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PENNSYLVANIA SUPREME COURT HOLDS THAT A CONTRACTOR MAY SUE AN ARCHITECT FOR ECONOMIC LOSSES CAUSED BY DEFECTIVE DESIGN, NOTWITHSTANDING LACK OF CONTRACTUAL RELATIONSHIP BETWEEN THE ARCHITECT AND CONTRACTOR
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Bilt-Rite Contractors, Inc. v. The Architectural Studio
2005 Pa. LEXIS 99 (Pa. January 19, 2005)
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| The East Penn School District entered into a contract with The Architectural Studio (“TAS”), pursuant to which TAS agreed to prepare plans, drawings and specifications (collectively, “Design Documents”) for the construction of a new school. The Design Documents were submitted to contractors for the purpose of preparing bids to perform the general construction of the school. Bilt-Rite submitted a bid for the general construction work, and was awarded the contract as the lowest responsive, responsible bidder. The contract between Bilt-Rite and the School District specifically referred to and incorporated by reference, TAS’s Design Documents.
The Design Documents represented that Bilt-Rite could construct certain systems using normal and reasonable construction means and methods. However, when Bilt-Rite commenced work, it discovered that the systems could not be built using such techniques; but rather, required special construction means and methods. Bilt-Rite incurred substantial additional costs as a result of this design error.
In response, Bilt-Rite filed an action for negligent misrepresentation against TAS. It cited to section 522 of the Restatement (Second) of Torts, which provides that a party who is in the business of supplying information that it intends or knows would be relied upon by others owes a duty to those parties who use that information in their business activities. Bilt-Rite argued that it met those requirements: TAS supplied information that it knew contractors would rely upon; Bilt-Rite reasonably relied on the Design Documents in preparing its bid; and it was damaged as a result. Bilt-Rite’s claim sought purely economic losses. It had no claims for personal injury or property damage. The trial court and appellate court both dismissed the claim, holding that a party seeking to recover purely economic losses cannot maintain a claim against a party absent a written agreement between the parties.
Reversing these decisions, the Supreme Court concluded that Bilt-Rite’s cause of action against TAS was viable under Pennsylvania law, and in doing so, adopted section 522 of the Restatement (Second) of Torts. According to the Court, and by adopting section 522, a defendant architect owes a duty of care to a plaintiff contractor because an architect could reasonably foresee that a contractor submitting a bid for work would rely upon the design documents to prepare its bid. The Supreme Court also recognized that the economic loss doctrine, which normally precludes a party from recovering pure economic losses in a tort action, did not apply in this instance. A tort action under section 522 is an exception to the economic loss doctrine. As a consequence, in limited circumstances, architects and engineers developing plans and specifications for use by bidders on projects may be exposed to potential tort claims from aggrieved contractors.
Click here for full text of decision.
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CONTRACT CLAUSE PROVIDING UNILATERAL RESERVATION OF RIGHT TO LITIGATE CLAIMS IS ENFORCEABLE
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Montgomery v. Decision One Financial Network
2005 U.S. Dist. LEXIS 3031 (E.D. Pa. Mar. 1, 2005)
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| A borrower brought an action against her lender in connection with the lender’s institution of foreclosure proceedings. The lender moved to dismiss the complaint and sought an order compelling plaintiff’s compliance with the claims resolution provisions contained in the parties’ arbitration agreement. Relying upon the Pennsylvania Superior Court’s decision in Lytle v. CitiFinancial Services, Inc., 2002 Pa. Super. 327, 810 A.2d 643 (2002), the borrower argued in opposition that the arbitration agreement was presumptively unconscionable because it excepted from the scope of arbitrable disputes certain remedies available only to the lender, such as foreclosure. In the Lytle case, the Pennsylvania Superior Court several years earlier declared that “under Pennsylvania law, the reservation by [the lender] of access to the courts for itself to the exclusion of the consumer creates a presumption of unconscionability.”
The lender in Montgomery responded by pointing out the absence of any decision on the issue by the Pennsylvania Supreme Court and urged the district court to follow the earlier decision of the United States Court of Appeals for the Third Circuit in Harris v. Green Tree Financial Corp., 183 F.3d 173 (3d Cir. 1999), a case involving substantially similar facts. In that case, the Third Circuit rejected the borrowers’ unconsconability arguments and held that “the mere fact that the [lender] retains the option to litigate some issues in court, while the [borrowers] must arbitrate all claims does not make the arbitration agreement unenforceable.”
