Valhal Corp v. Sullivan Assoc ( 1995 )

Opinions of the United
1995 Decisions States Court of Appeals
for the Third Circuit
1-4-1995
Valhal Corp v Sullivan Assoc
Precedential or Non-Precedential:
Docket 91-3650
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UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 94-1221
No. 94-1241
VALHAL CORP.,
Cross-appellant
v.
SULLIVAN ASSOCIATES, INC.,
ARCHITECTS, PLANNERS, ENGINEERS,
Appellant
ON APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF PENNSYLVANIA
(Civil No. 91-CV-3650)
Argued September 26, 1994
Before: SCIRICA, NYGAARD and McKEE, Circuit Judges
(Opinion filed: January 3, 1995)
OPINION OF THE COURT
Kean K. McDonald, Esq.
Pamela Tobin, Esq. (ARGUED)
Lisa C. Fogel, Esq.
LABRUM & DOAK
1818 Market Street
Suite 2900
Philadelphia, PA 19103
Attorneys for Appellant
Ira B. Silverstein, Esq. (ARGUED)
Gerald E. Arth, Esq.
FOX, ROTHSCHILD, O'BRIEN & FRANKEL
2000 Market Street, 10th floor
Philadelphia, PA 19103
Attorneys for Cross-appellant
William J. Kennedy, Esq.
Robert C. Clothier, Esq.
DECHERT, PRICE & RHOADS
4000 Bell Atlantic Tower
1717 Arch Street
Philadelphia, PA 19103
Attorneys for Amici Curiae:
American Consulting Engineers Council,
Hazardous Waste Action Coalition,
Consulting Engineers Council of
Pennsylvania, and
AFSE: The Association of Engineering
Firms Practicing in the Geosciences.
C. Grangier Bowman, Esq.
Gunther O. Carrle, Esq.
POWELL, TRACHTMAN, LOGAN, CARRLE
& BOWMAN, P.C.
367 South Gulph Road
King of Prussia, PA 19406
Attorneys for Amici Curiae:
American Institute of Architects,
National,
Pennsylvania Society of Architects and
its Regional Chapters - AIA,
Bucks County, AIA Central PA,
Eastern PA, AIA, Middle, PA, AIA,
Northeastern PA, AIA,
Northwestern PA, AIA,
AIA Philadelphia and AIA Pittsburgh,
Coalition of American Structural
Engineers,
Delaware Valley Association of
Structural
Engineers,
National Society of Professional
Engineers,
Pennsylvania Society of Professional
Engineers,
National Council of Structural Engineers
Associations
McKEE, Circuit Judge
This dispute centers on the enforceability of a limitation
of liability clause in a contract between a real estate developer
(Valhal Corporation), and an architectural firm (Sullivan
Associates). Valhal and Sullivan have both filed appeals from the
order of the district court denying Sullivan's motion for partial
summary judgment and granting Valhal's motion for partial summary
judgment. The district concluded that the disputed clause was
part of the contract but that it violated public policy and was
therefore unenforceable. We will reverse, and dismiss for lack
of jurisdiction.
I. Factual and Procedural Background
Valhal is a New York corporation which specializes in the
management and development of real estate. Sullivan Associates,
Inc., is a Pennsylvania corporation specializing in
architectural, planning and engineering services. In March of
1989, Valhal became interested in buying a parcel of real estate
located at 401 N. 21st Street in Philadelphia, Pennsylvania,
known as the "Channel 57 Property". Valhal planned to build a
high-rise residential tower on a portion of that property. In
early June of 1989, Valhal and Sullivan discussed the possibility
of Sullivan performing certain work in connection with the
project, including a feasibility study.
As a result of those discussions, Sullivan forwarded a
proposal to Valhal, dated June 7, 1989, detailing the services
which Sullivan would perform. A document entitled "Standard
Consulting Contract Terms and Conditions" was attached to the
proposal and provided in part:
Enclosed you will find our Standard
Consulting Contract Terms and Conditions
which are hereby made a part of this
proposal, as well as a copy of our Hourly
Billing Rates for your knowledge.
We believe the above scope of services
incorporates the elements discussed. If you
are in agreement with the terms of this
proposal, we ask that you sign both copies
and return one copy for our records. At that
time, a retainer in the amount of $1,000 is
to be provided to Sullivan Associates, Inc.
Paragraph 9 of the attached Standard Consulting Contract Terms
and Conditions is at the heart of the current controversy.
Paragraph 9 provided:
The OWNER agrees to limit the Design
Professional's liability to the OWNER and to
all construction Contractors and
Subcontractors on the project, due to the
Design Professional's professional negligent
acts, errors or omissions, such that the
total aggregate liability of each Design
Professional shall not exceed $50,000 or the
Design Professional's total fee for services
rendered on this project.
Should the OWNER find the above terms
unacceptable, an equitable surcharge to
absorb the Architect's increase in insurance
premiums will be negotiated.
The Standard Consulting Contract Terms and Conditions was signed
by Andrew Sullivan as president of the company.
