Negligent Misrepresentation of Facts Can Lead to Contract Disputes

Attorney in a black suit sitting at a desk and writing on a document on a clipboard. Scales of justice are in the foreground.

Contracts serve as the foundation and structure for any relationship.  These formal agreements govern the responsibilities and obligations of each party.  By setting clear expectations for everyone involved in a transaction or other arrangement, contracts help businesses across South Dakota avoid misunderstandings, and thereby lessen the likelihood of disputes, which are often costly.  It is like the old adage:  Good fences make good neighbors.

Accurate information and representations are key to any contract.  Under South Dakota law, both parties to a contract owe the other a duty of good faith and fair dealing.  This includes ensuring that information and representations conveyed in connection with entering into the agreement are truthful.  But occasionally, one party may enter into an agreement based on information that, without any wrongful intent by the other party, turns out to be incorrect or inaccurate.

Not a direct lie, but not the truth either

Negligent misrepresentation occurs when one party makes a statement without reasonable grounds for believing that the statement is true.  When this occurs, they may be negligently misrepresenting the facts at hand without directly lying.

Keep in mind that a person’s opinion or pitch designed to entice a buyer—sometimes referred to as “puffing”—does not necessarily constitute a misrepresentation.  To qualify as negligent misrepresentation, the statements in question must generally be aimed at getting the other party to rely on the statement to his/her detriment, perhaps by agreeing to purchase something.

For instance, this could occur during contract negotiations if another party made a statement about the industry or market without having any reason to believe it was true in an effort to persuade you to enter into a contract.  If you suffered a financial loss or were otherwise harmed because of the negligent statements made, you may be able to hold the other party liable for the misrepresentation to recoup your losses.

Proving your case

Negligent misrepresentation can be difficult to prove.  In South Dakota, a party must prove the following to recover for negligent misrepresentation:

  1. The defendant made a representation as a statement of fact;
  2. The representation was untrue;
  3. The defendant did so without reasonable grounds for believing the statement or representation to be true;
  4. The defendant did so with the intent to induce a particular action by the plaintiff;
  5. The plaintiff changed his/her position with actual and justifiable reliance on the statement or representation; and
  6. The plaintiff suffered damage as a result.

Mitigating risk with due diligence

Business transactions are not without risk, but entering into an agreement under false or incorrect assumptions can result in significant financial consequences.  When something seems too good to be true, it often is.  Performing your due diligence and thoroughly reviewing a contract before signing can prevent a contract dispute stemming from misinformation later on.  If you believe someone negligently represented facts to you when you entered into a contract, you are welcome to call the attorneys at Thomas Braun Bernard & Burke, LLP.