Economic Loss Rule of the Third Kind - Nothing New or Alien Concepts?

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Can a contractor sue the project’s designer for losses allegedly caused by errors in construction documents?

This question was presented in the Eby v. LAN/STV case, which is now before the Texas Supreme Court. Historically, many courts in Texas ruled that contractors do not have direct tort claims (other than for fraud) against design professionals because of the “economic loss rule.” The design team said the economic loss rule barred the claim, but the trial court disagreed and awarded damages in favor of the contractor. The court of appeals upheld the judgment. The Texas Supreme Court agreed to consider the Eby case and recently heard oral argument. The Court’s decision could have far-reaching implications for the construction industry and well beyond.

Background

Dallas Area Rapid Transit Authority (DART) built a rail project. The contractor, Eby, claimed substantial damages from alleged delays and disruptions it says were caused in large part by flawed construction documents. Eby sued DART for breach of contract. Eby also sued LAN/STV, the design team, for negligent misrepresentation, which is the dissemination of business information that is negligently wrong and damages another who relied on it.

The trial court entered a judgment against LAN/STV, and the intermediate appeals court affirmed, finding that the economic loss rule does not bar Eby’s recovery of economic damages on its tort claim (negligent misrepresentation). The Texas Supreme Court is now considering whether the economic loss rule bars Eby’s claim.

If the Texas Supreme Court affirms the judgment, it would almost certainly result in a significant increase in construction project stakeholders being sued by contractual strangers for purely economic loss.

For a legal analysis of the case and related issues, please click here.

For a business perspective analysis of the economic loss rule and how it is applied in this case, please click here.