Sullivan's initial proposal provided that its services would
be performed in two phases -- Phase "A" and Phase "B" -- and that
Sullivan's total fee would be $5,000. Valhal responded by
requesting that a service to be performed under Phase "B" be
included under Phase "A" and by requesting that two completely
new services be added to Phase "A". Sullivan agreed and a new
proposal was submitted to Valhal on June 22, 1989 in which
Sullivan increased its fee from $5,000 to $7,000 because of the
additional work it was to perform under Phase A. This second
proposal once again incorporated the Standard Contract Terms and
Conditions, including the limitation of liability provision, and
was again signed by Andrew Sullivan. After reviewing the
second proposal, Valhal requested another change to which
Sullivan agreed. Sullivan then submitted a third proposal on July
24, 1989, which also incorporated the Standard Contract Terms and
Conditions, including the limitation of liability provision which
remained unchanged and which was signed by Andrew Sullivan.
Although Valhal never signed the proposal letter or the Standard
Contract Terms and Conditions, Valhal did fax a letter to
Sullivan dated August 4, 1989 signed by Valhal’s Vice-President.
That letter stated:
As per your conversation with my assistant
this morning, we would like you to begin your
study of the Channel 57 property as soon as
possible. This letter will serve as
authorization for you to initiate a
feasibility study highlighting the
possibility of the construction of a tower
[on the property]. We would like your study
to include engineering research, as well as
estimation of construction costs, with
similar structures such as Corman (sic)
suites sited (sic) for comparison.
Sullivan responded by performing the services outlined in the
July 24, 1989 proposal, and thereafter provided a written report
to Valhal in which Sullivan concluded that the Channel 57
property was not burdened with any height restrictions and that
it was possible to erect the tower on the property without any
special governmental approvals.
Valhal thereafter entered into an Agreement of Sale for the
purchase of the Channel 57 property. However, after the sale
contingencies expired, Valhal learned that the property was
subject to a height restriction which would be violated by its
building. Nevertheless, Valhal proceeded to closing and paid the
purchase price of $10.1 million.1 Valhal then brought a
diversity action against Sullivan pursuant to 28 U.S.C. §1332
seeking damages in excess of $2,000,000 for breach of contract,
negligence, gross negligence and negligent misrepresentation
based upon Sullivan’s failure to inform it of the height
restriction.
Sullivan thereafter moved for partial summary judgment on
the grounds that its liability was expressly limited to $50,000
and that the district court therefore lacked diversity
jurisdiction. Valhal moved to strike the limitation of liability
1Valhal asserts that it proceeded to sale in order to
mitigate its damages.
provision arguing that it was not a part of the contract and that
even if it was, it was unenforceable. Valhal also argued that
the limitation of liability clause, if enforceable, was limited
only to its claim for negligence and did not apply to its breach
of contract claim or to its gross negligence claim. The district
court treated the parties' motions as cross-motions for summary
judgment, denied Sullivan's motion, and granted Valhal's motion.
The court ruled that the provision was part of the contract, but
that it was against public policy as expressed in 68 Pa. Cons.
Stat. Ann. § 491 (Purdons 1994) (the anti-indemnity statute) and
therefore unenforceable. See Memorandum and Order, dated May 17,
1993.2 Valhal Corp. v. Sullivan Associates, Inc., 1993 WL 175285
(E.D. Pa. 1993).
Thereafter, the jury returned a verdict in favor of Valhal
on both the contract and negligence claims but awarded damages of
$1,000,000 on the contract claim only. The jury also concluded
that Sullivan was not liable for gross negligence or negligent
misrepresentation. Sullivan's post-verdict motions were denied,
and this appeal followed.
II. Discussion
Both Sullivan and Valhal now renew the arguments they made
to the district court. We will consider the parties' claims
seriatim.
2
The district court did not find the limitation of liability
provision violated the Pennsylvania anti-indemnity statute. It
did hold, however, that the provision violated the public policy
evidenced by that statute.
The standard of review applicable to a grant of summary
judgment is plenary. Bixler v. Central Pa. Teamsters Health &
Welfare Fund, 12 F.3d 1292, 1297 (3d Cir. 1993). "On review, the
appellate court is required to apply the same test the district
court should have utilized initially." Goodman v. Mead Johnson &
Co., 535 F.2d 566, 573 (3d Cir. 1976), cert. denied, 429 U.S.
1038 (1977). A motion for summary judgment shall be granted if
the court determines "that there is no genuine issue as to any
material fact and that the moving party is entitled to judgment
as a matter of law." Fed. R. Civ. P. 56(c). In determining if
there is a genuine issue of material fact, "[i]nferences . . .
drawn from the underlying facts . . . must be viewed in the light
most favorable to the party opposing the motion. The non-
movant's allegations must be taken as true and, when these
assertions conflict with those of the movant, the former must
receive the benefit of the doubt." Goodman, 534 F.2d at 573.
A. The Limitation of Liability Clause is Part of the
Contract
Although Valhal admits that it contracted with Sullivan, it
relies primarily upon L.B. Foster Co. v. Tri-W Constr. Co., Inc.,
186 A.2d 18 (Pa. 1962), to argue that the provision limiting
Sullivan's liability to $50,000 was not part of the contract.
Valhal asserts that under L.B. Foster Co. such a provision cannot
be enforced under Pennsylvania law without some specific
manifestation of the consent of the party purportedly bound.
Valhal further argues that since it neither signed the contract
as requested in Sullivan’s proposals, nor manifested conscious
consent to the limitation of liability, that clause never became
part of the contract. In L.B. Foster Co., the Pennsylvania
Supreme Court held that a warrant of attorney to confess judgment
printed on the reverse side of a contract was not binding because
it was not signed by the alleged promisor. However, that holding
does not assist our analysis. A warrant of attorney to confess
judgment has a "very special and significant status" which
"confers. . . plenary power on the donee in respect of the
adjudication of his[/her] own claims. . . ." Frantz Tractor Co.,
Inc., v. Wyoming Valley Nursery, 120 A.2d 303, 305 (Pa. 1956).
