U.S. District Court in Pennsylvania Holds that Gist of the Action Doctrine Bars Claims for Fraud and Negligent Misrepresentation Where a Contract is Central to the Claim

Bryan’s Quality Plus, LLC v. Shaffer Builders, Inc.
2008 U.S. Dist. LEXIS 61713 (E.D. Pa. Aug. 12, 2008)

The District Court for the Eastern District of Pennsylvania was faced with a motion to dismiss a defendant’s counterclaims for fraud and negligent misrepresentation. The case arose out of a subcontract between the defendant contractor and the plaintiff subcontractor in which the subcontractor agreed to complete piling work for a commercial project undertaken by defendant (the “Project”). The contractor alleged in its counterclaim that the subcontractor represented that it would complete the work in seven days, that it could install in excess of fifty piles a day, that its performance and equipment would surpass conventional methods, that it would furnish and install pile tension brackets and fasteners, and that it had sufficient credit to purchase the materials necessary to complete the work. The parties executed a written contract, although some of the work was completed prior to execution of the subcontract.

The subcontractor failed to complete the work within the time proscribed. As a result, the subcontract was amended to agree that the subcontractor would provide another crew to install the pilings, and that the contractor would provide a crane, hammer, air compressor, hoses, and a crane operator. The contractor also agreed to further reimburse the subcontractor for the engineering fees associated with the piling work at the Project. Shortly thereafter the subcontractor submitted two applications for payment, which the contractor refused to pay. The contractor maintained that the subcontractor failed to complete the work in a timely manner, failed to pay for the materials or a second crew, and failed to authorize release of the engineering reports.

The subcontractor filed a lawsuit alleging a number of claims against the contractor including a breach of contract claim. The contractor filed a counterclaim against the subcontractor asserting breach of contract, fraud, and negligent misrepresentation claims against the subcontractor. The subcontractor moved to dismiss the fraud and negligent misrepresentation claims.

The subcontractor argued that the claim of fraud and negligent misrepresentation sounded in tort and were thus barred by the “gist of the action” doctrine as the duties in question between the parties all arose out of contract. The contractor opposed the motion to dismiss arguing that the “gist of the action” doctrine only applies to claims for fraud in the performance of a contract. Here, the contractor maintained that the fraud and negligent misrepresentation claims were designed to induce the contractor to enter into a contract with the subcontractor, and were thus not barred by the doctrine. The subcontractor responded by arguing that any pre-contractual promises subsumed by the contract by virtue of an integration clause in the subcontract.

The Court granted the subcontractor’s motion to dismiss. The Court held that a tort claim is barred by the gist of the action doctrine if (1) the tort claim arises solely from a contract between the parties; (2) the duties allegedly breached were created and grounded in the contract itself; (3) the liability stems from the contract; or (4) the tort claim essentially duplicates a breach of contract claim or the success of which is wholly dependent on the terms of the contract. In essence, the Court concluded that it must determine whether the source of the duties breached are “intertwined” with obligations under the contract. In this case, the Court concluded that the contractor’s claims for fraud and misrepresentation involve matters that became contractual duties as the contract specifically contained a provision addressing scheduling, a provision providing that the subcontractor would provide sufficient labor, materials, and equipment to maintain the progress of the work, and there was a provision providing for the quality of the work to be performed by the subcontractor. The Court therefore concluded that the tort claims were duplicate of the contractor’s claim for breach of contract, and thus were barred by the gist of the action doctrine.

The Court also noted that the parol evidence rule would be fatal to the contractor’s tort claims as prior representations concerning matters covered in a written contract cannot be considered where a contract contains an integration clause and the representations were not fraudulently omitted from the contract. The Court also concluded that the economic loss doctrine, which bars recovery for tort claims were losses are solely economic and no physical harm is suffered, would also bar the contractor’s counterclaim. The Court held that the Bilt-Rite exception to the economic loss rule in claims of negligent misrepresentation does not apply to this case as it is only applicable where the parties are in the business of supplying information. The Court held that to determine if the exception applies a court must consider not whether the damages are purely physical or economic, but rather whether the source of duty the defendant allegedly breached is based in contract or in tort.

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