restatement of the law third torts: liability for … restatement of the law third torts: liability...

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is document is submitted to the Advisers for their meeting on September 26 (at 9:00 a.m.), 2013, and to the Members Consultative Group for their meeting on September 27 (at 10:00 a.m.), 2013, both meetings at ALI Headquarters, 4025 Chestnut Street, Philadelphia, Pennsylvania. As of the date it was printed, it had not been considered by the Council or membership of e American Law Institute, and therefore does not represent the position of the Institute on any of the issues with which it deals. The Executive Office The American Law Institute 4025 Chestnut Street Philadelphia, PA 19104-3099 Telephone: (215) 243-1626 Fax: (215) 243-1636 E-mail: [email protected] • Website: http://www.ali.org ©2013 by The American Law Institute All Rights Reserved Restatement of the Law Third Torts: Liability for Economic Harm Preliminary Draft No. 2 (September 3, 2013) SUBJECTS COVERED CHAPTER 1 Unintentional Infliction of Economic Loss (§§ 7-8) CHAPTER 2 Liability in Tort for Fraud APPENDIX Black Letter of Preliminary Draft No. 2 © 2013 by The American Law Institute Preliminary Draft – not approved

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Page 1: Restatement of the Law Third Torts: Liability for … Restatement of the Law Third Torts: Liability for Economic Harm Preliminary Draft No. 2 Comments and Suggestions Invited We welcome

This document is submitted to the Advisers for their meeting on September 26 (at 9:00 a.m.), 2013, and to the Members Consultative Group for their meeting on September 27 (at 10:00 a.m.), 2013, both meetings at ALI Headquarters, 4025 Chestnut Street, Philadelphia, Pennsylvania. As of the date it was printed, it had not been considered by the Council or membership of The American Law Institute, and therefore does not represent the position of the Institute on any of the issues with which it deals.

The Executive OfficeThe American Law Institute

4025 Chestnut StreetPhiladelphia, PA 19104-3099

Telephone: (215) 243-1626 • Fax: (215) 243-1636 E-mail: [email protected] • Website: http://www.ali.org

©2013 by The American Law InstituteAll Rights Reserved

Restatement of the Law Third Torts: Liability for Economic Harm

Preliminary Draft No. 2(September 3, 2013)

SUBJECTS COVERED

CHAPTER 1 Unintentional Infliction of Economic Loss (§§ 7-8)CHAPTER 2 Liability in Tort for FraudAPPENDIX Black Letter of Preliminary Draft No. 2

© 2013 by The American Law Institute Preliminary Draft – not approved

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The American Law InstituteRoberta Cooper Ramo, PresidentAllen D. Black, 1st Vice PresidentDouglas Laycock, 2nd Vice PresidentMargaret H. Marshall, TreasurerPaul L. Friedman, SecretaryLance Liebman, DirectorStephanie A. Middleton, Deputy Director

COUNCILKenneth S. Abraham, University of Virginia School of Law, Charlottesville, VASusan Frelich Appleton, Washington University School of Law, St. Louis, MOKim J. Askew, K&L Gates, Dallas, TXJosé I. Astigarraga, Astigarraga Davis, Miami, FLJohn H. Beisner, Skadden, Arps, Slate, Meagher & Flom, Washington, DCAllen D. Black, Fine, Kaplan and Black, Philadelphia, PAAmelia H. Boss, Earle Mack School of Law at Drexel University, Philadelphia, PAElizabeth J. Cabraser, Lieff Cabraser Heimann & Bernstein, San Francisco, CAN. Lee Cooper, Maynard, Cooper & Gale, Birmingham, ALGeorge H. T. Dudley, Dudley, Topper and Feuerzeig, St. Thomas, U.S. VIChristine M. Durham, Utah Supreme Court, Salt Lake City, UTKenneth C. Frazier, Merck & Co., Inc., Whitehouse Station, NJPaul L. Friedman, U.S. District Court, District of Columbia, Washington, DCYvonne Gonzalez Rogers, U.S. District Court, Northern District of California, Oakland, CAAnton G. Hajjar, O’Donnell, Schwartz & Anderson, Washington, DCGeoffrey C. Hazard, Jr.*, University of California, Hastings College of the Law,

San Francisco, CA; University of Pennsylvania Law School, Philadelphia, PAD. Brock Hornby, U.S. District Court, District of Maine, Portland, MEWilliam C. Hubbard, Nelson Mullins Riley & Scarborough, Columbia, SCWallace B. Jefferson, Texas Supreme Court, Austin, TXMary Kay Kane, University of California, Hastings College of the Law, San Francisco, CAMichele C. Kane, The Walt Disney Company, Burbank, CACarolyn Dineen King, U.S. Court of Appeals, Fifth Circuit, Houston, TXHarold Hongju Koh, Yale Law School, New Haven, CTCarolyn B. Kuhl, Superior Court of California, County of Los Angeles, Los Angeles, CACarolyn B. Lamm, White & Case, Washington, DCDerek P. Langhauser, Maine Community College System, South Portland, MEDouglas Laycock, University of Virginia School of Law, Charlottesville, VACarol F. Lee, Taconic Capital Advisors, New York, NYDavid F. Levi, Duke University School of Law, Durham, NCGoodwin Liu, California Supreme Court, San Francisco, CAGerard E. Lynch, U.S. Court of Appeals, Second Circuit, New York, NYMargaret H. Marshall, Choate Hall & Stewart, Boston, MALori A. Martin, WilmerHale, New York, NYM. Margaret McKeown, U.S. Court of Appeals, Ninth Circuit, San Diego, CAJohn J. McKetta, III, Graves, Dougherty, Hearon & Moody, Austin, TXJudith A. Miller, Chevy Chase, MD Kathryn A. Oberly, District of Columbia Court of Appeals, Washington, DCHarvey S. Perlman, University of Nebraska, Lincoln, NERoberta Cooper Ramo, Modrall Sperling, Albuquerque, NMDavid W. Rivkin, Debevoise & Plimpton, New York, NYDaniel B. Rodriguez, Northwestern University School of Law, Chicago, IL

*Director Emeritus

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Lee H. Rosenthal, U.S. District Court, Southern District of Texas, Houston, TXGary L. Sasso, Carlton Fields, Tampa, FLMary M. Schroeder, U.S. Court of Appeals, Ninth Circuit, Phoenix, AZAnthony J. Scirica, U.S. Court of Appeals, Third Circuit, Philadelphia, PAMarsha E. Simms, Weil, Gotshal & Manges (retired), New York, NYRobert H. Sitkoff, Harvard Law School, Cambridge, MAJane Stapleton, Australian National University College of Law, Canberra, Australia;

University of Texas School of Law, Austin, TXLaura Stein, The Clorox Company, Oakland, CALarry S. Stewart, Stewart Tilghman Fox Bianchi & Cain, Miami, FLElizabeth S. Stong, U.S. Bankruptcy Court, Eastern District of New York, Brooklyn, NYCatherine T. Struve, University of Pennsylvania Law School, Philadelphia, PA David K. Y. Tang, K&L Gates, Seattle, WASarah S. Vance, U.S. District Court, Eastern District of Louisiana, New Orleans, LA Bill Wagner, Wagner, Vaughan & McLaughlin, Tampa, FLSteven O. Weise, Proskauer Rose, Los Angeles, CADiane P. Wood, U.S. Court of Appeals, Seventh Circuit, Chicago, IL

COUNCIL EMERITIShirley S. Abrahamson, Wisconsin Supreme Court, Madison, WIPhilip S. Anderson, Williams & Anderson, Little Rock, ARSheila L. Birnbaum, Quinn Emanuel Urquhart & Sullivan, New York, NYBennett Boskey**, Washington, DCMichael Boudin, U.S. Court of Appeals, First Circuit, Boston, MAWilliam M. Burke, Shearman & Sterling (retired), Costa Mesa, CAHugh Calkins, Initiatives in Urban Education Foundation, Cleveland Heights, OH Gerhard Casper, Stanford University, Stanford, CAWilliam T. Coleman, Jr., O’Melveny & Myers, Washington, DCEdward H. Cooper, University of Michigan Law School, Ann Arbor, MIRoger C. Cramton, Cornell Law School, Ithaca, NYGeorge Clemon Freeman, Jr., Hunton & Williams, Richmond, VAConrad K. Harper, Simpson Thacher & Bartlett (retired), New York, NYVester T. Hughes, Jr., K&L Gates, Dallas, TXHerma Hill Kay, University of California at Berkeley School of Law, Berkeley, CAPierre N. Leval, U.S. Court of Appeals, Second Circuit, New York, NYBetsy Levin, Washington, DCHans A. Linde, Portland, ORMartin Lipton, Wachtell, Lipton, Rosen & Katz, New York, NYMyles V. Lynk, Arizona State University, Sandra Day O’Connor College of Law, Tempe, AZRobert MacCrate, Sullivan & Cromwell, New York, NYVincent L. McKusick, Pierce Atwood, Portland, MERobert H. Mundheim, Shearman & Sterling, New York, NYRoswell B. Perkins***, Debevoise & Plimpton, New York, NYEllen Ash Peters, Connecticut Supreme Court (retired), Hartford, CTRobert A. Stein, University of Minnesota Law School, Minneapolis, MNMichael Traynor***, Cobalt LLP, Berkeley, CAPatricia M. Wald, Washington, DCLawrence E. Walsh, Crowe & Dunlevy (retired), Oklahoma City, OKWilliam H. Webster, Milbank, Tweed, Hadley & McCloy, Washington, DCGeorge Whittenburg, Whittenburg Whittenburg Schachter & Harris, Amarillo, TXHerbert P. Wilkins, Boston College Law School, Newton, MA

***Treasurer Emeritus***President Emeritus and Chair of the Council Emeritus

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Restatement of the Law Third Torts: Liability for Economic Harm

Preliminary Draft No. 2

Comments and Suggestions Invited

We welcome written comments on this draft and ask that they be addressed to the Director and the Reporter; their contact information appears below. Unless ex-pressed otherwise in the submission, by submitting written comments the author authorizes The American Law Institute to retain the submitted material in its files and archives, and to copy, distribute, publish, and otherwise make it available to others, with appropriate credit to the author.

ReporterDean Ward FarnsworthUniversity of Texas School of Law727 East Dean Keeton StreetAustin, TX 78705-3224Fax: (512) 471-6987Email: [email protected]

DirectorProfessor Lance LiebmanThe Executive OfficeThe American Law Institute4025 Chestnut StreetPhiladelphia, PA 19104-3099Fax: (215) 243-1636Email: [email protected]

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Restatement of the Law ThirdTorts: Liability for Economic Harm

REPORTERWard Farnsworth, University of Texas School of Law, Austin, TX

ADVISERSFortunato P. Benavides, U.S. Court of Appeals, Fifth Circuit, Austin, TXMax W. Berger, Bernstein Litowitz Berger & Grossmann, New York, NYMargot Botsford, Massachusetts Supreme Judicial Court, Boston, MAEllen Bublick, University of Arizona, James E. Rogers College of Law,

Tucson, AZElizabeth J. Cabraser, Lieff Cabraser Heimann & Bernstein, San Francisco, CAPeter Cane, Australian National University College of Law, Canberra, AustraliaDenise L. Cote, U.S. District Court, Southern District of New York, New York, NYWilliam B. Dawson, Gibson, Dunn & Crutcher, Dallas, TXJames Donato, Shearman & Sterling, San Francisco, CASander L. Esserman, Stutzman, Bromberg, Esserman & Plifka, Dallas, TXJay M. Feinman, Rutgers University School of Law - Camden, Camden, NJBruce Feldthusen, University of Ottawa, Faculty of Law, Common Law Section,

Ottawa, ON, CanadaParker C. Folse, III, Susman Godfrey, Seattle, WAMark P. Gergen, University of California, Berkeley, School of Law, Berkeley, CAVictor P. Goldberg, Columbia University School of Law, New York, NYGail K. Hillebrand, Consumer Financial Protection Bureau, Washington, DCSpencer Hosie, Hosie McArthur, San Francisco, CARalph A. Jacobs, Jacobs Singer Kivitz & Herman, Philadelphia, PAAndrew Kull, Boston University School of Law, Boston, MAJohn J. McKetta, III, Graves, Dougherty, Hearon & Moody, Austin, TXKen Oliphant, Institute for European Tort Law, Austrian Academy of Sciences, Vienna,

AustriaTeresa Wynn Roseborough, Metropolitan Life Insurance Company, Inc.,

Long Island City, NYDavid Schuman, Oregon Court of Appeals, Salem, OR Catherine M. Sharkey, New York University School of Law, New York, NYStuart H. Singer, Boies, Schiller & Flexner, Fort Lauderdale, FLKathleen Smalley, Boies, Schiller & Flexner, Santa Monica, CAJane Stapleton, Australian National University College of Law, Canberra, Australia;

University of Texas School of Law, Austin, TXGuy Miller Struve, Davis Polk & Wardwell, New York, NYStephen D. Sugarman, University of California, Berkeley, School of Law,

Berkeley, CAFrank Sullivan, Jr., Indiana University, Robert H. McKinney School of Law,

Indianapolis, INSamuel A. Thumma, Arizona Court of Appeals, Division One, Phoenix, AZJon S. Tigar, U.S. District Court, Northern District of California, San Francisco, CARobert C. Walters, Energy Future Holdings, Dallas, TX

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Marc T. Amy, Louisiana Court of Appeal, Third Circuit, Abbeville, LA

Glenn R. Anderson, Halifax, NS, Canada

José F. Anderson, Baltimore, MD Owen L. Anderson, Norman, OKJames K. Archibald, Baltimore, MDMary Arden, Court of Appeal of

United Kingdom, London, EnglandRonald G. Aronovsky,

Los Angeles, CA Jennifer S. Bard, Lubbock, TXWilliam T. Barker, Chicago, ILDabney Dorsett Bassel,

Fort Worth, TXKarl Bayer, Austin, TX James M. Beck, Philadelphia, PAMark A. Behrens, Washington, DCJohn Theodore Boese, Washington, DCLarry L. Boschee, Bismarck, NDAmelia H. Boss, Philadelphia, PADiane F. Bosse, Buffalo, NYThomas H. Boyd, Minneapolis, MNPeter J. Boyer, Marlton, NJ Scott A. Brister, Austin, TXBrian P. Brooks, Pasadena, CAHarvey G. Brown Jr., Texas First Court

of Appeals, Houston, TX Michael K. Brown, Walnut Creek, CATimothy W. Burns, Madison, WIJohn P. Burton, Santa Fe, NMRobert L. Byer, Pittsburgh, PADavid N. Calvillo, McAllen, TXElena A. Cappella, Philadelphia, PAW. Jonathan Cardi,

Winston-Salem, NCJo Carrillo, San Francisco, CAWilliam Frank Carroll, Dallas, TXRobert L. Carter, Illinois Appellate

Court, Third District, Ottawa, IL John Hill Cayce, Fort Worth, TXRobert P. Charrow, Washington, DCJordan B. Cherrick, St. Louis, MO Stephen Yee Chow, Boston, MADouglas L. Christian, Phoenix, AZ

George C. Christie, Durham, NCBradley G. Clary, Minneapolis, MNDavid S. Coale, Dallas, TXAnne E. Cohen, New York, NYNeil B. Cohen, Brooklyn, NYNili Cohen, Tel Aviv, IsraelMichael B. Colgan, Tampa, FLGeorge W. Conk, New York, NYHarry Clayton Cook, Jr.,

Washington, DCJeffrey O. Cooper, Indianapolis, INNina Cortell, Dallas, TXJohn G. Crabtree, Key Biscayne, FLJames W. Craig, New Orleans, LAThomas L. Cubbage, III,

Washington, DCRichard L. Cupp Jr., Malibu, CAChristopher Scott D’Angelo,

Philadelphia, PAJulie A. Davies, Sacramento, CAJohn A. Day, Brentwood, TNCharles E. Daye, Chapel Hill, NC Deborah A. DeMott, Durham, NCJohn L. Diamond, San Francisco, CADarby Dickerson, Lubbock, TXDan B. Dobbs, Tucson, AZGordon L. Doerfer, Boston, MAJames B. Dolan, Jr., Boston, MAJames Sholto Douglas, Supreme Court

of Queensland, Brisbane, AustraliaMeredith J. Duncan, Houston, TXJames J. Edelman, Supreme Court of

Western Australia, Perth, AustraliaSheldon H. Elsen, New York, NYCraig T. Enoch, Austin, TXSamuel Estreicher, New York, NYHeidi Li Feldman, Washington, DCArthur Norman Field, New York, NYJill Fisch, Philadelphia, PADavid A. Fischer, Columbia, MOJudith K. Fitzgerald, U.S. Bankruptcy

Court, Western District of Pennsylvania, Pittsburgh, PA

Thomas M. Flanagan, New Orleans, LA

MEMBERS CONSULTATIVE GROUP

Torts: Liability for Economic Harm(as of August 19, 2013)

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Joseph Z. Fleming, Miami, FLSusan S. Fortney, Hempstead, NYC. Allen Foster, Washington, DCVernon L. Francis, Philadelphia, PATheodore H. Frank, Arlington, VAGeorge Clemon Freeman, Jr.,

Richmond, VASteven F. Friedell, Camden, NJSteven I. Friedland, Greensboro, NCMarvin Garfinkel, Philadelphia, PA Faith E. Gay, New York, NYMark Eric Gebauer, Harrisburg, PAR. James George, Jr., Austin, TXE. Duncan Getchell, Jr.,

Richmond, VAShubha Ghosh, Madison, WILlewellyn J. Gibbons, Toledo, OHDonald G. Gifford, Baltimore, MDIsrael Gilead, Jerusalem, IsraelSharon L. Gleason, U.S. District Court,

District of Alaska, Anchorage, AK Martin Glenn, U.S. Bankruptcy Court,

Southern District of New York, New York, NY

James H. Goetz, Bozeman, MTPhilip S. Goldberg, Washington, DCRobert A. Goodin, San Francisco, CAWendy J. Gordon, Boston, MADavid M. Gossett, Washington, DCMarvin L. Gray, Jr., Seattle, WAOscar S. Gray, Baltimore, MDMichael D. Green, Winston-Salem, NCJeffrey J. Greenbaum, Newark, NJNorman L. Greene, New York, NYMichael Greenwald, Philadelphia, PACharles E. Griffin, Ridgeland, MSJohn J. Grogan, Philadelphia, PADavid Gruning, New Orleans, LATracy Raffles Gunn, Tampa, FLPeter E. Halle, Washington, DCKendyl T. Hanks, Austin, TXScott W. Hansen, Milwaukee, WIRichard E. V. Harris, Piedmont, CAPaul T. Hayden, Los Angeles, CASteven K. Hayes, Fort Worth, TXRex S. Heinke, Los Angeles, CADonald H. J. Hermann, Chicago, ILJames C. Ho, Dallas, TXRichard Anthony Hodyl, Jr.,

Chicago, IL

David A. Hoffman, Philadelphia, PARoger F. Holmes, Anchorage, AKC. Stephen Hsu, Beijing, ChinaWilliam C. Hubbard, Columbia, SCEdwin E. Huddleson,

Washington, DCBarry Hunsaker, Houston, TXBrian J. Hunt, Chicago, ILRichard H. Hunter, St. Croix, U.S. VI Michael John Hutter, Jr., Albany, NYDavid W. Ichel, New York, NYJohn E. Iole, Pittsburgh, PAJ. Russell Jackson, St. Louis, MOJack B. Jacobs, Delaware Supreme

Court, Wilmington, DEKirk C. Jenkins, Chicago, ILRoland K. Johnson, Fort Worth, TXVincent R. Johnson, San Antonio, TXKenneth C. Johnston, Dallas, TX Gregory G. Jones, Tampa, FLPaul F. Jones, Buffalo, NYEmma Coleman Jordan,

Washington, DCAllan Kanner, New Orleans, LAMatthew I. Katz, Vermont Superior

Court, Burlington, VTGregory C. Keating, Los Angeles, CAMichael J. Keating, St. Louis, MOHugh Rice Kelly, Houston, TXDavid R. Keyes, Austin, TXEvelyn V. Keyes, Texas First Court of

Appeals, Houston, TXJeff Kichaven, Los Angeles, CAMark R. Killenbeck, Fayetteville, AREdmund W. Kitch, Charlottesville, VAAndrew R. Klein, Indianapolis, INDaniel S. Kleinberger, St. Paul, MN Michael J. Kramer, Noble Superior

Court, Albion, INWilliam P. Kratzke, Memphis, TNMichael I. Krauss, Arlington, VAJane Kreusler-Walsh, West Palm

Beach, FLKurt Kuhn, Austin, TXPeter B Kutner, Norman, OKEdward Labaton, New York, NYSteven C. Laird, Fort Worth, TXIris Lan, New York, New YorkBarry S. Landsberg, Los Angeles, CAJoseph H. Lang, Jr., Tampa, FLOthni J. Lathram, Tuscaloosa, AL

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John P. Lavelle, Jr., Philadelphia, PAPaul A. LeBel, Grand Forks, NDMichael J. Leech, Chicago, ILSeth R. Lesser, Rye Brook, NYLawrence C. Levine, Sacramento, CAJeffrey S. Levinger, Dallas, TXAdam J. Levitt, Chicago, ILErika F. Lietzan, Washington, DCAllen M. Linden,

Toronto, ON, CanadaJoseph W. Little, Gainesville, FLDavid A. Logan, Bristol, RIKyle D. Logue, Ann Arbor, MIThad G. Long, Birmingham, ALRalph R. Mabey, Salt Lake City, UTWilliam Cullen Mac Donald,

New York, NYGerard N. Magliocca, Indianapolis, INSolangel Maldonado, Newark, NJNeal S. Manne, Houston, TXColin P. Marks, San Antonio, TXJames C. Martin, Pittsburgh, PAMiquel Martin-Casals, Girona, SpainAlbert J. Matricciani, Jr., Maryland

Court of Special Appeals, Baltimore, MD

Charles W. Matthews, Dallas, TXJames T. McCartt, Houston, TXJames A. McKenna, Hallowell, MEBenjamin C. McMurray,

Salt Lake City, UTWilliam J. McNichols, Norman, OKMichael J. Meehan, Tucson, AZMark S. Melodia, Princeton, NJChad C. Messier, St. Thomas, U.S. VIKevin H. Michels, Spokane, WAElizabeth S. Miller, Waco, TX Charles H. Moellenberg, Jr.,

Pittsburgh, PAJames S. Moody, Jr., U.S. District Court,

Middle District of Florida, Tampa, FL

Jennifer M. Moore, Albany, NYNancy J. Moore, Boston, MAOlivier Pierre Moréteau,

Baton Rouge, LAJuliet M. Moringiello, Harrisburg, PACharles R. A. Morse, New York, NYJim A. Moseley, Texas Fifth Court of

Appeals, Dallas, TXJonathan M. Moses, New York, NYEdward M. Mullins, Miami, FL

John Murphy, Manchester, EnglandJason M. Murray, Miami Lakes, FLGary Myers, Columbia, MORichard L. Neumeier, Boston, MAVirginia E. Nolan, San Diego, CAHarriet O’Neill, Austin, TXDavid G. Owen, Columbia, SCDennis Owens, Kansas City, MO Geoffrey Palmer,

Wellington, New ZealandJerry Richard Palmer, Topeka, KSStephen Patrick Pate, Houston, TXRobert S. Peck, Washington, DCHarvey S. Perlman, Lincoln, NEStephen R. Perry, Philadelphia, PATimothy J. Petumenos, Anchorage, AK Frank A. Pfiffner, Anchorage

Superior Court, Anchorage, AKJeffrey M. Pollock, Princeton, NJ David J. Porter, Pittsburgh, PASusan Poser, Lincoln, NEEdward M. Posner, Philadelphia, PAMatthew Christopher Powers,

Austin, TXKaren S. Precella, Fort Worth, TXPolly J. Price, Atlanta, GAJ. David Prince, St. Paul, MNCarey R. Ramos, New York, NYHugh M. Ray, Houston, TXBernard D. Reams, Jr.,

San Antonio, TXJoe R. Reeder, Washington, DCWilliam L. Reynolds, Baltimore, MDJanet Leach Richards, Austin, TXSally M. Rider, Tucson, AZRobert J. Ridge, Pittsburgh, PAClifford A. Rieders, Williamsport, PAJames L. Robertson, Jackson, MSChristopher John Robinette,

Harrisburg, PAReginald L. Robinson,

Washington, DCAnthony Z. Roisman, Lebanon, NHEdiberto Roman, Miami, FLKenneth Ross, Minnetonka, MNMary Massaron Ross, Detroit, MILinda J. Rusch, Seattle, WARobin Russell, Houston, TXTimothy C. Russell, Bryn Mawr, PAMichael L. Rustad,

South Burlington, VT

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Christopher Lynn Sagers, Cleveland, OH

Pablo Salvador-Coderch, Barcelona, Spain

Joseph Sanders, Houston, TXMilton R. Schroeder,

Paradise Valley, AZ Victor E. Schwartz, Washington, DCAnthony J. Sebok, New York, NYKarl E. Seib, New York, NYMarc M. Seltzer, Los Angeles, CAStephen M. Sheppard, Fayetteville, AREric A. Shumsky, Arlington, VABarbara T. Sicalides, Philadelphia, PAKenneth W. Simons, Boston, MAJoseph R. Slights, III, Wilmington, DEDouglas G. Smith, Chicago, ILCarl A. Solano, Philadelphia, PARobert A. Soriano, Tampa, FLGirardeau A. Spann, Washington, DCBrian F. Spector, Miami, FLMichael K. Steenson, St. Paul, MNKathryn A. Stephens, Texas Fourth

Court of Appeals, San Antonio, TXLarry S. Stewart, Miami, FLRobert H. Stier, Jr., Portland, ME David R. Stras, Minnesota Supreme

Court, St. Paul, MNLeo E. Strine, Jr., Delaware Court of

Chancery, Wilmington, DEKeith Strong, U.S. Magistrate Court,

District of Montana, Great Falls, MTAndrew H. Struve, Los Angeles, CAPatrick James Sullivan, Encinitas, CA

John S. Summers, Philadelphia, PAMary-Christine Sungaila,

Costa Mesa, CAWilliam Swadling, Oxford, EnglandStephen Lyle Tatum, Fort Worth, TXJohn D. Taurman, Washington, DCWilliam H. Theis, Winnetka, ILBowen H. Tucker, Chicago, ILSjef van Erp, Maastricht, NetherlandsVictor D. Vital, Dallas, TXEugene Volokh, Los Angeles, CABill Wagner, Tampa, FLSean P. Wajert, Philadelphia, PANicholas J. Wallwork,

Ruckersville, VARuth Wedgwood, Washington, DCJeffrey G. Weil, Philadelphia, PASteven O. Weise, Los Angeles, CAThomas J. Welsh, Meriden, CTStephen J. Werber, Cleveland, OHJerry Wertheim, Santa Fe, NMJoseph A. Wheelock, Jr.,

Williamstown, MAChristina B. Whitman, Ann Arbor, MISimon J. Whittaker, Oxford, EnglandGerard E. Wimberly, Jr.,

New Orleans, LANicholas J. Wittner, East Lansing, MIWilliam A. Worthington, Houston, TXJennifer Wriggins, Portland, MERichard W. Wright, Evanston, ILEric H. Zagrans, Cleveland, OHBenjamin C. Zipursky, New York, NY

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The bylaws of The American Law Institute provide that “Publication of any work as representing the Institute’s position requires approval by both the membership and the Council.” Each portion of an Institute project is sub-mitted initially for review to the project’s Consultants or Advisers as a Memorandum, Preliminary Draft, or Advisory Group Draft. As revised, it is then submitted to the Council of the Institute in the form of a Council Draft. After review by the Council, it is submitted as a Tentative Draft, Discussion Draft, or Proposed Final Draft for con-sideration by the membership at the Institute’s Annual Meeting. At each stage of the reviewing process, a Draft may be referred back for revision and resubmission. The status of this Draft is indicated on the front cover and title page. This project resumed in 2010. Sections 1 through 5 of Chapter 1 were approved by the membership at the 2012 Annual Meeting; there was insufficient time to consider § 6. This is the first draft of the material contained in this Draft. The project’s Reporter may have been involved in oth-er engagements on issues within the scope of the project; all Reporters are asked to disclose any conflicts of interest, or their appearance, in accord with the Policy Statement and Procedures on Conflicts of Interest with Respect to Institute Projects; and copies of Reporters’ written disclo-sures are available from the Institute upon request; how-ever, only disclosures provided after July 1, 2010, will be made available and, for confidentiality reasons, parts of the disclosures may be redacted or withheld.

