Lead Opinion
SUBSTITUTE MAJORITY OPINION
We overrule the motion for rehearing, withdraw our opinion dated February 2, 2012, and issue the following substitute opinion.
Nicolas Barzoukas sued Foundation Design, Ltd. and engineer Larry Smith for damages in connection with alleged defects in the foundation of Barzoukas’s house. The trial court granted a no-evidence summary judgment on all claims asserted against Foundation Design and Smith. We affirm in part and reverse and remand in part.
Background
Heights Development, Ltd. contracted with Barzoukas in September 2005 to build a house for him. Barzoukas sued Heights Development, Foundation Design, Smith, and numerous other defendants who participated in the construction of his house, contending that it is riddled with problems. Smith is the engineer of record for the house’s foundation design.
The plans and specifications originally called for 15-foot piers to support the foundation. After construction began, Smith signed a letter addressed to Heights Development changing the plans and specifications to allow for 12-foot piers — supposedly because “hard clay stone was encountered” while drilling holes for the piers. Barzoukas says the given justification for shallower piers was false and Smith knew or should have known it was false. According to Barzoukas, general contractor Heights Development used this letter to persuade the City of Houston to allow continuation of construction after an inspector initially rejected the foundation because the piers were too shallow. Bar-zoukas asserts that the city has never approved the house’s foundation. Barzou-kas’s expert engineer opines that Smith violated the professional standard of care by approving the pier depth change.
Expert reports indicate that the piers are deficient because they are too shallow;
Barzoukas eventually settled with all defendants except for Foundation Design, Smith, and another defendant who filed for bankruptcy. As to Foundation Design and Smith, Barzoukas asserted claims for negligence, negligent misrepresentation, fraud, fraudulent inducement, conspiracy, and exemplary damages in connection with the foundation.
Foundation Design and Smith filed a no-evidence motion for summary judgment on all claims asserted against them. The trial court granted the motion without specifying the basis for its ruling. The court later granted Barzoukas’s motion to sever his claims against Foundation Design and Smith. Barzoukas now appeals and contends that summary judgment is not warranted.
Standard of Review
In a no-evidence motion for summary judgment, the movant must specifically identify the elements for which there is no evidence. Walker v. Thomasson Lumber Co.,
We review a summary judgment de novo and must take as true all evidence favorable to the nonmovant and draw every reasonable inference and resolve all doubts in favor of the nonmovant. Valence Operating Co. v. Dorsett,
Analysis
In a single issue, Barzoukas contends that the trial court erred by granting summary judgment in favor of Foundation Design and Smith.
The parties’ appellate briefing focuses primarily on whether Barzoukas’s negligence and negligent misrepresentation claims are foreclosed under the economic loss rule. In addition to their reliance on the economic loss rule as a bar to recovery, Foundation Design and Smith contend that summary judgment is warranted because Barzoukas failed to proffer competent evidence establishing that their conduct proximately caused damages. Foundation Design and Smith also contend that Smith’s letter does not give rise to viable claims for fraud and fraudulent inducement. We address these contentions in turn.
I. Economic Loss Rule
A. Overview
Applying the economic loss rule in this case presents two challenges.
The second challenge arises because the relevant summary judgment pleadings in this record include neither (1) the contract between homeowner Barzoukas and general contractor Heights Development; nor (2) the purported subcontract between Heights Development and engineer Smith — or, possibly, between Heights Development and Foundation Design or some other entity related in some way to Smith. A portion of what appears to be the Bar-zoukas-Heights Development contract appears elsewhere in the record.
The difficulty is compounded by an awkward procedural posture. This case presents as an appeal from an order granting a no-evidence motion for summary judgment. Texas Rule of Civil Procedure 166a(i) authorizes summary judgment when “there is no evidence of one or more essential elements of a claim or defense on which an adverse party would have the burden of proof at trial.” Tex.R. Civ. P. 166a(i). Such a motion “must state the elements as to which there is no evidence” and the trial court must grant the motion “unless the respondent produces summary judgment evidence raising a genuine issue of material fact.” Id.
Significant hammering and bending is required to fit the appellate argument of Foundation Design and Smith — which invokes the economic loss rule in asserting that “as a matter of law no cause of action for negligence or negligent representation runs in favor of appellant with respect to appellees as subcontractors” — within Rule 166a(i). Determining whether “the moving party is entitled to judgment as a matter of law on the issues expressly set out in the motion” is an inquiry under Rule 166a(c)’s traditional summary judgment standard, with its attendant burdens on the movant. See Tex.R. Civ. P. 166a(c); see also KPMG Peat Marwick v. Harrison Cnty. Hous. Fin. Corp.,
Proper placement of the summary judgment burden helps to determine how gaps in evidence regarding the Barzoukas-Heights Development contract and the purported subcontract affect the analysis on appeal. But no argument regarding the operative summary judgment standard has been raised in the trial court or on appeal. Therefore, despite an imperfect fit between the arguments on appeal and the summary judgment mechanism the ap-pellees invoked in the trial court, the eco
Although areas of uncertainty exist under case law addressing the economic loss rule in Texas, at least one thing is clear: Details matter.
