When sophisticated investors carefully document their relationship, it’s unusual to see a claim for negligent misrepresentation. After all, sophisticated parties typically are only held to those commitments they agree to in writing. But as Judge Pauley’s opinion in Kortright v Investcorp teaches, unusual is not the same as never.
Investcorp, a well-known investment adviser, agreed to provide seed capital to an up-and-coming fund, Kortright, by investing $50 million of its own capital and $40 million of its clients’ capital. But soon thereafter, a competing financial bigfoot, The Man Group, tempted Kortright with a $300 million investment in exchange for absorbing Kortright’s funds. When Investcorp learned of Man’s interest it insisted on withdrawing its own proprietary investment, but agreed to leave its clients’ capital with Kortright. Man then negotiated its acquisition of Kortright, including a condition that Kortright maintain a minimum level of investment from Investcorp.
To assure that condition was met, Kortright persuaded Investcorp to sign a consent authorizing the transfer of its clients’ funds, and Kortright announced that Investcorp would remain an investor in Kortright after its absorption by Man—a plum selling point. But clouds soon appeared.
Investcorp determined that it could not transfer its clients’ funds on its own. Because Investcorp’s clients declined to consent, the client capital was not available for the Man transaction. Man walked away from its acquisition of Kortright, leaving Kortright holding the proverbial bag. Kortright sued Investcorp, asserting a boatload of breach of contract and tort claims. The only claim to hold water was the tort of negligent misrepresentation.
According to Judge Pauley, proof of negligent misrepresentation requires a material false statement on which a party reasonably relies to its detriment, and the existence of a duty “as a result of a special relationship” to give correct information. Absent a special relationship, there is no claim for negligent misrepresentation.
A special relationship is “less rigorous” than a fiduciary duty, but “a duty to speak with care exists when the relationship of the parties … is such that in morals and good conscience the one has the right to rely on the other for information ….” Although the duty can be related to a contract, it “must spring from circumstances extraneous to the contract….”
Investcorp moved to dismiss, arguing that it only had a contractual relationship with Kortright, and that under its contracts it had no obligation to maintain an investment in Kortright for any specific time-period. Therefore, the case should be thrown out.
Judge Pauley said it’s not that cut and dried.
He found that Investcorp also held itself out as a “strategic partner” of Kortright, had access to Kortright’s confidential information, helped to market Kortright’s funds, and had the right to veto certain Kortright transactions─all indicia of a special relationship. And nothing in the parties’ contracts specifically “disclaimed” a trust relationship. Thus, Kortright made out a claim of negligent misrepresentation, and its lawsuit was allowed to proceed on that ground.
According to Judge Pauley: Even in carefully documented transactions, parties may have obligations that go beyond those that they specifically agree to assume by contract.
Hat tip again to Bethany Clarke for assisting with this post.