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Reporter’s Memorandum To: Lance Liebman From: Ward Farnsworth Date: August 27, 2013 Re: Restatement Third, Torts: Liability for Economic Harm Preliminary Draft No. 2 ________________________________________________________________ Attached please find the next round of materials for Restatement Third, Torts: Liability for Economic Harm. The first two Sections here conclude the proposed treatment of liability for economic loss caused by negligence. Section 7 covers economic losses resulting from damage to a third party or to property not belonging to the plaintiff. Section 8 discusses economic losses resulting from a public nuisance. The next five Sections belong to Chapter 2: Liability in Tort for Fraud. The first of those Sections—§ 9—is the longest; it presents and explains the basic elements of the tort claim for fraud. Sections 10-12 discuss some specialized branches of the tort: liability for nondisclosure, liability for opinions, and liability for so-called promissory fraud. Section 13 discusses damages. This draft’s most significant departure from the Second Restatement is the proposed use of an out-of-pocket measure for compensatory damages rather than a measure based on the loss of the plaintiff’s bargain.

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TABLE OF CONTENTS Section Page Reporter’s Memorandum .................................. xiii

CHAPTER 1

UNINTENTIONAL INFLICTION OF ECONOMIC LOSS

[The first six Sections of Chapter 1 are contained in

Tentative Draft No. 1 (2012).]

§ 7. Economic loss from injury to a third person or to property not belonging to the claimant .................... 1 § 8. Public nuisance resulting in pure economic loss ..... 17

CHAPTER 2

LIABILITY IN TORT FOR FRAUD

§ 9. Fraud ............................................... 33

§ 10. Duties to disclose; tacit misrepresentation ....... 71

§ 11. Liability for misrepresentations of opinion ....... 83

§ 12. Misrepresentation of intention; promissory fraud .. 93

§ 13. Damages .......................................... 101

Appendix. Black Letter of Preliminary Draft No. 2 ....... 115

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1

CHAPTER 1 1

UNINTENTIONAL INFLICTION OF ECONOMIC LOSS 2

3 4 § 7. Economic loss from injury to a third person or to 5 property not belonging to the claimant. 6 7

Except as provided in § 8, a claimant cannot recover 8

for pure economic loss caused by 9

10

(a) unintentional personal injury to another 11

party; or 12

(b) unintentional injury to property in which 13

the claimant has no proprietary interest. 14

15

Comment: 16

17

a. Scope. The two limits on recovery stated in this 18

Section are related applications of the same principle, and 19

they apply to facts that usually have certain features in 20

common. The plaintiff and defendant typically are 21

strangers. The defendant commits a negligent act that 22

injures a third party’s person or property, and indirectly-23

-though perhaps foreseeably--causes various sorts of 24

economic loss to the claimant: lost income or profits, 25

missed business opportunities, expensive delays, or other 26

inconvenience. The plaintiff may suffer losses, for 27

example, because the defendant injured someone with whom 28

the plaintiff had a contract and from whom the plaintiff 29

had been expecting performance, such as an employee or 30

supplier. See Illustration 1. Or the plaintiff may be 31

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§ 7. Injuries to the person or property of third parties

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unable to make new contracts with others, such as customers 1

who cannot conveniently reach the plaintiff’s business 2

because the defendant’s negligence has damaged property 3

that now blocks the way. See Illustration 4. The common 4

law of tort does not recognize a plaintiff’s claim in such 5

circumstances. 6

7

Illustrations: 8

9

1. Driver negligently runs over Goalie, who has 10

a contract to play for Employer’s hockey team. As a 11

result of the accident, Goalie is unable to perform 12

for the rest of the season, and Employer suffers lost 13

revenues from ticket sales. Employer has no tort 14

claim against Driver. 15

16

2. Owner buys a policy from Insurer to cover the 17

risk of damage or loss to Owner’s barge. Tortfeasor 18

negligently sinks the barge, forcing Insurer to pay 19

Owner under the terms of the policy. Insurer seeks to 20

recover those sums from Tortfeasor. Insurer may be 21

entitled to restitution as subrogee of the rights of 22

Owner. Insurer does not have a right to collect from 23

Tortfeasor in a direct action for negligence. 24

25

3. Carrier delivering toxic chemicals to Factory 26

negligently spills them on Factory’s property. The 27

spill forces Factory to shut down for a week, during 28

which time Employees of Factory go unpaid. Employees 29

have no tort claim against Carrier. 30

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§ 7. Injuries to the person or property of third parties

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1

4. Builder negligently performs construction on 2

a building owned by Client. The building collapses as 3

a result, forcing the closure of an adjacent street 4

for several weeks. Delicatessen, which operates next 5

door to the collapsed building, suffers no physical 6

damage but loses profits because customers cannot 7

reach the entrance while the street is closed. 8

Delicatessen has no tort claim for negligence against 9

Builder. 10

11

Statutes may provide a plaintiff with a right to 12

recover for economic loss that results from the wrongful 13

death of another. Common law in some jurisdictions may 14

also provide a right to recover for loss of consortium, 15

which this Section does not classify as economic injury. 16

Those rights of action are outside the scope of this 17

Restatement, and they are not impaired by the rule of this 18

Section. Liability for intentional interference with 19

contractual relations is discussed in Chapter [X]. 20

21

b. Rationale. The rule of this Section is justified 22

by several considerations. The first, as noted in § 1, 23

economic losses can proliferate long after the physical 24

forces at work in an accident have spent themselves. A 25

collision that sinks a ship will cause a well-defined loss 26

to the ship’s owner; but it also may foreseeably cause 27

economic losses to wholesalers who had expected to buy the 28

ship’s cargo, then to retailers who had expected to buy 29

from the wholesalers, and then to suppliers, employees, and 30

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§ 7. Injuries to the person or property of third parties

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customers of the retailers, and so on. Recognizing claims 1

for those sorts of losses would greatly increase the 2

number, complexity, and expense of potential lawsuits 3

arising from many accidents. In some cases recognition of 4

such claims would also result in liabilities that are 5

indeterminate and out of proportion to the culpability of 6

the defendant. These costs do not seem likely to be 7

justified by comparable benefits; courts doubt that threats 8

of such open-ended liability would usefully improve the 9

incentives of parties to take precautions against 10

accidents. At the same time, the victims of economic 11

injury often can protect themselves effectively by means 12

other than a tort suit. They may be able to obtain “first-13

party” insurance against their losses, or recover in 14

contract from those who do have good claims against the 15

defendant. 16

The rationales just stated are general, and no one of 17

them is conclusive. They prevail by their cumulative 18

force. And while they do not apply with equal force to 19

every claim that arises under this Section, most courts 20

reject such claims categorically. They have concluded that 21

distinctions allowing some plaintiffs to recover but not 22

others, based on a case-by-case inquiry into the policies 23

at issue, cannot be made in a sufficiently principled 24

manner. Denying claims by rule undeniably works a hardship 25

on plaintiffs with claims that fall outside the policies 26

that make the rule attractive—claims that do not lend 27

themselves to solution by contract, for example, or that 28

produce no problems of indeterminacy. But a rule against 29

recovery has other advantages: predictability, clarity, 30

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§ 7. Injuries to the person or property of third parties

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and economy of application for courts, lawyers, and those 1

attempting to plan their affairs and anticipate their 2

liabilities. In this area those values have been thought 3

to outweigh the benefits of occasionally providing relief. 4

5

c. Proprietary interests. A claimant with a 6

proprietary interest in property can recover for economic 7

losses that result when the property is damaged. Simple 8

ownership is the most familiar example of a proprietary 9

interest, but there are other kinds as well. Proprietary 10

interests can be divided into two types: those that arise 11

from mere possession of property, and those that arise from 12

ownership interests without need of possession. If a 13

claimant possesses property without owning it, courts 14

decide whether the resulting interest is “proprietary” by 15

using a functional test: they ask whether the claimant has 16

control of the property and is responsible for its 17

maintenance and repair. Thus the law frequently allows a 18

lessee of property to recover for damage to it, but does 19

not allow recovery by a claimant who occupies or holds 20

property under a license that confers less extensive powers 21

and responsibilities. 22

If the claimant does not possess the damaged property, 23

then any proprietary interest must arise from a formal 24

right of ownership in it. Common examples of parties with 25

ownership rights in property they do not possess include a 26

lessor, a remainderman, a bailor, and the holder of an 27

easement. Their rights are regarded as proprietary 28

interests, so they can recover for economic losses they 29

suffer when the property is damaged while out of their 30

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§ 7. Injuries to the person or property of third parties

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possession. By contrast, a claimant who does not possess 1

the property and has a merely contractual interest in it, 2

such as an option to purchase or a contract for future 3

delivery, cannot recover in tort when the property is 4

damaged. The rights of the buyer and seller in such a case 5

are defined by their contracts. 6

As is evident from these examples, more than one party 7

can have a proprietary interest in the same property at the 8

same time. When such property is damaged, each party has a 9

separate cause of action for its economic losses, so long 10

as their losses are distinct; the tortfeasor cannot be made 11

to pay twice for identical damage. See Illustration 8. 12

13

Illustrations: 14

15

5. Company hires Contractor to build an 16

underground pipeline. Unrelated Excavator negligently 17

damages the pipeline while it is under construction. 18

Contractor has control of the pipeline at the time the 19

incident occurs, and is responsible for repair of any 20

damage to the work until the project is completed. 21

Contractor can recover its losses from Excavator. 22

23

6. Vessel negligently damages a railroad bridge 24

that Railroad has a right to use. The bridge is owned 25

and maintained by another. The damage forces Railroad 26

to send its trains by an alternate route that is more 27

expensive than using the bridge. Railroad cannot 28

recover its losses from owner of Vessel. 29

30

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§ 7. Injuries to the person or property of third parties

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7. Manufacturer hires Factory to add dye to 1

fabric. While Factory is performing the work, 2

Contractor negligently severs a utility line carrying 3

power to Factory’s machines. The fabric is ruined as 4

a result. The court finds that Factory was acting as 5

bailee of the fabric. Factory may recover in tort 6

against Contractor. 7

8

8. Tortfeasor negligently causes physical harm 9

to property belonging to A as lessor and B as lessee. 10

Repairs are not feasible, and the damage reduces the 11

income that the property can produce. B has an action 12

against Tortfeasor for lost income during the 13

remaining period of the lease. A has an action 14

against Tortfeasor for lost income thereafter. 15

16

d. Damage to property. As already noted, economic 17

loss can be recovered as an ordinary item of damages when it 18

results from actionable physical harm to the claimant or 19

the claimant’s property. But a plaintiff whose property 20

suffers some harm does not necessarily gain the right to 21

recover for pure economic loss that results from other 22

features of the same general incident. Courts require a 23

causal connection between the physical harm and the 24

economic loss. See Illustrations 9-10. Where physical 25

harm has occurred, traditional principles of causation 26

determine whether the harm is connected closely enough to 27

the claimant’s economic losses to permit recovery for them. 28

See Restatement Third, Torts: Liability for Physical and 29

Emotional Harm §§ —, —. 30

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§ 7. Injuries to the person or property of third parties

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1

Illustrations: 2

3

9. Contractor negligently severs a power line 4

running from Utility to Farmer’s indoor mushroom 5

nursery. The resulting loss of power causes Farmer’s 6

mushrooms to die. The destruction of the crop causes 7

Farmer to lose profits. Farmer may recover the lost 8

profits from Contractor. 9

10

10. Barge Operator negligently causes an oil 11

spill that forces the closure of a harbor and requires 12

Contractor to delay work on a construction project 13

there. The spilled oil also ruins an expensive piece 14

of Contractor’s machinery, but the machinery can be 15

swiftly replaced and is not the cause of Contractor’s 16

delay. Contractor can recover from Barge Operator for 17

the ruined machinery but not for the costs occasioned 18

by the delay of the project. 19

20

e. Fishermen. Commercial fisherman have sometimes 21

prevailed on claims that appear inconsistent with the rules 22

of this Section. Those results occur in two different 23

kinds of cases, and they are best considered separately. 24

(a) In the first pattern, a defendant’s negligence 25

damages a ship, typically by collision. The accident 26

causes economic losses to fishermen hired to work on the 27

ship, and who were to be paid a percentage of the profits 28

from the voyage—a so-called “lay agreement,” which might be 29

viewed as a type of joint venture with the owner. It is 30

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§ 7. Injuries to the person or property of third parties

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understood, as a background matter, that the owner likely 1

can sue the tortfeasor for profits that were expected from 2

the ship’s voyage and were lost to delays caused by the 3

accident. It is further understood that the owner is 4

liable in restitution to the fishermen for their share of 5

what he recovers; the judgment in favor of the owner can be 6

accompanied on the spot by recognition of a constructive 7

trust in favor of the fishermen. In these circumstances, 8

courts have also given fishermen the option of skipping the 9

middleman and suing the tortfeasor directly. 10

Why fishermen are allowed this direct option is a 11

matter of occasional debate. The same privilege is not 12

extended to other parties who suffer economic harm when 13

they have contracts with those whose property is damaged. 14

The difference is probably best explained by the unusually 15

clear and precise nature of the fishermen’s entitlement: 16

though they do not own the damaged property, they are joint 17

venturers with the party who does own it. Payment from the 18

tortfeasor, if made to the owner, passes through to the 19

fishermen in a manner that is unusually regular, clear-cut, 20

and automatic. Allowing the fishermen to sue in their own 21

right thus amounts to a convenient shortcut, not an 22

expansion of substantive rights. Nobody is made worse off 23

by it, since the tortfeasor merely pays one party rather 24

than another. 25

Describing this state of affairs as a “fishermen’s 26

exception,” or explaining it on the ground that fishermen 27

are “favorites of admiralty,” is unfortunate and best 28

avoided. Those phrases imply that fishermen are, by virtue 29

of their trade, exempt from the rules of this Section and 30

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§ 7. Injuries to the person or property of third parties

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able to collect whenever they suffer economic harm on 1

account of a defendant’s negligence. That is not so. In 2

fact only certain fishermen have been subject to 3

distinctive treatment: those who have lay agreements with 4

the owner of a damaged ship. The distinctive treatment is 5

justified not because they are fishermen but because 6

features of their commercial arrangement make it unusually 7

efficient to let them collect directly rather than 8

indirectly. The difference is procedural in character. 9

The allowance is not properly used to provide fishermen 10

with a greater recovery than they would have received in 11

the end without it, or to make a defendant pay more than 12

would have been due without it. 13

(b) In a second pattern, a defendant causes harm to a 14

natural resource, typically by spilling oil or other 15

chemicals into a body of water that serves as a fishing 16

ground. The affected fishermen sue and often win damages, 17

though they had no proprietary interest in the contaminated 18

waters or the uncaught fish. These cases are usually, and 19

correctly, understood as suits to remedy a public nuisance. 20

See Section X, which sometimes allows a plaintiff to 21

recover for damage to a natural resource if the plaintiff’s 22

injury differs from the injuries suffered by the community 23

in general. Fishermen often qualify as plaintiffs under 24

that rule, as do various others. Again, referring to the 25

result as a “fisherman’s exception” to the rule of this 26

Section is misleading. The right to sue belongs to anyone 27

who satisfies the principles of Section X. 28

29

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§ 7. Injuries to the person or property of third parties

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f. Judge and jury. Most courts express the rule of 1

this Section by describing it as a limitation of the 2

defendant’s duty. Other courts have occasionally stated 3

the principle as a matter of causation, or scope of 4

liability, or as a rule about damages. The labeling of the 5

issue usually is of no consequence so long as the rule’s 6

applicability is understood to be a matter of law for the 7

court, not a question for the jury. Treating the rule as a 8

limitation on the defendant’s duty will generally be the 9

clearest way to establish that distribution of labor. 10

11

Reporter’s Note 12

13 a. Scope. The problems addressed by this Section 14 were the subject of Restatement Second, Torts § 766C 15 (“Negligent Interference With Contract Or Prospective 16 Contractual Relation”). The rule stated here is often 17 associated with Robins Dry Dock & Repair Co. v. Flint, 275 18 U.S. 303 (1927) (Holmes, J.), but appeared in many earlier 19 cases as well. See, e.g., Byrd v. English, 43 S.E. 419 20 (1903); Conn. Mut. Life Ins. Co. v. New York & N.H.R. Co., 21 25 Conn. 265 (1856); Anthony v. Slaid, 52 Mass. 290 (1846); 22 see also Cattle v. Stockton Waterworks [1875] All E.R. 220, 23 223 (Q.B.). Contrary positions have been taken only 24 occasionally in the case law. See People Express Airlines, 25 Inc. v. Consolidated Rail Corp., 495 A.2d 107 (N.J. 1985); 26 Mattingly v. Sheldon Jackson College, 743 P.2d 356 (Alaska 27 1987). 28 The types of recovery prohibited by this Section are 29 sometimes described in some other countries as “relational 30 economic loss.” That term does not appear in American case 31 law, and is not advocated here because it is not likely to 32 produce improved clarity; the meaning of the phrase is not 33 evident from the words it employs. For comparative 34 discussion, see Feldthusen, Economic Negligence ch. 5 (5th 35 ed. 2008). 36 Claims for loss of consortium typically involve 37 recovery for the society and affection of a spouse or 38 parent who has been injured or killed. As noted in the 39

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Comment, these are not generally viewed as “economic” 1 losses. See, e.g., Phillips v. Erhart, 254 P.3d 1 (Idaho 2 2011); Boeken v. Philip Morris USA, Inc., 230 P.3d 342 (Cal 3 2010); Thorn v. Mercy Memorial Hosp., 767 N.W.2d 431 (Mich. 4 2009); Hutchings v. Childress 895 N.E.2d 520 (Ohio 2008); 5 Oaks v. Connors, 660 A.2d 423 (Md. 1995). 6 Illustration 1 is based on Phoenix Professional Hockey 7 Club v. Hirmer, 502 P.2d 164 (Ariz. 1972). Earlier common-8 law authorities that recognized liability on fact patterns 9 of this kind have been abandoned; they are viewed as 10 depending on an outdated view of the relation between 11 master and servant. See Anderson Plasterers v. Meinecke, 12 543 N.W.2d 612 (Iowa 1996); Flynn Const. Co., Inc. v. 13 Poulin, 570 A.2d 1200 (Me. 1990); Champion Well Service, 14 Inc. v. NL Industries, 769 P.2d 382 (Wyo. 1989); Annot., 4 15 A.L.R.4th 504 (1981). 16 Illustration 2 is the same in substance as 17 Illustration 2 to Restatement Second, Torts § 766C. See 18 Sinram v. Pennsylvania R. Co., 61 F.2d 767 (2d Cir. 1932); 19 Connecticut Mut. Life Ins. Co. v. New York & N.H.R. Co., 25 20 Conn. 265 (1856); Fifield Manor v. Finston, 354 P.2d 1073 21 (Cal. 1960). On the insurer’s rights as subrogee, see 22 Restatement Third, Restitution and Unjust Enrichment § 24. 23 Illustration 3 is based on Willis v. Georgia Northern 24 Ry. Co., 314 S.E.2d 919 (Ga. App. 1984); see also United 25 Textile Workers v. Lear Siegler Seating Corp., 825 S.W.2d 26 83 (Tenn. App. 1990); Local Joint Executive Board v. Stern, 27 651 P.2d 637 (Nev. 1982); Rodriquez v. Carson, 519 S.W.2d 28 214 (Tex. App. 1975); Stevenson v. East Ohio Gas Co., 73 29 N.E.2d 200 (Ohio 1946). 30 Illustration 4 is based on 532 Madison Avenue Gourmet 31 Foods, Inc., v. Finlandia Center, Inc., 750 N.E.2d 1097 32 (N.Y. 2001). 33 34 b. Rationale. For leading statements of the rule of 35 this Section and the reasons for it, see 532 Madison Avenue 36 Gourmet Foods, Inc., v. Finlandia Center, Inc., supra; 37 Aikens v. Debow, 541 S.E.2d 576 (W.Va. 2000); Louisiana ex 38 rel. Guste v. M/V Testbank, 752 F.2d 1019 (5th Cir.1985) 39 (en banc); Barber Lines A/S v. M/V Donau Maru, 764 F.2d 50 40 (1st Cir. 1985); Stevenson v. East Ohio Gas Co., supra. 41 For academic discussion, see Rabin, Tort Recovery for 42 Negligently Inflicted Economic Loss: A Reassessment, 37 43 Stan. L. Rev. 1513 (1985); James, Limitations on Liability 44 for Economic Loss Caused by Negligence: A Pragmatic 45

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Appraisal, 25 Vand. L. Rev. 43 (1972); Godwin, Negligent 1 Interference with Economic Expectancy: The Case for 2 Recovery, 16 Stan. L. Rev. 664 (1964). 3 Economists have offered an additional rationale for 4 the rule of this Section: sometimes an economic loss to 5 one party may become a benefit to another. If a restaurant 6 loses customers because of damage to a nearby roadway, 7 other restaurants gain when the customers go there instead. 8 To the extent that economic losses are offset in this way 9 by benefits to others, there is no social loss; there is 10 just a shifting of wealth from one party to another. This 11 line of reasoning may have merit, but it has not been 12 pursued by the courts. The reason may be that the aims of 13 tort law are not limited to avoiding social costs; and even 14 if they were, separating private from social losses in any 15 given situation, and with respect to all parties involved, 16 is difficult. In the example just described, the 17 disappointment of patrons who wanted to dine at the first 18 restaurant remains a real loss even if a second restaurant 19 captures all of their business--though the scale of their 20 disappointment may bear little relationship to the lost 21 profits that the first restaurant seeks to recover. 22 For discussion of the economic arguments just 23 discussed, see Posner, Common-Law Economic Torts: An 24 Economic and Legal Analysis, 48 Ariz. L. Rev. 735 (2006); 25 Gilead, Tort Law and Internalization: The Gap Between 26 Private Loss and Social Cost, 17 Int'l Rev. L. & Econ. 589 27 (1997); Goldberg, Recovery for Economic Loss Following the 28 Exxon Valdez Oil Spill, 23 J. Legal Stud. 1 (1994); Bishop, 29 Economic Loss in Tort, 2 Oxford J. Leg. Stud. 1 (1981). 30 31

c. Proprietary interests. For discussion of 32 proprietary interests and how they are defined for purposes 33 of this Section, see Holt Hauling & Warehousing Systems, 34 Inc. v. M/V Ming Joy, 614 F. Supp. 890 (E.D. Pa. 1985), and 35 Texas Eastern Transmission Corp. v. McMoRan Offshore 36 Exploration Co., 877 F.2d 1214 (5th Cir. 1989). 37 Illustration 5 is based on J. Ray McDermott & Co. v. 38 S.S. Egero, 453 F.2d 1202 (5th Cir. 1972). Illustration 6 39 is based on Louisville and N. R. Co. v. M/V Bayou Lacombe, 40 597 F.2d 469 (5th Cir. 1979). For a different result on 41 similar facts, see Canadian National Railway v. Norsk 42 Pacific Steamship Co., [1992] 1 S.C.R. 1021, 11 43 C.C.L.T.(2d) 1, 91 D.L.R.4th 289, 137 N.R. 241. 44

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§ 7. Injuries to the person or property of third parties