It matters who contracted with whom to do what. It matters what the contracts say; what they cover; and what they do not cover. It matters what kind of damages are requested. It matters whether the requested damages are attributed to activities covered by the contracts. It matters whether and how multiple parties in a chain of contracts allocated among themselves the risk that participants in the chain would perform deficiently, along with the obligation to pay for deficient performance. It matters what kinds of claims are asserted and against whom they are asserted.
The details are largely missing here. The parties agree that a contract existed between Barzoukas and Heights Development regarding the construction of Bar-zoukas’s house. They agree that a subcontract existed in relation to the house’s foundation. They also agree that Heights Development was a party to the purported subcontract, and Barzoukas was not. Much of the rest is guesswork.
This is the backdrop against which we must analyze the economic loss rule’s potential applicability when Barzoukas attempts to sue an engineer for professional negligence and negligent misrepresentation in connection with foundation problems in the house Heights Development contracted to build for him. Barzoukas does not contend that the original plans and specifications calling for 15-foot piers are deficient. Instead, his claims rest on a letter signed by Smith after construction was underway; this letter is characterized as “an addendum to the plans and specifications” by which Smith approved reducing the foundation’s pier depth from 15 feet to 12 feet.
Determining whether the economic loss rule applies here to foreclose Barzoukas’s negligence and negligent misrepresentation claims against Foundation Design and Smith involves a two-step analysis focusing on (1) identifying the governing legal standards, and (2) applying those standards to the record in this case. We now turn to this analysis.
B. Legal Standards Governing the Economic Loss Rule in Texas
The Texas Supreme Court’s most recent discussion of the economic loss rule appears in Sharyland Water Supply Corp. v. City of Alton,
In broad terms, this doctrine addresses efforts to use negligence and product liability claims as vehicles for recovery of economic losses. See id. at 414-418. Sharyland emphasizes that shorthand references to “the” economic loss rule in the singular can be “something of a misnomer” because this term actually encompasses multiple concepts addressing efforts to recover particular economic losses in particular situations. Id. at 414-15.
Sharyland goes on to describe the circumstances under which application of the economic loss rule is settled under Texas law, and those under which it is unsettled. Id. at 415-21.
• The economic loss rule forecloses strict liability claims based on a defective product that damages only itself but not other property. Id. at *6 [415-17] (citing Signal Oil & Gas Co. v. Universal Oil Prods.,572 S.W.2d 320 , 325-26 (Tex.1978); Mid Continent Aircraft Corp. v. Curry Cnty. Spraying Serv., Inc.,572 S.W.2d 308 , 312-13 (Tex.1978); and Nobility*835 Homes of Tex., Inc. v. Shivers,557 S.W.2d 77 , 81-2 (Tex.1977)).
• The economic loss rule also forecloses a negligence claim predicated on a duty created under a contract to which the plaintiff is a party when tort damages are sought for an injury consisting only of economic loss to the subject of the contract. Sharyland, [854 S.W.3d at 417-18 ]2011 WL 5042023 at *7 (citing Sw. Bell Tel. Co. v. DeLanney,809 S.W.2d 493 , 495 (Tex.1991); and Jim Walter Homes, Inc. v. Reed,711 S.W.2d 617 , 618 (Tex.1986)).
• In these two contexts, economic losses are more appropriately addressed through statutory warranty actions or common law breach of contract suits instead of tort claims. Sharyland, [354 S.W.3d at 417-18 ]2011 WL 5042023 at *7.
• “We ... declined to extend DeLanney to a fraudulent inducement claim, even when the claimant suffered only economic losses to the subject of a contract.” Id. (citing Formosa Plastics Corp. USA v. Presidio Eng’rs & Contractors, Inc.,960 S.W.2d 41 , 46 (Tex.1998)).
• The economic loss rule “ ‘applies when losses from an occurrence arise from failure of a product and the damage or loss is limited to the product itself.’ ” Sharyland, [354 S.W.3d at 417-18 ]2011 WL 5042023 at *7 (quoting Equistar Chems., L.P. v. Dresser-Rand Co.,240 S.W.3d 864 , 867 (Tex.2007)).
