Elliott-Lewis Corp. v. Skanksa USA Bldg., Inc., 2016 U.S. Dist. LEXIS 59406 (E.D.Pa. May 4, 2016)

The Federal District Court for the Eastern District of Pennsylvania held that the narrow exception to the economic loss doctrine carved out in Bilt-Rite Contractors, Inc. v. The Architectural Studio – where the Pennsylvania Supreme Court held that architects and other design professionals may be held liable to third parties that rely to their detriment on false information provided in design documents by architects and other design professionals – does not apply to a contractor that supplied information to design professionals in connection with remedial work performed by the contractor.

This case arose out of a dispute relating to the design and installation of a new HVAC system at the Franklin Institute in Philadelphia.  In performing its work on the project, Elliott-Lewis Corporation (“ELCo”), the HVAC subcontractor, decided not to follow the original cooling tower design for the HVAC system, opting to use a four-cell cooling tower as opposed to the two-cell tower upon which the design professionals had based their design.  After initially rejecting this change, the design professionals ultimately approved the change based, in part, upon assurances from ELCo and other subcontractors.  Unfortunately, the design professionals’ initial concerns related to potential overflows and system balancing issues associated with the use of a four-cell tower turned out to be well-founded, and the HVAC system did not function properly as initially installed.  Consequently, ELCo had to perform additional work on the HVAC system, and had to install a temporary cooling system to cool the Franklin Institute until the problem was fixed.  When ELCo submitted invoices for this work, Skanksa USA Building, Inc. (“Skanska”) did not pay.  In the meantime, as the problems with the HVAC system persisted, Comprehensive Test & Balance, Inc. (“CBT”) was retained to “balance the [HVAC] system.”

ELCo subsequently commenced this action by suing Skanska for unpaid, extra work.  Skanska, in turn, filed a third-party complaint against its design professionals – SaylorGregg Architects, Urban Engineers and Marvin Waxman Consulting Engineers (collectively, the “Designers”) – asserting that in the event Skanska was found to be liable to ELCo, the Designers were responsible as a result of errors in the design of the HVAC’s cooling system.  The Designers then filed a fourth-party complaint against CBT, among others, arguing that CBT was negligent in supplying the information it provided pertaining to how the HVAC system was functioning.

CBT, in a motion to dismiss, argued that the Designers’ claims were barred by the economic loss doctrine.  In response, the Designers contended that their claims were permissible under the Bilt-Rite exception to the economic loss doctrine.  As set forth below, the Eastern District agreed with CBT.
Under Pennsylvania law, negligence claims involving solely economic losses are generally barred by the economic loss doctrine.  However, in Bilt-Rite, the Pennsylvania Supreme Court adopted Section 552 of the Restatement (Second) of Torts and carved out a narrow exception to this rule.  Section 552, in pertinent part, states:

One who, in the course of his business, profession or employment, or in any other transaction in which he has a pecuniary interest, supplies false information for the guidance of others in their business transactions, is subject to liability for pecuniary loss caused to them by their justifiable reliance upon the information, if he fails to exercise reasonable care or competence in obtaining or communicating the information.

The Bilt-Rite court held that because architects and other design professionals are typically responsible for preparing plans and specifications that are supplied to potential bidders on construction projects and used to prepare bids, architects and design professionals may be liable to these third parties under Section 552 when those plans and specifications contain false information, and such claims are not barred by the economic loss doctrine.

The Elliott Lewis court noted, however, that the Bilt-Rite exception has been narrowly construed in Pennsylvania.  It has been applied in cases involving design professionals, who are “paid a fee for using [their] skill and training to provide information that is relied on by others prior to and during construction” and who “have a contractual relationship with some other party to the construction project, typically the owner, from which a duty flows to foreseeable third parties to that contract.”  Excavation Technologies, Inc. v. Columbia Gas Co. of Pennsylvania, 936 A.2d 111, 116 (Pa. Super. Ct. 2007).

In refusing to apply this exception to CBT, the Elliot Lewis court observed that CBT’s role on this project was “inherently different” from that of design professionals, in that CBT a) is not an architect or design professional and b) is not otherwise in the business of supplying information to others within the meaning of Section 552.  Rather, CBT was hired after commencement of the project to perform a service – balancing the HVAC system.  And while CBT provided information to the Designers about the HVAC system in connection with CBT’s performance of that service, as do many contractors that perform services, CBT was not in the business of providing information to be relied upon by others.  Thus, the court concluded that applying the Bilt-Rite exception in this case would vastly expand its scope beyond what the Supreme Court intended.  Accordingly, the court held that the Designers’ claims were barred by the economic loss doctrine.

To view the full text of the court’s decision, courtesy of Lexis ®, click here.