Expert Commentary

The Exception Is Swallowing the Rule: Negligent Misrepresentation and the Economic Loss Doctrine

The Pennsylvania Supreme Court recently added the Keystone State to the growing list of states that have suggested the economic loss doctrine is a viable theory of law, but then proceeds to find that the negligent misrepresentation exception is a viable means to avoid the doctrine. The opinion was handed down on January 19, 2005, in the case of Bilt-Rite Contractors, Inc. v. The Architectural Studio, 866 A.2d 270 (Pa. 2005).


Design Liability
July 2005

The Pennsylvania Supreme Court's opinion acknowledged that prior case law had held that a contractor cannot prevail against an architect for economic damages suffered as a result of negligence in drafting specification, absent privity of contract between the contractor and the architect. The court noted that tort law, unlike contract law, was not generally intended to compensate parties for losses suffered as a result of a breach of duties, which are assumed only by agreement. To recover in tort there must be a breach of duty of care imposed by law and a resulting injury.

The court found two viable exceptions to the economic loss rule recognized previously, and both were in negligent misrepresentation cases. One was where the defendant intentionally makes a false misrepresentation, which had no application under the facts of the case at issue, and two was where the defendant is in the business of supplying information for the guidance of others and makes a negligent misrepresentation. The court concluded the second theory allowed recovery.

This case was before the court as a matter of first impression. The court identified the issue before it as whether a building contractor may maintain a negligent misrepresentation claim against an architect for alleged misrepresentations in the architect's plan for a public construction contract where there is no privity of contract between the architect and the contractor, but the contractor reasonably relied on the misrepresentations in submitting its winning bid, and consequently suffered purely economic damages, as a result of that reliance.

The Facts and Arguments of the Bilt-Rite Claim

East Penn School District entered into a contract with The Architectural Studio (TAS), pursuant to which TAS provided architectural services for the design and construction of a new school. The services included the preparation of plans, drawings, and specifications to be submitted to contractors for the purpose of bidding or preparing bids for the construction of the new school.

In February of 1997, the School District solicited bids from contractors for all aspects of the project, including TAS's plans, drawings, and specifications and the bid documents supplied to the contractors. Appellant Bilt-Rite Contractors, Inc., submitted its bid for general construction work on the project, and on May 6, 1997, the School District awarded the general construction contract to Bilt-Rite, who was the lowest responsible bidder.

On June 6, 1997, the School District and Bilt-Rite entered into a contract for the project in the base amount of $16,238,900. The contract specifically referred and incorporated by reference TAS's plans, drawings, and specifications.

TAS's plans provided for the installation of an aluminum curtain wall system, sloping glazing system, and metal support systems, all of which TAS expressly represented could be installed and constructed through the use of normal and reasonable construction means and methods, using standard construction design tables.

Once construction commenced, however, Bilt-Rite discovered that the work, including the aluminum curtain wall, sloped glazing, and metal support systems could not be constructed using normal and reasonable construction methods. Bilt-Rite was required instead to employ special construction means, methods, and design tables resulting in substantially increased construction costs.

On November 19, 1999, Bilt-Rite sued TAS on the theory of negligent misrepresentation, under § 552 of the Restatement of Torts, claiming that TAS's specifications were false and/or misleading, seeking damages for its increased construction costs. TAS took the position that even if everything that Bilt-Rite claimed in the lawsuit were factually true, Bilt-Rite could not recover from TAS due to the economic loss doctrine. TAS argued that the economic loss doctrine holds that a tort plaintiff cannot recover for purely economic losses. TAS contended it owed no duty to Bilt-Rite, since the parties had no contractual relationship.

Bilt-Rite argued it could recover since its claim came with the Negligent Misrepresentation exception. Bilt-Rite made this argument even though Pennsylvania had not specifically decided that the doctrine was applicable to claims by disgruntled contractors against design professionals.

The Negligent Misrepresentation tort theory comes from the Restatement of Law, Torts, 2d. The applicable section, § 552, of the Restatement reads as follows:

  • Information Negligently Supplied for the Guidance of Others provides:
  1. 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 transaction is subject to liability for the pecuniary loss caused by them by their justifiable reliance upon the information, if he fails to exercise reasonable care or competence in obtaining or communicating the information.
  2. Except as stated in subsection 3, the liability stated in subsection 1 is limited to loss suffered
    1. By the person or one of a limited group of persons for whose benefit and guidance he intends to supply the information or knows that the recipient intends to supply it; and
    2. Through reliance upon it in a transaction he intends the information to influence or knows that the recipient so intends, or in a substantially similar transaction.
  3. The liability of one who is under a public duty to give information extends to loss suffered by any of the class of person for whose benefit the duty is created and any of the transactions in which it is intended to protect them.

Prior Pennsylvania case law had held that a contractor could not prevail, and, as a result, the trial court had ruled on TAS's motion and held that though Pennsylvania courts have cited § 552 of the Restatement with approval, no court had held that it permitted a cause of action against a design professional. The trial court found that Bilt-Rite's action did not fall into either of the exceptions outlined and, therefore, Bilt-Rite had failed to set forth a viable cause of action against TAS under § 552.

After the trial court's ruling was affirmed at the Court of Appeals, the Pennsylvania State Supreme Court granted further review because the question of the viability of a negligent representation tort action in the architect/contractor/no privity scenario is one of first impression.

