3.2 Negligent and Fraudulent Misrepresentation
Liability for negligent misrepresentation is established by Restatement (Second) of Torts § 552
as follows:
One who in the course of his business, profession or employment, or in any other transaction
in which he has a pecuniary interest, supplies false information for the guidance of others in
their business transactions, is subject to liability for pecuniary loss caused to them by their
justifiable reliance upon the information, if he fails to exercise reasonable care or competence
in obtaining or communicating the information.26
Liability for fraudulent misrepresentation is established by Restatement (Second) of Torts § 525
as follows:
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.27
Perritt argues that in a contract setting establishing the duty in a misrepresentation case above
and beyond what the contract requires of the parties is often very difficult. He additionally
argues that "the modern law of fraudulent misrepresentation is only subtlety different from the
modern law of breach of contract."28 He makes this argument both in regard to damages
recoverable and in establishing the elements of the case. As such, when a contractual
relationship exists there would appear to be only infrequent situations where it would be
beneficial to pursue a misrepresentation claim over a contract claim. One instance might be
where the time to bring a cause of action has passed the statute of limitations for bringing tort
claims but not a longer statute of limitations for contract claims.29
3.3 Fraud in the Inducement
The complexities and confusion caused by bringing a tort action within a contract setting and the
tendency of courts to defer to the written contract as the final agreement between the parties
sometimes may be overcome by claiming "fraud in the inducement" of the contract.30 The
objective of the plaintiff in such an action is to focus the courts attention solely on the events that
occurred prior to and separate from the contract. Alleged fraud, such as evidenced by fabricated
testimonials or test results, that occurred before consideration of a contract could justifiably be
considered as tortious conduct separate from the contract. The wrongful conduct led the party
into a contract which directly resulted in damages. Fraud in the inducement may be pursued
independent of contract claims. Thus, by this approach the plaintiff advocates disposition of the
dispute by establishing duties and breach of duty standards through tort concepts and ignoring
the contract language, except perhaps in evidencing the amounts and kinds of damages suffered.
3.4 Strict Products Liability
For public policy reasons, suppliers of defective products are often held strictly liable to
consumers and other product users for injuries caused by defective products. The primary
objective of strict products liability theory is to provide an incentive to manufacturers to keep
unsafe defective products off the market. The incentive is provided by reducing the burden of
proof on harmed parties and making the manufacturer and others in the supply chain responsible
for damages caused by unsafe defective products. If only negligence theory applied, suppliers
could often escape liability for defective unsafe products by showing that industry-wide
standards for design and manufacture were reasonably met. A product might be unsafe, yet still
meet usual industry standards for quality control and design.
Restatement of the Law (Second) Torts §402A states that:
(1) One who sells any product in a defective condition unreasonably dangerous to the user or
consumer or to his property is subject to liability for physical harm thereby caused to the
ultimate user or consumer, or to his property, if
(a) the seller is engaged in the business of selling such a product, and
(b) it is expected to and does reach the user or consumer without substantial change in the
condition in which it is sold.
(2) The rule stated in Subsection (1) applies although
(a) the seller has exercised all possible care in the preparation and sale of his product, and
(b) the user or consumer has not bought the product from or entered into any contractual
relation with the seller.
Under a strict products liability approach there is no need for the harmed party to show that those
with a financial interest in placing the product on the market were negligent in the design or
manufacture of the product. Showing the defective condition, that it was unreasonably
dangerous, and that it caused the physical harm suffered is sufficient. The duty of a product
provider in such an instance is to any reasonably foreseeable member of the public that might be
harmed by the good. Fault is not a required element of the cause of action under strict liability
and therefore waivers and disclaimers of fault that might be contained in a contract between the
supplier and the consumer are ineffective because they are irrelevant to the cause of action.
Other courts have held such disclaimers not to be irrelevant but to be invalid in consumer
transactions as against public policy.
Although liability is strict in such instances, it is not absolute. There is no award of damages for
purely economic injuries. There must be physical injury and the plaintiff must prove that a
defect attributable to the defendant caused the injury. Defects may be due to manufacture or
design. A manufacturing defect results when the finished product is not in the condition the
manufacturer intended it to be when it left its control. A design defect is one that causes the
product to carry an inherent risk of harm in its normal use.31
If a physical injury occurs only to property, the question often arises whether the physical injury
is of such a nature that the claim warrants inclusion under strict products liability theory. The
clearest cases appear to be those in which property damage involved a safety hazard that could
readily have caused personal physical injury to a consumer or other user even though in the case
at issue it caused only physical injury to property.32 That is, the nature of the defect and the type
of risk involved in causing the physical injury to property are so closely associated with potential
physical injury to persons that the underlying goal of preventing such hazards would be
frustrated if the physical injury to property is not included within the ambit of strict liability. 33
Other courts determine whether physical injury to property without physical injury to persons
falls within the ambit of tort law primarily by looking at the relationship among the parties. A
"garden variety" consumer has very little bargaining power and therefore some courts, on public
policy grounds, allow consumers to sue in tort rather than restrict them to breach of warranty
actions. Thus a consumer with little bargaining power that has suffered physical harm from a
defective product should be able to pursue a strict liability cause of action in these jurisdictions.
