Lan/STV v. Martin K. Eby Constr. Co.

• Decision Date: 20 June 2014
• Docket Number: No. 11–0810.,11–0810.
• Citation: 435 S.W.3d 234,57 Tex. Sup. Ct. J. 816
• Parties: LAN/STV, A Joint Venture of Lockwood, Andrews & Newman, Inc. and STV Incorporated, Petitioner, v. MARTIN K. EBY CONSTRUCTION COMPANY, INC., Respondent.
• Court: Texas Supreme Court

435 S.W.3d 234

57 Tex. Sup. Ct. J. 816

LAN/STV, A Joint Venture of Lockwood, Andrews & Newman, Inc. and STV Incorporated, Petitioner,

v.MARTIN K. EBY CONSTRUCTION COMPANY, INC., Respondent.

No. 11–0810.

Supreme Court of Texas.

Argued Oct. 8, 2013.

Decided June 20, 2014.

Elizabeth Bloch, Husch Blackwell LLP, Austin, TX, for Amicus Curiae Atkins North America, Inc.

Charles R. ‘Skip’ Watson, Jr., Locke Lord LLP, Austin, TX, for Amicus Curiae CCE, Inc.

Joseph F. Canterbury, Jr., Canterbury, Gooch, Surratt, Shapiro Stein & Gaswirth, P.C., Dallas, TX, for Amicus Curiae General Contractors of Texas, Inc.

Bradley Wayne Snead, Henry S. Platts Jr., Thomas C. Wright, Wanda McKee Fowler, Wright & Close LLP, Houston TX, for Petitioner.

Daniel J. Davis, Davis Law Firm, Jeffery A. Ford, Ford Nassen & Baldwin PC, Jeffrey S. Levinger, Levinger PC, Dallas, TX, for Respondent.

Chief Justice HECHT delivered the opinion of the Court.

In actions for unintentional torts, the common law has long restricted recovery of purely economic damages unaccompanied by injury to the plaintiff or his property ¹—a doctrine we have referred to as the economic loss rule.² The rule serves to provide a more definite limitation on liability than foreseeability can and reflects a preference for allocating some economic risks by contract rather than by law.³ But the rule is not generally applicablein every situation; it allows recovery of economic damages in tort, or not, according to its underlying principles.⁴ The issue in this case is whether the rule permits a general contractor to recover the increased costs of performing its construction contract with the owner in a tort action against the project architect for negligent misrepresentations—errors—in the plans and specifications. We conclude that the economic loss rule does not allow recovery and accordingly reverse the judgment of the court of appeals ⁵ and render judgment for the architect.

I

The Dallas Area Rapid Transportation Authority (“DART”) contracted with LAN/STV to prepare plans, drawings, and specifications for the construction of a light rail transit line from Dallas's downtown West End to the American Airlines Center about a mile away. LAN/STV agreed to “be responsible for the professional quality, technical accuracy, and ... coordination of all designs, drawings, specifications, and other services furnished”, and to be “liable to the Authority ... for all damages to the Authority caused by [LAN/STV's] negligent performance of any of the services furnished”. DART incorporated LAN/STV's plans into a solicitation for competitive bids to construct the project. Martin K. Eby Construction Company, which had built two other DART light rail projects, one of which was designed by LAN/STV, submitted the low bid on this project, just under $25 million, and was awarded the contract. The contract provided an administrative procedure for Eby to assert contract disputes with DART, including complaints about design problems. Eby and LAN/STV had no contract with each other. Thus, LAN/STV was contractually responsible to DART for the accuracy of the plans, as was DART to Eby, but LAN/STV owed Eby no contractual obligation.⁶

Days after beginning construction, Eby discovered that LAN/STV's plans were full of errors—about bridge structures, manhole and utility line locations, subsurface soil conditions, an existing retaining wall, and many other aspects of the proposed construction. While Eby expected that, as on any project, 10% of the plans would be changed, it found that 80% of LAN/STV's drawings had to be changed. This disrupted Eby's construction schedule and required additional labor and materials. In all, Eby now calculates it lost nearly $14 million on the project.

Only seven months into what would turn out to be a 25–month job, Eby sued DART for breach of contract in the United States District Court.⁷ The court dismissed the case because Eby had not exhausted its administrative remedies against DART under their contract and Texas law.⁸ Eby then invoked DART's contract dispute procedures, claiming $21 million. The hearing officer not only rejected Eby's claim in its entirety, he concluded that DART was entitled to $2.4 million in liquidated damages from Eby. Eby filed an administrative appeal, but, before it was resolved, settled with DART for $4.7 million.