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Illustration 7 is based on Priority Finishing Corp. v. 1 LAL Const. Co., Inc., 667 N.E.2d 290 (Mass. App. 1996); see 2 also Paragon Oil Co. v. Republic Tankers, S. A., 310 F.2d 3 169 (2d Cir. 1962). The bailee’s recovery on these facts 4 precludes suit by the bailor against the same defendant to 5 collect the same damages. If the bailee recovers amounts 6 that exceed its interest in the property, those amounts are 7 held in trust for the bailor. See Associates Discount 8 Corp. v. Gillineau, 78 N.E.2d 192 (Mass. 1948); The 9 Winkfield, [1902] P. 42 (C.A.), [1900-03] All Eng. Rep. 10 346. 11 Illustration 8 is based on Rogers Terminal & Shipping 12 Corp. v. International Grain Transfer, Inc., 672 F.2d 464 13 (5th Cir. 1982), but moving the case ashore. 14 15

d. Damage to property. Illustration 9 is based on 16 Newlin v. New England Tel. & Tel. Co., 54 N.E.2d 929 (Mass. 17 1944). Illustration 10 is based on Garweth Corp. v. Boston 18 Edison Co., 613 N.E.2d 92 (Mass. 1993); see also In re 19 Oriental Republic of Uruguay, 821 F. Supp. 934 (D. Del. 20 1993); Naviera Maersk Espana, S.A. v. Cho–Me Towing, Inc., 21 782 F. Supp. 317 (E.D. La. 1992). 22 23 e. Fishermen. The leading modern discussion of the 24 rights of fishermen on lay agreements is Carbone v. Ursich, 25 209 F.2d 178 (9th Cir. 1953); see also Yarmouth Sea 26 Products Ltd. v. Scully, 131 F.3d 389 (4th Cir. 1997); 27 Miller Industries v. Caterpillar Tractor Co., 733 F.2d 813 28 (11th Cir. 1984). On the rights of a fishing crew to 29 monies received by their ship’s owner after a collision, 30 see Jensen v. Goresen, 881 P.2d 1119 (Alaska 1994); Reefer 31 Queen Co. v. Marine Const. & Design Co., 440 P.2d 448 32 (Wash. 1968); Taber v. Jenny, 23 Fed. Cas. 605 (D. Mass. 33 1856). 34

The Comment mentions the rights of fishermen to 35 recover restitution from the owner of their ship under 36 certain circumstances. For discussion of the general 37 principles, see Restatement Third, Restitution and Unjust 38 Enrichment § 47 Comment c. illus. 7. 39 40 f. Judge and jury. For discussion of different ways 41 to express the rule of this Section, and the practical 42 equivalence of them, see Barber Lines A/S v. M/V Donau 43 Maru, 764 F.2d 50 (1st Cir. 1985). The Comment’s 44 recommendation that the rule be regarded as a matter of 45

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legal duty follows Sinram v. Pennsylvania R. Co., supra; 1 see also Aikens v. Debow, supra, and 532 Madison Avenue 2 Gourmet Foods, Inc., v. Finlandia Center, Inc., supra. 3 4

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17

§ 8. Public nuisance resulting in pure economic loss 1

2 An actor whose wrongful conduct harms or obstructs 3 public property or a public resource is subject to 4 liability for resulting pure economic loss if the 5 claimant’s losses are distinct from those suffered by 6 the public at large. 7

8

Comment: 9

a. Scope. This Section discusses the liability in 10

tort of defendant who creates a public nuisance that 11

results in pure economic loss to the plaintiff. It thus 12

does not attempt to restate the entire law of public 13

nuisance. Many public nuisances cause physical harm, as 14

when a defendant negligently leaves an obstruction in a 15

road and the plaintiff collides with it, or as when a 16

defendant’s pollution causes damage to property that the 17

plaintiff owns. Those cases are outside the scope of this 18

Section. 19

In addition to the common-law claims recognized here, 20

public officials may bring civil or criminal actions 21

against a defendant who creates a public nuisance. An 22

action of that type is the most common response to a 23

defendant’s invasion of a public right. The definition of 24

“public nuisance” for those purposes is widely a matter of 25

statute, and tends to be considerably broader than the 26

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§ 8. Public nuisance

18

definition recognized by this Section as a basis for 1

private suit. Statutes also may provide citizens with 2

rights to litigate that are broader than the common-law 3

rights recognized by this Section. 4

5

b. General principles; rationale. A public nuisance 6

arises when a defendant’s wrongful act causes harm to a 7

public right: a right held in common by all members of the 8

community. The wrongfulness may be established by showing 9

that the defendant’s conduct violated a statute (and thus 10

was a public nuisance “per se”), or by showing that the 11

conduct was intentional and unprivileged, that it was 12

unreasonable, or that it was subject to strict liability. 13

When a public nuisance is thus established, a private 14

plaintiff generally can sue only to redress a distinctive 15

or “special” injury beyond the harm suffered by all members 16

of the affected community. 17

The propositions just stated are widely accepted, but 18

are phrased at a level of generality that has sometimes 19

caused confusion about their scope. Any dangerous act by a 20

defendant might, in the abstract, be described as invading 21

the rights of the public, and this way of speaking has 22

occasionally caused unsound claims of public nuisance to be 23

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§ 8. Public nuisance

19

brought on facts that are distant from the traditional 1

meaning of the term. See Comment g. The actual scope of 2

tort liability for economic loss caused by a public 3

nuisance has generally and appropriately been confined to 4

the more limited circumstances stated in the blackletter of 5

this Section and discussed in the Comments. 6

Private liability for creation of a public nuisance is 7

an exception to the rule of § 7, which ordinarily prevents 8

a plaintiff from recovering for economic loss caused by 9

damage to property that the plaintiff does not own. That 10

background rule is justified in part because redress may 11

more appropriately be sought from the defendant by a better 12

plaintiff: the owner of the damaged property. When the 13

defendant does harm to resources that have no private 14

owner, however, it may be that no natural plaintiff exists 15

who can be counted upon to vindicate the injury. An action 16

by a public official will commonly lie to abate the 17

nuisance by injunction, but may not involve monetary 18

recovery for damage done. The social and private costs of 19

a public nuisance can nevertheless be large. Allowing 20

certain private parties a right of action can then provide 21

appropriate compensation for their losses and usefully 22

deter repetition of the wrong. 23

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§ 8. Public nuisance

20

1

c. Special injury. Recovery in tort by everyone a 2

public nuisance harms would raise the characteristic 3

problems that give rise to the rules of this Chapter: 4

defendants would be subject to potentially massive and 5

unpredictable liabilities, and courts would be faced with 6

an a large and unwieldy number of lawsuits. In response to 7

these concerns, courts recognize liability for a public 8

nuisance in tort only to a plaintiff who has suffered a 9

“special injury”: that is, an injury distinct from the harm 10

suffered by the community at large. 11

Which injuries are sufficiently distinctive to be 12

considered “special” is unavoidably a matter of judgment 13

rather than rule. Courts have reduced some of those 14

judgments to the patterns explained in Comments d and e. 15

In cases arising outside those patterns, decisions about 16

recovery are best made by asking if liability would cause 17

the problems that the requirement is meant to address: 18

whether permitting the plaintiff’s claim would multiply the 19

amount of litigation or the defendant’s liabilities unduly, 20

and whether plaintiffs allowed to sue can be separated from 21

those who are not in a principled fashion. These judgments 22

may bear less resemblance to conventional decisions about 23

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§ 8. Public nuisance

21

tort liability than they do to decisions that courts make 1

in other settings about whether, as a prudential matter, a 2

plaintiff should be found to have standing to bring a 3

claim. 4

5

d. Harm to public resources. A public nuisance 6

involving harm to a natural resource most often arises from 7

contamination of waterways: a defendant spills toxic 8

chemicals into the sea, causing economic injury to those 9

who depend on it for commercial or recreational purposes. 10

Courts typically recognize fishermen as a class of 11

plaintiffs who suffer special injury in those 12

circumstances, and allow them to recover in tort. As an 13

original matter it might be questioned whether the injuries 14

suffered by such fishermen are clearly distinct from the 15

injuries suffered by the many other parties who are 16

affected by a spill but whose claims tend to be denied. 17

That conclusion is nevertheless repeated often, probably 18

because it provides a familiar and convenient answer to a 19

hard question. 20

The pattern just described is sometimes confused with 21

the practice of allowing fishermen who work on lay 22

agreements to recover when a defendant negligently damages 23

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§ 8. Public nuisance

22

the ship they are using. Courts occasionally view these 1

patterns together and infer the existence of a “fishermen’s 2

rule” exempting that class from the usual rules governing 3

recovery for economic loss. The inference is faulty. 4

Fishermen recover in the two circumstances for distinct 5

reasons. The reasons for recognizing the claims of 6

fishermen on lay agreements are explained in Sec. 7, 7

Comment e. When claims by fishermen to recover for public 8

nuisance are allowed, it is on a different rationale—or 9

should be: they are the class of victims most immediately 10

and obviously affected by contamination of a waterway, and 11

can be separated with tolerable clarity from other classes 12

of affected plaintiffs. But claims by fishermen need not 13

be allowed when they do not satisfy the criteria just 14

noted, nor is there any impediment to recognizing claims by 15

other groups who may satisfy the criteria in any given 16

case. 17

18

Illustrations: 19

1. Carrier negligently spills toxic chemicals 20

into a bay. Hotel located on a nearby beach sues to 21

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§ 8. Public nuisance

23

recover for economic losses it suffers when its 1

customers, after hearing of the spill, cancel their 2

reservations. The court finds that Carrier created a 3

public nuisance, but that Hotel’s injuries are similar 4

in kind to injuries shared by all businesses in the 5

area. Carrier is not liable to Hotel. 6

7

2. Same facts as Illustration 1, but Carrier is 8

sued by fishermen and clam diggers for economic losses 9

that result from their inability to carry on their 10

work as a result of the contamination of the bay. The 11

court finds that these plaintiffs are directly 12

prevented from exercising their right to catch fish 13

and dig for claims. The court also finds that the 14

fishermen and clam diggers have suffered injuries 15

distinct in kind from those suffered by individuals 16

and businesses in the area generally, and that 17

permitting these plaintiffs to recover will result in 18

liability that is reasonably proportionate to the 19

defendant’s wrong and not indeterminate in scale. 20

Carrier may be held liable to the fishermen and clam 21

diggers for economic losses caused by the public 22

nuisance it created. 23

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§ 8. Public nuisance

24

1

e. Obstruction of public property. A public nuisance 2

that causes economic loss can also involve the obstruction 3

of public property or similar interference with access to 4

it, as when the defendant’s negligent conduct blocks a 5

road. An obstruction of that kind may cause economic loss 6

to plaintiffs who were accustomed to using the road for 7

commercial purposes or who relied on it as a means of 8

access for their customers. Suits to recover for such 9

losses most often fail because the plaintiff cannot show a 10

sufficiently distinctive injury. The court typically 11

concludes that the hardships the plaintiff has suffered are 12

similar to those suffered by others, and that recovery by 13

none of them is a lesser evil than recovery by all. Courts 14

have been willing to recognize such claims in certain 15

narrow circumstances, however, as when the defendant’s 16

wrongful conduct causes a substantial obstruction of access 17

to the plaintiff’s business alone, or otherwise affects the 18

plaintiff much more severely than others. Compare 19

Illustrations 3 and 4. 20

The requirement that the plaintiff show a “special 21

injury,” here as elsewhere in this Section, is a 22

placeholder for the policies noted in Comment c. Courts 23

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§ 8. Public nuisance

25

usually decline to impose liability for economic losses 1

caused by obstruction of a public way because they see no 2

end to it: countless businesses might show that a given 3

disruption to nearby traffic reduced the number of visits 4

they received from customers. On the other hand, liability 5

may be unobjectionable and useful if the plaintiff can show 6

an injury that is sufficiently distinct to allow principled 7

separation of the resulting claim from the claims that 8

others might bring. 9

10

Illustrations: 11

12

3. A building collapses in a city neighborhood. 13

The collapse is caused by the negligence of Builder in 14

performing renovations. The streets surrounding the 15

building are closed to pedestrian traffic for several 16

weeks. Nearby Delicatessen is obliged to close during 17

that period but suffers no physical damage. 18

Delicatessen sues Builder on a theory of public 19

nuisance to recover the profits it lost during the 20

closure. The court finds that Delicatessen’s injuries 21

are indistinguishable in kind from injuries suffered 22

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§ 8. Public nuisance

26

by large numbers of other businesses in the area. 1

Builder is not liable in tort to Delicatessen. 2

3

4. Restaurant on the bank of a river provides a 4

dock where customers can arrive by boat. Logger 5

wrongfully floats logs down the river in a loose 6

manner that allows them to become stuck near 7

Restaurant and block access to its dock. Restaurant 8

sues Logger on a theory of public nuisance to recover 9

profits it lost as a result of the blockage. The 10

court finds that Logger created a public nuisance and 11

that Restaurant suffered special damage as a result. 12

Logger may be held liable to Restaurant in tort. 13

14

f. Abatement. A plaintiff may seek to abate a public 15

nuisance by injunction. The usual requirement that such a 16

plaintiff show a special injury applies here as well, and 17

again it may be satisfied by plaintiffs who can show no 18

personal injury or property damage. The injuries in such a 19

case may be economic in character; in other instances they 20

can amount to inconvenience that cannot easily be reduced 21

to pecuniary terms. In any event, a plaintiff seeking 22

injunctive relief without damages may be held to satisfy 23

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§ 8. Public nuisance

27

the requirement of “special injury” more easily than a 1

plaintiff seeking to recover money, because the concerns in 2

the background of the inquiry are then different. An 3

injunction does not subject a defendant to indeterminate 4

liabilities or threaten the court with an avalanche of 5

lawsuits. The analysis still resembles inquiries into 6

standing that seek the best plaintiff to bring a claim, but 7

the different stakes of the decision sensibly can inform 8

the outcome. See Illustration 5, where the types of 9

injuries stated by the residents would not be enough to 10

support liability if they were businesses seeking to 11

recover for lost profits. In other cases the showing 12

required to support abatement may be greater than the 13

showing needed to recover damages. See Restatement Second, 14

Torts § 821B Comment i; § 821C Comment j. 15

16

Illustration: 17

18

5. Company opens a granite quarry near a 19

residential area. Residents sue to enjoin Company’s 20

operations, claiming that Company has created a public 21

nuisance. On the basis of evidence supplied by 22

Residents, court finds that trucks Company uses to 23

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§ 8. Public nuisance

28

serve the quarry violate size and weight limits 1

specified by ordinance for adjoining roads. The court 2

further finds that damage to the roads affects 3

Residents more than others in the community, because 4

Residents use the roads to come and go from their 5

homes. Residents have a sufficiently special injury 6

in prospect to allow them to sue, and to permit the 7

court to enjoin Company’s use of the trucks at their 8

request. 9

10

g. Products. Tort suits seeking to recover for 11

public nuisance have occasionally been brought against the 12

makers of products that have caused harm, such as tobacco, 13

firearms, and lead paint. These cases vary in the theory 14

of damages on which they seek recovery, but often involve 15

claims for economic losses the plaintiffs have suffered on 16

account of the defendant’s activities: the costs of 17

removing lead paint, for example, or of providing health 18

care to those injured by smoking cigarettes. Liability on 19

such theories has been rejected by most courts, and is 20

excluded by this Section, because the common law of public 21

nuisance is an inapt vehicle for addressing the conduct at 22

issue. Mass harms caused by dangerous products are better 23

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§ 8. Public nuisance

29

addressed through the law of products liability, which has 1

been developed and refined with sensitivity to the various 2

policies at stake. Claims for reimbursement of expenses 3

made necessary by a defendant’s products might also be 4

addressed by the law of restitution. If those bodies of 5

law provide do not supply adequate remedies or deterrence, 6

the best response is to address the problems at issue 7

through legislation that can account for all the affected 8

interests. 9

As noted in Comment g, problems caused by dangerous 10

products might have seemed to be matters for the law of 11

public nuisance only because the term “public nuisance” has 12

sometimes been defined in broad language that appears to 13

encompass anything injurious to public health. The 14

traditional office of the tort, however, has been narrower 15

than those formulations suggest, and contemporary case law 16

has made clear that its reach remains more modest. The 17

rules of this Section reflect that modesty. 18

19

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§ 8. Public nuisance

30

Reporter’s Note 1

a. Scope. Restatement Second, Torts § 821B-C defines 2 and discusses liability for creating a public nuisance. 3 Those Sections are more general than this one; they are not 4 confined to liability for economic loss, and they contain a 5 more extensive treatment of the standards for determining 6 whether an invasion of a public right is wrongful. The 7 interested reader is referred there for further discussion. 8 9

b. General principles; rationale. “Public nuisance” 10 originally referred to an invasion of rights held by the 11 Crown and punishable by criminal prosecution. The concept 12 gradually evolved to protect against invasions of rights 13 held by the public, such as blocking a road, with private 14 plaintiffs allowed to seek damages or abatement upon a 15 showing of “special injury.” On the development of the law 16 of public nuisance generally, see Restatement Second, Torts 17 § 821B; Abrams & Washington, The Misunderstood Law of 18 Public Nuisance: A Comparison with Private Nuisance Twenty 19 Years After Boomer, 54 Alb. L. Rev. 359 (1990); Prosser, 20 Private Action for Public Nuisance, 52 Va. L. R. 997 21 (1966). For a skeptical view of the tort’s development, 22 see Merrill, Is Public Nuisance a Tort? 4 J. Tort L. 1 23 (2011). 24 25

c. Special injury. For discussion of the meaning of 26 “special injury,” see 532 Madison Ave. Gourmet Foods, Inc. 27 v. Finlandia Center, Inc., 750 N.E.2d 1097 (N.Y. 2001); 28 Harbor Beach Surf Club, Inc. v. Water Taxi of Ft. 29 Lauderdale, Inc., 711 So.2d 1230 (Fla. App. 1998); In re 30 One Meridian Plaza Fire Litigation, 820 F. Supp. 1460 (E.D. 31 Pa. 1993); Antolini, Modernizing Public Nuisance: Solving 32 the Paradox of the Special Injury Rule, 28 Ecology L. Q. 33 755 (2001). 34 35

d. Harm to public resources. Illustrations 1 and 2 36 are based on Burgess v. The M/V Tamano, 370 F. Supp. 247 37 (D. Me. 1973), aff'd, 559 F.2d 1200 (1st Cir.1977); see 38 also Curd v. Mosaic Fertilizer, 39 So.3d 1216 (Fla. 2010); 39 Leo v. General Elec. Co., 538 N.Y.S.2d 844 (App. Div. 40 1989); State of La. ex rel. Guste v. M/V Testbank, 524 F. 41 Supp. 1170 (E.D. La. 1981); Potomac River Ass’n, Inc. v. 42 Lundeberg Maryland Seamanship School, Inc., 402 F. Supp. 43 344 (D. Md. 1975); Carson v. Hercules Powder Co., 402 44

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§ 8. Public nuisance

31

S.W.2d 640 (Ark. 1966); Hampton v. North Carolina Pulp Co., 1 27 S.E.2d 538 (1943); Columbia River Fishermen's Protective 2 Union v. City of St. Helens, 87 P.2d 195 (Or. 1939). Union 3 Oil Co. v. Oppen, 501 F.2d 558 (9th Cir. 1974), allowed 4 recovery on similar facts, but did not rely on the law of 5 public nuisance. For additional cases allowing parties 6 other than fishermen to recover, see Hardy Salt v. Southern 7 Pac. Transp. Co., 501 F.2d 1156 (10th Cir.1974) (salt-8 extraction firm); Shaughnessy v. PPG Industries, Inc., 795 9 F. Supp. 193 (W.D. La. 1992) (fishing guide). 10 11

e. Obstruction of public property. Illustration 3 is 12 based on 532 Madison Ave. Gourmet Foods, Inc. v. Finlandia 13 Center, Inc., supra; see also Nebraska Innkeepers, Inc. v. 14 Pittsburgh-Des Moines Corp., 345 N.W.2d 124 (Iowa 1984). 15 Illustration 4 is based on French v. Connecticut River 16 Lumber Co., 14 N.E. 113 (Mass. 1887); see also Savannah, F. 17 & W. Ry. Co. v. Gill, 45 S.E. 623 (Ga. 1903); In re One 18 Meridian Plaza Fire Litigation, supra; Stop & Shop 19 Companies, Inc. v. Fisher, 444 N.E.2d 368 (Mass. 1983). 20 21

f. Abatement. Illustration 5 is based on Hall v. 22 North Montgomery Materials, LLC, 39 So.3d 159, (Ala. App. 23 2008); see also Harbor Beach Surf Club, Inc. v. Water Taxi 24 of Ft. Lauderdale, Inc., supra.; Robinson v. Indianola Mun. 25 Separate School Dist., 467 So.2d 911 (Miss. 1985); cf. Akau 26 v. Olohana Corp., 652 P.2d 1130 (Haw. 1982). See 27 additional discussion not limited to cases of economic 28 loss, see Restatement Second, Torts § 821C. 29 30

g. Products. For representative cases denying 31 efforts to recover on a public-nuisance theory for economic 32 losses caused by defective products, see State v. Lead 33 Indus. Ass'n, Inc., 951 A.2d 428 (R.I. 2008); In re Lead 34 Paint Litigation, 924 A.2d 484 (N.J. 2007); City of Chicago 35 v. Beretta U.S.A. Corp., 821 N.E.2d 1099 (Ill. 2004) 36 (handguns); Ganim v. Smith and Wesson Corp., 780 A.2d 98 37 (Conn. 2001) (handguns); Allegheny General Hosp. v. Philip 38 Morris, Inc., 228 F.3d 429 (3rd Cir. 2000) (tobacco); 39 Association of Washington Public Hosp. Districts v. Philip 40 Morris, Inc., 241 F.3d 696 (9th Cir. 2001) (tobacco); 41 Detroit Board of Education v. Celotex Corp., 493 N.W.2d 513 42 (Mich. App. 1992). For discussion, see Schwartz & 43 Goldberg, The Law of Public Nuisance: Maintaining Rational 44 Boundaries on a Rational Tort, 45 Wash. L. J. 541 (2006); 45

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32

Gifford, Public Nuisance as a Mass Products Liability Tort, 1 71 U. Cin. L. Rev. 741 (2003). On the application of the 2 law of restitution to such cases, see Restatement Third, 3 Restitution and Unjust Enrichment § 22. 4

