Thought Leadership

Residential real estate sales are governed by the terms of the sales agreement. The contract for the sale of real estate establishes the legal rights and obligations of both the buyer and the seller in regard to the property itself and the transaction. When courts are confronted with disputes between a buyer and seller, and the seller’s agent, over a real estate transaction, the sales agreement along with the seller’s disclosure statement are the bases for the claims and defenses asserted. Despite real estate sales being a fundamentally contract matter, legal disputes between a buyer, a seller and an agent are not limited to breach of the contract upon which the transaction is based.

In the case of Josaphs v. Lacy, 2022 WL 474715 (E.D. Pa. Feb. 16, 2022), the court addressed a claim made by the buyer of residential property that the seller failed to complete repairs as required under the terms of the Agreement for Sale of Real Estate. The sellers then brought suit, alleging not only a claim for breach of the contract, but also separate tort claims for misrepresentation and fraud, and violations of the Real Estate Seller Disclosure Law and Unfair Trade Practices. The buyers sought to dismiss the claims on the basis of the legal doctrine that the “gist of the action” is in contract.

In its analysis, the court in Josaphs noted that the gist of the action doctrine precludes a plaintiff from bringing what is actually a breach of contract claim as a tort claim when the parties’ actions are defined by the terms of a contract and the claim is based on a breach of a specific promise in the contract. However, under established Pennsylvania law, the fact that a contract governs the parties’ actions does not limit a claim for damages to a breach of the contract where the wrong complained of arises from a violation of a broader social duty. Thus, fraud or misrepresentation claims not related to the performance of the contract are not precluded by the gist of the action doctrine.

Applying the principle of the gist of the action doctrine to the real estate dispute, the court held that the claim, based on the failure to make repairs to the property, was one of breach of the contract terms under the sales agreement. The plaintiffs’ claims of fraud, misrepresentation and violation of the Unfair Trade Practices law were barred as a result. A separate claim, that the defendants violated the disclosure statement by misrepresenting that the property had been vacant, was not barred by the gist of the action doctrine. The court reasoned that the disclosure statement was collateral to the sales agreement and the misrepresentation did not relate to the performance of a provision of the statement itself.

That the gist of the action doctrine was found to apply at all, even in a limited fashion, by the court in Josaphs is noteworthy as other courts have narrowed its application to cases involving disputes over insurance coverage under a contract. In two recent rulings, federal courts have held that this doctrine does not preclude misrepresentation claims against the insurer and the sales agent based on breach of a life insurance policy. In Rosenberg v. Nassau Life Insurance Company, 2022 WL 2718607 (E.D. Pa. Jul. 13, 2022), the Trust owner claimed that the insurer and the agent misrepresented the availability of an option to convert to another policy. The court found that the plaintiff’s fraud claim was premised not on the defendants’ obligations under the conversion provision of the contract, but on the defendants’ “broader social duty ... to refrain from defrauding” the Trust during the conversion process. In Vliet v. Liberty Mutual Insurance Company, 2022 WL 2109203 (E.D. Pa. Jun. 10, 2022), the plaintiff claimed the insurer did not fully cover property damage under its policy and had misled her into purchasing an inadequate insurance policy. The court found that this claim was not barred where the alleged misrepresentation was not based on following the terms of the policy but, rather, the inducement by the sales agent to purchase the insurance.

The importance of these decisions in the context of the defense of a real estate seller or agent is that, while the gist of the action doctrine may still be asserted to challenge a tort claim that is fundamentally based on the terms or conditions of the sales agreement or other contract between buyer and seller, courts are limiting the application of this principle where the claims involve alleged misrepresentations in the sales transaction separate from the terms of the agreement.

Legal Update for Insurance Agents & Brokers – August 2022, has been prepared for our readers by Marshall Dennehey. It is solely intended to provide information on recent legal developments, and is not intended to provide legal advice for a specific situation or to create an attorney-client relationship. We welcome the opportunity to provide such legal assistance as you require on this and other subjects. If you receive the alerts in error, please send a note tgventura@mdwcg.com. ATTORNEY ADVERTISING pursuant to New York RPC 7.1. © 2022 Marshall Dennehey. All Rights Reserved.