• The economic loss rule applies in some circumstances involving parties who are not in privity — such as those involving a remote manufacturer and a consumer in the defective product context. Sharyland, [354 S.W.3d at 417-18 ]2011 WL 5042023 at *7.
• “[W]e have never held that [the economic loss rule] ... precludes recovery completely between contractual strangers in a case not involving a defective product....” Id.
• The supreme court rejects a formulation of the economic loss rule that “says you can never recover economic damages for a tort claim.” Id. at *8 [418].
• The economic loss rule is not a general rule of tort law; instead, it is a rule in negligence and strict product liability cases. Id.
• Merely because the object of the negligent performance “was the subject of a contract does not mean that a contractual stranger is necessarily barred from suing a contracting party for breach of an independent duty.” Id. “If that were the case, a party could avoid tort liability to the world simply by entering into a contract with one party.” Id.
• “The economic loss rule does not swallow all claims between contractual and commercial strangers.” Id.
• The supreme court has not yet decided “whether purely economic losses may ever be recovered in negligence or strict liability cases.” Id.
Based on these precepts, the supreme court rejected reliance on the economic loss rule to foreclose Sharyland’s claim against a plumbing contractor alleged to have damaged Sharyland’s water system by negligently installing an adjacent sewer system under a separate contract to which Sharyland was not a party. Id. at 420-21.
Neither Sharyland’s Water Supply Agreement with the city nor the city’s separate contract with a plumbing contractor defeated Sharyland’s negligence claim against the plumbing contractor. Shary-land asserted this negligence claim against the contractor seeking to recover the cost of relocating or encasing its water lines to prevent contamination from the improper
In so holding, the supreme court disclaimed any intent to address circumstances in construction cases involving “parties in a contractual chain who have had the opportunity to allocate risk, unlike the situation faced by Sharyland.” Id. “While it is impossible to analyze all the situations in which an economic loss rule may apply, it does not govern here.” Id. “The rule cannot apply to parties without even remote contractual privity, merely because one of those parties had a construction contract with a third party, and when the contracting party causes a loss unrelated to its contract.” Id.
With the partial guidance provided in Sharyland, this court must determine whether to accept Foundation Design’s and Smith’s invitation and hold that the economic loss rule forecloses Barzoukas’s negligence and negligent misrepresentation claims predicated on the letter signed by Smith.
C. Applying the Economic Loss Rule
Foundation Design and Smith assert that “economic losses alleged by homeowners falling within the subject matter of their contract with the homebuilder preclude tort claims, including negligence and negligent misrepresentation, against subcontractors under the economic loss doctrine.” They rely heavily on Pugh v. Gen. Terrazzo Supplies, Inc., 243 S.W.3d 84 (Tex.App.-Houston [1st Dist.] 2007, pet. denied), to support this proposition.
Foundation Design and Smith also contend that Barzoukas’s negligence and negligent misrepresentation claims involve parties in a contractual chain who already have allocated the risk of deficient performance. They assert that applying the economic loss rule here is necessary to preserve the agreed-upon risk allocations among the parties who built Barzoukas’s house.
The arguments proffered by Foundation Design and Smith fail for two reasons.
First, Foundation Design and Smith misplace their reliance on Pugh. That case addressed claims for negligence, strict liability, and breach of implied warranties brought by homeowners against General Terrazzo, the manufacturer of an “exterior insulated finishing system” used in constructing their house. Pugh,
Pugh addressed only claims asserted against the product manufacturer. The homeowners dismissed their claims against the masonry subcontractor who applied the exterior finish manufactured by General Terrazzo. Id. at 87 n. 2. They obtained a default judgment against the general contractor. Id. Neither the general contractor nor the masonry subcontractor was a party to the appeal. Id.
As this procedural history makes clear, Pugh applied existing economic loss rule principles governing negligence and strict liability claims by consumers against the remote manufacturer of a defective product. Id. at 90-95; see also Sharyland Water Supply Corp.,
In contrast to Pugh, Barzoukas does not aim his negligence and negligent misrepresentation claims at the remote manufacturer of an allegedly defective product. Bar-zoukas’s claims involve Smith’s asserted professional negligence in connection with approval of foundation piers that are shorter than the depth called for by the original plans and specifications. Thus, we must address a different question that was left open in Sharyland by addressing whether — in the particular home construction circumstances presented here — the economic loss rule “precludes recovery completely between contractual strangers in a case not involving a defective product....” See Sharyland Water Supply Corp.,
Second, Foundation Design’s and Smith’s arguments fail because they rely on unwarranted assumptions. Foundation Design and Smith assume the existence of (1) a contractual chain that begins with Barzoukas and ends with Smith; and (2) risk allocations within this chain that need protection from the disruptive effects of a freestanding negligence claim by the homeowner against a subcontractor. Neither assumption is warranted on this record.
