from defendant's breach, i.e., damages suffered because it did not receive the benefit of its bargain. In such a dispute between two commercial parties East River appropriately applied to bar a tort recovery.
The fact that the contract involved professional services rather than the provision of manufactured goods, did not, the court held, change the appropriate analysis. While acknowledging the existence of a concurrent body of tort law dealing with professional malpractice, the court did not view the decision as imperiling malpractice law, because the "special non-contractual duties of professionals such as doctors, lawyers and architects enforced by tort law were created in part to make up for the lack of sophistication and bargaining power of those seeking these professional services." Id. Such conditions, the court stated, do not ordinarily obtain in service contracts between two commercial parties. As such, summary judgment on plaintiff's tort claims, including its fraud claim, was appropriate under any of the potentially applicable laws, including Pennsylvania's. Id.; see also, Public Service Co. of N.H. v. Westinghouse Elec., 685 F. Supp. 1281, 1287 (D.N.H. 1988);
Streiff Jewelry Co. v. United Parcel Serv., 670 F. Supp. 341 (S.D. Fla. 1987) withdrawn per stipulation 679 F. Supp. 7 (S.D. Fla. 1988) (No tort remedy available for a plaintiff alleging economic loss arising out of a breach of a shipping contract.)
c. The Plaintiffs' Allegations Do Not Fall Within Any Exception to the Economic Loss Rule.
PECO asserts that the plaintiffs may not avoid the effect of the economic loss doctrine simply because they are in contractual privity with PECO. Unlike plaintiffs not in contractual privity with a defendant, however, the plaintiffs here may recover for economic loss against PECO but only in contract. The plaintiffs have tried to evade this clear rule by pleading fraud and wanton and wilful misconduct, all in an attempt to do better than their contractual bargain -- and in the hope that they can recover large punitive damage awards.
PECO claims there are only two discrete exceptions to the economic loss rule: (1) when a defendant's conduct causes physical injury to property or persons or (2) when the defendant's breach is of a duty imposed by law, rather than by contract. Neither situation is applicable here.
The fact that this case involves a service contract is irrelevant. Unlike service cases involving certain professionals upon which the law has imposed certain duties, no cases have been cited which stand for the proposition that a commercial party such as PECO owed some legally imposed duty, outside the contract, to avoid causing economic loss to its corporate confrere's. Therefore, a tort recovery is inappropriate and unavailable. PPG Industries, 681 F. Supp. at 290.
Nor can the economic loss doctrine be by-passed by allegations of "wanton," "reckless," "bad-faith" or "fraudulent" conduct. See Iron Mountain Sec. Storage v. Am. Specialty Foods, 457 F. Supp. 1158 (E.D. Pa. 1978). Iron Mountain was a commercial contract case involving an alleged breach of an options contract. The defendant counterclaimed for punitive damages on count two of its counterclaim, which attempted to state a claim in tort on the theory "that a party to a contract who either recklessly or intentionally commits a bad faith or malicious breach of the duties imposed by that contract for the purpose of causing harm to the other party to the contract is liable [in] tort" for damages proximately caused thereby and for punitive damages. Id. at 1163 (record citation omitted.)
Judge Luongo put his finger on why plaintiffs always try to turn contract disputes into tort actions:
Although they derive from a common origin, distinct differences between civil actions for tort and contract breach have developed at common law. Tort actions lie for breaches of duties imposed by law as a matter of social policy, while contract actions lie only for breaches of duties imposed by mutual consensual agreements between particular individuals. In tort actions, damages are awarded to compensate the plaintiff for all loss suffered by breach of the duty, whereas in contract actions, damages are limited by the scope of the agreement and must be foreseeable at the time the agreement is made. If a tortfeasor breaches a duty imposed by society, a monetary levy beyond that which is compensatory may be imposed against him to punish the wrongdoing and serve as a deterrent; such "punitive damages" are not assessed for breach of mere contractual duties, however. These and other differences have characterized tort and contract as distinct forms of action, and the fact that tort rules usually provide greater advantages for plaintiffs' recoveries has led to "more or less inevitable efforts of lawyers to turn every breach of contract into a tort." W. Prosser, Hornbook of the Law of Torts, § 92 (4th ed. 1971): quotation from id. at 614 (footnote omitted). In this case, the difference in rules as to availability of punitive damages seems to have been a major factor promoting assertion of the tort claim since that is the only difference in the relief requested under the two counts of counterclaim.
Id. at 1165
The court assumed that the option contract contained an implied covenant of good faith and fair dealing, i.e., a duty created by law rather than the intent of the parties. Id. at 1166. However, it refused to hold that merely because there was a breach of a legal duty, a tort remedy must exist under Pennsylvania law.
