Texas Economic Loss Rule Bars General Contractor Recovery Against Architect

Construction and Procurement Newsletter Q3 2014

Client Alert

The Texas Supreme Court - in LAN/STV v. Martin K. Eby Construction Co. - applied its version of the economic loss rule to prohibit a general contractor from recovering from the architect the increased costs of performing due to alleged errors in the plans and specifications. This case reinforces the importance of a thoroughly reviewed and negotiated prime contract.

The case arose from a project in which the Dallas Area Rapid Transit System (“DART”) contracted with an architect, LAN/STV, to design a portion of DART’s light rail system in Dallas. DART incorporated LAN/STV’s plans, drawings, and specifications into the bid documents for the project.

During construction, Martin K. Eby Construction Company (“Eby”), the prime contractor, suffered numerous delays and increased costs totaling $14 million, which it attributed to errors in the plans and specifications. Eby sued LAN/STV for negligence and negligent misrepresentation, alleging that the plans and specifications contained errors that caused Eby to suffer significant economic damages. (Eby had also sued DART for breach of contract and negligent misrepresentations, but this dispute was resolved via settlement)

At trial, Eby was awarded $2.25 million plus interest. The intermediate court of appeals agreed with the trial court, and each party appealed to the Texas Supreme Court. That court viewed the sole issue on appeal as whether Texas’ “economic loss rule” barred Eby’s negligent misrepresentation claim. The Texas “economic loss rule” provides that “a plaintiff may not recover for his economic loss resulting from bodily harm to another or from physical damage to property in which he has no proprietary interest.” Plaintiffs also may not recover economic losses resulting from their reliance on negligent misrepresentations not made directly to them or on their behalves.

With this background, the court initially determined that actions for negligent performance of services are no different than those for negligent misrepresentations - in terms of the economic loss rule’s application. Then, the court found that a contractor’s negligent misrepresentation claim based on plans and specifications should not lie against the architect, “a contractual stranger,” but was instead only proper against the owner, “with whom the contractor is to reach an agreement.” The court focused primarily on this “vertical” contract arrangement in rejecting the contractor’s claim against the architect: “the owner contracts with an architect and with a general contractor, the general contractor contracts with subcontractors, a subcontractor may contract with a sub-subcontractor, and so on.” As such, the court observed that if, for example, one subcontractor could recover damages from another subcontractor due to the other’s negligence, “the risk of liability to everyone on the project would be magnified and indeterminate.” And in doing so, the court emphasized the available, contractual protections a contractor can insist on including within in its contract with the owner, which the owner can then include in its contract with the designer.

The importance of a thoroughly reviewed and negotiated prime contract becomes paramount based on the LAN/STV court’s decision. This case serves as an important reminder that, at least in Texas (as well as other jurisdictions with similar economic loss rules), absent contractual terms to the contrary, a contractor’s only remedy for pure economic losses resulting from deficient plans and specifications lies against the owner, not the designer.

Read or download the Construction and Procurement Newsletter Q3 2014 >>