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33

CHAPTER 2 1

LIABILITY IN TORT FOR FRAUD 2

3

§ 9. Fraud 4

5

An actor who knowingly makes a misrepresentation of 6

material fact is subject to liability for economic 7

loss caused by another’s justifiable reliance on it. 8

9

[A different sort of possibility, based on R2T: 10

11

(1) A misrepresentation is fraudulent if the maker 12

13

(a) knows or believes that the matter is not 14

as he represents it to be, 15

16

(b) does not have the confidence in the 17

accuracy of his representation that he states or 18

implies, or 19

20

(c) knows that he does not have the basis 21

for his representation that he states or implies. 22

23

(2) One who fraudulently makes a misrepresentation of 24

fact, opinion, intention or law for the purpose of 25

inducing another to act or to refrain from action in 26

reliance upon it, is subject to liability to the other 27

in deceit for pecuniary loss caused to him by his 28

justifiable reliance upon the misrepresentation.] 29

30

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§ 9. Fraud

34

Comment: 1

2

a. Scope. This Section states the rules of liability 3

for the tort of fraud, or deceit. The Comments below 4

discuss the principal elements shown in the black-letter. 5

Later Sections discuss variations on the basic tort: 6

liability for nondisclosure (or tacit fraud) (§ 10), 7

liability for false statements of opinion (§ 11), and 8

liability for promises that the maker does not intend to 9

keep (§ 12). Damages are treated in § 13. 10

The word “fraud” has two general meanings in law. It 11

can refer simply to a knowing misrepresentation, without 12

particular reference to the law of tort. Indeed, a 13

fraudulent statement has consequences under many other 14

different branches of law—most notably the law of contract, 15

the law of restitution, and criminal law. Meanwhile 16

“fraud” also is the name of a particular cause of action in 17

tort: a claim that allows a plaintiff to recover for damage 18

caused by reliance on a defendant’s knowing 19

misrepresentation. This distinction is worth noting 20

because the best legal response to the act of fraud is not 21

necessarily a claim for fraud. Fraud most often does harm 22

by causing a plaintiff to enter into a transaction and 23

suffer losses as a result. The law of contract and the law 24

of restitution supply remedies in such a case that may be 25

superior to those provided in tort, and that have 26

traditionally been a plaintiff’s first line of response. 27

Thus most of the Illustrations in this Section that result 28

in liability might also have been pressed successfully as 29

contract claims. The plaintiff who pursues a tort claim 30

for fraud typically means to avoid some limitation imposed 31

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§ 9. Fraud

35

by another body of law, such as restrictions on the 1

recovery of punitive damages for breach of contract. 2

With that said, the availability of remedies for fraud 3

in contract or restitution does not limit a plaintiff’s 4

ability to recover in tort. As discussed in § 2, the 5

economic-loss rule generally does foreclose liability in 6

tort for negligence in the negotiation or performance of a 7

contract, but it does not impair the claims of fraud 8

discussed in this Chapter. Recognizing claims of fraud 9

does not interfere with the process of settling obligations 10

by contract in an orderly and final manner; on the 11

contrary, liability in tort for fraud helps to protect the 12

integrity of the contractual process and sometimes 13

furnishes useful remedies that the law of contract does not 14

as readily provide. Parties to a contract do not typically 15

treat the chance that they are lying to each other as an 16

ordinary subject for their contract to allocate; they 17

regard honesty as an assumed backdrop to their 18

negotiations. 19

For a brief comparison of the remedies available for 20

fraud under the law of tort, contract, and restitution, see 21

Comment j. 22

23

b. Types of misrepresentations. This Section 24

recognizes liability for misrepresentations of fact. The 25

simplest and most common examples involve straightforward 26

false statements, as when the seller of a house falsely 27

states that the roof does not leak. But the coverage of 28

this Section can also extend to some situations outside 29

that paradigm. First, a misrepresentation need not take 30

the form of a statement. It can arise from conduct rather 31

than words, as when the seller of a car turns back its 32

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§ 9. Fraud

36

odometer. Second, a misrepresentation can be implied 1

rather than explicit. A statement of opinion may falsely 2

imply, for example, that its holder knows of no facts to 3

the contrary; liability then attaches to that false implied 4

statement, not to the opinion or prediction in itself. 5

Doubtful cases are best resolved by asking whether the 6

defendant’s claims included or implied any assertions that 7

are capable of being proven false. See Illus. 1. 8

(Liability for false statements of opinion as such, apart 9

from any facts they might imply, is subject to the rules 10

stated in § X.) 11

Liability also may be found under this Section for 12

ambiguous statements and half-truths. Thus a speaker may 13

make a statement and know that it is open to two 14

interpretations, one true and one false. The statement is 15

actionable if the speaker intends that it be understood in 16

its false sense, or is indifferent to which way the 17

statement is taken; a speaker who knowingly makes an 18

ambiguous statement is obliged to take reasonable steps to 19

ensure that the statement is understood accurately. See 20

Illus. 2. Likewise, if a speaker believes a statement is 21

true as far as it goes but knows that it is misleading 22

because it is incomplete or not duly qualified, liability 23

may be found under this Section. See Illus. 3. These 24

specific points are merely applications of the same general 25

principle: a defendant who knowingly misleads another may 26

be held liable for fraud. 27

28

Illustrations: 29

30

1. Buyer of a building asks Seller what material 31

lies behind the structure’s interior walls. Seller 32

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§ 9. Fraud

37

replies that it’s “not a problem.” Upon later 1

discovering asbestos behind the walls, Buyer sues 2

Seller for fraud. Seller admits that he was aware of 3

the asbestos, and knew that it might have affected 4

Seller’s decision to buy the property; but he claims 5

that his statement that the material was “not a 6

problem” was simply an opinion and so was not 7

actionable. The court finds that Seller’s statement 8

of opinion falsely implied knowledge of facts to 9

support it (and no knowledge inconsistent with it). 10

Seller may be held liable for fraud. 11

12

2. Seller promises to deliver “new” specialty 13

batteries to Buyer. Buyer discovers that the 14

batteries already had been used, and sues Seller for 15

fraud. Buyer claims that Seller’s description of the 16

batteries as “new” meant that the batteries had never 17

been used before. Seller contends that “new” meant 18

the batteries are the most recent model of their kind, 19

not part of an earlier series. Court finds that the 20

word “new” was ambiguous, and that Seller knew Buyer 21

was relying on an interpretation that Seller did not 22

share. Seller’s failure to dispel the ambiguity 23

subjects him to liability for fraud. 24

25

3. Retailer agrees to sell specialty cars made 26

by Manufacturer. Retailer worries that its rights 27

will not be exclusive; in response, Manufacturer 28

represents that it has no intention of marketing the 29

same specialty car through Rival, another dealership 30

nearby. Two months later, Manufacturer opens a new 31

dealership down the street from Retailer to sell the 32

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38

same specialty car. Manufacturer admits that it had 1

long intended to open the new dealership and 2

deliberately hid its plans from Retailer, but points 3

out that its statement to Retailer was technically 4

accurate: it never did intend to market the specialty 5

car through Rival. The court finds that 6

Manufacturer’s representation, while not false on its 7

face, was misleading, because it reasonably caused 8

Retailer to believe that Manufacturer intended to give 9

Retailer exclusive rights. Manufacturer may be held 10

liable for fraud. 11

12

c. Scienter. To prevail on a claim of fraud, a 13

plaintiff must prove that the defendant made a 14

misrepresentation knowingly; in other words, the plaintiff 15

must prove scienter. This requirement is the most 16

important difference between cases of fraud and cases of 17

negligent misrepresentation or breach of contract. The 18

legal tests for negligence or breach of contract are both 19

objective in character; they do not depend on whether a 20

defendant consciously committed a wrong. Fraud involves a 21

subjective inquiry. The defendant must be shown to have 22

had a culpable state of mind. Thus a party who makes a 23

false statement carelessly, but in good faith, is not 24

liable for fraud, but may be liable for negligent 25

misrepresentation under the rule of § 5. A party who 26

promises an act but then decides not to carry it out may be 27

liable for breach of contract or on a theory of promissory 28

estoppel, but is not liable for fraud unless the statement 29

of intention was false when made. See § 12. In short, the 30

law of fraud is concerned with lies, not mistakes or broken 31

promises. 32

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§ 9. Fraud

39

A statement often includes several components to which 1

the rule of this Section, and the requirement of scienter, 2

might apply: the literal truth of the matter stated (the 3

number of square feet in a house, the financial condition 4

of a company, and so on), but also implied claims about the 5

speaker’s confidence in the statement and basis for 6

asserting it. These latter points are representations in 7

their own right, even if they are not explicit. They can 8

be true or false, just as the literal substance of the 9

claim can be true or false. Thus a speaker may present a 10

mere belief as if it were knowledge, or offer a statement 11

as certain despite having doubts about it, or imply that a 12

claim is founded on personal observation when in fact it is 13

based on hearsay. In all such cases the speaker may think 14

the substance of the claim is true, yet still commit a 15

knowing misrepresentation with respect to the basis for the 16

claim or the confidence it warrants. The speaker in all 17

such cases has the necessary state of mind to support 18

liability for fraud if the other elements of the tort are 19

satisfied. See Illustration 4. 20

It is sometimes said that a statement is fraudulent if 21

its maker believes it to be false or is reckless as to its 22

truth or falsity. This last possibility must be treated 23

with care because “reckless” has a range of meanings in 24

law. The recklessness sufficient to support a claim of 25

fraud occurs when a speaker acts in conscious disregard of 26

a risk that a statement is false, as by offering it without 27

qualification while knowing that it may be untrue. Such 28

cases can be described as matters of recklessness if the 29

word is found convenient, but they also can be viewed as 30

straightforward cases of liability under the language of 31

this Section. They involve knowingly false 32

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40

representations, perhaps implied, about the speaker’s 1

confidence in the statement or basis for making it. In 2

other legal settings recklessness may be defined to 3

resemble gross negligence, but a statement reckless in that 4

sense does not subject its maker to liability under this 5

Chapter. However negligent it may be, an utterance is not 6

fraudulent if made in the belief that it is true and that 7

it accurately reflects whatever confidence and basis for 8

belief the speaker of it may possess. Liability for fraud 9

requires a conscious discrepancy between some feature of a 10

defendant’s representation and the truth. 11

12

Illustrations: 13

14

4. Buyer negotiates a purchase of property from 15

Seller. Seller firmly states that the property 16

consists of 130 acres. Seller believes this statement 17

of the acreage is more likely true than false, but 18

knows that he has not conducted a sufficient 19

investigation of the point to support the sense of 20

certainty that he implies. Buyer completes the 21

purchase of the property in reliance on Seller’s 22

claims, then discovers that the property consists of 23

90 acres. Seller is liable to Buyer for fraud. 24

25

5. Entrepreneur invites Investor to buy stock in 26

his company. In the course of their negotiations, 27

Entrepreneur grossly understates the company’s 28

liabilities. Investor purchases stock in reliance on 29

Entrepreneur’s false statements and suffers losses as 30

a result. The court finds that Entrepreneur, while 31

negligent, believed that his statements were true and 32

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well-founded. Investor has no tort claim for fraud 1

against Entrepreneur. Nor does Investor have a claim 2

for negligent misrepresentation; the economic-loss 3

rule precludes it, because Investor’s complaint 4

involves Entrepreneur’s negligence in the negotiation 5

or performance of a contract. Investor may, however, 6

have a good claim against Entrepreneur for breach of 7

warranty, or for rescission, restitution, and 8

incidental damages. 9

10

Scienter is often difficult to prove directly in a 11

suit for fraud. Mere evidence of a false or negligent 12

statement, without more, generally is not enough to support 13

liability; from either of those showings, no presumption 14

arises that the speaker knew the statement was false when 15

made. Successful claims of fraud typically are supported, 16

rather, by evidence that the defendant knew or must have 17

known the truth and made a statement inconsistent with it. 18

Compare Illustrations 6 and 7. 19

Whether the defendant had the necessary state of mind 20

is ordinarily a question for the jury. Like any such 21

question, however, it may be decided by the court if it 22

reasonably can be resolved in only one way. 23

24

Illustrations: 25

26

6. Buyer negotiates the purchase of a hotel from 27

Seller. Seller provides documents to Buyer showing 28

that the hotel has high occupancy rates and provides 29

consistent stated revenues. Buyer completes the 30

purchase of the hotel in reliance on Seller’s 31

documents. Buyer then examines the hotel’s internal 32

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42

records, which were personally maintained by Seller. 1

Buyer discovers that the hotel’s actual occupancy 2

rates and revenues were half those claimed by Seller 3

during the period in question. From this discrepancy 4

between Seller’s records and representations, a jury 5

may permissibly infer that Seller made knowing 6

misrepresentations to Buyer. 7

8

7. Buyer negotiates a purchase of land from 9

Seller. Buyer negotiates solely with Broker who 10

serves as Seller’s agent. Broker provides a listing 11

sheet and brochure stating that the land consists of 12

“20 acres, more or less.” Buyer completes the 13

purchase of the hotel in reliance on these statements. 14

Buyer then discovers that the land consists of 15 15

acres. Buyer sues Seller. Broker testifies at trial 16

that Seller provided the statement of acreage that was 17

passed on to Buyer. Seller is elderly and infirm, and 18

is not called to testify; nor is any other evidence 19

provided to establish Seller’s relationship to the 20

property or actual knowledge of it. Buyer’s tort 21

claim for fraud fails as a matter of law because Buyer 22

lacks evidence of scienter. Buyer may have a good 23

claim against Seller for breach of warranty or for 24

rescission, restitution, and incidental damages. 25

26

d. Materiality. Liability under this Section 27

attaches only to misrepresentations that are material. A 28

misrepresentation is material if a reasonable person would 29

give weight to it in deciding whether to enter into the 30

relevant transaction, or if the defendant knew that the 31

plaintiff would give it weight (whether reasonably or not). 32

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The question, in effect, is whether the defendant knew or 1

should have known that the misrepresentation would matter 2

to the plaintiff. If not, the plaintiff cannot collect 3

damages in tort, though any resulting contract may still be 4

voidable upon a showing that the plaintiff relied on the 5

misrepresentation. See Restatement Second, Contracts § 6

164. This element of the tort is most likely to be 7

important when one party to a negotiation makes false 8

statements to the other about a matter collateral to the 9

immediate subject of the bargain. See Illustration 8. It 10

also excludes liability for statements amounting to 11

“puffery”—that is, a seller’s broad and predictably 12

exaggerated statements about the quality of an item, as 13

distinct from particular claims of fact (claims based on 14

such facts may be dismissed, in the alternative, for want 15

of justifiable reliance). See Illustration 9. 16

17

Illustrations: 18

19

8. Contractor on a building project in an 20

unincorporated area approaches neighboring Town to 21

negotiate the purchase of a water supply. Town tells 22

Developer that it lacks the capacity to provide all 23

the water that Developer needs; Town agrees to meet 24

Developer’s requirements only if Developer decreases 25

the size of the project. Developer does so. 26

Developer later learns that Town spoke falsely in the 27

negotiations: Town did have the capacity to provide 28

the water that Developer wanted, but preferred not to 29

allocate it to him. Developer sues Town for fraud. 30

Developer’s claim fails because Town’s 31

misrepresentation was not material: a reasonable 32

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§ 9. Fraud

44

person would not be expected to assign weight to 1

Town’s particular reasons for its demands, and Town 2

had no reason to believe Contractor regarded those 3

reasons as important to his consent. 4

5

9. Buyer purchases a car from Seller. Seller 6

tells Buyer during negotiations that the car is “top 7

of the line” and provides an “outstanding ride.” 8

Buyer later determines that the car is mediocre and 9

provides a poor ride. Buyer sues Seller for fraud. 10

Buyer’s claim fails because the court finds that 11

Seller’s claims were “puffery”; even if they were 12

misrepresentations, they cannot be considered 13

material. In the alternative, Buyer’s claim may fail 14

because his reliance on Seller’s words was 15

unjustifiable. 16

17

10. Father approaches School about the 18

possibility of enrolling his daughter there. Officer 19

at School falsely tells Father that some of daughter’s 20

friends have already enrolled; Officer knows that 21

Father would consider this a significant fact in his 22

deliberations. Father enrolls his daughter at School, 23

then discovers that in fact her friends did not 24

enroll. Officer’s misrepresentation was material, and 25

he may be held liable for fraud. 26

27

e. Actual reliance. A plaintiff can recover only for 28

damage caused by actual reliance on a defendant’s 29

misrepresentation. Ordinarily this element is satisfied by 30

a showing that the plaintiff gave weight to the defendant’s 31

misrepresentation in making a decision that resulted in 32

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§ 9. Fraud

45

losses. It need not be shown that the plaintiff would 1

necessarily have made a different decision if the defendant 2

had spoken truthfully. The plaintiff may have been 3

influenced by several sources, or by multiple statements—4

some true, some false—made by the same party. It is enough 5

if the defendant’s misrepresentation was a substantial 6

factor influencing the plaintiff’s decision. On the other 7

hand, there can be no recovery if the plaintiff did not 8

believe the defendant’s misrepresentation, or was not aware 9

of it until after the transaction was complete, or if the 10

plaintiff would have been legally obliged to follow the 11

same course regardless of what the defendant said. In 12

those cases the claim fails because the plaintiff did not 13

rely on what the defendant said. 14

15

Illustrations: 16

17

11. Buyer makes investment in Firm. After the 18

purchase, Buyer discovers that Firm’s prospectus 19

contained misleading information. Buyer sues Firm for 20

fraud. Court finds that Buyer did not read Firm’s 21

prospectus until after making the investment. Buyer’s 22

claim fails for want of reliance. 23

24

12. Buyer negotiates the purchase of an antique 25

car from Seller. The car is advertised as having 500 26

miles of wear. Buyer does not believe the claimed 27

mileage is accurate but wishes it were. Seller says 28

that if the claimed mileage turns out to be wrong, he 29

will allow Buyer to return the car and will give Buyer 30

his money back. Buyer purchases the car, then 31

determines that the claimed mileage was wrong. Buyer 32

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§ 9. Fraud

46

sues Seller for fraud. Buyer’s claim fails because he 1

did not rely on Seller’s claims about mileage. Buyer 2

doubted the claims were true, and was compensated for 3

the doubts by Seller’s promise to undo the transaction 4

if the claims were false. That promise is 5

enforceable, but Buyer has no claim in tort. 6

7

13. Firm hires Worker to sell cars. Firm makes 8

several representations that cause Worker to accept 9

the job: a promised salary, attractive benefits, and 10

an assurance that Worker will be paid a commission of 11

5% on the gross receipts from all sales he makes. 12

Worker later learns that the last representation was 13

fraudulent; in fact Firm deducts 15% from the receipts 14

before calculating commissions. Worker sues Firm for 15

fraud. It is not clear whether Worker would have 16

accepted the job with Firm if the rules about his 17

commissions had been truthfully stated. The court 18

nevertheless finds that Firm’s false promise was a 19

substantial factor in Worker’s decision. Firm is 20

liable to Worker for fraud. 21

22

The requirement of actual reliance excludes liability 23

at common law for “fraud on the market”—that is, claims 24

that a defendant’s misrepresentations pushed up the price 25

of a stock, causing the plaintiff to pay too much for it. 26

To recover under this Section, plaintiffs must show that 27

they themselves relied on what the defendant said, not that 28

they were injured by the reliance of others. The result 29

may be different in claims brought under federal statutes 30

regulating securities. See Basic, Inc. v. Levinson, 485 31

U.S. 224 (1988). 32

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§ 9. Fraud

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Some special problems of causation are posed by 1

“holder” claims, in which a plaintiff is persuaded not to 2

sell shares of stock by the defendant’s fraudulent 3

statements. There is no reason in principle why a 4

plaintiff may not recover on those facts; no immunity 5

arises from the mere fact that a defendant’s lies moved the 6

plaintiff to inaction rather than action. The problems are 7

matters of proof. A plaintiff may claim to have thought 8

about selling, to have told nobody, but to have had a 9

change of mind after reading something the defendant wrote; 10

the defendant may then be peculiarly unable to argue the 11

point, because the facts consist entirely of mental states 12

in the plaintiff that produced no action and to which 13

nobody else was privy. (The problem is similar if the 14

plaintiff claims to have thought about buying stock but to 15

have decided against it.) To protect against false claims 16

in these circumstances, plaintiffs who base their claims on 17

transactions not made must provide more than a recounted 18

train of thought as proof of reliance. Typically there 19

must be evidence of direct efforts by the defendant to 20

dissuade the plaintiff from entering into the transaction, 21

or evidence of action that corroborates the account the 22

plaintiff gives of the decision—contemporaneous writings or 23

conversations, for example, that show the specific terms of 24

a sale the plaintiff would have made if not for the 25

defendant’s fraud. 26

27

f. Justifiable reliance. Principles of comparative 28

negligence do not apply to a claim of fraud, but liability 29

does require a showing that the plaintiff’s reliance on 30

what the defendant said was “justifiable.” Justifiable 31

reliance is a less demanding showing than the “reasonable” 32

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§ 9. Fraud

48

reliance discussed in § 5. Reasonable reliance is a type 1

of freedom from negligence. Justifiable reliance amounts 2

to freedom from recklessness: plaintiffs who close their 3

eyes to a known or obvious danger that a statement is 4

fraudulent cannot recover losses they suffer from reliance 5

on it. Cf. Restatement Third, Torts, Liability for 6

Physical and Emotional Harm § 2. The rules also differ 7

because reasonable reliance is an objective standard; the 8

plaintiff’s conduct is measured against community standards 9

of behavior. Justifiable reliance has a subjective 10

character. It is measured by reference to the plaintiff’s 11

capabilities and knowledge. A plaintiff’s sophistication 12

may affect a court’s judgments about what dangers were 13

fairly considered obvious. Compare Illustrations 15 and 14

16. 15

Whether a plaintiff’s reliance was justifiable is 16

ordinarily a question for the trier of fact, but may be 17

decided as a matter of law when reasonable minds could 18

reach only one conclusion. Compare Illustrations 14 and 19

15. Unlike the requirement of reasonable reliance found in 20

§ 5, the justifiable reliance required by this Section does 21

not call for a comparison of the fault attributable to the 22

plaintiff and defendant. It is a threshold requirement; if 23

it is satisfied, incremental doubts about the plaintiff’s 24

degree of care will not reduce the resulting recovery from 25

the intentional tortfeasor. 26

27

Illustrations: 28

29

14. Buyer purchases a house from Seller. During 30

their negotiations, Seller asserts that he “never had 31

water problems in the house.” Buyer orders an 32

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49

inspection prior to closing. The inspector informs 1

Buyer that there is evidence of recent water damage in 2

the basement. Buyer nevertheless goes through with 3

the purchase. Buyer then discovers that the basement 4

leaks. Buyer sues Seller for fraud. Buyer’s claim 5

fails as a matter of law because his reliance on 6

Seller’s statements was not justifiable; in view of 7

the findings in the inspection report, it was reckless 8

of Buyer to rely on Seller’s assertions without 9

further investigation. 10

11

15. Insurer sells life-insurance policy to 12

Consumer. Insurer misrepresents the effect of the 13

policy, falsely assuring Consumer that the policy can 14

serve as a vehicle for retirement savings. Consumer 15

later discovers that the policy cannot function as 16

described. Consumer sues Insurer for fraud. Insurer 17

claims that Consumer’s reliance on its statements was 18

unjustifiable because a reading of the written policy 19

would have made its limits clear to her. Consumer did 20

not read that part of the policy. The trier of fact 21

may reasonably conclude that Consumer’s reliance was 22

nevertheless justifiable. 23

24

16. Investor and Director of Company both sign a 25

guaranty in which each agrees to be personally liable 26

for repayment of Bank’s loan to Company if Company 27

defaults. The agreement states prominently that Bank 28

can collect the entire amount from either guarantor. 29

Company defaults. Bank seeks recovery only from 30

Investor. Investor sues Bank for fraud. Investor 31

claims that during negotiations over the loan, an 32

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50

officer of Bank said that Investor would not be held 1

responsible for more than half of it in the event of 2

default. The court finds that Investor was a 3

sophisticated and experienced party represented by 4

counsel, that the liability of Investor for the full 5

amount was a carefully negotiated term of the 6

agreement, and that the guaranty contract forbade 7

Bank’s officer to alter its terms. Investor’s claim 8

fails as a matter of law because his reliance on the 9

oral assurances of Bank’s officer was unjustifiable. 10

11

g. No-reliance clauses. Sometimes a plaintiff claims 12

to have been induced to sign a contract by false statements 13

that the defendant made during their negotiations. The 14

parol-evidence rule is a doctrine of contract law and is 15

not, in itself, an impediment to a tort claim based on such 16

facts. The contract itself, however, may contain language 17

that is inconsistent with the plaintiff’s theory of 18

recovery. It might include an integration clause stating 19

that the written contract is the exclusive statement of the 20

parties’ entire agreement, or it might contain a disclaimer 21

of reliance on representations made outside the four 22

corners of the document. Language of either type may 23

undermine a plaintiff’s claim to have relied on fraudulent 24

statements made before the contract was signed. 25

Disclaimers serve a useful commercial purpose, not by 26

shielding parties who lie but by protecting both parties 27

from costly litigation about whether they lied. 28

Disclaimers also may allow parties to usefully allocate 29

responsibility for determining the truth about the subject 30

of a transaction. But disclaimers also can serve as traps 31

for parties who are content to treat a written contract as 32

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51

final but do not mean to assume the risk that the other 1

side has committed fraud. The effect of a “no-reliance” 2

clause on a tort claim for fraud thus depends on two 3

considerations: the specificity of its wording and the 4

sophistication of the parties. 5

First, an ordinary integration clause, written in 6

general language, will not be read to foreclose a claim 7

that the plaintiff’s consent to the contract was procured 8

by fraud. Nor is such a claim barred by a broad statement 9

in the contract that neither party is relying on statements 10

made by the other outside the contract. More specific 11

disclaimers may be enforced, however, as when the plaintiff 12

signs a writing that denies reliance on particular 13

statements or on assurances the defendant has made about a 14

given topic. Second, a disclaimer of reliance on a 15

defendant’s statements will ordinarily be enforced only 16

against a sophisticated party. Sophistication, for these 17

purposes, typically means that the plaintiff was 18

represented by counsel and was a commercial actor rather 19

than a consumer. The two considerations just noted may 20

bear on one another: the more sophisticated the plaintiff, 21

the less specific the disclaimer need be to foreclose a 22

claim. When close questions arise about whether a contract 23

was specific enough, or a plaintiff sophisticated enough, 24

to justify enforcement of a no-reliance clause, they may be 25

resolved by reference to the policies that lie behind the 26

requirements. Their purpose is generally to limit 27

enforcement to cases in which the disclaimer was a 28

deliberate choice made for considered reasons, not a piece 29

of boilerplate that the plaintiff would be surprised to 30

find was a waiver of the right to honesty from the other 31

party to the agreement. 32

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52

Whether to give effect to a disclaimer of reliance is 1

a question for the court unless it depends on factual 2

disputes on which reasonable minds could differ. 3

4

Illustrations: 5

6

17. Commercial Purchaser of real estate makes a 7

contract to buy a building from Seller. Purchaser 8

later sues Seller for fraud. Purchaser claims that 9

during their negotiations, Seller made false 10

statements about the expenses of operating the 11

building. The contract between the parties states, 12

“Seller makes no representations as to the expenses, 13

operation or any other matter related to the premises, 14

except as herein specifically set forth. Purchaser 15

acknowledges that no such representations have been 16

made or are relied upon.” Purchaser’s tort claim for 17

fraud fails, because in view of the contractual 18

language he cannot show that he justifiably relied on 19

any statements the Seller might have made about the 20

expenses of operating the building. 21

22

18. Homeowner buys a security system from 23

Company. Homeowner relies on assurances offered 24

orally by Company that the system will operate even 25

after a general power failure affecting the house. 26

Homeowner later discovers that Company’s assurance was 27

fraudulent, and incurs expenses to have the system 28

replaced by another firm. The contract between 29

Homeowner and Company did not mention the system’s 30

ability to withstand a power failure, and the contract 31

contained an integration clause stating that the 32

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§ 9. Fraud

53

written agreement was a complete expression of the 1

parties’ understandings. Homeowner’s tort claim for 2

fraud nevertheless survives because he is not a 3

sophisticated party, and because the contract did not 4

specifically disclaim reliance on Agent’s assurances. 5

6

h. Scope of liability. A plaintiff can recover only 7

for the types of losses that might reasonably have been 8

expected to result from the defendant’s fraud. This 9

generally means that the fraud must have increased the risk 10

of the kind of harm that the plaintiff suffered. Thus no 11

liability results when a defendant’s lie causes the 12

plaintiff to make an investment that fails for reasons 13

unrelated to what the defendant said. On the other hand, a 14

lie that causes a small increase in the likelihood of the 15

loss that the plaintiff suffers is sufficient to support 16

liability. 17

18

Illustrations: 19

20

19. Investor buys shares in Company. Investor 21

is persuaded to make the purchase by Director’s false 22

assurance that he will invest in Company to a 23

comparable extent. Six months later, Company fails 24

due to a decline in the demand for its products. 25

Company might have failed even if Director had 26

invested as heavily as he promised. Investor sought 27

Director’s assurances, however, because the commitment 28

they reflected would have reduced the risk that 29

Company would fail in the way that it did. Investor’s 30

losses are within Director’s scope of liability for 31

fraud. 32

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§ 9. Fraud

54

1

20. Investor buys shares in Company. Investor 2

is persuaded to make the purchase by Director’s false 3

assurance that Company is in compliance with various 4

state regulations. Six months later, Company fails 5

due to a decline in the demand for its products. 6

Company’s failure to comply with the regulations 7

raised the risk that Company would be subjected to 8

various civil penalties, but the failure to comply did 9

not raise the risk that Company would fail in the way 10

that it did. The losses that Investor suffered as a 11

result of Company’s failure are outside Director’s 12

scope of liability for fraud. 13

14

Liability under this Section extends to damage 15

suffered by those whose reliance the defendant intended to 16

induce, or by others the defendant had reason to expect 17

would rely on the statements at issue. The plaintiff need 18

not have dealt directly with the defendant; it is enough if 19

the defendant had reason to expect that the plaintiff would 20

later receive the statement and rely on it. Nor need the 21

defendant know the specific identities of those who were 22

likely to rely; awareness of a class of potential victims 23

is sufficient. If the defendant’s statement is embedded in 24

a commercial document—a product label, for example, or a 25

security—then reliance on it by any who deal with the 26

document in the ordinary course of business is regarded as 27

expectable. The same general principles apply to the types 28

of decisions affected by the defendant’s statements: 29

liability extends to transactions of the kind the defendant 30

meant to influence by the fraudulent statement, or had 31

reason to believe would be influenced by it. If a statute 32

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requires a defendant to provide information, a defendant 1