Rather, the court distinguished between those situations where a breach of contract has led to tort liability to third persons; e.g., personal injury resulting to a person not a party to the contract, or the insurance contract context in which unequal bargaining power and adhesion contracts are prevalent. Id. at 1166-67. Where, as in Iron Mountain, the injury caused by the breach was within the scope of the contract and the loss was "purely economic and compensable in an action on the contract itself," Judge Luongo did not "believe that Pennsylvania would superimpose tort law on that contract action merely to allow recovery of punitive damages for breach of the implied contract term." Id. at 1166. See also Closed Circuit Corporation of America v. Jerrold Electronics, 426 F. Supp. 361, 364 (E.D. Pa. 1977) ("[a] claim ex contractu cannot be converted to one in tort simply by alleging that the conduct in question was wantonly done."); Cincinnati Gas & Elec. Co. v. General Elec. Co., 656 F. Supp. 49, 63 (S.D. Ohio 1986) ("Punitive damages are not appropriate to and may not be awarded in an action for breach of contract and a pleader does not alter what is essentially an action for breach of contract by adding the words wilfully, wantonly and maliciously to a claim").
Nor, argues PECO, does the mere fact that a defendant may have negligently or intentionally misrepresented the nature of its performance of a contract transform a breach of contract into tort. Its argument on this ground is heavily dependent on non-Pennsylvania cases such as Unifoil Corp. v. Cheque Printers and Encoders Ltd., 622 F. Supp. 268 (D.N.J. 1985).
In Cheque Printers, a third-party defendant moved to dismiss a fraud claim against it. The defendant premised a fraud claim on the theory that the third party knew that the sales contract specified a certain type of foil to be used in making lottery tickets, and knowingly supplied another kind. Judge Stern dismissed the fraud claim:
On the fraud claim, [plaintiff] argues that Spring Motors does not directly address allegations of intentionally tortious conduct. That is true; but the reasoning of Spring Motors leads us to conclude that, as between commercial parties, New Jersey will not countenance such claims. . . . [Plaintiff] also argues that case law demonstrates that an action for fraud will lie, even in the presence of a contract. But such cases deal with fraud in the inducement, not the performance, of a contract. This Court, moreover, has construed the law of New Jersey to prohibit fraud claims when the "fraud contemplated by the plaintiff . . . does not seem to be extraneous to the contract, but rather on fraudulent performance of the contract itself."
Id. at 270-71 (quoting Foodtown v. Sigma Marketing Systems, Inc., 518 F. Supp. 485, 490 (D.N.J. 1980)); see also, Unifoil Corp. v. CNA Ins. Cos., 218 N.J. Super. 461, 528 A.2d 47, 51 (App. Div. 1987). Similarly, Judge Wolin of this district recently dismissed a fraud complaint based on allegations that a party had sold a plastic processing machine with the knowledge that the machine would not meet contractual specification. In so deciding, he followed Cheque Printers and held that fraudulent performance of a contract between two commercial entities, as opposed to fraud extraneous to the contract, is not compensable in tort. Werner & Pfleiderer Corp. v. Gary Chemical Corp., 697 F. Supp. 808 (D.N.J. 1988).
In the power plant context, a federal court has held that a fraudulent breach of contract does not give rise to a separate tort action. In Public Service Co. of N.H. v. Westinghouse Elec. Co., 685 F. Supp. 1281 (D.N.H. 1988), the complaint alleged that the defendant fraudulently concealed facts about two failing turbine blades in a steam turbine electric generator which defendant supplied to the plaintiff. The plaintiff contended that if it had been told the true facts it would have had the blades inspected and would have avoided a subsequent breakdown and a resulting shutdown of the power plant.
The court indicated that defendant's duty to warn arose from the terms of the contract, rather than any common law duty. Id. at 1290. The gravamen of plaintiff's fraud claim was that it did not get the benefit of its bargain because the defendant's withholding of information breached the defendant's contractual duty to exercise reasonable professional knowledge and judgment. Id. As such, the plaintiff did not have an independent fraud claim under tort law. Instead, these allegations were properly regarded as another way of stating a claim for breach of contract. Id.; see also, Nissho-Iwai Co. Ltd. v. Occidental Crude Sales, Inc., 729 F.2d 1530, 1550-51 (5th Cir. 1984); Flow Industries, Inc. v. Fields Const. Co., 683 F. Supp. 527 (D.Md. 1988);
Pandjiris, Inc. v. Sunshine Stainless Tank & Equip., 655 F. Supp. 473 (E.D. Mo. 1987); Keene Corp. v. Insurance Co. of North America, 597 F. Supp. 934, 945-46 (D.D.C. 1984); cf. Hi-Grade Cleaners, Inc. v. American Permac, Inc., 561 F. Supp. 643, 644 (N.D. Ill. 1982) ("case law and the Restatement apparently confine the tort of negligent misrepresentation to persons and entities in the business of selling or supplying information which their customers will rely upon in taking some additional action.")
