Negligence Claim Precluded by Real Estate Service Contract

There are many service providers, such as real estate agents, architects and contractors, in the real estate industry. Some of these service providers must obtain certifications and licenses from the state in order to do business, while others are not so required. Either way, most of these service providers are retained by way of written contract. Many times when there is a falling out, there are claims of both breach of contract and negligence.

A Case in Point

In Greenwood Land Co. v. Omnicare Inc., 2011 U.S. Dist. LEXIS 767, March 25, 2011, the U.S. District Court for the Western District of Pennsylvania recently precluded a tenant from claiming negligence against its real estate management company under the gist of the action and economic loss doctrines as a result of a contract that existed between the parties.

After the landlord in Greenwood Land Co. initiated legal proceedings against the tenant for breach of the lease agreement, the tenant filed a third-party complaint against its real estate management company. In the complaint, the tenant, among other things, sought recovery under the real estate service agreement it signed with the real estate management company, as well as for professional negligence committed by the real estate management company in its dealings with the landlord on the tenant's behalf, the opinion said. The landlord argued that the claim for negligence should be dismissed under either the gist of the action or economic loss doctrines.

Tort Claims in Pennsylvania

In Pennsylvania, the gist of the action doctrine bars tort claims that sound in contract. According to the federal district court, “When a plaintiff alleges that the defendant committed a tort in the course of carrying out a contractual agreement, Pennsylvania courts examine the claim and determine whether the gist or gravamen of it sounds in contract or tort.”

The economic loss doctrine is similar, in that “no cause of action exists for negligence that results solely in economic damages unaccompanied by physical injury or property damage.”

In its attempt to prevent the dismissal of the negligence claim under the economic loss doctrine, the tenant asserted that damage was, indeed, caused to the landlord's property because of the negligence committed by the real estate management company, the opinion said.

The Ruling

The federal district court was not persuaded by this assertion, noting that the tenant failed to cite any authority for the proposition that damage to a landlord's property is sufficient to allow a tenant to claim property damage for purposes of circumventing the economic loss doctrine in a suit against a third party. The court next considered whether the real estate management company should be able to be sued in tort because its conduct fell short of professional property management standards.

Pennsylvania courts have held that claims against at least some professionals can be based both in tort and in contract. Rule 1042.1 of the Pennsylvania Rules of Civil Procedure, which governs professional liability actions, is applicable to certain health care providers, accountants, architects, chiropractors, dentists, engineers and land surveyors, nurses, optometrists, pharmacists, physical therapists, psychologists, veterinarians, attorneys and people or entities holding similar licenses in other states.

Since property management providers are absent from the list of the professionals enumerated in Rule 1042.1, the court openly questioned whether the gist of the action and economic loss doctrines would preclude a claim of negligence made against professionals other than those specified.

In relying upon the rationale employed by the Pennsylvania Court of Common Pleas of Allegheny County in Rapidigm v. ATM Management Services LLC, the federal district court emphasized that the “answer depends on whether parties contracting with those service providers should receive the protections of tort law or whether their rights should be governed solely by the terms of their agreement with the service provider.”

According to the court, “Where the claims of a party to a contract involve only economic losses, the trend in the law has been to look solely to contract law to determine the scope of the parties' duties and the remedies for a breach of these duties.

“A party should not be permitted to disrupt the expectations of the parties by supplanting their agreement with a tort action that claims that the party misperformed the agreement,” the opinion said. The court cautioned that “the rationale of the economic loss rule is that tort law is not intended to compensate parties for losses suffered as a result of a breach of duties assumed only by agreement.”

A Footnote

In a footnote in its memorandum opinion, the federal district court remarked that the trial court in
Rapidigm concluded that “professionals may be sued for malpractice because the higher standards of care imposed on them by their profession and by state licensing requirements engenders trust in them by clients that is not the norm of the marketplace. When no such higher code of ethics binds a person, such trust is unwarranted. Hence, no duties independent of those created by contract or under ordinary tort principles are imposed on them.”