A warrant of attorney authorizing judgment is
perhaps the most powerful and drastic
document known to civil law. The signer
deprives himself[/herself] of every defense
and every delay of execution, he[/she] waives
exemption of personal property from levy and
sale under the exemption laws, he[/she]
places his[/her] cause in the hands of a
hostile defender. The signing of a warrant
of attorney is equivalent to a warrior of old
entering a combat by discarding his shield
and breaking his sword. For that reason the
law jealously insists on proof that his[/her]
helplessness and impoverishment was
voluntarily accepted and consciously assumed.
Cutler Corp. v. Latshaw, 97 A.2d 234, 236 (Pa. 1953). It was the
draconian nature of a warrant of attorney to confess judgment
which caused the court in L. B. Foster Co. to rule that
a warrant of attorney to confess judgment
must be self-sustaining and to be self-
sustaining the warrant must be in writing and
signed by the person to be bound by it. The
requisite signature must bear a direct
relation to the warrant of attorney and may
not be implied.
L. B. Foster Company, 186 A.2d at 20.
However, Pennsylvania courts have never generalized this
rule to other types of contractual provisions.3 In Westinghouse
Elec. Co. v. Murphy, Inc., 228 A.2d 656, 660-661 (Pa. 1967), the
Pennsylvania Supreme Court specifically declined to hold that an
indemnity provision in an unsigned contract could not be enforced
against the indemnitor-painting contractor. There, the
surrounding circumstances provided the necessary manifestation of
consent to the terms of the contract including the indemnity
provision even though the latter was only attached as an
appendix.
Similarly, Pennsylvania law does not condition enforcement
of a limitation of liability provision upon any specific form of
consent, and an unsigned contract can include an enforceable
agreement to limit liability if both parties manifest their
approval of the terms. This is true whether the clause at issue
is an exculpatory clause, an indemnification clause or a
limitation of liability clause. Westinghouse Elec. Co. v. Murphy,
3
A caveat is in order, however. Certain contracts must be in
writing in order to satisfy the Statute of Frauds. 33 P.S. §1 et seq.
In addition, there are instances where diminutive type grossly
disproportionate to that used in the remainder of a baggage claim
check has been held to be ineffective to limit a common carrier's
liability to a passenger for lost baggage without proof of the
positive assent of the passenger. This is the "subterfuge of
fine print" first referred to in Verner v. Sweitzer, 321 Pa. 208
(1858). Of course, neither instance is applicable here.
Inc.; Daniel Adams Assoc. Inc. v. Rimbach Publishing Co., 519
A.2d 997, 1004 (Pa. Super. 1987).4
[w]hen the parties have not only completed
their arrangements but have actually
completed the commercial relationship
involved, notwithstanding the absence of
definite written terms, a trier of fact is
entitled to view the entire dealing and
conclude that it indicated there was a
contract with terms mutually understood
between the parties.
Caisson Corp. v. Ingersoll-Rand Co., 622 F.2d 672, 678 (3d Cir.
1980).
When the course of dealings between Valhal and Sullivan is
viewed in the light most favorable to Sullivan,5 it is clear that
Valhal consented to the Standard Consulting Contract Terms and
Conditions (including the limitation of liability clause) that
were attached to each proposal. Valhal authorized Sullivan to
proceed after reviewing each proposal containing those terms. In
addition, Sullivan expressly invited Valhal to negotiate for a
higher limit if Valhal found the conditions unacceptable.
Valhal's only response was to fax a letter to Sullivan
authorizing it to proceed. Therefore, the district court did not
err in ruling that the limitation of liability clause was part of
the contract between Valhal and Sullivan.
Valhal argues that the changes negotiated after the first
proposal constituted a counter-offer that somehow caused the
4
See discussion of the differences in these three types of
clauses infra.
5
Goodman, 534 F.2d at 573.
limitation of liability clause to disappear from the contract.
However, those changes only addressed the services to be
performed during various phases of the undertaking and did not
constitute "a substituted bargain differing from that proposed by
the original offer." Restatement (Second) of Contracts, §39(1).
Moreover, even if the changes requested by Valhal had
constituted a counter-offer, the limitation of liability clause
was nevertheless a part of any subsequent agreement as it was a
part of each proposal which Sullivan tendered. The district
court thus properly concluded that Valhal's August 4, 1989 letter
authorizing Sullivan to proceed constituted an acceptance of the
limitation of liability contained in the standard consulting
contract.
B. The Limitation of Liability Clause is Enforceable.
The heart of the instant controversy is Valhal's contention
that the limitation of liability clause is unenforceable even if
it is part of the contract with Sullivan. Valhal argues that
limitation of liability provisions are disfavored in Pennsylvania
and that this particular clause violates a specific public policy
against an architect limiting his/her liability for damages
caused by his/her own negligence.
1. Pennsylvania Does Not Have a General Policy Against
Such Clauses.
The law recognizes different methods by which a party can
limit his/her exposure to damages resulting from his/her
negligent performance of a contractual obligation. An
exculpatory clause immunizes a person from the consequences of
his/her negligence. See, e.g., Topp Copy Products, Inc. v.
