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

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

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.

© 2013 by The American Law Institute Preliminary Draft – not approved The American Law Institute Roberta Cooper Ramo, President Allen D. Black, 1st Vice President Douglas Laycock, 2nd Vice President Margaret H. Marshall, Treasurer Paul L. Friedman, Secretary Lance Liebman, Director Stephanie A. Middleton, Deputy Director

COUNCIL Kenneth S. Abraham, University of Virginia School of Law, Charlottesville, VA Susan Frelich Appleton, Washington University School of Law, St. Louis, MO Kim J. Askew, K&L Gates, Dallas, TX José I. Astigarraga, Astigarraga Davis, Miami, FL John H. Beisner, Skadden, Arps, Slate, Meagher & Flom, Washington, DC Allen D. Black, Fine, Kaplan and Black, Philadelphia, PA Amelia H. Boss, Earle Mack School of Law at Drexel University, Philadelphia, PA Elizabeth J. Cabraser, Lieff Cabraser Heimann & Bernstein, San Francisco, CA N. Lee Cooper, Maynard, Cooper & Gale, Birmingham, AL George H. T. Dudley, Dudley, Topper and Feuerzeig, St. Thomas, U.S. VI Christine M. Durham, Utah Supreme Court, Salt Lake City, UT Kenneth C. Frazier, Merck & Co., Inc., Whitehouse Station, NJ Paul L. Friedman, U.S. District Court, District of Columbia, Washington, DC Yvonne Gonzalez Rogers, U.S. District Court, Northern District of California, Oakland, CA Anton G. Hajjar, O’Donnell, Schwartz & Anderson, Washington, DC Geoffrey C. Hazard, Jr.*, University of California, Hastings College of the Law, San Francisco, CA; University of Pennsylvania Law School, Philadelphia, PA D. Brock Hornby, U.S. District Court, District of Maine, Portland, ME William C. Hubbard, Nelson Mullins Riley & Scarborough, Columbia, SC Wallace B. Jefferson, Texas Supreme Court, Austin, TX Mary Kay Kane, University of California, Hastings College of the Law, San Francisco, CA Michele C. Kane, The Walt Disney Company, Burbank, CA Carolyn Dineen King, U.S. Court of Appeals, Fifth Circuit, Houston, TX Harold Hongju Koh, Yale Law School, New Haven, CT Carolyn B. Kuhl, Superior Court of California, County of Los Angeles, Los Angeles, CA Carolyn B. Lamm, White & Case, Washington, DC Derek P. Langhauser, Maine Community College System, South Portland, ME Douglas Laycock, University of Virginia School of Law, Charlottesville, VA Carol F. Lee, Taconic Capital Advisors, New York, NY David F. Levi, Duke University School of Law, Durham, NC Goodwin Liu, California Supreme Court, San Francisco, CA Gerard E. Lynch, U.S. Court of Appeals, Second Circuit, New York, NY Margaret H. Marshall, Choate Hall & Stewart, Boston, MA Lori A. Martin, WilmerHale, New York, NY M. Margaret McKeown, U.S. Court of Appeals, Ninth Circuit, San Diego, CA John J. McKetta, III, Graves, Dougherty, Hearon & Moody, Austin, TX Judith A. Miller, Chevy Chase, MD Kathryn A. Oberly, District of Columbia Court of Appeals, Washington, DC Harvey S. Perlman, University of Nebraska, Lincoln, NE Roberta Cooper Ramo, Modrall Sperling, Albuquerque, NM David W. Rivkin, Debevoise & Plimpton, New York, NY Daniel B. Rodriguez, Northwestern University School of Law, Chicago, IL

*Director Emeritus

© 2013 by The American Law Institute Preliminary Draft – not approved Lee H. Rosenthal, U.S. District Court, Southern District of Texas, Houston, TX Gary L. Sasso, Carlton Fields, Tampa, FL Mary M. Schroeder, U.S. Court of Appeals, Ninth Circuit, Phoenix, AZ Anthony J. Scirica, U.S. Court of Appeals, Third Circuit, Philadelphia, PA Marsha E. Simms, Weil, Gotshal & Manges (retired), New York, NY Robert H. Sitkoff, Harvard Law School, Cambridge, MA Jane Stapleton, Australian National University College of Law, Canberra, Australia; University of Texas School of Law, Austin, TX Laura Stein, The Clorox Company, Oakland, CA Larry S. Stewart, Stewart Tilghman Fox Bianchi & Cain, Miami, FL Elizabeth S. Stong, U.S. Bankruptcy Court, Eastern District of New York, Brooklyn, NY Catherine T. Struve, University of Pennsylvania Law School, Philadelphia, PA David K. Y. Tang, K&L Gates, Seattle, WA Sarah S. Vance, U.S. District Court, Eastern District of Louisiana, New Orleans, LA Bill Wagner, Wagner, Vaughan & McLaughlin, Tampa, FL Steven O. Weise, Proskauer Rose, Los Angeles, CA Diane P. Wood, U.S. Court of Appeals, Seventh Circuit, Chicago, IL

COUNCIL EMERITI Shirley S. Abrahamson, Wisconsin Supreme Court, Madison, WI Philip S. Anderson, Williams & Anderson, Little Rock, AR Sheila L. Birnbaum, Quinn Emanuel Urquhart & Sullivan, New York, NY Bennett Boskey**, Washington, DC Michael Boudin, U.S. Court of Appeals, First Circuit, Boston, MA William M. Burke, Shearman & Sterling (retired), Costa Mesa, CA Hugh Calkins, Initiatives in Urban Education Foundation, Cleveland Heights, OH Gerhard Casper, Stanford University, Stanford, CA William T. Coleman, Jr., O’Melveny & Myers, Washington, DC Edward H. Cooper, University of Michigan Law School, Ann Arbor, MI Roger C. Cramton, Cornell Law School, Ithaca, NY George Clemon Freeman, Jr., Hunton & Williams, Richmond, VA Conrad K. Harper, Simpson Thacher & Bartlett (retired), New York, NY Vester T. Hughes, Jr., K&L Gates, Dallas, TX Herma Hill Kay, University of California at Berkeley School of Law, Berkeley, CA Pierre N. Leval, U.S. Court of Appeals, Second Circuit, New York, NY Betsy Levin, Washington, DC Hans A. Linde, Portland, OR Martin Lipton, Wachtell, Lipton, Rosen & Katz, New York, NY Myles V. Lynk, Arizona State University, Sandra Day O’Connor College of Law, Tempe, AZ Robert MacCrate, Sullivan & Cromwell, New York, NY Vincent L. McKusick, Pierce Atwood, Portland, ME Robert H. Mundheim, Shearman & Sterling, New York, NY Roswell B. Perkins***, Debevoise & Plimpton, New York, NY Ellen Ash Peters, Connecticut Supreme Court (retired), Hartford, CT Robert A. Stein, University of Minnesota Law School, Minneapolis, MN Michael Traynor***, Cobalt LLP, Berkeley, CA Patricia M. Wald, Washington, DC Lawrence E. Walsh, Crowe & Dunlevy (retired), Oklahoma City, OK William H. Webster, Milbank, Tweed, Hadley & McCloy, Washington, DC George Whittenburg, Whittenburg Whittenburg Schachter & Harris, Amarillo, TX Herbert P. Wilkins, Boston College Law School, Newton, MA ***Treasurer Emeritus ***President Emeritus and Chair of the Council Emeritus

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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.

Reporter Dean Ward Farnsworth University of Texas School of Law 727 East Dean Keeton Street Austin, TX 78705-3224 Fax: (512) 471-6987 Email: [email protected]

Director Professor Lance Liebman The Executive Office The American Law Institute 4025 Chestnut Street Philadelphia, PA 19104-3099 Fax: (215) 243-1636 Email: [email protected]

REPORTER Ward Farnsworth, University of Texas School of Law, Austin, TX

ADVISERS Fortunato P. Benavides, U.S. Court of Appeals, Fifth Circuit, Austin, TX Max W. Berger, Bernstein Litowitz Berger & Grossmann, New York, NY Margot Botsford, Massachusetts Supreme Judicial Court, Boston, MA Ellen Bublick, University of Arizona, James E. Rogers College of Law, Tucson, AZ Elizabeth J. Cabraser, Lieff Cabraser Heimann & Bernstein, San Francisco, CA Peter Cane, Australian National University College of Law, Canberra, Australia Denise L. Cote, U.S. District Court, Southern District of New York, New York, NY William B. Dawson, Gibson, Dunn & Crutcher, Dallas, TX James Donato, Shearman & Sterling, San Francisco, CA Sander L. Esserman, Stutzman, Bromberg, Esserman & Plifka, Dallas, TX Jay M. Feinman, Rutgers University School of Law - Camden, Camden, NJ Bruce Feldthusen, University of Ottawa, Faculty of Law, Common Law Section, Ottawa, ON, Canada Parker C. Folse, III, Susman Godfrey, Seattle, WA Mark P. Gergen, University of California, Berkeley, School of Law, Berkeley, CA Victor P. Goldberg, Columbia University School of Law, New York, NY Gail K. Hillebrand, Consumer Financial Protection Bureau, Washington, DC Spencer Hosie, Hosie McArthur, San Francisco, CA Ralph A. Jacobs, Jacobs Singer Kivitz & Herman, Philadelphia, PA Andrew Kull, Boston University School of Law, Boston, MA John J. McKetta, III, Graves, Dougherty, Hearon & Moody, Austin, TX Ken Oliphant, Institute for European Tort Law, Austrian Academy of Sciences, Vienna, Austria Teresa Wynn Roseborough, Metropolitan Life Insurance Company, Inc., Long Island City, NY David Schuman, Oregon Court of Appeals, Salem, OR Catherine M. Sharkey, New York University School of Law, New York, NY Stuart H. Singer, Boies, Schiller & Flexner, Fort Lauderdale, FL Kathleen Smalley, Boies, Schiller & Flexner, Santa Monica, CA Jane Stapleton, Australian National University College of Law, Canberra, Australia; University of Texas School of Law, Austin, TX Guy Miller Struve, Davis Polk & Wardwell, New York, NY Stephen D. Sugarman, University of California, Berkeley, School of Law, Berkeley, CA Frank Sullivan, Jr., Indiana University, Robert H. McKinney School of Law, Indianapolis, IN Samuel A. Thumma, Arizona Court of Appeals, Division One, Phoenix, AZ Jon S. Tigar, U.S. District Court, Northern District of California, San Francisco, CA Robert C. Walters, Energy Future Holdings, Dallas, TX

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

Marc T. Amy, Louisiana Court of George C. Christie, Durham, NC Appeal, Third Circuit, Abbeville, LA Bradley G. Clary, Minneapolis, MN Glenn R. Anderson, David S. Coale, Dallas, TX Halifax, NS, Canada Anne E. Cohen, New York, NY José F. Anderson, Baltimore, MD Neil B. Cohen, Brooklyn, NY Owen L. Anderson, Norman, OK Nili Cohen, Tel Aviv, Israel James K. Archibald, Baltimore, MD Michael B. Colgan, Tampa, FL Mary Arden, Court of Appeal of George W. Conk, New York, NY United Kingdom, London, England Harry Clayton Cook, Jr., Ronald G. Aronovsky, Washington, DC Los Angeles, CA Jeffrey O. Cooper, Indianapolis, IN Jennifer S. Bard, Lubbock, TX Nina Cortell, Dallas, TX William T. Barker, Chicago, IL John G. Crabtree, Key Biscayne, FL Dabney Dorsett Bassel, James W. Craig, New Orleans, LA Fort Worth, TX Thomas L. Cubbage, III, Karl Bayer, Austin, TX Washington, DC James M. Beck, Philadelphia, PA Richard L. Cupp Jr., Malibu, CA Mark A. Behrens, Washington, DC Christopher Scott D’Angelo, John Theodore Boese, Washington, DC Philadelphia, PA Larry L. Boschee, Bismarck, ND Julie A. Davies, Sacramento, CA Amelia H. Boss, Philadelphia, PA John A. Day, Brentwood, TN Diane F. Bosse, Buffalo, NY Charles E. Daye, Chapel Hill, NC Thomas H. Boyd, Minneapolis, MN Deborah A. DeMott, Durham, NC Peter J. Boyer, Marlton, NJ John L. Diamond, San Francisco, CA Scott A. Brister, Austin, TX Darby Dickerson, Lubbock, TX Brian P. Brooks, Pasadena, CA Dan B. Dobbs, Tucson, AZ Harvey G. Brown Jr., Texas First Court Gordon L. Doerfer, Boston, MA of Appeals, Houston, TX James B. Dolan, Jr., Boston, MA Michael K. Brown, Walnut Creek, CA James Sholto Douglas, Supreme Court Timothy W. Burns, Madison, WI of Queensland, Brisbane, Australia John P. Burton, Santa Fe, NM Meredith J. Duncan, Houston, TX Robert L. Byer, Pittsburgh, PA James J. Edelman, Supreme Court of David N. Calvillo, McAllen, TX Western Australia, Perth, Australia Elena A. Cappella, Philadelphia, PA Sheldon H. Elsen, New York, NY W. Jonathan Cardi, Craig T. Enoch, Austin, TX Winston-Salem, NC Samuel Estreicher, New York, NY Jo Carrillo, San Francisco, CA Heidi Li Feldman, Washington, DC William Frank Carroll, Dallas, TX Arthur Norman Field, New York, NY Robert L. Carter, Illinois Appellate Jill Fisch, Philadelphia, PA Court, Third District, Ottawa, IL David A. Fischer, Columbia, MO John Hill Cayce, Fort Worth, TX Judith K. Fitzgerald, U.S. Bankruptcy Robert P. Charrow, Washington, DC Court, Western District of Jordan B. Cherrick, St. Louis, MO Pennsylvania, Pittsburgh, PA Stephen Yee Chow, Boston, MA Thomas M. Flanagan, Douglas L. Christian, Phoenix, AZ New Orleans, LA

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© 2013 by The American Law Institute Preliminary Draft – not approved Joseph Z. Fleming, Miami, FL David A. Hoffman, Philadelphia, PA Susan S. Fortney, Hempstead, NY Roger F. Holmes, Anchorage, AK C. Allen Foster, Washington, DC C. Stephen Hsu, Beijing, China Vernon L. Francis, Philadelphia, PA William C. Hubbard, Columbia, SC Theodore H. Frank, Arlington, VA Edwin E. Huddleson, George Clemon Freeman, Jr., Washington, DC Richmond, VA Barry Hunsaker, Houston, TX Steven F. Friedell, Camden, NJ Brian J. Hunt, Chicago, IL Steven I. Friedland, Greensboro, NC Richard H. Hunter, St. Croix, U.S. VI Marvin Garfinkel, Philadelphia, PA Michael John Hutter, Jr., Albany, NY Faith E. Gay, New York, NY David W. Ichel, New York, NY Mark Eric Gebauer, Harrisburg, PA John E. Iole, Pittsburgh, PA R. James George, Jr., Austin, TX J. Russell Jackson, St. Louis, MO E. Duncan Getchell, Jr., Jack B. Jacobs, Delaware Supreme Richmond, VA Court, Wilmington, DE Shubha Ghosh, Madison, WI Kirk C. Jenkins, Chicago, IL Llewellyn J. Gibbons, Toledo, OH Roland K. Johnson, Fort Worth, TX Donald G. Gifford, Baltimore, MD Vincent R. Johnson, San Antonio, TX Israel Gilead, Jerusalem, Israel Kenneth C. Johnston, Dallas, TX Sharon L. Gleason, U.S. District Court, Gregory G. Jones, Tampa, FL District of Alaska, Anchorage, AK Paul F. Jones, Buffalo, NY Martin Glenn, U.S. Bankruptcy Court, Emma Coleman Jordan, Washington, DC Southern District of New York, Allan Kanner, New Orleans, LA New York, NY Matthew I. Katz, Vermont Superior James H. Goetz, Bozeman, MT Court, Burlington, VT Philip S. Goldberg, Washington, DC Gregory C. Keating, Los Angeles, CA Robert A. Goodin, San Francisco, CA Michael J. Keating, St. Louis, MO Wendy J. Gordon, Boston, MA Hugh Rice Kelly, Houston, TX David M. Gossett, Washington, DC David R. Keyes, Austin, TX Marvin L. Gray, Jr., Seattle, WA Evelyn V. Keyes, Texas First Court of Oscar S. Gray, Baltimore, MD Appeals, Houston, TX Michael D. Green, Winston-Salem, NC Jeff Kichaven, Los Angeles, CA Jeffrey J. Greenbaum, Newark, NJ Mark R. Killenbeck, Fayetteville, AR Norman L. Greene, New York, NY Edmund W. Kitch, Charlottesville, VA Michael Greenwald, Philadelphia, PA Andrew R. Klein, Indianapolis, IN Charles E. Griffin, Ridgeland, MS Daniel S. Kleinberger, St. Paul, MN John J. Grogan, Philadelphia, PA Michael J. Kramer, Noble Superior David Gruning, New Orleans, LA Court, Albion, IN Tracy Raffles Gunn, Tampa, FL William P. Kratzke, Memphis, TN Peter E. Halle, Washington, DC Michael I. Krauss, Arlington, VA Kendyl T. Hanks, Austin, TX Jane Kreusler-Walsh, West Palm Scott W. Hansen, Milwaukee, WI Beach, FL Richard E. V. Harris, Piedmont, CA Kurt Kuhn, Austin, TX Paul T. Hayden, Los Angeles, CA Peter B Kutner, Norman, OK Steven K. Hayes, Fort Worth, TX Edward Labaton, New York, NY Rex S. Heinke, Los Angeles, CA Steven C. Laird, Fort Worth, TX Donald H. J. Hermann, Chicago, IL Iris Lan, New York, New York James C. Ho, Dallas, TX Barry S. Landsberg, Los Angeles, CA Richard Anthony Hodyl, Jr., Joseph H. Lang, Jr., Tampa, FL Chicago, IL Othni J. Lathram, Tuscaloosa, AL

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© 2013 by The American Law Institute Preliminary Draft – not approved John P. Lavelle, Jr., Philadelphia, PA John Murphy, Manchester, England Paul A. LeBel, Grand Forks, ND Jason M. Murray, Miami Lakes, FL Michael J. Leech, Chicago, IL Gary Myers, Columbia, MO Seth R. Lesser, Rye Brook, NY Richard L. Neumeier, Boston, MA Lawrence C. Levine, Sacramento, CA Virginia E. Nolan, San Diego, CA Jeffrey S. Levinger, Dallas, TX Harriet O’Neill, Austin, TX Adam J. Levitt, Chicago, IL David G. Owen, Columbia, SC Erika F. Lietzan, Washington, DC Dennis Owens, Kansas City, MO Allen M. Linden, Geoffrey Palmer, Toronto, ON, Canada Wellington, New Zealand Joseph W. Little, Gainesville, FL Jerry Richard Palmer, Topeka, KS David A. Logan, Bristol, RI Stephen Patrick Pate, Houston, TX Kyle D. Logue, Ann Arbor, MI Robert S. Peck, Washington, DC Thad G. Long, Birmingham, AL Harvey S. Perlman, Lincoln, NE Ralph R. Mabey, Salt Lake City, UT Stephen R. Perry, Philadelphia, PA William Cullen Mac Donald, Timothy J. Petumenos, Anchorage, AK New York, NY Frank A. Pfiffner, Anchorage Gerard N. Magliocca, Indianapolis, IN Superior Court, Anchorage, AK Solangel Maldonado, Newark, NJ Jeffrey M. Pollock, Princeton, NJ Neal S. Manne, Houston, TX David J. Porter, Pittsburgh, PA Colin P. Marks, San Antonio, TX Susan Poser, Lincoln, NE James C. Martin, Pittsburgh, PA Edward M. Posner, Philadelphia, PA Miquel Martin-Casals, Girona, Spain Matthew Christopher Powers, Albert J. Matricciani, Jr., Maryland Austin, TX Court of Special Appeals, Karen S. Precella, Fort Worth, TX Baltimore, MD Polly J. Price, Atlanta, GA Charles W. Matthews, Dallas, TX J. David Prince, St. Paul, MN James T. McCartt, Houston, TX Carey R. Ramos, New York, NY James A. McKenna, Hallowell, ME Hugh M. Ray, Houston, TX Benjamin C. McMurray, Bernard D. Reams, Jr., Salt Lake City, UT San Antonio, TX William J. McNichols, Norman, OK Joe R. Reeder, Washington, DC Michael J. Meehan, Tucson, AZ William L. Reynolds, Baltimore, MD Mark S. Melodia, Princeton, NJ Chad C. Messier, St. Thomas, U.S. VI Janet Leach Richards, Austin, TX Kevin H. Michels, Spokane, WA Sally M. Rider, Tucson, AZ Elizabeth S. Miller, Waco, TX Robert J. Ridge, Pittsburgh, PA Charles H. Moellenberg, Jr., Clifford A. Rieders, Williamsport, PA Pittsburgh, PA James L. Robertson, Jackson, MS James S. Moody, Jr., U.S. District Court, Christopher John Robinette, Middle District of Florida, Harrisburg, PA Tampa, FL Reginald L. Robinson, Jennifer M. Moore, Albany, NY Washington, DC Nancy J. Moore, Boston, MA Anthony Z. Roisman, Lebanon, NH Olivier Pierre Moréteau, Ediberto Roman, Miami, FL Baton Rouge, LA Kenneth Ross, Minnetonka, MN Juliet M. Moringiello, Harrisburg, PA Mary Massaron Ross, Detroit, MI Charles R. A. Morse, New York, NY Linda J. Rusch, Seattle, WA Jim A. Moseley, Texas Fifth Court of Robin Russell, Houston, TX Appeals, Dallas, TX Timothy C. Russell, Bryn Mawr, PA Jonathan M. Moses, New York, NY Michael L. Rustad, Edward M. Mullins, Miami, FL South Burlington, VT

