Court Opinion

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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Precedential or Non-Precedential: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.