The court ultimately determined that a real estate property manager did not fall within the malpractice rule carved out by state courts in Pennsylvania for attorneys, accountants, and other licensed professionals. In doing so, the federal district court concluded that the tenant's claims did not implicate the skill, expertise, or special knowledge that the real estate management company brought to bear on its management of the leased premises, but instead rested upon whether the real estate management company did what it was contractually obligated to do.

Because of the existence of the real estate service agreement, the court also did not believe that the Pennsylvania Supreme Court's ruling in Bilt-Rite Contractors Inc. v. The Architectural Studio, 866 A.2d 270 (Pa. 2005), saved the negligence claim from dismissal.

Bilt-Rite Contractors Inc.

In Bilt-Rite Contractors Inc., the Pennsylvania Supreme Court held that a building contractor could maintain a negligent misrepresentation claim against an architect for alleged misrepresentations in the architect's plans for a public construction contract where there was no privity of contract between the architect and the contractor.

In interpreting the State supreme court's ruling, the Third U.S. Circuit Court of Appeals has only recognized a narrow exception to the doctrine of economic loss allowing an aggrieved party to seek recourse from another party with special expertise where the aggrieved party relied on that expertise, but lacked a contractual relationship.

Relying upon the Third Circuit's interpretation of Bilt-Rite Contractors Inc., the federal district court surmised that the gist of the action and economic loss doctrines pre-empted the negligence claim because the tenant had a contractual relationship with the real estate management company and any remedy that the tenant may have lies in an action for breach of contract.

Alan Nochumson is the sole shareholder of Nochumson P.C. His law firm's primary practice areas consist of real estate, litigation, employment and labor, land use and zoning, and estate planning. He is also president of Bear Abstract Services, where his title insurance company offers title insurance, title examination and closing services. He may be reached at 215-399-1346 or at [email protected]. This article also appeared in The Legal Intelligencer, an ALM sister publication of this newsletter.

There are many service providers, such as real estate agents, architects and contractors, in the real estate industry. Some of these service providers must obtain certifications and licenses from the state in order to do business, while others are not so required. Either way, most of these service providers are retained by way of written contract. Many times when there is a falling out, there are claims of both breach of contract and negligence.

A Case in Point

In Greenwood Land Co. v. Omnicare Inc., 2011 U.S. Dist. LEXIS 767, March 25, 2011, the U.S. District Court for the Western District of Pennsylvania recently precluded a tenant from claiming negligence against its real estate management company under the gist of the action and economic loss doctrines as a result of a contract that existed between the parties.

After the landlord in Greenwood Land Co. initiated legal proceedings against the tenant for breach of the lease agreement, the tenant filed a third-party complaint against its real estate management company. In the complaint, the tenant, among other things, sought recovery under the real estate service agreement it signed with the real estate management company, as well as for professional negligence committed by the real estate management company in its dealings with the landlord on the tenant's behalf, the opinion said. The landlord argued that the claim for negligence should be dismissed under either the gist of the action or economic loss doctrines.

Tort Claims in Pennsylvania

In Pennsylvania, the gist of the action doctrine bars tort claims that sound in contract. According to the federal district court, “When a plaintiff alleges that the defendant committed a tort in the course of carrying out a contractual agreement, Pennsylvania courts examine the claim and determine whether the gist or gravamen of it sounds in contract or tort.”

The economic loss doctrine is similar, in that “no cause of action exists for negligence that results solely in economic damages unaccompanied by physical injury or property damage.”

In its attempt to prevent the dismissal of the negligence claim under the economic loss doctrine, the tenant asserted that damage was, indeed, caused to the landlord's property because of the negligence committed by the real estate management company, the opinion said.

