Palco Linings, Inc. v. Pavex, Inc.

• Decision Date: 24 August 1990
• Docket Number: Civ. A. No. 3:CV-89-1631.
• Citation: 755 F. Supp. 1269
• Parties: PALCO LININGS, INC., Plaintiff, v. PAVEX, INC., Brinjac, Kambic & Associates, Inc., and Brinjac-Chester Engineers, City of Harrisburg, Defendants.
• Court: U.S. District Court — Middle District of Pennsylvania

755 F. Supp. 1269

PALCO LININGS, INC., Plaintiff, v. PAVEX, INC., Brinjac, Kambic & Associates, Inc., and Brinjac-Chester Engineers, City of Harrisburg, Defendants.

Civ. A. No. 3:CV-89-1631.

United States District Court, M.D. Pennsylvania.

August 24, 1990.

Debra Barnhart Todd, Adler, Cohen & Grigsby, P.C., Pittsburgh, Pa., for Palco Linings, Inc.

John A. Gill, Harrisburg, Pa., for Pavex, Inc.

Jane Campbell Moriarty, Pittsburgh, Pa., Paul Cottrell, Berg, Bifferato, Tighe & Cottrell, Thomas Harper Ellis, Wilmington, Del., Paul Cottrell, Berg, Bifferato, Tighe & Cottrell, Philadelphia, Pa., for Brinjac, Kambic & Associates, Inc.

Bradley C. Bechtel, Law Bureau, Harrisburg, Pa., for City of Harrisburg.

MEMORANDUM

CALDWELL, District Judge.

I. Introduction

In this diversity action controlled by Pennsylvania law, defendants, Brinjac, Kambic & Associates, Inc., and Brinjac-Chester Engineers (collectively "Brinjac"),¹ have filed a motion for summary judgment pursuant to Fed.R.Civ.P. 56. We will examine the motion under the well settled standard. See Celotex Corp. v. Catrett, 477 U.S. 317, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986).

This action arises out of a construction project for the City of Harrisburg, Department of Public Works (the "City"). Defendant, Pavex, Inc. ("Pavex"), was the general contractor and defendant Brinjac was the registered architect/engineer. Plaintiff, Palco Linings, Inc. ("Palco"), was Pavex's subcontractor. Plaintiff's claims against Brinjac are for negligence and negligent misrepresentation in connection with the project.

II. Background

The City entered into a contract with Pavex to rehabilitate a city-owned reservoir. Pavex then sub-contracted with plaintiff which agreed to furnish and install a liner and cover at the reservoir. Brinjac was a party to a separate contract with the City to provide engineering services for the project. Complications arose during the performance of the work, allegedly causing plaintiff to incur substantial and unexpected expenses. Plaintiff submitted a claim for increased expenses to Pavex which forwarded it to the City. The City refused to pay the expenses and plaintiff brought this action, asserting, inter alia, claims against Brinjac for negligence and negligent misrepresentation in connection with the control of the water flowing into the reservoir.

In moving for summary judgment, defendant relies on the economic loss rule. This is a negative concept which provides that a plaintiff may not recover in tort for losses that are purely economic, i.e., not involving personal injury or property damage. Additionally, defendant argues that, pursuant to a release provision in the City/Pavex contract, and the incorporation clause in the Pavex/Palco contract, defendant was released of any liability for negligent actions by Pavex's acceptance of final payment from the City. The plaintiff counters that Pennsylvania law applies the economic loss theory only in products liability cases, and asserts that, in any event, the defendant has mischaracterized its damages as purely for economic loss. Additionally, plaintiff contends that the defendant has not been released from liability under the above contracts.

III. Discussion

The rationale of the economic loss rule is that tort law is not intended to compensate parties for losses suffered as result of a breach of duties assumed only by agreement. Compensation in such cases requires an analysis of damages which were in the contemplation of the parties at the origination of the agreement, an analysis within the sole purview of contract law. On the other hand, the policy consideration underlying tort law is the protection of persons and property from losses resulting from injury, Sensenbrenner v. Rust, Orling & Neale Architects, Inc., 236 Va. 419, 374 S.E.2d 55 (1988), while the policy consideration underlying contract law is the protection of expectations bargained for. Id. Thus in light of these distinctions, to recover in tort a plaintiff must allege facts showing a breach of some duty imposed by law. In other words, to recover in negligence "there must be a showing of harm above and beyond disappointed expectations" evolving solely from a prior agreement. A buyer, contractor, or subcontractor's "desire to enjoy the benefit of his bargain is not an interest that tort law traditionally protects." See Redarowicz v. Ohlendorf, 92 Ill.2d 171, 177, 65 Ill.Dec. 411, 441 N.E.2d 324 (1982) cited in Anderson Electric, Inc. v. Ledbetter Erection Corporation, 115 Ill.2d 146, 104 Ill.Dec. 689, 503 N.E.2d 246 (1986).

