Causes of Action 2015: Construction Defects

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1 Causes of Action 2015: Construction Defects Presented to: 28 th Annual Construction Law Conference San Antonio, Texas Presented by: Mason P. Hester Coats Rose 9 Greenway Plaza, Ste Houston, TX With preparation assistance by Christian S. Dewhurst

2 TABLE OF CONTENTS I. Introduction... 1 II. Owner s Causes of Action... 1 Owner v. General Contractor: Breach of Contract and Express Warranty... 1 Owner v. General Contractor: Negligence Theories and The Economic Loss Rule... 4 Owner v. General Contractor: Implied Warranties Owner v. General Contractor: DTPA Non-privity Owner v. General Contractor: Nuisance Owner v. Subcontractor: Breach of Contract Third Party Beneficiary Owner v. Subcontractor: Negligence Owner v. Subcontractor: Express and Implied Warranties Owner v. Lower Tier Supplier: Express and Implied Warranties Owner v. Sub-Subcontractor/ Supplier: Negligence Owner v. Architect: Breach of Contract and Negligence Owner v. Architect s Sub-consultant: Breach of Contract Owner v. Architect s Sub-consultant: Negligence III. General Contractor s Causes of Action General Contractor v. Owner : Breach of Contract Substantial Performance General Contractor v. Owner - Fraudulent Inducement into Contract General Contractor v. Owner: Implied Warranty of Plans Supplied by Owner 50 General Contractor/ Other Non-Privity Parties v. Owner s Design Professional: Negligence Theories i

3 General Contactor v. Owner s Design Professional: Negligent Misrepresentation General Contractor v. Owner s Design Professional/ Other Contractors: ThirdPartyBeneficiary General Contractor v. Sub-subcontractor/Supplier Not in Privity: Breach of Contract and Negligence General Contractor v. Subcontractor in Privity: Breach of Contract Negligence General Contractor v. Subcontractor/ Supplier in Privity: the Emergence of Chapter 82 Indemnity IV. Conclusion ii

4 I. Introduction A critical stage in modern construction defect litigation is determining the proper parties and the causes of action to assert against those parties. Careful consideration must be given to the viability of claims and, relatedly, the role of insurance. This paper will address the causes of action in a modern construction defect suit. Obviously, no paper could cover every possible cause of action for every possible scenario. But we will attempt to discuss many of the more relevant defect causes of action as well as those that might catch the modern practitioner, and his/ her client, by surprise. In addition to standard negligence and breach of contract claims, we will address recently developing issues regarding implied warranties, insurance, the economic loss rule, and Chapter 82 indemnity, among others. For ease of reference, the paper is outlined from the perspective of an owner and then a general contractor, though, as will be seen, causes of action impacting subcontractors, sub-subcontractors/ suppliers, and design professionals are addressed in those sections. First, we begin with causes of action from the owner s perspective. II. Owner s Causes of Action Owner v. General Contractor: Breach of Contract and Express Warranty The construction contract is the basis of the relationship between the general contractor and the owner. Some construction defects result from failure of the general contractor (sometimes through a subcontractor) to construct the project in accordance with the plans and specifications; that assumes the plans are adequate usually a point of contention and an issue discussed later in this paper. Typically, the first claim an owner will consider is the standard breach of contract action. The elements for breach of contract have not changed since those taught in the first year of law school: 1. The existence of a valid, enforceable contract; 2. Plaintiff is a proper party to sue for breach of contract; 3. Plaintiff performed, tendered performance of, or was excused from performing its contractual obligations; 4. Defendant breached the contract; and 5. Defendant s breach caused the plaintiff injury. 1 1 Winchek v. Am. Express Travel Related Servs., 232 S.W.3d 197, 202 (Tex. App. Houston [1st Dist.] 2007, no pet.) (discussing elements 1 and 3-5); Residential Dynamics, LLC v. Loveless, 186 S.W.3d 192, 198 (Tex. App. Fort Worth 2006, no pet.) (same); Zuniga v. Wooster Ladder Co., 119 S.W.3d 856, 862 (Tex. App. San Antonio 2003, no pet.) (discussing element 2). 1

5 Many courts discuss only elements one and three though five. However, the importance of element two (proper party) becomes an issue in the context of an owner s breach of contract claim as a third party beneficiary, discussed in more detail later in this paper. Other issues concern breach of contract damages and the distinction between breach of contract and breach of warranty. In the frequently cited Vance v. My Apartment Steak House of San Antonio, Inc., the Texas Supreme Court discussed an owner s damages when the general contractor is alleged to be in breach due to construction defects. After a subcontractor brought suit against the general contractor and owner for payment, the general contractor filed a cross-claim seeking money due under the original contract. 2 The owner responded with a cross-claim seeking damages for defective construction and failure to complete the project. The general contractor claimed it was owed money because it substantially performed under its contract. The supreme court stated that, when a contractor has substantially performed a building contract, he is entitled to recover the full contract price, less the cost of remedying those defects that are remediable. 3 Regarding the owner s claim, the Vance court cited the established rule that the measure of damages for an owner when the general contractor is alleged to be in breach is the cost of completing the job or remedying those defects that are remediable. If only part of the contract price has been paid to the general contractor, then the amount of the owner s damages is credited against the balance of the owner s payments still due. 4 The supreme court held that it was the general contractor s burden to prove the reasonable cost of remedying the defects because the general contractor was seeking relief on a substantial performance theory. 5 In Jones v. Pesak Brothers Construction, Inc., the Houston Court of Appeals (1st District) discussed the distinction between breach of warranty and breach of contract claims. 6 The homeowners, the Joneses, hired Pesak to build a house near Columbus, Texas. The contract between Pesak and the homeowners specified the square footage of the living area, garages, and porches, as well as the materials Pesak would use in constructing the home; however, the contract did not address the grading or S.W.2d 480, 481 (Tex. 1984). 3 Id. at 481 (citations omitted). 4 Id. at Id. (citation omitted). 6 Jones v. Pesak Bros. Const., Inc., 416 S.W.3d 618, 626 (Tex. App. Houston [1st Dist.] 2013, no pet.). 2

6 landscaping of the land surrounding the construction site or reference any applicable building standards. The homeowners also hired an architect, Kieschnick s Designs in Wood, to design a floor plan. Kieschnick provided the homeowners with a list entitled Specifications for the home of Mr. & Mrs. Gary Jones, which stated: all materials and workmanship should meet or exceed local building code and also the Universal Building Code Book. 7 Shortly after completion, the home showed signs of foundation distress, including cracks in the exterior mortar and interior walls. The homeowners sued Pesak for, among other things, breach of contract and express and implied warranties. The homeowners later amended their petition to allege certain DTPA and tort claims stemming from a heart attack Mr. Jones allegedly suffered due to mental anguish from the foundation problems. The homeowners claimed Pesak had failed to comply with the applicable building standards referenced in the prime contract regarding the foundation. Specifically, the homeowners cited Kieschnick s Specifications list as evidence of their agreement with Pesak, through the doctrine of incorporation by reference. 8 The district court entered a take-nothing judgment in accordance with the jury s verdict for builder. The homeowners appealed this judgment. The court of appeals affirmed the jury s decision, holding that evidence supported the jury s verdict for builder on homeowners breach-of-contract and breachof-warranty claims. In doing so, the court provided a useful discussion about the nature of breach of contract versus breach of warranty claims: Although breach of warranty and breach of contract are distinct causes of action, an express warranty comprises part of the basis and thus is contractual in nature. Both breach-of-contract and breach-of-warranty claims involve a party seeking damages based on an opponent s failure to uphold its end of the bargain. 9 Because the written agreement between the parties did not mention the grading or landscaping of the land surrounding the construction site or reference any applicable building standards, the court agreed with the district court that Pesak had not breached a material term of its agreement with the homeowners or failed to comply with a warranty that was a producing cause of any damage to the homeowners. In response, the homeowners asserted that Kieschnick s list was part of their agreement with Pesak through the doctrine of incorporation by reference. However, because no reference to Kieschnick s list appeared in the contract between Pesak and the homeowners, the court of appeals rejected this argument. 7 Id. at Id. at Id. at

