Sharyland Water Supply Corp. v. City of Alton
55 Tex. Sup. Ct. J. 46, 354 S.W.3d 407, 2011 Tex. LEXIS 805 (2011)
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Rule of Law:
The economic loss rule does not bar a negligence claim by a property owner against a contractor, with whom the owner lacks contractual privity, when the contractor's work for a third party causes physical damage to the owner's property. The cost to repair the property to bring it back into compliance with safety and regulatory standards constitutes recoverable property damage, not a purely economic loss.
Facts:
- The City of Alton entered into a Water Supply Agreement with Sharyland Water Supply Corporation, conveying its water system to Sharyland.
- Under the agreement, Sharyland was responsible for providing potable water and maintaining the system in conformity with state regulations.
- In 1994, Alton hired several contractors (Carter & Burgess, Inc.; Turner, Collie & Braden, Inc.; and Cris Equipment Company, Inc.) to design and build a new sanitary sewer system.
- During construction, which was completed in 1999, the contractors installed portions of the new sewer lines parallel to and crossing over Sharyland's existing water lines.
- The contractors installed numerous sewer line crossings in violation of state regulations, placing them too close to Sharyland's water lines and sometimes above them, creating a risk of contamination.
- The improper installation rendered Sharyland's water system non-compliant with state law, requiring Sharyland to incur substantial costs to repair and remediate the system to restore its compliance and safety.
Procedural Posture:
- Sharyland Water Supply Corp. sued the City of Alton for breach of contract and sued the contractors for negligence in a Texas trial court.
- The jury found for Sharyland, determining that Alton had breached its contract and the contractors were negligent, and awarded over $1.1 million in damages.
- The trial court entered a judgment against Alton and the contractors, jointly and severally, for the damages found by the jury.
- Alton and the contractors, as appellants, appealed to the Texas Court of Appeals.
- The Court of Appeals reversed, holding that damages against Alton were barred by governmental immunity and that Sharyland's negligence claim against the contractors was barred by the economic loss rule.
- The Court of Appeals rendered a take-nothing judgment in favor of the contractors and most claims against Alton.
- Sharyland, as petitioner, appealed to the Supreme Court of Texas.
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Issue:
Does the economic loss rule bar a property owner's negligence claim against contractors, with whom the property owner has no contractual privity, for damages that consist of the cost to bring the owner's property into regulatory compliance after the contractors' work rendered it non-compliant?
Opinions:
Majority - Chief Justice Jefferson
No. The economic loss rule does not bar Sharyland's negligence claim against the contractors because their actions caused physical damage to Sharyland's property. The court reasoned that the economic loss rule is primarily intended to preserve the distinction between contract and tort law in cases involving defective products or breached contracts, where the loss is the disappointed expectation of the bargain. Here, Sharyland and the contractors were contractual strangers. The contractors had a common law duty not to negligently injure Sharyland's property. The court determined that rendering Sharyland's legally compliant water system non-compliant constituted actual property damage, not a purely economic loss. The costs of repair necessary to restore the property to its condition before the injury, including bringing it back into regulatory compliance, are recoverable damages in tort.
Analysis:
This decision significantly clarifies the scope of the economic loss rule in Texas, particularly in multi-party construction scenarios. It establishes that the rule does not provide a shield for contractors against tort liability for damaging the property of third parties who are strangers to the construction contract. By defining the cost of regulatory remediation as physical 'property damage' rather than 'purely economic loss,' the court prevents the rule from being overextended to bar legitimate negligence claims. This precedent ensures that property owners can seek recovery from negligent actors who damage their property, reinforcing the independent nature of tort duties outside of contractual obligations.
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