In business litigation, the issue of negligent misrepresentation is often misunderstood. Despite its name, “negligent misrepresentation” arises when a Defendant makes a statement (i.e. a representation) that he or she has no reasonable basis for believing to be true. While this technically may involve a state of mind on the part of the Defendant that seems like negligence, under California law this can legally constitute fraud. [Bily v. Arthur Young; Cal. Civil Code Sec. 1710(2)].
For example, in the famous case (for lawyers, at least) of Bily v. Arthur Young, a CPA firm published a report stating that a certain company’s financial statements were found to be “fairly stated” when in fact a Court determined that the CPA should have known that this was not so. While no one particularly believed that the CPA firm intended to deceive anyone, the Court found that this type of “negligent misrepresentation” constituted (“…a species of deceit…”) i.e. fraud. This is codified at Cal. Civil Code Section 1710(2). Thus negligent misrepresentation often arises when a person of greater than average knowledge of a matter, i.e. in the case of Bily, a professional Certified Public Accountant, makes a statement upon which others rely in a context when the professional or expert had no reasonable basis for making the statement.
The difference between this form of negligent misrepresentation and ordinary negligence can be critical in a lawsuit. Negligence does not in and of itself implicate punitive damages under California law. Fraud or deceit, on the other hand, can and often does. Certainly when Plaintiffs file pleadings in a lawsuit they will ask for punitive damages in a case alleging negligent misrepresentation. Thus the difference is not merely a fine point of law: it involves real money. A lawsuit containing an allegation of fraud and deceit, including negligent misrepresentation, significantly increases hazards of litigation as compared to a lawsuit alleging only ordinary negligence.
If you are involved in a situation involving allegations of business fraud we invite you to call for a free legal consultation with one of Buffington Law Firm’s experienced business litigation trial attorneys.