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Home | Columnists | Legal | Legal - The Economic Loss Rule and construction defect litigation Part 3: Blurred lines, uncertainty, and recent legal developments

Legal - The Economic Loss Rule and construction defect litigation Part 3: Blurred lines, uncertainty, and recent legal developments

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

AUSTIN - This is the third article in a three-part series about the economic loss rule. As previously discussed, the rule sorts legal claims by distinguishing whether a party can recover under contract or in tort. Thus, how the rule draws the line between contract and tort claims is vital for those in the construction industry. Indeed, if the rule sets a broad scope for contract claims, parties who rely on the certainty provided by certain contractual provisions (i.e., damages caps or attorney’s fees provisions) will be better off. Correlatively, if the rule sets a broad scope for tort claims, then parties who seek to avoid damages caps, attorney’s fees provisions, etc. will benefit. In either scenario, the rule’s ability to provide clear lines is of the utmost importance.

 

  However, recent Texas court decisions have blurred these lines—creating uncertainty for the construction industry. One of these decisions, Chapman Custom Homes, Inc. v. Dallas Plumbing Co., was decided by the Texas Supreme Court in 2014.
    In Chapman, a homeowner contracted with a builder to construct a home. The builder subcontracted with a plumber to install the home’s plumbing. The plumber’s work was defective and leaks damaged the home. The homeowner and builder both sued the plumber. Applying the economic loss rule, the appellate court determined (1) that homeowner could only sue the plumber in tort because its only contract was with the builder and (2) the builder could only sue the plumber for breach of contract because it did not own the (damaged) home. The court dismissed the builder’s claim because it could not recover on damaged property it did not own. And due to a pleading defect, the homeowner only asserted a contract claim which the appellate court dismissed because the homeowner had no contract with the plumber.
    The Texas Supreme Court reversed the appellate court’s ruling. In doing so, the court turned to a 70 year old case for the proposition that “having undertaken to install a plumbing system in the house, the plumber assumed an implied duty not to flood or otherwise damage the [owner’s] house while performing its contract.”
    This is where things get murky. The court seemed to use a tort theory—i.e., the obligation to not damage property which is outside the scope of one’s contractual work. However, the homeowner never brought a tort claim—the only duty it claimed breached was contractual in nature. In discussing this implied duty, the Chapman court blurred the distinctions created by the economic loss rule by allowing a party to, essentially, use a contract (which was only for plumbing work) to recover in tort (damage to the whole home).         Picking up on Chapman, the Corpus Christi appellate court used the implied duty to allow a party to sue a project engineer for damage to an apartment complex it purchased from the complex’s builder in USA Walnut Creek, DST v. Terracon Consultants, Inc. The Terracon court allowed the purchaser to sue the engineer for damage caused by improperly designing the complex’s foundation—including damage to the foundation itself—despite the purchaser not having a contract with the engineer. Seizing on the notion of an implied duty, Terracon presents another example of a court sidestepping the lines set by the economic loss rule by allowing a party to recover what essentially were breach of contract damages (i.e., improper construction and design services) from a party with whom it had no contract.
    If the results of these cases seem confusing, it is because they are. The implied duty discussed in Chapman blurs the distinctions set by the economic loss rule by allowing parties to recover contract damages under tort theories and vice versa. Allowing parties to avoid the economic loss rule’s restrictions in this way—and thus avoid limitations like damages caps or attorney’s fees provisions—upsets the contractual allocation of risk. And allowing parties to avoid the careful balancing of risk in their construction contracts represents a danger to those in the construction industry. Attention will have to be paid in the following years to see if the courts continue to blur these lines.

Contact:
Varant Yegparian
Schiffer Odom Hicks Johnson PLLC
700 Louisiana Ste. 2650
Houston, TX 77002
Tel: 713.255.4109
vyegparian@sohjlaw.com

                                      

1    445 S.W.3d 716 (2014).
2  2015 WL 832273 (Tex. App.—Corpus Christi Feb. 26, 2015, pet. denied)


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Carol Wiatrek meditor@constructionnews.net