Four Theories of Recovery for Misrepresentations Causing Pecuniary Harm
By John Jacob Tollefsen
The Restatement (Second) of Torts identifies four
causes of action that can be used to recover for misrepresentations
causing monetary harm. The distinctions between the four theories are
nuanced and are not uniformly applied by state courts. What follows is a
simplified summary of some of the major differences between the four
remedies. Both Fraud and Innocent Misrepresentation use scienter as an
element of their causes of action. Restitution and Negligent
Misrepresentation do not.
Breach of warranty
is also available under contract law and is subject to contract law
defenses. (E.g. Restatement (Second) of Contracts (St. Paul, MN:
American Law Institute Publishers, 1981), §§ 304, 306). It is outside
the scope article which deals with tort and near tort remedies. In cases
involving the sale of goods under Article 2 of the Uniform Commercial
Code, most fact patterns actionable under the tort of Innocent
Misrepresentation would also be actionable under the Code on the theory
of breach of warranty. Unlike Innocent Misrepresentation, the measure of
damages for breach of warranty includes compensation for benefit of the
bargain and for consequential losses. Innocent Misrepresentation has the
advantage of not being subject to Code defenses such as the parol
1) Restitution: After the merger of courts
of law and equity in most jurisdictions, some courts applied the
equitable rescission remedy at law allowing a party to seek rescission
of a transaction on the ground of misrepresentation, even an innocent
The usual precondition for Restitution is the return of what was
received although a “number of courts have permitted a tort action for
damages without regard to the requirement that the transaction be
completely rescinded, either by the plaintiff or by the court, and
without limiting the action to the restitutionary concept of recovery of
2) Fraud: Fraud has developed into a
complicated cause of action that requires proof, usually by clear and
convincing evidence, of a number of elements.
One element is the speaker’s knowledge of the falsity. Derry v. Peek
 held there was no liability for a
misrepresentation if the speaker believed the statement
to be true. The Derry
definition of scienter as that term is defined was incorporated into the
Restatement (Second) of Torts § 526.
The notes to the restatement justify following Lord Herschell’s opinion
by identifying eleven cases where
Derry was followed in the United States.
Studying these cases reveals that none of them contain detailed
analysis. None of them seem to recognize the intellectual challenge
faced by Lord Herschell. Only one mentions
Derry by name. None mention
Lord Herschell or his call for a legislative solution. One case uses
circular reasoning by citing the Restatement as its authority. Some
cases like Lamberton fear
eliminating the good faith exception without explanation.
Lamberton quotes with
approval a Pennsylvania case, “It would introduce a new and very
dangerous element into the case to say that the jury must decide whether
the defendant had reasonable grounds for his belief”. We are not told
why. Several cases do not seem to support the law as expressed by the
Restatement which currently reads:
§ 526. Conditions Under
Which Misrepresentation Is Fraudulent
A misrepresentation in a
business transaction is fraudulent if the maker (a) knows or believes
the matter to be otherwise than as represented, or (b) knows that he has
not the confidence in its existence or non-existence asserted by his
statement of knowledge or belief, or (c) knows that he has not the basis
for his knowledge or belief professed by his assertion.
The plaintiff has the burden of proving through
facts and circumstances the “guilty” knowledge of the maker of the
representation. Item (a) describes an intentional misrepresentation
because the maker knows the representation is not true. Items (b) and
(c) describe what the courts refer to as recklessness. The maker is
uncertain or merely guessing when he makes the representation. However,
if the maker is wrong because he has not been careful in researching the
facts before making the representation, or honestly believes a lie (e.g.
there was no Holocaust), the maker is not liable for Deceit.
3) Negligent misrepresentation: No scienter
is required to prove negligent misrepresentation. It is defined as:
§ 552. Information
Negligently Supplied For The Guidance Of Others
(1) One who, in the
course of his business, profession or employment, or in any other
transaction in which he has a pecuniary interest, supplies false
information for the guidance of others in their business transactions,
is subject to liability for pecuniary loss caused to them by their
justifiable reliance upon the information, if he fails to exercise
reasonable care or competence in obtaining or communicating the
(2) Except as stated in
Subsection (3), the liability stated in Subsection (1) is limited to
(a) by the person or one
of a limited group of persons for whose benefit and guidance he intends
to supply the information or knows that the recipient intends to supply
(b) through reliance
upon it in a transaction that he intends the information to influence or
knows that the recipient so intends or in a substantially similar
(3) The liability of one
who is under a public duty to give the information extends to loss
suffered by any of the class of persons for whose benefit the duty is
created, in any of the transactions in which it is intended to protect
Liability for Negligent Misrepresentation is more
limited than liability for Deceit which extends to any of the class of
persons who was intended or should have been expected to act in reliance
upon the misrepresentation. The defendant is liable for any loss
suffered by this class of persons in “any of the general type of
transactions in which he intends or should expect their conduct to be
On the other hand, the “maker of the negligent misrepresentation is
subject to liability to only those persons for whose guidance he knows
the information to be supplied, and to them only for loss incurred in
the kind of transaction in which it is expected to influence them, or a
transaction of a substantially similar kind”.