The first assumption is unwarranted because it is not clear who contracted with whom to do what. Heights Development contracted to build a house for Barzoukas. Smith is portrayed as a subcontractor, but his exact role is not clear on this record.
The most detailed evidence concerning Smith’s role comes from the Affidavit of Kirby Meyer, P.E., who states: “Larry F. Smith, a Professional Engineer, State of Texas License # 43095 is the engineer of record for the design of the foundation of this structure.” The affidavit also states: “It’s my understanding that Larry Smith may have done such work individually or under different entities.” Plaintiffs Seventh Amended Petition filed on April 15, 2010 lists the following as defendants: Foundation Design, LTD d/b/a Larry Smith Engineering; Larry Smith Engineering a/k/a Larry Smith, PC, a Texas professional corporation; Larry Smith, PC, a Texas professional corporation; and Larry Smith individually. The letter itself is typed on letterhead reading “Larry Smith Engineering” and is signed by Larry F. Smith above a signature block that reads, “Larry F. Smith, P.E. Registered Professional Engineer.” The letter does not reference “Foundation Design, Ltd.”
This evidence falls short of establishing that Barzoukas’s claims against Foundation Design and Smith are foreclosed “as a matter of law” because those claims are subsumed by a contractual chain in which the risk of Smith’s deficient performance already has been addressed. We do not know from the four corners of the summary judgment pleadings how the Heights Development-Barzoukas contract addressed changes to plans and specifications once construction had begun. The existence, terms and scope of any subcontract involving the foundation design are unresolved on this record. So too is the identity of the parties to the purported subcontract. Also unresolved is whether the asserted subcontract encompasses Smith’s post-design conduct in approving a change in pier depth after construction was underway.
The second assumption is unwarranted as well. Perhaps Smith or an entity relat
Mindful that this case comes to us as an appeal from an order granting a no-evidence summary judgment under Rule 166a(i), we conclude that reversal is warranted because Meyer’s affidavit and Smith’s letter raise material fact issues with respect to the mechanism for and effect of design changes during construction under the Heights Development-B ar-zoukas contract; the identities of the parties to any subcontract concerning the foundation; the scope of work to be performed under such a subcontract; whether the piers are 12 feet deep; whether Smith’s approval of changing the pier depth from 15 feet to 12 feet was within the scope of any subcontract concerning the foundation; and whether changing the pier depth caused a loss unrelated to a subcontract covering foundation plans and specifications. See Sharyland Water Supply Corp.,
Pointing to the existence of a conti'act between Heights Development and Bar-zoukas, or to the existence of a subcontract, is the beginning of the analysis — not the end.
Sharyland demonstrates that the mere presence of contracts in the general vicinity of a construction dispute does not justify indiscriminate invocation of the economic loss rule. See Sharyland Water Supply Corp.,
On this record, Foundation Design and Smith cannot obtain summary judgment on grounds that the economic loss rule forecloses Barzoukas’s negligence and negligent misrepresentation claims against them “as a matter of law.”
II. Causation and Damages
As alternative grounds for affirmance, Foundation Design and Smith argue that summary judgment on negligence and negligent misrepresentation is warranted because Barzoukas failed to proffer competent evidence establishing causation and damages in connection with the foundation.
Foundation Design and Smith objected to Barzoukas’s evidence on these grounds in the trial court. These objections are contained in “Defendants Foundation Design, Ltd. d/b/a Larry Smith Engineering and Larry Smith’s Reply to Plaintiffs Response to Defendants’ No Evidence Motion for Summary Judgment” filed on May 4, 2010. The record contains no indication that the trial court ruled on these objections. The summary judgment order itself does not address evidentiary objections.
We do not presume that an order granting summary judgment also overrules objections to summary judgment evidence. Seidner v. Citibank (S.D.) N.A.,
Roy’s report states that “[t]he damages in this case are primarily based upon the complaints made in the Givens Report dated April 20, 2007 and the construction defects that have been identified in the case records.” The Givens Report states that “the off grade concrete pier and wood beams foundation is found to have experienced differential movement of concern as evident by the significant unevenness in the floor elevation.” It also states that “[a] number of the concrete piers are tilted out of plumb to an excess amount.” The Givens Report further states that “[t] ilting of foundation support piers can be caused by a number of conditions” including “inadequate consideration for the design of the piers....”
Roy goes on to state as follows in his report:
The foundation suffers from several factors. The first is the fact that several of the drilled piers are not intal[l]ed vertical as designed. Also the piers were drilled 12 feet deep instead of the 15 feet required by the design. Finally the framing I-beams placed above the drilled piers do not make proper contact with all of the piers because some of the piers are not located where they were designed to be.