© 2013 by The American Law Institute Preliminary Draft – not approved Christopher Lynn Sagers, John S. Summers, Philadelphia, PA Cleveland, OH Mary-Christine Sungaila, Pablo Salvador-Coderch, Costa Mesa, CA Barcelona, Spain William Swadling, Oxford, England Joseph Sanders, Houston, TX Stephen Lyle Tatum, Fort Worth, TX Milton R. Schroeder, John D. Taurman, Washington, DC Paradise Valley, AZ William H. Theis, Winnetka, IL Victor E. Schwartz, Washington, DC Bowen H. Tucker, Chicago, IL Anthony J. Sebok, New York, NY Sjef van Erp, Maastricht, Netherlands Karl E. Seib, New York, NY Victor D. Vital, Dallas, TX Marc M. Seltzer, Los Angeles, CA Eugene Volokh, Los Angeles, CA Stephen M. Sheppard, Fayetteville, AR Bill Wagner, Tampa, FL Eric A. Shumsky, Arlington, VA Sean P. Wajert, Philadelphia, PA Barbara T. Sicalides, Philadelphia, PA Nicholas J. Wallwork, Kenneth W. Simons, Boston, MA Ruckersville, VA Joseph R. Slights, III, Wilmington, DE Ruth Wedgwood, Washington, DC Douglas G. Smith, Chicago, IL Jeffrey G. Weil, Philadelphia, PA Carl A. Solano, Philadelphia, PA Robert A. Soriano, Tampa, FL Steven O. Weise, Los Angeles, CA Girardeau A. Spann, Washington, DC Thomas J. Welsh, Meriden, CT Brian F. Spector, Miami, FL Stephen J. Werber, Cleveland, OH Michael K. Steenson, St. Paul, MN Jerry Wertheim, Santa Fe, NM Kathryn A. Stephens, Texas Fourth Joseph A. Wheelock, Jr., Court of Appeals, San Antonio, TX Williamstown, MA Larry S. Stewart, Miami, FL Christina B. Whitman, Ann Arbor, MI Robert H. Stier, Jr., Portland, ME Simon J. Whittaker, Oxford, England David R. Stras, Minnesota Supreme Gerard E. Wimberly, Jr., Court, St. Paul, MN New Orleans, LA Leo E. Strine, Jr., Delaware Court of Nicholas J. Wittner, East Lansing, MI Chancery, Wilmington, DE William A. Worthington, Houston, TX Keith Strong, U.S. Magistrate Court, Jennifer Wriggins, Portland, ME District of Montana, Great Falls, MT Richard W. Wright, Evanston, IL Andrew H. Struve, Los Angeles, CA Eric H. Zagrans, Cleveland, OH Patrick James Sullivan, Encinitas, CA Benjamin C. Zipursky, New York, NY

© 2013 by The American Law Institute Preliminary Draft – not approved 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 submitted 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 consideration 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 other 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 disclosures are available from the Institute upon request; however, only disclosures provided after July 1, 2010, will be made available and, for confidentiality reasons, parts of the disclosures may be redacted or withheld.

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.

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

© 2013 by The American Law Institute Preliminary Draft – not approved 1 CHAPTER 1 2 UNINTENTIONAL INFLICTION OF ECONOMIC LOSS 3 4 5 § 7. Economic loss from injury to a third person or to 6 property not belonging to the claimant. 7 8 Except as provided in § 8, a claimant cannot recover 9 for pure economic loss caused by 10 11 (a) unintentional personal injury to another 12 party; or 13 (b) unintentional injury to property in which 14 the claimant has no proprietary interest. 15 16 Comment: 17 18 a. Scope. The two limits on recovery stated in this 19 Section are related applications of the same principle, and 20 they apply to facts that usually have certain features in 21 common. The plaintiff and defendant typically are 22 strangers. The defendant commits a negligent act that 23 injures a third party’s person or property, and indirectly- 24 -though perhaps foreseeably--causes various sorts of 25 economic loss to the claimant: lost income or profits, 26 missed business opportunities, expensive delays, or other 27 inconvenience. The plaintiff may suffer losses, for 28 example, because the defendant injured someone with whom 29 the plaintiff had a contract and from whom the plaintiff 30 had been expecting performance, such as an employee or 31 supplier. See Illustration 1. Or the plaintiff may be

1 unable to make new contracts with others, such as customers 2 who cannot conveniently reach the plaintiff’s business 3 because the defendant’s negligence has damaged property 4 that now blocks the way. See Illustration 4. The common 5 law of tort does not recognize a plaintiff’s claim in such 6 circumstances. 7 8 Illustrations: 9 10 1. Driver negligently runs over Goalie, who has 11 a contract to play for Employer’s hockey team. As a 12 result of the accident, Goalie is unable to perform 13 for the rest of the season, and Employer suffers lost 14 revenues from ticket sales. Employer has no tort 15 claim against Driver. 16 17 2. Owner buys a policy from Insurer to cover the 18 risk of damage or loss to Owner’s barge. Tortfeasor 19 negligently sinks the barge, forcing Insurer to pay 20 Owner under the terms of the policy. Insurer seeks to 21 recover those sums from Tortfeasor. Insurer may be 22 entitled to restitution as subrogee of the rights of 23 Owner. Insurer does not have a right to collect from 24 Tortfeasor in a direct action for negligence. 25 26 3. Carrier delivering toxic chemicals to Factory 27 negligently spills them on Factory’s property. The 28 spill forces Factory to shut down for a week, during 29 which time Employees of Factory go unpaid. Employees 30 have no tort claim against Carrier.

1 2 4. Builder negligently performs construction on 3 a building owned by Client. The building collapses as 4 a result, forcing the closure of an adjacent street 5 for several weeks. Delicatessen, which operates next 6 door to the collapsed building, suffers no physical 7 damage but loses profits because customers cannot 8 reach the entrance while the street is closed. 9 Delicatessen has no tort claim for negligence against 10 Builder. 11 12 Statutes may provide a plaintiff with a right to 13 recover for economic loss that results from the wrongful 14 death of another. Common law in some jurisdictions may 15 also provide a right to recover for loss of consortium, 16 which this Section does not classify as economic injury. 17 Those rights of action are outside the scope of this 18 Restatement, and they are not impaired by the rule of this 19 Section. Liability for intentional interference with 20 contractual relations is discussed in Chapter [X]. 21 22 b. Rationale. The rule of this Section is justified 23 by several considerations. The first, as noted in § 1, 24 economic losses can proliferate long after the physical 25 forces at work in an accident have spent themselves. A 26 collision that sinks a ship will cause a well-defined loss 27 to the ship’s owner; but it also may foreseeably cause 28 economic losses to wholesalers who had expected to buy the 29 ship’s cargo, then to retailers who had expected to buy 30 from the wholesalers, and then to suppliers, employees, and

1 customers of the retailers, and so on. Recognizing claims 2 for those sorts of losses would greatly increase the 3 number, complexity, and expense of potential lawsuits 4 arising from many accidents. In some cases recognition of 5 such claims would also result in liabilities that are 6 indeterminate and out of proportion to the culpability of 7 the defendant. These costs do not seem likely to be 8 justified by comparable benefits; courts doubt that threats 9 of such open-ended liability would usefully improve the 10 incentives of parties to take precautions against 11 accidents. At the same time, the victims of economic 12 injury often can protect themselves effectively by means 13 other than a tort suit. They may be able to obtain “first- 14 party” insurance against their losses, or recover in 15 contract from those who do have good claims against the 16 defendant. 17 The rationales just stated are general, and no one of 18 them is conclusive. They prevail by their cumulative 19 force. And while they do not apply with equal force to 20 every claim that arises under this Section, most courts 21 reject such claims categorically. They have concluded that 22 distinctions allowing some plaintiffs to recover but not 23 others, based on a case-by-case inquiry into the policies 24 at issue, cannot be made in a sufficiently principled 25 manner. Denying claims by rule undeniably works a hardship 26 on plaintiffs with claims that fall outside the policies 27 that make the rule attractive—claims that do not lend 28 themselves to solution by contract, for example, or that 29 produce no problems of indeterminacy. But a rule against 30 recovery has other advantages: predictability, clarity,

1 and economy of application for courts, lawyers, and those 2 attempting to plan their affairs and anticipate their 3 liabilities. In this area those values have been thought 4 to outweigh the benefits of occasionally providing relief. 5 6 c. Proprietary interests. A claimant with a 7 proprietary interest in property can recover for economic 8 losses that result when the property is damaged. Simple 9 ownership is the most familiar example of a proprietary 10 interest, but there are other kinds as well. Proprietary 11 interests can be divided into two types: those that arise 12 from mere possession of property, and those that arise from 13 ownership interests without need of possession. If a 14 claimant possesses property without owning it, courts 15 decide whether the resulting interest is “proprietary” by 16 using a functional test: they ask whether the claimant has 17 control of the property and is responsible for its 18 maintenance and repair. Thus the law frequently allows a 19 lessee of property to recover for damage to it, but does 20 not allow recovery by a claimant who occupies or holds 21 property under a license that confers less extensive powers 22 and responsibilities. 23 If the claimant does not possess the damaged property, 24 then any proprietary interest must arise from a formal 25 right of ownership in it. Common examples of parties with 26 ownership rights in property they do not possess include a 27 lessor, a remainderman, a bailor, and the holder of an 28 easement. Their rights are regarded as proprietary 29 interests, so they can recover for economic losses they 30 suffer when the property is damaged while out of their

1 possession. By contrast, a claimant who does not possess 2 the property and has a merely contractual interest in it, 3 such as an option to purchase or a contract for future 4 delivery, cannot recover in tort when the property is 5 damaged. The rights of the buyer and seller in such a case 6 are defined by their contracts. 7 As is evident from these examples, more than one party 8 can have a proprietary interest in the same property at the 9 same time. When such property is damaged, each party has a 10 separate cause of action for its economic losses, so long 11 as their losses are distinct; the tortfeasor cannot be made 12 to pay twice for identical damage. See Illustration 8. 13 14 Illustrations: 15 16 5. Company hires Contractor to build an 17 underground pipeline. Unrelated Excavator negligently 18 damages the pipeline while it is under construction. 19 Contractor has control of the pipeline at the time the 20 incident occurs, and is responsible for repair of any 21 damage to the work until the project is completed. 22 Contractor can recover its losses from Excavator. 23 24 6. Vessel negligently damages a railroad bridge 25 that Railroad has a right to use. The bridge is owned 26 and maintained by another. The damage forces Railroad 27 to send its trains by an alternate route that is more 28 expensive than using the bridge. Railroad cannot 29 recover its losses from owner of Vessel. 30

1 7. Manufacturer hires Factory to add dye to 2 fabric. While Factory is performing the work, 3 Contractor negligently severs a utility line carrying 4 power to Factory’s machines. The fabric is ruined as 5 a result. The court finds that Factory was acting as 6 bailee of the fabric. Factory may recover in tort 7 against Contractor. 8 9 8. Tortfeasor negligently causes physical harm 10 to property belonging to A as lessor and B as lessee. 11 Repairs are not feasible, and the damage reduces the 12 income that the property can produce. B has an action 13 against Tortfeasor for lost income during the 14 remaining period of the lease. A has an action 15 against Tortfeasor for lost income thereafter. 16 17 d. Damage to property. As already noted, economic 18 loss can be recovered as an ordinary item of damages when it 19 results from actionable physical harm to the claimant or 20 the claimant’s property. But a plaintiff whose property 21 suffers some harm does not necessarily gain the right to 22 recover for pure economic loss that results from other 23 features of the same general incident. Courts require a 24 causal connection between the physical harm and the 25 economic loss. See Illustrations 9-10. Where physical 26 harm has occurred, traditional principles of causation 27 determine whether the harm is connected closely enough to 28 the claimant’s economic losses to permit recovery for them. 29 See Restatement Third, Torts: Liability for Physical and 30 Emotional Harm §§ —, —.

1 2 Illustrations: 3 4 9. Contractor negligently severs a power line 5 running from Utility to Farmer’s indoor mushroom 6 nursery. The resulting loss of power causes Farmer’s 7 mushrooms to die. The destruction of the crop causes 8 Farmer to lose profits. Farmer may recover the lost 9 profits from Contractor. 10 11 10. Barge Operator negligently causes an oil 12 spill that forces the closure of a harbor and requires 13 Contractor to delay work on a construction project 14 there. The spilled oil also ruins an expensive piece 15 of Contractor’s machinery, but the machinery can be 16 swiftly replaced and is not the cause of Contractor’s 17 delay. Contractor can recover from Barge Operator for 18 the ruined machinery but not for the costs occasioned 19 by the delay of the project. 20 21 e. Fishermen. Commercial fisherman have sometimes 22 prevailed on claims that appear inconsistent with the rules 23 of this Section. Those results occur in two different 24 kinds of cases, and they are best considered separately. 25 (a) In the first pattern, a defendant’s negligence 26 damages a ship, typically by collision. The accident 27 causes economic losses to fishermen hired to work on the 28 ship, and who were to be paid a percentage of the profits 29 from the voyage—a so-called “lay agreement,” which might be 30 viewed as a type of joint venture with the owner. It is

1 understood, as a background matter, that the owner likely 2 can sue the tortfeasor for profits that were expected from 3 the ship’s voyage and were lost to delays caused by the 4 accident. It is further understood that the owner is 5 liable in restitution to the fishermen for their share of 6 what he recovers; the judgment in favor of the owner can be 7 accompanied on the spot by recognition of a constructive 8 trust in favor of the fishermen. In these circumstances, 9 courts have also given fishermen the option of skipping the 10 middleman and suing the tortfeasor directly. 11 Why fishermen are allowed this direct option is a 12 matter of occasional debate. The same privilege is not 13 extended to other parties who suffer economic harm when 14 they have contracts with those whose property is damaged. 15 The difference is probably best explained by the unusually 16 clear and precise nature of the fishermen’s entitlement: 17 though they do not own the damaged property, they are joint 18 venturers with the party who does own it. Payment from the 19 tortfeasor, if made to the owner, passes through to the 20 fishermen in a manner that is unusually regular, clear-cut, 21 and automatic. Allowing the fishermen to sue in their own 22 right thus amounts to a convenient shortcut, not an 23 expansion of substantive rights. Nobody is made worse off 24 by it, since the tortfeasor merely pays one party rather 25 than another. 26 Describing this state of affairs as a “fishermen’s 27 exception,” or explaining it on the ground that fishermen 28 are “favorites of admiralty,” is unfortunate and best 29 avoided. Those phrases imply that fishermen are, by virtue 30 of their trade, exempt from the rules of this Section and

1 able to collect whenever they suffer economic harm on 2 account of a defendant’s negligence. That is not so. In 3 fact only certain fishermen have been subject to 4 distinctive treatment: those who have lay agreements with 5 the owner of a damaged ship. The distinctive treatment is 6 justified not because they are fishermen but because 7 features of their commercial arrangement make it unusually 8 efficient to let them collect directly rather than 9 indirectly. The difference is procedural in character. 10 The allowance is not properly used to provide fishermen 11 with a greater recovery than they would have received in 12 the end without it, or to make a defendant pay more than 13 would have been due without it. 14 (b) In a second pattern, a defendant causes harm to a 15 natural resource, typically by spilling oil or other 16 chemicals into a body of water that serves as a fishing 17 ground. The affected fishermen sue and often win damages, 18 though they had no proprietary interest in the contaminated 19 waters or the uncaught fish. These cases are usually, and 20 correctly, understood as suits to remedy a public nuisance. 21 See Section X, which sometimes allows a plaintiff to 22 recover for damage to a natural resource if the plaintiff’s 23 injury differs from the injuries suffered by the community 24 in general. Fishermen often qualify as plaintiffs under 25 that rule, as do various others. Again, referring to the 26 result as a “fisherman’s exception” to the rule of this 27 Section is misleading. The right to sue belongs to anyone 28 who satisfies the principles of Section X. 29

1 f. Judge and jury. Most courts express the rule of 2 this Section by describing it as a limitation of the 3 defendant’s duty. Other courts have occasionally stated 4 the principle as a matter of causation, or scope of 5 liability, or as a rule about damages. The labeling of the 6 issue usually is of no consequence so long as the rule’s 7 applicability is understood to be a matter of law for the 8 court, not a question for the jury. Treating the rule as a 9 limitation on the defendant’s duty will generally be the 10 clearest way to establish that distribution of labor. 11 12 Reporter’s Note 13 14 a. Scope. The problems addressed by this Section 15 were the subject of Restatement Second, Torts § 766C 16 (“Negligent Interference With Contract Or Prospective 17 Contractual Relation”). The rule stated here is often 18 associated with Robins Dry Dock & Repair Co. v. Flint, 275 19 U.S. 303 (1927) (Holmes, J.), but appeared in many earlier 20 cases as well. See, e.g., Byrd v. English, 43 S.E. 419 21 (1903); Conn. Mut. Life Ins. Co. v. New York & N.H.R. Co., 22 25 Conn. 265 (1856); Anthony v. Slaid, 52 Mass. 290 (1846); 23 see also Cattle v. Stockton Waterworks [1875] All E.R. 220, 24 223 (Q.B.). Contrary positions have been taken only 25 occasionally in the case law. See People Express Airlines, 26 Inc. v. Consolidated Rail Corp., 495 A.2d 107 (N.J. 1985); 27 Mattingly v. Sheldon Jackson College, 743 P.2d 356 (Alaska 28 1987). 29 The types of recovery prohibited by this Section are 30 sometimes described in some other countries as “relational 31 economic loss.” That term does not appear in American case 32 law, and is not advocated here because it is not likely to 33 produce improved clarity; the meaning of the phrase is not 34 evident from the words it employs. For comparative 35 discussion, see Feldthusen, Economic Negligence ch. 5 (5th 36 ed. 2008). 37 Claims for loss of consortium typically involve 38 recovery for the society and affection of a spouse or 39 parent who has been injured or killed. As noted in the

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

1 Appraisal, 25 Vand. L. Rev. 43 (1972); Godwin, Negligent 2 Interference with Economic Expectancy: The Case for 3 Recovery, 16 Stan. L. Rev. 664 (1964). 4 Economists have offered an additional rationale for 5 the rule of this Section: sometimes an economic loss to 6 one party may become a benefit to another. If a restaurant 7 loses customers because of damage to a nearby roadway, 8 other restaurants gain when the customers go there instead. 9 To the extent that economic losses are offset in this way 10 by benefits to others, there is no social loss; there is 11 just a shifting of wealth from one party to another. This 12 line of reasoning may have merit, but it has not been 13 pursued by the courts. The reason may be that the aims of 14 tort law are not limited to avoiding social costs; and even 15 if they were, separating private from social losses in any 16 given situation, and with respect to all parties involved, 17 is difficult. In the example just described, the 18 disappointment of patrons who wanted to dine at the first 19 restaurant remains a real loss even if a second restaurant 20 captures all of their business--though the scale of their 21 disappointment may bear little relationship to the lost 22 profits that the first restaurant seeks to recover. 23 For discussion of the economic arguments just 24 discussed, see Posner, Common-Law Economic Torts: An 25 Economic and Legal Analysis, 48 Ariz. L. Rev. 735 (2006); 26 Gilead, Tort Law and Internalization: The Gap Between 27 Private Loss and Social Cost, 17 Int'l Rev. L. & Econ. 589 28 (1997); Goldberg, Recovery for Economic Loss Following the 29 Exxon Valdez Oil Spill, 23 J. Legal Stud. 1 (1994); Bishop, 30 Economic Loss in Tort, 2 Oxford J. Leg. Stud. 1 (1981). 31 32 c. Proprietary interests. For discussion of 33 proprietary interests and how they are defined for purposes 34 of this Section, see Holt Hauling & Warehousing Systems, 35 Inc. v. M/V Ming Joy, 614 F. Supp. 890 (E.D. Pa. 1985), and 36 Texas Eastern Transmission Corp. v. McMoRan Offshore 37 Exploration Co., 877 F.2d 1214 (5th Cir. 1989). 38 Illustration 5 is based on J. Ray McDermott & Co. v. 39 S.S. Egero, 453 F.2d 1202 (5th Cir. 1972). Illustration 6 40 is based on Louisville and N. R. Co. v. M/V Bayou Lacombe, 41 597 F.2d 469 (5th Cir. 1979). For a different result on 42 similar facts, see Canadian National Railway v. Norsk 43 Pacific Steamship Co., [1992] 1 S.C.R. 1021, 11 44 C.C.L.T.(2d) 1, 91 D.L.R.4th 289, 137 N.R. 241.

