By: Jennifer M. Horn
The “Gist of the Action” Doctrine may bar plaintiffs from asserting tort-based claims, such as fraud, where the “gist” of the lawsuit is the breach of a contract. Although the Pennsylvania Supreme Court has not yet adopted the Gist of the Action Doctrine, the Pennsylvania Superior Court has done so on several occasions. In the recent case of Mendelsohn, Drucker & Associates v. Titan Atlas Manufacturing, Inc. (Civil Action No.12-453), U.S. federal court for the Eastern District of Pennsylvania strengthened the foothold of the Gist of the Action Doctrine in Pennsylvania by predicting that the Pennsylvania Supreme Court, if presented with the question, would adopt the Doctrine. The Eastern District also clarified an exception to the Gist of the Action Doctrine where allegations of fraudulent inducement were present. Although the Mendelsohn case involved a contract for legal services, its holding applies to other types of contracts, including construction.
The Mendelsohn Case
The Mendelsohn case involved a lawsuit between a law firm, Mendelsohn, Drucker & Associates (“Mendelsohn” or the “Firm”), and Titan Atlas Manufacturing, Inc. (“Titan”), whom Mendelsohn represented in separate litigation arising from Titan’s business activities. Although Titan failed to make timely payment to Mendelsohn for legal services rendered, it provided assurances to the Firm that payment would be forthcoming. After working for months, allegedly in reliance on the promises of payment, Mendelsohn finally withdrew as counsel and filed a complaint in the Eastern District of Pennsylvania against Titan, seeking $402,511.06 in unpaid legal fees. In addition to the underlying breach of contract claim, Mendelsohn alleged a tort-based claim of fraudulent inducement, based upon multiple promises from Titan and its CEO that the legal fees would be paid.
The “Gist of the Action” Rule . . . And The Exception . . .
Titan sought dismissal of the lawsuit based on the Gist of the Action Doctrine, which typically precludes plaintiffs from pursuing tort actions where the underlying “gist” of the action is the breach of contractual duties. Notably, the Pennsylvania Supreme Court has not yet recognized the doctrine. Where the state Supreme Court has not yet ruled on an issue, a U.S. federal court, such as the U.S. Court for the Eastern District of Pennsylvania, is required to predict how the state Supreme court would rule, and hold accordingly. The Eastern District, with the guidance of prior Pennsylvania Superior Court cases, predicted in the Mendelsohn case that the Pennsylvania Supreme Court would recognize the Gist of the Action Doctrine.
In addition, the Eastern District held that a certain exception to the Gist of the Action Doctrine would allow the tort claim to proceed, even though the alleged breach of a contract was central to the dispute. The Mendelson Court noted that sometimes the Doctrine is applied categorically, in that it bars fraud actions in connection with the performance of a contract, but does not preclude fraud in the inducement. This Court rejected that approach, and instead, engaged in what it called a “fact-intensive analysis of the parties’ conduct in relation to the fraud alleged.”
Although the District Court stopped short of holding that any fraudulent inducement claim would be an exception to the Doctrine, the Court ruled that where the fraudulent inducement was, as here, “collateral to the contract,” such claims would not be barred. The Court’s justification was its finding that the fraudulent act of promising payment, when no payment was forthcoming, was not itself a breach of the contract, but rather a breach of a duty “honestly imposed by society.” As a result, the tort claims were “collateral to the contract” and not barred by the Gist of the Action Doctrine.
Although the Pennsylvania Supreme Court has yet to issue a ruling regarding the Gist of the Action Doctrine, the Eastern District provided another example of its impact and a critical exception. In this regard, plaintiffs will likely be able to plead the tort-based claim of “fraudulent inducement” along side a breach of contract claim, but only where that fraudulent inducement arises from actions that are “collateral to the contract.” Significantly, in the view of the Eastern District, inducing a party to continue work under a contract by promising to provide payment constitutes inducement “collateral to the contract.” Thus, a cause of action for such conduct is not barred by the Doctrine. Potential litigants must be aware of this possible defense to tort claims, and the important exception.
Jennifer M. Horn is Senior Counsel at Cohen Seglias and a member of the Construction Group. She concentrates her practice in the areas of construction litigation and real estate.
Christopher Polchin, a Summer Associate with Cohen Seglias, contributed to this post.