August 22, 2014
Texas Supreme Court Limits the “Economic Loss Rule” Against Contractor
In a victory for homeowners against unscrupulous subcontractors, on August 22, 2014, the Texas Supreme Court limited the “economic loss rule” in a case where a subcontractor tried to escape liability by claiming the rule precluded a suit in tort for the subcontractor’s negligence. The economic loss rule refers to “a common law rule limiting a contracting party to contractual remedies for the recovery of economic losses unaccompanied by physical injury to persons or other party.” However, the decision in Chapman Custom Homes v. Dallas Plumbing Co. is helpful to homeowners for the reason it allows plaintiffs to recover when their claim against a subcontractor “states a tort claim when the duty allegedly breached is independent of the contractual undertaking and the harm suffered is not merely the economic loss of a contractual benefit.” Whether parties can bring tort actions are particularly important when no contractual relationship between the plaintiff and the defendant exists.
Background of the Case
Chapman Custom Homes (“Chapman”), a general contractor, hired Dallas Plumbing Company (“Dallas Plumbing”) as a subcontractor on one of its projects, a new home construction in Frisco, Texas. After completion, plumbing leaks allegedly flooded the new structure causing significant water damage. Chapman and the property owner sued Dallas Plumbing for damages, alleging breach of contract, breach of warranty, and negligence. The homeowners alleged that Dallas Plumbing negligently failed to properly join the water system to the hot water heaters, and that this failure was a proximate cause of the water damage to the newly constructed home.
Dallas Plumbing denied liability and filed a motion for summary judgment, which the trial court granted. The trial court held (i) the property owner had no breach-of-contract claim because it was not a party to the plumbing subcontract, and (ii) the “economic loss rule” barred the owner’s claim for negligence because its petition effectively “asserted only breach of contractual duties.” The court of appeals affirmed the trial court ruling, but the Texas Supreme Court reversed.
The Supreme Court of Texas
Looking back to a case from 1947, the Texas Supreme Court in Chapman reversed the trial court and the court of appeals. The Court found that, even though Dallas Plumbing and the property owner did not have a contractual relationship, Dallas Plumbing could be liable to the homeowner for negligence.
The Court stated that the economic loss rule “does not bar all tort claims arising out of a contractual setting,” with respect to third parties. Instead, “the plumber assumed an implied duty not to flood or otherwise damage the house while performing its contract with the builder.” Essentially, the Supreme Court recognized a common law duty of a plumber to perform its services with the care and skill required to complete its work and that the failure to meet this implied standard could provide a basis for recovery in tort, contract, or both under appropriate circumstances. When the plumber breached that duty and damaged the house, it became liable for damages. Therefore, Dallas Plumbing still had an implied duty to perform the contract with both care and skill and the homeowner and the builder had a valid tort claim against the plumber.
So–where are we now?
Chapman v. Dallas Plumbing provides a framework for a homeowner to recover against a subcontractor, despite only having a contractual relationship with the general contractor. While a property owner may not have standing to file a breach of contract claim against a subcontractor with whom they do not have a contractual relationship, the Court’s ruling shows that a property owner may have a negligence claim. Importantly, this potential liability is independent of any contract with the subcontractor.
Finally, the Court restated the limits of the economic loss rule. A party may state a tort claim if: (1) the party alleges that a duty that is independent of the contractual duties has been breached; and (2) the harm suffered by the party is not merely economic loss of the contractual benefit. If the duty is independent of the contract, and a breach of that duty is the cause of physical or economic loss beyond that of the contractual benefit, then the breaching party may be liable for the economic loss in tort.
If you have questions about this decision, feel free to contact me: @LaScalea