Meanwhile, Eby filed this tort suit against LAN/STV, asserting causes of action for negligence and negligent misrepresentation. After Eby and DART settled, this case proceeded to trial,⁹ but only on Eby's claim that LAN/STV negligently misrepresented the work to be done in its error-ridden plans.¹⁰ The jury agreed and assessed Eby's damages for its losses on the project at $5 million, but they also found that the damages were caused by Eby's and DART's negligence as well, and apportioned responsibility 45% to LAN/STV, 40% to DART, and 15% to Eby. The trial court concluded that Eby's $4.7 million settlement with DART should not be credited against the damages found by the jury, but that LAN/STV should be liable only for its apportioned share of the damages. Accordingly, the trial court rendered judgment for Eby for $2.25 million plus interest.

Both LAN/STV and Eby appealed, and following the court of appeals' affirmance, ¹¹ both petitioned for review. We granted both petitions,¹² but as we view the case, we need only address LAN/STV's argument that Eby's recovery for negligent misrepresentation is barred by the economic loss rule. ¹³ We begin by surveying the development of the rule in American law and its status in Texas. We then turn to its application in this case.

II

A

The law has long limited the recovery of purely economic damages in an action for negligence. An early example, oft-cited, is Justice Holmes's opinion in Robins Dry Dock & Repair Co. v. Flint,¹⁴ a suit by the charterers of a steamship against a dry dock for damages for loss of the use of the vessel from a delay in repairs due to the dry dock's negligence. The Supreme Court held that the charterers could not recover their economic damages from the dry dock, either as third-party beneficiaries of the contract between the owners and the dry dock,¹⁵or for the dry dock's negligence. Justice Holmes explained:

Of course the contract of the [dry dock] with the owners imposed no immediate obligation upon the [dry dock] to third persons [the charterers] as we already have said, and whether the [dry dock] performed it promptly or with negligent delay was the business of the owners and of nobody else.... [The charterers'] loss arose only through their contract with the owners.... [N]o authority need be cited to show that, as a general rule, at least, a tort to the person or property of one man does not make the tort-feasor liable to another merely because the injured person was under a contract with that other unknown to the doer of the wrong.... The law does not spread its protection so far.¹⁶

Nearly sixty years later, Judge Higginbotham observed in State of Louisiana v. M/V Testbank that “ Robins broke no new ground.... [T]he prevailing rule [in the United States and England] denied a plaintiff recovery for economic loss if that loss resulted from physical damage to property in which he had no proprietary interest.” ¹⁷ Judge Higginbotham cited Professor James's 1972 article, Limitations on Liability for Economic Loss Caused by Negligence: A Pragmatic Appraisal:

Under the prevailing rule in America, 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.¹⁸

“The reasons for this difference in treatment of indirect economic loss and physical damage,” Professor James continued, “do not derive from the theory or the logic of tort law”.¹⁹ Economic loss may be no less real than physical injury and just as foreseeable.In Robins, for example, the charterers' loss of business from the dry dock's negligent delay in repairing the steamship was readily foreseeable, but so would have been the charterers' clients' loss of business, and so on. Justice Holmes' abrupt curtailment of this rippling liability—“[t]he law does not spread its protection so far” ²⁰—could have been achieved by taking a more restrictive view of foreseeability. But, wrote Professor James,

judges who have been unwilling to accept narrow and unrealistic views of what is foreseeable—or of what a jury may find to be unforeseeable—remain generally unwilling to allow recovery for indirect economic loss. The explanation for this reluctance, repeated in decisions over the years, is a pragmatic one: the physical consequences of negligence usually have been limited, but the indirect economic repercussions of negligence may be far wider, indeed virtually open-ended. As Cardozo put it in a passage often quoted, liability for these consequences would be “liability in an indeterminate amount for an indeterminate time to an indeterminate class.” ²¹

Liability for economic loss directly resulting from physical injury to the claimant or his property—such as lost wages or medical bills—is limited by the scope of the injury. Liability for a standalone economic loss is not. ²²

Often, a more appropriate remedy for the victim is to allocate the risk of loss by contract or to cover it through insurance.²³ In Judge Posner's view:

This is simply generalizing to tort law the contract-law rule of Hadley v. Baxendale.... The point in Hadley ... was that the carrier could not estimate the loss that the customer would incur from a delay in the delivery of the repaired mill shaft to the customer, but the customer could estimate this cost and, therefore, was in a better position to avoid the loss by taking appropriate precautions or by buying insurance.²⁴

Thus, for...