Here, PECO says, the plaintiffs' fraud claims (to the extent PECO understands them, see, infra) are based solely upon misrepresentations and concealments of facts by PECO with respect to operations at the Peach Bottom plant; that is, fraudulent statements relating to PECO's performance of the Owners Agreement. Such fraud is not extraneous to the contractual dispute among the parties, but is instead but another thread in the fabric of plaintiffs' contract claim. Like the plaintiffs' other tort claims, its fraud claim is undergirded by factual allegations identical to those supporting their breach of contract counts. See Agreement Art. 13, § 13.1 (PECO "shall keep ACE, DPL, and PSE&G fully informed of the status of the Station.") This fraud did not induce the plaintiffs to enter into the original agreement nor did it induce them to enter into additional undertakings. It did not cause harm to the plaintiffs distinct from those caused by the breach of contract; and the mere fact that disclosure of certain facts to plaintiffs earlier may have allowed them to take corrective action does not change the result. If a plaintiff knew, for example, that he was being supplied with unsuitable goods he could act to obtain other goods and therefore avoid any harm from the supplier's breach. However, in just this type of situation courts have held that a tort remedy does not exist. See e.g., Cheque Printers, 622 F. Supp. at 270-71; Public Service Co., 685 F. Supp. at 1290.
PECO claims this case is no different. Plaintiffs merely allege that, but for PECO's fraud, they would have discovered PECO's improper operation of the plant and would have taken remedial actions which would have prevented the incidents leading to the shutdown. In short, the plaintiffs would have minimized the damages caused by PECO's improper performance of its contractual duty to efficiently operate and maintain the plant. Such a claim is simply indistinct from the concurrent contract claim, argues PECO, and the economic loss doctrine mandates its dismissal.
Finally, the plaintiffs' allegations of physical damage to the Peach Bottom plant do not constitute an exception to the economic loss doctrine, rather they merely strengthen PECO's contention that this is a contract case and nothing more. Atlantic City Electric and Delmarva's amended complaint added specific allegations that PECO breached its contractual obligations to "perform or contract for maintenance, renewals, and replacements required to keep the Station in safe and efficient operating condition and to protect the property. . . ." Agreement Art.12.1(d) quoted in ACE/DPL Amended Complaint para. 13. The amendment was intended to make clear that the "Owners Agreement is a maintenance contract, as well as an operating contract." ACE/DPL Supplemental Memorandum at 1. The same factual allegations constitute the basis for Atlantic City and Delmarva's attempt to recover for physical damages to the plant in tort as well as in contract.
PECO claims such allegations do not fall within the damage to property exception to the economic loss rule; rather, like damage to the defective product itself, damage to property which is the subject of a maintenance contract is compensable in contract only. If PECO's misconduct at Peach Bottom had resulted in physical damage to Delmarva Power's headquarters on King Street in Wilmington then Delmarva would have pled an exception to the economic loss rule since such property damage would not have been reasonably foreseen by the parties in making their contract. The risk that PECO would fail to live up to its contractual obligations and that Peach Bottom would be physically damaged, however, is like the risk that a product will malfunction or be destroyed by an internal defect, one which is both utterly foreseeable and within the scope of the contract.
PECO insists that East River and its progeny stand firmly for the proposition that these sort of risks will be contractually allocated by commercial parties, since they are so obviously known to the parties, and that public policy demands that such allocations be respected. PECO's duty to maintain the plant is firmly rooted in the Owners' Agreement, and it is the bargain they struck when the plaintiffs signed that agreement which must serve as the basis for recovering losses caused by violations of it. As Prosser and Keeton indicate:
It is suggested that to the extent that the duty a party to a contract owes to another party or third party beneficiary is to be determined upon the first party's manifested intention, the obligation is contractual and entirely contractual. This would normally be so when the claim is for economic loss. Such a claim should not be translatable into a tort action in order to escape some roadblock to recovery on a contract theory. . . . Thus, a builder or a contractor would normally be subject to liability on a contract theory only . . . for delays in construction or defects in construction that do not result in physical harm to persons or tangible things, other than the thing itself that is being constructed or repaired.
