Legal Memorandum: Damages for Fraudulent and Negligent Misrepresentation

Issue: Under California law, can a seller be liable for damages for misrepresenting a material fact in the sale of a business, despite an "as-is" clause?

In California, causes of action are recognized for fraudulent and negligent misrepresentation.  In Vogelsang v. Wolpert, 227 Cal. App. 2d 102, 38 Cal. Rptr. 440 (5th Dist. 1964), the court set out the elements of fraudulent misrepresentation:

The general elements of a cause of action for fraudulent misrepresentation are (1) misrepresentation (false representation, concealment, or nondisclosure); (2) knowledge of falsity (scienter); (3) intent to induce reliance; (4) justifiable reliance; and (5) resulting damage.

227 Cal. App. 2d at 109, 38 Cal. Rptr. at 446.  The court also explained that "fraud, of course, may be proved by inference and by the circumstances surrounding the transaction and the relationship and interests of the parties."  Id. at 111, 38 Cal. Rptr. at 447.

In Eddy v. Sharp, 199 Cal. App. 3d 858, 245 Cal. Rptr. 211 (3d Dist. 1988), the court stated what constitutes negligent misrepresentation in California:

In this state, negligent misrepresentation is a form of deceit defined as: "The assertion, as a fact, of that which is not true, by one who has no reasonable ground for believing it to be true."  To be actionable as deceit, the representation must have been made with the intent to induce the recipient to alter his position to his injury or his risk.  The defendant’s intent […]

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