1 Illustration 7 is based on Priority Finishing Corp. v. 2 LAL Const. Co., Inc., 667 N.E.2d 290 (Mass. App. 1996); see 3 also Paragon Oil Co. v. Republic Tankers, S. A., 310 F.2d 4 169 (2d Cir. 1962). The bailee’s recovery on these facts 5 precludes suit by the bailor against the same defendant to 6 collect the same damages. If the bailee recovers amounts 7 that exceed its interest in the property, those amounts are 8 held in trust for the bailor. See Associates Discount 9 Corp. v. Gillineau, 78 N.E.2d 192 (Mass. 1948); The 10 Winkfield, [1902] P. 42 (C.A.), [1900-03] All Eng. Rep. 11 346. 12 Illustration 8 is based on Rogers Terminal & Shipping 13 Corp. v. International Grain Transfer, Inc., 672 F.2d 464 14 (5th Cir. 1982), but moving the case ashore. 15 16 d. Damage to property. Illustration 9 is based on 17 Newlin v. New England Tel. & Tel. Co., 54 N.E.2d 929 (Mass. 18 1944). Illustration 10 is based on Garweth Corp. v. Boston 19 Edison Co., 613 N.E.2d 92 (Mass. 1993); see also In re 20 Oriental Republic of Uruguay, 821 F. Supp. 934 (D. Del. 21 1993); Naviera Maersk Espana, S.A. v. Cho–Me Towing, Inc., 22 782 F. Supp. 317 (E.D. La. 1992). 23 24 e. Fishermen. The leading modern discussion of the 25 rights of fishermen on lay agreements is Carbone v. Ursich, 26 209 F.2d 178 (9th Cir. 1953); see also Yarmouth Sea 27 Products Ltd. v. Scully, 131 F.3d 389 (4th Cir. 1997); 28 Miller Industries v. Caterpillar Tractor Co., 733 F.2d 813 29 (11th Cir. 1984). On the rights of a fishing crew to 30 monies received by their ship’s owner after a collision, 31 see Jensen v. Goresen, 881 P.2d 1119 (Alaska 1994); Reefer 32 Queen Co. v. Marine Const. & Design Co., 440 P.2d 448 33 (Wash. 1968); Taber v. Jenny, 23 Fed. Cas. 605 (D. Mass. 34 1856). 35 The Comment mentions the rights of fishermen to 36 recover restitution from the owner of their ship under 37 certain circumstances. For discussion of the general 38 principles, see Restatement Third, Restitution and Unjust 39 Enrichment § 47 Comment c. illus. 7. 40 41 f. Judge and jury. For discussion of different ways 42 to express the rule of this Section, and the practical 43 equivalence of them, see Barber Lines A/S v. M/V Donau 44 Maru, 764 F.2d 50 (1st Cir. 1985). The Comment’s 45 recommendation that the rule be regarded as a matter of

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

© 2013 by The American Law Institute Preliminary Draft – not approved © 2013 by The American Law Institute Preliminary Draft – not approved 1 § 8. Public nuisance resulting in pure economic loss 2 3 An actor whose wrongful conduct harms or obstructs 4 public property or a public resource is subject to 5 liability for resulting pure economic loss if the 6 claimant’s losses are distinct from those suffered by 7 the public at large. 8

9 Comment:

10 a. Scope. This Section discusses the liability in

11 tort of defendant who creates a public nuisance that

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

13 does not attempt to restate the entire law of public

14 nuisance. Many public nuisances cause physical harm, as

15 when a defendant negligently leaves an obstruction in a

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

17 defendant’s pollution causes damage to property that the

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

19 Section.

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

21 public officials may bring civil or criminal actions

22 against a defendant who creates a public nuisance. An

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

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

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

26 statute, and tends to be considerably broader than the

1 definition recognized by this Section as a basis for

2 private suit. Statutes also may provide citizens with

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

4 rights recognized by this Section.

6 b. General principles; rationale. A public nuisance

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

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

9 community. The wrongfulness may be established by showing

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

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

12 conduct was intentional and unprivileged, that it was

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

14 When a public nuisance is thus established, a private

15 plaintiff generally can sue only to redress a distinctive

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

17 of the affected community.

18 The propositions just stated are widely accepted, but

19 are phrased at a level of generality that has sometimes

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

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

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

23 occasionally caused unsound claims of public nuisance to be

1 brought on facts that are distant from the traditional

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

3 tort liability for economic loss caused by a public

4 nuisance has generally and appropriately been confined to

5 the more limited circumstances stated in the blackletter of

6 this Section and discussed in the Comments.

7 Private liability for creation of a public nuisance is

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

9 a plaintiff from recovering for economic loss caused by

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

11 background rule is justified in part because redress may

12 more appropriately be sought from the defendant by a better

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

14 defendant does harm to resources that have no private

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

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

17 by a public official will commonly lie to abate the

18 nuisance by injunction, but may not involve monetary

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

20 a public nuisance can nevertheless be large. Allowing

21 certain private parties a right of action can then provide

22 appropriate compensation for their losses and usefully

23 deter repetition of the wrong.

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

3 public nuisance harms would raise the characteristic

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

5 defendants would be subject to potentially massive and

6 unpredictable liabilities, and courts would be faced with

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

8 these concerns, courts recognize liability for a public

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

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

11 suffered by the community at large.

12 Which injuries are sufficiently distinctive to be

13 considered “special” is unavoidably a matter of judgment

14 rather than rule. Courts have reduced some of those

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

16 In cases arising outside those patterns, decisions about

17 recovery are best made by asking if liability would cause

18 the problems that the requirement is meant to address:

19 whether permitting the plaintiff’s claim would multiply the

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

21 and whether plaintiffs allowed to sue can be separated from

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

23 may bear less resemblance to conventional decisions about

1 tort liability than they do to decisions that courts make

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

3 plaintiff should be found to have standing to bring a

4 claim.

6 d. Harm to public resources. A public nuisance

7 involving harm to a natural resource most often arises from

8 contamination of waterways: a defendant spills toxic

9 chemicals into the sea, causing economic injury to those

10 who depend on it for commercial or recreational purposes.

11 Courts typically recognize fishermen as a class of

12 plaintiffs who suffer special injury in those

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

14 original matter it might be questioned whether the injuries

15 suffered by such fishermen are clearly distinct from the

16 injuries suffered by the many other parties who are

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

18 That conclusion is nevertheless repeated often, probably

19 because it provides a familiar and convenient answer to a

20 hard question.

21 The pattern just described is sometimes confused with

22 the practice of allowing fishermen who work on lay

23 agreements to recover when a defendant negligently damages

1 the ship they are using. Courts occasionally view these

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

3 rule” exempting that class from the usual rules governing

4 recovery for economic loss. The inference is faulty.

5 Fishermen recover in the two circumstances for distinct

6 reasons. The reasons for recognizing the claims of

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

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

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

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

11 and obviously affected by contamination of a waterway, and

12 can be separated with tolerable clarity from other classes

13 of affected plaintiffs. But claims by fishermen need not

14 be allowed when they do not satisfy the criteria just

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

16 other groups who may satisfy the criteria in any given

17 case.

19 Illustrations:

20 1. Carrier negligently spills toxic chemicals

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

1 recover for economic losses it suffers when its

2 customers, after hearing of the spill, cancel their

3 reservations. The court finds that Carrier created a

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

5 in kind to injuries shared by all businesses in the

6 area. Carrier is not liable to Hotel.

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

9 sued by fishermen and clam diggers for economic losses

10 that result from their inability to carry on their

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

12 court finds that these plaintiffs are directly

13 prevented from exercising their right to catch fish

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

15 fishermen and clam diggers have suffered injuries

16 distinct in kind from those suffered by individuals

17 and businesses in the area generally, and that

18 permitting these plaintiffs to recover will result in

19 liability that is reasonably proportionate to the

20 defendant’s wrong and not indeterminate in scale.

21 Carrier may be held liable to the fishermen and clam

22 diggers for economic losses caused by the public

23 nuisance it created.

2 e. Obstruction of public property. A public nuisance

3 that causes economic loss can also involve the obstruction

4 of public property or similar interference with access to

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

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

7 to plaintiffs who were accustomed to using the road for

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

9 access for their customers. Suits to recover for such

10 losses most often fail because the plaintiff cannot show a

11 sufficiently distinctive injury. The court typically

12 concludes that the hardships the plaintiff has suffered are

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

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

15 have been willing to recognize such claims in certain

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

17 wrongful conduct causes a substantial obstruction of access

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

19 plaintiff much more severely than others. Compare

20 Illustrations 3 and 4.

21 The requirement that the plaintiff show a “special

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

23 placeholder for the policies noted in Comment c. Courts

1 usually decline to impose liability for economic losses

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

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

4 disruption to nearby traffic reduced the number of visits

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

6 may be unobjectionable and useful if the plaintiff can show

7 an injury that is sufficiently distinct to allow principled

8 separation of the resulting claim from the claims that

9 others might bring.

11 Illustrations:

13 3. A building collapses in a city neighborhood.

14 The collapse is caused by the negligence of Builder in

15 performing renovations. The streets surrounding the

16 building are closed to pedestrian traffic for several

17 weeks. Nearby Delicatessen is obliged to close during

18 that period but suffers no physical damage.

19 Delicatessen sues Builder on a theory of public

20 nuisance to recover the profits it lost during the

21 closure. The court finds that Delicatessen’s injuries

22 are indistinguishable in kind from injuries suffered

1 by large numbers of other businesses in the area.

2 Builder is not liable in tort to Delicatessen.

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

5 dock where customers can arrive by boat. Logger

6 wrongfully floats logs down the river in a loose

7 manner that allows them to become stuck near

8 Restaurant and block access to its dock. Restaurant

9 sues Logger on a theory of public nuisance to recover

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

11 court finds that Logger created a public nuisance and

12 that Restaurant suffered special damage as a result.

13 Logger may be held liable to Restaurant in tort.

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

16 nuisance by injunction. The usual requirement that such a

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

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

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

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

21 can amount to inconvenience that cannot easily be reduced

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

23 injunctive relief without damages may be held to satisfy

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

2 plaintiff seeking to recover money, because the concerns in

3 the background of the inquiry are then different. An

4 injunction does not subject a defendant to indeterminate

5 liabilities or threaten the court with an avalanche of

6 lawsuits. The analysis still resembles inquiries into

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

8 the different stakes of the decision sensibly can inform

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

10 injuries stated by the residents would not be enough to

11 support liability if they were businesses seeking to

12 recover for lost profits. In other cases the showing

13 required to support abatement may be greater than the

14 showing needed to recover damages. See Restatement Second,

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

17 Illustration:

19 5. Company opens a granite quarry near a

20 residential area. Residents sue to enjoin Company’s

21 operations, claiming that Company has created a public

22 nuisance. On the basis of evidence supplied by

23 Residents, court finds that trucks Company uses to

1 serve the quarry violate size and weight limits

2 specified by ordinance for adjoining roads. The court

3 further finds that damage to the roads affects

4 Residents more than others in the community, because

5 Residents use the roads to come and go from their

6 homes. Residents have a sufficiently special injury

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

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

9 request.

11 g. Products. Tort suits seeking to recover for

12 public nuisance have occasionally been brought against the

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

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

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

16 claims for economic losses the plaintiffs have suffered on

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

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

19 care to those injured by smoking cigarettes. Liability on

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

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

22 nuisance is an inapt vehicle for addressing the conduct at

23 issue. Mass harms caused by dangerous products are better

1 addressed through the law of products liability, which has

2 been developed and refined with sensitivity to the various

3 policies at stake. Claims for reimbursement of expenses

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

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

6 law provide do not supply adequate remedies or deterrence,

7 the best response is to address the problems at issue

8 through legislation that can account for all the affected

9 interests.

10 As noted in Comment g, problems caused by dangerous

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

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

13 sometimes been defined in broad language that appears to

14 encompass anything injurious to public health. The

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

16 than those formulations suggest, and contemporary case law

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

18 rules of this Section reflect that modesty.

1 Reporter’s Note

2 a. Scope. Restatement Second, Torts § 821B-C defines 3 and discusses liability for creating a public nuisance. 4 Those Sections are more general than this one; they are not 5 confined to liability for economic loss, and they contain a 6 more extensive treatment of the standards for determining 7 whether an invasion of a public right is wrongful. The 8 interested reader is referred there for further discussion. 9 10 b. General principles; rationale. “Public nuisance” 11 originally referred to an invasion of rights held by the 12 Crown and punishable by criminal prosecution. The concept 13 gradually evolved to protect against invasions of rights 14 held by the public, such as blocking a road, with private 15 plaintiffs allowed to seek damages or abatement upon a 16 showing of “special injury.” On the development of the law 17 of public nuisance generally, see Restatement Second, Torts 18 § 821B; Abrams & Washington, The Misunderstood Law of 19 Public Nuisance: A Comparison with Private Nuisance Twenty 20 Years After Boomer, 54 Alb. L. Rev. 359 (1990); Prosser, 21 Private Action for Public Nuisance, 52 Va. L. R. 997 22 (1966). For a skeptical view of the tort’s development, 23 see Merrill, Is Public Nuisance a Tort? 4 J. Tort L. 1 24 (2011). 25 26 c. Special injury. For discussion of the meaning of 27 “special injury,” see 532 Madison Ave. Gourmet Foods, Inc. 28 v. Finlandia Center, Inc., 750 N.E.2d 1097 (N.Y. 2001); 29 Harbor Beach Surf Club, Inc. v. Water Taxi of Ft. 30 Lauderdale, Inc., 711 So.2d 1230 (Fla. App. 1998); In re 31 One Meridian Plaza Fire Litigation, 820 F. Supp. 1460 (E.D. 32 Pa. 1993); Antolini, Modernizing Public Nuisance: Solving 33 the Paradox of the Special Injury Rule, 28 Ecology L. Q. 34 755 (2001). 35 36 d. Harm to public resources. Illustrations 1 and 2 37 are based on Burgess v. The M/V Tamano, 370 F. Supp. 247 38 (D. Me. 1973), aff'd, 559 F.2d 1200 (1st Cir.1977); see 39 also Curd v. Mosaic Fertilizer, 39 So.3d 1216 (Fla. 2010); 40 Leo v. General Elec. Co., 538 N.Y.S.2d 844 (App. Div. 41 1989); State of La. ex rel. Guste v. M/V Testbank, 524 F. 42 Supp. 1170 (E.D. La. 1981); Potomac River Ass’n, Inc. v. 43 Lundeberg Maryland Seamanship School, Inc., 402 F. Supp. 44 344 (D. Md. 1975); Carson v. Hercules Powder Co., 402

1 S.W.2d 640 (Ark. 1966); Hampton v. North Carolina Pulp Co., 2 27 S.E.2d 538 (1943); Columbia River Fishermen's Protective 3 Union v. City of St. Helens, 87 P.2d 195 (Or. 1939). Union 4 Oil Co. v. Oppen, 501 F.2d 558 (9th Cir. 1974), allowed 5 recovery on similar facts, but did not rely on the law of 6 public nuisance. For additional cases allowing parties 7 other than fishermen to recover, see Hardy Salt v. Southern 8 Pac. Transp. Co., 501 F.2d 1156 (10th Cir.1974) (salt- 9 extraction firm); Shaughnessy v. PPG Industries, Inc., 795 10 F. Supp. 193 (W.D. La. 1992) (fishing guide). 11 12 e. Obstruction of public property. Illustration 3 is 13 based on 532 Madison Ave. Gourmet Foods, Inc. v. Finlandia 14 Center, Inc., supra; see also Nebraska Innkeepers, Inc. v. 15 Pittsburgh-Des Moines Corp., 345 N.W.2d 124 (Iowa 1984). 16 Illustration 4 is based on French v. Connecticut River 17 Lumber Co., 14 N.E. 113 (Mass. 1887); see also Savannah, F. 18 & W. Ry. Co. v. Gill, 45 S.E. 623 (Ga. 1903); In re One 19 Meridian Plaza Fire Litigation, supra; Stop & Shop 20 Companies, Inc. v. Fisher, 444 N.E.2d 368 (Mass. 1983). 21 22 f. Abatement. Illustration 5 is based on Hall v. 23 North Montgomery Materials, LLC, 39 So.3d 159, (Ala. App. 24 2008); see also Harbor Beach Surf Club, Inc. v. Water Taxi 25 of Ft. Lauderdale, Inc., supra.; Robinson v. Indianola Mun. 26 Separate School Dist., 467 So.2d 911 (Miss. 1985); cf. Akau 27 v. Olohana Corp., 652 P.2d 1130 (Haw. 1982). See 28 additional discussion not limited to cases of economic 29 loss, see Restatement Second, Torts § 821C. 30 31 g. Products. For representative cases denying 32 efforts to recover on a public-nuisance theory for economic 33 losses caused by defective products, see State v. Lead 34 Indus. Ass'n, Inc., 951 A.2d 428 (R.I. 2008); In re Lead 35 Paint Litigation, 924 A.2d 484 (N.J. 2007); City of Chicago 36 v. Beretta U.S.A. Corp., 821 N.E.2d 1099 (Ill. 2004) 37 (handguns); Ganim v. Smith and Wesson Corp., 780 A.2d 98 38 (Conn. 2001) (handguns); Allegheny General Hosp. v. Philip 39 Morris, Inc., 228 F.3d 429 (3rd Cir. 2000) (tobacco); 40 Association of Washington Public Hosp. Districts v. Philip 41 Morris, Inc., 241 F.3d 696 (9th Cir. 2001) (tobacco); 42 Detroit Board of Education v. Celotex Corp., 493 N.W.2d 513 43 (Mich. App. 1992). For discussion, see Schwartz & 44 Goldberg, The Law of Public Nuisance: Maintaining Rational 45 Boundaries on a Rational Tort, 45 Wash. L. J. 541 (2006);

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

© 2013 by The American Law Institute Preliminary Draft – not approved 1 CHAPTER 2 2 LIABILITY IN TORT FOR FRAUD 3 4 § 9. Fraud 5 6 An actor who knowingly makes a misrepresentation of 7 material fact is subject to liability for economic 8 loss caused by another’s justifiable reliance on it. 9 10 [A different sort of possibility, based on R2T: 11 12 (1) A misrepresentation is fraudulent if the maker 13 14 (a) knows or believes that the matter is not 15 as he represents it to be, 16 17 (b) does not have the confidence in the 18 accuracy of his representation that he states or 19 implies, or 20 21 (c) knows that he does not have the basis 22 for his representation that he states or implies. 23 24 (2) One who fraudulently makes a misrepresentation of 25 fact, opinion, intention or law for the purpose of 26 inducing another to act or to refrain from action in 27 reliance upon it, is subject to liability to the other 28 in deceit for pecuniary loss caused to him by his 29 justifiable reliance upon the misrepresentation.] 30

1 Comment: 2 3 a. Scope. This Section states the rules of liability 4 for the tort of fraud, or deceit. The Comments below 5 discuss the principal elements shown in the black-letter. 6 Later Sections discuss variations on the basic tort: 7 liability for nondisclosure (or tacit fraud) (§ 10), 8 liability for false statements of opinion (§ 11), and 9 liability for promises that the maker does not intend to 10 keep (§ 12). Damages are treated in § 13. 11 The word “fraud” has two general meanings in law. It 12 can refer simply to a knowing misrepresentation, without 13 particular reference to the law of tort. Indeed, a 14 fraudulent statement has consequences under many other 15 different branches of law—most notably the law of contract, 16 the law of restitution, and criminal law. Meanwhile 17 “fraud” also is the name of a particular cause of action in 18 tort: a claim that allows a plaintiff to recover for damage 19 caused by reliance on a defendant’s knowing 20 misrepresentation. This distinction is worth noting 21 because the best legal response to the act of fraud is not 22 necessarily a claim for fraud. Fraud most often does harm 23 by causing a plaintiff to enter into a transaction and 24 suffer losses as a result. The law of contract and the law 25 of restitution supply remedies in such a case that may be 26 superior to those provided in tort, and that have 27 traditionally been a plaintiff’s first line of response. 28 Thus most of the Illustrations in this Section that result 29 in liability might also have been pressed successfully as 30 contract claims. The plaintiff who pursues a tort claim 31 for fraud typically means to avoid some limitation imposed

1 by another body of law, such as restrictions on the 2 recovery of punitive damages for breach of contract. 3 With that said, the availability of remedies for fraud 4 in contract or restitution does not limit a plaintiff’s 5 ability to recover in tort. As discussed in § 2, the 6 economic-loss rule generally does foreclose liability in 7 tort for negligence in the negotiation or performance of a 8 contract, but it does not impair the claims of fraud 9 discussed in this Chapter. Recognizing claims of fraud 10 does not interfere with the process of settling obligations 11 by contract in an orderly and final manner; on the 12 contrary, liability in tort for fraud helps to protect the 13 integrity of the contractual process and sometimes 14 furnishes useful remedies that the law of contract does not 15 as readily provide. Parties to a contract do not typically 16 treat the chance that they are lying to each other as an 17 ordinary subject for their contract to allocate; they 18 regard honesty as an assumed backdrop to their 19 negotiations. 20 For a brief comparison of the remedies available for 21 fraud under the law of tort, contract, and restitution, see 22 Comment j. 23 24 b. Types of misrepresentations. This Section 25 recognizes liability for misrepresentations of fact. The 26 simplest and most common examples involve straightforward 27 false statements, as when the seller of a house falsely 28 states that the roof does not leak. But the coverage of 29 this Section can also extend to some situations outside 30 that paradigm. First, a misrepresentation need not take 31 the form of a statement. It can arise from conduct rather 32 than words, as when the seller of a car turns back its

