Tag: negligent misrepresentation

Information-Technology Firm Not An ‘Information’ Provider Under Negligent Misrepresentation Economic Loss Exception (ND IL)

computer crashPublications International Limited v. Mindtree Limited, 2014 WL 3687316 (N.D.Ill. 2014) looks at whether a Web site developer is financially responsible for  a customer’s multiple system crashes.

The plaintiff on-line consumer products reviewer sued the defendant information-technology firm after the plaintiff’s site kept malfunctioning.  The plaintiff sued for breach of the parties’ written consulting agreement and joined claims for wilfull and wanton conduct and fraudulent concealment. 

The plaintiff alleged that defendant’s negligence in installing and maintaining the site resulted in decreased customer traffic resulting in lost revenue.  The defendant moved to dismiss all claims except for the breach of contract count.  

Result: Motion granted. 

Reasons:

The Court rejected plaintiff’s breach of warranty claim failed because it was premised on a warranty – to comply with the standard of care of an experienced IT company – that didn’t exist in the parties’ contract. 

In Illinois, an express warranty is contractual in nature and the specific warranty text will govern the parties rights and duties.  Here, the consulting contract contained broad disclaimers of express and implied warranties as well as an integration clause. 

Illinois courts enforce warranty disclaimers as long as they’re conspicuous (e.g. bold, ALLCAPS language) and integration clauses are routinely applied to prevent contracting parties from trying to change a contract’s clear wording by citing prior oral statements related to the contract’s subject matter. (**2-3).

The Court struck the plaintiff’s negligence and willful and wanton counts based on the economic loss rule.   The economic-loss doctrine prevents a party from suing in tort to recover economic damages that are based on a breach of contract. 

So, if a contract involving a defective product exists, and the plaintiff alleges that the product defect caused disappointed commercial expectations, the plaintiff’s remedy lies in breach of contract; not in negligence or in another tort theory.

The Court found that the a contract clearly governed the parties’ relationship and the plaintiff’s claimed damages to its on-line presence, goodwill,  reputation and its brand were purely intangible and economic in nature. 

An exception to the economic loss rule involves an action alleging negligent misrepresentation.  This exception applies where a defendant is “in the business of supplying information for the guidance of others in their business transactions.”  Other economic loss exceptions include the fraud and sudden and dangerous occurrence exceptions.

Here, the negligent misrepresentation exception didn’t apply.  The defendant was hired to provide a product (software) and services (tech assistance) – not information (this in spite of the ironic “information-technology” title).  

Since the contract’s primary purpose was for the defendant to supply  software and technical services to the plaintiff, the negligent misrepresentation exception wasn’t triggered.  Any information provided by the defendant was purely tangential or “secondary” to the main purpose of the contract.

The Court also nixed the plaintiff’s “extra-contractual” duty argument: that defendant owed a duty of care outside the scope of the written contract.  The only situations that an extra-contractual duty applies are in professional malpractice suits (e.g., a legal malpractice case) where the defendant owes a fiduciary duty to a comparatively vulnerable plaintiff. 

The Court noted that there was no case-sanctioned practice or custom of allowing professional malpractice claims against IT developers and no law that saddled them with fiduciary duties to their customers.

 Afterwords:

– Warranty disclaimers are valid and enforced so long as they’re clear and conspicuous;

– The economic loss rule bars tort claims against a defendant who provides a mix of goods and information if the information is secondary to the supplier of goods or services.

 

Illinois Consumer Fraud Act Applies To ‘Biz to Biz’ Insurance Dispute Says Fed. Court

In GoHealth, LLC v. Zoom Health, Inc., 2013 WL 6183024, the Northern District provides a detailed summary of the necessary Illinois pleading elements of some signature business torts in a diversity contract dispute involving the sale of insurance products.

Plaintiff and defendants entered into a written agreement where plaintiff would sell insurance product leads to defendants for a fee.  The defendants would in turn use the leads in peddling insurance products to its own customers.  The relationship soured and each side filed claims against each other.  Defendant’s counterclaims sounded in consumer fraud and common law fraud. Each side moved to dismiss.

The Court struck defendants’ fraud and negligent misrepresentation claims and upheld its consumer fraud and trade secrets counts.

Fraud Claim and Negligent Misrepresentation Claims

The Court dismissed the defendants’ common law fraud  and negligent misrepresentation claims.  An Illinois fraud plaintiff must allege a (i) knowingly false statement, (ii) intended to induce reliance in the plaintiff, (iii) reliance by the plaintiff and (iv) damages resulting from the reliance.

Negligent misrepresentation has the same elements as fraud except the plaintiff must allege a negligent or reckless (instead of intentional) false statement.  Federal specificity-in-pleading rules under Rule 9(b) don’t apply to a negligent misrepresentation claim. *9-10.

Defendants’ fraud count asserted that plaintiff falsely inflated defendants commission and renewal rates and misstated some sales projections.

The Court found that these two statements non-actionable as they involved future events (e.g. future sales and commissions projections).  Statements of future intent, opinions or of financial projections don’t equal fraud under the law.