Singletary, 626 A.2d 98, 99 (Pa. 1993). Similarly, an indemnity
clause holds the indemnitee harmless from liability by requiring
the indemnitor to bear the cost of any damages for which the
indemnitee is held liable.6 See, e.g., Potts v. Dow Chemical
Co., 415 A.2d 1220, 1221 (Pa. Super. 1980). The instant clause
has no such consequence. The clause before us does not bar any
cause of action, nor does it require someone other than Sullivan
to ultimately pay for any loss caused by Sullivan's negligence.
Sullivan remains liable for its own negligence and continues to
be exposed to liability up to a $50,000 ceiling. Thus, the amount
of liability is capped, but Sullivan still bears substantial
responsibility for its actions. Hart v. Pennsylvania R.R. Co.,
112 U.S. 331, 5 S. Ct. 151, 154-156 (1884).
Valhal asserts that exculpatory clauses, indemnity clauses
and limitation of liability clauses differ only in form as the
effect of each is to limit one's liability for one's own
negligence. Brief of Valhal Corp. at 24-25. Valhal contends
that, thus, limitation of liability clauses are disfavored in
Pennsylvania and must meet stringent standards to be enforceable.
There are similarities between these types of clauses.
Dilks v. Flohr Chevrolet, Inc., 192 A.2d 682, 687 n.11 (Pa.
6
Generally, an indemnity agreement also includes a "hold
harmless" clause by which the indemnitor agrees "to indemnify and
hold harmless" the indemnitee. A hold harmless agreement is "A
contractual arrangement whereby one party assumes the liability
inherent in the undertaking, thereby relieving the other party of
the responsibility." Black's Law Dictionary 658 (5th ed. 1979).
1963). Indeed, the test used to determine the enforceability of
exculpatory and indemnity provisions is the same. Id. Those
clauses are disfavored and must meet certain conditions to be
enforceable. First, the clause must not contravene public policy.
Second, the contract must relate solely to the private affairs of
the contracting parties and not include a matter of public
interest. Third, each party must be a free bargaining agent. In
addition, an exculpatory or indemnity clause will still not be
enforced unless it is clear that the beneficiary of the clause is
being relieved of liability only for his/her own acts of
negligence. The clause must be construed strictly and the
contract must state the intention of the parties with the
greatest particularity. Furthermore, any ambiguity must be
construed against the party seeking immunity, and that party also
has the burden of proving each of the prerequisites to
enforcement. Topp Copy Products, 626 A.2d at 99. The district
applied this test to the limitation of liability clause at issue
here. See Memorandum Opinion, 1993 WL 175285 at *3.
Courts have developed these limitations as reasonable
conditions precedent to allowing a party to contract away
responsibility for his/her negligence. It is with good reason
therefore, that Pennsylvania allows such contractual provisions
only where matters of public interest are not involved. One can
not contract away responsibility to the public to exercise
reasonable care in performing a contract. Topp Copy Products, at
99.
However, Pennsylvania appellate courts recognize that there
are differences between a contract which insulates a party from
liability and one which merely places a limit upon that
liability. DeFrancesco v. Western Pa. Water Co., 478 A.2d 1295,
1306 (Pa. Super. 1984). The difference between the two clauses
"is. . . a real one." Posttape Assocs. v. Eastman Kodak Co., 537
F.2d 751, 755 (3d Cir. 1976). Presumably because of that
difference, we find no Pennsylvania cases in which a limitation
of liability clause has been disfavored or been tested by the
same stringent standards developed for exculpatory, hold
harmless, and indemnity clauses. Accordingly, we believe that
the district court erred in applying those stringent standards to
the clause before us. 1993 WL 175285 at *3.
Limitation of liability clauses are routinely enforced under
the Uniform Commercial Code when contained in sales contracts
negotiated between sophisticated parties and when no personal
injury or property damage is involved. This is true whether the
damages are pled in contract or tort. See, e.g., New York State
Elec. & Gas Corp. v. Westinghouse Elec. Corp., 564 A.2d 919, 924
(Pa. Super. 1989) ("[U]nder Pennsylvania law, contractual
provisions. . . excluding liability for special, indirect and
consequential damages are generally valid and enforceable."); 13
Pa. Cons. Stat. Ann. § 2719(c) (Purdons 1984) ("Limitation of
consequential damages for injury to the person in the case of
consumer goods is prima facie unconscionable but limitation of
damages where the loss in commercial is not," and such limitation
is enforceble). Such provisions have routinely been upheld in
sales contracts of varying types. See, e.g., LoBianco v.
Property Protection, Inc., 598 A.2d 52, 54 (Pa. Super. 1985)
(clause limiting liability of security alarm company upheld
against owner whose home was burglarized); Wedner v. Fidelity
Sec. Systems, 307 A.2d 429, 432 (Pa. Super. 1973) (alarm system
installer's limitation of liability enforced against business
operator); Eimco Corp. v. Joseph Lombardi & Sons, 162 A.2d 263,
266 (Pa. Super. 1960) (manufacturer's limitation of liability
enforced against buyer-contractor); Magar v. Lifetime, 144 A.2d
747, 748 (Pa. Super. 1958) (alarm installer's limitation of
liability enforced against private homeowner); see also Posttape,
537 F.2d at 755 (film manufacturer's limitation of liability
enforced against producer); Keystone Aeronautics Corp. v. R. J.
