The Texas Supreme Court recently held that a general contractor could not recover damages under the theory of “negligent misrepresentation” against an architect, with whom the contractor had not contracted, resulting from alleged errors in the architect’s plans and specifications.Through its decision, which is available here, the Supreme Court reversed the Dallas Court of Appeals’ holding in Martin K. Eby Const. Co. v. LAN/STV, 350 S.W.3d 675 (Tex. App.—Dallas, 2011).
In October of 2000, the Dallas Area Rapid Transit System (DART) entered into a contract with the architect, LAN/STV, requiring it to prepare plans, drawings, and specifications for the construction of a portion of DART’s light rail system in Dallas. As is typical on construction projects, these plans, drawings, and specifications were incorporated into bid documents that general contractors used in submitting bids to DART. General contractor Martin K. Eby Construction Company was awarded the contract based on its bid. After construction commenced, Eby suffered numerous delays and increased costs, which it attributed to errors in the plans and specifications. Eby sued DART in Federal District Court for breach of contract and negligent misrepresentations arising out of the design documents, and ultimately settled with DART for $4,700,000. After that settlement, Eby sued LAN/STV for negligent misrepresentation, alleging that the plans and specifications contained errors that caused Eby to suffer significant economic damages.
The jury found that LAN/STV had made negligent misrepresentations, and that Eby had suffered $5,000,000 in damages. (This amount was later reduced to $2,250,000 by the trial court, on the basis that the jury had also found that LAN/STV was only 45% responsible for Eby’s injuries.) On appeal, LAN/STV argued that Eby was barred from recovering under a negligent misrepresentation theory by Texas’s “economic loss rule,” which generally precludes recovery of purely economic damages under certain tort theories—including negligence actions. The Dallas Court of Appeals rejected this argument, holding that negligent misrepresentation was an exception to the economic loss rule, and allowed Eby to recover its “out-of-pocket” damages resulting from alleged negligent misrepresentations in the design. The Court of Appeals relied, in part, on the Restatement (Second) of Torts § 552B, which authorizes the recovery of some economic damages for negligent misrepresentations.
The Texas Supreme Court reversed, and held that a general contractor was precluded “from recovering delay damages from the owner’s architect.” In the Court’s opinion, released on June 20, Chief Justice Hecht, stated:
Construction projects operate by agreements among the participants. Typically, those agreements are vertical: 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. The architect does not contract with the general contractor, and the subcontractors do not contract with the architect, the owner, or each other.
We think it beyond argument that one participant on a construction project cannot recover from another – setting aside the architect for the moment – for economic loss caused by negligence.
The Chief Justice held that the economic loss rule “should not apply differently” where a general contractor couches his claims against the architect in terms of ordinary negligence or “an action for negligent misrepresentations[,]” and held that the general contractor should look instead to the party with whom it has contracted—here the owner—for its remedies.
The case will have a profound effect on the extent and viability of claims between non-contracting parties on construction projects. Prior to the Supreme Court’s decision, two Texas courts of appeals had held that general contractors could sue the owner’s design professionals directly for economic damages arising out of negligent misrepresentations in the design. Those results, and ones like them, appear to now be foreclosed, or at the very least severely curtailed.
Disclosure: William R. Allensworth acted as mediator for this dispute prior to the appeal. This synopsis reflects the views and interpretation of the author, and contains no information disclosed during that mediation.