As stated in Subsection (3), if is a public duty to give the
information, the negligent misrepresentation is actionable.
Unlike a Fraud action, the defendant is subject to
a contributory negligence defense:
§ 552A. Contributory Negligence
The recipient of a
negligent misrepresentation is barred from recovery for pecuniary loss
suffered in reliance upon it if he is negligent in so relying.
Damages are limited to out of pocket
pecuniary loss in contrast to Deceit which includes benefit of the
4) Innocent Misrepresentation: This remedy
is very similar to Restitution except that the plaintiff is permitted to
retain what he has received and recover damages. It is useful in cases
in which the plaintiff “is unable to restore what he received in its
original condition; when he has made improvements or for other reasons
finds it desirable to keep what he has received rather than return it;
when he is barred from rescission by delay or has so far committed
himself that he has lost the remedy by an election; or when for some
other reason, such as the defendant's change of position, restitution is
not available to him”.
Damages are solely to restore the plaintiff to his pre-transaction
status. Benefit of the bargain and consequential damages are
Although this tort could be considered an example
of strict liability, courts retain the requirement of scienter is a way
foreign to Derry or Restatement (Second) of Torts § 526:
The courts that apply
this rule have expressed it in differing ways. Some have imposed upon a
party to a bargaining transaction a “duty” to know. Others have held
that an unqualified statement of fact, which is susceptible of personal
knowledge and which turns out to be false, is fraudulent insofar as
there was no disclaimer of personal knowledge; and this view seems to
have been taken without regard to whether the other party was actually
deceived by the absence of the disclaimer. Although these courts use
the language of scienter, their decisions actually constitute the
imposition of liability for innocent misrepresentation.
The Restatement rule applies to any sale, rental,
or exchange of land, chattels, securities, or anything else of value
including intangibles. A person who is not a party to the transaction is
not covered even though he acts according to expectations in taking or
refraining from action it in reliance upon the misrepresentation. Even
if the plaintiff is a party to the misrepresentation, the rule does not
cover damages in a transaction with a third person resulting from the
 Rescission is similarly
granted for mutual mistake. See Restatement of Restitution,
§§ 6, 8.
 Restatement (Second)
of Torts, § 552C, “Comment on Subsection (1)”.
 E.g. Oregon requires: 1)
A representation; 2) Its falsity; 3) Its materiality; 4) The
speaker's knowledge of the representation's falsity or ignorance
of its truth; 5) Intent that the representation be acted on in a
manner reasonably contemplated; 6) The hearer's ignorance of the
falsity of the representation; 7) The hearer's reliance on its
truth; 8) The hearer's right to rely on the representation; and
9) Damage caused by the representation. Musgrave v. Lucas,
193 Or 401, 410, 238 P2d 780 (1951); Webb v Clark, 274 Or
387, 391, 546 P2d 1078 (1976).
 Derry v. Peek
, (1889) L.R. 14 App. Cas. 337 (House of Lords).
 See Reporter’s Notes
to § 526: “This Section adopts, in general effect, the
opinion of Lord Herschell in Derry v. Peek, 14 A.C.
337, 374 (1889). The decision has been accepted and followed in
numerous American cases . . .” . The First Restatement had the
same wording for the rule but did not include the Recorder’s
Sledge & Norfleet Co. v.
Mann, 193 Ark. 884, 103 S.W.2d 630 (1937) [possible bad
advice by lawyer to pay for quit claim deed];
Wishnick v. Frye, 111
Cal.App.2d 926, 245 P.2d 532 (1952) [citing Restatement § 526]; Dundee
Land Co. v. Simmons, 204 Ga. 248, 49 S.E.2d 488 (1948)
[built house on wrong lot];
Cantwell v. Harding,
249 Ill. 354, 94 N.E. 488 (1911) [failed to plead knowledge of
fraud]; Boddy v. Henry,
113 Iowa 462, 85 N.W. 771 (1901) [ranch had 2,000 acres less
Lambert v. Smith, 235 Md. 284, 201 A.2d 491 (1964) [no proof
that area rented was miscalculated];
Riggs v. Thorpe, 67
Minn. 217, 69 N.W. 891 (1897) [implied intent because statement
was inaccurate]; Kountze
v. Kennedy, 147 N.Y. 124, 41 N.E. 414 (1895) [no liability
for failing to disclose pending lawsuit intentionally];
Lamberton v. Dunham,
165 Pa. 129, 30 A. 716 (1895) [representation signature was
S.S. Co. v. Dexter Horton & Co., 29 Wash. 565, 70 P. 59
(1902) [misrepresentation of solvency and assets of purchaser].
Id., § 552.
Id., Comment: i. “Comparison with
The public duty exception
has been applied primarily to public officials but the
Restatement comment state that others (e.g. a corporation) which
has a duty to file could be liable. The example given is an
insurance company which must file financial information with a
state insurance commissioner is liable to its policy holders who
suffered losses by purchasing policies relying on the filing.
Id., § 552A.
Id., § 552A(2).
Id,. § 549(2).
Id., § 552C, “Comment
on Subsection (1)”.
Id., (emphasis added).