7 Owner v. General Contractor: Negligence Theories and The Economic Loss Rule The scope of insurance coverage for construction defects is a recent and constantly developing area of Texas law, 10 too broad to detail in this paper. But it should be noted that many insurers will still seek to deny insurance coverage where no tort of negligence as opposed to breach of contract is pleaded against the insured. Conversely, many adjusters have the mindset that if a cause of action for negligence is asserted, the insured is entitled to a defense (albeit potentially under a reservation of rights). Because the insurance carrier s participation could help finance the resolution of the case, both the plaintiff and the defendant in certain instances may want pleadings that assert a negligence cause of action and/or negligent acts by the defendant. Like breach of contract, the elements for a simple negligence cause of action in modern case law have not changed: 1. Defendant owed a legal duty to Plaintiff; 2. Defendant breached the duty; and 3. The breach proximately caused Plaintiff s injury. 11 What is different about the modern negligence case, however, is the development of the economic loss rule. Texas courts have often applied the economic loss rule to construction defect cases in at least two primary ways: 1. To preclude tort claims brought to recover economic losses when those losses are the subject matter of a contract; and 2. To preclude tort claims brought to recover economic losses against the manufacturer or seller of a defective product when the defect injures only the product and does not cause personal injury or damage to other property See, e.g., Lamar Homes, Inc. v. Mid-Continent Cas. Co., 242 S.W.3d 1 (Tex. 2007); Lennar Corp. v. Great American Ins. Co., 200 S.W.3d 651 (Tex. App. Houston [14th Dist.] 2006) (abrogated on other grounds by Gilbert Texas Const., L.P. v. Underwriters at Lloyd s London, 327 S.W.3d 118 (Tex. 2010). 11 Lee Lewis Constr., Inc. v. Harrison, 70 S.W.3d 778, 782 (Tex. 2001); Western Invs. v. Urena, 162 S.W.3d 547, 550 (Tex. 2005); Madison v. Williamson, No CV, 2007 WL , at *3 (Tex. App. Houston [1st Dist.] Sept. 27, 2007, pet. filed). 12 Pugh v. General Terrazzo Supplies, Inc., 243 S.W.3d 84, 91 (Tex. App. Houston [1st Dist.] 2007, pet denied) (citing, inter alia, Jim Walter Homes v. Reed, 711 S.W.2d 617, 618 (Tex. 1986); Mid-Continent Aircraft Corp. v. Curry County Spraying Serv., Inc., 572 S.W.2d 308, (Tex. 1978)). 4

8 Application of the economic loss rule to defective product claims is discussed in more detail below. The economic loss rule could be an effective tool against a negligence claim by an owner against a general contractor. However, if the negligence claim triggered the insurer s duty to defend, construction lawyers representing the general contractor might hesitate to assert the defense or, if asserted, move for a summary judgment on the defense, unless the negligence claim was the only claim asserted by the owner (unlikely). Even with recent developments in insurance coverage relative to the economic loss rule, losing insurance coverage for the general contractor is not something that a construction lawyer wants to chance. There are several conference papers and law journal publications including an update to be presented at this conference by Brad Snead that address the economic loss rule in greater detail than we can provide here. Practitioners would be wise to consult those publications for greater detail on this issue and to keep an eye on this constantly changing area of Texas law. However, some of the key Texas economic loss rule cases pertaining to construction defects are discussed immediately below. Economic Loss Rule: Jim Walter Homes v. Reed Perhaps the most influential early construction case involving the economic loss rule is the 1986 Texas Supreme Court case Jim Walter Homes v. Reed. There, the purchasers of a home sued the homebuilder for breach of the warranty of good workmanship found in the contract and gross negligence in supervising the construction of the home. 13 Addressing the economic loss rule, the supreme court cited its influential Montgomery Ward & Co. v. Scharrenbeck opinion for the proposition that a contractual relationship of the parties may create duties under both contract and tort law. 14 The supreme court summarized the economic loss doctrine as follows: The acts of a party may breach duties in tort or contract alone or simultaneously in both. The nature of the injury most often determines which duty or duties are breached. When the injury is only the economic loss to the subject of a contract itself, the action sounds in contract alone S.W.2d 617, 617 (Tex. 1986). 14 Id. at 618 (citing Montgomery Ward & Co. v. Scharrenbeck, 204 S.W.2d 508 (Tex. 1947)) S.W.2d at 618 (citing Mid-Continent Aircraft Corp. v. Curry County Spraying Service, 572 S.W.2d 308, 312 (Tex. 1978); Nobility Homes of Texas, Inc. v. Shivers, 557 S.W.2d 77 (Tex. 1977)). 5

9 The purchasers injury was that the house they were promised and paid for was not the house they received. The supreme court held that this injury could only be characterized as a breach of contract, and breach of contract could not support the jury s award of exemplary damages. 16 Economic Loss Rule: LAN/STV v. Martin K. Eby Construction Company Though not an owner versus contractor case, the Texas Supreme Court added another layer to the economic loss rule in 2014 in LAN/STV v. Martin K. Eby Construction Company; the supreme court held the economic loss rule barred a general contractor s negligent misrepresentation claim against an architect for the contractor s increased costs of performing. 17 The Dallas Area Rapid Transportation Authority ( DART ) contracted with LAN/STV to prepare plans, drawings, and specifications for the construction of a light rail transit line from Dallas s downtown West End to the American Airlines Center roughly a mile away. LAN/STV agreed to be responsible for the professional quality, technical accuracy, and... coordination of all designs, drawings, specifications, and other services furnished, and to be liable to the Authority... for all damages to the Authority caused by [LAN/STV s] negligent performance of any of the services furnished. DART incorporated LAN/STV s plans into a solicitation for competitive bids to construct the project. Martin K. Eby Construction Company, which had built two other DART light rail projects, one of which was designed by LAN/STV, was awarded the contract. The contract provided an administrative procedure for Eby to assert contract disputes with DART, including complaints about design problems. Eby and LAN/STV had no contract with each other. Thus, LAN/STV was contractually responsible to DART for the accuracy of the plans, as was DART to Eby, but LAN/STV owed Eby no contractual obligation. 18 Days after beginning construction, Eby discovered LAN/STV s plans were full of errors regarding bridge structures, manhole and utility line locations, subsurface soil conditions, an existing retaining wall, and other aspects of the proposed construction. Eby found that 80% of LAN/STV s drawings had to be changed. This disrupted Eby s construction schedule and required additional labor and materials. Eby calculated it lost nearly $14 million on the project. Relatively early in the project, Eby sued DART and later followed the contractually-required dispute procedures mandated by Eby s contract with DART, eventually leading to a settlement between Eby and DART for $4.7 million. Eby filed its tort suit against LAN/STV, asserting causes of action for negligence and negligent misrepresentation. After Eby and DART settled, the LAN/STV case proceeded to trial, but only on Eby s claim that LAN/STV negligently misrepresented the work to be done in its error-ridden plans. The jury agreed and S.W.2d at 618 (citing Bellefonte Underwriters Insurance Co. v. Brown, 704 S.W.2d 742 (Tex. 1986); Amoco Production Co. v. Alexander, 622 S.W.2d 563 (Tex. 1981)) S.W.3d 234, 236 (Tex. 2014) 18 Id. 6