Enstrom Corp., 499 F.2d 146, 149 (3d Cir. 1974) (Manufacturer's
limitation of liability upheld against buyer of used helicopters.
"[F]reedom of contract should be permitted to allow a corporate
purchaser to exercise its business judgment to forego claims for
liability against the seller in exchange for a lower price.");
Shafer v. Reo Motors, Inc., 205 F.2d 685, 687-688 (3d Cir. 1953)
(manufacturer's limitation of warranty enforced against buyer).
This tradition is codified at 13 Pa. Cons. Stat. Ann. §
2719(c) (Purdons 1984) which provides hat such provisions are
generally enforceable. Moreover, limitation of liability clauses
have been upheld in contracts not governed by the Uniform
Commercial Code. For example, in Behrend v. Bell Tel. Co., 242
Pa. Super. 47, 72, n.16 (Pa. Super. 1976), (Behrend I), vacated
on other grounds, 374 A.2d 536 (Pa. 1977), rev'd and remanded in
accordance with prior opinion, 390 A.2d 233 (Pa. 1978), a
business subscriber sued a telephone company for lost profits
because the telephone company omitted the subscriber's paid
Yellow Pages advertisement. The advertising contract contained a
provision limiting the telephone company's liability for an
advertising omission to the monthly charge for each month
omitted. The court stated that the issue was one of first
impression, but concluded "[w]e elect to join the majority of
jurisdictions in upholding tariff limitations." The court then
cautioned: "[h]owever, the limitation in the tariff is not
enforceable if the damage is caused by willful or wanton conduct
by Bell. The weight of authority supports interpreting the tariff
limitations to extend only to acts of ordinary negligence and
exclude conduct found to be willful, malicious or reckless."
Behrend, 363 A.2d at 1166. The court then ordered that the matter
be remanded to determine if the omission was willful or
malicious. "If appellant Bell's acts are found . . . not to be
willful or malicious, . . . damages must be limited to a maximum
of the amount specified in the [limitation] in the applicable
tariff provision." Id. at 1167.
Pennsylvania courts have routinely enforced such limitation
of damage provisions noting they are "[t]he subject of a private
contract between the customer and the telephone company. . . ."
Thus, the parties "[a]re at liberty to fashion the terms of their
bargain." Vasilis v. Bell of Pa., 598 A.2d 52, 54 (Pa. Super.
1991); see also Bash v. Bell Tel. Co. of Pa., 601 A.2d 825, 830
(Pa. Super. 1992).
We are persuaded that limitation of liability clauses are
not disfavored under Pennsylvania law; especially when contained
in contracts between informed business entities dealing at arm's
length, and there has been no injury to person or property.
Furthermore, such clauses are not subjected to the same stringent
standards applied to exculpatory and indemnity clauses.
Limitation of liability clauses are a way of allocating "unknown
or undeterminable risks," K & C, Inc. v. Westinghouse Elec.
Corp., 263 A.2d 390, 393 (Pa. 1970), and are a fact of every-day
business and commercial life. So long as the limitation which is
established is reasonable and not so drastic as to remove the
incentive to perform with due care, Pennsylvania courts uphold
the limitation.
Though it is possible that an agreement
setting damages at a nominal level may have
the practical effect of avoiding almost all
culpability for wrongful action, the
difference between the two concepts is
nevertheless a real one. The distinction
becomes more apparent in a situation which
[sic] the damage level set is substantial
rather than minimal, . . .
The line of demarcation between the two
types of agreements has significance here
because of the findings needed to establish
their existence. Pennsylvania permits
parties to contractually relieve themselves
from the consequences of negligent acts, but
any agreement must spell out the intention of
the parties with particularity.
Posttape, 537 F.2d at 755. Here, Sullivan is exposed to liability
which is seven times the amount of the remuneration under its
contract with Valhal. Accordingly, the cap does not immunize
Sullivan from the consequences for its own actions. It is a
reasonable allocation of risk between two sophisticated parties
and does not run afoul of the policy disfavoring clauses which
effectively immunize parties from liability.
Although it could be argued that the $50,000 limitation is
nominal when compared to the final verdict, we do not believe
that to be the proper measure. The inquiry must be whether the
cap is so minimal compared to Sullivan’s expected compensation as
to negate or drastically minimize Sullivan's concern for the
consequences of a breach of its contractual obligations. One
can not seriously argue that a cap which leaves Sullivan exposed
to damages that are seven times its expected fee insulates
Sullivan from liability.
2. The Disputed Clause is not Contrary to the Policy
Evidenced in 68 Pa. Cons. Stat. Ann. § 491.
In a related argument, Valhal contends that, even if the
clause is not contrary to general public policy, it is contrary
to the specific public policy prohibiting architects from
entering into “hold harmless clauses.” The district court agreed
that such a policy is expressed in 68 Pa. Cons. Stat. Ann. § 491
(Purdons 1994) which provides in part as follows:
Every covenant, agreement or understanding .
. . in connection with any contract or
agreement made and entered into by owners,
contractors, subcontractors or suppliers
whereby an architect . . . or his[/her]
agents . . . shall be indemnified or held
harmless for damages. . . arising out of: (1)
the preparation or approval by an architect .
. . or his [/her] agents. . . of . . .
opinions, reports, . . . or specifications,
or (2) the giving or the failure to give
directions or instructions by the architect .
