On Friday, June 20, 2014, the Texas Supreme Court delivered its opinion and judgment in the case of LAN/STV v. Martin K. Eby Construction Company, Inc., a case in which this firm has been involved since 2003.
In this decision, the Supreme Court sided with our client, LAN/STV, holding that the “economic loss rule” would not permit a general contractor to recover the increased costs of performing its construction contract in a tort action against the project designers (engineers and architects) for negligent misrepresentation based on errors in the plans and specifications prepared for the construction project.
The Dallas Area Rapid Transportation Authority (“DART”) contracted with LAN/STV for the preparation of plans, drawings, and specifications for the construction of a light rail transit line in downtown Dallas. Eby Construction Company (“Eby”) submitted the low bid on this project and was awarded the contract.
The contract between DART and Eby provided an administrative procedure for Eby to assert contract disputes, including complaints about any design problems encountered on the project. Eby and LAN/STV, however, had no contract with each other.
Days after beginning construction, Eby discovered that the construction plans were full of errors that disrupted Eby’s construction schedule, requiring additional labor and materials, at a cost of nearly $14 million over Eby’s original bid.
EBY LITIGATES AGAINST DART AND LAN/STV
Eby invoked DART’s contract dispute procedures, claiming $21 million in damages, a claim that was finally settled by DART for $4.7 million.
In the meantime, Eby also filed suit against LAN/STV, asserting causes of action for negligence and negligent misrepresentation. Jim Grau and Scott Whisler were then retained to represent LAN/STV as trial counsel.
At trial, we raised several legal arguments in opposition to Eby’s claims, including the assertion that the economic loss rule barred Eby’s attempts to sue LAN/STV. When the trial court rejected LAN/STV’s legal arguments, the jury found partially for Eby, assessing the damages on the project at $5 million, but apportioning responsibility of 45% to LAN/STV, 40% to DART, and 15% to Eby.
Refusing to allow LAN/STV a credit for Eby’s $4.7 million settlement with DART, the trial court rendered judgment for Eby for $2.25 million plus interest.
Both Eby and LAN/STV then appealed, LAN/STV being represented in the appeal process by the firm of Wright & Close, LLP. The Dallas Court of Appeals affirmed the trial court’s judgment. Both parties then appealed to the Supreme Court and that court granted the Petitions for Review.
But now the Supreme Court has reversed the trial court’s judgment, agreeing with LAN/STV’s assertion of the economic loss rule, and holding that Eby should recover nothing in this suit.
The question the Supreme Court posed for itself was this: whether to treat negligent misrepresentation claims against the designing engineers and architects on a construction project differently than regular negligence claims for economic losses against other participants in a construction project.
“We think it beyond argument that one participant on a construction project cannot recover from another — setting aside the architect for the moment — for economic loss caused by negligence.”
Ultimately, the Supreme Court determined that the designers should not be treated differently.
In its decision, the Supreme Court concluded that, because both negligence and negligent misrepresentation claims are based on the same logic in the same general theory of liability, the “economic loss rule should not apply differently to these two tort theories in the same situation.”
Noting that the courts nationwide were fairly evenly divided over whether to apply the economic loss rule in such a situation, the Supreme Court finally determined that it would “side with those who do.”
In the end, the Supreme Court determined that it would honor the contractual relationships negotiated by the parties, specifically those agreements as to specific remedies for disputes:
DART was contractually responsible to Eby for providing accurate plans for the job. Eby agreed to specified remedies for disputes, pursued those remedies…and settled its claims for $4.7 million. Had Dart chosen to do so, it could have sued LAN/STV for breach of their contract to provide accurate plans. But Eby had no agreement with LAN/STV and was not party to LAN/STV’s agreement with DART. Clearly, the economic loss rule barred Eby’s subcontractors from recovering their own delay damages in negligence claims against LAN/STV. We think Eby should not be treated differently.
On that basis, the Supreme Court reversed the judgment of the Court of Appeals and rendered judgment that Eby take nothing from LAN/STV.
In sum, the construction trade in Texas now has a “bright-line” statement of the law: the courts will observe, honor, and enforce the negotiated contractual agreements between the parties. Negligent misrepresentation claims against design professionals will not be treated differently than regular negligence claims between participants on a construction project who are not contractual partners.