who speaks falsely may be held liable for losses suffered 2

by those people, and in those types of transactions, that 3

the statute was meant to protect. 4

The principles just stated, however, require more than 5

just foreseeability of a risk that the plaintiff might 6

someday rely on what the defendant says. They require, 7

rather, that the defendant have reason to consider that 8

reliance likely, even if the plaintiff’s identity is 9

indistinct. It might seem peculiar to place such limits on 10

the liability of a defendant who has, by hypothesis, acted 11

with a culpable state of mind. But the limits reflect a 12

reasonable solicitude for the potential defendant who 13

commits no fraud but speaks often, or who employs others 14

who speak often. Even when speaking truthfully, such a 15

party must prepare for (and insure against) the risk of 16

litigation, with its attendant expenses, risk of error, and 17

other hardships. The limits explained here help such 18

defendants measure their exposure in advance and act 19

accordingly. 20

21

22

Illustrations: 23

24

21. Seller is considering a business arrangement 25

with Buyer, and asks Bank that holds Buyer’s account 26

for an opinion of Buyer’s financial stability. Bank 27

replies that Buyer is “sound.” Eighteen months later, 28

Seller enters into transaction with Buyer. Buyer goes 29

bankrupt soon thereafter. Seller sues Bank, claiming 30

its assurance of Buyer’s soundness was fraudulent. 31

The court finds that Buyer’s business was highly 32

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volatile, that the soundness of an enterprise in its 1

field will often change over the course of a few 2

months, and that Bank could not reasonably have 3

expected a statement it made to become the basis of 4

reliance by Seller over a year later. Seller’s claim 5

against Bank fails as a matter of law. 6

7

22. Accountant produces audit report for Company 8

1. Company 1 then merges with Company 2; the 9

shareholders of both companies receive Accountant’s 10

report. A few months later, Investor decides to buy 11

bonds that had been issued by Company 2 before the 12

merger. In deciding to buy the bonds, Investor relies 13

in part on Accountant’s audit of Company 1. The 14

report satisfies Investor that, with the companies now 15

merged, the bonds issued by Company 2 are safe. The 16

merged company soon fails and the bonds become 17

worthless. Investor sues Accountant in tort for 18

fraud. The court finds that Accountant prepared its 19

audit of Company 1 to satisfy shareholders who would 20

be approving the merger, and that Accountant had no 21

reason to expect reliance on the report by someone 22

buying Company 2’s bonds. Investor’s claim fails as a 23

matter of law. 24

25

23. Buyer negotiates to purchase Rancher’s 26

cattle. Rancher gives Buyer written assurances that 27

the cattle are healthy; in fact Rancher knows that the 28

cattle are diseased. Buyer takes Rancher’s assurances 29

to Bank to obtain financing for the purchase. Bank 30

provides it. Buyer acquires the cattle, they all die 31

from their preexisting disease, and Buyer goes 32

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bankrupt. Bank sues Rancher for fraud. Court finds 1

that Rancher knew Buyer would seek financing from a 2

bank, even if Rancher did not know which one, and that 3

Rancher knew Buyer was likely to provide the bank with 4

Rancher’s assurances that the cattle were healthy. 5

Rancher may be held liable to Bank. 6

7

i. Standard of proof. The elements of a tort claim 8

ordinarily must be proven by a preponderance of the 9

evidence, but courts have frequently required clear and 10

convincing evidence to establish liability for fraud. They 11

typically reason that a claim of fraud is easy to allege 12

and often has damaging side effects; it may injure the 13

reputation of the defendant and entitle the plaintiff to 14

seek punitive damages. Those points may be accurate, but 15

in themselves they do not fully explain the higher standard 16

of proof; they are true of many other intentional torts as 17

well. The special treatment of fraud is better understood 18

as a protection against encroachment into the law of 19

contract by the law of tort. An allegation of fraud often 20

arises from an exchange between the parties that the 21

plaintiff believes was tainted by deceit. If successful, 22

the claim may allow the plaintiff to obtain more aggressive 23

remedies in tort than contract law would provide. The law 24

generally prefers that disputed transactions be resolved by 25

the law of contract, and so makes escape from that body of 26

law a bit more demanding than the assertion of a claim that 27

has no other legal home. 28

A majority of courts apply the more demanding standard 29

of proof to all elements of a claim for fraud. A minority 30

apply it to scienter and perhaps to certain other elements 31

of the tort, but not to damages. The Institute favors the 32

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latter approach. The heightened standard of proof should 1

be applied only as far as the rationale for it will carry. 2

The rationale plausibly applies to an assertion that the 3

defendant made a false statement knowingly, because that 4

element of the tort—scienter—distinguishes a fraud claim 5

from a claim of negligence that would be extinguished by a 6

contract between the parties. The need for a heightened 7

standard in judging claims of reliance is far less clear; 8

indeed, once a defendant’s culpable state of mind has been 9

proven, it is difficult to see why the plaintiff should be 10

put to a harder task in proving causation of any sort than 11

would be necessary if the defendant were merely negligent. 12

Applying a more demanding standard to the proof of damages 13

is still harder to support. The best justification is 14

probably that a jury might be confused by different 15

standards of proof for different elements of a fraud claim, 16

but juries are assigned more demanding tasks often enough. 17

Because these issues have yet received only occasional 18

judicial attention, the Institute leaves to developing case 19

law the details of when clear and convincing proof ought to 20

be used. It recommends, however, that the heightened 21

standard be justified by good and specific reasons whenever 22

it is employed. 23

24

j. Relation to restitutionary and contract remedies. 25

If a defendant’s fraudulent statements induce a plaintiff 26

to enter into a contract, the resulting facts may be 27

addressed simultaneously by the law of tort, the law of 28

contract, and the law of restitution. For clarity’s sake, 29

it may be useful to summarize the differences between the 30

remedies available to a plaintiff under those theories. 31

32

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(1) Restitution. A plaintiff may rescind a contract 1

if it was procured by fraud. Rescission is a remedy 2

available under the law of restitution, not tort. See — . 3

Both sides give back whatever they received from the other, 4

to the extent such a return is feasible. Those acts of 5

restoration may be supplemented by awards of incidental 6

damages to make up for value that cannot be fully returned, 7

or to reflect costs that the defrauded party incurred in 8

reliance on the transaction. Many jurisdictions also allow 9

the plaintiff to obtain punitive damages in an appropriate 10

case. 11

12

(2) Contract. The law of contract responds to fraud 13

in several ways. First, a court may find that the fraud 14

prevented a contract from being formed at all, and so leave 15

the parties to their remedies under the law of restitution. 16

Second, a contract procured by fraud may be treated as 17

voidable; in other words, the victim of the fraud either 18

can elect to affirm and enforce the contract despite the 19

fraud that induced it, or can disaffirm the contract and 20

seek rescission. Third, in a case where the fraud took the 21

form of a writing that did not reflect the parties’ actual 22

agreement, the contract can be reformed to reflect the 23

intentions of the parties and then enforced on its new 24

terms. 25

But a misrepresentation, whether fraudulent or not, 26

does entitle a plaintiff to contract damages if it amounts 27

to a warranty that was breached. A warranty is a claim 28

about the characteristics of a thing sold or service 29

provided; the defendant is regarded as having guaranteed 30

those characteristics, and to be answerable in damages if 31

they do not exist. For breach of warranty a plaintiff may 32

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obtain expectation damages, which commonly means recovery 1

of whatever sums are needed to put the thing received into 2

the condition the defendant promised. If the thing 3

received cannot be put into the promised condition, the 4

difference between its actual and promised value is another 5

possible measure of recovery. 6

As this statement of options shows, fraud in itself 7

gives a plaintiff no claim to damages under the law of 8

contract. If a party is induced to enter a contract by 9

fraud, the fraud will typically allow the party to escape 10

the contract or have it reformed. And if the fraudulent 11

statement amounted to a promise, it can be enforced to the 12

same extent as any other promise. But the law of contract 13

does not otherwise enable a victimized party to both 14

enforce a contract and also seek additional sums that would 15

have been received if the defendant’s fraudulent statement 16

had been true. A plaintiff seeking that result might most 17

closely achieve it by making a claim for punitive damages, 18

which are available for breach of contract in some 19

jurisdictions when the breach also amounts to tortious 20

misconduct—a criterion satisfied when the defendant has 21

engaged in fraud. See Restatement Second, Contracts § 355. 22

23

(3) A tort claim, unlike the other types of suit just 24

described, permits recovery of damages for fraud as such. 25

A claim under this Chapter entitles a plaintiff to affirm 26

the contract but seek out-of-pocket damages: the 27

difference between the value of what the plaintiff paid and 28

received, along with other sums needed to restore the 29

position the plaintiff would have occupied if the defendant 30

had not committed the fraud. Such damages resemble a 31

combination of reliance and consequential damages in the 32

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law of contract. Punitive damages also are available in 1

tort (see § 14). Sometimes an award of punitive damages 2

may be calculated to give the plaintiff the benefit of the 3

bargain made with the defendant, much as a successful claim 4

for breach of warranty would. As a comparison of this 5

paragraph and the previous one will suggest, a plaintiff 6

with an enforceable claim for breach of warranty typically 7

has nothing to gain by also pursuing a tort remedy, except 8

perhaps incidental advantages such as a longer statute of 9

limitations due to idiosyncractic facts of the case. In 10

some jurisdictions an award of punitive damages may be more 11

readily available in tort than in a suit for breach of 12

contract. 13

A plaintiff can allege a right to recover under any of 14

these theories or all of them, but cannot be compensated 15

more than once. Moreover, the pursuit of multiple remedies 16

may be subject to rules of election. Rescission is 17

inconsistent with a claim for breach of contract or tort 18

damages, and so cannot be sought at the same time as relief 19

on those other theories; and rescission must be elected 20

promptly—typically before the case goes to a jury, and 21

often earlier—because a court’s ability to fully undo an 22

exchange deteriorates with the passage of time. Claims for 23

breach of contract and for tort damages are not 24

inconsistent with one another, and so typically may be 25

advanced together at trial without an election between them 26

so long as it is made clear to the jury that the plaintiff 27

can recover under one theory or the other, but not both. 28

29

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Illustration: 1

2

24. Buyer offers to purchase Seller’s business 3

for two installment payments of $450,000 spaced six 4

months apart. Buyer is to receive half of Seller’s 5

shares in the company in return for each payment. 6

After paying the first installment, Buyer discovers 7

that Seller fraudulently misrepresented the value of 8

the business: he made it appear to be worth $1.5 9

million, but its actual value was $500,000. Buyer can 10

rescind the contract, returning Seller’s shares and 11

recouping his $450,000 payment. If Buyer instead 12

affirms the contract and brings a tort claim for 13

fraud, he owes Seller the remaining installment 14

payment of $450,000, but can collect (or subtract), as 15

out-of-pocket damages, the $400,000 difference between 16

what he agreed to pay for the business and what it was 17

worth. If Buyer wishes to collect the $1 million 18

difference between what the Seller said the business 19

was worth and what it was worth in fact, Buyer must 20

pursue that sum as a contract remedy for breach of 21

warranty or as punitive damages for the tort claim; it 22

is not properly awarded as compensatory damages in 23

tort. Nor can Buyer collect both out-of-pocket 24

damages in tort and expectation damages in contract. 25

26

Reporter’s Note 27

28 a. Scope. This Section consolidates principles that 29 were covered in Restatement Second, Torts §§ 525-529, 531-30 537, 539-542, and 546-548. 31 On the perils of attempts to define “fraud” too 32 precisely, see Howard v. Scott, 125 S.W. 1158 (Mo. 1910): 33 34

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What is fraud? No statute and no judge has been so 1 daring and unwise as to define it by hard and fast 2 rules. That pre-eminent jurist who “perfected English 3 equity into a symmetrical science,” who is deemed by 4 no less an authority than Lord Campbell “the most 5 consummate judge who ever sat in the court of 6 chancery,” Lord Chancellor Hardwicke, he who as the 7 lad, Phillip Yorke, was designed by his pious 8 Presbyterian mother for some “honester trade” than the 9 profession of an attorney (she longing to “see his 10 head wag in the pulpit”), who gave his “days and 11 nights to the volumes of Addison” in acquiring a 12 luminous and chaste style, and at the bar with 13 unremitting toil and pains, superadded to a happy 14 temperament and facile and receptive mind, informed 15 and grounded himself in all essentials to wisdom, 16 learning, and virtue on the woolsack, so that his 17 administration on that judgment seat is “fondly looked 18 back upon as the golden age of equity,” laid down the 19 precept, never since departed from, that fraud should 20 be left undefined. 21

22 b. Types of misrepresentations. Illustration 1 is 23 based on Heider v. Leewards Creative Crafts, Inc., 613 24 N.E.2d 805 (Ill. App. 1993). See also Hall v. Edge, 782 25 P.2d 122 (Okla. 1989); West Side Federal Sav. & Loan Ass'n 26 of New York City v. Hirschfeld, 476 N.Y.S.2d 292 (App. Div. 27 1984); Bails v. Wheeler, 559 P.2d 1180 (Mont. 1977); 28 Sorensen v. Gardner, 334 P.2d 471 (Or. 1959). For 29 application of the same principle to predictions of future 30 profits, see Fisher v. Mr. Harold's Hair Lab, Inc., 527 31 P.2d 1026 (Kan. 1974). 32 Illustration 2 is based on Anchorage Chrysler Center, 33 Inc. v. DaimlerChrysler Corp., 129 P.3d 905 (Alaska 2006). 34 See also Berry v. Indianapolis Life Ins. Co., 600 F. 35 Supp.2d 805 (N.D. Tex. 2009); Uptegraft v. Dome Petroleum 36 Corp., 764 P.2d 1350 (Okla. 1988); Nobility Homes, Inc. v. 37 Ballentine, 386 So.2d 727 (Ala. 1980); Sheets v. B & B 38 Personnel Systems of Oregon, Inc., 475 P.2d 968 (Or. 1970); 39 Morrow v. Wm. Berklund Forest Products Co., 346 P.2d 623 40 (Idaho 1959); Gray v Richmond Bicycle Co., 167 N.Y. 348 41 (N.Y. 1901). 42 Illustration 3 is based on Level 3 Communications, LLC 43 v. Liebert Corp., 535 F.3d 1146 (10th Cir. 2008). 44 45 c. Scienter. This Comment is the successor to 46 Restatement Second, Torts § 526. For leading statements 47

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and discussion of the scienter requirement for fraud, see 1 Derry v. Peek, 14 App.Cas. 337 (H.L. 1889); Nash v. 2 Minnesota Title Insurance & Trust Co., 40 N.E. 1039 (Mass. 3 1895); Donnelly v. Baltimore Trust & Guarantee Co., 61 A. 4 301 (Md. 1905); Morrow v. Franklin, 233 S.W. 224 (Mo. 5 1921); Nielsen v. Adams, 388 N.W.2d 840 (Neb. 1986); 6 Florenzano v. Olson, 387 N.W.2d 168 (Minn. 1986). Certain 7 features of Derry v. Peek are no longer representative of 8 English or American law, but its account of the mental 9 state needed to support liability for fraud retains 10 vitality. On the unimportance of a defendant’s motive for 11 making a knowing misrepresentation, see Beeck v. Kapalis, 12 302 N.W.2d 90 (Iowa 1981); Spiess v. Brandt, 41 N.W.2d 561 13 (Minn. 1950); McDonald v. McNeil, 104 A. 337 (Vt. 1918); 14 John V. Farwell Co. v. Nathanson, 99 Ill.App. 185 (1900); 15 Whiting v. Price, 48 N.E. 772 (Mass. 1897) (Holmes, J.). 16 Illustration 4 is based on Cabot v. Christie, 42 Vt. 17 121 (Vt. 1869); see also Ellerin v. Fairfax Sav., F.S.B., 18 652 A.2d 1117 (Md. 1995); Cunningham v. Miller, 552 A.2d 19 1203 (Vt. 1988); Riley Hill General Contractor, Inc. v. 20 Tandy Corp., 737 P.2d 595 (Or. 1987); Beeck v. Kapalis, 21 supra; National Bank of Pawnee v. Hamilton, 202 Ill.App. 22 516 (1916); Vincent v. Corbitt, 47 So. 641 (Miss. 1908). 23 Illustration 5 is based on Kountze v. Kennedy, 41 N.E. 24 414 (N.Y. 1895); see also Metro Communication Corp. BVI v. 25 Advanced Mobilecomm Technologies Inc., 854 A.2d 121 (Del. 26 Ch. 2004); Muhammad v. Strassburger, McKenna, Messer, 27 Shilobod and Gutnick, 587 A.2d 1346 (Pa. 1991); Florenzano 28 v. Olson, supra; B & B Asphalt Co., Inc. v. T. S. McShane 29 Co., Inc., 242 N.W.2d 279 (Iowa 1976); Reno v. Bull, 124 30 N.E. 144 (N.Y. 1919); Cahill v. Applegarth, 56 A. 794 (Md. 31 1904). 32 Illustration 6 is based on Follo v. Florindo, 970 A.2d 33 1230 (Vt. 2009). Illustration 7 is based on Cunningham v. 34 Miller, 552 A.2d 1203 (Vt. 1988). For the proposition that 35 fraud will not be presumed, see ServiceMaster Industries 36 Inc. v. J.R.L. Enterprises, Inc., 388 N.W.2d 83 (Neb. 37 1986); Gershman v. Engelstad, 160 N.W.2d 80 (N.D. 1968); 38 Ley v. Metropolitan Life Ins. Co., 94 N.W. 568 (Iowa 1903). 39 For discussion of whether and when the determination of 40 scienter can be taken from the jury, see Quill v. Newberry, 41 518 S.E.2d 189 (Ga. App. 1999); In re Chavin, 150 F.3d 726 42 (7th Cir. 1998); the Chavin case involves the 43 interpretation of bankruptcy law, but the principles it 44 sets forth are applicable to common-law claims of fraud as 45 well. 46

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From Massey v. Young, 73 Mo. 260 (Mo. 1880): 1 2

Fraud is rarely ever susceptible of positive proof, 3 for the obvious reason that it does not cry aloud in 4 the streets, nor proclaim its iniquitous purposes from 5 the housetops. Its vermiculations are chiefly 6 traceable by “covered tracks and studious 7 concealments.” Cooley on Torts, 475; Hopkins v. 8 Sievert, 58 Mo. 201; Burgert v. Borchert, 59 Mo. 80. 9 And though fraud is not to be presumed, yet it is as 10 legitimate to infer its existence from surrounding 11 circumstances pointing unmistakably to a wrongful 12 purpose, as it is to thus infer under similar 13 circumstances the commission of a crime; and this is 14 done daily. Anything, therefore, which satisfies the 15 mind and conscience of the existence of fraud is 16 sufficient. 17

18 d. Materiality. Illustration 8 is based on Goldman 19 v. Town of Plainfield, 762 A.2d 854 (Vt. 2000). See also 20 Renasant Bank v. Ericson, 2012 WL 640659 (M.D. Tenn. 2012) 21 (Tennessee law); Adelson v. Adelson, 806 N.E.2d 108 (Mass. 22 App. 2004); Lewis v. Bank of America, 343 F.3d 540 (5th 23 Cir. 2003) (Texas law); Ivey Corp. v. Yates, 516 So.2d 558 24 (Ala. 1987). Illustration 9 is based on McGowan v. 25 Chrysler Corp., 631 So.2d 842 (Ala. 1993); see also Corry 26 v. Jahn, 972 N.E.2d 907 (Ind. App. 2012); Tietsworth v. 27 Harley-Davidson, Inc., 677 N.W.2d 233 (Wis. 2004). 28 Illustration 10 is based on Brown v. Search, 111 N.W. 29 210 (Wis. 1907); see also Brown v. Bennett, 136 S.W.3d 552 30 (Mo. App. 2004); Arter v. Spathas, 779 P.2d 1066 (Or. App. 31 1989); Bergeron v. Dupont, 359 A.2d 627 (N.H. 1976); Saxton 32 v. Harris, 395 P.2d 71 (Alaska 1964); Collinson v. 33 Jeffries, 54 S.W. 28 (Tex. App. 1899). 34 Difficult cases can arise when sellers falsely claim 35 to have received other offers to purchase whatever they are 36 selling, thus inducing buyers who hear the claim to make 37 higher bids. Depending on the context, one might question 38 the reasonableness of a buyer’s reliance on such 39 statements; there nevertheless is authority for holding 40 sellers liable on some versions of those facts. See 41 Kabatchnick v. Hanover-Elm Bldg. Corp., 103 N.E.2d 692 42 (Mass. 1952); Beavers v. Lamplighters Realty, Inc., 556 43 P.2d 1328 (Okla. App. 1976); Kansas Mun. Gas Agency v. 44 Vesta Energy Co., Inc., 840 F. Supp. 814 (D. Kan. 1993) 45 (Oklahoma law). Compare cases where sellers lie about the 46 minimum prices they would accept, on which see American Bar 47

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Association, Model Rules of Professional Conduct, Rule 1 4.1(a), official comment (1983) (“Under generally accepted 2 conventions in negotiation, certain types of statements 3 ordinarily are not taken as statements of material fact. 4 Estimates of price or value placed on the subject of a 5 transaction and a party’s intentions as to an acceptable 6 settlement of a claim are ordinarily in this category[.]”). 7 8 e. Actual reliance. Illustration 11 is based on 9 Sharp v. Idaho Inv. Corp., 504 P.2d 386 (Idaho 1972). See 10 also Richardson v. Hardin, 5 P.3d 793 (Wyo. 2000); 11 Schlaifer Nance & Co., Inc. v. Estate of Warhol, 927 F. 12 Supp. 650 (S.D.N.Y. 1996); Eagle Properties, Ltd. v. KPMG 13 Peat Marwick, 912 S.W.2d 825 (Tex. App. 1995); Zavradinos 14 v. Lund, 741 S.W.2d 863 (Mo. App. 1987). 15 Illustration 12 is based on Slaymaker v. Westgate 16 State Bank, 739 P.2d 444 (Kan. 1987). See also Liberty 17 Nat. Life Ins. Co. v. Allen, 699 So.2d 138 (Ala. 1997); 18 Nader v. Allegheny Airlines, Inc., 626 F.2d 1031 (D.C. Cir. 19 1980); Gooch v. E.I. DuPont de Nemours & Co., 40 F. Supp. 20 2d 857 (W.D. Ky. 1998); Luciani v. Bestor, 436 N.E.2d 251 21 (Ill. App. 1982); Boyd v. Miller, 230 N.W. 851 (Iowa 1930). 22 Illustration 13 is based on Nails v. S & R, Inc., 639 23 A.2d 660 (Md. 1994). See also Virginia Academy of Clinical 24 Psychologists v. Group Hospitalization and Medical 25 Services, Inc., 878 A.2d 1226 (D.C. 2005); Engalla v. 26 Permanente Medical Group, Inc., 938 P.2d 903 (Cal. 1997); 27 Ferrell v. Cox, 617 A.2d 1003 (Me. 1992); Phoenix Assur. 28 Co. of Canada v. Runck, 366 N.W.2d 788 (N.D. 1985); Davis 29 v. Re-Trac Mfg. Corp., 149 N.W.2d 37 (Minn. 1967); State 30 Street Trust Co. v. Ernst, 15 N.E.2d 416 (N.Y. 1938). 31 Some courts recognize a rebuttable presumption of 32 reliance when a defendant has made a material 33 misrepresentation to the plaintiff. See, e.g., Marler v. 34 E.M. Johansing, LLC, 199 Cal.App.4th 1450 (Cal. App. 2011); 35 Sargent County Bank v. Wentworth, 500 N.W.2d 862 (N.D. 36 1993). 37

For the proposition that actual reliance cannot be 38 shown when the plaintiff had a legal obligation to take the 39 same course of action in any event, see Conroy v. Regents 40 of University of Cal., 203 P.3d 1127 (Cal. 2009); Kitt v. 41 Capital Concerts, Inc., 742 A.2d 856 (D.C. 1999). For 42 discussion of the difference between the “actual reliance” 43 required in suits based on tort and contract, see CBS Inc. 44 v. Ziff-Davis Pub. Co., 553 N.E.2d 997 (N.Y. 1990). 45 On the treatment of holder claims at common law, see 46 Holmes v. Grubman, 691 S.E.2d 196 (Ga. 2010); Grant 47