10 assessed Eby s damages for its losses on the project at $5 million, but they also found that the damages were caused by Eby s and DART s negligence as well, and apportioned responsibility 45% to LAN/STV, 40% to DART, and 15% to Eby. The trial court rendered judgment for Eby against LAN/STV for $2.25 million plus interest, in addition to the amount for which Eby had settled with DART. 19 In reaching its holding, the Texas Supreme Court engaged in a lengthy discussion of the case law history behind the economic loss rule, as well as relying heavily though not entirely upon the recently approved Restatement (Third) of Torts: Liability for Economic Harm. Quoting the Restatement, the supreme court noted [C]ourts generally do not recognize tort liability for economic losses caused by the breach of a contract between the parties, and often restrict the role of tort law in other circumstances in which protection by contract is available. 20 Relying on the Restatement, the supreme court stated it was more probable that a contractor will assume it must look to its agreement with the owner for damages if the project is not as represented, or for any other breach: Though there remains the possibility that a contractor may not do so, we think the availability of contractual remedies must preclude tort recovery in the situation generally because, as stated above, clarity allows parties to do business on a surer footing. Where contracts might readily have been used to allocate the risk of a loss, the Restatement observes, a duty to avoid the loss is unlikely to be recognized in tort not because the economic loss rule applies, but simply because courts prefer, in general, that economic losses be allocated by contract where feasible. We see no reason not to apply the economic loss rule to achieve this end. 21 The supreme court concluded by noting DART was contractually responsible to Eby for providing accurate plans for the job. Eby agreed to specified remedies for disputes, pursued those remedies, and settled its claims for $4.7 million. According to the supreme court, had DART chosen to do so, it could have sued LAN/STV for breach of their contract to provide accurate plans. But Eby had no agreement with LAN/STV and was not party to LAN/STV s agreement with DART. Clearly, according to the Eby court, the economic loss rule barred Eby s subcontractors from recovering their own delay damages in negligence claims against LAN/STV. We think Eby should not be treated differently Id. at Id. at 242 (quoting RESTATEMENT (THIRD) OF TORTS: LIABILITY FOR ECONOMIC HARM 1 cmt. c (Tentative Draft No. 1, 2012)). 21 Eby, 435 S.W.3d at 248 (citations omitted). 22 Id. at

11 Economic Loss Rule: Sharyland Water Supply Corporation v. City of Alton In 2011, the Texas Supreme Court published one of the most seminal construction-related opinions regarding the economic loss rule in Sharyland Water Supply Corporation v. City of Alton. 23 Alton is a municipality in Hidalgo County. Sharyland Water Supply Corporation is a non-profit rural water supply corporation in the same county. In the early 1980s, Alton constructed a potable water distribution system for its residents. Alton and Sharyland executed a Water Supply Agreement whereby Alton conveyed its water system to Sharyland. In exchange, Sharyland provided potable water to Alton residents and maintained the system. The Water Supply Agreement gave Sharyland a ten-foot easement and required Sharyland to set rates and regulate the water distribution system s operation. After an initial one-year period, Sharyland was responsible for repairing the system and maintaining the lines in conformity with current or future state agency rules and regulations. In 1994, Alton received federal and local grants to install a sanitary sewer system, consisting of main sewer lines, residential service connections, and yard lines. Alton contracted with construction and design firms (the contractors ) to build the sanitary sewer system. In some locations, Alton s sewer main was installed parallel to Sharyland s water main, so that connecting the sewer main to the residential service line required the sewer line to cross the water main. 24 A year after the project was complete, Sharyland sued Alton for breaching the Water Supply Agreement, alleging Sharyland suffered significant injury because Alton s sanitary sewer residential service connections were negligently installed in violation of state regulations and industry standards. Specifically, Sharyland claimed the location and proximity of the sewer lines to the water system threatened to contaminate Sharyland s potable water supply. Alton counterclaimed, seeking a declaration that the Water Supply Agreement was void. Sharyland also sued the contractors for negligence and breach of contract, contending Sharyland was a third party beneficiary of the contractors agreement with Alton. 25 The court of appeals held that Sharyland suffered only economic losses, which it could not recover in its negligence action against the contractors. The Texas Supreme Court disagreed. It noted [i]t is true that parties may be barred from recovering in negligence or strict liability for purely economic losses. This is often referred to as the economic loss rule. 26 But the supreme court then noted that the economic loss rule was something of a misnomer and that: S.W.3d 407 (Tex. 2011). 24 Id. at Id. at Id. at

12 [T]here is not one economic loss rule 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. For example, the rules that limit the liability of accountants to third parties for harm caused by negligence or that save careless drivers from liability to the employer of a person injured in an auto accident may be fundamentally distinct from the ones that bar compensation in tort for purely economic losses resulting from defective products or misperformance of obligations arising only under contract. 27 The supreme court then gave a detailed history of the application of the rule in Texas, concluding: Thus, we have applied the economic loss rule only in cases involving defective products or failure to perform a contract. In both of those situations, we held that the parties economic losses were more appropriately addressed through statutory warranty actions or common law breach of contract suits than tort claims. 28 Further, though the supreme court applied this rule even to parties not in privity (e.g. a remote manufacturer and a consumer), we have never held that it precludes recovery completely between contractual strangers in a case not involving a defective product as the court of appeals did here. 29 Because there was no evidence that the sewer lines had contaminated the water supply, the court of appeals had reasoned, Sharyland had not suffered property damage, and the economic loss rule precluded a damage award. But the supreme court saw at least two problems with this analysis. First, it overstated and oversimplified the rule: to say that the economic loss rule preclude[s] 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, overlooked all of the tort claims for which courts have allowed recovery of economic damages even absent physical injury or property damage. Among these were negligent misrepresentation, legal or accounting malpractice, breach of fiduciary duty, fraud, fraudulent inducement, tortious interference with contract, nuisance, wrongful death claims related to loss of support from the decedent, business disparagement, and some statutory causes of action. 30 In important dicta, the supreme court noted the question was not whether the economic loss rule should apply where there is no privity of contract (we have already held that it can), but whether it should apply at all in a situation like this. Simply because the sewer as issue was the subject of a contract does not mean that a contractual stranger is necessarily barred from suing a contracting party for breach of an independent duty. If that were the case, a party 27 Id. at 415 (quoting Vincent R. Johnson, The Boundary Line Function of the Economic Loss Rule, 66 Wash. & Lee L. Rev. 523, (2009)) S.W.3d at Id. 30 Id. at (citations omitted). 9

