Economic Loss Rule

Texas Supreme Court Denies General Contractor’s Negligent-Misrepresentation Claim Against Architect for Increased Construction Costs Caused By Deficient Plans

Jason Cagle | The Dispute Resolver
January 20, 2015

The Texas Supreme Court recently held that the economic-loss rule bars claims of negligence and negligent misrepresentation from a general contractor against an architect because there was no contract between the parties. Instead, the contractor was limited to its claims for breach of contract against the project’s owner. LAN/STV v. Martin K. Eby Constr. Co., 435 S.W. 3d 234 (Tex. Jun. 20, 2014).

The Dallas Area Rapid Transportation Authority (the “Owner”) contracted with the architect, LAN/STV (the “Architect”), to prepare plans, drawing, and specifications for the construction of a rail line within downtown Dallas. The Architect agreed to be responsible for the professional quality, technical accuracy, and coordination of all designs, drawings, specification, and to be liable to the Owner for all damages caused by the Architect’s negligent performance of any of the services furnished. The Owner incorporated the Architect’s plans into its solicitation for competitive bids to construct the rail line. The project was awarded to Martin K. Eby Construction Company (the “Contractor”). The construction contract contained administrative procedures for the Contractor to follow if asserting disputes against the Owner, including any design problems. There was no contact or contractual privity between the Contractor and the Architect.

Just after starting construction, the Contractor discovered that the Architect’s plans were replete with errors. While the Contractor expected that only 10% of the plans would be changed, eventually 80% of the Architect’s plans had to be changed. This greatly disrupted the construction schedule and required additional labor and materials. In total, the Contractor calculated that it lost nearly $14 million on the Project.

After settling with the Owner, the Contractor filed this tort action against the Architect alleging claims for negligent misrepresentation. The jury apportioned some responsibility to the Owner and the Contractor, but found that the Architect was 45% responsible. Judgment was subsequently rendered in favor of the Contractor for about $2.25 million. The Court of Appeals affirmed the judgment.

The Texas Supreme Court analyzed whether the economic-loss rule barred the Contractor’s recovery for negligent misrepresentation. Under the economic-loss rule in Texas, a plaintiff suffering purely economic loss cannot recover under negligence theories against a defendant if the duties allegedly breached arose solely from the defendant’s contract with a third-party. Put another way, the economic-loss rule means that there is “no general duty to avoid the unintentional infliction of economic loss.” Restatement (Third) of Torts: Liability for Economic Harm, § 1.

The economic-loss rule does not create a bright-line standard, and has caused some confusion among courts as to its application. In the construction context, the Court recently explained that the economic-loss rule does not bar an owner’s negligence claims directly against a subcontractor for damage to the owner’s property caused by defective work. Though the owner had no contract directly with the subcontractor, the subcontractor owes all persons (including the owner) the duty to perform its work with reasonable care to avoid causing damage to other persons’ property. In that case, the property damage was to the owner’s property and fell outside the scope of work in the subcontractor’s construction contract with the general contractor. Thus, the owner’s negligence claims were permitted to proceed. Chapman Custom Homes, Inc. v. Dallas Plumbing Co., 445 S.W. 3d  716 (Tex. 2014). The case is analyzed in further detail here.

In the LAN/STV case, in contrast, the Contractor sought to recover only for its increased costs of construction resulting from the Architect’s failure to comply with the standards of performance required under its design contract with the Owner. The Court explained that participants in construction projects typically cannot recover their economic losses from parties with whom they did not contract. A roofing subcontractor, for example, could not recover its economic losses through negligence claims against a foundation subcontractor that caused construction delays by failing to perform its work in a timely manner. Rather, the roofing subcontractor’s recovery, if any, would lie in claims for breach of contract against the general contractor, the only party with whom the roofing subcontractor had an agreement.

With respect to the Contractor’s negligent-misrepresentation claims against the Architect, the Court felt that the same reasoning barred any recovery. This is a divergence from the recent Restatement on the issue, which suggests that an architect’s duty to a contractor arises from the expectation that plans are prepared for contractors to rely upon to carry out the construction. Restatement (Third) of Torts: Liability for Economic Harm, § 6, cmt. b. While the Court agreed with this concept, it held that the contractor’s “principal reliance must be on the presentation of the plans by the owner, with whom the contract is to reach an agreement, not the architect, a contractual stranger.” The Court felt that contractors were sophisticated parties who could protect their interests adequately through allocating risk in their construction contracts with the owners.

As the Court noted, there are significant differences of opinion among various states as to whether contractors may assert negligent-misrepresentation claims against architects absent contractual privity. Indeed, prior to this case, several Texas courts of appeals permitted such claims. However, this case clarifies that, in Texas, contractors may not recover purely economic losses through negligent-misrepresentation claims against architects with whom they lack contractual privity.

The content of this article is intended to provide general information and as a guide to the subject matter only. Please contact an Advise & Consult, Inc. expert for advice on your specific circumstances.

SOURCE: abaconstructionforumdivision1.blogspot.com

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