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Thornton LLP v. Prospect High Income Fund, 314 S.W.3d 913 1 (2010); Dloogatch v. Brincat, 920 N.E.2d 1161 (Ill. App. 2 2009); Small v. Fritz Companies, Inc., 65 P.3d 1255 (Cal. 3 2003). 4 5 f. Justifiable reliance. Illustration 14 is based on 6 Daly v. Kochanowicz, 884 N.Y.S.2d 144 (App. Div. 2009). 7 See also Dillhyon v. Dunn, 812 N.W.2d 540 (Wis. App. 2012); 8 Worley v. City of Jonesboro, 385 S.W.3d 908 (Ark. App. 9 2011); Crandall v. Grbic, 138 P.3d 365 (Kan. 2006); Johnson 10 v. State Farm Ins. Co., 587 So.2d 974 (Ala. 1991). 11 Illustration 15 is based on Toy v. Metropolitan Life 12 Ins. Co., 928 A.2d 186 (Pa. 2007). See also Passatempo v. 13 McMenimen, 960 N.E.2d 275 (Mass. 2012); Cooper v. Berkshire 14 Life Ins. Co., 810 A.2d 1045 (Md. App. 2002); Richardson v. 15 Liberty Nat. Life Ins. Co., 750 So.2d 575 (Ala. App. 1999); 16 AgriStor Leasing v. Farrow, 826 F.2d 732 (8th Cir. 1987) 17 (Iowa law); Giles v. Lanford & Gibson, Inc., 328 S.E.2d 916 18 (S.C. App. 1985); King v. Brasington, 312 S.E.2d 111 (Ga. 19 1984); Darner Motor Sales, Inc. v. Universal Underwriters 20 Ins. Co., 682 P.2d 388 (Ariz. 1984). 21 Illustration 16 is based on Spreitzer v. Hawkeye State 22 Bank, 779 N.W.2d 726 (Iowa 2009). See also Ex parte Ford 23 Motor Credit Co., 717 So.2d 781 (Ala. 1997). For cases on 24 the general importance of the plaintiff’s sophistication in 25 determining whether the reliance made was justifiable, see 26 1001 McKinney Ltd. v. Credit Suisse First Boston Mortg. 27 Capital, 192 S.W.3d 20 (Tex. App. 2005); Nader v. Allegheny 28 Airlines, Inc., 626 F.2d 1031 (D.C. Cir. 1980). 29 On the treatment of justifiable reliance as ordinarily 30 a question for the jury, see Spreitzer v. Hawkeye State 31 Bank, 779 N.W.2d 726 (Iowa 2009); Anchorage Chrysler 32 Center, Inc. v. DaimlerChrysler Corp., 129 P.3d 905 (Alaska 33 2006). 34 For additional and general discussion of justifiable 35 reliance and its meaning, see Field v. Mans, 516 U.S. 59 36 (1995); DDJ Management, LLC v. Rhone Group L.L.C., 931 37 N.E.2d 87 (N.Y. 2010); Grant Thornton LLP v. Prospect High 38 Income Fund, 314 S.W.3d 913 (Tex. 2010); Spreitzer v. 39 Hawkeye State Bank, supra; Toy v. Metropolitan Life Ins. 40 Co., 928 A.2d 186 (Pa. 2007). On the inapplicability of 41 principle of comparative negligence to claims of fraud, see 42 Otero v. Jordan Rest. Enter., 922 P.2d 569 (N.M. 1996); 43 Tratchel v. Essex Group, Inc., 452 N.W.2d 171 (Iowa 1990); 44 Angerosa v. White Co., 290 N.Y.S. 204 (App. Div. 1936); see 45 also Field v. Boyer Co., L.C., 952 P.2d 1078 (Utah 1998). 46

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g. No-reliance clauses. Illustration 17 is based on 1 Danann Realty Corp. v. Harris, 157 N.E.2d 597 (N.Y. 1959); 2 see also RAA Mgmt., LLC v. Savage Sports Holdings, Inc., 45 3 A.3d 107 (Del. 2012); Barr v. Dyke, 49 A.3d 1280 (Me. 4 2012); Forest Oil Corp. v. McAllen, 268 S.W.3d 51, 60 (Tex. 5 2008); Extra Equipamentos e Exportação Ltda. v. Case Corp., 6 541 F.3d 719, 722-26 (7th Cir. 2008) (Posner, J.) (Illinois 7 law); Slack v. James, 614 S.E.2d 636 (S.C. 2005). For the 8 point that a disclaimer can be enforced even when less 9 specific if the parties are sufficiently sophisticated, see 10 Citibank, N.A. v. Plapinger, 485 N.E.2d 974 (N.Y. 1985). 11 Illustration 18 is based on Cirillo v. Slomin's Inc., 12 768 N.Y.S.2d 759 (Sup. Ct. 2003). See also Carousel’s 13 Creamery, L.L.C. v. Marble Slab Creamery, Inc., 134 S.W.3d 14 385 (Tex. App. 2004). For discussion, see Blair, A Matter 15 of Trust: Should No-Reliance Clauses Bar Claims for 16 Fraudulent Inducement of Contract? 92 Marq. L. Rev. 423 17 (2009). 18 On the role of judge and jury in deciding the effect 19 of a no-reliance clause, see Italian Cowboy Partners, Ltd. 20 v. Prudential Ins. Co. of America, 341 S.W.3d 323 (Tex. 21 2011); Novare Group, Inc. v. Sarif, 718 S.E.2d 304 (Ga. 22 2011); Extra Equipamentos E Exportacao Ltda. v. Case Corp., 23 supra. 24 25 h. Scope of liability. This Comment is the successor 26 to Restatement Second, Torts §§ 548A and 531-533. 27 Illustrations 19 and 20 are based on the facts and 28 discussion in Midwest Management Corp. v. Stephens, 353 29 N.W.2d 76 (Iowa 1984), and Spreitzer v. Hawkeye State Bank, 30 779 N.W.2d 726 (Iowa 2009). See also PopCap Games, Inc. v. 31 MumboJumbo, LLC, 350 S.W.3d 699 (Tex. App. 2011); OCM 32 Principal Opportunities Fund v. CIBC World Markets Corp., 33 68 Cal.Rptr.3d 828 (Cal. App. 2007); In re Worldcom, Inc. 34 Securities Litigation, 456 F. Supp.2d 508 (S.D.N.Y. 2006); 35 Ambassador Hotel Co., Ltd. v. Wei-Chuan Investment, 189 36 F.3d 1017 (9th Cir. 1999); Standard Chartered PLC v. Price 37 Waterhouse, 945 P.2d 317 (Ariz. App. 1996); Citibank, N.A. 38 v. K-H Corp., 968 F.2d 1489 (2d Cir. 1992) (New York law). 39 For discussion of the relationship between the common-40 law rules governing scope of liability and the notion of 41 “loss causation” in securities law, see Emergent Capital 42 Inv. Management, LLC v. Stonepath Group, Inc., 343 F.3d 189 43 (2d Cir. 2003); Reisman v. KPMG Peat Marwick LLP, 787 44 N.E.2d 1060 (Mass. App. 2003); Bastian v. Petren Resources 45 Corp., 892 F.2d 680 (7th Cir. 1990). 46

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Illustration 21 is based on Dahlgren v. First Nat. 1 Bank of Holdrege, 533 F.3d 681 (8th Cir. 2008). 2 Illustration 22 is based on Ernst & Young, L.L.P. v. 3 Pacific Mut. Life Ins. Co., 51 S.W.3d 573 (Tex. 2001). 4 Illustration 23 is based on Citizens State Bank, Moundridge 5 v. Gilmore, 603 P.2d 605 (Kan. 1979); see also Clark v. 6 McDaniel, 546 N.W.2d 590 (Iowa 1996); In re Chivers, 275 7 B.R. 606 (Bankr. D. Utah 2002); Federal Deposit Ins. Corp. 8 v. Hudson, 758 F. Supp. 663 (D. Kan. 1991). 9 On misrepresentations embedded in commercial 10 instruments, see Koch v. Royal Wine Merchants, Ltd., 907 F. 11 Supp.2d 1332 (S.D. Fla. 2012); Printcraft Press, Inc. v. 12 Sunnyside Park Utilities, Inc., 283 P.3d 757 (Idaho 2012); 13 Diamond Point Plaza Ltd. Partnership v. Wells Fargo Bank, 14 N.A., 929 A.2d 932 (Md. 2007). 15 16 i. Standard of proof. For representative cases 17 applying a heightened standard of proof to claims of fraud, 18 see Elcon Const., Inc. v. E. Washington Univ., 273 P.3d 19 965, 970 (Wash. 2012); Estate of Alden v. Dee, 35 A.3d 950, 20 961 (Vt. 2011); Bank Ctr. v. Wiest, 793 N.W.2d 172, 178 21 (N.D. 2010); Flegles, Inc. v. TruServ Corp., 289 S.W.3d 22 544, 548-49 (Ky. 2009); Bowman v. Presley, 212 P.3d 1210, 23 1218 (Okla. 2009); Kelly v. VinZant, 197 P.3d 803, 808 24 (Kan. 2008); AmOffice of Disciplinary Counsel v. 25 Kiesewetter, 889 A.2d 47 (Pa. 2005); Wells Fargo Bank v. 26 Arizona Laborers, Teamsters & Cement Masons Local No. 395 27 Pension Trust Fund, 38 P.3d 12 (Ariz. 2002). For cases 28 taking the more selective approach endorsed in the Comment, 29 see Cohen v. Roll-A-Cover, LLC, 27 A.3d 1 (Conn. App. 30 2011); Hoffman v. Stamper, 867 A.2d 276 (Md. 2005); Riley 31 Hill Gen. Contractor, Inc. v. Tandy Corp., 737 P.2d 595 32 (Or. 1987). For cases requiring proof by a preponderance 33 of the evidence with respect to all elements, see Bomar v. 34 Moser, 251 S.W.3d 234 (Ark. 2007); State by Humphrey v. 35 Alpine Air Products, Inc., 500 N.W.2d 788 (Minn. 1993); 36 Wieczoreck v. H & H Builders, Inc., 475 So. 2d 227 (Fla. 37 1985). 38 39 j. Relation to restitutionary and contract remedies. 40 On the use of rescission as a response to a claim of fraud, 41 see Restatement Third, Restitution and Unjust Enrichment 42 § 54. For cases discussing the availability of punitive 43 damages when a plaintiff seeks rescission, see Medasys 44 Acquisition Corp. v. SDMS, P.C., 55 P.3d 763 (Ariz. 2002); 45 Seaton v. Lawson Chevrolet-Mazda, Inc., 821 S.W.2d 137 46 (Tenn. 1991); Ind. & Mich. Elec. Co. v. Harlan, 504 N.E.2d 47

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301 (Ind. App. 1987); Z.D. Howard Co. v. Cartwright, 537 1 P.2d 345 (Okla. 1975); Mid-State Homes, Inc. v. Johnson, 2 311 So.2d 312 (Ala. 1975); Boise Dodge, Inc. v. Clark, 453 3 P.2d 551 (Idaho 1969). 4 On the relationship between a claim for rescission and 5 a tort claim for fraud, see Collier v. Bryant, 719 S.E.2d 6 70 (N.C. App. 2011); Hillcrest Center, Inc. v. Rone, 711 7 So.2d 901 (Ala. 1997); Patray v. Northwest Pub., Inc., 931 8 F. Supp. 865 (S.D. Ga. 1996); Fields v. Yarborough Ford, 9 Inc., 414 S.E.2d 164 (S.C. 1992); Morse/Diesel, Inc. v. 10 Fid. & Deposit Co. of Maryland, 768 F. Supp. 115 (S.D.N.Y. 11 1991) (New York law); LaFazia v. Howe, 575 A.2d 182 (R.I. 12 1990); Chester v. McDaniel, 504 P.2d 726 (Or. 1972). On 13 the election of rescission and the timing of it, see Marx 14 Real Estate Investments, LLC v. Coloso, 384 S.W.3d 595 15 (Ark. App. 2011); Schwartz v. Rockey, 932 A.2d 885 (Pa. 16 2007); Merritt v. Craig, 746 A.2d 923 (Md. App. 2000); 17 Nordstrom v. Miller, 605 P.2d 545 (Kan. 1980); Isaacs v. 18 Bokor, 566 S.W.2d 532 (Tenn. 1978). 19 On liability in damages for breach of warranty, see 20 CBS Inc. v. Ziff-Davis Pub. Co., 553 N.E.2d 997 (N.Y. 21 1990); Johnson v. Healy, 405 A.2d 54 (Conn. 1978). 22 On the extent of a plaintiff’s right to pursue tort 23 and contract remedies at the same time, see Regions Bank v. 24 Griffin, 217 S.W.3d 829 (Ark. 2005); Hawkinson v. Bennett, 25 962 P.2d 445 (Kan. 1998); Tobin v. Flynn & Larsen Implement 26 Co., 369 N.W.2d 96 (Neb. 1985). 27 Illustration 24 is based on Brown v. Richards, 840 28 P.2d 143 (Utah App. 1992). 29

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71

§ 10. Duties to disclose; tacit misrepresentation 1

2

A misrepresentation that supports liability under 3

§ 9 may result from a failure to disclose information, 4

but only when the person remaining silent has a duty 5

to speak. Such a duty may exist where: 6

7

(a) the actor has made prior statements and 8

knows that they will mislead another if not 9

amended, even if they were not actionable when 10

made; or 11

12

(b) the actor has a special relationship 13

with another that obliges the actor to be 14

forthcoming; or 15

16

(c) the actor knows that another party is 17

about to enter into a transaction under a mistake 18

about a basic assumption behind it, and that the 19

other party, because of the relationship between 20

them, the customs of the trade, or other 21

circumstances, would reasonably expect a 22

disclosure of what the actor knows. 23

24

Comment: 25

26

a. Scope; other actions compared. Liability for 27

fraud ordinarily arises from misleading statements, not 28

from silence. That is so because one party to a 29

transaction has no general duty to make disclosures to the 30

other. On occasions discussed in this Section, however, a 31

plaintiff does have such a duty. In those cases silence 32

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may be considered a form of deceit, and the nondisclosure 1

of a fact treated the same as an assertion of its 2

nonexistence. 3

The liability recognized by this Section is a species 4

of deceit; indeed, this Section is best understood as 5

detailing when silence can satisfy the “misrepresentation” 6

element of § X. The discussion in § X of other elements of 7

liability for fraud, such as materiality and causation, 8

continue to be relevant to a claim that meets the 9

requirements this Section. A statement that is misleading 10

if not properly qualified may support liability under § 7 11

without reference to the principles stated here. This 12

Section, rather, recognizes liability for nondisclosure as 13

such—that is, for a failure to disclose unaccompanied by 14

any statement that would support liability in itself. 15

On liability for omissions under a theory of negligent 16

misrepresentation, see § 5, Comment e. If the cases 17

treated in this Section were found to involve negligence 18

rather than a more culpable state of mind, most of them 19

would not be candidates for liability under § 5. The 20

reason is that liability under § 5 cannot arise from 21

negligence in the performance or negotiation of a contract; 22

such claims are eliminated by the economic-loss rule of § 23

2. Thus § 5 mostly involves negligent misrepresentations 24

between parties who do not have contracts. The claims 25

treated in this Section, by contrast, typically do arise 26

from the performance or negotiation of contracts. They 27

survive the economic-loss rule because they involve more 28

than negligence. They are varieties of deceit, to which 29

the economic-loss rule does not apply. It follows that if 30

a defendant lacks the state of mind needed to support a 31

claim under this Section, the plaintiff’s likely fallback 32

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is not a negligence claim. It is a claim based on the law 1

of contract or restitution. Those bodies of law provide 2

rules that allow plaintiffs, on terms more liberal than 3

those found here, to rescind a transaction and seek 4

restitution of any benefits conferred because the defendant 5

failed to disclose information material to a bargain the 6

parties made. See Restatement Third, Restitution and 7

Unjust Enrichment §§ 5 and 34; Restatement Second, 8

Contracts § 303(b). 9

10

b. Prior speech. Nondisclosure can amount to deceit 11

if the defendant has spoken other words, or performed other 12

acts, that may not have been culpable at the time but will 13

become so if the defendant remains silent. Thus a 14

defendant may make a statement and believe it to be true 15

but later discover that it is false or misleading. Or a 16

defendant may make a statement in the belief that it will 17

not elicit reliance but later discover that it has. In 18

these cases the defendant is obliged to update the earlier 19

statements to prevent them from having fraudulent effect, 20

and may be held liable for failing to do so. 21

22

Illustrations: 23

24

1. Seller of property tells prospective Buyer 25

that the property’s septic system is in good working 26

order. Seller’s statement is true when he makes it, 27

but Seller learns a week later that the septic system 28

has failed. Seller signs a contract of sale with 29

Buyer without disclosing the failure of the system. 30

Seller may be held liable to Buyer for fraud. 31

32

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2. Worker offers to leave his job at Company and 1

join Rival. Worker tells Rival that he will bring 2

clients from Company to Rival if he moves there. 3

Worker’s statements are true when made. Two weeks 4

later, Company offers Worker a severance contract that 5

requires him not to take Company’s clients elsewhere. 6

Worker signs the agreement, then joins Rival without 7

disclosing it. Rival later discovers that Worker 8

cannot bring clients from Company as he had described. 9

Worker may be held liable to Rival for fraud. 10

11

3. Retailer makes a six-month contract to 12

distribute Manufacturer’s products. Manufacturer 13

offers a friendly assurance that he hopes to work with 14

Retailer for years to come. The statement is false, 15

but Manufacturer has no reason to expect Retailer to 16

rely on it. Retailer later informs Manufacturer that 17

he plans to reject an alternative supplier in favor of 18

the long-term relationship that Manufacturer has 19

proposed. Manufacturer says nothing, but has no 20

interest in a long-term relationship and ends their 21

dealings a few months later. Manufacturer did not 22

commit fraud when he first spoke, but had a duty to 23

modify his statement when he learned that Retailer was 24

relying on it. Manufacturer may be held liable to 25

Retailer. 26

27

c. Special relationships. Silence may amount to 28

deceit if it occurs against the backdrop of a special 29

relationship between the parties that causes one of them to 30

count on the other to be forthcoming. A defendant in a 31

fiduciary relationship with the plaintiff, for example, is 32

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expected to disclose anything the plaintiff might consider 1

material to a transaction between them; if such a defendant 2

deliberately keeps silent about such facts, and the 3

plaintiff relies on their non-existence, the defendant may 4

be held liable for fraud. “Confidential” relationships are 5

defined less formally than fiduciary relationships but have 6

similar consequences under this Section. They arise when 7

one party justifiably comes to trust the other, creating a 8

reasonable expectation that the other will act with the 9

utmost good faith and disclose any facts material to their 10

dealings. (For more discussion of fiduciary and 11

confidential relationships, see Section X, Comment Y.) 12

13

Illustrations: 14

15

4. Tenant 1 and Tenant 2 hold a parcel of 16

property as tenants in common. They agree to 17

partition the property. Tenant 1, who has possession 18

of the parcel, does not disclose to Tenant 2 that he 19

has harvested most of the timber on the part of the 20

land that Tenant 2 will receive. Tenant 2 later 21

discovers that the timber is gone and sues Tenant 1. 22

The court finds that Tenant 1’s possession of the land 23

gave rise to a relationship of trust and confidence 24

with Tenant 2, which in turn created a duty to 25

disclose facts material to the proposed transaction. 26

The court further finds that Tenant 1 did not disclose 27

the information to Tenant 2 because he thought that it 28

would affect Tenant 2’s willingness to consent to the 29

deal. Tenant 1 may be held liable for fraud. 30

31

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5. Driller 1 owns a lease to extract minerals 1

from tribal lands. Worker for tribe discovers that 2

mineral deposits on the lands are more extensive than 3

Driller 1 knows. Worker joins Driller 2 and passes on 4

his knowledge. Driller 2 buys Driller 1’s mineral 5

rights. Driller 1 then discovers that it sold the 6

rights for much less than they were worth, and sues 7

Worker and Driller 2 for fraud. The court finds that 8

Worker obtained his knowledge lawfully, that Driller 1 9

and Driller 2 were engaged in an arm’s-length 10

transaction, and that neither Worker nor Driller 2 had 11

any obligation to disclose their knowledge to Driller 12

1. Driller 1’s fraud claim fails. 13

14

d. Superior knowledge. One party often knows more 15

than the other about the subject of an exchange between 16

them. That difference, without more, creates no obligation 17

of disclosure. Better information is a legitimate 18

advantage at the bargaining table, and the law means to 19

encourage its acquisition. In some cases, however, an 20

imbalance of knowledge creates a duty in the better-21

informed party to disclose it. Liability on this theory 22

requires, first, a showing that the fact at issue was basic 23

to the transaction. Second, the plaintiff must have a 24

reason out of the ordinary to rely on an adversary to 25

supply the information. Part of the reason usually is a 26

difference in each party’s access to the facts. If one 27

party knows something that the other cannot find out, 28

letting the other suffer for its ignorance may not appeal 29

to notions of fairness or usefully encourage the discovery 30

of knowledge. See Illustrations 6 and 8. Even when two 31

parties have different access to basic facts, however, 32

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rules to govern the defendant’s obligations are hard to 1

state. Liability on this basis typically arises from 2

conduct that represents a gross violation of business 3

ethics and amounts to a swindling of one side by the other. 4

Such conclusions depend in significant part on commercial 5

customs, which vary in different settings. 6

7

Illustrations: 8

9

6. Buyer purchases a house from Seller. Buyer 10

then discovers serious defects in the foundation that 11

Seller did not disclose. The court finds that Seller 12

knew of the defects before the sale, knew they would 13

be of great importance to Buyer, and knew they were 14

not discoverable by the use of reasonable care; Buyer 15

had obtained a customary and competent inspection, and 16

the defects were not found. Seller may be held liable 17

to Buyer for fraud. 18

19

7. Employee and Employer negotiate a 20

compensation agreement. After each side has reviewed 21

the resulting document many times, Employer inserts a 22

change without telling Employee. Employee signs the 23

document, discovers the change a week later, and 24

brings suit for fraud. The court finds that the 25

transaction was made at arm’s length and that Employee 26

had a full opportunity to reread the contract just 27

before signing it. The court also finds, however, 28

that Employer knew its last-minute change was 29

important, and that Employee would not expect it and 30

was not aware of it. Employer may be held liable in 31

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tort for fraud. (Reformation of their contract is 1

another natural possibility.) 2

3

8. Wholesaler has an ongoing agreement to buy 4

cereals from Producer for resale to various grocers. 5

Producer decides to start selling its cereals to 6

grocers directly, but does not disclose this plan to 7

Wholesaler. The parties renew their contract. 8

Wholesaler then discovers that it can no longer resell 9

most of the cereals it has purchased because grocers 10

are buying them directly from Producer. The court 11

finds that when the parties renewed their contract, 12

Producer knew that Wholesaler expected to resell the 13

cereals but would no longer be able to do so; that 14

Producer knew Wholesaler would consider Producer’s new 15

plans important in deciding whether to renew; and that 16

Wholesaler had no way to learn of Producer’s plans if 17

Producer did not disclose them. Producer may be held 18

liable for fraud. 19

20

9. Buyer purchases house from Seller, then 21

discovers that its driveway encroaches on a neighbor’s 22

property. The court finds that Seller knew of the 23

encroachment and did not disclose it to Buyer. The 24

court also finds, however, that the encroachment could 25

have been discovered by a survey or by inspection of 26

public records, neither of which Buyer performed. 27

Seller had no obligation to disclose the encroachment 28

to Buyer, and is not liable for fraud. 29

30

Rationales for these illustrations may be found in 31

sound policy as well as in notions of fairness. Thus in 32

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Illustration 6, denying recovery would give future buyers 1

an incentive to invest in more expensive inspections that 2

would rarely be worth the cost. It is more efficient to 3

require the seller to reveal what he knows in the sales 4

contract, rather than in litigation afterwards. In 5

Illustration 9, by contrast, requiring each side to inform 6

itself of the facts—or even just requiring the buyer to put 7

direct questions to the seller—is not unduly burdensome, 8

and is consistent with the commercial customs that govern 9

real-estate transactions. 10

11

e. Judge and jury. Liability under the logic of this 12

Section requires a finding that the defendant had a duty to 13

speak. The existence of that duty is a question for the 14

court. If disputed facts bear on the existence of the 15

duty, they may be submitted to the trier of fact for 16

resolution. Examples may include the defendant’s knowledge 17

of a fact, the other’s ignorance of it, the customs of a 18

commercial situation, the defendant’s knowledge that the 19

plaintiff expects disclosure, or the defendant’s state of 20

mind. 21

22

Reporter’s Note 23

24

a. Scope; other actions compared. This Section is 25 the successor to Restatement Second, Torts § 551. A 26 majority of jurisdictions have adopted that Section or 27 cited it with approval. See Richey v. Patrick, 904 P.2d 28 798 (Wyo. 1995). The wording of § 551 created possible 29 ambiguities about whether it recognized liability for 30 negligence or only for deceit. See U.S. Nat. Bank of 31 Oregon v. Fought, 630 P.2d 337 (Or. 1981); cf. McElhannon 32 v. Ford, 73 P.3d 827 (N.M. 2003); General Acquisition, Inc. 33 v. GenCorp Inc., 766 F. Supp. 1460 (S.D. Ohio 1990). This 34 Section makes clear that the liability it recognizes is for 35

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§ 10. Duties to disclose

80

a type of fraud. One reason involves the scope of the 1 economic-loss rule, which was not clearly established when 2 § 551 was drafted. The rule now makes clear that liability 3 in tort is not generally recognized for negligence in the 4 negotiation or performance of a contract. The economic-5 loss rule does not preclude claims of deceit, however, such 6 as those recognized in this Section and elsewhere in this 7 Chapter. 8 In some jurisdictions a defendant held liable under 9 the principles of this Section is said to have committed a 10 tort with a distinct name: fraudulent concealment. See 11 Barr v. Dyke, 49 A.3d 1280 (Me. 2012); Anderson v. Kriser, 12 266 P.3d 819 (Utah 2011); Knights of Columbus Council 3152 13 v. KFS BD Inc., 791 N.W.2d 317 (Neb. 2010); Fuller v. 14 Banknorth Mortg. Co., 788 A.2d 14 (Vt. 2001). 15 16 b. Prior speech. Illustration 1 is based on Bergeron 17 v. Dupont, 359 A.2d 627 (N.H. 1976). 18 Illustration 2 is based on Refrigeration Indus., Inc. 19 v. Nemmers, 880 S.W.2d 912 (Mo. App. 1994). See also 20 Pearson v. Simmonds Precision Products, Inc., 624 A.2d 1134 21 (Vt. 1993); Mammas v. Oro Valley Townhouses, Inc., 638 P.2d 22 1367 (Ariz. App. 1981); Bursey v. Clement, 387 A.2d 346 23 (N.H. 1978); Fischer v. Kletz, 266 F. Supp. 180 (S.D.N.Y. 24 1967); Brown v. Honiss, 68 A. 150 (N.J. E. & A. 1907). 25 Illustration 3 is based on Jones Distributing Co., 26 Inc. v. White Consol. Industries, Inc., 943 F. Supp. 1445 27 (N.D. Iowa 1996). See also U. S. Fidelity and Guaranty Co. 28 v. Black, 313 N.W.2d 77 (Mich. 1981). 29 30 c. Special relationships. Illustration 4 is based on 31 Watts v. Krebs, 962 P.2d 387 (Idaho 1998). Illustration 5 32 is based on Mallon Oil Co. v. Bowen/Edwards Associates, 33 Inc., 965 P.2d 105 (Col. 1998). See also Deptula v. 34 Simpson, 164 P.3d 640 (Alaska 2007); Lee v. LPP Mortg. 35 Ltd., 74 P.3d 152 (Wyo. 2003); Schwaiger v. Mitchell 36 Radiology Associates, P.C., 652 N.W.2d 372 (S.D. 2002); 37 Mallon Oil Co. v. Bowen/Edwards Associates, Inc., 965 P.2d 38 105 (Col. 1998); Colonial Imports, Inc. v. Carlton 39 Northwest, Inc., 853 P.2d 913 (Wash. 1993). 40 41 d. Superior knowledge. Illustration 6 is adapted 42 from Mitchell v. Christensen, 31 P.3d 572 (Utah 2001), 43 which involved leaks in a swimming pool. Illustration 7 is 44 based on Hennig v. Ahearn, 601 N.W.2d 14 (Wis. App. 1999). 45 Illustration 8 is based on Kaloti Enterprises, Inc. v. 46 Kellogg Sales Co., 699 N.W.2d 205 (Wis. 2005). 47