. . Or his[/her] agents. . . Shall be void as
against public policy and wholly
unenforceable. (emphasis added).
The district court reasoned that the contract between Valhal
and Sullivan violated this policy and declared the contract void.
The court ruled:
It suffices to say that the Pennsylvania
legislature has determined as a matter of
public policy that indemnity and hold
harmless clauses found in certain contracts
involving architects are unenforceable and
void. Thus, whether or not the statute is
directly applicable, it certainly establishes
that a contract for professional
architectural services is a matter of
interest to the public, and that an
exculpatory provision therein contravenes
public policy. Accordingly, we find that
under the common law of Pennsylvania that the
limitation on liability clause found in
Paragraph 9 is unenforceable.
1993 WL 175285 at *3 (footnotes omitted). In a footnote, the
district court noted that section 491 may not be directly
applicable as Valhal was not an "owner" at the time the contract
was entered in to, and because "it is not clear from the literal
language used by the Legislature whether it intended the term
'indemnified or held harmless' to include a partial limitation or
cap on damages." Id. at *3 n.2.
Similarly, Valhal does not argue that the limitation of
liability provision in its contract falls within the statute. It
does contend, however, that the district court correctly
concluded that the statute expresses a public policy against
architects attempting to contractually limit their liability. We
disagree.
As the district court correctly noted, the terms of the
statute pertain only to indemnity and hold harmless provisions.
We have already discussed the very real difference between such
clauses and the one in the contract before us. Those differences
preclude an assumption that a statute expressing a prohibition
against indemnity and hold harmless provisions announces a public
policy against something as distinct and accepted as limitation
of liability clauses. Indeed, the contrary precedent which we
have discussed above convinces us that such an assumption has the
practical effect of amending this statute.
However, even if we assume that the public policy expressed
by the statute extends to limitation of liability clauses, the
statute still would not apply here. The district court quite
correctly noted that the contract between Valhal and Sullivan is
not between an architect and an "owner," but between an architect
and a "developer". "When the words of a statute are clear and
free from all ambiguity, the letter of it is not to be
disregarded under the pretext of pursuing its spirit." 1 Pa.
Cons. Stat. Ann. § 1921(b) (Purdons 1994). Had the legislature
intended this provision to apply to contracts between architects
and developers, it clearly could have said so. We can not
interpret the statute to apply to developers (or to limitation of
liability clauses) unless we stretch its language or implication
beyond the boundaries of the actual statute. See Strunack v.
Ecker, 424 A.2d 1355, 1357 (Pa. Super. 1981) (where certain
things are specifically designated in a statute all omissions
should be understood as exclusions). We decline Valhal's
subliminal invitation to judicially amend this statute.
We are also unpersuaded by Valhal's argument that public
policy precludes licensed professionals from limiting their
liability for their own negligence. In support of this argument
Valhal relies on a line of non-Pennsylvania cases which have held
that public policy prohibits physicians and attorneys from
contractually exculpating themselves from all liability for
malpractice. Brief of Valhal, at 31-36.
We have already noted that the contract before us does not
relieve Sullivan of all liability for malpractice. In addition,
this contract does not involve an agreement between a
professional and an unsuspecting consumer. Nor does it involve an
agreement between a client and attorney, or a patient and
physician. Such contracts involve fiduciary relationships that
are given special protection even to the extent of affording
certain communications between such parties a testimonial
privilege.7
7
See, 42 Pa. Cons. Stat. Ann. § 5916 (Supp. 1994) ("In a
criminal proceeding counsel shall not be competent or permitted
to testify to confidential communications made to him[/her] by
his[/her] client, nor shall the client be compelled to disclose
the same, unless in either case this privilege is waived upon the
trial by the client"); 42 Pa. Cons. Stat. Ann. § 5928 (Supp.
1994) ("In a civil matter counsel shall not be competent or
permitted to testify to confidential communications made to
him[/her] by his[/her] client, nor shall the client be compelled
to disclose the same, unless in either case this privilege is
waived upon trial by the client."); 42 Pa. Cons. Stat. Ann. §
5929 (Supp. 1994) ("No physician shall be allowed, in any civil
matter, to disclose any information which he[/she] acquired in
Here, an architectural firm and real estate developer have
attempted to allocate risks between themselves in such a way that
neither is relieved from liability for its own negligence. We
see no reason to hold that the policy enunciated in section 491
precludes them from doing so. Valhal’s argument to the contrary
would more properly be addressed to the Pennsylvania legislature.
Nor can we conclude that the enactment of section 491
elevates a private contract involving an architect to a matter of
public concern. In order for a contractual provision to violate
public policy the provision must involve a matter of interest to
the public or the state. Seaton v. East Windsor Speedway, Inc.,
582 A.2d 1380, 1382 (Pa. Super. 1990). In Seaton, a member of a
speedway pit crew at a speedway was killed when a car crashed
into a guardrail during a race. The decedent's estate sued the
speedway alleging negligence, and the speedway moved for summary
judgment based upon the release which the worker had signed which
provided that the worker "releases, waives, discharges and
covenants not to sue the [defendant]" in return for the worker
being allowed to enter certain restricted areas. The Superior
Court upheld the trial court's grant of summary judgment against
an argument that the release violated public policy. The court
noted:
Appellant's argument that the Release
violates public policy is without merit.
