2014 Fall Newsletter - Economic Loss Doctrine

 

What little hope Texas contractors had that they could go after their owners’ professional design firms when faulty design plans caused economic harm was dashed by the Texas Supreme Court during the summer. In LAN/STV v. Martin K. Eby Constr. Co., (Tex.2014), the Texas Supreme Court applied the economic loss rule to preclude a direct claim for negligent misrepresentation by a construction contractor against an owner's architect based on flawed design documents. 

The Eby decision is bad news for contractors but good news for design professionals, as the court ruled decisively on an issue that divides courts across the country. Eby makes clear that parties are free to agree on a potentially different outcome than would result from the Texas Supreme Court decision by modifying contractual language. 

Facts

Dallas Area Rapid Transit Authority (DART) built a rail project. The contractor, Eby, claimed delay and disruption damages caused errors in the construction drawings (CD). 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 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.

How does this decision affect you?

With the Texas Supreme Court's clear emphasis on the parties' bargained-for agreements, it is more important than ever for parties to focus on the drafting and negotiation of their construction contracts for traditional design-bid-build projects. 

 

Design Professionals' Perspective. Include disclaimer of third-party beneficiaries in contract with owners to close the door to contractors’ claims. 
 

Owners' Perspective. Try to expand the scope of the design professional's liability to better protect the owner and to narrow the potential gap between the owner's potential strict liability to the contractor for breach of contract or implied warranties, and what can be pushed back to the design professional due to its errors or omissions.
 

Contractors' Perspective. Object to including provisions in the owner-contractor contract that preclude direct claims against the owner's design professional.