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Illustration 9 is based on Schwartz v. Morgan, 776 N.W.2d 1 827 (S.D. 2009). See also Lerner v. DMB Realty, LLC, 294 2 P.3d 135 (Ariz. App. 2012); Lindskov v. Lindskov, 800 3 N.W.2d 715 (S.D. 2011); Zawaideh v. Nebraska Dept. of 4 Health and Human Services Regulation and Licensure, supra; 5 Bradford v. Vento, 48 S.W.3d 749 (Tex. 2001); United Jersey 6 Bank v. Kensey, 704 A.2d 38 (N.J. App. 1997); Baskin v. 7 Collins, 806 S.W.2d 3 (Ark. 1991). 8 For discussion of what facts and assumptions are 9 “basic” to a transaction, see Restatement Second, Contracts 10 § 152 Comment b. 11 12 e. Judge and jury. On the allocation to judge and 13 jury of the matters considered in this Section, see 14 Printcraft Press, Inc. v. Sunnyside Park Utilities, Inc., 15 283 P.3d 757 (Idaho 2012); State Farm Fire and Cas. Co. v. 16 Owen, 729 So.2d 834 (Ala. 1998); cf. Rambus Inc. v. 17 Infineon Technologies AG, 318 F.3d 1081 (Fed. Cir. 2003). 18

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§ 11. Liability for misrepresentations of opinion 1

2

A misrepresentation that supports liability under 3

§ 9 may be a false statement of opinion only when 4

5

(1) the parties had a fiduciary or confidential 6

relationship, or 7

8

(2) the defendant purported to have special knowledge 9

or otherwise invited the plaintiff’s reliance on the 10

opinion offered. 11

12

Comment: 13

14

a. Generally. A statement of opinion may imply that 15

its maker has knowledge of facts to support it, or no 16

knowledge of facts inconsistent with it. In either case 17

the factual implication, if known by the speaker to be 18

false, can support liability for fraud under the rule of 19

§ 7 without reference to the rules stated here. This 20

Section addresses a separate question: the liability of a 21

defendant for the false statement of an opinion as such, 22

and without implications of fact. 23

Statements traditionally classified as opinions 24

include judgments about the quality or value of a thing 25

sold and views about the future likelihood of events. 26

False statements of pure opinion ordinarily are not 27

actionable. The reason is not that opinions are incapable 28

of being true or false; for when a speaker claims to hold 29

an opinion but does not, the claim is as contrary to the 30

truth as any other. The reason for the rule, rather, is 31

that reliance on another party’s opinion is regarded in 32

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most cases as unjustifiable as a matter of law. It is 1

better practice, and more consistent with customs of 2

commercial life, for parties to rely just on statements of 3

fact made by others and to form their own opinions on the 4

basis of them. This rule is relaxed when there is 5

unusually good reason for the plaintiff to defer to the 6

defendant’s judgment (as explained in Comment b), but a 7

typical buyer is not entitled to rely on the opinions of a 8

typical seller. 9

If a defendant offers an opinion in circumstances that 10

can support liability under the rules of this Section, the 11

other traditional elements of fraud stated in § 7 still 12

must be satisfied: the plaintiff is required to show that 13

the defendant’s statement was material, that reliance on it 14

was justifiable, and so forth. 15

16

Illustrations: 17

18

1. Buyer negotiates the purchase of a used car 19

from Seller. Seller states that the car is in good 20

mechanical condition, and Buyer relies on that 21

assurance. Buyer soon discovers that the car’s engine 22

is in poor repair and will be expensive to fix, and 23

that other interior components have rotted. Buyer 24

sues Seller for fraud. Seller’s statement that the 25

car was in good mechanical condition was an opinion, 26

but it implied that Seller knew of facts to support it 27

and not of facts that made it false. The court finds 28

that Seller knew of the car’s problems at the time he 29

made the claim. Seller may be held liable for fraud 30

under the principles of § 7. The liability is not for 31

Seller’s false statement of opinion as such. It is 32

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for the false factual implications of what Seller 1

said, which amounted to a warranty. 2

3

2. Buyer negotiates the purchase of a restaurant 4

from Seller. Seller accurately states the 5

restaurant’s revenues to date and gives Buyer complete 6

access to his business records. Seller tells Buyer 7

that he thinks the restaurant will produce gross 8

revenues of $10,000 per day going forward. After 9

acquiring the restaurant, Buyer finds that it produces 10

revenues of $5,000 per day. Buyer sues Seller for 11

fraud, claiming that Seller’s statements about the 12

restaurant’s future earnings were wrong and that 13

Seller knew they would be. Buyer’s claim fails 14

because Seller’s statements about the future were 15

matters of opinion, and implied no knowledge of facts 16

that Buyer did not have. 17

18

Difficult cases can arise at the seam between opinion 19

and fact. They are best resolved by recalling that the 20

distinction is drawn not for its own sake but to identify 21

cases in which reliance by one party on the claims of 22

another is categorically unjustifiable. The inquiry serves 23

a practical policy: enabling parties to rely on each 24

other’s words when it saves time and trouble or is 25

otherwise commercially useful, and discouraging them from 26

such reliance when they can as easily form their own 27

judgments for themselves. If the classification of a 28

statement as opinion or fact is a matter on which 29

reasonable minds could differ, it is an appropriate matter 30

for decision by jury. 31

32

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b. Circumstances justifying reliance. False 1

statements of opinion can support a claim for fraud in two 2

general circumstances. The first arises when parties have 3

a fiduciary or confidential relationship. A fiduciary has 4

a legal obligation to act for the benefit of another; the 5

obligation arises automatically from certain formally 6

recognized relationships, such as attorney and client or 7

trustee and beneficiary. A confidential relationship 8

produces similar obligations but is less formal. It arises 9

from circumstances in which the parties are not on equal 10

footing; one has influence over the other, and the stronger 11

party is trusted to act in the interest of the weaker. 12

Such relations often appear within families. In a 13

relationship of either of these types, it may be 14

appropriate for the dependent party to rely on the opinions 15

of the other. 16

Second, a claim of fraud may lie for a false statement 17

of opinion when the defendant purports to be an expert or 18

otherwise invites deference by claiming access to knowledge 19

that the plaintiff cannot readily duplicate. Relying on 20

the defendant’s opinion in such a case may well be 21

reasonable and more efficient than collecting facts and 22

forming an opinion of one’s own. The law protects the 23

plaintiff’s right to so rely by imposing liability if the 24

opinion is falsely stated. 25

26

Illustrations: 27

28

3. Plaintiff is injured in a car accident. 29

Agent for Plaintiff’s insurer tells Plaintiff that he 30

probably does not have a good claim against the other 31

driver. Plaintiff releases his claims in return for a 32

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87

small settlement. Plaintiff later learns that he had 1

a strong claim against the other driver. Plaintiff 2

sues insurer for fraud. The court finds that Agent 3

knowingly misrepresented the strength of Plaintiff’s 4

case to induce Plaintiff to accept a swift settlement. 5

Court further finds that Agent’s statement was an 6

opinion, but that Agent and Plaintiff were in a 7

confidential relationship that required Agent to act 8

in utmost good faith. Insurer may be held liable to 9

Plaintiff. 10

11

4. Professional Realtor produces a report 12

appraising a house at $300,000. Buyer relies on 13

Realtor’s report in deciding to purchase the house. 14

Buyer later discovers that the market value of the 15

house was below $200,000. Buyer sues Realtor for 16

fraud. Buyer’s evidence shows that Realtor was party 17

to a scheme to acquire houses at low prices and then 18

offer inflated opinions of their value to prospective 19

buyers. The court finds that Realtor’s appraisal was 20

an opinion, but also finds that Realtor held himself 21

out as an expert whose opinions could be trusted. 22

Realtor may be held liable to Buyer for fraud. 23

24

c. Matters of law. Assertions of law are sometimes 25

said to be matters of opinion that cannot serve as the 26

basis for a claim of fraud. While that is often true, 27

statements about the legal consequences of an act law are 28

best treated as statements of opinion: they may be 29

actionable if they imply untrue facts, or if the parties 30

have a relationship that makes it reasonable for the 31

plaintiff to rely on the defendant’s opinions. They are 32

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not actionable if they amount to judgments based on facts 1

known to both sides, and on which the plaintiff can 2

reasonably be expected to arrive at an independent view. 3

A claim of law may imply facts of two kinds. First, 4

it may imply that facts in the world justify the speaker’s 5

conclusions. Thus an assertion that one mortgage has 6

priority over another may imply that one was made before 7

the other; and a claim that a corporation has the right to 8

do business in a state may imply that it has taken all 9

steps necessary to be duly qualified. Second, a claim of 10

law may imply the existence of legal facts: that a 11

regulation has been passed or repealed, or that a piece of 12

property was zoned for commercial use or not. A defendant 13

who knowingly misleads the plaintiff with respect to any of 14

these sorts of facts may be held liable for fraud if the 15

other elements stated in § 7 are satisfied. Often they 16

will not be satisfied; justifiable reliance typically is 17

hard to show when the defendant’s claim might easily have 18

been checked against public records. In all events, any 19

liability in such a case arises not from the defendant’s 20

false statement of opinion per se, but from the facts it 21

implies. 22

On the other hand, no liability arises when one 23

adversary in a negotiation offers another a view about the 24

best interpretation of legal language—for example, the 25

wording of a lease or a statute—that is equally visible to 26

both. The defendant’s statement then is a true matter of 27

opinion, and a claim of fraud founded on it fails as a 28

matter of law unless the rules of this Section are 29

satisfied. Thus an attorney may be held liable to a client 30

for a legal opinion falsely stated, because an attorney and 31

client have a fiduciary relationship. And if a non-lawyer 32

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89

claims to have special knowledge or otherwise invites 1

reliance by the plaintiff, a plaintiff again may recover if 2

falsely stated opinions of law follow. 3

4

Illustrations: 5

6

5. Tenant negotiates the rental of property from 7

Landlord. During their discussions, Landlord tells 8

tenant that local zoning rules will permit Tenant’s 9

business to operate on the premises. When Tenant 10

proposes to go confirm this, Landlord dissuades him, 11

assuring Tenant that “we know the area.” Acting in 12

reliance on these assurances, Tenant signs a contract 13

with Landlord. The assurances turn out to be false, 14

and Tenant suffers losses as a result. Tenant 15

produces evidence that Landlord knew the assurances 16

were false when he made them. Landlord may be held 17

liable for fraud. 18

19

6. Tenant negotiates the rental of property from 20

Landlord. During their discussions, Landlord makes a 21

claim about the meaning of language in the proposed 22

lease. Landlord says the language is best understood 23

to give Tenant exclusive use of a walkway adjacent to 24

the property. Acting in reliance on these assurances, 25

Tenant signs a contract with Landlord. The assurances 26

turn out to be false; a court later finds that a 27

neighboring tenant has a right to use the walkway as 28

well. Tenant sues Landlord for fraud, proposing to 29

show that Landlord knew his reading of the lease was 30

infirm. Tenant’s claim fails because Landlord’s 31

interpretation of the language in the lease was a 32

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matter of opinion, the basis for which was equally 1

visible to both sides; and the parties were in an 2

arm’s-length relationship that did not entitle Tenant 3

to rely on Landlord’s opinions. 4

5 Reporter’s note 6

7 a. Generally. For general discussion of when 8 fraudulent opinions are actionable, see Italian Cowboy 9 Partners, Ltd. v. Prudential Ins. Co. of America, 341 10 S.W.3d 323 (Tex. 2011); Flegles, Inc. v. TruServ Corp., 289 11 S.W.3d 544 (Ky. 2009); Power v. Smith, 786 N.E.2d 1113 12 (Ill. App. 2003); Hall v. Edge, 782 P.2d 122 (Okla. 1989); 13 Borba v. Thomas, 138 Cal. Rptr. 565 (Cal. App. 1977). 14 Illustration 1 is based on Briggs v. Carol Cars, Inc., 15 553 N.E.2d 930 (Mass. 1990); see also Heider v. Leewards 16 Creative Crafts, 613 N.E.2d 805 (Ill. App. 1993); Black v. 17 J. N. Blair & Co., 302 P.2d 609 (Cal. App. 1956); cf. 18 Pennington v. Singleton, 606 S.W.2d 682 (Tex. 1980). 19 Illustration 2 is based on Mutsch v. Rigi, 430 N.W.2d 20 201 (Minn. App. 2001). The Mutsch case itself involved an 21 action on a promissory note; for applications in tort, see 22 Sundown, Inc. v. Pearson Real Estate Co., Inc., 8 P.3d 324 23 (Wyo. 2000); Daibo v. Kirsch, 720 A.2d 994 (N.J. App. 24 1998); Pugh's IGA, Inc. v. Super Food Services, Inc., 531 25 N.E.2d 1194 (Ind. App. 1988); Zar v. Omni Industries, Inc., 26 813 F.2d 689 (5th Cir. 1987) (Texas law); Fisher v. Mr. 27 Harold's Hair Lab, Inc., 527 P.2d 1026 (Kan. 1974); Annot., 28 27 A.L.R.2d 14. 29 30 b. Circumstances justifying reliance. Illustration 3 31 is based on Hutchins v. Utica Mut. Ins. Co., 484 N.Y.S.2d 32 686 (N.Y. App. 1985); see also Love v. Home Transp. Co., 33 Inc., 641 P.2d 854 (Ariz. 1982); Spry Funeral Homes, Inc. 34 v. Deaton, 363 So.2d 786 (Ala. App. 1978). 35 Illustration 4 is based on Hoffman v. Stamper, 867 36 A.2d 276 (Md. 2005); see also Davis v. McGuigan, 325 S.W.3d 37 149 (Tenn. 2010); Decatur Ventures, LLC v. Daniel, 485 F.3d 38 387 (7th Cir. 2008) (Indiana law); American United Life 39 Ins. Co. v. Douglas, 808 N.E.2d 690 (Ind. App. 2004); James 40 v. Nationsbank Trust Co. (Florida) Nat. Assoc., 639 So.2d 41 1031 (Fla. App. 1994); Duhl v. Nash Realty, Inc., 429 42 N.E.2d 1267 (Ill. App. 1981); cf. McCollum v. P/S 43 Investments, Ltd., 764 S.W.2d 252 (Tex. App. 1988). 44

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91

On the occasions for submitting the distinction 1 between fact and opinion to a jury, see Jordan v. Hunter, 2 865 P.2d 990 (Idaho App. 1993); Henderson v. Forman, 436 3 N.W.2d 526 (Neb. 1989); Hughes v. Holt, 435 A.2d 687 (Vt. 4 1981); Christy v. Heil, 123 N.W.2d 408 (Iowa 1963). 5 6 c. Matters of law. Illustration 5 is based on 7 National Conversion Corp. v. Cedar Bldg. Corp., 246 N.E.2d 8 351 (N.Y. 1969); see also Hoyt Properties, Inc. v. 9 Production Resource Group, L.L.C., 736 N.W.2d 313 (Minn. 10 2007); Empiregas, Inc. of Ardmore v. Hardy, 487 So.2d 244 11 (Ala. 1985); White v. Mulvania, 575 S.W.2d 184 (Mo. 1978). 12 Illustration 6 is based on Cheung-Loon, LLC v. Cergon, 13 Inc., 392 S.W.3d 738 (Tex. App. 2012), though the facts 14 have been simplified here for clarity’s sake; the actual 15 case involved a parking lot. See also Koagel v. Ryan 16 Homes, Inc., 562 N.Y.S.2d 312 (N.Y. App. 1990); Two, Inc. 17 v. Gilmore, 679 P.2d 116 (Col. App. 1984); Borba v. Thomas, 18 138 Cal.Rptr. 565 (Cal. App. 1977).19

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93

§ 12. Misrepresentation of intention; promissory fraud 1

2

A statement of a speaker’s intentions is a 3

misrepresentation if the intentions do not exist. 4

5

[We might consider whether this Section should be reduced 6

to a comment in Section 9.] 7

8

Comment: 9

10

a. Generally. Promissory fraud occurs when a party 11

makes a promise and does not intend to keep it. In certain 12

respects this form of fraud is a straightforward 13

application of the general principles of Sec. 7: a promise 14

is a statement of intent; if the intent does not exist, the 15

declaration of it is a misrepresentation that is actionable 16

like any other. A claim of promissory fraud can cause 17

confusion, however, because it may closely resemble a claim 18

of promissory estoppel. See Restatement Second, Contracts 19

§ 90. A claim of promissory fraud differs principally 20

because the plaintiff adds an assertion that the promisor 21

never intended to carry out the promise that is the basis 22

for the suit. The plaintiff who makes such a claim 23

typically receives two practical benefits in return. 24

First, a claim of fraud may entitle the plaintiff to an 25

award of punitive damages that would not be available on 26

other theories. See Section 13. Second, a suit for 27

promissory fraud may allow a plaintiff to avoid doctrinal 28

obstacles that would derail claims for breach of contract 29

or promissory estoppel. See Comment c. 30

Since it is not tortious to break a promise, it may 31

seem surprising that it is tortious to make a promise while 32

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intending to break it. But the recipient of a promise 1

typically values the promisor’s intention to carry the 2

promise out, and would not do business with a promisor 3

whose intentions were known to be otherwise. A tort claim 4

for fraud under this Section thus protects rights of the 5

promisee in a way that a suit for breach of contract does 6

not. 7

8

b. Proof. A claim of promissory fraud must be 9

supported by evidence that the defendant made a 10

misrepresentation of intent. The statement of intent need 11

not by explicit. Most often the plaintiff simply produces 12

a contract that the defendant signed, and offers to prove 13

that the defendant never intended to perform it. 14

Ordinarily the contract itself will suffice as 15

representation of the defendant’s intent; a party who signs 16

a contract presumptively represents, at least by 17

implication, an intent to do what the contract requires. 18

But that description may not apply to every case. Both 19

parties to a contract might understand that a breach of it 20

is likely enough; the purpose of the agreement may just be 21

to make clear who pays for the resulting damages in that 22

event. There is no liability for fraud if those facts are 23

shown. Liability arises only when the promisor misleads 24

the promisee. 25

A plaintiff typically must use circumstantial evidence 26

to prove that the defendant had no intention of keeping the 27

promise at the time it was made. No such inference can be 28

drawn from a mere failure to perform the promise later. A 29

plaintiff’s case may be helped, however, by evidence of 30

plans the defendant had at the time of the promise that 31

were inconsistent with it; or by evidence that the promise 32

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95

was impossible to keep for reasons the defendant knew (and 1

the plaintiff did not); or by evidence that the defendant 2

made and broke other promises routinely, and so must have 3

expected to break this one at well. Other facts may tend 4

to support the innocence of the defendant’s intentions: 5

evidence that the defendant partially performed the 6

promise, for example, or that changed circumstances make 7

the defendant’s promise costlier to honor that had 8

originally appeared. See Illustrations 1 and 2. 9

10

Illustrations: 11

12

1. Corporation promises to supply Seller with 13

products, and Seller promises to distribute them in 14

Montana. The term of the agreement is five years. 15

Two years later, Corporation announces that it is 16

withdrawing from Montana and cancels its agreement 17

with Seller. Seller discovers internal memoranda from 18

Corporation showing that at the time the agreement was 19

signed, Corporation had already made a decision, not 20

disclosed to Seller, to end all operations in Montana 21

after two years. Corporation is subject to liability 22

for promissory fraud. 23

24

2. Employee is dismissed by Employer. Employee 25

brings a lawsuit alleging that during his term of 26

employment he performed extra services after hours, 27

that Employer promised him payment for those services, 28

and that Employer made the promise without ever 29

intending to keep it. Employer denies making such a 30

promise at all. Employee’s only evidence of fraud is 31

Employer’s denial and a showing that Employer stood to 32

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§ 12. Promissory fraud

96

benefit financially by inducing Employee to work 1

without having to pay him. Employee may have a good 2

claim for breach of contract, but his evidence of 3

fraud is insufficient as a matter of law. 4

5

c. Relation to the statute of frauds and parol 6

evidence rule. Claims under this Section are not impaired 7

by a jurisdiction’s statute of frauds. A statute of frauds 8

extinguishes contract claims, not tort claims; it prevents 9

the enforcement of a promise under certain circumstances if 10

the promise is not evidenced in a writing signed by the 11

promisor. Liability under this Section does not result in 12

the enforcement of a promise. It results in compensation 13

for losses suffered by a plaintiff who relied on a promise. 14

The law of tort protects defendants against unfounded 15

claims of deceit not with the statute of frauds but by the 16

use of a heightened standard of proof with respect to the 17

defendant’s state of mind. See § 7, Comment i. 18

Courts likewise state as a matter of course that the 19

parol evidence rule does not impede claims of fraud. See 20

Restatement Second, Contracts § 214. The application of 21

that principle to claims of promissory fraud may be 22

explained in more particular terms. Thus two parties may 23

sign a contract with an integration clause stating that the 24

writing is the complete expression of their agreement; and 25

later the plaintiff might offer extrinsic evidence that the 26

promisor never intended to perform the promise that the 27

agreement contained. The plaintiff in such a case is not 28

adding terms to the written contract, or varying them. The 29

plaintiff is proving, rather, that a representation in the 30

contract was false. Neither the parol evidence rule nor an 31

integration clause are obstacles to such a showing. 32

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97

A related problem arises when the parties have a 1

written agreement and the plaintiff claims that the 2

defendant made a separate false promise that was not 3

reflected in the writing. The parol-evidence rule may 4

preclude enforcement of the separate promise as a matter of 5

contract law. The plaintiff nevertheless may assert a 6

claim in tort that the second promise—the one outside the 7

written contract—was made with no intention that it would 8

be kept. It might seem odd that a promise the parol-9

evidence rule would otherwise extinguish becomes 10

enforceable just because it was made by a promisor who 11

never planned to keep it. Again, however, liability for 12

fraud does not cause the promise to be enforced; rather, 13

the plaintiff collects for damage caused by reliance on it. 14

While the parol-evidence rule does not obstruct claims 15

of promissory fraud, however, the existence of a contract 16

may suggest that the plaintiff was not justified in relying 17

on an earlier promise that was inconsistent with it. That 18

conclusion is especially likely to be drawn, of course, if 19

the contract contains language expressly disavowing 20

reliance on a promise such as the one at issue. For 21

discussion of when a no-reliance clause defeats a claim of 22

fraud, see § 7, Comment g. 23

24

Illustration: 25

26

3. Company hires Accountant, then fires him six 27

months later. Accountant sues Company for fraud. He 28

claims that Company originally promised to retain him 29

for at least a year, and he offers to prove that 30

Company never intended to keep that promise. Company 31

argues that Accountant’s claim fails because their 32

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§ 12. Promissory fraud

98

written contract allows Company to fire him at any 1

time, and because the parol-evidence rule forbids 2

claims based on promises made outside the writing that 3

are inconsistent with it. The parol-evidence rule may 4

prevent Accountant from bringing a contract claim to 5

enforce the promise that he says Company made. 6

Accountant nevertheless may pursue a claim in tort to 7

collect damages he suffered in reliance on Company’s 8

false assurances. 9

10

Reporter’s Note 11

12

a. Generally. For representative cases recognizing 13 and discussing promissory fraud, see Riverisland Cold 14 Storage, Inc. v. Fresno-Madera Production Credit Ass’n., 15 291 P.3d 316 (Cal. 2013); Chedick v. Nash, 151 F.3d 1077 16 (D.C.Cir. 1998); Graubard Mollen Dannett & Horowitz v 17 Moskovitz, 653 N.E.2d 1179 (N.Y. 1995); Cabnetware, Inc. v. 18 Birmingham Saw Works, Inc., 614 So.2d 1034 (Ala. 1993); 19 Marion Production Credit Ass'n v. Cochran, 533 N.E.2d 325 20 (Ohio 1988). For a sustained academic examination, see 21 Ayres & Klass, Insincere Promises: The Law of 22 Misrepresented Intent (2005). 23 24 b. Proof. Illustration 1 is based on Alexander v. 25 Texaco, Inc., 530 F. Supp. 864 (D. Mont. 1981). 26 Illustration 2 is based on Connecticut General Life Ins. 27 Co. v. Jones, 764 So.2d 677 (Fla. App. 2000). See also 28 Riverisland Cold Storage, Inc. v. Fresno-Madera Production 29 Credit Ass’n., supra; Southland Bank v. A & A Drywall 30 Supply Co., Inc., 21 So.3d 1196 (Ala. 2008); Connecticut 31 General Life Ins. Co. v. Jones, 764 So.2d 677 (Fla. App. 32 2000; Stacks v. Saunders, 812 S.W.2d 587 (Tenn. App. 1990). 33 34 c. Relation to statute of frauds and parol evidence 35 rule. On the relationship between the statute of frauds 36 and tort claims of promissory fraud, see BPI Energy 37 Holdings, Inc. v. IEC (Montgomery), LLC, 664 F.3d 131 (7th 38 Cir. 2011) (Posner, J.) (“[t]he Statute of Frauds is a 39 defense to a claim for breach of contract, not a defense to 40 a tort, and fraud is a tort, and promissory fraud is a form 41