The central issues presented in this case are: (1) whether the restrictions of the economic loss rule should be applied beyond products liability cases to construction cases; (2) whether the absence of other bases for recovery should preclude application of the economic loss rule; (3) whether the economic loss theory should be excluded from consideration in cases of negligent misrepresentation as opposed to those of negligence; (4) whether plaintiff's losses in fact constitute purely economic losses; and (5) whether the release and incorporation provisions asserted by defendant are vague and/or overbroad, so as to preclude the release of defendant from liability.

In examining the instant case some essential points initially must be considered: the factors involved in the application of the economic loss rule to negligence claims, and the earlier, more general precedent, regarding policy considerations for tort as opposed to contractual theories of liability.

The economic loss theory has been defined and developed in the case of East River Steamship Corp. v. Transamerica Delaval, Inc., 476 U.S. 858, 106 S.Ct. 2295, 90 L.Ed.2d 865 (1986). The Supreme Court opined that, based on the theory, there cannot be recovery in tort for economic loss. In East River the Court affirmed the district court's dismissal of a negligence count seeking recovery for repair costs and lost income. In affirming, the Court stated that any loss sustained "due to repair costs, decreased value, and lost profits is essentially the failure of the purchaser to receive the benefit of its bargain — traditionally the core concern of contract law." East River, 476 U.S. at 870, 106 S.Ct. at 2301. The Court specifically defined economic loss in a product liability context as "damage sustained resulting from a qualitative defect of the product and no person is injured or other property damaged." Id. Therefore, under the theory, the ultimate loss incurred by the plaintiff in East River was purely economic and not recoverable in tort.

The economic loss rule has been refined since 1982, when the Illinois appellate court in Moorman Manufacturing Co. v. National Tank Co., 91 Ill.2d 69, 61 Ill.Dec. 746, 435 N.E.2d 443 (1982) first discussed it, and the rule is generally accepted by the majority of the courts in the United States. The East River case, supra, applied the economic loss theory to a products liability action. In doing so, it followed the rationale used by other courts that to allow tort recovery for economic losses in the absence of privity would "virtually negate the law of warranty, as codified in the provisions of the Uniform Commercial Code." Key International Manufacturing Inc. v. Morse/Diesel, Inc., 142 A.D.2d 448, 536 N.Y.S.2d 792 (1982). The majority rule has been adopted based on "the need to keep products liability and contract law in separate spheres and to maintain a realistic limitation on damages." East River, 476 U.S. at 871, 106 S.Ct. at 2302.

The plaintiff's central assertion in this case is that the economic loss limitation has been applied by Pennsylvania courts solely in tort actions involving products liability. For that reason, the plaintiff concludes that Pennsylvania does not preclude recovery for economic loss based on claims of negligence and negligent misrepresentation in the context of a construction project. The plaintiff, however, cites no Pennsylvania case law which limits the rule to products liability cases, and it provides no logical reason for its position. The contentions of the plaintiff require a review of the cases which extend the application of the economic loss rule beyond products liability actions. Such review will clearly reveal that plaintiff's argument is unfounded.

In Key International, supra, the court held, in light of controlling precedent, that "the owner of a construction project may not recover compensation for economic damages caused by the negligence of an architect or engineer with whom it is not in privity of contract." Key, 536 N.Y.S.2d at 792. Key extends the economic loss theory to claims arising from construction projects. The court reasoned that "there is no visible reason for any distinction between the liability of one who supplies a chattel and one who erects a structure." (Inman v. Binghamton Housing Auth., 3 N.Y.2d 137, 144, 164 N.Y.S.2d 699, 143 N.E.2d 895 (1957), quoting Prosser, Torts § 85, at 517; see also Cubito v. Kreisberg, 69 A.D.2d 738, 745, 419 N.Y.S.2d 578 (1979), affd. 51 N.Y.2d 900, 434 N.Y.S.2d 991, 415 N.E.2d 979 (1980)).

More closely applicable to the facts at hand is the case of Alvord & Swift v. Muller Constr. Co., (NYLJ, Sept. 15, 1976, at 7, col. 4, affd. 56 A.D.2d 761, 391 N.Y. S.2d 1012, on opn. of Greenfield, J. at Special Term, affd. 46 N.Y.2d 276, 413 N.Y. S.2d 309, 385 N.E.2d 1238 (1978)), which applied the economic loss rule to subcontractor-plaintiffs who bring economic claims in tort against the owner's architect, a person who is not in privity with the subcontractors. The court in Alvord dismissed an action brought by a subcontractor against the owner's architect for damages resulting from constructions delays because the architect owed a duty only to the owner and not the plaintiff-subcontractor. Ossining Union Free School Dist. v. Anderson LaRocca Anderson, 135 A.D.2d 518, 521 N.Y.S.2d 747 (1987), is consistent with Alvord holding that...