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Getting to the Gist of the Action

The Superior Court of Pennsylvania has issued two recent opinions that have established a “gist of the action” test for claims based on both breach of contract and tort. Tort claims involve wrongful acts and negligence which are breaches of duties imposed by law as a matter of social policy. Contract actions lie only for breaches of duties imposed by the contract itself. The most common tort claims made in breach of contract cases involve fraud and/or negligence. Tort claims are often made in connection with breach of contract claims for two basic reasons: (1) induce a favorable settlement of the contract (breach) claim; or (2) increase the available damages should the plaintiff prevail on its tort claim.

In eToll, Inc. v. Elias/Savion Advertising Inc., et al, decided in November 2002, eToll, an internet email service provider, had engaged Elias to promote its services. eToll alleged that Elias was in breach of contract because it had failed to follow through on its contractual promises. Among other claims, the complaint also alleged fraud. The main issue on appeal was whether eToll’s claim for fraud was a separate cause of action or merely a recasting of the breach of contract claim. Both the trial court and the Superior court held that the fraud claim was really a recasting of the breach of contract. To decide this issue both courts applied the “gist of the action” test.

In Pennsylvania courts, the “gist of the action” test is applied to maintain the conceptual distinction between breach of contract claims and tort claims. It bars plaintiffs from recasting ordinary breach of contract claims into tort claims. A claim therefore is limited to a contract claim when the parties’ obligations are defined by the terms of the contract, and not by the larger social policies embodied by the law of torts.

The gist of the action test is not limited to discrete instances of conduct. It is concerned with the nature of the action as a whole and the essential ground, foundation, or material part of the entire complaint or lawsuit. While it is possible that a breach of contract also gives rise to an actionable tort, for the claim to be construed as in tort, however, the wrong committed must be the gist of the claim.

Cases involving the tort of fraud seem to turn on the question of whether the alleged fraud concerned the performance of contractual duties. If so, then the alleged fraud is generally held to be merely collateral to a contract claim for breach of those duties and not the basis for a separate cause of action. Otherwise the gist of the action would be the fraud, rather than any contractual relationship between the parties. An example is the tort of misrepresentation or fraud in the inducement. Fraud to induce a person to enter into a contract is generally not interwoven with the terms of the contract itself. Fraud in the inducement requires that the party perpetrating the fraud intend to do so for the purpose of inducing another to enter into a contract. It has nothing to do with the performance of any obligation established by the contractual agreement.

The holding in eToll was followed three months later in Freestone v. New England Log Homes, Inc., et al. In Freestone the plaintiffs tried to bootstrap a negligence claim onto a breach of contract. In applying the gist of the action test, the court found that the alleged negligence was really an outgrowth of the defendant’s contractual obligation to provide a sound product and thus a failure to live up to a contractual obligation. The gist of the action was held to be a breach of contract and plaintiffs’ negligence claim was dismissed.

The bottom line when alleging a tort claim with a breach of contract claim is that a plaintiff must allege material facts supporting the tort claim independent of the defendant’s contractual obligations.

The “gist of the action” test has never been adopted by the Pennsylvania Supreme Court and until it holds otherwise, eToll is the leading case in Pennsylvania for the application of this doctrine and it can be utilized to bar tort claims arising out of breach of contract.

This letter has been prepared for informational purposes only and should not be considered legal advice. The furnishing of this information is not intended to create, and receipt does not constitute, a lawyer-client relationship. You should not act upon any information provided in this letter without seeking professional legal advice.