Changes to the Gist of the Action Doctrine in Pennsylvania

On Behalf of | Jul 2, 2015 | Insurance Defense |

Recently, the Pennsylvania Supreme Court has issued a ruling which may grant tort claims for fraudulent contract performance. Bruno v. Erie Ins. Co., 106 A.3d 48 (Pa. 2014). Pennsylvania courts have employed two methods to determine whether tort claims that accompany contract claims should be allowed as freestanding causes of action or rejected as impermissible attempts to recast a contract claim into a tort: the gist of the action doctrine and the economic loss doctrine. In theory, these are distinct doctrines under Pennsylvania law. From a practical perspective, the doctrines operate identically and share a common purpose: maintaining the separate spheres of contract and tort.[1] Historically, the economic loss doctrine evolved in the context of products liability cases, precluding tort recovery where the only injury is to the product itself, while the gist of the action has been applied more frequently in non-products liability cases.[2]

Despite an abundance of Superior Court and Commonwealth Court cases applying these doctrines, the Pennsylvania Supreme Court did not explicitly adopt either of these doctrines until December 15, 2014, when Justice Debra McCloskey Todd decided Bruno v. Erie Ins. Co., 106 A.3d 48 (Pa. 2014), which clarified the appropriate analysis for determining the viability of a tort claim, under the gist of action doctrine, where the parties have a pre-existing contractual relationship. She summed up the unsettled state of the doctrine under Pennsylvania law prior to her decision, “[o]ur Court has had scant occasion to opine as to how the gist of the action doctrine should be employed to ensure that a party does not bring a tort claim for what is, in actuality, a claim for a breach of contract.”

The leading pre-Bruno Superior Court case on the gist of action doctrine is eToll, Inc. v. Elias/Savion Adver., Inc., 811 A.2d 10 (Pa. Super. 2002). There, Elias/Savion, an advertising agency allegedly defrauded eToll, a software developer, by (1) misrepresenting its ability to market eToll’s products, (2) accepting payments from eToll for services not actually performed, and (3) contracting for goods and services on eToll’s behalf which were unauthorized and sometimes fictitious. The Superior Court affirmed the award of summary judgment in favor of Elias/Savion on eToll’s common law fraud claim, finding that all of the alleged fraudulent acts “arose in the course of the parties’ contractual relationship” and the “duties regarding billing and performance were created and grounded in the parties’ contract.” Despite acknowledging the harshness of the result, Judge Maureen Lally-Green, writing for the Superior Court, held that the “gist of the action doctrine should apply to claims for fraud in the performance of a contract,” but acknowledged that the doctrine would not bar claims for fraud in the inducement. The critical inquiry, according to eToll, is whether a tort claim is “inextricably intertwined” with a contract claim – if it is, the gist of the action is contract.

Bruno, though not explicitly abrogating eToll, casts doubt onto its “inextricably intertwined” analysis and instead clarifies that the proper question is one of duty.[3] Bruno addressed a claim brought against Erie Insurance Company related to a homeowners’ insurance policy covering expenses associated with mold. After being called to the house by the insured plaintiffs to inspect suspected mold, Erie Insurance’s agents informed the plaintiffs that the suspected mold was harmless, resulting in the plaintiffs continuing with their renovation plans on the home and continuing to reside at that address. The mold later proved toxic, causing the plaintiffs significant respiratory illnesses and resulting in the development of throat cancer by one of the plaintiffs.

The relevant issue on appeal to the Pennsylvania Supreme Court was whether the Brunos’ negligence claim, which was based on Erie’s representation that the mold was harmless, was barred by the gist of the action doctrine. Though Justice McCloskey Todd conceded that Erie was under a contractual obligation to investigate the alleged mold, she held that the gist of the action doctrine did not apply because Erie acted negligently in fulfilling these obligations, and this negligence “concerns Erie’s alleged breach of a general social duty, not a breach of any duty created by the insurance policy itself.” This represents a substantial departure from eToll, where the Superior Court applied the doctrine despite eToll’s argument that “the duty to refrain from deliberate deceit is a duty implied by law, not derived from a private contract.”

Bruno has the potential to expand tort liability for conduct that would have been previously actionable only as contract under eToll and appears to set aside, or at least substantially blur, the distinction recognized there between fraud in the inducement and fraud in the performance of a contract. Bruno recognizes that a contract is just a “vehicle” which establishes a relationship between parties, but does not provide an exhaustive basis for the source of duties owed by the parties, and that a contractual relationship does not necessarily preclude the existence of extra-contractual duties. eToll would likely have come out different if decided today and, in light of Bruno, it now appears that claims for fraudulent contract performance are viable. This case has the potential to expand tort liability and legal duties for contracting parties.

[1] See generally Kimberton Healthcare Consulting, Inc. v. Primary PhysicianCare, Inc., 2011 WL 6046923, at *6 (E.D. Pa. Dec. 6, 2011)

[2] Id.

[3] Bruno at 69 (referring to the concept of duty as “the touchstone standard for ascertaining the true gist or gravamen of a claim pled by a plaintiff.”)