Negligent Misrepresentation: When a Careless Statement Costs You

What negligent misrepresentation is

Texas adopted the definition of negligent misrepresentation from section 552 of the Restatement (Second) of Torts in Federal Land Bank Association of Tyler v. Sloane (Tex. 1991). The claim has four elements, which the Texas Supreme Court restated in JPMorgan Chase Bank v. Orca Assets (Tex. 2018):

1. The defendant made a representation in the course of its business, or in a transaction in which it had a pecuniary interest.
2. The defendant supplied false information for the guidance of others in their business.
3. The defendant did not exercise reasonable care or competence in obtaining or communicating the information.
4. The plaintiff suffered pecuniary loss by justifiably relying on the representation.

The third element is what distinguishes the claim. Fraud asks whether the speaker knew the statement was false or made it recklessly. Negligent misrepresentation asks only whether the speaker was careless. A lender that tells a borrower a loan is approved when its own file shows the committee has not met, a broker that passes along square footage from an old listing without checking, an accountant that reports a figure it did not reconcile: each may be liable without any intent to deceive.

How it differs from fraud

Because the two claims share most of their facts, negligent misrepresentation is usually pleaded alongside fraud as the fallback: if the jury is not persuaded the speaker knew, it can still find the speaker careless. The elements of the fraud claim, and the evidence for each, are set out in how to prove fraud in a Texas business dispute.

The statement must be about an existing fact

Negligent misrepresentation covers false information about something that exists or has happened: the balance in an account, the status of an approval, the condition of property, the terms of an existing agreement. It does not reach promises about the future. A promise that is not kept is a contract claim or, if it was made with no intention of performing, fraud. A careless prediction ("the permit should issue by March") is ordinarily neither, because a forecast is not a representation of present fact. The line between promise and fact is explored in fraud versus a broken promise.

Who gets sued for negligent misrepresentation

The first element limits the claim to statements made in the speaker's business or in a transaction where the speaker had a financial stake. In business disputes, the defendants tend to be:

• Lenders and loan officers, for statements about approval, terms or payoff figures.
• Sellers of businesses and their brokers, for financial information supplied in diligence.
• Accountants and other professionals, for figures supplied to a client or to a third party the professional knew would rely on them.
• Appraisers, inspectors and surveyors, for reports relied on by a buyer or lender.
• Counterparties in a transaction, for statements about their own capacity, licensing or insurance.

A professional's liability to someone other than its own client is limited. Under the Restatement approach Texas follows, the duty runs to the limited group of people the professional intended or knew would receive and rely on the information, not to everyone who later sees it. Whether a particular lender, investor or buyer falls inside that group is often the decisive issue in claims against accountants, and is discussed in claims against accountants and advisors.

Reliance must still be justifiable

The fourth element imports the same justifiable-reliance analysis that governs fraud. In Orca Assets the Texas Supreme Court disposed of the plaintiff's negligent misrepresentation claim on the same ground as its fraud claim: an experienced party that ignored red flags and relied on an oral statement contradicted by the written documents had not relied justifiably. A disclaimer-of-reliance clause that defeats fraud defeats negligent misrepresentation as well.

Example

Suppose a Plano equipment dealer asks its bank whether a line of credit will be renewed before committing to a large inventory order. The relationship manager replies by email that the renewal "has been approved at the same terms." The dealer places the order. Three weeks later the bank declines the renewal; the manager's email was based on a conversation with a credit officer, not a committee decision, and the file shows no approval was ever entered. The manager did not lie, but a statement about an existing approval was made without reasonable care, in the bank's business, for the dealer's guidance, and the dealer relied on it. The dealer's recoverable loss is what it spent in reliance (restocking fees, financing costs on the inventory, the cost of replacement credit), not the profit it hoped to make selling the equipment.

What you can recover

Damages are the claim's main limitation. In Sloane the Texas Supreme Court adopted section 552B of the Restatement: a plaintiff recovers the difference between the value of what it received and what it gave, plus other pecuniary losses suffered as a consequence of the reliance. It does not recover the benefit of the bargain, meaning the value it would have received had the statement been true, and it does not recover lost profits of that kind. Mental anguish and other non-pecuniary harm are not recoverable.

Exemplary damages are not available. Section 41.003 of the Civil Practice and Remedies Code permits them only for fraud, malice or gross negligence proven by clear and convincing evidence; ordinary negligence in making a statement does not qualify.

The two-year deadline

Texas courts generally treat negligent misrepresentation as a negligence claim governed by the two-year period in section 16.003 of the Civil Practice and Remedies Code, rather than the four years that apply to fraud under section 16.004. The clock ordinarily starts when the plaintiff knew of the injury, even if it did not yet know the full extent or the person responsible. A business that is weighing a fraud claim should keep the shorter deadline in view, because the fallback theory can expire two years before the main one. The deadlines for the related claims are compared in the deadline to sue for fraud or fiduciary breach.

The economic loss limit

Where the parties have a contract and the plaintiff's only loss is the loss of the benefit of that contract, Texas courts generally require the claim to be brought in contract, not as negligent misrepresentation. The claim is strongest when the careless statement came from someone outside the contract (a lender, an appraiser, an accountant) or when it caused losses beyond the contract's subject matter. A statement that induced the contract in the first place is treated more favorably, but the fraud exception recognized for fraudulent inducement has not been extended as clearly to negligent inducement, and the outcome varies with the facts.

When to involve a litigator

Negligent misrepresentation is rarely the headline claim, but it is often the one that survives. A litigator evaluating a misrepresentation case will plead it with fraud, calendar both deadlines, and build the record on reasonable care: what the speaker had, what it checked, and what its own procedures required. Tina Wysk represents businesses and individuals in misrepresentation and fraud disputes in Dallas state and federal courts.