Applying the Measure to Nonclients

Applying the Measure to Nonclients

A nonclient who sues a lawyer for negligent misrepresentation holds a tort claim and no contract, and that fact shapes the whole damages calculation. Lawyers may be liable to nonclients for negligent misrepresentation, while a client hurt by the same misstatement of fact usually frames the claim as malpractice.¹ Liability for negligent misrepresentation arises only under limited circumstances,² and most of the litigation grows out of economic dealings rather than personal relations.³ This section assumes the nonclient is a proper plaintiff and asks what that plaintiff collects.

The measure comes from Restatement (Second) of Torts § 552B(1). It compensates the pecuniary loss of which the misrepresentation is a legal cause,⁴ including the difference between the value of what the plaintiff received and the price or other value given for it,⁵ and any other pecuniary loss suffered as a consequence of reliance.⁶

The misstatement need not be a flat assertion of fact. An opinion carries implied factual assertions: that the facts known to the speaker are not incompatible with the opinion, and that the speaker knows facts sufficient to justify forming it.⁷ A lawyer who offers a careless opinion on the condition of collateral or the state of a title can therefore misrepresent as surely as one who misreports a fact.

Because the nonclient has no contract with the lawyer, the choice of measure is made before any arithmetic begins. Subsection (2) of § 552B excludes "the benefit of the plaintiff's contract with the defendant."⁸ The Restatement's commentary says the same thing from the other direction: it adopts the out-of-pocket rule for negligent misrepresentation and specifically excludes benefit-of-the-bargain damages.⁹ And when the representation is unrelated to any contract between the parties, the primary measure must be the plaintiff's out-of-pocket loss, since no bargain exists of which the plaintiff can be given the benefit.¹⁰

The nonclient may well have struck a bargain with someone else, such as the lawyer's client, but the lawyer promised the nonclient nothing about that deal. The measure therefore reaches the losses the misstatement caused and stops short of the profit the nonclient hoped the deal would yield.¹¹

Cole's demand mixes items that belong in the award with items that do not. Five steps, run in order, put every dollar through the same filters:

The first step starts at the loan itself. Cole gave $400,000 and received a secured position backed by only $300,000 of equipment value, because the $150,000 senior lien absorbs part of the equipment's $450,000 worth. The difference between what she gave and the value of what she received is $100,000.¹² The $5,000 in fees belongs to the second step. Cole paid them because the letter led her to make the loan, and they repeat nothing in the $100,000, so they are pecuniary loss suffered otherwise as a consequence of reliance.¹³ A misrepresentation claim requires proof of actual damages, so Cole must prove each figure.¹⁴

Two of Cole's items fall at the third step. The $60,000 of expected interest is the return her loan would have earned had the letter been true. Section 552B(2) speaks of the plaintiff's contract with the defendant, and Cole's loan agreement is with Marlow, not Reyes, so its text does not strike the item by itself. The result is the same, because Reyes promised Cole nothing, no bargain with him exists for her to be given the benefit of, and out-of-pocket loss remains the primary measure.¹⁵ Profit Cole abandoned on some other opportunity in reliance on the letter would raise a different question, since that is pecuniary loss suffered as a consequence of reliance, and she would have to prove it.¹⁶ The $20,000 for embarrassment and lost sleep is not pecuniary loss, and § 552B(1) compensates pecuniary loss.¹⁷

Three items reach the fourth step, and the largest fails there. Legal cause requires a causal connection between the misstatement and the harm, and the harm must be a foreseeable result of relying on the false statement. The $100,000 gap and the $5,000 in fees trace straight to the undisclosed lien and to Cole's decision to lend, so both pass. The $300,000 flood loss does not. Had the equipment been free of the senior lien, as the letter said, the flood would have destroyed it just the same, and a flood is not a foreseeable result of relying on a statement about liens. The stock-purchase example makes the same point: a seller who lies to induce a purchase escapes liability when the company goes bankrupt from unforeseeable later events unrelated to the falsity, unless the buyer shows the company probably would have weathered them had its condition been as represented, or unless the later events were foreseeable.¹⁸ Cole can show neither. Reyes answers for the $100,000 the lien took from her collateral, and the flood is not his to pay for.

The last step turns to Cole's own conduct. The factfinder assigned her 30 percent of the responsibility for skipping a routine lien search, and the jurisdiction applies comparative fault to this claim, so the $105,000 falls by $31,500 to $73,500. Comparative fault may reduce an award for negligent misrepresentation when it would not reduce one for intentional fraud.¹⁹ Because the reduction comes last, it changes how much of the total Cole keeps and never which items belong in it.

On an exam, treat every item in a nonclient's demand as a candidate that must clear the five steps. The value gap and the reliance expenses go in, expected profit and distress stay out, a loss produced by an unrelated and unforeseeable event drops out at the causation step, and the nonclient's own fault trims what remains. The measure does not change if the lawyer lied: a nonclient with no bargain with the lawyer still has none to be given the benefit of, so out-of-pocket loss remains the primary measure.²⁰ The nonclient's own fault, however, would then ordinarily leave the award untouched.²¹