I have estimated what it would cost to repair the foundation problems, if in fact the foundation can ever be brought up to its designed capacity. The repair would require the placement of approximately 10 new piers and the added frame work to connect the new piers to the existing foundation. I estimate that this work could be done for about $25,000.00
We reject Foundation Design’s and Smith’s contention that Roy’s expert damage evidence is conclusory with respect to necessary foundation repairs. Roy’s estimate adequately links the stated cost to the installation of additional piers to address differential movement attributed to interrelated foundation problems.
III. Fraud and Fraudulent Inducement
Barzoukas contends that the trial court erred by granting summary judgment on his fraud and fraudulent-inducement claims because he presented evidence raising a fact issue on each element of these claims.
When pursuing claims for fraud and fraudulent inducement, a plaintiff must establish that the defendant made a material misrepresentation. See Amouri v. Sw. Toyota, Inc.,
The letter, which was addressed only to Heights Development, contains the following statements:
At your request, an engineer from our firm has reviewed the information provided regarding the pier drilling operations at the above referenced residence. A representative of your firm notified us that during the drilling operations, clay was encountered. The foundation design (see LSE Job Number 2005-1038) specifies the piers to be 12" in diameter, to extend 15 feet below grade and to be reinforced with one # 5 bar. We were notified that hard clay stone was encountered at approximately 12'-0". Due to the presence of hard clay stone, the pier depth shallowed to 12'-0" with the reinforcement remaining at one # 5 bar. This letter is to serve as an addendum to the plans and specifications with the changes noted above. If any pier holes cave, due to the presence of the clay, our office should be contacted for further recommendation.
We trust this is the information, which you require. If you have any questions regarding this, please feel free to contact us.
Barzoukas argues that Smith, as the foundation engineer for the project, was presenting the information in the letter as fact because he was authorizing a material reduction in pier depth. Barzoukas also contends that the letter was used by Heights Development to obtain city approval for the pier reduction.
Regardless of whether Smith intended that this letter would be submitted to the city, nothing in the letter supports an inference that Smith represented hard clay stone was discovered at twelve feet. Smith merely acknowledged that Heights Development made such a representation, and Smith approved a shallower pier depth based on this information. Barzoukas did not present evidence supporting an inference that Smith or Foundation Design made a purposeful misrepresentation. Accordingly, the trial court did not err by granting summary judgment in favor of Smith and Foundation Design on Barzou-kas’s fraud and fraudulent inducement claims. We overrule the portion of Bar-zoukas’s sole issue as it pertains to his claims for fraud and fraudulent inducement.
Conclusion
We affirm the trial court’s summary judgment with respect to fraud, fraudulent inducement, conspiracy, and exemplary damages. We reverse the trial court’s summary judgment with respect to negligence and negligent misrepresentation, and remand for proceedings consistent with this opinion.
SEYMORE, J. concurring and dissenting.
Notes
. Barzoukas does not challenge the portion of the trial court's judgment pertaining to his claims for conspiracy and exemplary damages. Thus, we affirm the judgment to the extent it pertains to those claims.
. A portion of a "New Home Contract” identifying Heights Development as the "Seller” and Barzoukas as the "Buyer” was attached to Plaintiff’s Response to Heights Defendants’ Motion for Summary Judgment as to the Measure of Damages. This is identified as a form contract "Promulgated By The Texas Real Estate Commission” and bears the name "Karen Derr & Associates Realty" across the top. This copy is not signed by Barzoukas or a representative of Heights Development, although it appears to have Barzoukas’s initials at the bottom of pages one through seven. Paragraph 7.B. of this document is entitled "Construction Documents” and states: "Seller shall complete all improvements to the Property with due diligence in accordance with the Construction Documents.” In turn, the "Construction Documents" are defined to include plans, specifications, and change orders; the document recites that the "Construction Documents have been signed by the parties and are incorporated into this contract by reference." The "Construction Documents” themselves do not appear in the record.
. Appellees contend on rehearing that this holding with respect to objections to the reliability of an expert opinion conflicts with Praytor v. Ford Motor Co.,
Concurrence Opinion
concurring and dissenting.
I withdraw my concurring and dissenting opinion dated February 2, 2012 and issue this substitute concurring and dissenting opinion.
I concur with the majority’s holding that the record contains no evidence raising a fact issue regarding Barzoukas’s claims for fraud and fraudulent inducement. However, I respectfully dissent from the majori
I.Background
In September 2005, Barzoukas contracted with Heights Development, Ltd. (“HDL”) to build a residential house in Harris County, Texas. Barzoukas specified that the house must be built on a pier- and-beam foundation. HDL retained Smith to design the foundation.