1 odometer. Second, a misrepresentation can be implied 2 rather than explicit. A statement of opinion may falsely 3 imply, for example, that its holder knows of no facts to 4 the contrary; liability then attaches to that false implied 5 statement, not to the opinion or prediction in itself. 6 Doubtful cases are best resolved by asking whether the 7 defendant’s claims included or implied any assertions that 8 are capable of being proven false. See Illus. 1. 9 (Liability for false statements of opinion as such, apart 10 from any facts they might imply, is subject to the rules 11 stated in § X.) 12 Liability also may be found under this Section for 13 ambiguous statements and half-truths. Thus a speaker may 14 make a statement and know that it is open to two 15 interpretations, one true and one false. The statement is 16 actionable if the speaker intends that it be understood in 17 its false sense, or is indifferent to which way the 18 statement is taken; a speaker who knowingly makes an 19 ambiguous statement is obliged to take reasonable steps to 20 ensure that the statement is understood accurately. See 21 Illus. 2. Likewise, if a speaker believes a statement is 22 true as far as it goes but knows that it is misleading 23 because it is incomplete or not duly qualified, liability 24 may be found under this Section. See Illus. 3. These 25 specific points are merely applications of the same general 26 principle: a defendant who knowingly misleads another may 27 be held liable for fraud. 28 29 Illustrations: 30 31 1. Buyer of a building asks Seller what material 32 lies behind the structure’s interior walls. Seller

1 replies that it’s “not a problem.” Upon later 2 discovering asbestos behind the walls, Buyer sues 3 Seller for fraud. Seller admits that he was aware of 4 the asbestos, and knew that it might have affected 5 Seller’s decision to buy the property; but he claims 6 that his statement that the material was “not a 7 problem” was simply an opinion and so was not 8 actionable. The court finds that Seller’s statement 9 of opinion falsely implied knowledge of facts to 10 support it (and no knowledge inconsistent with it). 11 Seller may be held liable for fraud. 12 13 2. Seller promises to deliver “new” specialty 14 batteries to Buyer. Buyer discovers that the 15 batteries already had been used, and sues Seller for 16 fraud. Buyer claims that Seller’s description of the 17 batteries as “new” meant that the batteries had never 18 been used before. Seller contends that “new” meant 19 the batteries are the most recent model of their kind, 20 not part of an earlier series. Court finds that the 21 word “new” was ambiguous, and that Seller knew Buyer 22 was relying on an interpretation that Seller did not 23 share. Seller’s failure to dispel the ambiguity 24 subjects him to liability for fraud. 25 26 3. Retailer agrees to sell specialty cars made 27 by Manufacturer. Retailer worries that its rights 28 will not be exclusive; in response, Manufacturer 29 represents that it has no intention of marketing the 30 same specialty car through Rival, another dealership 31 nearby. Two months later, Manufacturer opens a new 32 dealership down the street from Retailer to sell the

1 same specialty car. Manufacturer admits that it had 2 long intended to open the new dealership and 3 deliberately hid its plans from Retailer, but points 4 out that its statement to Retailer was technically 5 accurate: it never did intend to market the specialty 6 car through Rival. The court finds that 7 Manufacturer’s representation, while not false on its 8 face, was misleading, because it reasonably caused 9 Retailer to believe that Manufacturer intended to give 10 Retailer exclusive rights. Manufacturer may be held 11 liable for fraud. 12 13 c. Scienter. To prevail on a claim of fraud, a 14 plaintiff must prove that the defendant made a 15 misrepresentation knowingly; in other words, the plaintiff 16 must prove scienter. This requirement is the most 17 important difference between cases of fraud and cases of 18 negligent misrepresentation or breach of contract. The 19 legal tests for negligence or breach of contract are both 20 objective in character; they do not depend on whether a 21 defendant consciously committed a wrong. Fraud involves a 22 subjective inquiry. The defendant must be shown to have 23 had a culpable state of mind. Thus a party who makes a 24 false statement carelessly, but in good faith, is not 25 liable for fraud, but may be liable for negligent 26 misrepresentation under the rule of § 5. A party who 27 promises an act but then decides not to carry it out may be 28 liable for breach of contract or on a theory of promissory 29 estoppel, but is not liable for fraud unless the statement 30 of intention was false when made. See § 12. In short, the 31 law of fraud is concerned with lies, not mistakes or broken 32 promises.

1 A statement often includes several components to which 2 the rule of this Section, and the requirement of scienter, 3 might apply: the literal truth of the matter stated (the 4 number of square feet in a house, the financial condition 5 of a company, and so on), but also implied claims about the 6 speaker’s confidence in the statement and basis for 7 asserting it. These latter points are representations in 8 their own right, even if they are not explicit. They can 9 be true or false, just as the literal substance of the 10 claim can be true or false. Thus a speaker may present a 11 mere belief as if it were knowledge, or offer a statement 12 as certain despite having doubts about it, or imply that a 13 claim is founded on personal observation when in fact it is 14 based on hearsay. In all such cases the speaker may think 15 the substance of the claim is true, yet still commit a 16 knowing misrepresentation with respect to the basis for the 17 claim or the confidence it warrants. The speaker in all 18 such cases has the necessary state of mind to support 19 liability for fraud if the other elements of the tort are 20 satisfied. See Illustration 4. 21 It is sometimes said that a statement is fraudulent if 22 its maker believes it to be false or is reckless as to its 23 truth or falsity. This last possibility must be treated 24 with care because “reckless” has a range of meanings in 25 law. The recklessness sufficient to support a claim of 26 fraud occurs when a speaker acts in conscious disregard of 27 a risk that a statement is false, as by offering it without 28 qualification while knowing that it may be untrue. Such 29 cases can be described as matters of recklessness if the 30 word is found convenient, but they also can be viewed as 31 straightforward cases of liability under the language of 32 this Section. They involve knowingly false

1 representations, perhaps implied, about the speaker’s 2 confidence in the statement or basis for making it. In 3 other legal settings recklessness may be defined to 4 resemble gross negligence, but a statement reckless in that 5 sense does not subject its maker to liability under this 6 Chapter. However negligent it may be, an utterance is not 7 fraudulent if made in the belief that it is true and that 8 it accurately reflects whatever confidence and basis for 9 belief the speaker of it may possess. Liability for fraud 10 requires a conscious discrepancy between some feature of a 11 defendant’s representation and the truth. 12 13 Illustrations: 14 15 4. Buyer negotiates a purchase of property from 16 Seller. Seller firmly states that the property 17 consists of 130 acres. Seller believes this statement 18 of the acreage is more likely true than false, but 19 knows that he has not conducted a sufficient 20 investigation of the point to support the sense of 21 certainty that he implies. Buyer completes the 22 purchase of the property in reliance on Seller’s 23 claims, then discovers that the property consists of 24 90 acres. Seller is liable to Buyer for fraud. 25 26 5. Entrepreneur invites Investor to buy stock in 27 his company. In the course of their negotiations, 28 Entrepreneur grossly understates the company’s 29 liabilities. Investor purchases stock in reliance on 30 Entrepreneur’s false statements and suffers losses as 31 a result. The court finds that Entrepreneur, while 32 negligent, believed that his statements were true and

1 well-founded. Investor has no tort claim for fraud 2 against Entrepreneur. Nor does Investor have a claim 3 for negligent misrepresentation; the economic-loss 4 rule precludes it, because Investor’s complaint 5 involves Entrepreneur’s negligence in the negotiation 6 or performance of a contract. Investor may, however, 7 have a good claim against Entrepreneur for breach of 8 warranty, or for rescission, restitution, and 9 incidental damages. 10 11 Scienter is often difficult to prove directly in a 12 suit for fraud. Mere evidence of a false or negligent 13 statement, without more, generally is not enough to support 14 liability; from either of those showings, no presumption 15 arises that the speaker knew the statement was false when 16 made. Successful claims of fraud typically are supported, 17 rather, by evidence that the defendant knew or must have 18 known the truth and made a statement inconsistent with it. 19 Compare Illustrations 6 and 7. 20 Whether the defendant had the necessary state of mind 21 is ordinarily a question for the jury. Like any such 22 question, however, it may be decided by the court if it 23 reasonably can be resolved in only one way. 24 25 Illustrations: 26 27 6. Buyer negotiates the purchase of a hotel from 28 Seller. Seller provides documents to Buyer showing 29 that the hotel has high occupancy rates and provides 30 consistent stated revenues. Buyer completes the 31 purchase of the hotel in reliance on Seller’s 32 documents. Buyer then examines the hotel’s internal

1 records, which were personally maintained by Seller. 2 Buyer discovers that the hotel’s actual occupancy 3 rates and revenues were half those claimed by Seller 4 during the period in question. From this discrepancy 5 between Seller’s records and representations, a jury 6 may permissibly infer that Seller made knowing 7 misrepresentations to Buyer. 8 9 7. Buyer negotiates a purchase of land from 10 Seller. Buyer negotiates solely with Broker who 11 serves as Seller’s agent. Broker provides a listing 12 sheet and brochure stating that the land consists of 13 “20 acres, more or less.” Buyer completes the 14 purchase of the hotel in reliance on these statements. 15 Buyer then discovers that the land consists of 15 16 acres. Buyer sues Seller. Broker testifies at trial 17 that Seller provided the statement of acreage that was 18 passed on to Buyer. Seller is elderly and infirm, and 19 is not called to testify; nor is any other evidence 20 provided to establish Seller’s relationship to the 21 property or actual knowledge of it. Buyer’s tort 22 claim for fraud fails as a matter of law because Buyer 23 lacks evidence of scienter. Buyer may have a good 24 claim against Seller for breach of warranty or for 25 rescission, restitution, and incidental damages. 26 27 d. Materiality. Liability under this Section 28 attaches only to misrepresentations that are material. A 29 misrepresentation is material if a reasonable person would 30 give weight to it in deciding whether to enter into the 31 relevant transaction, or if the defendant knew that the 32 plaintiff would give it weight (whether reasonably or not).

1 The question, in effect, is whether the defendant knew or 2 should have known that the misrepresentation would matter 3 to the plaintiff. If not, the plaintiff cannot collect 4 damages in tort, though any resulting contract may still be 5 voidable upon a showing that the plaintiff relied on the 6 misrepresentation. See Restatement Second, Contracts § 7 164. This element of the tort is most likely to be 8 important when one party to a negotiation makes false 9 statements to the other about a matter collateral to the 10 immediate subject of the bargain. See Illustration 8. It 11 also excludes liability for statements amounting to 12 “puffery”—that is, a seller’s broad and predictably 13 exaggerated statements about the quality of an item, as 14 distinct from particular claims of fact (claims based on 15 such facts may be dismissed, in the alternative, for want 16 of justifiable reliance). See Illustration 9. 17 18 Illustrations: 19 20 8. Contractor on a building project in an 21 unincorporated area approaches neighboring Town to 22 negotiate the purchase of a water supply. Town tells 23 Developer that it lacks the capacity to provide all 24 the water that Developer needs; Town agrees to meet 25 Developer’s requirements only if Developer decreases 26 the size of the project. Developer does so. 27 Developer later learns that Town spoke falsely in the 28 negotiations: Town did have the capacity to provide 29 the water that Developer wanted, but preferred not to 30 allocate it to him. Developer sues Town for fraud. 31 Developer’s claim fails because Town’s 32 misrepresentation was not material: a reasonable

1 person would not be expected to assign weight to 2 Town’s particular reasons for its demands, and Town 3 had no reason to believe Contractor regarded those 4 reasons as important to his consent. 5 6 9. Buyer purchases a car from Seller. Seller 7 tells Buyer during negotiations that the car is “top 8 of the line” and provides an “outstanding ride.” 9 Buyer later determines that the car is mediocre and 10 provides a poor ride. Buyer sues Seller for fraud. 11 Buyer’s claim fails because the court finds that 12 Seller’s claims were “puffery”; even if they were 13 misrepresentations, they cannot be considered 14 material. In the alternative, Buyer’s claim may fail 15 because his reliance on Seller’s words was 16 unjustifiable. 17 18 10. Father approaches School about the 19 possibility of enrolling his daughter there. Officer 20 at School falsely tells Father that some of daughter’s 21 friends have already enrolled; Officer knows that 22 Father would consider this a significant fact in his 23 deliberations. Father enrolls his daughter at School, 24 then discovers that in fact her friends did not 25 enroll. Officer’s misrepresentation was material, and 26 he may be held liable for fraud. 27 28 e. Actual reliance. A plaintiff can recover only for 29 damage caused by actual reliance on a defendant’s 30 misrepresentation. Ordinarily this element is satisfied by 31 a showing that the plaintiff gave weight to the defendant’s 32 misrepresentation in making a decision that resulted in

1 losses. It need not be shown that the plaintiff would 2 necessarily have made a different decision if the defendant 3 had spoken truthfully. The plaintiff may have been 4 influenced by several sources, or by multiple statements— 5 some true, some false—made by the same party. It is enough 6 if the defendant’s misrepresentation was a substantial 7 factor influencing the plaintiff’s decision. On the other 8 hand, there can be no recovery if the plaintiff did not 9 believe the defendant’s misrepresentation, or was not aware 10 of it until after the transaction was complete, or if the 11 plaintiff would have been legally obliged to follow the 12 same course regardless of what the defendant said. In 13 those cases the claim fails because the plaintiff did not 14 rely on what the defendant said. 15 16 Illustrations: 17 18 11. Buyer makes investment in Firm. After the 19 purchase, Buyer discovers that Firm’s prospectus 20 contained misleading information. Buyer sues Firm for 21 fraud. Court finds that Buyer did not read Firm’s 22 prospectus until after making the investment. Buyer’s 23 claim fails for want of reliance. 24 25 12. Buyer negotiates the purchase of an antique 26 car from Seller. The car is advertised as having 500 27 miles of wear. Buyer does not believe the claimed 28 mileage is accurate but wishes it were. Seller says 29 that if the claimed mileage turns out to be wrong, he 30 will allow Buyer to return the car and will give Buyer 31 his money back. Buyer purchases the car, then 32 determines that the claimed mileage was wrong. Buyer

1 sues Seller for fraud. Buyer’s claim fails because he 2 did not rely on Seller’s claims about mileage. Buyer 3 doubted the claims were true, and was compensated for 4 the doubts by Seller’s promise to undo the transaction 5 if the claims were false. That promise is 6 enforceable, but Buyer has no claim in tort. 7 8 13. Firm hires Worker to sell cars. Firm makes 9 several representations that cause Worker to accept 10 the job: a promised salary, attractive benefits, and 11 an assurance that Worker will be paid a commission of 12 5% on the gross receipts from all sales he makes. 13 Worker later learns that the last representation was 14 fraudulent; in fact Firm deducts 15% from the receipts 15 before calculating commissions. Worker sues Firm for 16 fraud. It is not clear whether Worker would have 17 accepted the job with Firm if the rules about his 18 commissions had been truthfully stated. The court 19 nevertheless finds that Firm’s false promise was a 20 substantial factor in Worker’s decision. Firm is 21 liable to Worker for fraud. 22 23 The requirement of actual reliance excludes liability 24 at common law for “fraud on the market”—that is, claims 25 that a defendant’s misrepresentations pushed up the price 26 of a stock, causing the plaintiff to pay too much for it. 27 To recover under this Section, plaintiffs must show that 28 they themselves relied on what the defendant said, not that 29 they were injured by the reliance of others. The result 30 may be different in claims brought under federal statutes 31 regulating securities. See Basic, Inc. v. Levinson, 485 32 U.S. 224 (1988).

1 Some special problems of causation are posed by 2 “holder” claims, in which a plaintiff is persuaded not to 3 sell shares of stock by the defendant’s fraudulent 4 statements. There is no reason in principle why a 5 plaintiff may not recover on those facts; no immunity 6 arises from the mere fact that a defendant’s lies moved the 7 plaintiff to inaction rather than action. The problems are 8 matters of proof. A plaintiff may claim to have thought 9 about selling, to have told nobody, but to have had a 10 change of mind after reading something the defendant wrote; 11 the defendant may then be peculiarly unable to argue the 12 point, because the facts consist entirely of mental states 13 in the plaintiff that produced no action and to which 14 nobody else was privy. (The problem is similar if the 15 plaintiff claims to have thought about buying stock but to 16 have decided against it.) To protect against false claims 17 in these circumstances, plaintiffs who base their claims on 18 transactions not made must provide more than a recounted 19 train of thought as proof of reliance. Typically there 20 must be evidence of direct efforts by the defendant to 21 dissuade the plaintiff from entering into the transaction, 22 or evidence of action that corroborates the account the 23 plaintiff gives of the decision—contemporaneous writings or 24 conversations, for example, that show the specific terms of 25 a sale the plaintiff would have made if not for the 26 defendant’s fraud. 27 28 f. Justifiable reliance. Principles of comparative 29 negligence do not apply to a claim of fraud, but liability 30 does require a showing that the plaintiff’s reliance on 31 what the defendant said was “justifiable.” Justifiable 32 reliance is a less demanding showing than the “reasonable”

1 reliance discussed in § 5. Reasonable reliance is a type 2 of freedom from negligence. Justifiable reliance amounts 3 to freedom from recklessness: plaintiffs who close their 4 eyes to a known or obvious danger that a statement is 5 fraudulent cannot recover losses they suffer from reliance 6 on it. Cf. Restatement Third, Torts, Liability for 7 Physical and Emotional Harm § 2. The rules also differ 8 because reasonable reliance is an objective standard; the 9 plaintiff’s conduct is measured against community standards 10 of behavior. Justifiable reliance has a subjective 11 character. It is measured by reference to the plaintiff’s 12 capabilities and knowledge. A plaintiff’s sophistication 13 may affect a court’s judgments about what dangers were 14 fairly considered obvious. Compare Illustrations 15 and 15 16. 16 Whether a plaintiff’s reliance was justifiable is 17 ordinarily a question for the trier of fact, but may be 18 decided as a matter of law when reasonable minds could 19 reach only one conclusion. Compare Illustrations 14 and 20 15. Unlike the requirement of reasonable reliance found in 21 § 5, the justifiable reliance required by this Section does 22 not call for a comparison of the fault attributable to the 23 plaintiff and defendant. It is a threshold requirement; if 24 it is satisfied, incremental doubts about the plaintiff’s 25 degree of care will not reduce the resulting recovery from 26 the intentional tortfeasor. 27 28 Illustrations: 29 30 14. Buyer purchases a house from Seller. During 31 their negotiations, Seller asserts that he “never had 32 water problems in the house.” Buyer orders an

1 inspection prior to closing. The inspector informs 2 Buyer that there is evidence of recent water damage in 3 the basement. Buyer nevertheless goes through with 4 the purchase. Buyer then discovers that the basement 5 leaks. Buyer sues Seller for fraud. Buyer’s claim 6 fails as a matter of law because his reliance on 7 Seller’s statements was not justifiable; in view of 8 the findings in the inspection report, it was reckless 9 of Buyer to rely on Seller’s assertions without 10 further investigation. 11 12 15. Insurer sells life-insurance policy to 13 Consumer. Insurer misrepresents the effect of the 14 policy, falsely assuring Consumer that the policy can 15 serve as a vehicle for retirement savings. Consumer 16 later discovers that the policy cannot function as 17 described. Consumer sues Insurer for fraud. Insurer 18 claims that Consumer’s reliance on its statements was 19 unjustifiable because a reading of the written policy 20 would have made its limits clear to her. Consumer did 21 not read that part of the policy. The trier of fact 22 may reasonably conclude that Consumer’s reliance was 23 nevertheless justifiable. 24 25 16. Investor and Director of Company both sign a 26 guaranty in which each agrees to be personally liable 27 for repayment of Bank’s loan to Company if Company 28 defaults. The agreement states prominently that Bank 29 can collect the entire amount from either guarantor. 30 Company defaults. Bank seeks recovery only from 31 Investor. Investor sues Bank for fraud. Investor 32 claims that during negotiations over the loan, an

1 officer of Bank said that Investor would not be held 2 responsible for more than half of it in the event of 3 default. The court finds that Investor was a 4 sophisticated and experienced party represented by 5 counsel, that the liability of Investor for the full 6 amount was a carefully negotiated term of the 7 agreement, and that the guaranty contract forbade 8 Bank’s officer to alter its terms. Investor’s claim 9 fails as a matter of law because his reliance on the 10 oral assurances of Bank’s officer was unjustifiable. 11 12 g. No-reliance clauses. Sometimes a plaintiff claims 13 to have been induced to sign a contract by false statements 14 that the defendant made during their negotiations. The 15 parol-evidence rule is a doctrine of contract law and is 16 not, in itself, an impediment to a tort claim based on such 17 facts. The contract itself, however, may contain language 18 that is inconsistent with the plaintiff’s theory of 19 recovery. It might include an integration clause stating 20 that the written contract is the exclusive statement of the 21 parties’ entire agreement, or it might contain a disclaimer 22 of reliance on representations made outside the four 23 corners of the document. Language of either type may 24 undermine a plaintiff’s claim to have relied on fraudulent 25 statements made before the contract was signed. 26 Disclaimers serve a useful commercial purpose, not by 27 shielding parties who lie but by protecting both parties 28 from costly litigation about whether they lied. 29 Disclaimers also may allow parties to usefully allocate 30 responsibility for determining the truth about the subject 31 of a transaction. But disclaimers also can serve as traps 32 for parties who are content to treat a written contract as

1 final but do not mean to assume the risk that the other 2 side has committed fraud. The effect of a “no-reliance” 3 clause on a tort claim for fraud thus depends on two 4 considerations: the specificity of its wording and the 5 sophistication of the parties. 6 First, an ordinary integration clause, written in 7 general language, will not be read to foreclose a claim 8 that the plaintiff’s consent to the contract was procured 9 by fraud. Nor is such a claim barred by a broad statement 10 in the contract that neither party is relying on statements 11 made by the other outside the contract. More specific 12 disclaimers may be enforced, however, as when the plaintiff 13 signs a writing that denies reliance on particular 14 statements or on assurances the defendant has made about a 15 given topic. Second, a disclaimer of reliance on a 16 defendant’s statements will ordinarily be enforced only 17 against a sophisticated party. Sophistication, for these 18 purposes, typically means that the plaintiff was 19 represented by counsel and was a commercial actor rather 20 than a consumer. The two considerations just noted may 21 bear on one another: the more sophisticated the plaintiff, 22 the less specific the disclaimer need be to foreclose a 23 claim. When close questions arise about whether a contract 24 was specific enough, or a plaintiff sophisticated enough, 25 to justify enforcement of a no-reliance clause, they may be 26 resolved by reference to the policies that lie behind the 27 requirements. Their purpose is generally to limit 28 enforcement to cases in which the disclaimer was a 29 deliberate choice made for considered reasons, not a piece 30 of boilerplate that the plaintiff would be surprised to 31 find was a waiver of the right to honesty from the other 32 party to the agreement.