The Supreme Court of Pennsylvania considered Bilt-Rite's argument that the school district had hired TAS to prepare plans, drawings, and specifications with the intention of conveying those documents to contractors for purposes of bidding. In fact, Bilt-Rite argued that the sole purpose of the design documents was for the use by the contractors in the bidding process, and the court apparently accepted that argument. Bilt-Rite argued that TAS knew that contractors would rely on the designs and specifications in submitting bids and yet failed to exercise reasonable care in preparing those documents. Since Bilt-Rite's reliance on the designs was both justifiable and foreseeable, Bilt-Rite argued that its Complaint fell squarely within § 552.

Bilt-Rite also referred the court to the comments in the Restatement under § 552, which Bilt-Rite felt "exactly" described the case at hand. The comment explains that the law does not require that the maker of the alleged negligent misrepresentation need have any particular person in mind as the intended, or even the probable, recipient of the information. In other words, the Restatement does not require that the person who becomes the eventual plaintiff need not be identified to, or known to, the eventual defendant. If the maker of the representation intends the information should reach and influence either a particular person or group of persons known to him, or a group or class or persons distinct from the much larger class who might reasonably be expected sooner or later to have access to the information, and if that person or group of persons will foreseeably take some action in reliance on the information, then the requirements of the Restatement are met. If the maker of the representation knows that his recipient intends to transmit the information to similar person, persons, or group that meets the requirements of the section.

TAS responded to Bilt-Rite's arguments by reliance on the more traditional view of tort law. TAS responded that the economic loss doctrine precludes causes of action based on negligence or negligent misrepresentation where the plaintiff claims only economic loss and the parties are not in privity of contract. TAS argued that the doctrine applies to services rendered by design professionals, and that Pennsylvania courts and federal courts in Pennsylvania have held that design professionals cannot be held liable for purely economic losses to a party with whom they share no contractual relationship.

As to § 552, TAS argued that it should be construed as inapplicable to the case at hand involving a design professional and citing cases from state and federal courts that have declined to apply the Section to design professionals, absent privity.

The Supreme Court's Analysis and Conclusion

The Supreme Court of Pennsylvania concluded that though it had in the past cited with approval § 552 on multiple occasions, the court never explicitly adopted § 552 as the law in Pennsylvania, much less the specific comments and illustrations relied on by the contractor. The Pennsylvania Supreme Court reasoned that a cause of action in negligence requires allegations that established a breach of a legally recognized duty or obligation that is causally connected to the damages suffered by the complainant. The primary element of any negligence cause of action, the court reasoned, is that the defendant owes a duty of care to the plaintiff.

The court reasoned that the concept of duty amounts to no more than the sum total of those considerations of policy that led the law to say that the particular plaintiff is entitled to protection from the harm suffered. The court held that to give duty any greater mystique would unduly hamper the system of jurisprudence in adjusting to the changing times. The Pennsylvania Supreme Court noted that it has recognized that a tort duty can arise absent privity of contract in other certain circumstances.

With that in mind, the court next turned to an examination of the persuasiveness of the cases relied on by the courts below in support of the holding that Bilt-Rite's negligent misrepresentation claim fails as a matter of law. The Pennsylvania Supreme Court was persuaded that the adoption of § 552 would simply subject the design professions to the same sort of professional responsibility other professions face. The PennsylvaniaSupreme Court then held:

  1. This Court should formally adopt § 552, which it had cited with approval in the past as applied by other jurisdictions in the architect/contractor scenario;

  2. There is no requirement of privity in order to recover under § 552; and

  3. The economic loss rule does not bar recovery in such a case.

The Pennsylvania Supreme Court said it believed that the tort was sufficiently narrowly tailored, since it applies only to those businesses that provide services and/or information that they know will be relied on by third parties in their business endeavor, and the requirements included a foreseeability requirement. The court believed this reasonably restricted the class of potential plaintiffs.

The Pennsylvania Supreme Court said that it saw no reason why § 552 should not apply to architects and other design professionals. The Supreme Court quoted, with approval, the Court of Appeals of North Carolina, where the Court said:

  • An architect in the performance of his contract with his employer is required to exercise the ability, skill, and care customarily used by architects upon such products …. Where breach of such contract results in foreseeable injury, economic or otherwise, to persons so situated by their economic relationships, the community of interest has to impose a duty of due care, we know of no reason why an architect cannot be held liable for such injury. Liability arises from the negligent breach of a common law duty of care flowing from the parties working relationship. Accordingly, we hold that an architect in absence of privity of contract may be sued by a general contractor or the subcontractors working on a construction project for economic loss foreseeably resulting from breach of an architect's common law duty of due care in the performance of his contract with the owner.

The Supreme Court said that it recognizes that a design professional's liability for economic damages to a third party cannot be without limits, but it was satisfied that § 552 is sufficiently narrowly tailored so as to assure the appropriate limitation.

Conclusion

Putting aside whether the plans and specifications are information provided to the contractor "for guidance" of its "business transaction," throughout the opinion, the court talks about the negligent misrepresentation exception, while really talking in terms that rings with traditional "standard of care" jargon. The opinion does not really talk about the required "misrepresentation." The conclusion you could draw is that any error in the design is now a "misrepresentation" upon which a bid could rely to make a claim, similar to Bilt-Rite's claim in this case.

A reasonable reading of this opinion is that now any deviation from the standard of care in the design documents prepared by a design professional is sufficient to meet the requirements of the negligent misrepresentation criteria adopted by this Pennsylvania court. The court could have as easily abandoned the economic loss doctrine as it relates to the design professions. It could have simply concluded the "duty" it found flows from the traditional tort principals. However, this court opted for the route of applying the negligent misrepresentation exception to the economic loss doctrine for the stated reason that a more limited class of potential plaintiff will now have a viable cause of action against the practicing design professional.

For design professionals providing services in Pennsylvania, this may be distinction without a difference.


Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.

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