According to Barzoukas, Smith instructed the contractor to set the piers twelve feet below grade without informing Bar-zoukas. After the City of Houston refused to approve the house because of the pier reduction, Smith and HDL asserted that hard clay stone was discovered at twelve feet, preventing further drilling. Barzou-kas claims the reduced piers rendered the foundation unstable and caused systemic damages to his house.
Barzoukas filed suit against HDL, Smith, and various other participants.
II. Standard of Review
In a single issue, Barzoukas contends the trial court erred by granting summary judgment in favor of Smith on Barzoukas’s claims for negligence, negligent misrepresentation, fraud, and fraudulent inducement.
In a no-evidence motion for summary judgment, the movant represents that there is no evidence of one or more essential elements of the claims for which the nonmovant bears the burden of proof at trial. Tex.R. Civ. P. 166a(i); Timpte Indus., Inc. v. Gish,
An appellate court reviews a summary judgment de novo and must take as true all evidence favorable to the nonmovant and draw every reasonable inference and resolve all doubts in favor of the nonmov-ant. Valence Operating Co. v. Dorsett,
III. Negligence and Negligent Misrepresentation
Barzoukas argues that the trial court erred by granting summary judgment in favor of appellees on Barzoukas’s claims for negligence and negligent misrepresentation.
In their motion for summary judgment, appellees argued that the economic loss rule precluded Barzoukas from raising a fact issue regarding the duty and breach elements of his negligence claims and also generally argued as follows: “Barzoukas has no evidence of any of the essential elements listed above which are necessary to support such a claim of negligence, including without limitation no evidence of any duty or standard of care owed, breach of that duty, breach of that standard of care, economic damages to Barzoukas from that negligence, or proximate cause between the purported negligence and damages.” Consequently, it was Barzoukas’s burden as the nonmovant to present evidence raising a genuine issue of fact as to each of these elements. Tamez,
As an initial matter, I would conclude the trial court properly granted summary judgment relative to Barzoukas’s negligence claims against Foundation Design. Although appellees challenged each negligence element in their no-evidence motion for summary judgment, Foundation Design is not referenced in any of the reports, letters, or other documents attached to Barzoukas’s response. Thus, Barzoukas did not present evidence raising a fact issue regarding his negligence claims against Foundation Design. See Tamez,
I next consider whether Barzoukas’s negligence claims against Smith are barred under the economic loss rule.
A. Economic Loss Rule
When a party breaches a contract and the only damage allegation amounts to economic loss to the subject matter of the contract, the action sounds solely in contract. Jim Walter Homes, Inc. v. Reed,
B. Analysis
It is undisputed Barzoukas contracted with HDL to build a house, and HDL subcontracted with Smith to design the foundation.
Goose Creek Independent School District contracted with Lewis to construct three schools. Id. at 491. Lewis then subcontracted with Jarrar’s Plumbing to install plumbing. Id. After the schools were occupied, plumbing defects were discovered. Id. The school district sued Lewis and later sued Jarrar’s Plumbing for various causes of actions including negligence. Id. 491-92. The school district alleged that Jarrar’s Plumbing’s negligence caused “the invasion of raw sewage and sewer gas into the school buildings, ... causing] portions of the buildings to be unusable at times.” Id. at 495. The jury concluded Jarrar’s Plumbing was negligent and awarded the school district damages for cost of repairs and loss of use. Id. at 492. The trial court denied Jarrar’s Plumbing’s motion for judgment notwithstanding the verdict based on an argument that the school district’s negligence claim was barred under the economic loss rule. Id. at 493-94.
Acknowledging there was no contract between the school district and Jarrar’s Plumbing, the court of appeals concluded the school district’s negligence claim was not barred by the economic loss rule because it was “based on a breach of Jarrar’s Plumbing’s duty to all persons to use reasonable care not to injure persons or property in the performance of the contract.” Id. at 494. The court further reasoned:
The acts [the school district] alleged may also have breached Jarrar’s Plumbing’s contract with Lewis. However, the injury [the school district] alleged, the invasion of sewage and sewer gas into the school buildings, constitutes an injury to property that was not the subject matter of the contract, that portion of the contract [the school district] had with Lewis for which Lewis contracted with Jarrar’s Plumbing, namely the plumbing. Therefore, the injury alleged did not constitute pure economic loss for which [the school district] could recover only in contract.
