Legal Bulletins

Holding:

Even though Maryland historically required a contractual relationship or its equivalent to impose liability for negligence on a defendant in business cases, a party may now be held liable for negligent misrepresentations absent such a relationship.

Background:

Two private lenders filed suit against an accounting firm for allegedly negligent misrepresentations made in connection with loans to a corporate borrower. The borrower corporation was the accountants' client, and the lenders had no contractual relationship with the accounting firm. The plaintiffs claimed that financial reports and audits prepared by the accountants for the corporation mistakenly overstated the corporation's inventory.

Despite the fact that the financial reports were not prepared for the lenders, they alleged that the accountants were aware that they intended to rely on those reports in loaning the corporation over $1 Million. The accountants argued that they had no duty to the lenders because there was no contractual relationship between them. The trial court agreed and granted summary judgment to the accountants. The Court of Appeals of Maryland reversed.

Law:

In a negligence case for economic damages as opposed to personal injury, Maryland historically required an "intimate nexus" between the parties satisfied by a contractual relationship or its equivalent. While Maryland courts have been vague in defining what the "equivalent" of a contractual relationship is, the decision in Walpert greatly expands the class of persons to whom a duty is owed.

A duty may now be owed not only to the parties to a contract but also to third parties that may reasonably rely on the representations made. Moreover, there appears to be no requirement that the financial information be provided directly to the person relying on it. In fact, any evidence showing knowledge on the part of the defendant that another will rely on the information may be sufficient to create a duty and a jury issue.

Recommendations:

In the wake of Walpert and the decision in Jacques v. First Nat'l Bank of Maryland, financial institutions and businesses should be careful when providing financial information, documents or advise of any kind to their customers, particularly where the institution has any knowledge that the information might be relied upon by a third party. Be particularly careful when third parties are brought into negotiations. By contrast, if an institution relies on information negligently provided to it by another party in a loan or business transaction, the institution may have a cause of action against that party even absent a contractual relationship. It is advisable to consult an attorney under these various circumstances.