LAN/STV v. Martin K. Eby Construction Co., Inc.

Brief Fact Summary.

DART had a contract with LAN/STV (Defendant) to design a light rail system and had a contract with Martin K. Eby Construction Co., Inc. (Plaintiff) to build it. When design flaws caused economic loss to Plaintiff, it brought an action in negligent misrepresentation against Defendant.

Synopsis of Rule of Law.

A contractor on a construction project is barred by the economic loss rule from recovering from the project architect for purely economic loss in a negligent misrepresentation action even though the two do not have a contractual relationship.

Facts.

The Dallas Area Rapid Transportation Authority (DART) hired Defendant to design a light rail transit line. DART used that design to solicit bids for a contractor to build the project. Plaintiff was awarded the contract, which contained clauses regarding the means by which Plaintiff could resolve disputes with DART. Plaintiff and Defendant each had contracts with DART, but not with each other. Plaintiff discovered design defects that required 80 percent of the project’s plans to be redesigned. This delay cost Plaintiff time, materials, and labor that Plaintiff calculated was worth $14 million. Plaintiff settled its dispute over the plans with DART for $4.7 million and then brought an action for negligence and negligent misrepresentation against Defendant. The jury found for Plaintiff on the negligent misrepresentation claim, awarding $5 million. Defendant appealed, arguing that the economic loss rule barred recover. The state appellate court affirmed and the state Supreme Court granted review.

Issue.

Where an architect on a construction project is sued for purely economic loss in a negligent misrepresentation action by a contractor with whom he does not have a contractual relationship, does the economic loss rule prevent recovery?

Held.

(Hecht, C.J.) Yes. A contractor on a construction project is barred by the economic loss rule from recovering from the project architect for purely economic loss in a negligent misrepresentation action even though the two do not have a contractual relationship. The recovery of purely economic loss in negligence actions has traditionally been limited, especially where the tortfeasor and plaintiff had a contractual relationship. This rule developed because of the need to draw a boundary between the law of torts and contract law. It expanded to include plaintiffs without contractual relationships with the tortfeasor because of the unpredictability and potential disproportionality of economic losses. The risk of economic loss is best suited to resolution by contracts. An exception to this rule comes where negligence is alleged against professionals, like lawyers and health care providers. Negligent misrepresentation actions should be treated in the same manner as negligence actions as both general theories of liability are the same. In construction projects, contracts between parties are frequently vertical, with the architect and contractor having separate contracts with the owner, and the subcontractors having their own contracts with the contractor. It is well-settled that one party in a construction project cannot sue another for negligence, and we now extend that rule to negligent misrepresentation and to include architects. Although the plans are drawn to be used and relied upon by the contractor, it is the owner who provides the plans to the contractor. The risk of errors in the plans can be assigned by contract. Where, as here, the architect is responsible to the owner for design flaws, and the owner is responsible to the contractor for design flaws, the contractor is protected. The availability of contractual remedies prevents recovery in torts in this situation, and so there is no reason not to apply the economic loss rule. DART was contractually responsible to Plaintiff for the design, Plaintiff agreed to dispute resolution procedures in the contract, and the matter was settled between the two for $4.7 million. DART could then have chosen to sue Defendant for a breach of their contract. Reversed. Judgment rendered that Plaintiff does not recover from Defendant.

Discussion.

Jurisdictions are split on the issue presented here. The Restatement (Third) of Torts allows tort claims against the architect under the thinking that the architect’s designs are intended to be relied upon by contractors when they are preparing their bids. The Restatement analogizes the architect’s plans to a standard case of negligent misrepresentation–an audit report supplied by an accountant to a client for distribution to potential investors. The Texas Supreme Court acknowledges this analogy, but concludes that an audit report is an invitation for those investors to whom it is specifically directed to rely whereas an architects plans are not an invitation for all potential bidders to rely.