A new Texas Supreme Court decision in Chapman Custom Homes, Inc. v. Dallas Plumbing Co., 2014 WL 4116839 (Tex. 2014) narrows the stranglehold of the Economic Loss Doctrine (ELD) and states that the ELD precludes recovery in tort for economic losses resulting from a party’s failure to perform under a contract when the harm consists only of the economic loss of a contractual expectancy. It no longer bars all tort claims arising out of the performance of a contract.
Historically, the ELD prohibits a plaintiff in a non-product liability case from recovering in negligence or strict liability for purely economic losses. Nobility Homes of Texas, Inc. v. Shivers, 557 S.W.2d 77 (Tex. 1977); Purina Mills, Inc. v. Odell, 948 S.W.2d 927 (Tex. App. 1997); Equistar Chems. L.P. v. Dresser-Rand Co., 240 S.W.3d 864 (Tex. 2007); Jim Walter Homes, Inc. v. Reed, 711 S.W.2d 617 (Tex. 1986). In Texas, the ELD has historically only been applied in cases involving strict product liability or failure to perform a contract. The ELD has never been a general rule of tort law; it is a rule sounding in negligence and strict product liability. Pure economic loss is still commonly recoverable in certain torts, including: (1) negligent misrepresentation, Grant Thornton L.L.P. v. Prospect High Income Fund, 314 S.W.3d 913, 920 (Tex. 2010); (2) legal malpractice, Akin, Gump, Strauss, Hauer & Feld, L.L.P. v. Nat’l Dev. & Research Corp., 299 S.W.3d 106, 122 (Tex. 2009); (3) accounting malpractice, Atkins v. Crosland, 417 S.W.2d 150, 152–53 (Tex. 1967); (4) breach of fiduciary duty, ERI Consulting Eng’rs, Inc. v. Swinnea, 318 S.W.3d 867, 873–74 (Tex. 2010); (5) fraud, Trenholm v. Ratcliff, 646 S.W.2d 927, 933 (Tex. 1983); (6) nuisance, Comminge v. Stevenson, 76 Tex. 642, 13 S.W. 556, 558 (Tex. 1890); (7) fraudulent inducement, Formosa Plastics Corp. USA v. Presidio Eng’rs & Contractors, Inc., 960 S.W.2d 41, 47 (Tex. 1998); and (8) fraudulent interference with contract, Am. Nat’l Petroleum Co. v. Transcon. Gas Pipe Line Corp., 798 S.W.2d 274, 278 (Tex. 1990).
Product Failure. The ELD applies when losses from an occurrence arise from failure of a product and the damage or loss is limited to the product itself. The ELD in Texas was originally established to set perimeters only in such product liability cases. Sharyland Water Supply Corp. v. City of Alton, 354 S.W.3d 407, 415 (Tex. 2011). In such cases, recovery is generally limited to remedies grounded in contract (such as warranty claims or contract-based statutory remedies), rather than tort. Signal Oil & Gas Co. v. Universal Oil Prods., 572 S.W.2d 320 (Tex. 1978) (where only the product itself is damaged, such damage constitutes economic loss recoverable only as damages for breach of an implied warranty under the Business and Commerce Code). Usually, written or implied warranty claims are the only recourse in such situations, although an implied warranty claim could sound in either contract or tort depending on the damages alleged. JCW Elecs., Inc. v. Garza, 257 S.W.3d 701 (Tex. 2008). Injury to the defective product itself is an “economic loss” governed by the Uniform Commercial Code. Mid Continent Aircraft Corp. v. Curry Cnty. Spraying Serv. Inc., 572 S.W.2d 308 (Tex. 1978) (distinguished cases involving personal injury or damage to property other than the product itself, noting that those damages could be recovered under strict liability theories). Where a defective product causes damages to the product itself and to surrounding property, the damages to the product itself can be recovered in tort along with the damage to the surrounding property. Signal Oil and Gas Co. v. Universal Oil Products, 572 S.W.2d 320 (Tex. 1978).