(..continued)
attending the patient in a professional capacity, and which was
necessary to enable him[/her] to act in that capacity, which
shall tend to blacken the character of the patient, without
consent of said patient, except in civil matters brought by such
patient, for damages on account of personal injuries.")
Contracts against liability, although not
favored by courts, violate public policy only
when they involve a matter of interest to the
public or the state. Such matters of interest
to the public or state include the employer-
employee relationship, public service, public
utilities, common carriers, and hospitals.
Id. at 1382. In addition, the Pennsylvania Superior Court has
stated that the Restatement (Second) of Contracts §195(2)(b)
(1981) "is a correct statement of the public policy of the
Commonwealth." See DeFrancesco v. Western Pa. Water Co., 478
A.2d at 1306.8 Section 195(2)(b) of the Restatement provides:
(2) A term exempting a party from tort
liability9 for harm caused negligently is
unenforceable on grounds of public policy
if...
(b) the term exempts one charged with a duty of
public service from liability to one to whom
that duty is owed for compensation for breach
of that duty.
In DeFrancesco, property owners sued a water company
alleging that its failure to provide adequate water pressure
prevented a fire from being brought under control before it
spread to their property. The water company moved for summary
judgment on the grounds that the tariff which it had filed with
the Public Utility Commission excluded such liability. The
8
While the Pennsylvania Supreme Court has not had the occasion
to adopt this section of the Restatement as expressing the public
policy of the Commonwealth, we may consider pronouncements of
state intermediate appellate courts as an indication of how the
state's highest court would rule. Adams v. Cuyler, 592 F.2d 720,
725 n. 5 (3d Cir. 1979), aff'd, 449 U.S. 433 (1981).
9
Although the Restatement speaks in terms of "tort liability"
and the instant controversy involves contract liability, we do
not believe the distinction alters our analysis here. See
discussion, infra.
applicable portion of that tariff provided that the water company
"shall not in any way or under any circumstances be held
responsible . . . for any deficiency in the pressure, . . . or
supply of water due to any cause whatsoever." 478 A.2d at 1305.
In finding that this provision did not insulate the water company
from damages for negligence the court first noted that prior case
law (including Behrend I ) did not control. The court stated
"[t]his case, however, is not governed by our holding and
reasoning in Behrend I. For while Behrend I involved what was
clearly a limitation of liability, this case involves what is
just as clearly an exculpatory clause." DeFrancesco, 478 A.2d at
1306.10
The limitation clause in the contract between Sullivan and
Valhal is similar to the clause in Behrend I in that it provides
a reasonable allocation of risks between private parties without
insulating the beneficiary of the clause from liability. Since
Pennsylvania courts allow a public utility to contractually limit
its liability in a matter involving the Public Utilities
Commission we fail to see how Pennsylvania public policy
prohibits the instant limitation clause.
Valhal also argues that Pennsylvania's licensure requirement
for architects evidences a public interest in the private
contracts of architects. See Brief of Valhal Corp. at 31-36. 63
10
We note that the court in DeFrancesco and Behrend
discussed the relevance of the Public Utility Commission's duty
to assess the reasonableness of such tariff provisions. However,
we do not feel that role played by the PUC lessens the relevance
of those cases to the facts before us here.
Pa. Cons. Stat. Ann. § 34.3 (Purdons 1994) does provide that the
purpose of the licensure requirement for architects is to
"protect the health, safety and property of people of the
Commonwealth. . . and to promote their welfare. . . ." However,
that requirement, without more, cannot convert a private dispute
into a matter of public concern. Frampton v. Dauphin
Distribution Servs. Co., et. al., 648 A.2d 236 (Pa. Super. 1994).
In Frampton, two workers were electrocuted when scaffolding
contacted overhead power lines during a construction job. Their
estates sued the contractor and the architectural firm it had
contracted with. The architectural firm had prepared the
construction drawings, but had limited its obligation to
preparation of documents. Plaintiffs maintained that the
architectural firm had been negligent in failing to warn of the
overhead power lines, or to take any steps to minimize the
danger. In upholding the trial court's grant of summary judgment
in favor of the architectural firm, the Superior Court noted
Pennsylvania courts . . . have refused to
impose a duty on an architect to protect
workers from hazards on a construction site
in the absence of an undertaking by the
architect, either by contract or course of
conduct, to supervise and/or control the
construction and to maintain safe conditions
on the construction site.
Id. at 328.
Accordingly, we conclude that Pennsylvania law does not
charge Sullivan with any generalized duty to the public which
could elevate its private contracts to matters of public concern.
Valhal suggests that "[t]here is a clear public interest in
regulating professionals and their dealings with the public that
prevents professionals from limiting their liability under the
stringent standards set forth by the Pennsylvania Supreme Court.
See Employers Liability Assurance,. . . 224 A.2d at 622-23
(1966)." Brief of Valhal at 32. However, in pressing this point
Valhal persists in failing to accord proper significance to the
difference between the "stringent standards" established for
exculpatory clauses, and the policy favoring reasonable
limitation of liability clauses which "strik[e]. . . a balance of
'benefits and burdens.'" Behrend I, 363 A.2d at 1165. The clause
in Employer's Liability Assurance provided that "[The owner]
shall not be responsible . . . for any damages occurring to the
property of [Lesee]". 224 A.2d at 621. Thus, that clause was
remarkably like the one in DeFrancesco. It is just as surely not
like the clause in Behrend I or the one before us.
