THE LOWER COURT DECISIONS

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1 MAY 2005 Construction Law Pennsylvania Supreme Court Holds That a Contractor May Assert Claims for Negligent Misrepresentation Against Architect Despite Lack of Contractual Privity The Pennsylvania Supreme Court, in a case of first impression, has held that a contractor may assert a negligent misrepresentation claim against an architect for misstatements found in the architect s plans for a public construction contract, even though no contract existed between the contractor and architect, Bilt-Rite Contractors, Inc. v. The Architectural Studio, 866 A.2d 270 (Pa. 2005) ( Bilt-Rite ). In doing so, the Court, for the first time, expressly adopted Section 552 of the Restatement (Second) of Torts ( Section 552 ). As a result of this decision, Pennsylvania has joined the growing number of jurisdictions which permit contractors to assert negligent misrepresentation claims against design professionals where the contractor can show it reasonably relied upon the misrepresentations, that the reliance was foreseeable, and that it suffered economic damages as a result. FACTUAL BACKGROUND East Penn School District ( Owner ) hired The Architectural Studio ( TAS ) to provide architectural services for the design and construction of a new high school in Lehigh County, Pennsylvania. The services included the preparation of plans, drawings, and specifications to be submitted to contractors for the purpose of preparing bids for the construction of the new school. The Owner solicited bids from contractors for all aspects of the project and included TAS s plans, drawings and specifications in the bid documents supplied to the contractors. Bilt-Rite Contractors, Inc. ( Bilt-Rite ) was the lowest responsible bidder and was awarded the general construction contract. The contract specifically referred to, and incorporated by reference, TAS s plans, drawings and specifications. TAS s plans called for the installation of an aluminum curtain wall system, sloped glazing system and metal support systems, all of which TAS represented could be installed and constructed through the use of normal and reasonable construction means and methods, using standard construction design tables. After construction began, however, Bilt-Rite discovered that this work could not in fact be constructed using normal and reasonable construction methods. Instead, Bilt- Rite was required to employ special construction means, methods and design tables, resulting in substantially increased construction costs. THE LOWER COURT DECISIONS Based upon the contention that TAS s specifications were false and/or misleading, Bilt-Rite commenced a legal action against TAS asserting claims for negligent misrepresentation under Section 552. TAS filed preliminary objections on the grounds that (i) TAS owed no duty to Bilt-Rite due to the lack of a contractual relationship between them; and (ii) Bilt- Rite s claims were barred by the economic loss doctrine. The trial court sustained these objections primarily relying on Linde Enterprises, Inc. v. Hazelton City Authority, 602 A.2d 897 (Pa. Super. 1992) and Palco Linings, Inc. v. Pavex, Inc., 755 F. Supp (M.D. Pa. 1990). 1