Id. at 495; see Thomson v. Espey Huston & Assocs. Inc.,
Relying on Goose Creek, Barzoukas argues that the economic loss rule is inapplicable because the damages caused to his house were beyond the scope of HDL’s foundation-design subcontract with Smith. Contrarily, Smith argues that the economic loss rule applies because the damages to Barzoukas’s house are within the scope of Barzoukas’s contract with HDL. Smith relies on the First Court of Appeals’s opinion in Pugh v. General Terrazzo Supplies, Inc.,
The Pughs contracted with Westbrook to build their house. Id. at 86. West-brook subcontracted with RBS to apply veneer on the house. Id. General Terrazzo manufactured the veneer, instructed RBS regarding veneer application, and inspected RBS’s work. Id. The Pughs later complained that the veneer had been improperly applied, causing moisture penetration and damage to the wood structure of the house and hardwood flooring. Id. at 86-87. Among other claims, the Pughs sued General Terrazzo for negligence (supplying incompatible, improperly manufactured veneer, and failing to supervise application and inspect completed work) and products liability (marketing without adequate instructions). Id. at 87. In its motion for summary judgment, General Terrazzo argued the Pughs’ negligence claims were barred under the economic loss rule. Id. The Pughs responded that the doctrine was inapplicable because they sought damages beyond the scope of General Terrazzo’s duties. Id. The trial court granted General Terrazzo’s motion. Id. at 88-89.
The court of appeals acknowledged that courts have applied the economic loss rule in two contexts: (1) “to preclude tort claims brought to recover economic losses when those losses are the subject matter of a contract”; and (2) “to preclude tort claims brought to recover economic losses against the manufacturer or seller of a defective product where the defect damages only the product and does not cause ‘personal injury’ or damage to ‘other property.’” Id. at 90-91 (citations omitted). The court determined that both contexts applied to the Pughs’ claims. Id. at 93-94. In regard to the first context, the court noted that the economic loss rule “has been applied to preclude tort claims between parties who are not in privity.” Id. at 91. The court determined that the rule applied to bar the Pughs’ claims, in part because their damages were limited to the house. Id. at 94. The court explained, “[A]lthough the Pughs were not in privity with General Terrazzo, their economic losses were the subject matter of their contract with Westbrook, and the Pughs have already obtained a judgment against Westbrook for their economic losses to their home.” Id. at 94.
Barzoukas contends Pugh is inapplicable because that court was addressing a products-liability claim, whereas Barzoukas’s claims are based on general negligence. Although the products-liability aspect of Pugh distinguishes it from the present case, I reiterate that the court’s conclusion was based partially on the fact that the damages caused by misapplication of the veneer involved the Pughs’ house, which
Admittedly, the court in Goose Creek focused on the subject matter of the contract between the general contractor and the subcontractor — plumbing—and concluded the economic loss rule did not apply because the plaintiffs damages extended beyond plumbing.
I am persuaded to apply the Pugh court’s rationale in order to preserve the risk allocations existing among the various parties involved in a construction project.
[Construction projects are multi-party transactions, but rarely is it the case that all or most of the parties involved in the project will be parties to the same document or documents. In fact, most construction transactions are documented in a series of two-party contracts, such as owner/architect, owner/contractor, and contractor/subcontractor. Nevertheless, the conduct of most construction projects contemplates a complex set of interrelationships, and respective rights and obligations.
Fundamentals of Construction Law 4-5 (Carina Y. Enhada et al., eds., 2001).
Barzoukas responds that concerns about risk allocations are moot in this situation because HDL and Smith acted in complicity. Specifically, Barzoukas contends HDL has no cognizable claim for breach of contract against Smith because they acted in concert to lower the pier depth. I would not create such an exception to the economic loss rule. Admittedly, by ratifying a subcontractor’s negligence, a general contractor might waive its right to sue the subcontractor for breach of contract. However, this concept affects only the risk allocation between the contractor and the subcontractor; the risk allocation between the property owner and the general contractor remains the same, i.e., the owner’s recourse is against the general contractor, regardless of whether the general contractor has a cognizable breach-of-contract claim against the subcontractor. I recognize there may be situations in which an owner is unable to recover fully against the general contractor. Nevertheless, “[ijmplicit in the [economic loss rule] is the policy judgment that in a commercial context the possibility of an inadequate recovery ... does not justify permitting a tort recovery that will allow a purchaser to ... disrupt[ ] the risk allocations that have been worked out in the transaction comprising that chain.” Hou-Tex, Inc.,
Several other sister state jurisdictions have concluded that the economic loss rule bars negligence claims against subcontractors in construction cases. For example, Sensenbrenner v. Rust, Orling & Neale, Architects, Inc., involved facts very similar to those of the present case.
The plaintiffs here allege nothing more than disappointed economic expectations. They contracted with a builder for the purchase of a package. The package included land, design services, and construction of a dwelling. The package also included a foundation for the dwelling, a pool, and a pool enclosure. The package is alleged to have been defective — one or more of its component parts was sufficiently substandard as to cause damage to other parts. The effect of the failure of the substandard parts to meet the bargained-for level of quality was to cause a diminution in the value of the whole, measured by the cost of repair. This is a purely economic loss, for which the law of contracts provides the sole remedy.
