[NOTE: This discussion is offered for general informational and educational purposes. It is not offered as, and does not constitute, legal advice or a legal opinion. These materials should not be utilized as a substitute for professional services in a specific situation. If legal advice or other expert assistance is required, the services of an appropriate professional should be sought.]


Fraudulent Misrepresentation


Under Pennsylvania Law, a business and/or its agents, can be liable for fraudulent misrepresentation if a misrepresentation of fact or law is fraudulently made for the purpose of inducing another to act or refrain from acting .

The elements of fraudulent misrepresentation are as follows:

  1. a false representation is made;
  2. which is material to the transaction;
  3. which is made with knowledge of its falsity or reckless disregard as to whether it was true or false;
  4. with the intention by the person making the representation that the recipient will be induced to act or refrain from acting;
  5. which representation is justifiably relied upon by the recipient; and
  6. which reliance proximately causes the recipient to suffer damages.
The fact that somebody can be held liable for a fraudulent misrepresentation is hardly surprising. Beyond this basic concept, however, the law does take what may be some suprising turns.

First, in order to be actionable, the representation need not be in the form of a positive assertion. It can consist of anything calculated to deceive, whether by single act or combination, whether by suppression of truth or a suggestion of what is false, and it includes direct falsehoods, innuendos, silence, gestures, etc.

Secondly, an innocent representation is actionable where the party making the representation is under some duty to ascertain the truth or falsity of the statement before making the "representation."

Lastly, a representation may be actionable by some third party if that third party's reliance was foreseeable.

For example, consider the case of Bortz v. Noon, 698 A.2d 1311 (Pa. Super. 1997). Bortz involved a suit brought by a purchaser of real estate against the real estate broker, contractor, and settlement agent for damages suffered as a result of a defective septic system. Note that the real estate broker and contractor had been engaged by the sellers, and the settlement agent was acting on behalf of the bank providing the purchase funding to the purchaser.

One of the conditions of the mortgage commitment in the case was that the property's septic system had to pass a dye test prior to closing. The property failed the first test. The real estate broker advised the purchaser of the problem and of the fact that closing would be delayed until the test was passed.

The sellers hired a contractor to make the necessary repairs. The contractor apparently did some work on the system and delivered to the settlement agent at closing a "report" that was ambiguous in that it stated that the property had passed the test, but also revealed the existence of certain facts that would indicate that the problem(s) had not been remedied. Based on that report, which was interpreted by the settlement agent as indicating that the test had been passed, the closing proceeded. The problem(s), of course, had not been remedied, resulting in significant damages to the purchaser after the closing.

In holding that the real estate agent could be liable for fraudulent misrepresentation, the court concluded that she had a duty to make sure that, in fact, the problem had been remedied before allowing the sale to close. This duty appeared to arise out of her statement to the purchaser that the problem(s) would be corrected before closing. The court found that her silence (innocent though it may have been) constituted a false representation that the problem(s) had in fact been corrected. The liability of the contractor was relatively easy for the court, finding, as it did, that he knew that the purchaser would rely on his report and that he was on notice of facts that should have called his conclusion into question. Lastly, the court held the settlement agent liable on the basis that it was his interpretation of the report on which everyone relied in proceeding with the closing, and that, having been confronted with an ambiguous report he should have questioned the conclusion on behalf of the purchaser.

It seemed to have been pretty much accepted by all parties that the purchaser's reliance on everybody else was justifiable. One would expect, however, that this was based on the consumer nature of the transaction. In a business to business transaction, courts would likely require some effort on the part of the recipient to protect itself. Accordingly, the lesson is not (and/or should not be) that parties are relieved of the duty to do their own "due diligence."

On the other hand, it is clear that courts will interpret a party's duty of care expansively to cover any third party who the party knew or should have known would rely on his "representation." Accordingly, in transactions involving third parties, one must take extreme care in what is said and done in order to make sure no innocent statements cause the assumption of an unintended duty.

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