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Home | Columnists | Legal | Legal - The Economic Loss Rule and construction defect litigation Part 2: What does the economic loss do?

Legal - The Economic Loss Rule and construction defect litigation Part 2: What does the economic loss do?

image Varant Yegparian, Associate Schiffer Odom Hicks and Johnson PLLC Houston, TX

AUSTIN - Last month’s article provided a brief overview of the economic loss rule. As discussed, the rule is a type of legal sorting machine: put in information regarding the type of claim or loss, and the rule will tell you whether you have a contract-based cause of action or a tort-based cause of action. While this sorting may not mean much, this article will explain why the rule can provide a powerful defense in a construction defect lawsuit. This article, part two of a three-part series, will explain how the economic loss rule can prove to be useful in a construction defect lawsuit.

  The Economic Loss Rule, one more time: Why’s it important.
    The economic loss rule can tell you whether a legal claim is for breach of contract or for tort. But that is not all it does. Again, tort damages cannot be recovered in contract – and – contract damages cannot be recovered in tort. And this is precisely why the economic loss rule can be valuable to a litigant.
    The significant consequences of this rule relate directly to the types of claims, damages, and defenses that can be raised in a lawsuit. Indeed, if a construction defect claim relates only to a contract (as in the dispute between the project owner and a subcontractor for non-payment), then the terms of that contract will govern the lawsuit. A court will have to enforce the terms of a contract—something that might have a significant result on the litigation. For example, if the project owner sued the subcontractor for breach of contract, and the contract capped the amount of damages that could be recovered or limited the types of claims that the owner could bring, then the subcontractor would have some options in defending the lawsuit. Again, these terms are part and parcel of the bargain struck between the owner and the subcontractor—it is how they allocated risk.
    On the other hand, the subcontractor would not be able to take advantage of these contractual provisions in the case where it is sued for negligence by the inspector. Recall last month’s hypothetical: a city inspector comes out to the job site to inspect the electrical subcontractor’s work. During his inspection, the inspector comes into contact with some faulty wiring, is electrocuted, and sues the subcontractor for negligence. Unlike the scenario above, there is no contract between the subcontractor and the inspector and the inspector’s only claim is for the subcontractor’s negligence. And, the subcontractor would not be able to enforce the limitations or caps contained in its contract with the project owner. And so, the risks faced by the contractor in this scenario could be far greater than those in a lawsuit governed by a contract.

    It might not seem like much, but the economic loss rule can have huge implications in a lawsuit. In complex, multi-party construction contracts, there might not be a direct contractual relationship between the various entities involved in the project. Depending on what goes wrong and who is involved, a defendant may be stuck defending a lawsuit without the protections it bargained for in its contract. Those bargains represent a carefully balanced allocation of risk, and the prospect of facing litigation risk without the contractual protections can be a difficult situation to stomach. Because it sorts between contract and tort claims, the economic loss rule plays an important role in helping defendants in construction litigation reduce their risk by enforcing contractual terms.
    Because the economic loss rule is so important, those in the construction industry need to be aware of court cases interpreting the doctrine. Next month’s article will explain recent developments in the case law surrounding the economic loss doctrine and why it is important for those in the construction industry.

Varant Yegparian
Schiffer Odom Hicks and Johnson PLLC
700 Louisiana Ste. 2650
Houston, TX 77002
Tel: 713.255.4109


1The Texas Supreme Court has described the rule as follows: “A plaintiff may not recover for his economic loss resulting from bodily harm to another or from physical damage to property in which he has no proprietary interest. Similarly, a plaintiff may not recover for economic loss caused by his reliance on a negligent misrepresentation that was not made directly to him or specifically on his behalf.”  LAN/STV v. Martin Eby Construction Co., Inc., 435 S.W.2d 234, 238 (Tex. 2014).

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Reesa Doebbler reesa@constructionnews.net