PBS Coals, Inc. v. Burnham Coal Co.
558 A.2d 562, 384 Pa. Super. 323, 105 Oil & Gas Rep. 458 (1989)
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Rule of Law:
In a commercial transaction for the transfer of real property interests between sophisticated parties, an 'as is' clause unambiguously shifts the risk of loss for after-discovered, latent defects to the buyer.
Facts:
- Burnham Coal Company (Burnham) drafted an agreement to transfer its interests in certain strip-mining properties to PBS Coals, Inc. (PBS).
- The agreement contained a clause stating that PBS would accept the properties 'as is.'
- A PBS official inspected a piece of equipment on one of the properties while the ground was covered in snow.
- After the agreement was executed and the snow melted, an acid water discharge, a form of pollution, was discovered on one of the transferred properties.
- Neither Burnham nor PBS was aware of the acid water discharge problem at the time the agreement was signed.
- Both parties were experienced businesses in the coal mining industry.
Procedural Posture:
- The Pennsylvania Department of Environmental Resources (DER) notified Burnham that it would be assessed penalties for the acid discharge unless the problem was corrected.
- PBS Coals, Inc. instituted a declaratory judgment action in a state trial court, seeking a ruling that it was not responsible for the cleanup costs.
- Burnham filed a counterclaim seeking reimbursement for costs it incurred treating the discharge.
- The trial court found the agreement ambiguous, admitted outside evidence, and entered a final decree in favor of PBS.
- Burnham, as the appellant, appealed the trial court's decree to the Superior Court of Pennsylvania, an intermediate appellate court.
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Issue:
Does an 'as is' clause in an agreement for the transfer of mining property interests between two sophisticated commercial parties obligate the buyer to assume responsibility for a latent environmental problem discovered after the transfer?
Opinions:
Majority - Del Sole, J.
Yes. An 'as is' clause in a real property transfer agreement between sophisticated parties serves to shift the risk of after-discovered defects to the buyer. The paramount goal of contract interpretation is to effectuate the intent of the parties as clearly expressed in the written agreement. The term 'as is' has a common business meaning that puts the buyer on notice that there may be attendant liabilities and that implied warranties do not attach. Citing cases from other jurisdictions, the court found it persuasive that an 'as is' clause refers to the property's then-existing physical condition and places the risk of loss for unknown defects on the purchaser. As the parties in this case were seasoned businessmen, they are presumed to be familiar with such common terms. It is not the court's function to redraft a contract to be more favorable to one party, especially absent allegations of fraud or mistake. Therefore, the obligation to correct the after-discovered drainage problem rests with PBS.
Analysis:
This decision establishes a significant precedent in Pennsylvania by applying the 'as is' doctrine, traditionally used for the sale of goods, to the transfer of real property interests between commercial entities. The ruling solidifies the principle that sophisticated parties are bound by the common commercial meaning of contract terms, placing a heavy burden of due diligence on the buyer. The case signals to commercial buyers that they cannot rely on judicial intervention to escape a bad bargain resulting from unknown, latent defects if they have agreed to an 'as is' clause; instead, they must negotiate specific warranties or representations to allocate such risks.
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