13 could avoid tort liability to the world simply by entering into a contract with one party. The economic loss rule did not swallow all claims between contractual and commercial strangers. 31 Finally, the court of appeals blanket statement also expanded the rule, deciding a question the supreme court had yet to decide: whether purely economic losses may ever be recovered in negligence or strict liability cases. 32 But the supreme court decided it did not need to explore this question in the case before it. This was because the court of appeals had already erred in concluding Sharyland s water system had not been damaged. According to the supreme court, Sharyland s water system once complied with the law and now it did not. Sharyland was contractually obligated to maintain the system in accordance with state law and now had to either relocate or encase its water lines. These expenses, imposed on Sharyland by the contractors conduct, were the damages the jury awarded. Costs of repair necessarily implied that the system was damaged. Sharyland presented evidence that it experienced between 100 and 150 water system leaks each year; a break in the water line threatened contamination. There was also evidence that when Sharyland excavated a representative sample of sixty-six sewer crossings, sixty of them had been illegally installed, and there was at least one leaking sewer pipe located six inches above a water pipe. Further, there was evidence that approximately 340 locations would require remediation. Because of this, the supreme court disagreed that the economic loss rule bars Sharyland s recovery in this case. 33 Negligent Undertaking and Negligent Infliction of Emotional Distress: What about other negligence claims by the owner against the contractor, like negligent undertaking or negligent infliction of emotional distress? Recall from the Jones v. Pesak case above that the homeowners, the Joneses, sued their builder, Pesak, for foundation problems and an alleged heart attack suffered by Mr. Jones as a result of stress associated with the defects. The homeowners in Pesak also brought a negligence claim against Pesak, which the trial court refused to submit to the jury. The homeowners alleged Pesak failed to act with due care by selecting a construction site that had serious drainage problems, which problems Pesak then failed to remedy. The homeowners also pursued a negligent infliction of emotional distress claim against Pesak, alleging Pesak s negligence caused Mr. Jones to suffer his heart attack and negligence under the voluntary undertaking theory. The court of appeals rejected these arguments, finding that the economic loss rule barred the homeowners from bringing such claims. Specifically, the court explained: 31 Id. at 419 (emphasis in original). 32 Id. 33 Id. at

14 To distinguish between contract and tort causes of action, we analyze the source of the duty and the nature of the remedy. If the defendant s conduct gives rise to liability because it breaches an agreement between the parties, the plaintiff s claim ordinary sounds only in contract. In determining whether the plaintiff may recover on a tort theory, if the damages sought are only loss or damage to the subject matter of the contract, the cause of action is ordinarily on the contract. In other words, absent a duty to act independently of the promise made, failure to perform on a promise will not give rise to a cause of action for negligence. 34 Because the Joneses did not identify any duty Pesak owed, other than the duties connected with the construction of the home (that is, the subject matter of the contract) the trial court had properly denied submission of the homeowners negligence claim to the jury. 35 Interestingly, the court of appeals stated Pesak owed no independent legal duty not to negligently inflict emotional distress in performing under the contract and that Mr. Jones s heart attack was not a foreseeable result of any allegedly defective performance of the construction contract that would otherwise give rise to a legal duty. 36 Regarding the negligent undertaking claim, the court provided a useful discussion about the nature of such a claim and how it relates to an ordinary negligence claim. Specifically, the homeowners sought to hold Pesak liable under the negligent undertaking theory, because they had taken Pesak s suggestion to build the home on a site downhill from the location they originally considered. 37 Quoting the Texas Supreme Court s opinion in Colonial Savings Association v. Taylor, the court explained that one who voluntarily undertakes an affirmative course of action for the benefit of another has a duty to exercise reasonable care that the other s person or property will not be injured thereby. 38 Further, the court explained that, as with a simple negligence claim, a negligent undertaking claim still requires proof that the defendant owed the plaintiff a legal duty and violated; however, undertaking liability requires the presence of the following specific duty predicates: (1) that the defendant undertook to perform services that it knew or should have known were necessary for the plaintiffs protection, (2) the defendant failed to exercise reasonable care in performing those services, and either (3) a third party charged with protecting the plaintiffs relied upon the defendant s performance, or (4) the defendant s performance 34 Pesak, 416 S.W.3d at 631 (citations omitted). 35 Id. at Id. 37 Id. at Id. 11

15 increased the plaintiffs risk of harm. 39 In its evaluation of the homeowners claim, the court noted that the homeowners did not present any testimony to support a finding that proper final grading would not have corrected for any difference in drainage between the two sites. 40 Because the homeowners did not show a separate undertaking from the construction contract itself, or any increased risk of harm separate from the performance under the contract, the court held that the trial court did not err in refusing to submit the homeowner s negligent undertaking claim to the jury as a separate cause of action. Owner v. General Contractor: Implied Warranties Implied Warranty of Good and Workmanlike Performance in New Construction and Repair In Gonzales v. Southwest Olshan Foundation Repair Company, LLC, a homeowner, Gonzales, hired a plumber to repair water leaks under her foundation and hired Olshan to repair foundation problems the water leaks had caused. 41 The foundation repair contract included a lifetime, transferrable warranty on the work requiring Olshan to adjust the foundation due to settling. The contract further provided that Olshan perform all the necessary work in connection with this job... in a good and workmanlike manner. The work included cosmetic repairs to the interior of the house, such as taping, floating, texturing, and painting walls and ceilings. Gonzales soon noticed doors not locking, windows not opening, and new cracks appearing in previously repaired walls. 42 She eventually sued Olshan for, among other things, breach of an express warranty, breach of the common-law warranty of good and workmanlike repairs, and DTPA violations. 43 The Texas Supreme Court held: 1) Olshan s express warranty superseded the implied warranty of good and workmanlike repair; 2) the jury s finding that Olshan did not breach the express warranty precluded liability on Gonzales s warranty claims; and 3) Gonzales s DTPA claim was barred by limitations. As to the express warranty superseding the good and workmanlike warranty, the supreme court cited its prior recognition in Melody Home Manufacturing v. Barns of an implied warranty to repair or modify existing tangible goods or property in a good and workmanlike manner. 44 The Olshan court, quoting Melody Home, defined good and workmanlike as that quality of work performed by one who has the knowledge, 39 Id. 40 Id S.W.3d 52, (Tex. 2013). 42 Id. at 54 (quotations in original). 43 Id. at Id. at 56 (quoting Melody Home, 741 S.W.2d 349, 354 (Tex. 1987)). 12