1 Whether to give effect to a disclaimer of reliance is 2 a question for the court unless it depends on factual 3 disputes on which reasonable minds could differ. 4 5 Illustrations: 6 7 17. Commercial Purchaser of real estate makes a 8 contract to buy a building from Seller. Purchaser 9 later sues Seller for fraud. Purchaser claims that 10 during their negotiations, Seller made false 11 statements about the expenses of operating the 12 building. The contract between the parties states, 13 “Seller makes no representations as to the expenses, 14 operation or any other matter related to the premises, 15 except as herein specifically set forth. Purchaser 16 acknowledges that no such representations have been 17 made or are relied upon.” Purchaser’s tort claim for 18 fraud fails, because in view of the contractual 19 language he cannot show that he justifiably relied on 20 any statements the Seller might have made about the 21 expenses of operating the building. 22 23 18. Homeowner buys a security system from 24 Company. Homeowner relies on assurances offered 25 orally by Company that the system will operate even 26 after a general power failure affecting the house. 27 Homeowner later discovers that Company’s assurance was 28 fraudulent, and incurs expenses to have the system 29 replaced by another firm. The contract between 30 Homeowner and Company did not mention the system’s 31 ability to withstand a power failure, and the contract 32 contained an integration clause stating that the

1 written agreement was a complete expression of the 2 parties’ understandings. Homeowner’s tort claim for 3 fraud nevertheless survives because he is not a 4 sophisticated party, and because the contract did not 5 specifically disclaim reliance on Agent’s assurances. 6 7 h. Scope of liability. A plaintiff can recover only 8 for the types of losses that might reasonably have been 9 expected to result from the defendant’s fraud. This 10 generally means that the fraud must have increased the risk 11 of the kind of harm that the plaintiff suffered. Thus no 12 liability results when a defendant’s lie causes the 13 plaintiff to make an investment that fails for reasons 14 unrelated to what the defendant said. On the other hand, a 15 lie that causes a small increase in the likelihood of the 16 loss that the plaintiff suffers is sufficient to support 17 liability. 18 19 Illustrations: 20 21 19. Investor buys shares in Company. Investor 22 is persuaded to make the purchase by Director’s false 23 assurance that he will invest in Company to a 24 comparable extent. Six months later, Company fails 25 due to a decline in the demand for its products. 26 Company might have failed even if Director had 27 invested as heavily as he promised. Investor sought 28 Director’s assurances, however, because the commitment 29 they reflected would have reduced the risk that 30 Company would fail in the way that it did. Investor’s 31 losses are within Director’s scope of liability for 32 fraud.

1 2 20. Investor buys shares in Company. Investor 3 is persuaded to make the purchase by Director’s false 4 assurance that Company is in compliance with various 5 state regulations. Six months later, Company fails 6 due to a decline in the demand for its products. 7 Company’s failure to comply with the regulations 8 raised the risk that Company would be subjected to 9 various civil penalties, but the failure to comply did 10 not raise the risk that Company would fail in the way 11 that it did. The losses that Investor suffered as a 12 result of Company’s failure are outside Director’s 13 scope of liability for fraud. 14 15 Liability under this Section extends to damage 16 suffered by those whose reliance the defendant intended to 17 induce, or by others the defendant had reason to expect 18 would rely on the statements at issue. The plaintiff need 19 not have dealt directly with the defendant; it is enough if 20 the defendant had reason to expect that the plaintiff would 21 later receive the statement and rely on it. Nor need the 22 defendant know the specific identities of those who were 23 likely to rely; awareness of a class of potential victims 24 is sufficient. If the defendant’s statement is embedded in 25 a commercial document—a product label, for example, or a 26 security—then reliance on it by any who deal with the 27 document in the ordinary course of business is regarded as 28 expectable. The same general principles apply to the types 29 of decisions affected by the defendant’s statements: 30 liability extends to transactions of the kind the defendant 31 meant to influence by the fraudulent statement, or had 32 reason to believe would be influenced by it. If a statute

1 requires a defendant to provide information, a defendant 2 who speaks falsely may be held liable for losses suffered 3 by those people, and in those types of transactions, that 4 the statute was meant to protect. 5 The principles just stated, however, require more than 6 just foreseeability of a risk that the plaintiff might 7 someday rely on what the defendant says. They require, 8 rather, that the defendant have reason to consider that 9 reliance likely, even if the plaintiff’s identity is 10 indistinct. It might seem peculiar to place such limits on 11 the liability of a defendant who has, by hypothesis, acted 12 with a culpable state of mind. But the limits reflect a 13 reasonable solicitude for the potential defendant who 14 commits no fraud but speaks often, or who employs others 15 who speak often. Even when speaking truthfully, such a 16 party must prepare for (and insure against) the risk of 17 litigation, with its attendant expenses, risk of error, and 18 other hardships. The limits explained here help such 19 defendants measure their exposure in advance and act 20 accordingly. 21 22 23 Illustrations: 24 25 21. Seller is considering a business arrangement 26 with Buyer, and asks Bank that holds Buyer’s account 27 for an opinion of Buyer’s financial stability. Bank 28 replies that Buyer is “sound.” Eighteen months later, 29 Seller enters into transaction with Buyer. Buyer goes 30 bankrupt soon thereafter. Seller sues Bank, claiming 31 its assurance of Buyer’s soundness was fraudulent. 32 The court finds that Buyer’s business was highly

1 volatile, that the soundness of an enterprise in its 2 field will often change over the course of a few 3 months, and that Bank could not reasonably have 4 expected a statement it made to become the basis of 5 reliance by Seller over a year later. Seller’s claim 6 against Bank fails as a matter of law. 7 8 22. Accountant produces audit report for Company 9 1. Company 1 then merges with Company 2; the 10 shareholders of both companies receive Accountant’s 11 report. A few months later, Investor decides to buy 12 bonds that had been issued by Company 2 before the 13 merger. In deciding to buy the bonds, Investor relies 14 in part on Accountant’s audit of Company 1. The 15 report satisfies Investor that, with the companies now 16 merged, the bonds issued by Company 2 are safe. The 17 merged company soon fails and the bonds become 18 worthless. Investor sues Accountant in tort for 19 fraud. The court finds that Accountant prepared its 20 audit of Company 1 to satisfy shareholders who would 21 be approving the merger, and that Accountant had no 22 reason to expect reliance on the report by someone 23 buying Company 2’s bonds. Investor’s claim fails as a 24 matter of law. 25 26 23. Buyer negotiates to purchase Rancher’s 27 cattle. Rancher gives Buyer written assurances that 28 the cattle are healthy; in fact Rancher knows that the 29 cattle are diseased. Buyer takes Rancher’s assurances 30 to Bank to obtain financing for the purchase. Bank 31 provides it. Buyer acquires the cattle, they all die 32 from their preexisting disease, and Buyer goes

1 bankrupt. Bank sues Rancher for fraud. Court finds 2 that Rancher knew Buyer would seek financing from a 3 bank, even if Rancher did not know which one, and that 4 Rancher knew Buyer was likely to provide the bank with 5 Rancher’s assurances that the cattle were healthy. 6 Rancher may be held liable to Bank. 7 8 i. Standard of proof. The elements of a tort claim 9 ordinarily must be proven by a preponderance of the 10 evidence, but courts have frequently required clear and 11 convincing evidence to establish liability for fraud. They 12 typically reason that a claim of fraud is easy to allege 13 and often has damaging side effects; it may injure the 14 reputation of the defendant and entitle the plaintiff to 15 seek punitive damages. Those points may be accurate, but 16 in themselves they do not fully explain the higher standard 17 of proof; they are true of many other intentional torts as 18 well. The special treatment of fraud is better understood 19 as a protection against encroachment into the law of 20 contract by the law of tort. An allegation of fraud often 21 arises from an exchange between the parties that the 22 plaintiff believes was tainted by deceit. If successful, 23 the claim may allow the plaintiff to obtain more aggressive 24 remedies in tort than contract law would provide. The law 25 generally prefers that disputed transactions be resolved by 26 the law of contract, and so makes escape from that body of 27 law a bit more demanding than the assertion of a claim that 28 has no other legal home. 29 A majority of courts apply the more demanding standard 30 of proof to all elements of a claim for fraud. A minority 31 apply it to scienter and perhaps to certain other elements 32 of the tort, but not to damages. The Institute favors the

1 latter approach. The heightened standard of proof should 2 be applied only as far as the rationale for it will carry. 3 The rationale plausibly applies to an assertion that the 4 defendant made a false statement knowingly, because that 5 element of the tort—scienter—distinguishes a fraud claim 6 from a claim of negligence that would be extinguished by a 7 contract between the parties. The need for a heightened 8 standard in judging claims of reliance is far less clear; 9 indeed, once a defendant’s culpable state of mind has been 10 proven, it is difficult to see why the plaintiff should be 11 put to a harder task in proving causation of any sort than 12 would be necessary if the defendant were merely negligent. 13 Applying a more demanding standard to the proof of damages 14 is still harder to support. The best justification is 15 probably that a jury might be confused by different 16 standards of proof for different elements of a fraud claim, 17 but juries are assigned more demanding tasks often enough. 18 Because these issues have yet received only occasional 19 judicial attention, the Institute leaves to developing case 20 law the details of when clear and convincing proof ought to 21 be used. It recommends, however, that the heightened 22 standard be justified by good and specific reasons whenever 23 it is employed. 24 25 j. Relation to restitutionary and contract remedies. 26 If a defendant’s fraudulent statements induce a plaintiff 27 to enter into a contract, the resulting facts may be 28 addressed simultaneously by the law of tort, the law of 29 contract, and the law of restitution. For clarity’s sake, 30 it may be useful to summarize the differences between the 31 remedies available to a plaintiff under those theories. 32

1 (1) Restitution. A plaintiff may rescind a contract 2 if it was procured by fraud. Rescission is a remedy 3 available under the law of restitution, not tort. See — . 4 Both sides give back whatever they received from the other, 5 to the extent such a return is feasible. Those acts of 6 restoration may be supplemented by awards of incidental 7 damages to make up for value that cannot be fully returned, 8 or to reflect costs that the defrauded party incurred in 9 reliance on the transaction. Many jurisdictions also allow 10 the plaintiff to obtain punitive damages in an appropriate 11 case. 12 13 (2) Contract. The law of contract responds to fraud 14 in several ways. First, a court may find that the fraud 15 prevented a contract from being formed at all, and so leave 16 the parties to their remedies under the law of restitution. 17 Second, a contract procured by fraud may be treated as 18 voidable; in other words, the victim of the fraud either 19 can elect to affirm and enforce the contract despite the 20 fraud that induced it, or can disaffirm the contract and 21 seek rescission. Third, in a case where the fraud took the 22 form of a writing that did not reflect the parties’ actual 23 agreement, the contract can be reformed to reflect the 24 intentions of the parties and then enforced on its new 25 terms. 26 But a misrepresentation, whether fraudulent or not, 27 does entitle a plaintiff to contract damages if it amounts 28 to a warranty that was breached. A warranty is a claim 29 about the characteristics of a thing sold or service 30 provided; the defendant is regarded as having guaranteed 31 those characteristics, and to be answerable in damages if 32 they do not exist. For breach of warranty a plaintiff may

1 obtain expectation damages, which commonly means recovery 2 of whatever sums are needed to put the thing received into 3 the condition the defendant promised. If the thing 4 received cannot be put into the promised condition, the 5 difference between its actual and promised value is another 6 possible measure of recovery. 7 As this statement of options shows, fraud in itself 8 gives a plaintiff no claim to damages under the law of 9 contract. If a party is induced to enter a contract by 10 fraud, the fraud will typically allow the party to escape 11 the contract or have it reformed. And if the fraudulent 12 statement amounted to a promise, it can be enforced to the 13 same extent as any other promise. But the law of contract 14 does not otherwise enable a victimized party to both 15 enforce a contract and also seek additional sums that would 16 have been received if the defendant’s fraudulent statement 17 had been true. A plaintiff seeking that result might most 18 closely achieve it by making a claim for punitive damages, 19 which are available for breach of contract in some 20 jurisdictions when the breach also amounts to tortious 21 misconduct—a criterion satisfied when the defendant has 22 engaged in fraud. See Restatement Second, Contracts § 355. 23 24 (3) A tort claim, unlike the other types of suit just 25 described, permits recovery of damages for fraud as such. 26 A claim under this Chapter entitles a plaintiff to affirm 27 the contract but seek out-of-pocket damages: the 28 difference between the value of what the plaintiff paid and 29 received, along with other sums needed to restore the 30 position the plaintiff would have occupied if the defendant 31 had not committed the fraud. Such damages resemble a 32 combination of reliance and consequential damages in the

1 law of contract. Punitive damages also are available in 2 tort (see § 14). Sometimes an award of punitive damages 3 may be calculated to give the plaintiff the benefit of the 4 bargain made with the defendant, much as a successful claim 5 for breach of warranty would. As a comparison of this 6 paragraph and the previous one will suggest, a plaintiff 7 with an enforceable claim for breach of warranty typically 8 has nothing to gain by also pursuing a tort remedy, except 9 perhaps incidental advantages such as a longer statute of 10 limitations due to idiosyncractic facts of the case. In 11 some jurisdictions an award of punitive damages may be more 12 readily available in tort than in a suit for breach of 13 contract. 14 A plaintiff can allege a right to recover under any of 15 these theories or all of them, but cannot be compensated 16 more than once. Moreover, the pursuit of multiple remedies 17 may be subject to rules of election. Rescission is 18 inconsistent with a claim for breach of contract or tort 19 damages, and so cannot be sought at the same time as relief 20 on those other theories; and rescission must be elected 21 promptly—typically before the case goes to a jury, and 22 often earlier—because a court’s ability to fully undo an 23 exchange deteriorates with the passage of time. Claims for 24 breach of contract and for tort damages are not 25 inconsistent with one another, and so typically may be 26 advanced together at trial without an election between them 27 so long as it is made clear to the jury that the plaintiff 28 can recover under one theory or the other, but not both. 29

1 Illustration: 2 3 24. Buyer offers to purchase Seller’s business 4 for two installment payments of $450,000 spaced six 5 months apart. Buyer is to receive half of Seller’s 6 shares in the company in return for each payment. 7 After paying the first installment, Buyer discovers 8 that Seller fraudulently misrepresented the value of 9 the business: he made it appear to be worth $1.5 10 million, but its actual value was $500,000. Buyer can 11 rescind the contract, returning Seller’s shares and 12 recouping his $450,000 payment. If Buyer instead 13 affirms the contract and brings a tort claim for 14 fraud, he owes Seller the remaining installment 15 payment of $450,000, but can collect (or subtract), as 16 out-of-pocket damages, the $400,000 difference between 17 what he agreed to pay for the business and what it was 18 worth. If Buyer wishes to collect the $1 million 19 difference between what the Seller said the business 20 was worth and what it was worth in fact, Buyer must 21 pursue that sum as a contract remedy for breach of 22 warranty or as punitive damages for the tort claim; it 23 is not properly awarded as compensatory damages in 24 tort. Nor can Buyer collect both out-of-pocket 25 damages in tort and expectation damages in contract. 26 27 Reporter’s Note 28 29 a. Scope. This Section consolidates principles that 30 were covered in Restatement Second, Torts §§ 525-529, 531- 31 537, 539-542, and 546-548. 32 On the perils of attempts to define “fraud” too 33 precisely, see Howard v. Scott, 125 S.W. 1158 (Mo. 1910): 34

1 What is fraud? No statute and no judge has been so 2 daring and unwise as to define it by hard and fast 3 rules. That pre-eminent jurist who “perfected English 4 equity into a symmetrical science,” who is deemed by 5 no less an authority than Lord Campbell “the most 6 consummate judge who ever sat in the court of 7 chancery,” Lord Chancellor Hardwicke, he who as the 8 lad, Phillip Yorke, was designed by his pious 9 Presbyterian mother for some “honester trade” than the 10 profession of an attorney (she longing to “see his 11 head wag in the pulpit”), who gave his “days and 12 nights to the volumes of Addison” in acquiring a 13 luminous and chaste style, and at the bar with 14 unremitting toil and pains, superadded to a happy 15 temperament and facile and receptive mind, informed 16 and grounded himself in all essentials to wisdom, 17 learning, and virtue on the woolsack, so that his 18 administration on that judgment seat is “fondly looked 19 back upon as the golden age of equity,” laid down the 20 precept, never since departed from, that fraud should 21 be left undefined. 22 23 b. Types of misrepresentations. Illustration 1 is 24 based on Heider v. Leewards Creative Crafts, Inc., 613 25 N.E.2d 805 (Ill. App. 1993). See also Hall v. Edge, 782 26 P.2d 122 (Okla. 1989); West Side Federal Sav. & Loan Ass'n 27 of New York City v. Hirschfeld, 476 N.Y.S.2d 292 (App. Div. 28 1984); Bails v. Wheeler, 559 P.2d 1180 (Mont. 1977); 29 Sorensen v. Gardner, 334 P.2d 471 (Or. 1959). For 30 application of the same principle to predictions of future 31 profits, see Fisher v. Mr. Harold's Hair Lab, Inc., 527 32 P.2d 1026 (Kan. 1974). 33 Illustration 2 is based on Anchorage Chrysler Center, 34 Inc. v. DaimlerChrysler Corp., 129 P.3d 905 (Alaska 2006). 35 See also Berry v. Indianapolis Life Ins. Co., 600 F. 36 Supp.2d 805 (N.D. Tex. 2009); Uptegraft v. Dome Petroleum 37 Corp., 764 P.2d 1350 (Okla. 1988); Nobility Homes, Inc. v. 38 Ballentine, 386 So.2d 727 (Ala. 1980); Sheets v. B & B 39 Personnel Systems of Oregon, Inc., 475 P.2d 968 (Or. 1970); 40 Morrow v. Wm. Berklund Forest Products Co., 346 P.2d 623 41 (Idaho 1959); Gray v Richmond Bicycle Co., 167 N.Y. 348 42 (N.Y. 1901). 43 Illustration 3 is based on Level 3 Communications, LLC 44 v. Liebert Corp., 535 F.3d 1146 (10th Cir. 2008). 45 46 c. Scienter. This Comment is the successor to 47 Restatement Second, Torts § 526. For leading statements

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

1 From Massey v. Young, 73 Mo. 260 (Mo. 1880): 2 3 Fraud is rarely ever susceptible of positive proof, 4 for the obvious reason that it does not cry aloud in 5 the streets, nor proclaim its iniquitous purposes from 6 the housetops. Its vermiculations are chiefly 7 traceable by “covered tracks and studious 8 concealments.” Cooley on Torts, 475; Hopkins v. 9 Sievert, 58 Mo. 201; Burgert v. Borchert, 59 Mo. 80. 10 And though fraud is not to be presumed, yet it is as 11 legitimate to infer its existence from surrounding 12 circumstances pointing unmistakably to a wrongful 13 purpose, as it is to thus infer under similar 14 circumstances the commission of a crime; and this is 15 done daily. Anything, therefore, which satisfies the 16 mind and conscience of the existence of fraud is 17 sufficient. 18 19 d. Materiality. Illustration 8 is based on Goldman 20 v. Town of Plainfield, 762 A.2d 854 (Vt. 2000). See also 21 Renasant Bank v. Ericson, 2012 WL 640659 (M.D. Tenn. 2012) 22 (Tennessee law); Adelson v. Adelson, 806 N.E.2d 108 (Mass. 23 App. 2004); Lewis v. Bank of America, 343 F.3d 540 (5th 24 Cir. 2003) (Texas law); Ivey Corp. v. Yates, 516 So.2d 558 25 (Ala. 1987). Illustration 9 is based on McGowan v. 26 Chrysler Corp., 631 So.2d 842 (Ala. 1993); see also Corry 27 v. Jahn, 972 N.E.2d 907 (Ind. App. 2012); Tietsworth v. 28 Harley-Davidson, Inc., 677 N.W.2d 233 (Wis. 2004). 29 Illustration 10 is based on Brown v. Search, 111 N.W. 30 210 (Wis. 1907); see also Brown v. Bennett, 136 S.W.3d 552 31 (Mo. App. 2004); Arter v. Spathas, 779 P.2d 1066 (Or. App. 32 1989); Bergeron v. Dupont, 359 A.2d 627 (N.H. 1976); Saxton 33 v. Harris, 395 P.2d 71 (Alaska 1964); Collinson v. 34 Jeffries, 54 S.W. 28 (Tex. App. 1899). 35 Difficult cases can arise when sellers falsely claim 36 to have received other offers to purchase whatever they are 37 selling, thus inducing buyers who hear the claim to make 38 higher bids. Depending on the context, one might question 39 the reasonableness of a buyer’s reliance on such 40 statements; there nevertheless is authority for holding 41 sellers liable on some versions of those facts. See 42 Kabatchnick v. Hanover-Elm Bldg. Corp., 103 N.E.2d 692 43 (Mass. 1952); Beavers v. Lamplighters Realty, Inc., 556 44 P.2d 1328 (Okla. App. 1976); Kansas Mun. Gas Agency v. 45 Vesta Energy Co., Inc., 840 F. Supp. 814 (D. Kan. 1993) 46 (Oklahoma law). Compare cases where sellers lie about the 47 minimum prices they would accept, on which see American Bar

