Presented by
Construction Conference
September 21, 2007
m a c d o n a l d d e v i n . c o m
The Economic Loss Rule as a Design
Professional’s Defense to Owner/Contractor Claims
The Case of the Defective School
Foundation and the Elusive Engineer
New school building
School hired architect and contractor Architect hired foundation engineer Foundation movement
Walls and tile floors cracking
Foundation repair cost $2 million
The Case of the Defective School
Foundation and the Elusive Engineer
Five years later, School sues General Contractor and AIA for breach of
contract and negligence for repair costs School sues PE for negligence and
breach of contract as 3rd Party
Beneficiary to PE-AIA contract General Contractor sues PE for contribution
AIA cannot sue PE – statute of
The Case of the Defective School
Foundation and the Elusive Engineer
PE files Motion for Summary Judgment against the School District
Basis: the economic loss rule bars
negligence claims and School is not an intended 3rd Party Beneficiary
PE files Motion for Summary Judgment against General Contractor
Basis: Contribution claim derivative of School’s claim, barred by economic loss
Common Problems with Advocating the
“Economic Loss Rule”
Boring
Mysterious
Complicated/Makes head hurt Client: I don’t understand it
Judge: If I don’t understand it, there
must be a fact question somewhere
Lawyers: I’ve never seen or heard it
Biggest Problem with “Economic Loss
Rule” in Texas
Unsettled in Texas construction law because:
1. Scarce case law
2. Obscure fact patterns
3. Poorly-written or very short opinions, until August 2007
De-mystifying the “Economic Loss
Doctrine”
What is it?
Why do we care?
How can it help or hurt our position in a construction contract or claim?
How can we take advantage of it? How can we avoid it?
“Economic Loss Rule” – What is it?
Legal doctrine favorable for defendants Sometimes called “economic loss bar” Simply put -- one cannot sue for
negligence to recover purely economic loss
Origin and Evolution of the Doctrine
Products Liability
Commercial and Consumer Litigation Construction Defect
What does it do?
Limits recovery to contract damages – “benefit of bargain” -- where loss is purely economic in nature
Prohibits recovery of tort claims, i.e. negligence, breach of implied warranty Can serve as a complete defense
Often raised by defendants in construction litigation
Definition of “Economic Loss Rule”
“When a claimant asserts only economic injury to the subject matter of the
contract itself, the action sounds in
contract, not in tort.”
Southwestern Bell Tel. Co. v. DeLanney, 809 S.W.2d 493, 494-495 (Tex.
1991)(emphasis added).
Definition of “Economic Loss Rule”
Limits claims to contract damages when:
Claim is for “purely economic loss”
Loss arose out of the “subject matter
of a contract itself”
No damage to “other property” occurred
Elements of “Economic Loss Rule”
Economic loss - costs of repair and
replacement, lost profits, inadequate value
Subject matter of contract –
- between claimant and defendant - between claimant and 3rd Party
- between 3rd party and defendant
No Damage to “other property” – property
not the subject matter of contract
Benefits of Economic Loss Rule
Why do we care? What does it do for me?
Limits a claimant to recover their contract damages only, i.e. “benefit of the bargain” Bars tort claims, including:
- Negligence
- Breach of Implied Warranty - Misrepresentation
Benefits of “Economic Loss Rule”
Why do we want contract claims instead of torts?
Contractual clauses may help defense: - accrual clause for statute of limitations - limitation of liability for damages
May be no contract with Claimant (no privity) Claimant may not be 3rd Party Beneficiary
If no tort claims and no contract claims, then claim may be barred completely
Texas Construction Cases and
“Economic Loss Rule”
Jim Walter Homes, Inc. v. Reed, 711
S.W.2d 617 (Tex. 1986) Homeowner vs. Builder Construction defects
Negligence claims only
Barred by economic loss rule Bargained for “finished house” No claim for damage to “other property”
Texas Construction Cases and
Economic Loss Rule
M.D. Thomson v. Espey Huston & Associates, Inc., 899 S.W.2d 415
(Tex. App.– Austin 1995, no writ)
Landowner vs. civil/geotech engineer Water damage to apartment complex Partial summary judgment for damage to property the subject matter of
contract based on economic loss rule Denied on damage to “other property”
Texas Construction Cases and
Economic Loss Rule
Goose Creek Consolidated School Dist. v. Jarrar’s Plumbing,
(Texarkana 2002)
School vs. plumbing sub
Plumbing line break and water damage to school interior
No economic loss rule defense as to damage to school interior, MSJ denied Plumber failed to move for partial MSJ for damage to plumbing line itself
Texas Construction Cases and
Economic Loss Rule
Pugh v. General Terrazzo, 2007 Tex.
App. LEXIS 5454 (Tex. App. – Houston [1st Dist.] July 12, 2007)
EIFS, residential construction case Homeowners vs. subcontractors
Summary judgment for subs
Economic loss rule barred tort claims, including breach of implied warranty Court followed majority of states
Example: School Foundation Claim
School District building new school
General Contractor hired to construct Architect hired to design
Structural engineer hired by architect to design foundation
General Contract hired sub-contractors to do the work
Example: School Foundation Claim
School District
Architect
General
Contractor
Subcontractors
Structural
School Foundation Claim
After construction:
Foundation movement
Cracking in bricks and floors
Cracking in wall expansion joints
Wall crumbles and falls on school bus Students injured
School Foundation Lawsuit
School District v. Everyone
Breach of contract, negligence, and breach of warranty
General Contractor v. Everyone
- GC v. subs for breach of contract, negligence and contribution
- GC v. AIA and PE for contribution
Applicability to Claims Against
Architects and Engineers
Engineer’s Motion for Summary Judgment based on economic loss rule:
Economic loss? Repair and replacement
damages -- Yes
Loss to Subject Matter of Contract? School
contracted for finished building and PE contracted to design foundation – Yes
Damage to “Other Property”? - Yes, school
bus
Is Engineer Entitled to Summary
Judgment?
Does the damage to walls, brick, floors and bus (other than the foundation):
1.amount to “other property” not the subject matter of the PE’s contract; and
2. preclude economic loss rule?
Does the personal injury preclude the application of the rule?
Is the rule “all or nothing” or is partial application permitted?
Strategically Advantageous Time to
Raising Economic Loss Rule Defense
Pre-Suit
Early filing of Motion for Traditional Summary Judgment
Advantages of Raising Economic Loss Rule
Eliminating or Limiting Liability Exposure Reducing Expectations of Other Parties for Settlement Contribution
Suggested Contract Language
Limitation of liability clauses:
“Notwithstanding anything to the contrary, the [contractor, architect, engineer] shall not be
liable for any special, indirect, consequential
or incidental damages, including, without limitation, loss of profits or business
interruption, even if the damage is to
property beyond the subject matter of this agreement.” [emphasis added]
Construction Conference
September 21, 2007
m a c d o n a l d d e v i n . c o m
