You be the judge in this Texas-centric case

FACTS: An engineering joint venture contracted with the Dallas Area Rapid Transit (“DART”) to provide design plans and specifications for a light rail line in Dallas, Texas. Subsequently, DART entered into a contract with a general contractor based upon a bid prepared relying upon the engineer’s design. There were no contracts between the engineer and contractor.

Just days after beginning construction, the contractor “discovered” the engineer’s plans had numerous errors and claimed that 80% of the construction drawings required revisions and modifications. The contractor contended it lost millions of dollars because of the delays and increased costs associated with the engineer’s negligent plans.

After an arduous process finally ending in a partial settlement with DART, the contractor sued the engineer for negligence and negligent misrepresentation—both tort-based causes of action. Only the negligent misrepresentation cause of action was tried. The jury found fault on the part of the engineer (45%), DART (40%), and the contractor (15%).

In 2014, the Texas Supreme Court reviewed the issue raised by the engineer that claims for negligent misrepresentation between contractual strangers are barred by the economic loss rule. The engineer argued lawsuits related to the negligent performance of services in a contract should be limited to the contracting parties (i.e. the engineer and owner). Conversely, the contractor argued that an exception applied related to the negligent performance of services in professional malpractice cases (i.e. the engineer was a design professional).

ISSUE: Does the owner of a CM at Risk construction project give an implied warranty regarding the designer's plans and specifications in the same way that the owner does in a traditional design-bid-build construction project?

LAN/STV, A Joint Venture of Lockwood, Andrews & Newman, Incorporated and STV Incorporated v. Martin K. Eby Construction Company, Incorporated, 435 S.W.3d 234 (Tex. 2014).

Ruling 

No, the Texas Supreme Court held the economic loss rule precludes a contractor from recovering directly from an engineer for an engineer’s negligent plans so long as the parties are contractual strangers. In support of its holding, the Court noted “the contractor’s principal reliance must be on the presentation of the plans by the owner, with whom the contractor is to reach an agreement, not the [design professional], a contractual stranger.” See 435 S.W.3d 234, 247. Accordingly, the contractor’s exclusive remedy was from the owner, DART, who submitted the engineer’s plans to the contractor.

Lesson 

In assisting design professional clients in contract drafting, one must be mindful to avoid expanding contractual rights to third party beneficiaries so that no such rights are created in favor of a general contractor or subcontractor. In Texas, to the extent a contractor has delay claims based upon negligently prepared plans and the contractor is a contractual stranger to the design professional, the cause of action must be brought against the owner who must then, in turn, determine whether or not an independent claim should be brought against the design professional. Be cautious of language in assignments, lender’s consents and other companion documents that may also create such a duty.

When negotiating contracts related to construction projects, each party—whether owner, engineer, architect, general contractor, or sub-contractor—must analyze risk and protect itself through bargaining. As advised by the Texas Supreme Court, “If contractors want to be protected, they can insist on that protection from the owner who will get protection from the [design professional].” See Id. at 248.

TAKE AWAY: While the LAN/STV case demonstrates the role of contractual protection in Texas, please contact the authors if you have questions on these provisions for other jurisdictions.