III. The Limitation Provision Can Not Be Limited to the
Negligence Claim.
The jury found Sullivan liable on both the negligence and
the breach of contract claims, but awarded damages only on the
contract claim. Valhal contends that even if the limitation of
liability provision is enforceable, it applies only to its
negligence action and not its breach of contract action.
Valhal attempts to draw support for this argument from a
decision of the Arkansas Supreme Court which concerned a
limitation of liability clause almost identical to the clause
here. Brief of Valhal, at 22-24. In W. William Graham, Inc. v.
Cave City, 709 S.W.2d 94 (Ark. 1986), a city sued a design
engineer for damages for breach of contract in connection with
the preparation of plans for a wastewater treatment facility.
The design engineer contended that the contract contained a valid
and enforceable limitation of liability clause which prohibited
the city from recovering more than $99,214, which was his total
fee for the project. The limitation of liability clause
provided:
The OWNER agrees to limit the ENGINEER'S
liability to the OWNER and to all
Construction Contractors and Subcontractors
on the Project, due to ENGINEER'S
professional negligent acts, error or
omissions, such that the total aggregate
liability of the ENGINEER to those named
shall not exceed Fifty Thousand Dollars
($50,000.00) or the ENGINEER'S total fee for
services rendered on this project, whichever
is greater.
However, the Arkansas Supreme Court did not decide the
enforceability of this provision. Instead, it held that the
clause only covered the engineer's negligence and was not
applicable to any damages which resulted from a breach of
contract. Id. at 96.
However, the contract at issue stated that the engineer was
to provide the plans to the city within 135 days, and it was
clear that time was of the essence because delay would result in
a substantial reduction of the city's funding for the project.
Despite the fact that both the city and the engineer clearly
understood that time was of the essence of the contract, the
engineer did not have the plans ready on time and the city lost
in excess of $300,000 in funding. Id. at 95.
There were no allegations that the engineer was
professionally negligent in his preparation of the plans or that
the plans themselves were defective. Accordingly, the engineer
could not assert the provision which limited his liability for
negligently performing the contract.
Under Pennsylvania law there are two separate lines of
reasoning employed by courts in determining whether a cause of
action, although arising from a contractual relationship, should
be brought in contract or in tort. The first line comes from the
Pennsylvania Superior Court's opinion in Raab v. Keystone Ins.
Co., 412 A.2d 638 (Pa. Super. 1979), which involved a claim that
the insurance company negligently failed to pay benefits under a
no-fault automobile insurance policy and that an agent of the
company maliciously interfered with the contractual relationship
between the policyholder and the carrier. The court wrote:
Generally, when the breach of a
contractual relationship is expressed in
terms of tortious conduct, the cause of
action is properly brought in assumpsit and
not in trespass. However, there are
circumstances out of which a breach of
contract may give rise to an actionable tort.
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 a mere
failure to perform (nonfeasance).
Id. at 187-88. Under the Raab line of reasoning, if there has
been a complete failure to perform a contract, the action lies in
assumpsit, while if there has been an improper performance, the
action lies in tort. See also Hirsh v. Mount Carmel Dist. Indus.
Fund, Inc., 526 A.2d 422, 423 n. 2 (Pa. Super. 1987). Under
the second line, the misfeasance/nonfeasance distinction is not
pursued. Rather, the nature of the wrong ascribed to the
defendant "[is] the gist of the action, the contract being
collateral." Grode v. Mutual Fire, Marine, and Inland Ins.
Company, 623 A.2d 933, 935 n. 3 (Pa. Cmwlth. 1993) (quoting
Closed Circuit Corp. v. Jerrold Elec., 426 F. Supp. 361, 364
(E.D. Pa. 1977)). Thus, if the harm suffered by the plaintiff
would traditionally be characterized as a tort, then the action
sounds in tort and not in contract.
Here, Sullivan's omission of the height restriction was
undoubtedly professional negligence, and all of Valhal's damages
flowed from that negligence. Sullivan did not totally fail to
perform (nonfeasance). Rather, in performing, it negligently
omitted the height restriction (misfeasance). Valhal bottomed its
negligence and breach of contract counts on that omission. If
Sullivan's conduct is viewed under either the
"misfeasance/nonfeasance" theory or "gist of the action" theory,
the result in the same. Although Valhal crafted a count against
Sullivan in contract, Valhal suffered its loss because of
Sullivan's negligence. Thus, Valhal can not escape the terms of
its own contract by attempting to recast the theory of its case
so as to avoid the limitation of liability clause.
IV.
The jurisdiction of the district court was based solely on
diversity. Diversity jurisdiction requires an amount in
controversy in excess of $50,000 excluding fees and costs. 28
U.S.C. §1332(a). "This provision must be narrowly construed so
as not to frustrate the congressional purpose behind it: to keep
the diversity caseload of the federal courts under some modicum
of control." Packard v. Provident Nat'l Bank, 994 F.2d 1039,
1044-45 (3d Cir.), cert. denied, ___ U.S. ___, 114 S. Ct. 440
(1993). Because we have concluded that the limitation of
liability clause is an enforceable part of the contract which is
the basis of this diversity action, Valhal's maximum possible
recovery is $50,000. Therefore, the district court was without
subject matter jurisdiction to hear this controversy.
Accordingly, we will vacate the order of the district court and
remand with directions to dismiss for lack of subject matter
jurisdiction.