16 training, or experience necessary for the successful practice of a trade or occupation and performed in a manner generally considered proficient by those capable of judging such work. 45 The Olshan court further noted, as in Melody, that the implied warranty may not be waived or disclaimed. 46 In addition to relying on Melody Home, the Olshan court also relied upon its holding in Centex Homes v. Buecher. 47 In Buecher, the supreme court addressed the implied warranty of good workmanship in new home construction. There, the supreme court noted the implied warranty of good workmanship serves as a gap-filler or default warranty ; it applies unless and until the parties express a contrary intention. 48 The Buecher court held that the implied warranty of good workmanship attaches to a new home sale if the parties agreement does not provide how the builder or the structure is to perform. 49 Therefore, when the parties agreement sufficiently describes the manner, performance or quality of construction, the express agreement may supersede the implied warranty of good workmanship. 50 Applying the above analysis to the case before it, the Olshan court held that parties cannot disclaim but can supersede the implied warranty for good and workmanlike repair of tangible goods or property if the parties agreement specifically describes the manner, performance, or quality of the services. 51 Because the parties agreement in Olshan specified that the service provider would perform foundation repair in a good and workmanlike manner and adjust the foundation for the life of the home due to settling, the express warranty sufficiently described the manner, performance, or quality of the services so as to supersede the Melody Home implied warranty. 52 Implied warranties might also apply to commercial owners in certain instances. In Barnett v. Coppell North Texas Court, Ltd., 53 the Dallas Court of Appeals applied the implied warranty of construction in a good and workmanlike manner to a project for the construction of an athletic facility. The Barnett court cited verbatim the good and workmanlike standard from Melody Home as that quality of work performed by one who has the knowledge, training, or experience necessary for the successful 45 Olshan, 400 S.W.3d at 56 (quoting Melody Home, 741 S.W.2d at 354). 46 Olshan, 400 S.W.3d at 56 (quoting Melody Home, 741 S.W.2d at 355) S.W.3d 266, (Tex. 2002). 48 Olshan, 400 S.W.3d at 56 (quoting Buecher, 95 S.W.3d at 273). 49 Id. 50 Olshan, 400 S.W.3d at 56 (quoting Buecher, 95 S.W.3d at 268). 51 Olshan, 400 S.W.3d at Id S.W.3d 804 (Tex. App. Dallas 2003, pet. denied). 13

17 practice of a trade or occupation and performed in a manner generally considered proficient by those capable of judging such work. 54 The owners in Barnett brought multiple claims against the general contractor, who left the job unfinished after roughly a year on the project. 55 The court of appeals affirmed the trial court s finding that the general contractor had breached the warranty of good and workmanlike performance. Relying almost entirely on residential construction defect cases, the appellate court affirmed the trial court because the general contractor had failed to complete the work as required under the contract, and because the subsequent purchaser of the property stated that some of the work, such as concrete and flooring, had to be redone. 56 This application of the implied warranty of good and workmanlike performance is interesting given that one of the main purposes behind the implied warranty is the protection of the helpless consumer who takes what he gets because he does not know enough technically to test or judge what is before him, 57 though the Barnett court did note the gymnastics instruction business at issue was the sole source of income for the plaintiff husbandwife couple in the case. 58 In certain situations the economic loss rule might limit the application of this implied warranty. In Trans-Gulf Corp. v. Performance Aircraft Services, Inc., the Eastland Court of Appeals held that the economic loss rule barred the purchaser of an airplane from bringing a breach of implied warranty of good and workmanlike performance claim against contractors hired to repair the airplane months before the purchaser bought it. The court of appeals noted that [i]mplied warranties are grounded more in tort than in contract. If the economic loss rule precludes a negligence cause of action sounding in tort [the court had previously held it did], we see no reason why it should not also preclude other causes of action sounding in tort. 59 The purchaser of the airplane had brought claims against a contractor hired by the airplane seller, as well as a subcontractor hired by that contractor for allegedly using improper sealant in performing the repair work. According to the Eastland 54 Id. at 824 (citing Melody Home, 741 S.W.2d at 354 (applying the implied warranty to service transactions, in case involving repairs made to a mobile home)). 55 Barnett, 123 S.W.3d at Id. at 823 (citing Melody Home, 741 S.W.2d at 349; Centex Homes v. Buecher, 95 S.W.3d 226, (Tex. 2002)). 57 Haire v. Nathan Watson Co., 221 S.W.3d 293, 302 (Tex. App. Fort Worth 2007, no pet.) S.W.3d at S.W.3d 691, (Tex. App. Eastland 2002, no pet.). 14

18 Court of Appeals, the economic loss rule precluded the negligence claims by these contractual strangers where there was no accompanying claim for damages to a person or property. 60 Because the allegedly deficient repairs resulted only in economic loss, the contractors and subcontractors liability should be restricted to the risk allocations contained within the contracts between the previous owner and its contractors, and the risk allocations contained within the contract between the previous owner and subsequent purchaser. 61 The Builder s Implied Contractual Covenant to Build to Code In addition to the implied warranties above, at least one Texas court has held the contractor has an implied covenant to comply with building codes. In Tips v. Hartland Developers, Inc., the owner, Tips, and the prime contractor, Hartland, executed a contract for Hartland to construct an airplane hangar. 62 The construction of the airplane hangar also included installation of a mezzanine for offices and ramp access to the hangar. Under the contract, Hartland was to prepare the drawings and plans and specifications for the hangar and to secure all permits for its completion. 63 During construction, a Tips representative instructed Hartland to cease work prior to completion of the mezzanine and ramp because Tips could no longer make payments. 64 Tips could not obtain a certificate of occupancy from the city because the building failed to comply with fire code requirements. 65 Unfortunately, the court of appeals did not state specifically what these fire code violations were. Because of Tips s cease work directive, Hartland eventually sued Tips for breach of contract, unjust enrichment, and fraud. Tips counterclaimed for breach of contract and DTPA violations. 66 The trial court awarded Hartland the amount owing on the contract, less the cost of completing the office mezzanine, plus attorney s fees, and interest. It allowed Tips an offset of $65,000 for Hartland s failure to provide ramp access to the hangar. 67 The trial court ruled that the items needed to bring the 60 Id. at Id. at S.W.2d 618, 620 (Tex. App. San Antonio 1998, no pet.). 63 Tips, 961 S.W.2d at Id. at Id. at Id. 67 Id. 15

19 hangar in compliance with the city fire code were not contemplated by the parties in their contract. 68 Tips appealed, raising three points of error related to the implied duty to build to code, arguing: 1) the trial court failed to consider that implied covenants in a contract require the builder to deliver a building that complies with relevant building codes and regulations; 2) the evidence was legally and factually insufficient to support a finding that items necessary to bring the structure into compliance with the fire code were not within the scope of the contract; and 3) Hartland had a duty to deliver a structure usable for its intended purposes. 69 The Fourth Court of Appeals agreed with Tips that an implied covenant to comply with code exists. But the court also held that the implied covenant may be modified by contract and, further, that the parties made such modification: He [Tips] asks this court to hold that all contractors, when entering into building contracts, impliedly agree to comply with relevant municipal and county codes so that the building is suitable for its intended purpose. We find that such a covenant is implied in construction contracts, but we agree with Hartland that these parties modified the covenant by agreement. 70 Thus, the court of appeals agreed with Tips on his first point of error: there generally exists an implied covenant from the builder to build to code. But the court disagreed with Tips on points two and three: there was sufficient evidence that the parties modified the implied duty, so that items necessary to bring the structure into compliance with the fire code were not within the scope of Hartland s contract (point two); therefore Hartland had no duty to deliver a structure fit for its intended purpose (point three): In reaching our decision on this point, we dispose of Tips s second and third points of error. There is sufficient evidence in the record to support the trial court's findings on the scope of the agreement. We agree that Hartland had a general duty to deliver a structure fit for its intended purpose, including compliance with code requirements. 68 Id. at Id. at Id. (emphasis added). 16

