LAN/STV v. Martin K. Eby Construction Co.
435 S.W.3d 234 (2014)
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Rule of Law:
The economic loss rule bars a general contractor from recovering purely economic damages in a tort action for negligent misrepresentation against a project architect with whom the contractor does not have a contract.
Facts:
- Dallas Area Rapid Transportation Authority (DART) contracted with the architectural firm LAN/STV to prepare plans and specifications for a light rail transit line.
- LAN/STV's contract with DART stipulated that LAN/STV would be responsible for the professional quality and technical accuracy of the plans and liable to DART for damages caused by negligent performance.
- DART incorporated LAN/STV's plans into a bid solicitation for the project's construction.
- Martin K. Eby Construction Company (Eby) was awarded the construction contract after submitting the winning bid based on these plans.
- Eby had a contract with DART, but no contract existed between Eby and LAN/STV.
- Shortly after beginning construction, Eby discovered that 80% of LAN/STV's plans contained significant errors regarding bridge structures, utility lines, soil conditions, and other elements.
- These errors caused major disruptions to Eby's construction schedule and required substantial additional labor and materials, resulting in a loss of nearly $14 million for Eby.
Procedural Posture:
- Eby first sued DART for breach of contract in United States District Court.
- The federal court dismissed the suit because Eby had failed to exhaust its administrative remedies as required by its contract with DART.
- Eby then pursued its administrative claim against DART, ultimately settling for $4.7 million.
- Meanwhile, Eby filed this tort action against LAN/STV in Texas state trial court for negligent misrepresentation.
- The jury found in favor of Eby, assessing $5 million in damages and apportioning 45% of the fault to LAN/STV.
- The trial court entered a judgment for Eby against LAN/STV for $2.25 million (45% of $5 million) plus interest.
- LAN/STV, as appellant, and Eby, as appellee/cross-appellant, appealed to the intermediate court of appeals, which affirmed the trial court's judgment.
- The Supreme Court of Texas granted petitions for review from both LAN/STV and Eby.
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Issue:
Does the economic loss rule preclude a general contractor from recovering purely economic damages from a project architect for negligent misrepresentation in project plans when there is no contractual privity between them?
Opinions:
Majority - Chief Justice Hecht
Yes. The economic loss rule bars a general contractor from recovering delay damages from a project architect for negligent misrepresentation. The rule's underlying rationales—preventing indeterminate liability and deferring to contractual risk allocation—are particularly applicable in the context of large construction projects. The intricate web of contracts among the owner, architect, and contractors is the proper framework for allocating the risk of economic loss. Allowing a contractor to sue an architect in tort would disrupt this contractual scheme, where the contractor's remedy for defective plans lies with the project owner, who in turn has a contractual remedy against the architect. While an architect's plans are intended for a contractor's use, the contractor's principal reliance should be on the owner who provides the plans and with whom the contractor has a direct contractual relationship. Enforcing this contractual chain of responsibility provides certainty and predictability, allowing parties to negotiate risk allocation in advance rather than relying on after-the-fact tort litigation.
Analysis:
This decision solidifies the application of the economic loss rule within the multi-party context of construction litigation in Texas, prioritizing contractual allocation of risk over tort duties. By precluding direct negligence claims for economic loss between non-contracting parties on a project, the court reinforces the importance of the contractual chain of liability. The ruling enhances predictability for design professionals and contractors, compelling them to manage risks of economic loss through explicit contractual provisions, such as warranties and indemnification clauses, rather than seeking remedies in tort. This case establishes a clear boundary between contract and tort law in a significant commercial setting, limiting the scope of negligent misrepresentation claims where a network of contracts governs the parties' relationships.
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