TEXAS SUPREME COURT CLARIFIES ECONOMIC LOSS RULE

The Texas Supreme Court recently addressed the economic loss rule, a legal concept that can have a significant impact on construction defect cases and other cases involving contractual relationships. As clarified by the Court in LAN/STV v. Martin Eby Constr. Co. (Tex. June 20, 2014), a plaintiff seeking purely economic losses based on negligent performance of services cannot recover such losses in tort. Rather, a party can only be liable for purely economic losses if the party contractually accepted such liability.

In LAN/STV v. Martin Eby, for example, the general contractor on a major construction project sued the project architect for negligent performance of the architect’s design services. The losses sought by the contractor, however, were purely economic losses. The contractor alleged that it had under-bid the project with the owner because of the architect’s design plans, and it ultimately spent more money than anticipated due to necessary changes arising out of the architect’s alleged negligence. The Supreme Court held that the contractor could not assert such a claim in tort against the architect due to the economic loss rule;  when designing the building, the architect did not owe any duties in tort to the contractor to protect the contractor from purely economic losses. By extension, subcontractors on construction projects have no viable tort claims against other subcontractors for purely economic losses (e.g., delay damages), and construction project owners should also have no viable tort claims against subcontractors for purely economic losses (e.g. lost profits, delay damages).

The economic loss rule, however, does not apply when the tort plaintiff seeks damages to property other than the work itself. For example, if the negligent performance of a subcontractor’s work causes a flood, the homeowner can maintain a tort claim against the plumbing subcontractor because, when undertaking the plumbing work, the plumber assumed a duty not to flood or otherwise damage the house. See, Chapman v. Custom Homes, Inc. v. Dallas Plumbing Co., (Tex. Aug. 22, 2014). The economic loss rule would apply, however, to bar a tort claim by the homeowner if the damages sustained as a result of the plumber’s work either were only to the plumber’s work or were other purely economic losses.

Whether parties can bring tort actions are particularly important when there is no contractual relationship between the plaintiff and the defendant. These two recent opinions help define the legal theories that plaintiffs can validly assert in such cases.

 

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