20 But we also find that the parties made their own arrangements that modified the general duty. 71 In reaching its holding, the court of appeals emphasized the superior knowledge of a contractor when compared to an owner. It cited the Texas Supreme Court Gupta v. Ritter Homes opinion: 72 In Gupta the supreme court stated that builders carry the burden of delivering structures in a good and workmanlike manner because (1) they should be in the business of constructing buildings free of latent defects; (2) buyers are not in a position to discern defects; (3) buyers cannot normally rely on their own judgment in such matters; (4) buyers rely on builders to construct in a good and workmanlike manner; and (5) the builder is the only one who knows the manner in which the building was built. 73 The Tips court bracketed the discussion between the owner and builder, with no reference to the responsibility an architect might play, particularly on non-designbuild projects: existing codes require newly constructed buildings to meet certain standards; however, the codes do not dictate whether the responsibility for ensuring compliance rests on the building owner or the building contractor. The court concluded the burden should fall on the builder. 74 It stated in blunt dicta: [c]ontractors, not owners, are in the best position to know about and comply with relevant building codes 75 Similarly, the court cited court opinions from other states relying on the unique position of the contractor in finding such an implied covenant: [s]everal other jurisdictions have found such implied covenants in construction contracts. The rationale for these holdings is plain: a builder is uniquely situated to know or discover compliance requirements Id. at 623 (emphasis added). 72 Gupta v. Ritter Homes, Inc., 646 S.W.2d 168 (Tex. 1983). Gupta held that an implied warranty from the builder can transfer to subsequent homeowners but note that Gupta was subsequently overruled at least as to the transfer of DTPA warranties by PPG Indus., Inc. v. JMB/Houston Ctrs. Partners Ltd. P ship. 146 S.W.3d 79, 89 (Tex. 2004). 73 Tips, 961 S.W.2d at 622 (citing Gupta, 646 S.W.2d at 169). 74 Tips, 961 S.W.2d at Tips, 961 S.W.2d at Id. (citing, inter alia, Denice v. Spotswood I. Quinby, Inc., 248 Md. 428, 237 A.2d 4, 9 (1968)). This dicta in Tips is eerily similar to the dicta from the seminal Texas Supreme Court opinion, Lonergan v. San Antonio Loan & Trust Co., regarding the builder s superior knowledge, compared to the owner, as to the sufficiency of plans and specifications. 104 S.W. 1061, 1065 (Tex. 1907) ( There is no more reason why the loan and trust company [owner] should be held responsible for the alleged defects in the specifications that it did not discover for want of skill 17

21 In addition to the unique position of the builder, the court of appeals also looked at other tort duties imposed upon contracts by Texas courts: As one court noted, [i]mplicit in every contract is a common-law duty to perform the terms of the contract with care, skill, and reasonable experience. Texas courts have also recognized that builders have a duty to deliver buildings that are habitable. 77 Surprisingly, in reaching its opinion, the court did not discuss related Texas opinions holding that parties are deemed to have understood the laws in effect at the time of executing a contract. 78 The Tips court made clear the covenant to build to code might be modified by an agreement of the parties. 79 It is also worth noting that though not discussed in detail in Tips the U.C.C. provides: Sec EXCLUSION OR MODIFICATION OF WARRANTIES. (a) Words or conduct relevant to the creation of an express warranty and words or conduct tending to negate or limit warranty shall be construed wherever reasonable as consistent with each other; but subject to the provisions of this chapter on parole or extrinsic evidence (Section 2.202) negation or limitation is inoperative to the extent that such construction is unreasonable. (b) Subject to Subsection (c), to exclude or modify the implied warranty of merchantability or any part of it the language must mention merchantability and in case of a writing must be conspicuous, and to exclude or modify any implied warranty of fitness the exclusion must be and knowledge of the business of an architect, than there is for holding Thos. Lonergan & Co. [contractor] to be bound by their acceptance of the defective plans which they understood as well as the trust company did, and in all probability much better. ). Though some Texas courts of appeal have declined to follow Lonergan, the San Antonio court of appeals still follows it, as discussed later in this paper. Alamo Cmty. Coll. Dist. v. Browning Constr. Co., 131 S.W.3d 146, 155 ( Tex. App. San Antonio 2004, pet. dism d by agr.). 77 Tips, 961 S.W.2d at 621 (quoting Sipes v. Langford, 911 S.W.2d 455, 457 (Tex. App. Texarkana 1995, writ denied); citing Parkway Co. v. Woodruff, 857 S.W.2d 903, 910 (Tex. App. Houston [1st Dist.] 1993), aff'd as modified, 901 S.W.2d 434 (Tex.1995)). 78 E.g., Jamestown Partners, L.P. v. City of Fort Worth, 83 S.W.3d 376, 381 (Tex. App. Fort Worth 2002, pet. denied) ( Courts presume the parties to a contract knew and took into consideration the laws affecting matters about which they contracted, unless the contrary clearly appears in the written terms of the contract. ). Though the Tips court did note that [e]very contract incorporates existing laws, and a party's obligation under a contract is measured by the standard of the laws existing at the time the contract is made. Tips, 961 S.W.2d at Tips, 961 S.W.2d at

22 by a writing and conspicuous. Language to exclude all implied warranties of fitness is sufficient if it states, for example, that "There are no warranties which extend beyond the description on the face hereof." (c) Notwithstanding Subsection (b) (1) unless the circumstances indicate otherwise, all implied warranties are excluded by expressions like "as is", "with all faults" or other language which in common understanding calls the buyer's attention to the exclusion of warranties and makes plain that there is no implied warranty; and (2) when the buyer before entering into the contract has examined the goods or the sample or model as fully as he desired or has refused to examine the goods there is no implied warranty with regard to defects which an examination ought in the circumstances to have revealed to him; and (3) an implied warranty can also be excluded or modified by course of dealing or course of performance or usage of trade. 80 Builder s Implied Warranty of Habitability (even to subsequent purchasers); Comparative Suitability for Intended Commercial Purposes In Old HH, Ltd. v. Henderson, Yolanda and Christopher Conyers sold Mary Henderson their house, which had been built by Old HH, Ltd. After discovering alleged defects in the house, Henderson sued the Conyerses and Old HH, asserting various causes of action against the Conyerses and causes of action against Old HH for DTPA violations, breach of the implied warranty of good workmanship, and breach of the implied warranty of habitability. 81 Henderson alleged that, about a year and a half after she purchased the home, water began leaking into the residence from a dead valley located above the front entry. She claimed that subsequent mold testing revealed the presence of pathogenic mold in the living room, home office, a bedroom, and the chimney area. Henderson hired an engineer to inspect the house, and the engineer reported that there were numerous other construction defects, including defects in the foundation and roof framing. 82 At trial, the jury found Old HH breached the implied warranty of good workmanship and awarded Henderson $85,000 to compensate her for the reasonable cost of repairs necessary to cure any construction defect, $4,500 as reasonable and necessary engineering and consulting costs, and $10,200 as the reasonable expenses of 80 TEX. BUS. & COM. CODE ANN (Vernon 2014). 81 No CV, 2011WL , at *1 (Tex. App. Austin Dec. 9, 2011, no pet.) (mem. op.) (not designated for publication). 82 Id. 19

