In the last year, Texas courts have produced three opinions which correct the prevailing view that the economic loss rule bars all claims by damaged parties in construction cases where there is no contractual privity and the injuries are only economic in nature.2 That prevailing view was based on a simplistic understanding of the economic loss rule. Now that the Texas Supreme Court's position is clear ("[W]e have never held that [the economic loss rule] precludes recovery between contractual strangers in a case not involving a defective product"),3 the construction bar is at risk to repeat a similar over-simplification by claiming that as a result, all construction cases are truly negligence claims-even when there is contractual privity. That claim would not be correct either, however, because "there is not one economic loss rule that is broadly applicable throughout the field of torts, but rather several more limited rules that govern recovery of economic losses in selected areas of the law."4
In order to determine the viability of a tort claim in a construction case, there are two principal issues to resolve. The first is whether an independent duty can be proven without pointing to a contract. If such a duty exists, there is likely a negligence claim; if not, the claim is likely barred. The second issue concerns the nature of the damages recoverable. For example, benefit of the bargain damages and other damages that typically arise in the context of a contract cannot be recovered in a tort claim, whereas reliance and direct out-of-pocket economic damages may be recovered.5
This paper examines the opinions of Sharyland Water Supply Corp. v. City of Alton, Eby v. LAN/STV, and CCE Inc. v. PBS &J Construction Services, Inc. to some degree, but more broadly examines the law of Texas and other jurisdictions in light of these three opinions, in an attempt to identify the sorts of analyses that are now relevant in determining the applicability of the economic loss rule in the construction case context.
I I. THE NATURE OF THE “DUTY"
Prior to Sharyland, the Texas Supreme Court had not conclusively addressed whether the economic loss rule precluded a third party's negligence claim for damages comprised solely of economic loss.6 The Texas Supreme Court hinted, however, in Lamar Homes, Inc. v. Mid Continent Casualty Co. that its position might not be as clear as previously believed, by noting two items of significance regarding the economic loss rule.7 The first item was that "[t]he rule generally precludes recovery in tort for economic loss from the failure of a party to perform under a contract."8 The use of the word "generally" cannot have been an accident, and implied that under certain circumstances a negligence claim may, in fact, be viable. The second item noted by the Court in Lamar Homes was the restrictive nature of the rule's definition, as taken from its earlier opinion in Jim Walter Homes, Inc. v. Reed.9 In Reed, the Court stated "[w]hen the injury is only the economic loss to the subject matter of the contract itself, the action sounds in contract alone."10 This language is consistent with economic loss rule jurisprudence from other jurisdictions, and hinted that the Texas rule was not as restrictive as previously thought.
Perhaps this oversimplification arose from a number of Texas appellate opinions which, on their face, were decided solely on the basis of simple platitudes. For example, in Prospect High Income Fund v. Grant 7hornton, L.L.P., the Dallas Court of Appeals relied upon its own opinion in Express One International Inc. v. Steinbeck to deny a party's negligence claim, stating that "to recover for negligence, a plaintiff must show either a personal injury or property damage and not merely economic harm."11 However, a careful reading of the Express One opinion shows that the conditional term "generally" was selected to describe the recoverability of economic damages under a negligence claim, which notably, was the same term used by the Texas Supreme Court in its DeLanney opinion, and the Houston Fourteenth Court of Appeals's decision in Coastal Conduit & Ditching, Inc. v. Noram Energy Corp.12 However, neither the DeLanney nor Coastal opinion stopped their analysis with the simple statement cited above. Instead, they each explored the issue of whether a duty existed, and both determined that the respective claims should fail because none did.13 Finally, the Express One analysis is limited to "simple" negligence cases, which is distinguishable from professional malpractice and negligent misrepresentation.14
The Sharyland opinion makes clear that the economic loss rule is not some "one size fits all" panacea for parties seeking to bar claims. 15 Rather, the rule should be applied on a case-by-case basis, in which the gravamen of the analysis is placed on the nature and source of the duty because as we all remember from law school, duty is merely a function of foreseeability.16
In establishing whether a duty exists, foreseeability is the critical element-not privity.17 The concept as articulated in Justice Cardozo's opinion in MacPherson v. Buick Motor Co.,18 was followed by the Amarillo Court of Appeals in Bass v. City of Dallas,19 which cited 7homson v. Espey Huston & Associates, Inc. 20 Additionally, the Texas First Court of Appeals elaborated on the concept nicely in 10.1 Systems v. City of Cleveland, where it stated that "[t]he nature of a professional's duty, the standard of care imposed, varies in different circumstances . . . in our view the extent of appellee's duty may best be defined by reference to the foreseeability of injury consequent upon breach of that duty."21