1 Association, Model Rules of Professional Conduct, Rule 2 4.1(a), official comment (1983) (“Under generally accepted 3 conventions in negotiation, certain types of statements 4 ordinarily are not taken as statements of material fact. 5 Estimates of price or value placed on the subject of a 6 transaction and a party’s intentions as to an acceptable 7 settlement of a claim are ordinarily in this category[.]”). 8 9 e. Actual reliance. Illustration 11 is based on 10 Sharp v. Idaho Inv. Corp., 504 P.2d 386 (Idaho 1972). See 11 also Richardson v. Hardin, 5 P.3d 793 (Wyo. 2000); 12 Schlaifer Nance & Co., Inc. v. Estate of Warhol, 927 F. 13 Supp. 650 (S.D.N.Y. 1996); Eagle Properties, Ltd. v. KPMG 14 Peat Marwick, 912 S.W.2d 825 (Tex. App. 1995); Zavradinos 15 v. Lund, 741 S.W.2d 863 (Mo. App. 1987). 16 Illustration 12 is based on Slaymaker v. Westgate 17 State Bank, 739 P.2d 444 (Kan. 1987). See also Liberty 18 Nat. Life Ins. Co. v. Allen, 699 So.2d 138 (Ala. 1997); 19 Nader v. Allegheny Airlines, Inc., 626 F.2d 1031 (D.C. Cir. 20 1980); Gooch v. E.I. DuPont de Nemours & Co., 40 F. Supp. 21 2d 857 (W.D. Ky. 1998); Luciani v. Bestor, 436 N.E.2d 251 22 (Ill. App. 1982); Boyd v. Miller, 230 N.W. 851 (Iowa 1930). 23 Illustration 13 is based on Nails v. S & R, Inc., 639 24 A.2d 660 (Md. 1994). See also Virginia Academy of Clinical 25 Psychologists v. Group Hospitalization and Medical 26 Services, Inc., 878 A.2d 1226 (D.C. 2005); Engalla v. 27 Permanente Medical Group, Inc., 938 P.2d 903 (Cal. 1997); 28 Ferrell v. Cox, 617 A.2d 1003 (Me. 1992); Phoenix Assur. 29 Co. of Canada v. Runck, 366 N.W.2d 788 (N.D. 1985); Davis 30 v. Re-Trac Mfg. Corp., 149 N.W.2d 37 (Minn. 1967); State 31 Street Trust Co. v. Ernst, 15 N.E.2d 416 (N.Y. 1938). 32 Some courts recognize a rebuttable presumption of 33 reliance when a defendant has made a material 34 misrepresentation to the plaintiff. See, e.g., Marler v. 35 E.M. Johansing, LLC, 199 Cal.App.4th 1450 (Cal. App. 2011); 36 Sargent County Bank v. Wentworth, 500 N.W.2d 862 (N.D. 37 1993). 38 For the proposition that actual reliance cannot be 39 shown when the plaintiff had a legal obligation to take the 40 same course of action in any event, see Conroy v. Regents 41 of University of Cal., 203 P.3d 1127 (Cal. 2009); Kitt v. 42 Capital Concerts, Inc., 742 A.2d 856 (D.C. 1999). For 43 discussion of the difference between the “actual reliance” 44 required in suits based on tort and contract, see CBS Inc. 45 v. Ziff-Davis Pub. Co., 553 N.E.2d 997 (N.Y. 1990). 46 On the treatment of holder claims at common law, see 47 Holmes v. Grubman, 691 S.E.2d 196 (Ga. 2010); Grant

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

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

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

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

© 2013 by The American70 Law Institute Preliminary Draft – not approved 1 § 10. Duties to disclose; tacit misrepresentation 2 3 A misrepresentation that supports liability under 4 § 9 may result from a failure to disclose information, 5 but only when the person remaining silent has a duty 6 to speak. Such a duty may exist where: 7 8 (a) the actor has made prior statements and 9 knows that they will mislead another if not 10 amended, even if they were not actionable when 11 made; or 12 13 (b) the actor has a special relationship 14 with another that obliges the actor to be 15 forthcoming; or 16 17 (c) the actor knows that another party is 18 about to enter into a transaction under a mistake 19 about a basic assumption behind it, and that the 20 other party, because of the relationship between 21 them, the customs of the trade, or other 22 circumstances, would reasonably expect a 23 disclosure of what the actor knows. 24 25 Comment: 26 27 a. Scope; other actions compared. Liability for 28 fraud ordinarily arises from misleading statements, not 29 from silence. That is so because one party to a 30 transaction has no general duty to make disclosures to the 31 other. On occasions discussed in this Section, however, a 32 plaintiff does have such a duty. In those cases silence

1 may be considered a form of deceit, and the nondisclosure 2 of a fact treated the same as an assertion of its 3 nonexistence. 4 The liability recognized by this Section is a species 5 of deceit; indeed, this Section is best understood as 6 detailing when silence can satisfy the “misrepresentation” 7 element of § X. The discussion in § X of other elements of 8 liability for fraud, such as materiality and causation, 9 continue to be relevant to a claim that meets the 10 requirements this Section. A statement that is misleading 11 if not properly qualified may support liability under § 7 12 without reference to the principles stated here. This 13 Section, rather, recognizes liability for nondisclosure as 14 such—that is, for a failure to disclose unaccompanied by 15 any statement that would support liability in itself. 16 On liability for omissions under a theory of negligent 17 misrepresentation, see § 5, Comment e. If the cases 18 treated in this Section were found to involve negligence 19 rather than a more culpable state of mind, most of them 20 would not be candidates for liability under § 5. The 21 reason is that liability under § 5 cannot arise from 22 negligence in the performance or negotiation of a contract; 23 such claims are eliminated by the economic-loss rule of § 24 2. Thus § 5 mostly involves negligent misrepresentations 25 between parties who do not have contracts. The claims 26 treated in this Section, by contrast, typically do arise 27 from the performance or negotiation of contracts. They 28 survive the economic-loss rule because they involve more 29 than negligence. They are varieties of deceit, to which 30 the economic-loss rule does not apply. It follows that if 31 a defendant lacks the state of mind needed to support a 32 claim under this Section, the plaintiff’s likely fallback

1 is not a negligence claim. It is a claim based on the law 2 of contract or restitution. Those bodies of law provide 3 rules that allow plaintiffs, on terms more liberal than 4 those found here, to rescind a transaction and seek 5 restitution of any benefits conferred because the defendant 6 failed to disclose information material to a bargain the 7 parties made. See Restatement Third, Restitution and 8 Unjust Enrichment §§ 5 and 34; Restatement Second, 9 Contracts § 303(b). 10 11 b. Prior speech. Nondisclosure can amount to deceit 12 if the defendant has spoken other words, or performed other 13 acts, that may not have been culpable at the time but will 14 become so if the defendant remains silent. Thus a 15 defendant may make a statement and believe it to be true 16 but later discover that it is false or misleading. Or a 17 defendant may make a statement in the belief that it will 18 not elicit reliance but later discover that it has. In 19 these cases the defendant is obliged to update the earlier 20 statements to prevent them from having fraudulent effect, 21 and may be held liable for failing to do so. 22 23 Illustrations: 24 25 1. Seller of property tells prospective Buyer 26 that the property’s septic system is in good working 27 order. Seller’s statement is true when he makes it, 28 but Seller learns a week later that the septic system 29 has failed. Seller signs a contract of sale with 30 Buyer without disclosing the failure of the system. 31 Seller may be held liable to Buyer for fraud. 32

1 2. Worker offers to leave his job at Company and 2 join Rival. Worker tells Rival that he will bring 3 clients from Company to Rival if he moves there. 4 Worker’s statements are true when made. Two weeks 5 later, Company offers Worker a severance contract that 6 requires him not to take Company’s clients elsewhere. 7 Worker signs the agreement, then joins Rival without 8 disclosing it. Rival later discovers that Worker 9 cannot bring clients from Company as he had described. 10 Worker may be held liable to Rival for fraud. 11 12 3. Retailer makes a six-month contract to 13 distribute Manufacturer’s products. Manufacturer 14 offers a friendly assurance that he hopes to work with 15 Retailer for years to come. The statement is false, 16 but Manufacturer has no reason to expect Retailer to 17 rely on it. Retailer later informs Manufacturer that 18 he plans to reject an alternative supplier in favor of 19 the long-term relationship that Manufacturer has 20 proposed. Manufacturer says nothing, but has no 21 interest in a long-term relationship and ends their 22 dealings a few months later. Manufacturer did not 23 commit fraud when he first spoke, but had a duty to 24 modify his statement when he learned that Retailer was 25 relying on it. Manufacturer may be held liable to 26 Retailer. 27 28 c. Special relationships. Silence may amount to 29 deceit if it occurs against the backdrop of a special 30 relationship between the parties that causes one of them to 31 count on the other to be forthcoming. A defendant in a 32 fiduciary relationship with the plaintiff, for example, is

1 expected to disclose anything the plaintiff might consider 2 material to a transaction between them; if such a defendant 3 deliberately keeps silent about such facts, and the 4 plaintiff relies on their non-existence, the defendant may 5 be held liable for fraud. “Confidential” relationships are 6 defined less formally than fiduciary relationships but have 7 similar consequences under this Section. They arise when 8 one party justifiably comes to trust the other, creating a 9 reasonable expectation that the other will act with the 10 utmost good faith and disclose any facts material to their 11 dealings. (For more discussion of fiduciary and 12 confidential relationships, see Section X, Comment Y.) 13 14 Illustrations: 15 16 4. Tenant 1 and Tenant 2 hold a parcel of 17 property as tenants in common. They agree to 18 partition the property. Tenant 1, who has possession 19 of the parcel, does not disclose to Tenant 2 that he 20 has harvested most of the timber on the part of the 21 land that Tenant 2 will receive. Tenant 2 later 22 discovers that the timber is gone and sues Tenant 1. 23 The court finds that Tenant 1’s possession of the land 24 gave rise to a relationship of trust and confidence 25 with Tenant 2, which in turn created a duty to 26 disclose facts material to the proposed transaction. 27 The court further finds that Tenant 1 did not disclose 28 the information to Tenant 2 because he thought that it 29 would affect Tenant 2’s willingness to consent to the 30 deal. Tenant 1 may be held liable for fraud. 31

1 5. Driller 1 owns a lease to extract minerals 2 from tribal lands. Worker for tribe discovers that 3 mineral deposits on the lands are more extensive than 4 Driller 1 knows. Worker joins Driller 2 and passes on 5 his knowledge. Driller 2 buys Driller 1’s mineral 6 rights. Driller 1 then discovers that it sold the 7 rights for much less than they were worth, and sues 8 Worker and Driller 2 for fraud. The court finds that 9 Worker obtained his knowledge lawfully, that Driller 1 10 and Driller 2 were engaged in an arm’s-length 11 transaction, and that neither Worker nor Driller 2 had 12 any obligation to disclose their knowledge to Driller 13 1. Driller 1’s fraud claim fails. 14 15 d. Superior knowledge. One party often knows more 16 than the other about the subject of an exchange between 17 them. That difference, without more, creates no obligation 18 of disclosure. Better information is a legitimate 19 advantage at the bargaining table, and the law means to 20 encourage its acquisition. In some cases, however, an 21 imbalance of knowledge creates a duty in the better- 22 informed party to disclose it. Liability on this theory 23 requires, first, a showing that the fact at issue was basic 24 to the transaction. Second, the plaintiff must have a 25 reason out of the ordinary to rely on an adversary to 26 supply the information. Part of the reason usually is a 27 difference in each party’s access to the facts. If one 28 party knows something that the other cannot find out, 29 letting the other suffer for its ignorance may not appeal 30 to notions of fairness or usefully encourage the discovery 31 of knowledge. See Illustrations 6 and 8. Even when two 32 parties have different access to basic facts, however,

1 rules to govern the defendant’s obligations are hard to 2 state. Liability on this basis typically arises from 3 conduct that represents a gross violation of business 4 ethics and amounts to a swindling of one side by the other. 5 Such conclusions depend in significant part on commercial 6 customs, which vary in different settings. 7 8 Illustrations: 9 10 6. Buyer purchases a house from Seller. Buyer 11 then discovers serious defects in the foundation that 12 Seller did not disclose. The court finds that Seller 13 knew of the defects before the sale, knew they would 14 be of great importance to Buyer, and knew they were 15 not discoverable by the use of reasonable care; Buyer 16 had obtained a customary and competent inspection, and 17 the defects were not found. Seller may be held liable 18 to Buyer for fraud. 19 20 7. Employee and Employer negotiate a 21 compensation agreement. After each side has reviewed 22 the resulting document many times, Employer inserts a 23 change without telling Employee. Employee signs the 24 document, discovers the change a week later, and 25 brings suit for fraud. The court finds that the 26 transaction was made at arm’s length and that Employee 27 had a full opportunity to reread the contract just 28 before signing it. The court also finds, however, 29 that Employer knew its last-minute change was 30 important, and that Employee would not expect it and 31 was not aware of it. Employer may be held liable in

1 tort for fraud. (Reformation of their contract is 2 another natural possibility.) 3 4 8. Wholesaler has an ongoing agreement to buy 5 cereals from Producer for resale to various grocers. 6 Producer decides to start selling its cereals to 7 grocers directly, but does not disclose this plan to 8 Wholesaler. The parties renew their contract. 9 Wholesaler then discovers that it can no longer resell 10 most of the cereals it has purchased because grocers 11 are buying them directly from Producer. The court 12 finds that when the parties renewed their contract, 13 Producer knew that Wholesaler expected to resell the 14 cereals but would no longer be able to do so; that 15 Producer knew Wholesaler would consider Producer’s new 16 plans important in deciding whether to renew; and that 17 Wholesaler had no way to learn of Producer’s plans if 18 Producer did not disclose them. Producer may be held 19 liable for fraud. 20 21 9. Buyer purchases house from Seller, then 22 discovers that its driveway encroaches on a neighbor’s 23 property. The court finds that Seller knew of the 24 encroachment and did not disclose it to Buyer. The 25 court also finds, however, that the encroachment could 26 have been discovered by a survey or by inspection of 27 public records, neither of which Buyer performed. 28 Seller had no obligation to disclose the encroachment 29 to Buyer, and is not liable for fraud. 30 31 Rationales for these illustrations may be found in 32 sound policy as well as in notions of fairness. Thus in

1 Illustration 6, denying recovery would give future buyers 2 an incentive to invest in more expensive inspections that 3 would rarely be worth the cost. It is more efficient to 4 require the seller to reveal what he knows in the sales 5 contract, rather than in litigation afterwards. In 6 Illustration 9, by contrast, requiring each side to inform 7 itself of the facts—or even just requiring the buyer to put 8 direct questions to the seller—is not unduly burdensome, 9 and is consistent with the commercial customs that govern 10 real-estate transactions. 11 12 e. Judge and jury. Liability under the logic of this 13 Section requires a finding that the defendant had a duty to 14 speak. The existence of that duty is a question for the 15 court. If disputed facts bear on the existence of the 16 duty, they may be submitted to the trier of fact for 17 resolution. Examples may include the defendant’s knowledge 18 of a fact, the other’s ignorance of it, the customs of a 19 commercial situation, the defendant’s knowledge that the 20 plaintiff expects disclosure, or the defendant’s state of 21 mind. 22 23 Reporter’s Note 24 25 a. Scope; other actions compared. This Section is 26 the successor to Restatement Second, Torts § 551. A 27 majority of jurisdictions have adopted that Section or 28 cited it with approval. See Richey v. Patrick, 904 P.2d 29 798 (Wyo. 1995). The wording of § 551 created possible 30 ambiguities about whether it recognized liability for 31 negligence or only for deceit. See U.S. Nat. Bank of 32 Oregon v. Fought, 630 P.2d 337 (Or. 1981); cf. McElhannon 33 v. Ford, 73 P.3d 827 (N.M. 2003); General Acquisition, Inc. 34 v. GenCorp Inc., 766 F. Supp. 1460 (S.D. Ohio 1990). This 35 Section makes clear that the liability it recognizes is for

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

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

© 2013 by The American81 Law Institute Preliminary Draft – not approved © 2013 by The American Law Institute Preliminary Draft – not approved 1 § 11. Liability for misrepresentations of opinion 2 3 A misrepresentation that supports liability under 4 § 9 may be a false statement of opinion only when 5 6 (1) the parties had a fiduciary or confidential 7 relationship, or 8 9 (2) the defendant purported to have special knowledge 10 or otherwise invited the plaintiff’s reliance on the 11 opinion offered. 12 13 Comment: 14 15 a. Generally. A statement of opinion may imply that 16 its maker has knowledge of facts to support it, or no 17 knowledge of facts inconsistent with it. In either case 18 the factual implication, if known by the speaker to be 19 false, can support liability for fraud under the rule of 20 § 7 without reference to the rules stated here. This 21 Section addresses a separate question: the liability of a 22 defendant for the false statement of an opinion as such, 23 and without implications of fact. 24 Statements traditionally classified as opinions 25 include judgments about the quality or value of a thing 26 sold and views about the future likelihood of events. 27 False statements of pure opinion ordinarily are not 28 actionable. The reason is not that opinions are incapable 29 of being true or false; for when a speaker claims to hold 30 an opinion but does not, the claim is as contrary to the 31 truth as any other. The reason for the rule, rather, is 32 that reliance on another party’s opinion is regarded in

1 most cases as unjustifiable as a matter of law. It is 2 better practice, and more consistent with customs of 3 commercial life, for parties to rely just on statements of 4 fact made by others and to form their own opinions on the 5 basis of them. This rule is relaxed when there is 6 unusually good reason for the plaintiff to defer to the 7 defendant’s judgment (as explained in Comment b), but a 8 typical buyer is not entitled to rely on the opinions of a 9 typical seller. 10 If a defendant offers an opinion in circumstances that 11 can support liability under the rules of this Section, the 12 other traditional elements of fraud stated in § 7 still 13 must be satisfied: the plaintiff is required to show that 14 the defendant’s statement was material, that reliance on it 15 was justifiable, and so forth. 16 17 Illustrations: 18 19 1. Buyer negotiates the purchase of a used car 20 from Seller. Seller states that the car is in good 21 mechanical condition, and Buyer relies on that 22 assurance. Buyer soon discovers that the car’s engine 23 is in poor repair and will be expensive to fix, and 24 that other interior components have rotted. Buyer 25 sues Seller for fraud. Seller’s statement that the 26 car was in good mechanical condition was an opinion, 27 but it implied that Seller knew of facts to support it 28 and not of facts that made it false. The court finds 29 that Seller knew of the car’s problems at the time he 30 made the claim. Seller may be held liable for fraud 31 under the principles of § 7. The liability is not for 32 Seller’s false statement of opinion as such. It is

1 for the false factual implications of what Seller 2 said, which amounted to a warranty. 3 4 2. Buyer negotiates the purchase of a restaurant 5 from Seller. Seller accurately states the 6 restaurant’s revenues to date and gives Buyer complete 7 access to his business records. Seller tells Buyer 8 that he thinks the restaurant will produce gross 9 revenues of $10,000 per day going forward. After 10 acquiring the restaurant, Buyer finds that it produces 11 revenues of $5,000 per day. Buyer sues Seller for 12 fraud, claiming that Seller’s statements about the 13 restaurant’s future earnings were wrong and that 14 Seller knew they would be. Buyer’s claim fails 15 because Seller’s statements about the future were 16 matters of opinion, and implied no knowledge of facts 17 that Buyer did not have. 18 19 Difficult cases can arise at the seam between opinion 20 and fact. They are best resolved by recalling that the 21 distinction is drawn not for its own sake but to identify 22 cases in which reliance by one party on the claims of 23 another is categorically unjustifiable. The inquiry serves 24 a practical policy: enabling parties to rely on each 25 other’s words when it saves time and trouble or is 26 otherwise commercially useful, and discouraging them from 27 such reliance when they can as easily form their own 28 judgments for themselves. If the classification of a 29 statement as opinion or fact is a matter on which 30 reasonable minds could differ, it is an appropriate matter 31 for decision by jury. 32

1 b. Circumstances justifying reliance. False 2 statements of opinion can support a claim for fraud in two 3 general circumstances. The first arises when parties have 4 a fiduciary or confidential relationship. A fiduciary has 5 a legal obligation to act for the benefit of another; the 6 obligation arises automatically from certain formally 7 recognized relationships, such as attorney and client or 8 trustee and beneficiary. A confidential relationship 9 produces similar obligations but is less formal. It arises 10 from circumstances in which the parties are not on equal 11 footing; one has influence over the other, and the stronger 12 party is trusted to act in the interest of the weaker. 13 Such relations often appear within families. In a 14 relationship of either of these types, it may be 15 appropriate for the dependent party to rely on the opinions 16 of the other. 17 Second, a claim of fraud may lie for a false statement 18 of opinion when the defendant purports to be an expert or 19 otherwise invites deference by claiming access to knowledge 20 that the plaintiff cannot readily duplicate. Relying on 21 the defendant’s opinion in such a case may well be 22 reasonable and more efficient than collecting facts and 23 forming an opinion of one’s own. The law protects the 24 plaintiff’s right to so rely by imposing liability if the 25 opinion is falsely stated. 26 27 Illustrations: 28 29 3. Plaintiff is injured in a car accident. 30 Agent for Plaintiff’s insurer tells Plaintiff that he 31 probably does not have a good claim against the other 32 driver. Plaintiff releases his claims in return for a