The district court in Montgomery agreed with the lender and granted its motion. In reaching its decision, the district court observed that “[a]bsent a conflicting decision from the Pennsylvania Supreme Court, this Court is bound by the decisions of the United States Court of Appeals for the Third Circuit in determining state law.” The court followed Pennsylvania’s two-part test for determining whether contract provisions are legally unconscionable: (1) that there is meaningful choice on the part of the other party regarding acceptance of the provisions, and (2) that the contractual terms are unreasonably favorable to the drafter. Although acknowledging the Pennsylvania Superior Court’s contrary decision in Lytle, the district court nonetheless concluded that “[a]s we rely on Harris for our decision, Plaintiff has failed to meet the second requirement of the unconscionability test because she has not presented contractual terms that unreasonable favor Defendant. The Arbitration Agreement is, therefore, enforceable.”
In so holding, the district court’s decision was the latest in a line of cases declining to follow Lytle in favor of Harris. See, e.g., In re Brown, 311 B.R. 702, 710 (Bank. E.D. Pa. 2004); Zimmer v. Copperneff Advisors, Inc., Civ. A. No. 04-3816, 2004 WL 2933979 (E.D. Pa. Dec. 20 2004); Aames Funding Corp. v. Sharpe, No. Civ. A. 04-4337, 2004 WL 2418284 (E.D. Pa. Oct. 28, 2004); Choice v. Option One Mortgage Corp., No. Civ. A. 02-6626, 2003 WL 22097455 (E.D. Pa. May 13, 2003). It appears only one federal court has expressed a willingness to depart from Harris and “follow Pennsylvania’s rule of law concerning unconscionability as newly established by Lytle.” In re Mintze, 288 B.R. 95, 103 n.11 (Bank. E.D. Pa. 2003).
Click here for full text of decision.
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PENNSYLVANIA SUPREME COURT HOLDS “PASS-THROUGH” CLAUSE INEFFECTIVE TO IMPOSE INDEMNITY OBLIGATION ON SUBCONTRACTOR
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Bernotas v. Super Fresh Food Markets, Inc.
863 A.2d 478, 2004 Pa. LEXIS 3238 (Dec. 22, 2004)
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| Barbara Bernotas sustained serious injuries when she fell into a hole at a construction area inside a Super Fresh store. Bernotas sued Super Fresh for her injuries. Super Fresh filed cross-claims against the general contractor, and its electrical subcontractor, seeking indemnity for any damages under those parties’ contracts. Bernotas settled for $200,000, with each defendant contributing 1/3 of the amount. The trial court then held a bench trial in which Super Fresh sought indemnity from the general contractor pursuant to the prime contract, and the general contractor in turn sought indemnity from its electrical subcontractor pursuant to their subcontract. The Supreme Court’s opinion addresses only the scope of the subcontractor’s indemnity obligations to the general contractor.
In rejecting the general contractor’s indemnity claim against the electrical subcontractor, the Pennsylvania Supreme Court held that a pass-through clause that incorporated the prime contract was insufficient to impose indemnity obligations. The contract between the general contractor and Super Fresh required the contractor to “assume entire responsibility and liability for” all damages resulting from injuries “caused by … the execution of the work provided for in this Contract.” The subcontract required the subcontractor to indemnify the general contractor and Super Fresh for injuries “that may result from or arise from the performance … of the Work.” In addition, the subcontract incorporated the prime contract by reference, stating that “the Contract Documents form a part of this Subcontract … as if herein set forth at length.” The general contractor argued that this latter provision “passed through” to the subcontractor the obligation to assume responsibility for all damages, rather than just those arising from the performance of the subcontractor’s work.
Reversing the Pennsylvania Superior Court, the Supreme Court held that the “pass-through” clause did not impose the indemnity obligation of the prime contract upon the subcontractor. The Court noted that the trial court never found that Bernotas’s injuries resulted from the performance of the subcontractor’s work. Thus, the indemnity obligation in the subcontract was never triggered, leaving the “pass-through” clause as the only potentially applicable contract provision.
The Court noted that Pennsylvania had not addressed the general issue of pass-through clauses, but that other courts had found them effective to incorporate “no-damages-for-delay” and dispute resolution provisions. However, the Court also recognized that courts in California, Arizona, and New York had found such clauses ineffective to incorporate indemnity provisions. The Court stated Pennsylvania’s requirement that any obligation to indemnify for the negligence of another must be set forth clearly and unequivocally in the contract. The Court noted that the passed-through provision would impose a greater obligation than that in the subcontract, and held that this resulting inconsistency failed the “clear and unequivocal” test. The Court further stated that such pass-through provisions were generally insufficient to incorporate an indemnity obligation, “unless the contract language is clear and specific.”
Click here for full text of decision.
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