LITIGATION ALERT: Texas Supreme Court Limits the Application of the Economic Loss Rule


Earlier this week, the Texas Supreme Court issued a per curium opinion limiting the application of the economic loss doctrine or rule, as it is referred to in Texas, in the context of residential construction defect claims.

In Texas, the economic loss rule has been applied by courts to prevent a plaintiff from recovering purely economic losses in a negligence or strict liability action.  In products liability cases, when a loss results from the failure of a product and the damage is limited to the product itself, recovery is generally limited to contract-based remedies.  If the defective product causes physical harm to the ultimate user or the user's other property, then the plaintiff can recover damages under a negligence-based theory of liability.  In cases involving the failure to perform a contract, when the only damages sustained are economic loss to the subject of the contract, recovery is generally limited to contract-based remedies.  However, a contracting party can breach contractual duties and tort duties simultaneously.  The nature of the injury determines which duty or duties have been breached.

Recently, arguments have been made that the economic loss rule bars negligence-based claims against subcontractors for damages to a home or other structure.  The arguments have been that such claims are barred because (1) the damages are the subject matter of a contract between the property owner and the builder or general contractor and (2) the home or other structure is a finished product that the subcontractor's work was incorporated into.

With the Texas Supreme Court's decision in Chapman Custom Homes, Inc. v. Dallas Plumbing Co., 13-0776, 2014 WL 4116839 (Tex. Aug. 22, 2014), these arguments should now be put to rest.  Without hearing oral argument, the court ruled that a plumbing subcontractor assumes an implied duty not to flood or otherwise damage a home while performing its contract with a builder.  This duty is independent of any obligation undertaken in its subcontract and damages caused by the breach of this duty "extend beyond the economic loss of any anticipated benefit under the [sub]contract."  The court decided that the economic loss rule does not apply in this context and held that the negligent performance of a contract that damages a non-contracting party's person or property states a negligence claim.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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