The Ruling

The federal district court was not persuaded by this assertion, noting that the tenant failed to cite any authority for the proposition that damage to a landlord's property is sufficient to allow a tenant to claim property damage for purposes of circumventing the economic loss doctrine in a suit against a third party. The court next considered whether the real estate management company should be able to be sued in tort because its conduct fell short of professional property management standards.

Pennsylvania courts have held that claims against at least some professionals can be based both in tort and in contract. Rule 1042.1 of the Pennsylvania Rules of Civil Procedure, which governs professional liability actions, is applicable to certain health care providers, accountants, architects, chiropractors, dentists, engineers and land surveyors, nurses, optometrists, pharmacists, physical therapists, psychologists, veterinarians, attorneys and people or entities holding similar licenses in other states.

Since property management providers are absent from the list of the professionals enumerated in Rule 1042.1, the court openly questioned whether the gist of the action and economic loss doctrines would preclude a claim of negligence made against professionals other than those specified.

In relying upon the rationale employed by the Pennsylvania Court of Common Pleas of Allegheny County in Rapidigm v. ATM Management Services LLC, the federal district court emphasized that the “answer depends on whether parties contracting with those service providers should receive the protections of tort law or whether their rights should be governed solely by the terms of their agreement with the service provider.”

According to the court, “Where the claims of a party to a contract involve only economic losses, the trend in the law has been to look solely to contract law to determine the scope of the parties' duties and the remedies for a breach of these duties.

“A party should not be permitted to disrupt the expectations of the parties by supplanting their agreement with a tort action that claims that the party misperformed the agreement,” the opinion said. The court cautioned that “the rationale of the economic loss rule is that tort law is not intended to compensate parties for losses suffered as a result of a breach of duties assumed only by agreement.”

A Footnote

In a footnote in its memorandum opinion, the federal district court remarked that the trial court in
Rapidigm concluded that “professionals may be sued for malpractice because the higher standards of care imposed on them by their profession and by state licensing requirements engenders trust in them by clients that is not the norm of the marketplace. When no such higher code of ethics binds a person, such trust is unwarranted. Hence, no duties independent of those created by contract or under ordinary tort principles are imposed on them.”

The court ultimately determined that a real estate property manager did not fall within the malpractice rule carved out by state courts in Pennsylvania for attorneys, accountants, and other licensed professionals. In doing so, the federal district court concluded that the tenant's claims did not implicate the skill, expertise, or special knowledge that the real estate management company brought to bear on its management of the leased premises, but instead rested upon whether the real estate management company did what it was contractually obligated to do.

Because of the existence of the real estate service agreement, the court also did not believe that the Pennsylvania Supreme Court's ruling in Bilt-Rite Contractors Inc. v. The Architectural Studio , 866 A.2d 270 (Pa. 2005), saved the negligence claim from dismissal.

Bilt-Rite Contractors Inc.

In Bilt-Rite Contractors Inc., the Pennsylvania Supreme Court held that a building contractor could maintain a negligent misrepresentation claim against an architect for alleged misrepresentations in the architect's plans for a public construction contract where there was no privity of contract between the architect and the contractor.

In interpreting the State supreme court's ruling, the Third U.S. Circuit Court of Appeals has only recognized a narrow exception to the doctrine of economic loss allowing an aggrieved party to seek recourse from another party with special expertise where the aggrieved party relied on that expertise, but lacked a contractual relationship.

Relying upon the Third Circuit's interpretation of Bilt-Rite Contractors Inc., the federal district court surmised that the gist of the action and economic loss doctrines pre-empted the negligence claim because the tenant had a contractual relationship with the real estate management company and any remedy that the tenant may have lies in an action for breach of contract.

Alan Nochumson is the sole shareholder of Nochumson P.C. His law firm's primary practice areas consist of real estate, litigation, employment and labor, land use and zoning, and estate planning. He is also president of Bear Abstract Services, where his title insurance company offers title insurance, title examination and closing services. He may be reached at 215-399-1346 or at [email protected]. This article also appeared in The Legal Intelligencer, an ALM sister publication of this newsletter.