Texas contractors have long tried to directly sue their owners’ professional design firms -- rarely with success -- when faulty plans cause economic losses such as increased costs from delays and disruptions. A few cases in recent years brought contractors hope that there might be a viable path to professional designers’ checkbooks through tort claims like negligent misrepresentation. Negligent misrepresentation is the dissemination of business information, like that in contract documents (CD's), which is negligently wrong and damages another, like a contractor, who was entitled to rely on the information. The Texas Supreme Court just took away this hope in LAN/STV v. Martin K. Eby Constr. Co., __ SW3d __, 2014 WL 2789097 (Tex. June 20, 2014).
The Economic Loss Rule
The Court based its decision in Eby on the Economic Loss Rule. The Rule is a legal barrier to tort claims, like negligence or negligent misrepresentation, for the recovery of purely economic loss. When applied, the Rule prevents a general contractor from recovering increased performance and delay costs from errors in CD's directly against the owner’s project designer. The contractor's remedy for this economic loss remains against the owner. Of course, when project stakeholders are limited to contract claims, owners cannot sue subcontractors or sub-consultants, contractors and subcontractors cannot sue designers, and vice versa, for economic loss because there is no contract between them.
The Eby Case
Dallas Area Rapid Transit Authority (DART) built a rail project. The contractor, Eby, claimed delay and disruption damages caused errors in the CD’s. Eby sued DART for breach of contract. Eby also sued LAN/STV, DART’s design team, for negligent misrepresentation trying to recover out-of-pocket expenditures and consequential losses Eby suffered by relying on the CD’s. The trial court entered a judgment against LAN/STV based upon the jury’s finding of LAN/STV’s negligent misrepresentation in the form of errors in its CD’s. The intermediate court of appeals in Dallas agreed with the trial court. The Texas Supreme Court applied the Economic Loss Rule, reversing and rendering judgment in favor of LAN/STV.
The Predictability of Risk in Contracts
The Court explored principal rationales for the Economic Loss Rule. Economic losses grow more easily than losses usually associated with torts, injury to the body or property of another. The physical forces that cause personal injury and property damage spend themselves in predictable ways, but economic harm is not self-limiting. If, for example, a roofing sub could sue a foundation sub for delays, the risk of liability for all stakeholders would be magnified and indeterminate. The indeterminate liability of economic loss may be out of proportion with the culpability. Also risks of economic loss are especially well suited to allocation by contract. Contracting parties can assess the risks before signing a contract and agree to allocate the risk through insurance, indemnities and the like.
The Eby case will disappoint contractors and relieve designers, but all construction stakeholders can at least be sure that the contract they negotiate will be the final word for resolution of claims for economic loss. Carefully crafting risk shifting tools such as indemnity, release, insurance and dispute resolution provisions is now more important than ever.