On December 4, 2000, the Supreme Court of Tennessee addressed two certified legal questions from the Sixth Circuit Court of Appeals regarding the tort of negligent misrepresentation. The court ruled that liability for negligent misrepresentation is not confined to professionals, indicating that commercial entities can also be held accountable for providing misleading information. However, the court found that the case record did not sufficiently establish the elements required for this cause of action.
The plaintiffs, Jack and Nancy Ritter, Thomas H. and Debra Kitt's, and Fred A. and Donna J. Sykes, alleged economic losses after using a product called Frost Guard, manufactured by the defendant, Custom Chemicals, Inc., which was advertised as protective against frost damage for their tomato crops. Following extensive crop damage, the plaintiffs initially filed claims for breach of warranties, negligence, and negligent misrepresentation. The district court granted summary judgment for the defendant on all claims, leading to an appeal focused solely on negligent misrepresentation.
The plaintiffs argued that their circumstances met the criteria for recovery under the tort of negligent misrepresentation, referencing relevant case law and the Restatement (Second) of Torts § 552. The defendant contested this applicability, citing its own legal precedents. The court clarified that while distinctions exist between damages for economic losses and property damage, the current case specifically sought damages for economic loss, which was the focal point of the certified questions.
The terms "economic loss" and "pecuniary loss" are equivalent in this context, encompassing loss of profits, as established in John Martin Co. v. Morse Diesel, Inc. The complaint does not include allegations of fraud. The distinction between Section 402B (Misrepresentation by Seller of Chattels to Consumer) and Section 552 of the Restatement (Information Negligently Supplied for the Guidance of Others) is noted, but the resolution hinges on Section 552, as interpreted by the Sixth Circuit. Section 552 outlines the liability for pecuniary loss due to negligent misrepresentation, stipulating that one who supplies false information in a business context may be liable for resulting losses if they fail to exercise reasonable care. Liability extends only to those individuals or a limited group intended to benefit from the information, and reliance must be justifiable. The John Martin Co. case examined whether a subcontractor could pursue a tort claim against a construction manager for economic loss due to negligent misinformation. The court ruled that privity of contract is not necessary for a negligent misrepresentation claim against professionals who provide technical guidance. Subsequently, Bethlehem Steel Corp. v. Ernst & Whinney confirmed that Section 552 serves as the standard for determining the liability of accountants and other professionals in similar situations, even without contractual privity.
In Bethlehem Steel Corp. v. Ernst & Whinney, the court clarified that Section 552 of the relevant statute is not limited to professionals, as it applies to anyone acting in the course of business or with a pecuniary interest. This includes non-professionals involved in various business transactions, supported by case law involving diverse entities such as pest control companies, landlords, and real estate sellers. The court determined that Section 552 imposes liability if a defendant provides false information in a business context or fails to exercise reasonable care in communicating such information.
However, the plaintiffs failed to establish a cause of action under Section 552. Their allegations centered on their reliance on advertisements and assurances from Custom Chemicals regarding the product "Frost Guard," which allegedly caused crop damage. The court noted that the plaintiffs did not identify any specific false information provided by the defendant nor demonstrate negligence in how that information was communicated. The court also emphasized that general claims about product effectiveness do not suffice to prove misrepresentation under Section 552. Furthermore, the Sixth Circuit pointed out that the plaintiffs might have had a viable claim under Section 402B, which holds sellers liable for misrepresentations that cause harm to consumers, but they did not pursue this avenue for property damage.
A seller can be held liable for misrepresentation of material facts regarding the quality of a sold chattel, regardless of negligence or contractual relationship. However, liability under Section 402B is restricted to physical harm to persons or property, excluding economic loss. Although the plaintiffs experienced extensive crop damage, which constitutes physical property damage eligible for recovery under Section 402B, their lawsuit focused on economic damages due to lost profits, thus barring recovery under this section. The John Martin Co. ruling clarified that Section 552 does not apply to product liability cases, emphasizing that the recovery theory involved negligent information provision rather than product liability. The plaintiffs' losses stemmed from a defective product, not from misguidance in service performance. Prior to the ruling in First Nat'l Bank v. Brooks Farms, Tennessee law allowed for recovery of economic damages in product liability cases, as established in Ford Motor Co. v. Lonon. However, Brooks Farms overruled Lonon, limiting recovery in product liability cases to personal injury or property damage and asserting that manufacturers are not responsible for purely economic damages. This stance aligns with the Model Uniform Product Liability Act, which restricts negligent misrepresentation recovery to recognized damages, excluding direct or consequential economic loss. Academic consensus supports the notion that negligent misrepresentation cannot be used to claim pure economic loss from product failures.
Negligence law requires a defendant to exercise due care to prevent harm to persons or property. If a defendant fails in this duty, they are liable for resulting injuries and related losses. However, there is no legal obligation for manufacturers, such as International Harvester, to ensure their products, like tractors, meet specific performance standards necessary for a purchaser's profitability in farming. Economic loss claims arising from product failures are better addressed through contractual theories rather than negligence. Tennessee courts, for example, have affirmed that the Uniform Commercial Code governs buyer-seller economic relations, allowing buyers to seek legislative remedies. The prevailing view is that negligent misrepresentation does not allow recovery for pure economic losses due to a product's failure, a stance supported by various academic commentators and aligned with the Model Uniform Product Liability Act.
A duty under negligence law does not arise from warranties, agreements, or representations by the defendant. In Tennessee, product liability claims for pure economic loss are better addressed through theories other than negligence. The case of Prairie Production illustrates this, where a seed company faced economic losses due to a pesticide's failure, leading to the Court of Appeals affirming that the Uniform Commercial Code governs buyer-seller relations, allowing the buyer to seek legislative remedies. Numerous cases support this framework, demonstrating that recovery for negligent misrepresentation does not cover pure economic loss from a product's underperformance. Academic consensus aligns with this view, emphasizing that negligence law requires defendants to avoid harm to persons or property but does not obligate them to ensure profitability for purchasers.
Negligence law does not impose a duty on manufacturers to ensure that their products meet specific economic expectations of buyers, such as profitability or reliability in operation. Instead, Tennessee law aligns with jurisdictions that suggest product liability claims for pure economic loss are better addressed under alternative theories rather than negligence. An illustrative case is Prairie Production, where a seed company suffered economic losses due to an ineffective pesticide. The appellate court upheld the lower court's summary judgment, determining that Article 2 of the Uniform Commercial Code governs buyer-seller relationships, allowing the dissatisfied buyer to seek legislative remedies. Academic consensus supports that negligent misrepresentation cannot be used to recover pure economic losses from product performance failures. The Supreme Court of Idaho further clarified that while negligence requires due care in preventing harm to persons or property, it does not extend to ensuring economic success for a purchaser's business.