2 The trial court considered itself bound by the Superior Court s decision in Linde which held that a contractor cannot prevail against an architect for economic damages suffered as a result of negligence in drafting specifications, absent privity of contract between the contractor and the architect. 2 The trial court found further support in the Palco court s discussion of two possible exceptions to the economic loss doctrine: (1) where there is an intentional misrepresentation and (2) in the context of negligent misrepresentations, where the defendant is in the business of supplying information that is relied upon by others. 3 The trial court noted that Palco held that neither exception applied to architects. 4 The Superior Court, in an unpublished decision, affirmed the trial court s decision. In considering the issues before it, the Superior Court noted that absence of privity was not an absolute bar to economic damages in a tort setting. 5 Instead, the court stated that relationships exempt from the privity requirements must be decided on a case-by-case basis. 6 The court noted that although the Pennsylvania Supreme Court had cited to Section 552 with approval, it had never been expressly adopted. 7 Moreover, Section 552 had never expressly included or excluded the architect-contractor relationship. 8 Citing its decision in Linde for authority, the Superior Court held that the architect-contractor relationship was not exempt from the privity requirements. 9 Subsequently, Bilt-Rite appealed the Superior Court s decision to the Pennsylvania Supreme Court. PENNSYLVANIA SUPREME COURT PERMITS NEGLIGENT MISREPRESENTATION CLAIMS AGAINST ARCHITECT On appeal, the Pennsylvania Supreme Court reversed the trial court s dismissal of the contractor s negligent misrepresentation claims. The Court began its analysis by first recognizing that the question of whether a contractor may assert negligent misrepresentation claims against a design professional under Section 552 was one of first impression under Pennsylvania law. 10 In so stating, the Court distinguished on factual grounds three recent Supreme Court decisions addressing the tort of negligent misrepresentation and Section 552. The first of these three decisions was in Bortz v. Noon, 729 A.2d 555 (Pa.1999), wherein the Court concluded that no special relationship existed between a real estate agent and a buyer, and thus no duty was found on behalf of the agent. 11 Next, the Court considered Gibbs v. Ernst, 647 A.2d 882 (Pa. 1994), which discussed negligent misrepresentation in the context of adoption. Although it cited to Section 552 with approval, the Court also noted in Gibbs that Pennsylvania had long recognized the common law tort of negligent misrepresentation. 12 Ultimately, the Court in Gibbs found that the parents had stated a viable claim for negligent misrepresentation against the adoption agency. 13 Finally, the Court reviewed its decision in Rempel v. Nationwide Ins. Co., 370 A.2D 366 (Pa. 1977), which again cited with approval to Section 552, but did not expressly adopt it. 14 After discussing its treatment of Section 552, the Court went on to review its recent decision in Sharpe v. St. Luke s Hospital, 821 A.2d 1215 (Pa. 2003) for a discussion of general principles of negligence. In Sharpe, the Court held that a hospital that had conducted drug testing of a third party s employee could be liable to the employee even though there was no privity of contract. 15 The Court cited to five factors to determine whether a duty in tort existed: 1) the relationship between the parties; 2) the social utility of the actor s conduct; 3) the nature of the risk imposed and forseeability of the harm incurred; 4) the consequences of imposing a duty upon the actor; and 5) the overall public interest in the proposed solution. 16 Based on these factors, the Court in Sharpe held that a tort duty can arise absent privity of contract between the employee and the hospital conducting the testing MAY 2005 KIRKPATRICK & LOCKHART NICHOLSON GRAHAM LLP

3 With the above-referenced precedent as a guide, the Court then went on to examine the application of the Linde and Palco decisions that were relied upon by the lower courts. The Court noted that the panel in Linde had rejected the claim largely because Pennsylvania law had not yet accepted the cause of action. 18 The Court then commented on the Palco court s reliance on Illinois case law. 19 Further, the Court noted that as the highest court in Pennsylvania, it was not bound by the decisions in Linde and Palco. 20 In short, the Court declined to follow those decisions. Instead, the Court looked to decisions from other jurisdictions which have allowed contractors to assert negligent misrepresentation claims against design professionals. In particular, the Court discussed at length decisions from Massachusetts 21 and Arizona, 22 and also noted concurring opinions from Georgia, 23 Montana, 24 North Carolina, 25 South Carolina 26 and Tennessee. 27 Based primarily upon the rationale set forth in the decisions from other jurisdictions, the Court concluded as follows: We are persuaded by these decisions from our sister jurisdictions that (1) this Court should formally adopt Section 552 of the Restatement (Second), which we have cited with approval in the past, as applied by those jurisdictions in the architect/contractor scenario; (2) there is no requirement of privity in order to recover under Section 552; and (3) the economic loss rule does not bar recovery in such a case. Recognizing such a cause of action, with such contours, is consistent with Pennsylvania s traditional common law formulation of the tort of negligent misrepresentation. 28 Although the Court made clear that Section 552 would be applicable to architects and design professionals, it clarified that their liability would not be limitless in that only those for whose benefit and guidance the information is supplied may assert such claims. 29 Therefore, liability is limited to those whose use of the information is reasonably foreseeable to the design professional. 30 In addition, the Court noted that by adopting Section 552, it was not supplanting the common law version of the tort; instead, Section 552 is intended to clarify the elements of the tort as it is applied to businesses engaged in the supply of information. 31 In finding that an architect owes a duty in tort, the Court, relying on the Sharpe factors, noted that (1) although an architect or design professional may not have a contractual relationship with the contractor, the professional is well aware that the design will be provided to and utilized by others; (2) with respect to social utility of the conduct at issue, given the important reliance placed on professional services, there is no reason to exempt such professionals from the tort consequences of a negligent failure to perform those services in a competent fashion; (3) given the limitations found in Section 552, the tort adequately accounts for the nature of the risk the duty imposes and the forseeability of the prospective harm; (4) the consequence of imposing a duty upon design professionals is not unreasonable or unduly burdensome; and (5) Section 552 will serve the public interest by discouraging negligence among design professionals. 32 In its second major holding, the Court rejected TAS s contention that the economic loss doctrine barred Bilt-Rite s claims. In so holding, the Court noted that Pennsylvania has long recognized that purely economic losses are recoverable in a variety of tort actions including the professional malpractice actions. 33 The Court went on to note that to apply the economic loss doctrine in the context of a Section 552 claim would be nonsensical: it would allow a party to pursue an action only to hold that, once the elements of the cause of action are shown, the party is unable to recover for its losses. 34 Accordingly, the Court found that the economic loss doctrine is not a bar to recovery for claims of negligent misrepresentation under Section The Court then applied its holdings with regard to Section 552 and the economic loss doctrine to the facts at hand. After noting that TAS provided plans and specifications for the school project with full knowledge that those plans and specifications would 3 MAY 2005 KIRKPATRICK & LOCKHART NICHOLSON GRAHAM LLP

