Tension and Controversy
Today the great majority of jurisdictions use Restatement (Second) of Torts §552 as the appropriate standard in negligent misstatement cases. But tension in its appliÂcation and controversy about the issues involved in negligent misstatement remain.
The principal competitor to §552 is the near privity doctrine with which the New York Court of Appeals has revitalised the Ultramares principle. In Credit Alliance Corp v Arthur Andersen & Co and subsequent cases, the Court framed a doctrine that preserved the policies of Glanzer and Ultramares but is easier to apply than the standards in those cases.[1289] The Court's rule took the form of two three-prong tests. The first test stated the elements of a negligent misrepresentation cause of action:(1) the existence of a special or privity-like relationship imposing a duty on the defendant to impart correct information to the plaintiff;
(2)that the information was incorrect; and
(3)reasonable reliance on the information.[1290]
The second test determined whether there was a sufficient relationship to satisfy the first element of the cause of action:
(1) [the defendant] must have been aware that [its information] was to be used for a particular purpose or purposes;
(2)in the furtherance of which a known party or parties was intended to rely; and
(3) there must have been some conduct on the part of [the defendant] linking it to that party or parties, which evinces the [defendant's] understanding of that party or parties' reliance.[1291]
The two cases that were consolidated for appeal in Credit Alliance demonstrate the application of the tests. In Credit Alliance itself, an accountant was held not liable to a lender who had loaned money to the accountant's client in reliance on the accountant's erroneous audit, a copy of which had been provided to it by the client.
Even though the accountant knew or had reason to know that the client was showing the report to the lender to induce the loan, there was no allegation that the audit was prepared for that particular purpose or that the accountant had any direct dealings with the plaintiff. Thus, the elements of the test were lacking, espeÂcially the linking conduct required by the third element. In European American Bank and Trust Co v Strauhs & Kaye,[1292] however, a lender alleged that the accountÂant was aware that it was relying on the accountant's work in valuing the collateral of its loans and otherwise assessing the financial status of the accountant's client, the borrower. Further, the accountant and the lender were in contact with respect to the borrower's affairs over a substantial period of time, they met for the purÂpose of discussing the borrower's financial condition and the lender's reliance on the accountant's evaluation, and the accountant made repeated representations in person about the value of the borrower's assets. Therefore, each element of the test was met, particularly the requirement of linking conduct.The requirement of some linking conduct or nexus between the purveyor of information and the relying third party has become the most important and the most difficult for a plaintiff to meet. Cases since Credit Alliance suggest that the conduct required of the defendant must clearly indicate that the defendant knows that the plaintiff will rely on the information it provides in the specific transacÂtion, and that the reliance is a motivation for the defendant's engagement. When both of those factors are not clearly shown by the linking conduct, no liability is possible.[1293]
Credit Alliance stands in opposition to §552, and it has been adopted by a few jurisdictions other than New York.[1294] Even among jurisdictions that apply the Restatement rule there is considerable controversy about the breadth of its appliÂcation.
The most significant differences concern who may rely on the information and the transaction in which the reliance may occur. The drafters of the R estateÂment (Second) intended that the scope of liability for negligent misstatement should be narrower than for intentional misrepresentation and that it should be determined by a Learned Hand-type balancing formula for negligence.[1295] The test is ‘a relative standard, which may be defined only in terms of the use to which the information will be put, weighed against the magnitude and probability of loss that might attend that use if the information proves to be incorrect’.[1296]Subsection (2) of §552 mandates a double requirement of intent or knowledge, as to both the person who relies on the information and the transaction in which that person relies. The courts vary in the degree of intent or knowledge required of the defendant, from a narrow focus on the actual intent of the defendant to a broad consideration of the relationships in the context in which the misrepÂresentation is made. In Bily v Arthur Young & Co the California Supreme Court practically equated the knowledge requirement of §552 with the intent standard for intentional torts or the intended beneficiary requirement of contract law.[1297] The Court stated:
The ‘intent to benefit’ language of the Restatement (Second) thus creates an objective standard that looks to the specific circumstances (eg, supplier-client engagement and the supplier’s communications with the third party) to ascertain whether a supplier [of information] has undertaken to inform and guide a third party with respect to an identiÂfied transaction or type of transaction.[1298]
At the other extreme, some courts loosen the knowledge test so it approaches foreseeability. For example, when an appraisal of real property is a condition of the buyer’s financing, the buyer is deemed to rely on the making of the loan as an indication of the value of the property as determined by the appraisal, and the appraiser is held to have constructive knowledge of the buyer’s constructive reliance.[1299] The particular borrower who is likely to rely may be known to the appraiser or the appraiser may only know that some borrower, then unidentified, will rely on the appraisal; in either case, the borrower is a foreseeable victim of a negligently prepared appraisal.[1300]
Many courts require that a defendant know of the potential user of the inforÂmation it provides and of the potential use of the information.[1301] This standard constitutes a middle ground between the intent standard of Bily and a rule which renders the defendant liable for foreseeable uses of the information.[1302] ‘Knowledge’
under this standard is distinguished from the Bily Court's emphasis on actual intent or substantial certainty of consequences and from foreseeability.[1303]
V.