, No. 11-0810
An architect on a commercial project was sued by a contractor on the project for their negligent work, which allegedly caused significant increased costs that the contractor could not recoup.
The key fact here turns out to be that the architect worked for the project owner, not the contractor. For that reason, the architect argued, Texas law does not permit the contractor to sue it for pure economic losses (those unconnected to some bodily harm or property damage) caused by its allegedly negligent work. The principle involved is the “economic loss rule.”
As the opinion explains, the economic loss rule aims to draw a clearer line to the edges of tort liability than offered by older principles such as “foreseeability.” While foreseeability can turn on idiosyncratic facts, the economic loss rule instead invites a court to announce broad policy determinations about whether tort liability should apply in a particular situation.
The Texas Supreme Court ultimately agreed with the architect and held that the architect had no liability for these economic losses suffered by a contractor relying on its plans. What makes this opinion notable — and ensures it will be frequently cited, despite its narrow holding — is the depth of its examination of the policies and principles behind the economic loss rule, both in terms of Texas law and the larger national academic discussion.
That extensive background sets the stage for the Court to announce a rule at odds with the Restatement. Some commentary in the Restatement addresses just this situation — an architect, whose plans inflict economic loss on others in the project. The Restatement suggests that an architect on a commercial project should expect exactly this degree of reliance from contractors bidding on the project and, thus, that it is appropriate to impose tort liability as the default rule and let the parties choose, if they wish, to modify that by contract.
A unanimous Texas Supreme Court disagreed. It viewed the policies behind the economic loss rule as better served by leaving this kind of liability among people engaged in the same economic transaction exclusively to the realm of contract law: “We think it more probable that a contractor will assume it must look to its agreement with the owner for damages if the project is not as represented or for any other breach. Though there remains the possibility that a contractor may not do so, we think the availability of contractual remedies must preclude tort recovery in the situation generally because … ‘clarity allows parties to do business on a surer footing’.”
To explain its thinking, the Court offered an excerpt from a 1992 law review article by Professor William Powers, an extensive block quote that may soon be a favorite example for those defending the practical value of the legal academy. (( This opinion extensively discusses academic publications by Professor Powers, Professor Fleming James, and Judge Posner, among others. ))
The Court’s precise holding turns out to be narrow: That a general contractor cannot recover pure economic losses from an architect hired by the project’s owner. The implications for future contractors are clear enough: negotiate for contractual or insurance-based protection.