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99

of fraud and so a tort and so not subject to the Statute of 1 Frauds”); Irish Oil and Gas, Inc. v. Riemer, 794 N.W.2d 715 2 (N.D. 2011); Tenzer v. Superscope, Inc., 702 P.2d 212 (Cal. 3 1985); Munson v. Raudonis, 387 A.2d 1174 (N.H. 1978); 4 Burgdorfer v. Thielemann, 55 P.2d 1122 (Or. 1936); Annot., 5 104 A.L.R. 1420. 6 Illustration 3 is based on Ramsay Health Care, Inc. v. 7 Follmer, 560 So.2d 746 (Ala. 1990), though with simplified 8 facts; the actual case involved promised termination 9 benefits. On the relationship between the parol-evidence 10 rule and tort claims of promissory fraud, see Riverisland 11 Cold Storage, Inc. v. Fresno-Madera Production Credit 12 Ass’n., supra; PCR Contractors, Inc. v. Danial, 354 S.W.3d 13 610 (Ky. App. 2011); Shah v. Racetrac Petroleum Co., 338 14 F.3d 557 (6th Cir. 2003) (Tennessee law); Galmish v. 15 Cicchini, 734 N.E.2d 782 (Ohio 2000); Parker v. Columbia 16 Bank, 604 A.2d 521 (Md. App. 1992); Abbott v. Abbott, 174 17 N.W.2d 335 (Neb. 1970).18

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101

§ 13. Damages 1

2

(a) Compensatory damages for the tort of fraud 3

are calculated to restore the financial position that 4

the plaintiff would occupy if the tort had not been 5

committed. 6

7

(b) Punitive damages may be assessed as necessary 8

to ensure deterrence and to further other policies not 9

adequately secured by a compensatory award. 10

11

Comment: 12

13

a. General principles. The range of forms that fraud 14

can take calls for a flexible approach to the measurement 15

of damages. Reliance on a defendant’s falsehood may cause 16

a plaintiff to buy something worth less than was promised, 17

or to sell something worth more than the plaintiff was led 18

to believe, or to enter an exchange that the plaintiff 19

would not have made at all if the defendant’s motives or 20

identity were known. Or a fraud may result in no exchange 21

with the defendant, but in expenditures by the plaintiff in 22

preparation for one. The size of any difference between 23

what the plaintiff spent, what the plaintiff received, and 24

what the defendant promised may also vary widely. No one 25

formula will produce the right measure of damages in all 26

such cases, but the two principles of this Section provide 27

general guidance. First, compensatory damages here, as 28

elsewhere in tort, are meant to restore the position the 29

plaintiff would have occupied if the wrong had not been 30

committed. In a case of fraud, that generally means the 31

financial position the plaintiff would have had if the 32

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defendant had spoken truthfully. Second, punitive damages 1

may be added as necessary to deter the defendant and others 2

from committing similar wrongs in the future, and to serve 3

other policies beyond compensation of the plaintiff. See 4

Comment d. 5

The first principle just stated—the rule of (a)—6

ordinarily makes “out of pocket” damages the standard 7

measure of recovery for fraud. In a typical case those 8

damages are the difference between what the plaintiff spent 9

on account of the defendant’s fraud and the value of what 10

the plaintiff received as a result. Thus if the 11

defendant’s fraud caused the plaintiff to pay a million 12

dollars for property worth $600,000, the plaintiff’s out-13

of-pocket damages are $400,000. If the defendant’s fraud 14

caused the plaintiff to lend a million dollars to a bad 15

credit risk who then repaid $600,000, the plaintiff’s out-16

of-pocket damages likewise are $400,000. Payment of the 17

$400,000 difference in either case is meant to make the 18

defendant’s fraud costless to the plaintiff. It may be 19

supplemented by recovery of special damages that the 20

plaintiff incurred in reliance on what the defendant said—21

for example, the cost of hiring a lawyer to help carry out 22

the transaction. See Comment b. The goal of all such 23

calculations is to ensure that the plaintiff’s financial 24

position is no worse than it was before the defendant made 25

the misrepresentation. 26

Courts sometimes allow a plaintiff to seek recovery on 27

a “loss of bargain” theory of damages. This measure 28

compares the value of what the plaintiff received to what 29

the defendant said it was worth. It puts plaintiffs where 30

they would have been if the fraudulent statements they 31

relied on had been true. Such a recovery resembles 32

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expectation damages in the law of contract, not traditional 1

damages in tort. It can make plaintiffs better off than 2

they were before the fraud was committed. Loss-of-bargain 3

recovery is usually justified by the inadequacy of out-of-4

pocket damages to deter fraud. Indeed, a plaintiff’s out-5

of-pocket damages sometimes may be zero; this can occur 6

when the property received is worth what the plaintiff 7

paid, but the defendant had promised that it was worth much 8

more. Allowing the defendant to pay no damages on those 9

facts would be bad policy, so awarding the plaintiff the 10

benefit of the fraudulent bargain might make sense. But 11

such an award is meant not to make the plaintiff whole but 12

to deter the defendant, or perhaps to achieve more complete 13

justice between the parties. Awards for those purposes are 14

the traditional office of punitive rather than compensatory 15

damages. Loss-of-bargain recovery is therefore best 16

considered a form of punitive recovery and described 17

accordingly. See Comment d. 18

Separating the loss-of-bargain measure from the 19

calculation of compensatory damages can help clarify the 20

difference between a plaintiff’s possible recovery under 21

different branches of law. A fraud claim often arises from 22

a contract that was tainted by a defendant’s 23

misrepresentations. The plaintiff’s typical choices may 24

then include rescinding the contract, seeking recovery of 25

the defendant’s gains in a suit for restitution, seeking 26

expectation damages through a suit for breach of warranty, 27

or seeking damages in tort for fraud. See § 7, Comment j. 28

Allowing recovery in tort for “loss of bargain” makes tort 29

claims hard to distinguish from claims for breach of 30

warranty. Limiting compensatory damages in tort to the 31

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§ 13. Damages

104

out-of-pocket measure helps to keep tort and contract 1

recovery distinct, and makes them useful in different ways. 2

In some cases the out-of-pocket measure of recovery 3

does not comfortably fit the facts of a case, as when the 4

plaintiff’s losses do not arise from a difference in value 5

between what the plaintiff received and was promised. 6

Damages are then calculated by returning to first 7

principles and asking what the plaintiff must receive to be 8

left no worse off by the defendant’s wrong. See 9

Illustration 1. 10

11

Illustration: 12

13

1. Retailer of specialty tires has a supply 14

contract with Manufacturer of them. The contract 15

gives either side a right to terminate on short 16

notice. In July, Retailer is offered an alternative 17

supply of the specialty tires by a different maker. 18

Retailer notifies Manufacturer and asks if 19

Manufacturer has any plans to stop supplying its 20

tires. Manufacturer assures Retailer that it has no 21

such plans. The assurance is fraudulent; Manufacturer 22

plans to stop making the tires at the end of the 23

summer. A month later, Manufacturer stops making the 24

tires and terminates its contract with Retailer. 25

Retailer’s alternative supply is no longer available; 26

as a result, Retailer goes out of business. Retailer 27

can recover the value of its business from 28

Manufacturer. 29

30

In calculating out-of-pocket damages, the usual 31

question is the difference in market value between what the 32

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§ 13. Damages

105

plaintiff gave up and received. “Market value” means the 1

price at which the property at issue could have been resold 2

in an open market or by private sale if its quality and 3

other characteristics were known. The market value of an 4

article is generally measured at time of the fraudulent 5

transaction in which it changed hands. In occasional cases 6

that timing is inapt, as when the property the plaintiff 7

received was priced too high because its market value was 8

tainted by the same fraud that affected the plaintiff’s own 9

judgment. In that case the market value of the property is 10

measured as of the time when fraud was widely discovered. 11

For further discussion, see Restatement Second, Torts § 12

549, Comment b. 13

14

b. Special damages. Fraud often causes a plaintiff 15

to buy something that is worth less than the defendant 16

stated. In that case a court begins the measurement of 17

damages by comparing what the plaintiff paid to the value 18

received in return. But a plaintiff may also incur 19

additional damages on account of the defendant’s fraud, 20

such as sums spent to prepare for the transaction or to 21

undo or mitigate harm caused by it, or harm caused because 22

the thing acquired from the defendant was unsuitable for 23

its intended purpose. Losses of these kinds, though 24

another branch of out-of-pocket recovery, are best termed 25

“special” damages, as distinct from the general damages 26

that flow directly from the disparity of value in a 27

transaction. Special damages are available in a case of 28

fraud as a matter of course, in addition to whatever else 29

the plaintiff may collect. Their recovery is necessary to 30

restore the position that the plaintiff would have occupied 31

if the fraud had not been committed. In some cases special 32

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§ 13. Damages

106

damages may be a plaintiff’s only damages, as when a 1

fraudulent statement causes the plaintiff to prepare for a 2

deal that is never made. 3

A plaintiff must prove to a reasonable degree of 4

certainty both the amount of any special damages and that 5

the damages were caused by the defendant’s fraud. These 6

requirements can limit a plaintiff’s recovery 7

significantly. In principle, for example, special damages 8

may include the value of opportunities the plaintiff lost 9

because its assets were diverted by the fraud; such 10

recovery is uncommon in practice, however, because the 11

cause and amount of such losses usually are hard to prove 12

with sufficient clarity. See Illustration 2. Recoverable 13

damages also are limited to losses that might reasonably be 14

expected to follow from the fraud. See § 7, Comment h. 15

16

Illustrations: 17

18

2. Farmer buys milk cows from Supplier, relying 19

on Supplier’s fraudulent assurance that the cows are 20

free from disease. In fact they are infected with 21

Maltese fever, which they communicate to the rest of 22

Farmer’s herd. Farmer is entitled to collect from 23

Supplier, as general damages, the difference between 24

what he paid for the cows and their actual value as 25

infected animals. Farmer also proves, however, that 26

the spread of the disease required him to pay for 27

veterinary treatment and vaccinations of those animals 28

not yet infected; in addition, the disease caused many 29

cows he already owned to become less productive and to 30

lose market value. Farmer is entitled to compensation 31

for those losses as special damages. 32

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§ 13. Damages

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1

3. Buyer purchases an apartment building from 2

Seller. In the course of their negotiations, Seller 3

fraudulently states that the building complies with 4

all local regulations; after the purchase, Buyer 5

discovers that it does not. Buyer hires Lawyer to 6

determine what steps would bring the building into 7

conformity, then pays for repairs and permits that 8

Lawyer recommends. Buyer successfully sues Seller for 9

fraud, and the court finds that Buyer’s expenditures 10

were reasonable and prudent. Buyer can recover from 11

Seller the costs of hiring Lawyer to advise about the 12

repairs and permits, and the cost of securing them. 13

Buyer cannot recover the cost of paying Lawyer to sue 14

Seller for fraud. Miller v. Higgins, 452 S.W.2d 121 15

(Mo. 1970). 16

17

4. Company hires Broker to handle the initial 18

public offering of its stock. Broker fraudulently 19

assures separate Investor that he will have many 20

shares in Company to sell to Investor on the day of 21

the IPO. Investor agrees to buy 100,000 shares from 22

Broker, and Investor forms a company for the sole 23

purpose of making the purchase. In fact Broker does 24

not know if he will have access to any shares. On the 25

day of Company’s IPO, the value of its shares rises 26

tenfold in two hours, but Broker has none to sell to 27

Investor. Investor sues Broker for breach of contract 28

and fraud. The court finds that Investor’s contract 29

claim fails because his purchase was subject to a 30

condition that never occurred: Broker’s acquisition 31

of the shares. Broker is liable for fraud, however, 32

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because he knowingly misrepresented the likelihood 1

that the condition would be fulfilled. Investor has 2

no general damages, but can collect as special damages 3

the costs incurred in forming a company to buy the 4

shares. Investor’s compensatory damages do not 5

include profits he would have made if Broker had 6

obtained the shares for him on the morning of the IPO. 7

Twin Fires Inv., LLC v. Morgan Stanley Dean Witter & 8

Co., 837 N.E.2d 1121 (Mass. 2005). 9

10

5. Company proposes a one-year service agreement 11

with Technician. Technician accepts only because 12

Company assures him that he will be a strong candidate 13

for a long-term contract if he meets certain 14

efficiency standards during the year. Company’s 15

assurances are fraudulent; Technician meets the 16

standards but company does not consider him for a 17

long-term contract, and never intended to do so. 18

Technician sues Company for fraud. He cannot recover 19

his ordinary costs of performance for the year because 20

they were compensated under the contract with Company. 21

But Technician can recover as special damages the sums 22

he spent to meet the high efficiency standards, since 23

he was induced to incur them by false hopes that 24

Company raised. Technician also seeks to recover 25

profits he could have made if he had not been busy 26

pursuing a long-term relationship with Company. The 27

court finds evidence of such lost profits speculative; 28

Technician is unable to identify specific jobs that he 29

could have taken but rejected because of his work for 30

Company, nor can he prove what the other jobs would 31

have paid and cost to perform. Technician’s claim for 32

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§ 13. Damages

109

lost profits fails for want of reasonable certainty. 1

Hoechst Celanese Corp. v. Arthur Bros., Inc., 882 2

S.W.2d 917 (Tex. App. 1994). 3

4

c. Nominal damages. A plaintiff whose rights have 5

been invaded, but who suffers no provable economic damage 6

as a result, may be awarded nominal damages. Nominal 7

damages do not attempt to compensate for actual loss. They 8

are small sums awarded to reflect the judicial conclusion 9

that the plaintiff’s rights were violated. 10

11

d. Punitive damages. Punitive (or “exemplary”) 12

damages may be assessed against a defendant when 13

compensatory damages are insufficient, as may be found for 14

various reasons. First, compensatory damages measured by 15

the principles of Comment a may be too small to deter the 16

defendant or others from engaging in further acts of fraud; 17

sometimes the compensatory award may be nil, despite 18

undoubtedly culpable acts by the defendant. Allowing no 19

recovery on those facts would tempt the defendant or others 20

to repeat the fraud. Punitive damages curb the temptation. 21

Second, sometimes acts of fraud are part of a pattern and 22

are subject to concealment, calling for enhanced damages 23

when they are discovered in order to eliminate the value 24

they have to the defendant when they are not discovered. 25

Third, if an act of fraud is especially outrageous, an 26

award of punitive damages can express the community’s 27

abhorrence in response. Punitive damages justified on this 28

theory require something more than the knowing utterance of 29

a falsehood; the plaintiff must show that the fraud was 30

aggravated in some way, as when the defendant acted with 31

malice or deliberation. 32

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The due process clause of the Fourteenth Amendment 1

imposes additional constraints on the imposition of 2

punitive damages. In deciding whether an award of such 3

damages is constitutionally excessive, courts consider the 4

reprehensibility of the defendant’s conduct, the 5

relationship between punitive award and the actual or 6

potential harm suffered by the plaintiff, and the 7

relationship between the punitive award and civil penalties 8

available in similar cases. The second consideration is 9

sometimes pursued by examining the ratio between the 10

punitive and compensatory damages in a case, with ratios 11

greater than 10:1 regarded as suspect. Such ratios must be 12

used with particular caution in cases of fraud, however; as 13

noted above, a plaintiff’s compensatory award sometimes may 14

amount to little or nothing—and indeed that may be the 15

reason for awarding the punitive damages in the first 16

place. Effective deterrence in such a case may require a 17

punitive award considerably greater than the provable harm 18

suffered by the plaintiff. By the same logic, punitive 19

damages should not be restricted to cases in which the 20

plaintiff can show actual damages. Punitive damages may be 21

most important precisely when actual damages are impossible 22

to prove but the defendant’s culpability is clear. Nominal 23

damages can then provide a sufficient predicate for a 24

punitive award. 25

26

e. Mental anguish. The tort of fraud protects the 27

plaintiff’s economic interest in making informed decisions. 28

It is not a dignitary tort, and does not entitle a 29

plaintiff to recover damages for mental anguish. Damages 30

of that kind are best pursued by a claim for the 31

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§ 13. Damages

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intentional or negligent infliction of emotional distress. 1

See R3T: PEH —. 2

3

Reporter’s Note 4 5

a. General principles. Restatement Second, Torts 6 § 549 stated that loss-of-bargain damages were generally 7 available to plaintiffs in a case of fraud, and many courts 8 have claimed to follow that rule. In practice, however, 9 those courts often balk at awarding loss-of-bargain damages 10 on facts where sound policy does not seem to support them. 11 See, e.g., Twin Fires Inv., LLC v. Morgan Stanley Dean 12 Witter & Co., 837 N.E.2d 1121 (Mass. 2005); Goldstein v. 13 Miles, 859 A.2d 313 (Md. App. 2004); Collins v. Burns, 741 14 P.2d 819 (Nev. 1987). This Section need not alter the 15 result in those cases where courts have found that loss-of-16 bargain recovery is appropriate. The Section merely 17 describes such recovery as punitive in character, since it 18 is meant to serve purposes other than making the plaintiff 19 whole. For cases following the out-of-pocket approach to 20 measurement taken here, see Continental Cas. Co. v. 21 PricewaterhouseCoopers, LLP, 933 N.E.2d 738 (N.Y. 2010); 22 Stout v. Turney, 586 P.2d 1228 (Cal. 1978); Peterson v. 23 Johnston, 254 N.W.2d 360 (Minn. 1977). For further 24 discussion and endorsement, see Lens, Honest Confusion: 25 The Purpose of Compensatory Damages in Tort and Fraudulent 26 Misrepresentation, 59 Kan. L. Rev. 231 (2011). 27 For cases recognizing the punitive or “admonitory” 28 function of loss-of-bargain damages, see Goodrich & 29 Pennington Mortg. Fund, Inc. v. J.R. Woolard, Inc., 101 30 P.3d 792 (Nev. 2004) (“[t]he benefit-of-the-bargain rule is 31 a punitive measure”); Midwest Home Distributor, Inc. v. 32 Domco Industries Ltd., 585 N.W.2d 735 (Iowa 1998); Kirkruff 33 v. Wisegarver, 697 N.E.2d 406 (Ill. App. 1998); Lutfy v. R. 34 D. Roper & Sons Motor Co., 115 P.2d 161 (Ariz. 1941); see 35 also Restatement Second, Torts § 549, Comment i. 36 Illustration 1 is based on B.F. Goodrich Co. v. Mesabi 37 Tire Co., Inc., 430 N.W.2d 180 (Minn. 1988). 38 39 b. Special damages. Illustration 2 is based on 40 Moreland v. Austin, 330 P.2d 136 (Col. 1958). Illustration 41 3 is based on Miller v. Higgins, 452 S.W.2d 121 (Mo. 1970). 42 Illustration 4 is based on Twin Fires Inv., LLC v. Morgan 43 Stanley Dean Witter & Co., 837 N.E.2d 1121 (Mass. 2005). 44 Illustration 5 is based on Hoechst Celanese Corp. v. Arthur 45 Bros., Inc., 882 S.W.2d 917 (Tex. App. 1994); see also 46

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§ 13. Damages

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Murray v. Hadid, 385 S.E.2d 898 (Va. 1989). For additional 1 cases defining and explaining special damages, see Baylor 2 University v. Sonnichsen, 221 S.W.3d 632 (Tex. 2007); 3 Zanakis-Pico v. Cutter Dodge, Inc., 47 P.3d 1222 (Haw. 4 2002); Popp Telcom v. American Sharecom, Inc., 210 F.3d 928 5 (8th Cir. 2000) (Minnesota law); Ong Intern. (U.S.A.) Inc. 6 v. 11th Ave. Corp., 850 P.2d 447 (Utah 1993); 7 Commerzanstalt v. Telewide Systems, Inc., 880 F.2d 642 (2d 8 Cir.1989) (New York law). Special damages are sometimes 9 also called “consequential damages,” but that term is 10 avoided here to prevent confusion with the concept bearing 11 the same name in the law of contract. See B.F. Goodrich 12 Co. v. Mesabi Tire Co., Inc., 430 N.W.2d 180 (Minn. 1988). 13 14 c. Nominal damages. For discussion of nominal 15 damages, see Kekona v. Abastillas, 150 P.3d 823 (Haw. 16 2006); Nappe v. Anschelewitz, Barr, Ansell & Bonello, 477 17 A.2d 1224 (N.J. 1984); Maher v. Wilson, 73 P. 418 (Cal. 18 1903). 19 20 d. Punitive damages. On rationales for awarding 21 punitive damages in cases of fraud, and the criteria for 22 imposing them, see Adamson v. Bicknell, 287 P.3d 274 (Kan. 23 2012); Austin v. Stokes-Craven Holding Corp., 691 S.E.2d 24 135 (S.C. 2010); Gennari v. Weichert Co. Realtors, 691 A.2d 25 350 (N.J. 1997); Giblin v. Murphy, 532 N.E.2d 1282 (N.Y. 26 1988); Home Sav. and Loan Ass'n of Joliet v. Schneider, 483 27 N.E.2d 1225 (Ill. 1985); Green v. Uncle Don's Mobile City, 28 568 P.2d 1375 (Or. 1977); Ray Dodge, Inc. v. Moore, 479 29 S.W.2d 518 (Ark. 1972). On the availability of punitive 30 damages in tort claims for fraud generally, see Annot., 165 31 A.L.R. 614. On the rationales for punitive damages 32 generally, see Kemezy v. Peters, 79 F.3d 33 (7th Cir. 33 1996). 34 The leading cases discussing the constitutional limits 35 on punitive damages are State Farm Mut. Auto. Ins. Co. v. 36 Campbell, 538 U.S. 408 (2003), and BMW of North America v. 37 Gore, 517 U.S. 559 (1996). The BMW case notes that “low 38 awards of compensatory damages may properly support a 39 higher ratio than high compensatory awards, if, for 40 example, a particularly egregious act has resulted in only 41 a small amount of economic damages.” For application of 42 the constitutional standards and further consideration of 43 the permissible ratio between compensatory and punitive 44 damages, see Howard University v. Wilkins, 22 A.3d 774 45 (D.C. 2011); Casciola v. F.S. Air Service, Inc., 120 P.3d 46

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§ 13. Damages

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1059 (Alaska 2005); Boyd v. Goffoli, 608 S.E.2d 169 (W. Va. 1 2004). 2 On the sufficiency of a nominal injury to support a 3 punitive award, see Collier v. Bryant, 719 S.E.2d 70 (N.C. 4 App. 2011); Amerigraphics, Inc. v. Mercury Cas. Co., 107 5 Cal.Rptr.3d 307 (Cal. App. 2010); Kirkpatrick v. Strosberg, 6 894 N.E.2d 781 (Ill. App. 2008); Kekona v. Abastillas, 150 7 P.3d 823 (Haw. 2006); Third Generation, Inc. v. Wilson, 668 8 So.2d 518 (Ala. 1995); Nappe v. Anschelewitz, Barr, Ansell 9 & Bonello, 477 A.2d 1224 (N.J. 1984). 10 11 e. Mental anguish. The position taken in the Comment 12 follows Restatement Second, Torts § 525. See also FMC 13 Corp., Inc. v. Helton, 202 S.W.3d 490 (Ark. 2005); Cornell 14 v. Wunschel, 408 N.W.2d 369, 382 (Iowa 1987); Stich v. 15 Oakdale Dental Center, P.C., 501 N.Y.S.2d 529 (App. Div. 16 1986); Umphrey v. Sprinkel, 682 P.2d 1247 (Idaho 1983). 17 For examples of contrary approaches, see Crowley v. Global 18 Realty, Inc., 474 A.2d 1056 (N.H. 1984); Holcombe v. 19 Whitaker, 318 So. 2d 289 (Ala. 1975). 20

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APPENDIX BLACK LETTER OF PRELIMINARY DRAFT NO. 2

§ 7. Economic loss from injury to a third person or to property not belonging to the claimant.

Except as provided in § 8, a claimant cannot recover

for pure economic loss caused by

(a) unintentional personal injury to another

party; or

(b) unintentional injury to property in which

the claimant has no proprietary interest.

§ 8. Public nuisance resulting in pure economic loss

An actor whose wrongful conduct harms or obstructs public property or a public resource is subject to liability for resulting pure economic loss if the claimant’s losses are distinct from those suffered by the public at large.

§ 9. Fraud

An actor who knowingly makes a misrepresentation of

material fact is subject to liability for economic

loss caused by another’s justifiable reliance on it.

[A different sort of possibility, based on R2T:

(1) A misrepresentation is fraudulent if the maker

(a) knows or believes that the matter is not

as he represents it to be,

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(b) does not have the confidence in the

accuracy of his representation that he states or

implies, or

(c) knows that he does not have the basis

for his representation that he states or implies.

(2) One who fraudulently makes a misrepresentation of

fact, opinion, intention or law for the purpose of

inducing another to act or to refrain from action in

reliance upon it, is subject to liability to the other

in deceit for pecuniary loss caused to him by his

justifiable reliance upon the misrepresentation.]

§ 10. Duties to disclose; tacit misrepresentation

A misrepresentation that supports liability under

§ 9 may result from a failure to disclose information,

but only when the person remaining silent has a duty

to speak. Such a duty may exist where:

(a) the actor has made prior statements and

knows that they will mislead another if not

amended, even if they were not actionable when

made; or

(b) the actor has a special relationship

with another that obliges the actor to be

forthcoming; or

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(c) the actor knows that another party is

about to enter into a transaction under a mistake

about a basic assumption behind it, and that the

other party, because of the relationship between

them, the customs of the trade, or other

circumstances, would reasonably expect a

disclosure of what the actor knows.

§ 11. Liability for misrepresentations of opinion

A misrepresentation that supports liability under

§ 9 may be a false statement of opinion only when

(1) the parties had a fiduciary or confidential

relationship, or

(2) the defendant purported to have special knowledge

or otherwise invited the plaintiff’s reliance on the

opinion offered.

§ 12. Misrepresentation of intention; promissory fraud

A statement of a speaker’s intentions is a

misrepresentation if the intentions do not exist.

§ 13. Damages

(a) Compensatory damages for the tort of fraud

are calculated to restore the financial position that

the plaintiff would occupy if the tort had not been

committed.

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(b) Punitive damages may be assessed as necessary

to ensure deterrence and to further other policies not

adequately secured by a compensatory award.

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