W. Prosser & W. Keeton, The Law of Torts, § 92 at 659 (5th ed. 1984).
The fact that the co-owners may have to expend money to repair or replace parts of the plant does not distinguish them from commercial buyers which must repair or replace a defective or destroyed crankshaft or turbine; each may have to make such expenditures if the contract so allocates this risk since, like plaintiffs' other tort claims, this is a risk of purely economic loss which the plaintiffs foreseeably faced if PECO did not live up to its contractual obligations.
2. The Plaintiffs' Perspective
The plaintiffs have, as might be expected, a totally different view of what this case is about. They say that, messy though it may be, tort law has traditionally been applicable to conduct involving the performance of contracts, particularly service contracts. In Pennsylvania, a tort recovery exists for a plaintiff harmed by a defendant who has improperly performed his contractual duties under a service contract absent a valid exculpatory clause.
Such is the law, and the plaintiffs argue that the economic loss cases cited by the defendant are not to the contrary. One set involves parties not in privity and are best viewed, according to plaintiffs, as proximate cause cases. The second, East River and its progeny, are applicable only to cases governed by the U.C.C. and do not, and do not purport to, overrule or affect the concurrent body of tort law governing misfeasance in the performance of service contracts.
Moreover, Pennsylvania law does not favor exculpatory clauses, and its public policy forbids a party from relieving itself from liability for conduct violative of statutory and regulatory safety codes. Indeed, even where such conduct is not present, tort liability is precluded only if the exculpatory clause is found to be enforceable, a decision contingent upon several potential factors including equality of bargaining power, the nature of the transaction, and the clarity of the exculpatory clause. And where conduct violative of law is present, such as here, PECO is simply mistaken in arguing that it violated duties imposed solely by contract. In short, plaintiffs contend that their tort claims are fully consonant with Pennsylvania law.
Plaintiffs cite to two recent Pennsylvania Superior Court decisions to support their position that the improper performance, as opposed to mere nonperformance, of a contract gives rise to tort liability under Pennsylvania law. The most recent of these decisions is Hirsch v. Mount Carmel Dist. Ind. Fund, 363 Pa. Super. 433, 526 A.2d 422 (1987).
Mount Carmel involved a contract which required the defendant to obtain financing for the plaintiffs' addition to their manufacturing plant. Economic damages were sought for the delay caused by the defendant's supposedly inadequate efforts in performing its contractual duties. The trial court had granted summary judgment for defendant on plaintiffs' contract and tort causes of action, based on the existence of an exculpatory clause in the contract.
On appeal, the Superior Court reversed because it found that plaintiff's complaint alleged negligent performance of contractual duties, i.e., misfeasance; rather than a failure to perform, i.e., non-feasance:
The test used to determine if there exists a cause of action in tort growing out of a breach of contract is whether there was an improper performance of a contractual obligation (misfeasance) rather than the mere failure to perform (non-feasance).
Id. at 423 quoting Raab v. Keystone Ins. Co., 271 Pa. Super. 185, 412 A.2d 638 (1979) appeal dismissed, 496 Pa. 414, 437 A.2d 941 (1981).
The court held that a tort cause of action was properly stated under this test since the dilatory performance alleged by plaintiffs constituted misfeasance. Id. at 424-25.
While acknowledging that this non-feasance/misfeasance distinction has not been explicitly used to distinguish between when a tort claim for economic damages will be maintainable and when it will not, the plaintiffs' point to several Pennsylvania cases which have allowed a tort recovery for economic loss between parties in contractual privity. For example, Douglas W. Randall, Inc. v. AFA Protective Sys., Inc., 516 F. Supp. 1122 (E.D. Pa. 1981), aff'd without opinion, 688 F.2d 820 (3d Cir. 1982), is a case where a plaintiff was permitted to recover economic loss in tort against a defendant who breached a contract to service a burglar alarm system installed in plaintiff's jewelry store. The store was burglarized and the alarm did not go off because the defendant's repairman had turned it down too low. The jury decided this conduct was both negligent and grossly negligent. On post-trial motions the jury's verdict was attacked on the ground that an exculpatory clause in the service contract limited defendant's liability for negligence. The court rejected this challenge "since the jury found that the defendant was grossly negligent" and therefore "the exculpatory clause does not limit the defendant's liability to the plaintiff." Id. at 1127.
