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James Creedon
Photo by  Sharon McCutcheon  on  Unsplash

Photo by Sharon McCutcheon on Unsplash

The economic loss rule can be a source of uncertainty for many Texas practitioners. While most understand the premise—a prohibition on recovery of purely economic losses with no related injury to person or property—determining under which scenarios the rule will apply can result in confusion.

In general, the economic loss rule requires that a plaintiff in a negligence case prove some personal injury or property damage before the plaintiff can recover for associated economic losses. The personal injury or property damage establishes the requisite duty, and thus the plaintiff is entitled to damages, including economic losses, resulting from breach of that duty.

In cases involving a contractual relationship between the parties, the economic loss rule generally does not apply. This is because the parties are not strangers owing no duty to one another, but instead are known to one another with some duty resulting from the nature of the relationship. Similarly, the economic loss rule does not apply in instances where a special relationship exists even if a contract is not established—e.g., professional malpractice claims.

But what about cases where a third-party is harmed as a result of a breach of contract between two other parties? Or situations where the two parties are complete strangers? Texas law provides several avenues to recovery of economic loss, even in the absence of personal injury or property damage.

Notably, the economic loss rule does not apply in cases involving intentional torts. The Texas Supreme Court has rejected the notion that the economic loss rule “precludes tort claims between parties who are not in contractual privity and that damages are recoverable only if they are accompanied by actual physical injury or property damage.” (Sharyland Water Supply Corp. v. City of Alton, 354 S.W.3d 407, 418 (Tex. 2011)(internal citations omitted)). Such intentional torts could include, among others, fraud (PDQ Consulting, Inc. v. Capital One Bank, N.A., 2019 WL 1982532 (E.D. Tex. 2019)), interference with a contract (American Nat’l Petroleum Co. v. Transcontinental Gas Pipe Line Corp., 798 S.W.2d 274, 278 (Tex. 1990)), infliction of emotional distress (Motsenbocker v. Potts, 863 S.W.2d 126 (Tex. App.—Dallas 1993)), or misappropriation of trade secrets (Eagle Oil & Gas Co. v. Shale Expl., LLC, 549 S.W.3d 256 (Tex. App.—Houston [1st Dist.] 2018, pet. dism’d).

It is less clear whether negligent misrepresentation claims are subject to the economic loss rule under current Texas jurisprudence. On one hand, the Texas Supreme Court has listed negligent misrepresentation among claims not subject to the economic loss rule (Sharyland, 354 S.W.3d at 419). However, the Court has also subsequently applied the economic loss rule to bar a non-contractual negligent misrepresentation claim (LAN/STV v. Martin K. Eby Const. Co., Inc., 435 S.W.3d 234 (Tex. 2014)).

Additionally, one Texas case has held that an unconscionability claim arising under the Deceptive Trade Practice Act (DTPA) is not subject to the economic loss rule. In analyzing Sharyland, the Eastland Court of Appeals stated:

One distinguishing factor seems to be that, when the source of the duty lies outside the contract, economic damages are recoverable. . . . [T]he trial court concluded that [defendants] used or employed false, misleading, or deceptive acts or practices under Section 17.50(a)(1) of the DTPA . . . .

When the court in Sharyland included “some statutory causes of action” among those in which pure economic losses were recoverable, it cited Section 17.50 of the DTPA as authorizing the recovery of economic damages . . . . Sharyland, 354 S.W.3d at 419 n. 24. Under the record in this case, we hold that the duty breached by SCS and Spoon: to refrain from engaging in or using deceptive trade practices as set out in Section 17.50(a)(3)—unconscionable actions or courses of action—was one that . . . arose outside, and existed independently of, the contract.

SCS Builders, Inc. v. Searcy, 390 S.W.3d 534, 540 (Tex. App. 2012). While the parties in Searcy were in privity of contract, this case may provide support for the proposition that a DTPA violation is not subject to the economic loss rule under Sharyland, given the holding that the unconscionable conduct arose independent of the contract. However, in the absence of a contractual relationship, the plaintiff would still need to establish it is a consumer under the DTPA, and thus entitled to bring a DTPA claim in the first place.

In summary, Texas case law consistently holds that recovery for purely economic losses is barred for claims of negligence. To avoid this rule, a plaintiff will need to prove (i) physical injury to property or person, (ii) an intentional tort, (iii) potentially some negligent misrepresentation, or (iv) potentially a viable unconscionability claim under the DTPA.

For more information on this article and this topic, contact Mark Killingsworth.

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