4 be included in a bid package supplied to prospective bidders and relied upon by those bidders, the Court held that the facts came within the framework of Section 552 such that Bilt-Rite had a cognizable claim against TAS under Pennsylvania law. 36 CONCLUSION The Bilt-Rite decision changes the contours of liability between design professionals and contractors on public projects in Pennsylvania. Despite the fact that no written contract may exist between them, a design professional may now be liable to contractors for errors in designs, plans and specifications which the design professional knew would be included in bid packages supplied to and relied upon by bidders. Bilt-Rite therefore raises the stakes for design professionals involved with public projects. Because the rationale employed by the Pennsylvania Supreme Court is equally applicable in the private contract setting, design professionals should expect the holding of Bilt-Rite will be made applicable to private projects as well. The Court, however, left open the question of whether a Certificate of Merit under Rule is required when bringing a claim of negligent misrepresentation against a design professional. As a result of the Bilt-Rite decision, design professionals need to be aware of these additional liabilities in (i) establishing and performing their scope of work; (ii) pricing their work; and (iii) procuring insurance products. In particular, design professionals should examine their existing professional liability policies and, if necessary, contact their carriers to make certain that their policies provide coverage for such liabilities to contractors. R.J. Chleboski [email protected] Michael J. Zukowski [email protected] ENDNOTES 1 Bilt-Rite, 866 A.2d at at The Court also noted that the question had split the lower federal courts in Pennsylvania and other state courts. (citing Linde Enterprises, Inc. v. Hazelton City Authority, 602 A.2d 897 (Pa. Super. 1992), appeal denied, 617 A.2d 1275 (Pa. 1992) and Borough of Lansdowne v. Sevenson Env. Services, 2000 WL (E.D. Pa. 2000)). 11 at at at at 281 (citations omitted). 17 at at at Nota Construction Corp. v. Keyes Associates, 694 N.E.2d 401 (Mass. App. Ct. 1998). 22 Donnelly Construction Co. v. Oberg/Hunt/Gilleland, 677 P.2d 1292 (Ariz. 1984). 23 Robert & Company Associates v. Rhodes-Haverty Partnership, 300 S.E.2d 503 (Ga. 1983). 24 Jim s Excavating Service, Inc. v. HKM Associates, 878 P.2d 248 (Mont. 1994). 25 Davidson and Jones, Inc. v. County of New Hanover, 225 S.E.2d 580 (N.C. Ct. App. 1979). 26 Tommy L. Griffin Plumbing & Heating Co. v. Jordan, Jones & Goulding, Inc., 463 S.E.2d 85 (S.C. 1995). 27 John Martin Co., Inc. v. Morse/Kiesel, Inc., 819 S.W.2d 428 (Tenn. 1991). 28 Bilt-Rite, 866 A.2d at at at at MAY 2005 KIRKPATRICK & LOCKHART NICHOLSON GRAHAM LLP

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