Essentially, the economic loss rule states that with regard to unintentional torts such as negligence, and negligent misrepresentation, there can be no recovery for the plaintiff unless the plaintiff suffers some form of physical injury. See LAN/STV v. Martin K. Eby Const. Co., Inc., 11-0810, 2014 WL 2789097 (Tex. June 20, 2014). Purely financial loss is insufficient. See Id.
When analyzing the latest Texas Supreme Court case on the issue, it becomes apparent that contractors should beware! In LAN/STV, an architect completed plans for a project on behalf of the owner. The owner then incorporated those plans to solicit competitive bids. Naturally the contractors based their bids on the architect’s plans and one contractor was awarded the project. However, early into the project the contractor realized that the plans were completely flawed. The flawed plans delayed the job and cost the contractor 14 million in revenue.
The contractor sued the owner for breach of contract but eventually settled out of court for 4.7 million. The contractor then tried to sue the architect but as is typical in the construction industry, the contractor did not have a contractual relationship with the architect because the contractor only entered into an agreement with the owner. Consequently, there was no contract remedy such as breach of contract through which the contractor could obtain damages from the architect.
The contractor decided to sue under a tort theory of negligent misrepresentation. The Texas Supreme Court Stated that “the law has long limited the recovery of purely economic damages in an action for negligence”, and concluded that “the economic loss rule does not allow recovery.” LAN/STV v. Martin K. Eby Const. Co., Inc., 11-0810, 2014 WL 2789097 (Tex. June 20, 2014).
WHAT IT MEANS FOR YOU
What this means for you is that you must protect yourself during the bargaining process. If you are the general contractor, it is probably wise that while bargaining with the owner, you insist on protection from the architect. This protection can come in the form of insurance, which you can include in the cost of your bid or a indemnification clause that you put in the contract. The same applies to sub-contractors.
Nothing here is intended to be legal advice nor should it be construed as such. If you have questions or would like to discuss an issue with your company, please call 832-930-0529 or visit www.kestephenslaw.com.