DESIGN PROFESSIONALS BEWARE
Negligent misrepresentation claims under Texas law
In many construction projects, the general contractor, instead of the owner, hires design professionals, such as engineers and architects, to assist in the design of the structure. Therefore, in such situations, a contract will obviously not exist between the owner and the design professional. Because a contract does not exist between the parties, an owner cannot assert a direct claim for breach of contract or professional malpractice against the design professional. However, there is a growing sentiment in Texas courts to allow a design professional to be sued for negligent misrepresentation by owners with whom they have no contractual relationship. Based upon these cases, the owner may now be allowed to assert a claim of negligent misrepresentation against the design professional despite the lack of privity of contract. Whether the claim will be allowed or disallowed will depend on the court's interpretation of the economic loss doctrine in cases where no privity exists.
I. THE ECONOMIC LOSS DOCTRINE
Most courts cite to either the Texas Supreme Court case of Jim Walter Homes, Inc. v. Reed, 711 S.W.2d 617 (Tex.1986) or Southwestern Bell Telephone Company v. Delanney, 809 S.W.2d 493 (Tex. 1991) when discussing the applicability of the economic loss doctrine. Both cases involved parties in privity of contract and alleged only benefit of the bargain damages. Reed held that “[w]hen the injury is only the economic loss to the subject of a contract itself, the action sounds in contract alone.” Southwestern Bell held that “[i]f the defendant’s conduct…would give rise to liability independent of the fact that a contract exists between the parties, the plaintiff’s claim may also sound in tort. Conversely, if the defendant’s conduct…would give rise to liability only because it breaches the parties' agreement, the plaintiff’s claim ordinarily sounds only in contract.” The inability to recover economic damages beyond those stemming from the alleged breach of contract became known as the economic loss doctrine.
Some Texas appellate courts have expanded the applicability of the economic loss doctrine to parties not in privity of contract. In other words, the courts have eliminated the recovery of tort damages despite the lack of a contract. These cases have inaccurately expanded the holdings of Reed and Southwestern Bell by relying on cases with parties in privity or citing to cases from other jurisdictions and other areas of the law. Federal courts in Texas have correctly refused to apply the economic loss doctrine in negligence cases against parties who do not have privity of contract.
II. NEGLIGENT MISREPRESENTATION AND THE RESTATEMENT
Twenty years ago, the Texas Supreme Court in Federal Land Bank Association of Tyler v. Sloane, 825 SW.2d 439 (Tex. 1991) adopted Restatement (Second) of Torts Sections 552 and 552B, which apply to the tort of negligent misrepresentation. Pursuant to Section 552, a plaintiff must prove that: (1) a defendant, in the course of its business or in a transaction in which it had a pecuniary interest, made a representation, (2) the defendant supplied "false information" for the guidance of another in the other's business, (3) the defendant did not exercise reasonable care or competence in obtaining or communicating the information, and (4) the plaintiff suffered pecuniary loss by justifiably relying on the representation.
Liability for a negligent misrepresentation is limited to a loss suffered (1) by the person or one of a limited group of persons for whose benefit and guidance he or she intends to supply the information or knows that the recipient intends to supply it, and (2) through reliance upon it in a transaction that he or she intends the information to influence or knows that the recipient so intends or in a substantially similar transaction. Liability for breach of the duty to exercise reasonable care or competence in obtaining or communicating the information relied upon occurs and is appropriate only when (1) the defendant is aware of the non-client and intends that the non-client rely on the representation, and (2) the non-client justifiably relies on the defendant's representation of a material fact. Justifiable reliance, also known as the "materiality" element, has two aspects: the plaintiff must in fact have relied and this reliance must have been reasonable.
Pursuant to Section 552B, damages recoverable for a negligent misrepresentation are those necessary to compensate the plaintiff for a pecuniary loss to the plaintiff of which the misrepresentation is a legal cause, including (1) the difference between the value of what he has received in the transaction and its purchase price or other value given for it (i.e. the contract price), and (2) pecuniary loss suffered otherwise as a consequence of the plaintiff's reliance upon the misrepresentation. Section 552B specifically states that the damages recoverable for a negligent misrepresentation do not include the benefit of the plaintiff's contract with the defendant.
III. NEGLIGENT MISREPRESENTATION And THE ECONOMIC LOSS DOCTRINE
Sloane recognized that Section 552B allows the recovery of damages caused to a plaintiff as a result of reliance upon negligent misrepresentation, but does not allow recovery for benefit of the bargain damages. Sloane, however, did not involve parties lacking privity of contract nor did it expressly address the applicability of the economic loss doctrine to a negligent misrepresentation claim involving parties lacking privity of contract. In 1999, the Texas Supreme Court in McCamish, Martin, Brown and Loeffler v. F.E. Appling Interests, 991 S.W.2d 787 (Tex. 1999) specifically recognized that a negligent misrepresentation claim can exist between parties not in privity of contract. However, this court did not address the applicability of the economic loss doctrine to a negligent misrepresentation claim.
While some Texas appellate courts after Sloane have refused to apply the economic loss doctrine to negligent misrepresentation claims involving parties lacking privity of contract, other Texas appellate courts, relying on Reed and Southwestern Bell, have applied the economic loss doctrine to this type of claim. Generally, federal courts continue to refuse to apply the economic loss doctrine to negligent misrepresentation claims involving parties not in privity of contract. The Texas Supreme Court has not expressly addressed this issue.
A claim of negligent misrepresentation against a design professional may also be the basis of a Texas Deceptive Trade Practices Act ("DTPA") claim. Although the DTPA expressly exempts claims against professionals for providing judgment, advice or opinion, a claim for a negligent misrepresentation of material fact will likely not be barred by this exception.
Due to conflicting court opinions, there is continuing uncertainty in Texas over the application of the economic loss doctrine to claims for negligent misrepresentation between parties not in privity. This uncertainly will continue to create litigation between owners and design professionals until Texas courts have reconciled this confusing but important area of the law. Until such time, practitioners representing owners and design professionals will continue to struggle with the applicability of the economic loss doctrine to a negligent misrepresentation claim.
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This Litigation Alert is a summary of recent developments in the law and is provided for informational purposes only. It is not intended to constitute legal advice or to create an attorney-client relationship. Readers should obtain legal advice specific to their situation in connection with topics discussed.
Copyright © 2011 Kane Russell Coleman & Logan PC. All rights reserved. Unless otherwise indicated, the authors are not certified by the Texas Board of Legal Specialization.