In Short
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Negligent misstatement occurs when a false statement is made by someone who owes a duty of care, leading to financial loss.
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The recipient must show a special relationship, reasonable reliance and resulting loss to make a successful claim.
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Legal advice is essential, as negligent misstatement claims are complex and fact-specific.
Tips for Businesses
To avoid negligent misstatement claims, ensure that all statements made in professional settings are accurate and well-supported. Keep communication clear and well-documented, particularly when advising clients or making promises. Regularly assess your business’ risk of exposure to such claims and consult legal experts when necessary.
Negligent misstatement is a form of negligence. While claims are not often successful, they are often included alongside other claims such as the Fair Trading Act or other consumer laws. Negligent misstatement generally refers to situations where there is a false statement by a person who owes a duty of care to another. Further, the reliance on this false statement causes the latter person financial loss. This article will set out:
- what negligent misstatement is; and
- how it works in practice.
What is Negligent Misstatement?
Negligent misstatement is a form of negligence that is typically quite common in business disputes. While the bar is quite high, it is easy to make a claim that negligent misstatement occurs. It includes instances where:
- a person or business makes a false or misleading statement to another person or business;
- a duty of care or special relationship exists between the parties;
- the person receiving the statement relied on it in a reasonable way; and
- that person suffered some type of loss as a result of relying on the false or misleading statement.
There are various different legal considerations. Further, there are a variety of ‘elements’ that must be satisfied or confirmed for a claim to be successful. These usually vary based on the facts and specific circumstances of the situation. For instance, to see whether there was a duty of care or special relationship between parties, a lawyer or court will look at:
- the nature of the relationship between you and the other party;
- whether the consequential problems were foreseeable; and
- how close and trusted the other party was to you.
How Does Negligent Misstatement Work In Practice?
Negligent misstatement can seem a little theoretical or abstract. Therefore, it can be useful to think about how it plays out in practice. In employment law, for example, an employer may give a reference. They know that whoever is receiving the reference will rely on that information when deciding to hire someone for a job. Therefore, the employer is under a duty to use reasonable care to see that the information is:
- true;
- accurate; and
- not misleading.
Negligent misstatement can also occur where parties are entering into contracts with each other. It will not apply to every situation where parties are entering into a contract. There needs to be a special relationship between those parties that gives rise to a duty of care. For example, it might arise where there is a partnership agreement between parties, and one partner gets another to enter into a contract based on a claim that is not true.
Commercial disputes are costly, stressful and can damage your business reputation. LegalVision’s free Guide to Resolving NZ Business Disputes can help.
Case Study
The recent High Court case of Mudaliar v Sharma [2024] NZHC 1432 provides insights into how courts assess negligent misstatement claims in practice. This case involved a failed property investment where the plaintiff alleged his friend had made negligent misstatements about the investment. The plaintiff argued that he had believed his friend was still a lawyer and had relied on him as his trusted advisor. The court emphasised several key elements of negligent misstatement:
- Duty of Care: The court found that despite the previous lawyer-client relationship, no duty of care existed for this investment opportunity. This ultimately highlights that the context of the relationship, which attaches a duty, is key.
- Reasonable Reliance: The court noted that it was unreasonable for the plaintiff to rely on assumptions about the investment without making inquiries.
- Actionable Misrepresentations: The court was not satisfied that any express or implied misrepresentations were made that were causative of the loss claimed.
- Specificity of Claims: The importance of clearly providing specific misrepresentations was underscored.
This case demonstrates the high threshold for successful negligent misstatement claims. If you are considering such a claim, you should be aware that:
- you must make reasonable inquiries and not blindly rely on assumptions, even when dealing with friends or former advisors;
- you must be able to clearly identify and prove specific misrepresentations that directly caused your loss; and
- courts will carefully examine the context and reasonableness of your reliance on any statements made.
Key Takeaways
Negligent misstatement is a form of negligence. It refers to situations where a person or business makes a false or misleading statement to another person or business. Further, the latter relies on the statement and suffers some kind of loss or detriment as a consequence. There needs to be a special relationship or ‘duty of care’ between these parties. Not all false statements will amount to negligent misstatement for this reason. Getting specialist advice from a lawyer is useful if you consider you have suffered as a consequence of someone else’s negligent misstatement. The law is very fact-specific and will apply differently depending on your personal circumstances.
If you are pursuing a negligent misstatement claim, our experienced disputes and litigation lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0800 005 570 or visit our membership page for more information.
Frequently Asked Questions
It is situations there is a false statement by a person or business who owes a duty of care to another person or business, and the reliance on this false statement causes the latter person financial loss.
A duty of care refers to when two parties (whether individuals or businesses) have a special relationship which means that one of those parties would be entitled to trust or rely on information provided by the other party. There are lots of legal tests and arguments around when a duty of care applies and when it does not, so there is no simple answer to whether there is a duty of care in any given situation.
Resulting loss refers to when the person or business receiving the negligent misstatement suffers some kind of loss or detriment as a consequence of relying on that statement. For instance, if a business can show that it has lost revenue as a consequence, that typically will amount to resulting loss.
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