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.



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