1 small settlement. Plaintiff later learns that he had 2 a strong claim against the other driver. Plaintiff 3 sues insurer for fraud. The court finds that Agent 4 knowingly misrepresented the strength of Plaintiff’s 5 case to induce Plaintiff to accept a swift settlement. 6 Court further finds that Agent’s statement was an 7 opinion, but that Agent and Plaintiff were in a 8 confidential relationship that required Agent to act 9 in utmost good faith. Insurer may be held liable to 10 Plaintiff. 11 12 4. Professional Realtor produces a report 13 appraising a house at $300,000. Buyer relies on 14 Realtor’s report in deciding to purchase the house. 15 Buyer later discovers that the market value of the 16 house was below $200,000. Buyer sues Realtor for 17 fraud. Buyer’s evidence shows that Realtor was party 18 to a scheme to acquire houses at low prices and then 19 offer inflated opinions of their value to prospective 20 buyers. The court finds that Realtor’s appraisal was 21 an opinion, but also finds that Realtor held himself 22 out as an expert whose opinions could be trusted. 23 Realtor may be held liable to Buyer for fraud. 24 25 c. Matters of law. Assertions of law are sometimes 26 said to be matters of opinion that cannot serve as the 27 basis for a claim of fraud. While that is often true, 28 statements about the legal consequences of an act law are 29 best treated as statements of opinion: they may be 30 actionable if they imply untrue facts, or if the parties 31 have a relationship that makes it reasonable for the 32 plaintiff to rely on the defendant’s opinions. They are

1 not actionable if they amount to judgments based on facts 2 known to both sides, and on which the plaintiff can 3 reasonably be expected to arrive at an independent view. 4 A claim of law may imply facts of two kinds. First, 5 it may imply that facts in the world justify the speaker’s 6 conclusions. Thus an assertion that one mortgage has 7 priority over another may imply that one was made before 8 the other; and a claim that a corporation has the right to 9 do business in a state may imply that it has taken all 10 steps necessary to be duly qualified. Second, a claim of 11 law may imply the existence of legal facts: that a 12 regulation has been passed or repealed, or that a piece of 13 property was zoned for commercial use or not. A defendant 14 who knowingly misleads the plaintiff with respect to any of 15 these sorts of facts may be held liable for fraud if the 16 other elements stated in § 7 are satisfied. Often they 17 will not be satisfied; justifiable reliance typically is 18 hard to show when the defendant’s claim might easily have 19 been checked against public records. In all events, any 20 liability in such a case arises not from the defendant’s 21 false statement of opinion per se, but from the facts it 22 implies. 23 On the other hand, no liability arises when one 24 adversary in a negotiation offers another a view about the 25 best interpretation of legal language—for example, the 26 wording of a lease or a statute—that is equally visible to 27 both. The defendant’s statement then is a true matter of 28 opinion, and a claim of fraud founded on it fails as a 29 matter of law unless the rules of this Section are 30 satisfied. Thus an attorney may be held liable to a client 31 for a legal opinion falsely stated, because an attorney and 32 client have a fiduciary relationship. And if a non-lawyer

1 claims to have special knowledge or otherwise invites 2 reliance by the plaintiff, a plaintiff again may recover if 3 falsely stated opinions of law follow. 4 5 Illustrations: 6 7 5. Tenant negotiates the rental of property from 8 Landlord. During their discussions, Landlord tells 9 tenant that local zoning rules will permit Tenant’s 10 business to operate on the premises. When Tenant 11 proposes to go confirm this, Landlord dissuades him, 12 assuring Tenant that “we know the area.” Acting in 13 reliance on these assurances, Tenant signs a contract 14 with Landlord. The assurances turn out to be false, 15 and Tenant suffers losses as a result. Tenant 16 produces evidence that Landlord knew the assurances 17 were false when he made them. Landlord may be held 18 liable for fraud. 19 20 6. Tenant negotiates the rental of property from 21 Landlord. During their discussions, Landlord makes a 22 claim about the meaning of language in the proposed 23 lease. Landlord says the language is best understood 24 to give Tenant exclusive use of a walkway adjacent to 25 the property. Acting in reliance on these assurances, 26 Tenant signs a contract with Landlord. The assurances 27 turn out to be false; a court later finds that a 28 neighboring tenant has a right to use the walkway as 29 well. Tenant sues Landlord for fraud, proposing to 30 show that Landlord knew his reading of the lease was 31 infirm. Tenant’s claim fails because Landlord’s 32 interpretation of the language in the lease was a

1 matter of opinion, the basis for which was equally 2 visible to both sides; and the parties were in an 3 arm’s-length relationship that did not entitle Tenant 4 to rely on Landlord’s opinions. 5 6 Reporter’s note 7 8 a. Generally. For general discussion of when 9 fraudulent opinions are actionable, see Italian Cowboy 10 Partners, Ltd. v. Prudential Ins. Co. of America, 341 11 S.W.3d 323 (Tex. 2011); Flegles, Inc. v. TruServ Corp., 289 12 S.W.3d 544 (Ky. 2009); Power v. Smith, 786 N.E.2d 1113 13 (Ill. App. 2003); Hall v. Edge, 782 P.2d 122 (Okla. 1989); 14 Borba v. Thomas, 138 Cal. Rptr. 565 (Cal. App. 1977). 15 Illustration 1 is based on Briggs v. Carol Cars, Inc., 16 553 N.E.2d 930 (Mass. 1990); see also Heider v. Leewards 17 Creative Crafts, 613 N.E.2d 805 (Ill. App. 1993); Black v. 18 J. N. Blair & Co., 302 P.2d 609 (Cal. App. 1956); cf. 19 Pennington v. Singleton, 606 S.W.2d 682 (Tex. 1980). 20 Illustration 2 is based on Mutsch v. Rigi, 430 N.W.2d 21 201 (Minn. App. 2001). The Mutsch case itself involved an 22 action on a promissory note; for applications in tort, see 23 Sundown, Inc. v. Pearson Real Estate Co., Inc., 8 P.3d 324 24 (Wyo. 2000); Daibo v. Kirsch, 720 A.2d 994 (N.J. App. 25 1998); Pugh's IGA, Inc. v. Super Food Services, Inc., 531 26 N.E.2d 1194 (Ind. App. 1988); Zar v. Omni Industries, Inc., 27 813 F.2d 689 (5th Cir. 1987) (Texas law); Fisher v. Mr. 28 Harold's Hair Lab, Inc., 527 P.2d 1026 (Kan. 1974); Annot., 29 27 A.L.R.2d 14. 30 31 b. Circumstances justifying reliance. Illustration 3 32 is based on Hutchins v. Utica Mut. Ins. Co., 484 N.Y.S.2d 33 686 (N.Y. App. 1985); see also Love v. Home Transp. Co., 34 Inc., 641 P.2d 854 (Ariz. 1982); Spry Funeral Homes, Inc. 35 v. Deaton, 363 So.2d 786 (Ala. App. 1978). 36 Illustration 4 is based on Hoffman v. Stamper, 867 37 A.2d 276 (Md. 2005); see also Davis v. McGuigan, 325 S.W.3d 38 149 (Tenn. 2010); Decatur Ventures, LLC v. Daniel, 485 F.3d 39 387 (7th Cir. 2008) (Indiana law); American United Life 40 Ins. Co. v. Douglas, 808 N.E.2d 690 (Ind. App. 2004); James 41 v. Nationsbank Trust Co. (Florida) Nat. Assoc., 639 So.2d 42 1031 (Fla. App. 1994); Duhl v. Nash Realty, Inc., 429 43 N.E.2d 1267 (Ill. App. 1981); cf. McCollum v. P/S 44 Investments, Ltd., 764 S.W.2d 252 (Tex. App. 1988).

1 On the occasions for submitting the distinction 2 between fact and opinion to a jury, see Jordan v. Hunter, 3 865 P.2d 990 (Idaho App. 1993); Henderson v. Forman, 436 4 N.W.2d 526 (Neb. 1989); Hughes v. Holt, 435 A.2d 687 (Vt. 5 1981); Christy v. Heil, 123 N.W.2d 408 (Iowa 1963). 6 7 c. Matters of law. Illustration 5 is based on 8 National Conversion Corp. v. Cedar Bldg. Corp., 246 N.E.2d 9 351 (N.Y. 1969); see also Hoyt Properties, Inc. v. 10 Production Resource Group, L.L.C., 736 N.W.2d 313 (Minn. 11 2007); Empiregas, Inc. of Ardmore v. Hardy, 487 So.2d 244 12 (Ala. 1985); White v. Mulvania, 575 S.W.2d 184 (Mo. 1978). 13 Illustration 6 is based on Cheung-Loon, LLC v. Cergon, 14 Inc., 392 S.W.3d 738 (Tex. App. 2012), though the facts 15 have been simplified here for clarity’s sake; the actual 16 case involved a parking lot. See also Koagel v. Ryan 17 Homes, Inc., 562 N.Y.S.2d 312 (N.Y. App. 1990); Two, Inc. 18 v. Gilmore, 679 P.2d 116 (Col. App. 1984); Borba v. Thomas, 19 138 Cal.Rptr. 565 (Cal. App. 1977).

© 2013 by The American91 Law Institute Preliminary Draft – not approved © 2013 by The American Law Institute Preliminary Draft – not approved 1 § 12. Misrepresentation of intention; promissory fraud 2 3 A statement of a speaker’s intentions is a 4 misrepresentation if the intentions do not exist. 5 6 [We might consider whether this Section should be reduced 7 to a comment in Section 9.] 8 9 Comment: 10 11 a. Generally. Promissory fraud occurs when a party 12 makes a promise and does not intend to keep it. In certain 13 respects this form of fraud is a straightforward 14 application of the general principles of Sec. 7: a promise 15 is a statement of intent; if the intent does not exist, the 16 declaration of it is a misrepresentation that is actionable 17 like any other. A claim of promissory fraud can cause 18 confusion, however, because it may closely resemble a claim 19 of promissory estoppel. See Restatement Second, Contracts 20 § 90. A claim of promissory fraud differs principally 21 because the plaintiff adds an assertion that the promisor 22 never intended to carry out the promise that is the basis 23 for the suit. The plaintiff who makes such a claim 24 typically receives two practical benefits in return. 25 First, a claim of fraud may entitle the plaintiff to an 26 award of punitive damages that would not be available on 27 other theories. See Section 13. Second, a suit for 28 promissory fraud may allow a plaintiff to avoid doctrinal 29 obstacles that would derail claims for breach of contract 30 or promissory estoppel. See Comment c. 31 Since it is not tortious to break a promise, it may 32 seem surprising that it is tortious to make a promise while

1 intending to break it. But the recipient of a promise 2 typically values the promisor’s intention to carry the 3 promise out, and would not do business with a promisor 4 whose intentions were known to be otherwise. A tort claim 5 for fraud under this Section thus protects rights of the 6 promisee in a way that a suit for breach of contract does 7 not. 8 9 b. Proof. A claim of promissory fraud must be 10 supported by evidence that the defendant made a 11 misrepresentation of intent. The statement of intent need 12 not by explicit. Most often the plaintiff simply produces 13 a contract that the defendant signed, and offers to prove 14 that the defendant never intended to perform it. 15 Ordinarily the contract itself will suffice as 16 representation of the defendant’s intent; a party who signs 17 a contract presumptively represents, at least by 18 implication, an intent to do what the contract requires. 19 But that description may not apply to every case. Both 20 parties to a contract might understand that a breach of it 21 is likely enough; the purpose of the agreement may just be 22 to make clear who pays for the resulting damages in that 23 event. There is no liability for fraud if those facts are 24 shown. Liability arises only when the promisor misleads 25 the promisee. 26 A plaintiff typically must use circumstantial evidence 27 to prove that the defendant had no intention of keeping the 28 promise at the time it was made. No such inference can be 29 drawn from a mere failure to perform the promise later. A 30 plaintiff’s case may be helped, however, by evidence of 31 plans the defendant had at the time of the promise that 32 were inconsistent with it; or by evidence that the promise

1 was impossible to keep for reasons the defendant knew (and 2 the plaintiff did not); or by evidence that the defendant 3 made and broke other promises routinely, and so must have 4 expected to break this one at well. Other facts may tend 5 to support the innocence of the defendant’s intentions: 6 evidence that the defendant partially performed the 7 promise, for example, or that changed circumstances make 8 the defendant’s promise costlier to honor that had 9 originally appeared. See Illustrations 1 and 2. 10 11 Illustrations: 12 13 1. Corporation promises to supply Seller with 14 products, and Seller promises to distribute them in 15 Montana. The term of the agreement is five years. 16 Two years later, Corporation announces that it is 17 withdrawing from Montana and cancels its agreement 18 with Seller. Seller discovers internal memoranda from 19 Corporation showing that at the time the agreement was 20 signed, Corporation had already made a decision, not 21 disclosed to Seller, to end all operations in Montana 22 after two years. Corporation is subject to liability 23 for promissory fraud. 24 25 2. Employee is dismissed by Employer. Employee 26 brings a lawsuit alleging that during his term of 27 employment he performed extra services after hours, 28 that Employer promised him payment for those services, 29 and that Employer made the promise without ever 30 intending to keep it. Employer denies making such a 31 promise at all. Employee’s only evidence of fraud is 32 Employer’s denial and a showing that Employer stood to

1 benefit financially by inducing Employee to work 2 without having to pay him. Employee may have a good 3 claim for breach of contract, but his evidence of 4 fraud is insufficient as a matter of law. 5 6 c. Relation to the statute of frauds and parol 7 evidence rule. Claims under this Section are not impaired 8 by a jurisdiction’s statute of frauds. A statute of frauds 9 extinguishes contract claims, not tort claims; it prevents 10 the enforcement of a promise under certain circumstances if 11 the promise is not evidenced in a writing signed by the 12 promisor. Liability under this Section does not result in 13 the enforcement of a promise. It results in compensation 14 for losses suffered by a plaintiff who relied on a promise. 15 The law of tort protects defendants against unfounded 16 claims of deceit not with the statute of frauds but by the 17 use of a heightened standard of proof with respect to the 18 defendant’s state of mind. See § 7, Comment i. 19 Courts likewise state as a matter of course that the 20 parol evidence rule does not impede claims of fraud. See 21 Restatement Second, Contracts § 214. The application of 22 that principle to claims of promissory fraud may be 23 explained in more particular terms. Thus two parties may 24 sign a contract with an integration clause stating that the 25 writing is the complete expression of their agreement; and 26 later the plaintiff might offer extrinsic evidence that the 27 promisor never intended to perform the promise that the 28 agreement contained. The plaintiff in such a case is not 29 adding terms to the written contract, or varying them. The 30 plaintiff is proving, rather, that a representation in the 31 contract was false. Neither the parol evidence rule nor an 32 integration clause are obstacles to such a showing.

1 A related problem arises when the parties have a 2 written agreement and the plaintiff claims that the 3 defendant made a separate false promise that was not 4 reflected in the writing. The parol-evidence rule may 5 preclude enforcement of the separate promise as a matter of 6 contract law. The plaintiff nevertheless may assert a 7 claim in tort that the second promise—the one outside the 8 written contract—was made with no intention that it would 9 be kept. It might seem odd that a promise the parol- 10 evidence rule would otherwise extinguish becomes 11 enforceable just because it was made by a promisor who 12 never planned to keep it. Again, however, liability for 13 fraud does not cause the promise to be enforced; rather, 14 the plaintiff collects for damage caused by reliance on it. 15 While the parol-evidence rule does not obstruct claims 16 of promissory fraud, however, the existence of a contract 17 may suggest that the plaintiff was not justified in relying 18 on an earlier promise that was inconsistent with it. That 19 conclusion is especially likely to be drawn, of course, if 20 the contract contains language expressly disavowing 21 reliance on a promise such as the one at issue. For 22 discussion of when a no-reliance clause defeats a claim of 23 fraud, see § 7, Comment g. 24 25 Illustration: 26 27 3. Company hires Accountant, then fires him six 28 months later. Accountant sues Company for fraud. He 29 claims that Company originally promised to retain him 30 for at least a year, and he offers to prove that 31 Company never intended to keep that promise. Company 32 argues that Accountant’s claim fails because their

1 written contract allows Company to fire him at any 2 time, and because the parol-evidence rule forbids 3 claims based on promises made outside the writing that 4 are inconsistent with it. The parol-evidence rule may 5 prevent Accountant from bringing a contract claim to 6 enforce the promise that he says Company made. 7 Accountant nevertheless may pursue a claim in tort to 8 collect damages he suffered in reliance on Company’s 9 false assurances. 10 11 Reporter’s Note 12 13 a. Generally. For representative cases recognizing 14 and discussing promissory fraud, see Riverisland Cold 15 Storage, Inc. v. Fresno-Madera Production Credit Ass’n., 16 291 P.3d 316 (Cal. 2013); Chedick v. Nash, 151 F.3d 1077 17 (D.C.Cir. 1998); Graubard Mollen Dannett & Horowitz v 18 Moskovitz, 653 N.E.2d 1179 (N.Y. 1995); Cabnetware, Inc. v. 19 Birmingham Saw Works, Inc., 614 So.2d 1034 (Ala. 1993); 20 Marion Production Credit Ass'n v. Cochran, 533 N.E.2d 325 21 (Ohio 1988). For a sustained academic examination, see 22 Ayres & Klass, Insincere Promises: The Law of 23 Misrepresented Intent (2005). 24 25 b. Proof. Illustration 1 is based on Alexander v. 26 Texaco, Inc., 530 F. Supp. 864 (D. Mont. 1981). 27 Illustration 2 is based on Connecticut General Life Ins. 28 Co. v. Jones, 764 So.2d 677 (Fla. App. 2000). See also 29 Riverisland Cold Storage, Inc. v. Fresno-Madera Production 30 Credit Ass’n., supra; Southland Bank v. A & A Drywall 31 Supply Co., Inc., 21 So.3d 1196 (Ala. 2008); Connecticut 32 General Life Ins. Co. v. Jones, 764 So.2d 677 (Fla. App. 33 2000; Stacks v. Saunders, 812 S.W.2d 587 (Tenn. App. 1990). 34 35 c. Relation to statute of frauds and parol evidence 36 rule. On the relationship between the statute of frauds 37 and tort claims of promissory fraud, see BPI Energy 38 Holdings, Inc. v. IEC (Montgomery), LLC, 664 F.3d 131 (7th 39 Cir. 2011) (Posner, J.) (“[t]he Statute of Frauds is a 40 defense to a claim for breach of contract, not a defense to 41 a tort, and fraud is a tort, and promissory fraud is a form

1 of fraud and so a tort and so not subject to the Statute of 2 Frauds”); Irish Oil and Gas, Inc. v. Riemer, 794 N.W.2d 715 3 (N.D. 2011); Tenzer v. Superscope, Inc., 702 P.2d 212 (Cal. 4 1985); Munson v. Raudonis, 387 A.2d 1174 (N.H. 1978); 5 Burgdorfer v. Thielemann, 55 P.2d 1122 (Or. 1936); Annot., 6 104 A.L.R. 1420. 7 Illustration 3 is based on Ramsay Health Care, Inc. v. 8 Follmer, 560 So.2d 746 (Ala. 1990), though with simplified 9 facts; the actual case involved promised termination 10 benefits. On the relationship between the parol-evidence 11 rule and tort claims of promissory fraud, see Riverisland 12 Cold Storage, Inc. v. Fresno-Madera Production Credit 13 Ass’n., supra; PCR Contractors, Inc. v. Danial, 354 S.W.3d 14 610 (Ky. App. 2011); Shah v. Racetrac Petroleum Co., 338 15 F.3d 557 (6th Cir. 2003) (Tennessee law); Galmish v. 16 Cicchini, 734 N.E.2d 782 (Ohio 2000); Parker v. Columbia 17 Bank, 604 A.2d 521 (Md. App. 1992); Abbott v. Abbott, 174 18 N.W.2d 335 (Neb. 1970).

