Construction Conference

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1 m a c d o n a l d d e v i n. c o m Construction Conference September 21, 2007 The Economic Loss Rule as a Design Professional s Defense to Owner/Contractor Claims Presented by Greg Ziegler Macdonald Devin, PC

2 The Case of the Defective School Foundation and the Elusive Engineer New school building School hired architect and contractor Architect hired foundation engineer Foundation movement Walls and tile floors cracking Foundation repair cost $2 million Walls and floor repair costs $1 million

3 The Case of the Defective School Foundation and the Elusive Engineer Five years later, School sues General Contractor and AIA for breach of contract and negligence for repair costs School sues PE for negligence and breach of contract as 3 rd Party Beneficiary to PE-AIA contract General Contractor sues PE for contribution AIA cannot sue PE statute of limitations expired per accrual clause

4 The Case of the Defective School Foundation and the Elusive Engineer PE files Motion for Summary Judgment against the School District Basis: the economic loss rule bars negligence claims and School is not an intended 3 rd Party Beneficiary PE files Motion for Summary Judgment against General Contractor Basis: Contribution claim derivative of School s claim, barred by economic loss

5 Common Problems with Advocating the Economic Loss Rule Boring Mysterious Complicated/Makes head hurt Client: I don t understand it Judge: If I don t understand it, there must be a fact question somewhere Lawyers: I ve never seen or heard it work, so it must not work

6 Biggest Problem with Economic Loss Rule in Texas Unsettled in Texas construction law because: 1. Scarce case law 2. Obscure fact patterns 3. Poorly-written or very short opinions, until August 2007

7 De-mystifying the Economic Loss Doctrine What is it? Why do we care? How can it help or hurt our position in a construction contract or claim? How can we take advantage of it? How can we avoid it?

8 Economic Loss Rule What is it? Legal doctrine favorable for defendants Sometimes called economic loss bar Simply put -- one cannot sue for negligence to recover purely economic loss

9 Origin and Evolution of the Doctrine Products Liability Commercial and Consumer Litigation Construction Defect Design Professional

10 What does it do? Limits recovery to contract damages benefit of bargain -- where loss is purely economic in nature Prohibits recovery of tort claims, i.e. negligence, breach of implied warranty Can serve as a complete defense Often raised by defendants in construction litigation Rarely litigated

11 Definition of Economic Loss Rule When a claimant asserts only economic injury to the subject matter of the contract itself, the action sounds in contract, not in tort. Southwestern Bell Tel. Co. v. DeLanney, 809 S.W.2d 493, (Tex. 1991)(emphasis added). **last Tex Sup Ct opinion**

12 Definition of Economic Loss Rule Limits claims to contract damages when: Claim is for purely economic loss Loss arose out of the subject matter of a contract itself No damage to other property occurred No personal injury occurred

13 Elements of Economic Loss Rule Economic loss - costs of repair and replacement, lost profits, inadequate value Subject matter of contract - between claimant and defendant - between claimant and 3 rd Party - between 3 rd party and defendant No Damage to other property property not the subject matter of contract No personal injury

14 Benefits of Economic Loss Rule Why do we care? What does it do for me? Limits a claimant to recover their contract damages only, i.e. benefit of the bargain Bars tort claims, including: - Negligence - Breach of Implied Warranty - Misrepresentation - Fraud

15 Benefits of Economic Loss Rule Why do we want contract claims instead of torts? Contractual clauses may help defense: - accrual clause for statute of limitations - limitation of liability for damages May be no contract with Claimant (no privity) Claimant may not be 3 rd Party Beneficiary If no tort claims and no contract claims, then claim may be barred completely

16 Texas Construction Cases and Economic Loss Rule Jim Walter Homes, Inc. v. Reed, 711 S.W.2d 617 (Tex. 1986) Homeowner vs. Builder Construction defects Negligence claims only Barred by economic loss rule Bargained for finished house No claim for damage to other property

17 Texas Construction Cases and Economic Loss Rule M.D. Thomson v. Espey Huston & Associates, Inc., 899 S.W.2d 415 (Tex. App. Austin 1995, no writ) Landowner vs. civil/geotech engineer Water damage to apartment complex Partial summary judgment for damage to property the subject matter of contract based on economic loss rule Denied on damage to other property

18 Texas Construction Cases and Economic Loss Rule Goose Creek Consolidated School Dist. v. Jarrar s Plumbing, (Texarkana 2002) School vs. plumbing sub Plumbing line break and water damage to school interior No economic loss rule defense as to damage to school interior, MSJ denied Plumber failed to move for partial MSJ for damage to plumbing line itself

19 Texas Construction Cases and Economic Loss Rule Pugh v. General Terrazzo, 2007 Tex. App. LEXIS 5454 (Tex. App. Houston [1 st Dist.] July 12, 2007) EIFS, residential construction case Homeowners vs. subcontractors Summary judgment for subs Economic loss rule barred tort claims, including breach of implied warranty Court followed majority of states

20 Example: School Foundation Claim School District building new school General Contractor hired to construct Architect hired to design Structural engineer hired by architect to design foundation General Contract hired sub-contractors to do the work

21 Example: School Foundation Claim School District General Contractor Architect Subcontractors Structural Engineer

22 School Foundation Claim After construction: Foundation movement Cracking in bricks and floors Cracking in wall expansion joints Wall crumbles and falls on school bus Students injured School bus totaled

23

24 School Foundation Lawsuit School District v. Everyone Breach of contract, negligence, and breach of warranty General Contractor v. Everyone - GC v. subs for breach of contract, negligence and contribution - GC v. AIA and PE for contribution Parents v. Everyone for negligence

25 Applicability to Claims Against Architects and Engineers Engineer s Motion for Summary Judgment based on economic loss rule: Economic loss? Repair and replacement damages -- Yes Loss to Subject Matter of Contract? School contracted for finished building and PE contracted to design foundation Yes Damage to Other Property? - Yes, school bus Personal Injury? Yes, students injured

26 Is Engineer Entitled to Summary Judgment? Does the damage to walls, brick, floors and bus (other than the foundation): 1.amount to other property not the subject matter of the PE s contract; and 2. preclude economic loss rule? Does the personal injury preclude the application of the rule? Is the rule all or nothing or is partial application permitted?

27 Strategically Advantageous Time to Raising Economic Loss Rule Defense Pre-Suit Early filing of Motion for Traditional Summary Judgment Advantages of Raising Economic Loss Rule Eliminating or Limiting Liability Exposure Reducing Expectations of Other Parties for Settlement Contribution Reducing Defense Costs

28 Suggested Contract Language Limitation of liability clauses: Notwithstanding anything to the contrary, the [contractor, architect, engineer] shall not be liable for any special, indirect, consequential or incidental damages, including, without limitation, loss of profits or business interruption, even if the damage is to property beyond the subject matter of this agreement. [emphasis added]

29

30 m a c d o n a l d d e v i n. c o m Construction Conference September 21, 2007 Thank You

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