23 temporary housing reasonably necessary during the repair period. However, the trial court refused Henderson s request to submit a jury question asking whether Old HH violated the implied warranty of habitability. 83 The court of appeals reversed and remanded, holding the trial court was required to submit that implied warranty of habitability question and erred in failing to do so. 84 In reaching its conclusion, the court of appeals relied heavily upon the 1983 Texas Supreme Court Opinion, Gupta v. Ritter Homes, Inc.: The supreme court has held that the implied warranty of habitability, which is implicit in the contract between the builder/vendor and the original purchaser, is automatically assigned to a subsequent purchaser. 85 The court of appeals emphasized the following language from Gupta: As between the builder and owner, it matters not whether there has been an intervening owner. The effect of the latent defect on the subsequent owner is just as great as on the original buyer and the builder is no more able to justify his improper work as to a subsequent owner than to the original buyer. 86 The court of appeals noted that the extension of the builder s liability to subsequent purchasers under the implied warranty of habitability theory was limited to latent defects that manifest themselves after the purchase and are not discoverable by the subsequent purchaser s reasonably prudent inspection at the time of sale. 87 Citing the seminal 2002 Texas Supreme Court Centex v. Buecher opinion, the court of appeals defined latent defects as those defects that are not known by or expressly disclosed to the buyer. 88 The court of appeals also rejected an argument from Old HH that reasonably prudent inspection meant inspection by a reasonably prudent home inspector ; relying upon Gupta again, the court of appeals noted the implied warranty arises to protect the purchaser from defects that she herself cannot discover by reasonable inspection. There is no requirement that the defects be undiscoverable by a person with more knowledge or experience than the buyer, such as a professional home inspector Id. at *2. 84 Id. at *7. 85 Id. at *4 (citing Gupta v. Ritter Homes, Inc., 646 S.W.2d 168, 169 (Tex.1983)). 86 Old HH, 2011 WL , at *4 (quoting Gupta, 646 S.W.2d at 169). 87 Old HH, 2011 WL , at *5 (citing Gupta, 646 S.W.2d at 170). 88 Old HH, 2011 WL , at *5 (citing Centex Homes v. Buecher, 95 S.W.3d 266, 274 (Tex. 2002)). 89 Old HH, 2011 WL , at *5 (citing Gupta, 646 S.W.2d at 169). 20

24 The court of appeals also noted that breach of the implied warranty of habitability occurs when the defect is of a nature that will render the premises unsafe, unsanitary, or otherwise unfit for living therein. 90 The nature of the deficiency, its effect on habitability, the length of time for which it persisted, the age of the structure, and the area in which the premises are located are all factors to be considered in deciding if there has been a breach of the warranty of habitability. 91 The court of appeals concluded that the record contained some evidence that the house was unfit to live in and that it would have been unsafe for Henderson to continue to live there; this was because the record contained evidence that engineering consultants hired by Henderson to inspect the house (after the alleged defects manifested themselves) advised her that she should move out of the house to protect herself and a report prepared by one of the consultants referred to the unsafe condition of the house, including unsafe structures. Further, there was also extensive testimony regarding the presence of mold in the house. According to the court of appeals, a jury finding that Old HH breached the implied warranty of habitability was important because such a finding would entitle Henderson to recover, among other things, the reasonable expenses of temporary housing reasonably necessary during the repair period, pursuant to the Residential Construction Liability Act ( RCLA ). 92 Henderson testified that she rented a house that was built with the exact same floor plan as her own house. Evidence admitted at trial demonstrated that Henderson paid $1,695 per month for the first year of the lease, with a twelve month total of $20,340. Rent for this house increased by five percent each year, and Henderson paid rent totaling $21,360 during the second year of the lease, $22,428 during the third year of the lease, and $23,544 during the fourth year of the lease. 93 Old HH unsuccessfully argued that such evidence had no relevance to living expenses for a repair period, since no repair period was ever identified or quantified. In rejecting this argument, the court of appeals stated [e]ven if the lack of evidence regarding the length of the repair period vitiated the evidentiary value of testimony regarding the rent payments, however, Henderson also presented evidence of her moving and storage costs and that [t]hese costs, which fall under the category of expenses of temporary housing, would be incurred regardless of the length of time Henderson was required to be absent from her home i.e., the repair period and would therefore be recoverable without evidence of what the repair period actually was or should have been. 94 Because Henderson 90 Old HH, 2011 WL , at *6 (citing Kamarath v. Bennett, 568 S.W.2d 658, 661 (Tex.1978)). 91 Id. 92 Old HH, 2011 WL , at *7 (quoting TEX. PROP. CODE (g)(4) (West. Supp. 2011)). 93 Old HH, 2011 WL , at *7. 94 Id. 21

25 presented some evidence of damages recoverable under the implied warranty of habitability theory of recovery, the court of appeals could not conclude that the trial court s erroneous refusal to submit the requested question was harmless. 95 The Old HH opinion is important for a variety of reasons but perhaps most important is that it breathes new life into the implied warranty of habitability cause of action by a subsequent purchaser. While Gupta previously laid the groundwork for such cause of action, that opinion is now thirty years old. Also, though Gupta s holding on the implied warranty issue had never been expressly overruled, at least some doubt as to its efficacy had been cast by subsequent opinions regarding DTPA and implied workmanship causes of action. 96 The Old HH court s thorough reliance upon and analysis of Gupta makes it clearer that homebuilders must be aware there is some risk that, in certain instances, they could be liable to subsequent purchasers with whom the homebuilder never contracted. Finally, while the implied warranty of habitability of course applies mainly to residential structures, in certain instances there may be a somewhat comparable implied warranty of suitability for intended commercial purposes. 97 Applied mostly in commercial landlord/tenant disputes, the warranty means that at the inception of the lease, there are no latent defects in the facilities that are vital to the use of the premises for their intended commercial purpose, and that these essential facilities will remain in a suitable condition. 98 But the implied warranty of suitability may be contractually waived, unlike the implied warranty of habitability, which can be waived only to the extent that defects are adequately disclosed. 99 In certain situations, the owner of commercial property might have a cause of action for the breach of the implied warranty of suitability against a commercial contractor, similar to a landlord/tenant dispute or a suit by a homeowner against a homebuilder who violates the implied warranty of habitability Id. 96 See, e.g., PPG Indus., Inc. v. JMB/Houston Ctrs. Partners Ltd. P ship, 146 S.W.3d 79, 89 (Tex. 2004) (impliedly overruling Gupta as to DTPA cause of action, holding that a downstream buyer can sue a remote seller for breach of an implied warranty, but cannot sue under the DTPA); Villarreal et. al. v. MG Builders et. al., 354 Fed.Appx. 177, 2009 WL (5th Cir. Nov. 19, 2009) (regarding implied workmanship for owners not in privity with builder). 97 Gym-N-I Playgrounds, Inc. v. Snider, 220 S.W.3d 905, 910 (Tex. 2007). 98 Id. (citing Davidow v. Inwood North Professional Group Phase I, 747 S.W.2d 373, 377 (Tex. 1988)) S.W.3d at (citing Centex Homes, 95 S.W.3d at 274). 100 Humber v. Morton, 426 S.W.2d 554, 555 (Tex. 1968). 22