Recovery in tort is available only when there is a breach of a duty “to take care for the safety of the person or property of another.” ... [The subcontractors] assumed no such duty to the plaintiffs by contract, and the plaintiffs’ complaint alleges no facts showing a breach of any such duty imposed by law.
Id. at 58.
As an another example, in Indianapolis-Marion County Public Library v. Charlier Clark & Linard, P.C., a county library contracted with an architect to remodel a building, and the architect hired subcontractors to perform architectural and engineering services, including remodeling the basement-level garage of the building.
Generally, “[o]ne who undertakes to perform a contract assumes a duty to all persons to take reasonable care not to injure them or their property in the performance of that contract, and one who is not privy to the contract may assert a claim for negligence for a breach of that duty.” Wolf Hollow I, L.P. v. El Paso Marketing, L.P.,
. I would grant appellees' motion for rehearing because I believe the economic loss rule bars appellant’s negligence claims and the majority has improperly shifted the burden of proof to the parties moving for no-evidence summary judgment.
.In the "Statement of Facts” section of Bar-zoukas's appellate brief, he made the following factual recitations: (1) Barzoukas contracted with HDL to build his house; and (2) "HDL retained Larry Smith, an engineer from the Dallas area, and various entities associated with him, to design the foundation of Barzoukas's house.” Appellees did not contradict these statements. Under the Rules of Appellate Procedure, we must "accept as true the facts stated [by appellant in the "Statement of Facts” section of his brief] unless another party contradicts them.” Tex. R.App. P. 38.1(g). This rule applies on appeal from a summary judgment. See Choice v. Gibbs,
. With the exception of Smith and a defendant who filed bankruptcy, Barzoukas settled with all other defendants, including HDL.
. As the majority notes, Barzoukas does not challenge the portion of the trial court's judgment pertaining to his claims for conspiracy and exemplary damages.
. This court has previously affirmed a trial court’s order granting a no-evidence motion for summary judgment in which the movant argued there was no evidence relative to the nonmovant’s negligence claims because the economic loss rule applied. See Coastal Conduit & Ditching, Inc. v. Noram Energy Corp.,
. See footnote 1, supra.
. I acknowledge that Pugh is also factually distinct from the present case because General Terrazzo was a manufacturer, whereas Smith is a subcontractor.
. The majority concludes summary judgment was improper because the risk allocations accepted between the contracting parties are unknown. I agree that the contract between Barzoukas and HDL and the subcontract between HDL and Smith were not presented to the trial court relative to appellees’ no-evidence motion for summary judgment. However, it is conclusively established that Bar-zoukas hired HDL to construct the house, and HDL subcontracted with Smith to design the foundation. After designing the foundation, Smith sent a letter to HDL in which he made the following recitations:
At your request, an engineer from our firm has reviewed the information provided regarding the pier drilling operations at the above referenced residence [Barzoukas’s house]. A representative of your firm notified us that during the drilling operations, clay was encountered.... Due to the presence of hard clay stone, the pier depth shallowed to 12'-0".... This letter is to serve as an addendum to the plans and specifications with the changes noted above.... We trust this is the information, which you require.
Although the majority concludes it is unknown whether Smith made this addendum pursuant to the terms of his subcontract with HDL, it is obvious the addendum was made pursuant to Smith's relationship with HDL— HDL informed Smith that a pier reduction occurred, and Smith amended the design plans accordingly. Plan modifications are common in construction projects, and I can conceive of no reason why the economic loss rule should not apply when the general contractor requests a subcontracted engineer to amend his designs. Each of the parties had the opportunity and prerogative to allocate risk of loss. Accordingly, the fact that we do not know how risks were actually allocated should not preclude application of the economic loss rule.
Additionally, I would affirm the trial court's summary judgment relative to Barzoukas’s negligence claims because Barzoukas, as the nonmovant to a no-evidence motion for summary judgment, did not present evidence supporting an inference that the economic loss rule does not apply, i.e., no evidence supports a finding that Smith committed negligence outside his role as subcontractor or that Bar-zoukas sustained damages unrelated to the subject matter of the prime contract. As noted in footnote 4, supra, our court previously affirmed a trial court’s order granting a no-evidence motion in which the movant contended the nonmovant’s negligence claims were precluded by the economic loss rule. See Coastal Conduit,
. After Calloway, the Nevada Legislature enacted a statute that authorizes residential homeowners to pursue negligence claims in residential construction defect cases. See Olson v. Richard,