© 2013 by The American99 Law Institute Preliminary Draft – not approved © 2013 by The American Law Institute Preliminary Draft – not approved 1 § 13. Damages 2 3 (a) Compensatory damages for the tort of fraud 4 are calculated to restore the financial position that 5 the plaintiff would occupy if the tort had not been 6 committed. 7 8 (b) Punitive damages may be assessed as necessary 9 to ensure deterrence and to further other policies not 10 adequately secured by a compensatory award. 11 12 Comment: 13 14 a. General principles. The range of forms that fraud 15 can take calls for a flexible approach to the measurement 16 of damages. Reliance on a defendant’s falsehood may cause 17 a plaintiff to buy something worth less than was promised, 18 or to sell something worth more than the plaintiff was led 19 to believe, or to enter an exchange that the plaintiff 20 would not have made at all if the defendant’s motives or 21 identity were known. Or a fraud may result in no exchange 22 with the defendant, but in expenditures by the plaintiff in 23 preparation for one. The size of any difference between 24 what the plaintiff spent, what the plaintiff received, and 25 what the defendant promised may also vary widely. No one 26 formula will produce the right measure of damages in all 27 such cases, but the two principles of this Section provide 28 general guidance. First, compensatory damages here, as 29 elsewhere in tort, are meant to restore the position the 30 plaintiff would have occupied if the wrong had not been 31 committed. In a case of fraud, that generally means the 32 financial position the plaintiff would have had if the

101

1 defendant had spoken truthfully. Second, punitive damages 2 may be added as necessary to deter the defendant and others 3 from committing similar wrongs in the future, and to serve 4 other policies beyond compensation of the plaintiff. See 5 Comment d. 6 The first principle just stated—the rule of (a)— 7 ordinarily makes “out of pocket” damages the standard 8 measure of recovery for fraud. In a typical case those 9 damages are the difference between what the plaintiff spent 10 on account of the defendant’s fraud and the value of what 11 the plaintiff received as a result. Thus if the 12 defendant’s fraud caused the plaintiff to pay a million 13 dollars for property worth $600,000, the plaintiff’s out- 14 of-pocket damages are $400,000. If the defendant’s fraud 15 caused the plaintiff to lend a million dollars to a bad 16 credit risk who then repaid $600,000, the plaintiff’s out- 17 of-pocket damages likewise are $400,000. Payment of the 18 $400,000 difference in either case is meant to make the 19 defendant’s fraud costless to the plaintiff. It may be 20 supplemented by recovery of special damages that the 21 plaintiff incurred in reliance on what the defendant said— 22 for example, the cost of hiring a lawyer to help carry out 23 the transaction. See Comment b. The goal of all such 24 calculations is to ensure that the plaintiff’s financial 25 position is no worse than it was before the defendant made 26 the misrepresentation. 27 Courts sometimes allow a plaintiff to seek recovery on 28 a “loss of bargain” theory of damages. This measure 29 compares the value of what the plaintiff received to what 30 the defendant said it was worth. It puts plaintiffs where 31 they would have been if the fraudulent statements they 32 relied on had been true. Such a recovery resembles

1 expectation damages in the law of contract, not traditional 2 damages in tort. It can make plaintiffs better off than 3 they were before the fraud was committed. Loss-of-bargain 4 recovery is usually justified by the inadequacy of out-of- 5 pocket damages to deter fraud. Indeed, a plaintiff’s out- 6 of-pocket damages sometimes may be zero; this can occur 7 when the property received is worth what the plaintiff 8 paid, but the defendant had promised that it was worth much 9 more. Allowing the defendant to pay no damages on those 10 facts would be bad policy, so awarding the plaintiff the 11 benefit of the fraudulent bargain might make sense. But 12 such an award is meant not to make the plaintiff whole but 13 to deter the defendant, or perhaps to achieve more complete 14 justice between the parties. Awards for those purposes are 15 the traditional office of punitive rather than compensatory 16 damages. Loss-of-bargain recovery is therefore best 17 considered a form of punitive recovery and described 18 accordingly. See Comment d. 19 Separating the loss-of-bargain measure from the 20 calculation of compensatory damages can help clarify the 21 difference between a plaintiff’s possible recovery under 22 different branches of law. A fraud claim often arises from 23 a contract that was tainted by a defendant’s 24 misrepresentations. The plaintiff’s typical choices may 25 then include rescinding the contract, seeking recovery of 26 the defendant’s gains in a suit for restitution, seeking 27 expectation damages through a suit for breach of warranty, 28 or seeking damages in tort for fraud. See § 7, Comment j. 29 Allowing recovery in tort for “loss of bargain” makes tort 30 claims hard to distinguish from claims for breach of 31 warranty. Limiting compensatory damages in tort to the

1 out-of-pocket measure helps to keep tort and contract 2 recovery distinct, and makes them useful in different ways. 3 In some cases the out-of-pocket measure of recovery 4 does not comfortably fit the facts of a case, as when the 5 plaintiff’s losses do not arise from a difference in value 6 between what the plaintiff received and was promised. 7 Damages are then calculated by returning to first 8 principles and asking what the plaintiff must receive to be 9 left no worse off by the defendant’s wrong. See 10 Illustration 1. 11 12 Illustration: 13 14 1. Retailer of specialty tires has a supply 15 contract with Manufacturer of them. The contract 16 gives either side a right to terminate on short 17 notice. In July, Retailer is offered an alternative 18 supply of the specialty tires by a different maker. 19 Retailer notifies Manufacturer and asks if 20 Manufacturer has any plans to stop supplying its 21 tires. Manufacturer assures Retailer that it has no 22 such plans. The assurance is fraudulent; Manufacturer 23 plans to stop making the tires at the end of the 24 summer. A month later, Manufacturer stops making the 25 tires and terminates its contract with Retailer. 26 Retailer’s alternative supply is no longer available; 27 as a result, Retailer goes out of business. Retailer 28 can recover the value of its business from 29 Manufacturer. 30 31 In calculating out-of-pocket damages, the usual 32 question is the difference in market value between what the

1 plaintiff gave up and received. “Market value” means the 2 price at which the property at issue could have been resold 3 in an open market or by private sale if its quality and 4 other characteristics were known. The market value of an 5 article is generally measured at time of the fraudulent 6 transaction in which it changed hands. In occasional cases 7 that timing is inapt, as when the property the plaintiff 8 received was priced too high because its market value was 9 tainted by the same fraud that affected the plaintiff’s own 10 judgment. In that case the market value of the property is 11 measured as of the time when fraud was widely discovered. 12 For further discussion, see Restatement Second, Torts § 13 549, Comment b. 14 15 b. Special damages. Fraud often causes a plaintiff 16 to buy something that is worth less than the defendant 17 stated. In that case a court begins the measurement of 18 damages by comparing what the plaintiff paid to the value 19 received in return. But a plaintiff may also incur 20 additional damages on account of the defendant’s fraud, 21 such as sums spent to prepare for the transaction or to 22 undo or mitigate harm caused by it, or harm caused because 23 the thing acquired from the defendant was unsuitable for 24 its intended purpose. Losses of these kinds, though 25 another branch of out-of-pocket recovery, are best termed 26 “special” damages, as distinct from the general damages 27 that flow directly from the disparity of value in a 28 transaction. Special damages are available in a case of 29 fraud as a matter of course, in addition to whatever else 30 the plaintiff may collect. Their recovery is necessary to 31 restore the position that the plaintiff would have occupied 32 if the fraud had not been committed. In some cases special

1 damages may be a plaintiff’s only damages, as when a 2 fraudulent statement causes the plaintiff to prepare for a 3 deal that is never made. 4 A plaintiff must prove to a reasonable degree of 5 certainty both the amount of any special damages and that 6 the damages were caused by the defendant’s fraud. These 7 requirements can limit a plaintiff’s recovery 8 significantly. In principle, for example, special damages 9 may include the value of opportunities the plaintiff lost 10 because its assets were diverted by the fraud; such 11 recovery is uncommon in practice, however, because the 12 cause and amount of such losses usually are hard to prove 13 with sufficient clarity. See Illustration 2. Recoverable 14 damages also are limited to losses that might reasonably be 15 expected to follow from the fraud. See § 7, Comment h. 16 17 Illustrations: 18 19 2. Farmer buys milk cows from Supplier, relying 20 on Supplier’s fraudulent assurance that the cows are 21 free from disease. In fact they are infected with 22 Maltese fever, which they communicate to the rest of 23 Farmer’s herd. Farmer is entitled to collect from 24 Supplier, as general damages, the difference between 25 what he paid for the cows and their actual value as 26 infected animals. Farmer also proves, however, that 27 the spread of the disease required him to pay for 28 veterinary treatment and vaccinations of those animals 29 not yet infected; in addition, the disease caused many 30 cows he already owned to become less productive and to 31 lose market value. Farmer is entitled to compensation 32 for those losses as special damages.

1 2 3. Buyer purchases an apartment building from 3 Seller. In the course of their negotiations, Seller 4 fraudulently states that the building complies with 5 all local regulations; after the purchase, Buyer 6 discovers that it does not. Buyer hires Lawyer to 7 determine what steps would bring the building into 8 conformity, then pays for repairs and permits that 9 Lawyer recommends. Buyer successfully sues Seller for 10 fraud, and the court finds that Buyer’s expenditures 11 were reasonable and prudent. Buyer can recover from 12 Seller the costs of hiring Lawyer to advise about the 13 repairs and permits, and the cost of securing them. 14 Buyer cannot recover the cost of paying Lawyer to sue 15 Seller for fraud. Miller v. Higgins, 452 S.W.2d 121 16 (Mo. 1970). 17 18 4. Company hires Broker to handle the initial 19 public offering of its stock. Broker fraudulently 20 assures separate Investor that he will have many 21 shares in Company to sell to Investor on the day of 22 the IPO. Investor agrees to buy 100,000 shares from 23 Broker, and Investor forms a company for the sole 24 purpose of making the purchase. In fact Broker does 25 not know if he will have access to any shares. On the 26 day of Company’s IPO, the value of its shares rises 27 tenfold in two hours, but Broker has none to sell to 28 Investor. Investor sues Broker for breach of contract 29 and fraud. The court finds that Investor’s contract 30 claim fails because his purchase was subject to a 31 condition that never occurred: Broker’s acquisition 32 of the shares. Broker is liable for fraud, however,

1 because he knowingly misrepresented the likelihood 2 that the condition would be fulfilled. Investor has 3 no general damages, but can collect as special damages 4 the costs incurred in forming a company to buy the 5 shares. Investor’s compensatory damages do not 6 include profits he would have made if Broker had 7 obtained the shares for him on the morning of the IPO. 8 Twin Fires Inv., LLC v. Morgan Stanley Dean Witter & 9 Co., 837 N.E.2d 1121 (Mass. 2005). 10 11 5. Company proposes a one-year service agreement 12 with Technician. Technician accepts only because 13 Company assures him that he will be a strong candidate 14 for a long-term contract if he meets certain 15 efficiency standards during the year. Company’s 16 assurances are fraudulent; Technician meets the 17 standards but company does not consider him for a 18 long-term contract, and never intended to do so. 19 Technician sues Company for fraud. He cannot recover 20 his ordinary costs of performance for the year because 21 they were compensated under the contract with Company. 22 But Technician can recover as special damages the sums 23 he spent to meet the high efficiency standards, since 24 he was induced to incur them by false hopes that 25 Company raised. Technician also seeks to recover 26 profits he could have made if he had not been busy 27 pursuing a long-term relationship with Company. The 28 court finds evidence of such lost profits speculative; 29 Technician is unable to identify specific jobs that he 30 could have taken but rejected because of his work for 31 Company, nor can he prove what the other jobs would 32 have paid and cost to perform. Technician’s claim for

1 lost profits fails for want of reasonable certainty. 2 Hoechst Celanese Corp. v. Arthur Bros., Inc., 882 3 S.W.2d 917 (Tex. App. 1994). 4 5 c. Nominal damages. A plaintiff whose rights have 6 been invaded, but who suffers no provable economic damage 7 as a result, may be awarded nominal damages. Nominal 8 damages do not attempt to compensate for actual loss. They 9 are small sums awarded to reflect the judicial conclusion 10 that the plaintiff’s rights were violated. 11 12 d. Punitive damages. Punitive (or “exemplary”) 13 damages may be assessed against a defendant when 14 compensatory damages are insufficient, as may be found for 15 various reasons. First, compensatory damages measured by 16 the principles of Comment a may be too small to deter the 17 defendant or others from engaging in further acts of fraud; 18 sometimes the compensatory award may be nil, despite 19 undoubtedly culpable acts by the defendant. Allowing no 20 recovery on those facts would tempt the defendant or others 21 to repeat the fraud. Punitive damages curb the temptation. 22 Second, sometimes acts of fraud are part of a pattern and 23 are subject to concealment, calling for enhanced damages 24 when they are discovered in order to eliminate the value 25 they have to the defendant when they are not discovered. 26 Third, if an act of fraud is especially outrageous, an 27 award of punitive damages can express the community’s 28 abhorrence in response. Punitive damages justified on this 29 theory require something more than the knowing utterance of 30 a falsehood; the plaintiff must show that the fraud was 31 aggravated in some way, as when the defendant acted with 32 malice or deliberation.

1 The due process clause of the Fourteenth Amendment 2 imposes additional constraints on the imposition of 3 punitive damages. In deciding whether an award of such 4 damages is constitutionally excessive, courts consider the 5 reprehensibility of the defendant’s conduct, the 6 relationship between punitive award and the actual or 7 potential harm suffered by the plaintiff, and the 8 relationship between the punitive award and civil penalties 9 available in similar cases. The second consideration is 10 sometimes pursued by examining the ratio between the 11 punitive and compensatory damages in a case, with ratios 12 greater than 10:1 regarded as suspect. Such ratios must be 13 used with particular caution in cases of fraud, however; as 14 noted above, a plaintiff’s compensatory award sometimes may 15 amount to little or nothing—and indeed that may be the 16 reason for awarding the punitive damages in the first 17 place. Effective deterrence in such a case may require a 18 punitive award considerably greater than the provable harm 19 suffered by the plaintiff. By the same logic, punitive 20 damages should not be restricted to cases in which the 21 plaintiff can show actual damages. Punitive damages may be 22 most important precisely when actual damages are impossible 23 to prove but the defendant’s culpability is clear. Nominal 24 damages can then provide a sufficient predicate for a 25 punitive award. 26 27 e. Mental anguish. The tort of fraud protects the 28 plaintiff’s economic interest in making informed decisions. 29 It is not a dignitary tort, and does not entitle a 30 plaintiff to recover damages for mental anguish. Damages 31 of that kind are best pursued by a claim for the

1 intentional or negligent infliction of emotional distress. 2 See R3T: PEH —. 3 4 Reporter’s Note 5 6 a. General principles. Restatement Second, Torts 7 § 549 stated that loss-of-bargain damages were generally 8 available to plaintiffs in a case of fraud, and many courts 9 have claimed to follow that rule. In practice, however, 10 those courts often balk at awarding loss-of-bargain damages 11 on facts where sound policy does not seem to support them. 12 See, e.g., Twin Fires Inv., LLC v. Morgan Stanley Dean 13 Witter & Co., 837 N.E.2d 1121 (Mass. 2005); Goldstein v. 14 Miles, 859 A.2d 313 (Md. App. 2004); Collins v. Burns, 741 15 P.2d 819 (Nev. 1987). This Section need not alter the 16 result in those cases where courts have found that loss-of- 17 bargain recovery is appropriate. The Section merely 18 describes such recovery as punitive in character, since it 19 is meant to serve purposes other than making the plaintiff 20 whole. For cases following the out-of-pocket approach to 21 measurement taken here, see Continental Cas. Co. v. 22 PricewaterhouseCoopers, LLP, 933 N.E.2d 738 (N.Y. 2010); 23 Stout v. Turney, 586 P.2d 1228 (Cal. 1978); Peterson v. 24 Johnston, 254 N.W.2d 360 (Minn. 1977). For further 25 discussion and endorsement, see Lens, Honest Confusion: 26 The Purpose of Compensatory Damages in Tort and Fraudulent 27 Misrepresentation, 59 Kan. L. Rev. 231 (2011). 28 For cases recognizing the punitive or “admonitory” 29 function of loss-of-bargain damages, see Goodrich & 30 Pennington Mortg. Fund, Inc. v. J.R. Woolard, Inc., 101 31 P.3d 792 (Nev. 2004) (“[t]he benefit-of-the-bargain rule is 32 a punitive measure”); Midwest Home Distributor, Inc. v. 33 Domco Industries Ltd., 585 N.W.2d 735 (Iowa 1998); Kirkruff 34 v. Wisegarver, 697 N.E.2d 406 (Ill. App. 1998); Lutfy v. R. 35 D. Roper & Sons Motor Co., 115 P.2d 161 (Ariz. 1941); see 36 also Restatement Second, Torts § 549, Comment i. 37 Illustration 1 is based on B.F. Goodrich Co. v. Mesabi 38 Tire Co., Inc., 430 N.W.2d 180 (Minn. 1988). 39 40 b. Special damages. Illustration 2 is based on 41 Moreland v. Austin, 330 P.2d 136 (Col. 1958). Illustration 42 3 is based on Miller v. Higgins, 452 S.W.2d 121 (Mo. 1970). 43 Illustration 4 is based on Twin Fires Inv., LLC v. Morgan 44 Stanley Dean Witter & Co., 837 N.E.2d 1121 (Mass. 2005). 45 Illustration 5 is based on Hoechst Celanese Corp. v. Arthur 46 Bros., Inc., 882 S.W.2d 917 (Tex. App. 1994); see also

1 Murray v. Hadid, 385 S.E.2d 898 (Va. 1989). For additional 2 cases defining and explaining special damages, see Baylor 3 University v. Sonnichsen, 221 S.W.3d 632 (Tex. 2007); 4 Zanakis-Pico v. Cutter Dodge, Inc., 47 P.3d 1222 (Haw. 5 2002); Popp Telcom v. American Sharecom, Inc., 210 F.3d 928 6 (8th Cir. 2000) (Minnesota law); Ong Intern. (U.S.A.) Inc. 7 v. 11th Ave. Corp., 850 P.2d 447 (Utah 1993); 8 Commerzanstalt v. Telewide Systems, Inc., 880 F.2d 642 (2d 9 Cir.1989) (New York law). Special damages are sometimes 10 also called “consequential damages,” but that term is 11 avoided here to prevent confusion with the concept bearing 12 the same name in the law of contract. See B.F. Goodrich 13 Co. v. Mesabi Tire Co., Inc., 430 N.W.2d 180 (Minn. 1988). 14 15 c. Nominal damages. For discussion of nominal 16 damages, see Kekona v. Abastillas, 150 P.3d 823 (Haw. 17 2006); Nappe v. Anschelewitz, Barr, Ansell & Bonello, 477 18 A.2d 1224 (N.J. 1984); Maher v. Wilson, 73 P. 418 (Cal. 19 1903). 20 21 d. Punitive damages. On rationales for awarding 22 punitive damages in cases of fraud, and the criteria for 23 imposing them, see Adamson v. Bicknell, 287 P.3d 274 (Kan. 24 2012); Austin v. Stokes-Craven Holding Corp., 691 S.E.2d 25 135 (S.C. 2010); Gennari v. Weichert Co. Realtors, 691 A.2d 26 350 (N.J. 1997); Giblin v. Murphy, 532 N.E.2d 1282 (N.Y. 27 1988); Home Sav. and Loan Ass'n of Joliet v. Schneider, 483 28 N.E.2d 1225 (Ill. 1985); Green v. Uncle Don's Mobile City, 29 568 P.2d 1375 (Or. 1977); Ray Dodge, Inc. v. Moore, 479 30 S.W.2d 518 (Ark. 1972). On the availability of punitive 31 damages in tort claims for fraud generally, see Annot., 165 32 A.L.R. 614. On the rationales for punitive damages 33 generally, see Kemezy v. Peters, 79 F.3d 33 (7th Cir. 34 1996). 35 The leading cases discussing the constitutional limits 36 on punitive damages are State Farm Mut. Auto. Ins. Co. v. 37 Campbell, 538 U.S. 408 (2003), and BMW of North America v. 38 Gore, 517 U.S. 559 (1996). The BMW case notes that “low 39 awards of compensatory damages may properly support a 40 higher ratio than high compensatory awards, if, for 41 example, a particularly egregious act has resulted in only 42 a small amount of economic damages.” For application of 43 the constitutional standards and further consideration of 44 the permissible ratio between compensatory and punitive 45 damages, see Howard University v. Wilkins, 22 A.3d 774 46 (D.C. 2011); Casciola v. F.S. Air Service, Inc., 120 P.3d

1 1059 (Alaska 2005); Boyd v. Goffoli, 608 S.E.2d 169 (W. Va. 2 2004). 3 On the sufficiency of a nominal injury to support a 4 punitive award, see Collier v. Bryant, 719 S.E.2d 70 (N.C. 5 App. 2011); Amerigraphics, Inc. v. Mercury Cas. Co., 107 6 Cal.Rptr.3d 307 (Cal. App. 2010); Kirkpatrick v. Strosberg, 7 894 N.E.2d 781 (Ill. App. 2008); Kekona v. Abastillas, 150 8 P.3d 823 (Haw. 2006); Third Generation, Inc. v. Wilson, 668 9 So.2d 518 (Ala. 1995); Nappe v. Anschelewitz, Barr, Ansell 10 & Bonello, 477 A.2d 1224 (N.J. 1984). 11 12 e. Mental anguish. The position taken in the Comment 13 follows Restatement Second, Torts § 525. See also FMC 14 Corp., Inc. v. Helton, 202 S.W.3d 490 (Ark. 2005); Cornell 15 v. Wunschel, 408 N.W.2d 369, 382 (Iowa 1987); Stich v. 16 Oakdale Dental Center, P.C., 501 N.Y.S.2d 529 (App. Div. 17 1986); Umphrey v. Sprinkel, 682 P.2d 1247 (Idaho 1983). 18 For examples of contrary approaches, see Crowley v. Global 19 Realty, Inc., 474 A.2d 1056 (N.H. 1984); Holcombe v. 20 Whitaker, 318 So. 2d 289 (Ala. 1975).

§ 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,

(b) does not have the confidence in the accuracy of his representation that he states or implies, or

(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

(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.

(b) Punitive damages may be assessed as necessary to ensure deterrence and to further other policies not adequately secured by a compensatory award.