§55.3 Reasonable Reliance

The Case: Bradley v. All-American Classics of Tennessee, Inc., 2009 WL 1034797 (Tenn. Ct. App. April 16, 2009).

The Basic Facts: Plaintiff responded to an Internet advertisement seeking to sell a classic automobile. Bradley purchased the vehicle without seeing it and claimed it was not as represented in the advertisement. Seller said the problems could have been observed if Bradley had inspected the vehicle and thus there was no duty to disclose the problems. The trial judge directed a verdict for the defendant.

The Bottom Line:

• "[T]he defendant relies on the principle that it had 'a duty to disclose . . . any material fact affecting the essence of the subject matter of the contract, unless ordinary diligence would have revealed the undisclosed fact.' Lonning v. Jim Walter Homes, Inc., 725 S.W.2d 682, 685 (Tenn. Ct. App. 1986). This concept goes back almost 200 years in this state, to the time when Judge Overton wrote that it was 'a sound principle of equity that each party to a contract is bound to disclose to the other all he may know respecting the subject-matter materially affecting a correct view of it, unless common observation would have furnished the information.'^FN3 Perkins v. McGavock, 3 Tenn. 415, 417 (1813)."

  FN3 The expression "common observation" used in Perkins has been construed to include the exercise of ordinary diligence. Simmons v. Evans, 206 S.W.2d 295, 296 (Tenn. 1947).

  2009 WL 1034797 at *4.
• "The defendant's entire argument on the directed verdict motion is that Bradley's reliance on the defendant's web site, representations and pictures was unreasonable and Bradley should have inspected the vehicle himself or had someone inspect it for him. The reasonableness of a party's reliance is a question of fact. City State Bank v. Dean Witter Reynolds, Inc., 948 S.W.2d 729, 737 (Tenn. Ct. App. 1996). Factors relevant to the determination of the reasonableness of a plaintiff's reliance on a misrepresentation include (1) the plaintiff's business expertise and sophistication; (2) the existence of longstanding business or personal relationships between the parties; (3) the availability of the relevant information; (4) the existence of a fiduciary relationship; (5) the concealment of the fraud; (6) the opportunity to discover the fraud; (7) which party initiated the transaction; and (8) the specificity of the misrepresentation. Id." Id. at *4.
• "Although Bradley had done some reading, he was not experienced in regard to vintage automobiles. He had no longstanding relationship, business, personal or fiduciary, with All American Classics of Tennessee. Bradley made the initial contact with the defendant. As for availability of information, Lebanon, Tennessee, and San Carlos, California, are approximately 2,000 miles apart. All American Classics possessed the car and controlled the flow of information through the pictures it sent to Bradley and the comments its employees made. Acquisition of information on Bradley's part would cost him more money and be inconvenient. The fraud was concealed by the use of camera angles (failure of the defendant's pictures to show the rust on one side of the car and holes in the muffler), by covering up obvious problems (using a red cloth to hide a large patch in the floor of the trunk, spraying undercoating over rust spots on the underside of the car), and with outright lies (representations that the engine and transmission were completely rebuilt, the car was rust free, and the brakes had been rebuilt). Opportunity to discover the fraud was minimized by the defendant's efforts to hide obvious problems in the pictures and the distance between Bradley and the car." Id. at 5.
• "From the facts of this case, one could certainly find that the representations and actions of All American Classics of Tennessee were 'calculated to lull the suspicions of a careful man into a complete reliance thereon.' Pakrul, 631 S.W.2d at 438. In our opinion, under these facts, it is too simplistic merely to say that Bradley should have examined the car or hired someone to inspect it. Our rules of conduct are based primarily on the face-to-face transaction, historically the most common mode of conducting commerce. That is why the opportunity to inspect is given such importance: even if the seller lies to the buyer, the buyer can view and examine what he is buying. In the last decade, the internet has revolutionized commerce. In this case prospective purchasers all over the world can look at All American Classics' web site. While it may be reasonable for a prospective buyer in Nashville, Charlotte, Jackson or even Memphis to make the pilgrimage to Lebanon to examine the car personally, it may not be reasonable for someone farther away to do so." Id.
• "Ownership of a web site is not a license to lie. When considering the reasonableness of Bradley's reliance, we cannot lose sight of the representations All American Classics made and the actions it took to induce his reliance. All American Classics made a number of bold, unequivocal statements on its web site about the condition of the car body, the engine, the transmission and the brakes that, according to Bradley's proof, are false. The pictures sent to Bradley were taken in a way that would not reveal these and other problems. One cannot be permitted to fill a web site with misrepresentations designed to induce a buyer to purchase an item in reliance thereon and remain immune from liability based on the simple fact that the buyer did not inspect the item before purchase. The reasonableness of Bradley's reliance on All American Classics' misrepresentations must be determined objectively in light of the totality of the circumstances surrounding the transaction, including, but not limited to, whether All American Classics intended that Bradley rely upon its misrepresentations and act or not act in reliance on those representations. See 8 T.P.I. - Civil 8.36 (8th ed. 2008)." Id.
• "Given the evidence of the misrepresentations on the web site, the misrepresentations by employees of All American Classics, and the apparently intentional acts to conceal problems with the car in the pictures, we cannot say definitively that Bradley was unreasonable in relying on the misrepresentations and pictures. Consequently, we respectfully disagree with the trial court's grant of a directed verdict on Bradley's fraud allegation." Id. at *6.

Other Sources of Note: For a recent case dealing with the issue of reasonableness of reliance in a real estate transaction, read Goodall v. Akers, 2009 WL 528784 (Tenn. Ct. App. March 3, 2009) ( jury question was present on whether plaintiff should have had a dam on property inspected before purchasing the property). The recent decision in Rural Developments, LLC. v. Tucker, 2009 WL 112541 (Tenn. Ct. App. Jan. 14, 2009) held that "generally, a party dealing on equal terms with another is not justified in relying upon representations where the means of knowledge are readily within his reach." Id. at *7 (citation omitted).

Recent Cases: Homestead Group, LLC v. Bank of Tennessee , No. E2008-00350-COA-R3-CV, 2009 WL 482714 (Tenn. Ct. App. Feb. 26, 2009) (affirming trial court's ruling in favor of defendant on negligent misrepresentation claim on same grounds as fraud claim finding no evidence in the record that the representation was false and finding plaintiff's reliance on the representation unreasonable); Orndorff v. Calahan, No. M2007-02060-COA-R3-CV, 2008 WL 4613546 (Tenn. Ct. App. Oct. 9, 2008) (upholding trial court's findings that plaintiffs' reasonably relied on representations by defendants).