On June 20, Texas joined a number of states that apply the economic loss rule to damages claims arising from negligent misrepresentation between contractors and the owner’s architect. In LAN/STV v. Martin K. Eby Construction Company, Inc., No. 11-0810,1 the Supreme Court of Texas reversed the court of appeals, holding that the economic loss rule barred a general contractor from recovering delay damages in negligence claims against the owner’s architect. This decision reiterates the preference of many courts to allocate the risk of economic losses by contract where feasible.
In LAN/STV, the contractor, Martin K. Eby Construction Company, Inc. (Eby) sued the owner’s architect, LAN/STV, for delay damages arising from LAN/STV’s negligent misrepresentation—errors—in the plans and specifications. Eby submitted the low bid and was awarded a contract for the construction of a light rail transit line for Dallas Area Rapid Transit (DART). DART contracted with LAN/STV to prepare the plans, drawings and specifications that were incorporated into DART’s solicitation for competitive bids to construct the project. Days after beginning construction, Eby discovered the plans were full of errors and that 80% of the drawings had to be changed.
The jury found the architect negligently misrepresented the work and assessed Eby’s damages for its losses at $5 million. The jury also found that the damages were caused by Eby’s and DART’s negligence as well, and apportioned responsibility. The trial court found that the architect should only be liable for its apportioned share of the damages and rendered a $2.25 million judgment for Eby. The court of appeals affirmed.
The Supreme Court of Texas reversed the court of appeals. The court concluded that the purpose of the economic loss rule applied to the facts of this case and precluded a general contractor from recovering delay damages from the owner’s architect.
The economic loss rule restricts the recovery of purely economic damages in an action for negligence or strict liability. Unlike physical harm, purely economic harm is not self-limiting. Therefore, a single act of negligence can result in indeterminate and disproportionate liability. Risk of economic loss can be allocated by contract and, thus, should be imposed selectively in tort claims. Bearing this in mind, the court deviated from its previous practice of allowing recovery for economic losses for negligent misrepresentation.
The court’s rationale was twofold. First, the court found no reason to treat architects differently than any other party that agrees to participate in a construction project. While the plans drawn by the architect are intended to serve as a basis for reliance by the contractor, the court stated that the contractor’s principal reliance must be on the presentation of the plans by the owner, not the architect. Second, the court concluded that the parties could protect themselves by allocating the risk of economic loss contractually.
While this case departs from previous practice in Texas, it is consistent with many other states that apply the economic loss rule to negligent misrepresentation claims. As more states apply the economic loss rule, participants in construction projects should consider allocating this risk of loss contractually because their relief in court may be limited if they fail to do so.