The Texas Supreme Court denied a petition for review stemming from the Houston Court of Appeals’Barzoukas v. Found. Design, Ltd. decision.1 The case is significant because of its application of the economic loss rule (under Texas law) in the context of an owner-subcontractor dispute. In its simplest and most general form, the economic loss rule bars claims in negligence and strict product liability when the plaintiff’s damage is to the subject of the contract or to the purchased product itself. Barzoukas, and other appellate cases before it, show that under Texas law the economic loss rule does not foreclose owner negligence claims against a subcontractor when damages are to the subject of the main contract but beyond that of the subcontract between the general contractor (“GC”) and the subcontractor.
Barzoukas hired a GC to build a home. The GC subcontracted with Foundation Design, Ltd. (“FDL”) and foundation engineer Smith for the house’s piers. The original plans and specifications called for 15-foot piers, but 12-foot piers were eventually installed. Barzoukas alleged that the house was “riddled with problems” and sued numerous defendants, including FDL and Smith. Barzoukas asserted claims of negligence and negligent representation, among others, against FDL and Smith in connection with the house’s foundation.
FDL and Smith moved for summary judgment as to the negligence claims on the basis that these claims were barred by the economic loss rule because Barzoukas’s harm was to the subject of his contract,i.e., the house. The trial court granted the motion and Barzoukas appealed.
On appeal, citing Pugh v. Gen. Terrazo Supplies, Inc., FDL and Smith argued that applying the economic loss rule was “necessary to preserve the agreed-upon risk allocations among the parties who built Barzoukas’s house.”2 In Pugh, the court held that the economic loss rule foreclosed claims against General Terrazo, the manufacturer of a finished exterior product, because Pugh’s damages were confined to his house, the subject of his contract.3
The Houston Court of Appeals rejected FDL and Smith’s argument for two reasons. First, the court distinguished Pugh because it applied the economic loss rule to the remote manufacturer of a defective product. In this case, Barzoukas alleged claims against subcontractors. Further, the court held that FDL and Smith’s risk allocation assumptions were unwarranted because the main contract and the subcontract were not part of the appellate record. In the absence of the contractual documents, any discussion of the parties’ risk allocation was speculative. On this record, the court held that FDL and Smith could not “obtain summary judgment on grounds that the economic loss rule foreclose[d] Barzoukas’s negligence” claims as a matter of law.
Barzoukas’s sarguably narrow holding is consistent with two other Texas appellate cases that considered whether the economic loss rule foreclosed owner negligence claims against subcontractors. In Goose Creek Consol. Indep. Sch. Dist. v. Jarrar’s Plumbing, Inc., Goose Creek contracted with Lewis for the construction of school buildings and Lewis subcontracted with Jarrar for plumbing work.4 The court held that the economic loss rule did not shield Jarrar from Goose Creek’s negligence claims after sewage and sewer gas invaded the school buildings. These damages “constitute[d] an injury to property that was not the subject matter of the contract, that portion of the contract Goose Creek had with Lewis for which Lewis contracted with Jarrar’s Plumbing, namely the plumbing.”5
Likewise, in Thomson v. Espey Huston & Assocs., Inc., Thomson, the owner, sued Espey, a subcontractor, for negligently designing an apartment complex drainage system.6 The court held that the economic loss rule did not bar Thomson’s claims because Espey’s alleged “negligence in designing the drainage system and testing soil quality” caused damage to parts of the apartment complex beyond the scope of the GC’s subcontract with Espey.7
As the dissent in Barzoukas argued, other states espouse a stricter construction of the economic loss rule. These states apply the rule to foreclose owner claims against subcontractors when the damages are to the subject of the owner-GC contract, even if beyond the scope of the subcontract.8 With the Texas Supreme Court’s denial of FDL and Smith’s petition, it appears that current Texas law favors allowing owners the right to pursue negligence claims against subcontractors precisely under these conditions.