or disprove a set of facts which are known only to Alice?

In the law of contract, advertisers routinely rely on the perfect defence to a claim of misrepresentation: it is well established law that a representation made in an advertisement is 'mere puff', however untruthful that representation may be. A company which sells a product might claim in its advertising that the product has health-giving properties, but if it has no such properties the claim is not actionable, because everyone knows or ought to know that such a representation is 'mere puffery', giving no legal remedy, on the established principle of 'buyer beware'.

This demonstrates how difficult it can be to establish in contract law any cause of action based upon a misrepresentation. What the claimant hopes to establish is an actionable misrepresentation, which is quite a different thing.