The Court also rejected defendants’ argument that plaintiff was in business of providing information for the guidance of others in their business dealings – a key exception to the economic loss rule (this rule posits that you can’t recover in tort where a contract governs the parties’ relationship.)

The Court held that plaintiff was contractually obligated to provide sales leads and nothing else.  It wasn’t hired to provide sales projections or renewal forecasts – the bases for defendants’ fraud and negligent misrepresentation claims.  Any information provided by plaintiff in connection with the leads was peripheral to the contract’s core purpose.  *11.

Consumer Fraud Claims – Allowed

The court sustained defendants’ consumer fraud counterclaim. 815 ILCS 505/1 (the “Act”).  The consumer fraud count was based on plaintiff furnishing over 40,000 bogus and recycled sales leads to defendant instead of fresh leads.

Allowing the claim, the Court broadly construed the Act to encompass business-to-business relationships: “the protections of the Act are not limited to consumers”, but applies broadly to “persons”, including businesses. *12.

The court found the defendant was a “consumer” of plaintiff’s sales leads which constituted intangible property under the Act. (The Act applies to intangible property.)

The defendants’ claim that plaintiff supplied a high volume of duplicate leads also stated a deceptive act under the Act.   *12.

Afterword:

This case is post-worthy for its application of the consumer fraud statute to a purely business-to-business setting and its discussion of what constitutes “information” in the context of a negligent misrepresentation claim that will beat an economic loss rule challenge.

The Negligent Misrepresentation Exception to Economic Loss Rule: The Information v. Tangible Product Dichotomy

The economic loss rule bars recovery in tort where the claim is essentially one for breach of contract.  Lincoln Park West Condominium Association v. Mann, Gin, Ebel & Frazier, 136 Ill.2d 302, 307 (1990)(economic loss rule generally).  “Economic loss” means (i) damages for inadequate value, (ii) costs of repair and replacement of the defective product, (iii) consequent loss of profits without any claim of personal injury or damage to other property or (iv) the diminution in the value of the product caused by its defect.   Id.

Where a contract governs the parties’ relationship, the proper remedy for a breach is generally a breach of contract action; not a negligence claim.  A crude example: plaintiff enters into contract for defendant to supply 50 pieces of computer hardware.  Defendant fails to do so.  Plaintiff’s remedy is a breach of contract suit; not a negligence action.

The main exceptions (meaning, situations where the economic loss rule won’t defeat a tort claim) to the economic loss rule are (1) the fraud exception: the claim is based on defendant’s fraudulent conduct; (2) the sudden or dangerous occurrence exception: plaintiff’s claim results from a calamitous event (like a flood or explosion); (3) the “extra-contractual” exception: attorneys and accountants owe clients fiduciary duties that go beyond the scope of the contract; and (4) the negligent misrepresentation exception: a tort claim will lie against a defendant who makes a negligent misrepresentation and who is in the business of providing information for the guidance of others in their business transactions. 

In Stewart Title Guaranty Company v. Inspection and Valuation International, Inc., 2013 WL 5587293 (N.D.Ill. 2013), the Court found that the negligent misrepresentation exception did not apply to deficient construction management services on a hotel renovation project.

The plaintiff – assignee of mortgage lender on hotel development – sued a construction manager for negligence in failing to properly monitor the hotel development.  A written contract required the construction manager to manage all aspects of the project.  The plaintiff alleged the defendant failed to properly supervise the project and misrepresented the project’s status, budget issues and quality of the work.

The defendant moved to dismiss the negligent misrepresentation claim based on the economic loss rule.  The defendant’s key argument was that since a written contract governed the parties’ relationship (the construction management contract), the plaintiff’s remedy was a breach of contract action; not a claim for negligence claim. 

Held: motion to dismiss granted.  Plaintiff’s negligent misrepresentation claim is barred by economic loss rule.

Why?

The negligent misrepresentation exception to the economic loss rule applies where (1) defendant is in business of supplying information for the guidance of others in their business dealings; (2) defendant provided information that constitutes a misrepresentation; (3) defendant supplied information for guidance in plaintiff’s business dealings.  *5.

The critical question in determining whether the exception applies is whether the parties’ relationship will culminate in the creation of a tangible product.  If it does, the economic loss rule will bar recovery.  If it doesn’t (meaning, the end product is intangible “services”), the plaintiff may have a viable negligence claim.  

The First District sided with the defendant and held that, as part of its contractual management duties, the defendant was hired to cull engineering and architectural drawings, plans and data and incorporate that information into a tangible product – namely, the renovated hotel.  Any information supplied by the defendant was incidental to and merged into the building itself. 

The Court rejected plaintiff’s argument that defendant was an information-producing “consultant” to the project whose main role was to “advise” the plaintiff.  The Court ruled that since any information provided by defendant was incorporated into the hotel structure, any information provided was insignificant.

Comments: Where the main purpose or end result of a given contract is a palpable product – as opposed to advice giving, consulting or information – the economic loss rule will apply and defeat a tort suit.  The Court does acknowledge though that in certain instances, a contract involving an architect, engineer or contractor – usually quintessential tangible product contracts – can meet the  negligent misrepresentation test if the contract is purely for consulting/advising.