Failure to Perform Contract. In recent years, Texas expanded the ELD to prohibit tort claims when economic damages result from the failure to perform a contract properly, even where there is no contractual privity between the parties. Schambacher v. R.E.I. Elec., Inc., 2010 WL 3075703 (Tex. App. 2010). Unfortunately, this harsh rule often left many plaintiffs without a remedy when a subcontractor’s negligence causes economic damages. Where there is a negligent failure to perform a contract and the plaintiff seeks damages for breach of a duty created under contract, as opposed to a duty imposed by law, tort damages are unavailable as a result of the ELD. Southwestern Bell Telephone Co. v. DeLanney, 809 S.W.2d 493 (Tex. 1991). The ELD does not prohibit recovery for damage to property falling outside the scope of a subcontract, but within the scope of the overall contract. Munters Euroform GMBH v. American Nat’l Power, Inc., 2009 WL 2837643 (Tex. Civ. App. – Austin, 2009). It does not limit recovery from a subcontractor to the subject of a subcontract when the subcontractor’s actions or product damages property beyond the scope of the subcontract. Id.
Exception. An exception to the ELD exists when there is a fraudulent inducement, even if the plaintiff suffers only economic damages to the subject of the contract. Formosa Plastics Corp. USA v. Presidio Eng’rs & Contractors, Inc., 960 S.W.2d 41 (Tex. 1998). The ELD also applies when losses from an occurrence arise from failure of a product and the damage or loss is limited to the product itself. Equistar Chemicals, L.P. v. Dresser–Rand Co., 240 S.W.3d 864 (Tex. 2007). Texas has clarified that although many courts have stated in overly broad terms that the ELD means that “purely economic losses cannot be recovered in tort”, such broad statements are not accurate. Sharyland Water Supply Corp., supra.
Chapman Custom Homes, Inc. v. Dallas Plumbing Co. While the ELD generally precludes recovery in tort for economic losses resulting from a party’s failure to perform under a contract when the harm consists only of the economic loss of a contractual expectancy, it does not bar all tort claims arising out of a contractual setting. In Chapman Custom Homes, Inc., a builder contracted with a plumber to install the plumbing system in a house during the original construction. The homeowner and builder later sued the plumber and asserted breach of contract claims arising from extensive damages caused by plumbing leaks. The trial court granted summary judgment (1) in favor of the plumber on the builder’s breach of contract claims because the builder was not the property owner and did not suffer compensable damages, and (2) in favor of plumber on the homeowner’s breach of contract claim because the homeowner was not a party to the plumbing subcontract, and (3) in favor of the plumber on the homeowner’s negligence claim because the homeowner’s pleadings alleged only breach of contract. The Court of Appeals affirmed, stating that the homeowner’s tort claims were barred by the ELD because the homeowner’s property damage was “a mere economic loss arising from the subject matter of the plumbing subcontract.” In reversing the Court of Appeals, the Supreme Court held that the ELD does not bar a homeowner’s negligence claims against a subcontractor because the subcontractor owes an independent duty to the homeowner if any damages caused by the subcontractor’s breach of that independent duty “extend beyond the economic loss of any anticipated benefit under the subcontract.” Id. The Court based its opinion on a long-standing common law duty to perform a contract with due care. Montgomery Ward & Co. v. Scharrenbock, 204 S.W.2d 508 (Tex. 1947). This duty supports a claim in tort, in contract, or both. Therefore, a defendant cannot avoid tort liability to the world simply by entering into a contract with one party. If it could, the ELD consumes all claims between contractual and commercial strangers. Sharyland Water Supply Corp., supra. After Chapman Custom Homes, Inc., a plaintiff can recover in tort where the defendant breaches a duty which is independent of the contractual undertaking and the harm suffered is not merely the economic loss of a contractual benefit. The Supreme Court held that the plumber’s duty not to flood or otherwise damage the house is independent of any obligation undertaken in its plumbing contract with the builder, and the damages flowing from a breach of that duty extend beyond the economic loss of any anticipated benefit under the contract itself.
If you should have any questions regarding this article or subrogation in general, please contact Gary Wickert at [email protected].