Benefit-of-the-Bargain Exclusion

Benefit-of-the-Bargain Exclusion

Tort law imposes liability for economic loss caused by negligent misrepresentation only under limited circumstances, and most of the litigation arises out of economic dealings rather than personal relations.¹ The damages question therefore usually concerns a deal: what the plaintiff gave, what the plaintiff got, and what the plaintiff hoped to get. Section 552B(2) of the Restatement (Second) of Torts rules out the third item in a single sentence: the damages recoverable for a negligent misrepresentation “do not include the benefit of the plaintiff’s contract with the defendant.”²

The commentary to § 552B shows how the permitted items fit together. The Restatement adopts the “out-of-pocket” rule as the measure of damages for negligent misrepresentation and specifically excludes “benefit-of-the-bargain” damages.³ Prosser and Keeton describe the out-of-pocket rule as one that “looks to the loss which the plaintiff has suffered in the transaction, and gives him the difference between the value of what he has parted with and the value of what he has received.”⁴ Subsection (1)(b) then adds to that value gap any pecuniary loss otherwise suffered as a consequence of the plaintiff’s reliance on the misrepresentation.

The excluded measure starts from the statement instead of the deal. Benefit of the bargain gives the plaintiff the difference between the value the property would have had as represented and the value it actually has.⁵ Both formulas subtract the same actual value, and they differ only in the starting point: the out-of-pocket rule starts from what the plaintiff paid, while the benefit-of-the-bargain rule starts from what the plaintiff was told the property was worth. A buyer who pays $10,000 for property actually worth $10,000, after a statement that it was worth $12,000, shows the difference. The out-of-pocket measure yields nothing, because the buyer received exactly what the buyer paid for, while the benefit-of-the-bargain measure would yield $2,000, the $12,000 represented value minus the $10,000 actual value.⁶ Subsection (2) removes that $2,000 and leaves the value-gap claim at zero.

The exclusion does not always shrink the award. Because the two formulas subtract the same actual value, the larger result belongs to whichever starting figure is higher, the price paid or the value as represented.⁷ Take a house that a seller carelessly describes as worth $100,000 and that is actually worth $85,000. A buyer who pays $90,000 has an out-of-pocket loss of $5,000 but a benefit-of-the-bargain figure of $15,000, so the exclusion strips away the $10,000 bargain a true statement would have delivered. A buyer who pays $110,000 for the same house has an out-of-pocket loss of $25,000, which exceeds the $15,000 expectation figure, so the exclusion costs that buyer nothing. The second buyer recovers more even though a true statement would still have left that buyer overpaying by $10,000, because the out-of-pocket measure asks what the buyer lost in the deal and never asks what the statement promised.

Two reasons support the exclusion, and they reinforce each other. First, benefit of the bargain pays the plaintiff what a true statement would have delivered, which treats a careless speaker as though the speaker had promised the result. Where a jurisdiction allows loss-of-bargain damages, fraud can justify that fuller measure, but negligence calls for a milder one.⁸ Second, courts that refuse the measure in Rule 10b–5 stock cases explain the refusal in part by its speculative character. It requires the court to compare two values that may be disputed, what the stock was really worth and what it would have been worth had the statement been true, whereas the out-of-pocket rule sets one disputable value against the known sum the plaintiff paid.⁹ The same objection applies to a house or a truck.

The exclusion also surfaces in claims that look nothing like a house purchase, as Sloane shows. Borrowers relied on a loan officer’s careless statement that a loan had been approved, and they sought the profits of a poultry contract that they would have won with the financing. The court refused those profits because the borrowers would not have received the contract whether or not the misrepresentation was made; they lost it only because the bank never lent the money, so an award would have given them the benefit of a loan that was never made.¹⁰ That description echoes the exclusion, but the label fits poorly. The borrowers had no contract with the bank, so subsection (2), which speaks of the plaintiff’s contract with the defendant, had nothing literal to exclude. And profit on a separate contract with a third party resembles a consequential reliance loss under (1)(b) more than it resembles benefit of the bargain, which ordinarily measures the lessened value of what the defendant’s own contract concerned.¹¹ The better explanation is the legal-cause requirement: had the officer spoken carefully, the borrowers would still have lacked the loan and so would still have lacked the contract, and the misstatement did not cause that loss.

Profits and expenses on collateral dealings do count when the misstatement legally caused them. Consequential damages include expenses incurred or profits lost as a proximate result of the misrepresentation, provided the plaintiff proves them with reasonable certainty and they do not duplicate another award. They must also be realized or more likely than not to be realized in the future, so a paper loss that is unlikely ever to be realized does not qualify.¹²

This chapter concerns a lawyer who carelessly misstates something to a nonclient, and the text of subsection (2) never reaches that nonclient, who has no contract with the lawyer. The limit on damages does not depend on a contract, however. When the misrepresentation is merely negligent, the Restatement limits liability to the out-of-pocket measure and to consequential damages that are not the equivalent of benefit-of-the-bargain damages,¹³ and that limit governs the nonclient as it governs a buyer. The nonclient therefore recovers the value gap, if the reliance took the form of a purchase or exchange with someone else, together with the reliance losses that the statement legally caused and the nonclient proves with reasonable certainty. The profit a true statement would have produced stays outside the award.

Lawyers often speak in opinions, and an opinion can ground liability because, under Restatement (Second) § 539, it carries implied factual assertions, including that the speaker knows facts sufficient to justify forming it; Hearst’s statement that shoes were “good ones” worthy of its seal implied that Hearst had some basis for saying so.¹⁴ Whether the statement was a plain assertion of fact or an opinion of that kind, the measure of recovery is the same.