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.
Thanks to Ian Fullington at Griffith Davison& Shurtleff, P.C. for assistance with preparing this post.