Nor is the Randall case alone in allowing recovery of economic losses in tort for the negligent provision of services. See Kairys v. Aetna Casualty & Sur. Co., 314 Pa. Super. 502, 461 A.2d 269 (1983) (Insurance broker held liable for breach of contract and negligence because he left a large gap in the plaintiff's medical malpractice coverage.); Garbish v. Malvern Federal Sav. & Loan Ass'n., 358 Pa. Super. 282, 517 A.2d 547 (1986) appeal den. 533 A.2d 712, 516 Pa. 641 (1987) (Agent/lender held liable in tort to a plaintiff home buyer for improperly disbursing funds for the construction of plaintiff's house.);
Kremer v. Janet Fleisher Gallery, Inc., 320 Pa. Super. 384, 467 A.2d 377 (1983) (Agency case in which an art gallery was held liable for negligently selling a painting at too low a price); Dubern v. Girard Trust Bank, 454 F.2d 565 (3d Cir. 1972) (Where agent bank's failure to disburse funds in accord with principal's instruction caused principal to incur tax liability the principal was not limited to contract damages but could recover the measure of damages which would most nearly make him whole).
Nor, say the plaintiffs, is such a tort remedy only available to "little guys" who purchase services from banks, lawyers, accountants and doctors. Rather, negligence actions for economic loss have been permitted when brought by a mill owner against an architect, Bloomsburg Mills, Inc. v. Sordoni Construction Co., 401 Pa. 358, 164 A.2d 201 (1960), a bank versus an accountant, Robert Wooler Co. v. Fidelity Bank, 330 Pa. Super. 523, 479 A.2d 1027 (1984), and by a general contractor against an architect. General State Authority v. Sutter Corp., 69 Pa. Commw. 504, 452 A.2d 75 (1982).
Further, the plaintiffs contend that their action against PECO is essentially grounded in PECO's mismanagement of the Peach Bottom plant, and that mismanagement cases have traditionally sounded in tort. Selheimer v. Manganese Corp. of Am., 423 Pa. 563, 224 A.2d 634 (1966); Hunt v. Aufderheide, 330 Pa. 362, 199 A. 345 (1938).
In short, plaintiffs say that Pennsylvania law has consistently considered the improper performance of service contracts a concern of not only contract law, but also of tort. Indeed, states other than Pennsylvania also adhere to a distinction between contracts for the sale of goods and those for the provision of services.
Consolidated Edison Co. v. Westinghouse Corp., 567 F. Supp. 358 (S.D.N.Y. 1983), involved a claim for economic loss by an electric utility. This loss had allegedly occurred because the defendant, which furnished equipment for and constructed a nuclear power plant for plaintiff, delayed informing the plaintiff of problems revealed by data generated as a result of inspections defendant had performed on steam generators. That part of plaintiff's complaint which sought relief for economic loss due to defendant's provision of defective equipment was dismissed under an East River-like analysis. With respect to plaintiff's allegations that the defendant delayed informing plaintiff of problems revealed by its inspection of the steam generators, the court held that this allegation did state a claim in tort under New York law because it alleged negligence in the performance of a service. Id. at 365-66; accord, Howell v. Freifeld, 631 F. Supp. 1222, 1225-26 (S.D.N.Y. 1986); see also Bryant v. Murray-Jones-Murray, Inc., 653 F. Supp. 1015, 1015 (E.D. Mo. 1985). (Under Missouri law, the bar on recovery of economic loss in tort is not applicable to "an action based on the negligent rendition of services by a professional rather than on the negligent manufacture or provision of a defective product"); but, c.f., Public Service Co. of N.H., 685 F. Supp. at 1287 (supra, note 6).
Plaintiffs contend that the present case falls squarely within this body of law. They allege misfeasance in the performance of a service contract, a contract to operate and maintain a nuclear power plant. These contractual duties required PECO to utilize its professional and managerial expertise. And like other professionals and managers PECO's failure to use reasonable care, or its intentionally tortious behavior, expose it to tort liability to its co-owners.
b. Exculpatory Clauses
Nor does the fact that the Owners Agreement contains provisions dealing with the allocation of the risks of cessation of power production at Peach Bottom (see Agreement § 25.2: "all power replacement costs incurred by each [co-owner] as a result of the total or partial unavailability of its ownership share of [Peach Bottom] . . . shall not be considered as a shared liability and shall be borne entirely by each [co-owner]") provide comfort to PECO on this motion.
While such exculpatory clauses may limit a contracting party's liability for negligent conduct, such clauses were interpreted in light of the following standards:
(1) contracts providing for immunity from liability for negligence must be construed strictly since they are not favorites of the law;
(2) such contracts must spell out the intention of the parties with the greatest of particularity and show the intent to release from liability beyond doubt by express stipulation and no inference from words of general import can establish it;