This may be true even for a commercial consumer assuming the commercial consumer has little
expertise in the product and the product was offered "as is" with little or no bargaining involved.
If a party has little bargaining power, sound public policy also indicates that the consumer also
has no power to disclaim their right to seek redress under strict liability principles.34
Several court cases in the U.S. have indicated that the imposition of strict liability should be
allowed in electronic maps and charts.35 The language of these cases justifies including
electronic charts and maps while excluding how-to-do books from the realm of strict liability by
distinguishing charts and maps as technical tools whereas how-to-do books are more in the
tradition and nature of providing ideas and expressions. At least one commentator suggests that
this distinction is not very useful. He suggests that distinguishing practical works that lead
people to depend on a work product for taking direct physical action is a more reasonable way to
determine which products should be considered within the ambit strict liability.36 Whether
treated as a technical tool or a practical work that leads people to take action, electronic charts
and maps seem to be well within the bounds of the type of information product reasonably
considered under strict liability principles.
Damages are recoverable for direct injuries such as medical expenses, lost wages, property
damages, and pain and suffering. Losses which are solely economic without physical injury are
generally not recoverable under strict liability.
3.5 Tort Liability in GIS Cases
3.5.1 Scenario 2 - In scenario 2 discussed previously, the only damages alleged by the health
care products distributor are economic. In that case the clear showing of a defect in the software
that resulted in the system malfunctioning rather than not working may be sufficient to meet the
requirement of misfeasance. If so, this would allow the parallel action in negligence and raise
the possibility of recovering damages beyond those allowed under contract liability principles.
However, even if negligence is found in failing to meet the requisite duty, the fact remains that
the waiver of express and implied warranties in that specific contract might still be upheld.
3.5.2 Scenario 3 - Let''s assume that a small two person "timber finding" business reads about the
possibilities of finding pockets of hardwoods through the use of GIS and image processing
software in combination with satellite imagery. A large GIS consulting firm advises the timber
finding business that they have already developed the system that the timber finding company
needs, they have numerous clients using the system, and those clients have all increased their
hardwood finds by at least 200% over conventional ground cruising methods. The timber
finding business enters into a contract with the GIS consulting firm for delivery of a fully
operational system including the imagery they need for the large land mass that they are
interested in investigating. The signed contract between the parties states that "damages
recoverable by the purchaser in the event of a breach of this contract by the seller are limited
solely to return of the price of the contract." The GIS consulting firm fails to provide the system
and in fact no system has ever been developed. The timber finding company relies on the
consulting firm''s promise to deliver the system on time and suffers substantial reliance damages
due to timber finding contracts it was forced to breach because the new capabilities were not
delivered as promised.
Discussion: In this case the claimed losses are solely economic. They are arguably the result of
nonperformance as opposed to improper performance. Thus, the traditional test for allowing a
negligence action in parallel with the contract action is not met. Yet, the plaintiff would still
prefer suing in tort since tort actions may allow the possibility for a greater range of damage
recoveries.
One approach that the timber finding company might take is to argue the malpractice claim that a
duty independent of the contractual duty arose in this specific instance. In arguing the "special
relationship" elements of such a case the timber finding company would argue that their
company is relatively unsophisticated, they needed to depend on the expertise of the consulting
company, did in fact do so, and the consulting company held itself out as having the required
special expertise to implement the complex technological system for them. If the court rejects
these arguments, defers to the contract as the final agreement between the parties, and holds that
the contract is not unconscionable, the provision limiting the contract damages is likely to be
upheld.37
Negligent or fraudulent misrepresentation may also be potential causes of action in the case. If
the plaintiff can prove through a preponderance of the evidence the misstatements of facts as
alleged, they probably have a good case for fraudulent misrepresentation. For instance, evidence
of fabricated written testimonials of the other purported clients of the GIS consulting firm would
be solid evidence of fraudulent intent and misrepresentation of facts. If the only evidence of
fraud is oral, the danger exists that oral statements prior to the contract will be treated as
"puffery" on the part of the seller which any reasonable purchaser should have treated with
caution and the court may lean toward the contract as evidencing the full and final agreement
between the parties.
A claim for "fraud in the inducement" of the contract also offers possibilities for success by the
plaintiff. Here the objective is to convince the court that the alleged fraud involved separate and
distinct actions prior to and extraneous to the contract. If the court is convinced that the fraud
was a sufficiently separate occurrence there is less likelihood of deferring to the contract
language to resolve the matter. This would undoubtedly be to the plaintiff''s benefit as it would
avoid imposition of the contract language limiting damages.

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