Several months back I blogged on the Economic Loss Rule―the doctrine that restricts liability in tort for “economic loss” except in cases of a “special relationship” or negligent misrepresentation. Such losses are typically the province of contract law, not tort law. I noted that the Plourde case made clear that the absence of a contract relationship with the offending party doesn't alter the application of the rule. A few years later Wyle v. Lees, 162 N.H. 406 (2011), closed the loop, making clear that the presence of a contractual relationship doesn’t matter either. One cannot sue for economic loss in tort “unless he is owed an independent duty of care outside the terms of the contract,” id. at 410.
At first blush, this quote from Wyle seems a bit tautological. After all, if one is owed a duty “outside the terms of the contract,” then it must be a tort duty. But drilling deeper, the point being made is that an actionable negligent misrepresentation must be based on something more than what the parties' contract already promises.
The plaintiff in Wyle had purchased an apartment building from the defendants based on a listing agreement which stated that no improvements had been constructed without permits, and based on the contractor’s statement that he had done everything the Town asked him to do. Both representations turned out to be false. After correcting numerous code violations and thus incurring an economic loss, the plaintiff sued for negligent misrepresentation. The defendants argued that the claim was barred by the economic loss rule, thus teeing up a question for the Court: “While we have recognized an exception to the economic loss doctrine for a negligent misrepresentation claim when the plaintiff and defendant are not parties to a contract, we have never addressed the issue presently before us—whether the economic loss doctrine bars recovery for such a claim between two contracting parties.” Id. at 410.
The Court ultimately decided in the plaintiff’s favor, noting that his claims “do not merely relate to a breached promise to perform the terms of the contract or attempt to recharacterize a breach of contract claim as a negligent misrepresentation,” but rather “alleged that the defendants' misrepresentations, unrelated to any material terms of the actual purchase and sale agreement, induced him to enter into the agreement.” Id. at 412. This “unrelatedness” was key, making the tort duty an “independent” duty.
The bottom line is that economic loss is recoverable in a negligent misrepresentation case despite the presence of a contract if a party’s misrepresentations induced the other party to enter into the contract in the first place. Schaefer v. Indymac Mortgage Services, 731 F.3d 98, 109 (1st Cir. 2013) (“the negligent misrepresentation exception reaches only those representations that precede the formation of the contract or that relate to a transaction other than the one that constitutes the subject of the contract”).
Negligent misrepresentation, like fraud (i.e., intentional misrepresentation), is by nature an “economic” tort―in the sense that the expected value of something has been diminished as a result of disappointed expectations―so it stands to reason that the rule prohibiting economic loss recovery in a tort case would have an exception for the tort of misrepresentation, whether or not plaintiff and defendant have entered into a contract. If they do have a contract, the misrepresentation claim must be based on something other than breach of the contractual promise, or else it is exclusively the subject of contract recovery. In either case, a “benefit of the bargain” or “benefit of the representation” measure of damages is appropriate―in other words, economic loss. The independent duty requirement assures that a valid tort theory is in play, and not a contract claim under a different guise.
At first blush, this quote from Wyle seems a bit tautological. After all, if one is owed a duty “outside the terms of the contract,” then it must be a tort duty. But drilling deeper, the point being made is that an actionable negligent misrepresentation must be based on something more than what the parties' contract already promises.
The plaintiff in Wyle had purchased an apartment building from the defendants based on a listing agreement which stated that no improvements had been constructed without permits, and based on the contractor’s statement that he had done everything the Town asked him to do. Both representations turned out to be false. After correcting numerous code violations and thus incurring an economic loss, the plaintiff sued for negligent misrepresentation. The defendants argued that the claim was barred by the economic loss rule, thus teeing up a question for the Court: “While we have recognized an exception to the economic loss doctrine for a negligent misrepresentation claim when the plaintiff and defendant are not parties to a contract, we have never addressed the issue presently before us—whether the economic loss doctrine bars recovery for such a claim between two contracting parties.” Id. at 410.
The Court ultimately decided in the plaintiff’s favor, noting that his claims “do not merely relate to a breached promise to perform the terms of the contract or attempt to recharacterize a breach of contract claim as a negligent misrepresentation,” but rather “alleged that the defendants' misrepresentations, unrelated to any material terms of the actual purchase and sale agreement, induced him to enter into the agreement.” Id. at 412. This “unrelatedness” was key, making the tort duty an “independent” duty.
The bottom line is that economic loss is recoverable in a negligent misrepresentation case despite the presence of a contract if a party’s misrepresentations induced the other party to enter into the contract in the first place. Schaefer v. Indymac Mortgage Services, 731 F.3d 98, 109 (1st Cir. 2013) (“the negligent misrepresentation exception reaches only those representations that precede the formation of the contract or that relate to a transaction other than the one that constitutes the subject of the contract”).
Negligent misrepresentation, like fraud (i.e., intentional misrepresentation), is by nature an “economic” tort―in the sense that the expected value of something has been diminished as a result of disappointed expectations―so it stands to reason that the rule prohibiting economic loss recovery in a tort case would have an exception for the tort of misrepresentation, whether or not plaintiff and defendant have entered into a contract. If they do have a contract, the misrepresentation claim must be based on something other than breach of the contractual promise, or else it is exclusively the subject of contract recovery. In either case, a “benefit of the bargain” or “benefit of the representation” measure of damages is appropriate―in other words, economic loss. The independent duty requirement assures that a valid tort theory is in play, and not a contract claim under a different guise.
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