26 Note Regarding Texas Residential Construction Commission Sunset For several years, it appeared implied warranty cases would be dominated by commercial, rather than residential, construction cases. This was because the Texas Legislature created the Texas Residential Construction Commission ( TRCC ) in 2003; the Commission had rule-making authority to create statutory warranties of workmanship and habitability as to new residential construction. 101 These statutory warranties were exclusive and superseded all previous implied warranties of workmanship and habitability as they pertained to residential construction defects. 102 However, the Texas Legislature effectively allowed the TRCC along with its statutory warranties to expire in August The expiration of the TRCC has therefore increased the import of Texas court opinions regarding implied warranties, as well as the procedural provisions of the Texas Residential Construction Liability Act. 104 Owner v. General Contractor: DTPA Recall from the Jones v. Pesak case above that the homeowners, the Joneses, sued their builder, Pesak, for foundation problems and an alleged heart attack suffered by Mr. Jones as a result of stress associated with the defects. The homeowners also brought a DTPA claim against Pesak, alleging Pesak engaged in false, misleading, and/or deceptive acts or practices that the homeowners relied on to their detriment. 101 TEX. PROP. CODE ANN (2) (Vernon 2007). 102 Id ; Gym-N-I Playgrounds, 220 S.W.3d at 914 n TEX. PROP. CODE ANN (Vernon 2003) ( sunset provision stating, unless expressly continued by the Legislature, the commission [TRCC] is abolished and this title expires September 1, ); The Sunset Commission issued its Staff Report in August 2008 and its Final Report in July The August 2008 Report as the 2009 report would eventually do recommended the TRCC be abolished and the TRCCA repealed. The 2009 report noted [p]eople do not trust the [TRCC] regulatory processes to protect them from unqualified builders who should not be in business and that [w]hen confronted with the daunting issues involved in controlling such a large, important, and complex field as residential construction, Sunset staff did not trust that the commitment exists to establish the true regulation needed for the protection of the public. SUNSET ADVISORY COMMISSION, FINAL REPORT, TEXAS RESIDENTIAL CONSTRUCTION COMMISSION (July 2009). Thus, if the 2009 Legislature did not enact a statute expressly continuing the TRCC/ TRCCA, both would be gone. There were few attempts to continue the TRCC/ TRCCA by the 2009 Legislature, but none of them gained significant momentum. E.g., Tex. H.B. 2295, 81st Leg., R.S. (2009). Interestingly, the Legislature did not pass a bill abolishing the TRCC and the Texas Residential Construction Commission Act, but simply allowed them to sunset. 104 TEX. PROP. CODE

27 Citing to Section 17.50(a)(1) and (a)(3) of the DTPA (Texas Business and Commerce Code), the Pesak court explained that a consumer may bring a DTPA cause of action for either a violation of section 17.46(b) of the DTPA (the laundry list ) or for an unconscionable action or course of action if the violation constitute[s] a producing cause of economic damages or damages for mental anguish. 105 The homeowners brought both types of claims. Thus, charge question 2 asked the jury to find whether Pesak engaged in any false, misleading, or deceptive act or practice that the homeowners relied on to their detriment and was a producing cause of their damages. Specifically, the charge asked the jury to consider whether Pesak: (1) represented that the home as completed had or would not have had the characteristics that the home did not have, or (2) represented that the home was or would be of a particular quality when it was of another, or (3) failed to disclose information about the home that was known at the time of the transaction with the intention to induce the homeowners into a transaction that they otherwise would not have entered into if the information had been disclosed. 106 Charge question 3 tasked the jury with finding whether Pesak s conduct violated the provision of the DTPA that prohibits unconscionable conduct; the charge defined unconscionable action or course of action as an act or practice that to a consumer s detriment, takes advantage of the lack of knowledge, ability, experience, or capacity of a consumer to a grossly unfair degree. 107 The jury answered no to both charge questions. 108 On appeal, the homeowners pointed to the construction agreement as evidence supporting their DTPA claim that the home was misrepresented as being in conformity with applicable local, state, and national building codes. The Pesak court rejected this argument, holding the evidence did not support the conclusion that Pesak failed to comply with any code requirement that produced the foundation s heaving and movement because the only reference to building code standards appeared in Kieschnick s list not any agreement between Pesak and the homeowners. 109 Non-privity Owner(s) v. General Contractor: Nuisance In C.C. Carlton Industries, Ltd. v. Blanchard 110 a group of homeowners sued C.C. Carlton Industries, Ltd. ( Carlton ) and KB Homes Lone Star, L.P. ( KB ), 105 Id. at Id. at Id. 108 Id. 109 Id.; see also PPG Indus., Inc. v. JMB/Houston Ctrs. Partners Ltd. P ship, 146 S.W.3d 79, 89 (Tex. 2004) (holding that a downstream buyer can sue a remote seller for breach of an implied warranty, but cannot sue under the DTPA) S.W.3d 654 (Tex. App. Austin 2010, no pet.). 24

28 seeking money damages allegedly suffered from KB s and Carlton s construction activities that created a nuisance behind their homes. 111 The homeowners were neighbors whose homes were contiguous and whose homes were as close as twenty feet to the construction activity. 112 KB, a homebuilder and developer, and Carlton, a general contractor, began constructing a new 550-home subdivision in southeast Austin near the homeowners homes ( the Project ). The Project included tearing up and widening a road, adding curbs and sidewalks, grading and preparing the land for home sites, removing many trees, adding residential streets, installing sewer and utility lines, and constructing a storm-drainage culvert and retention pond. Carlton used heavy equipment for bulldozing, pounding, and steam-rolling the land, laying and tearing up asphalt, and digging through layers of hard clay and limestone. 113 The jury found KB s and Carlton s construction activities caused a nuisance to the homeowners and, under that theory, held KB and Carlton liable for $200,988 in damages. 114 The Austin Court of Appeals affirmed. The court of appeals defined a nuisance as a condition that substantially interferes with the use and enjoyment of land by causing unreasonable discomfort or annoyance to persons of ordinary sensibilities. 115 Quoting the Texas Supreme Court, the court of appeals noted [t]here is no question that foul odors, dust, noise, and bright lights if sufficiently extreme may constitute a nuisance. 116 The court of appeals also divided actionable nuisance into three categories: 1) negligent invasion of another s interests; 2) intentional invasion of another s interests; or 3) other conduct, culpable because abnormal and out of place in its surroundings, that invades another s interests. 117 The court of appeals found there was sufficient evidence to support the jury s nuisance finding and its determination that Carlton s conduct was abnormal and out of place in its surroundings. 118 The court of appeals emphasized the following facts: 111 Id. at Id. at 657, Id. at Id. at Id. at 659 (citing Schneider Nat l Carriers, Inc. v. Bates, 147 S.W.3d 264, 269 (Tex. 2004); Graham v. Pirkey, 212 S.W.3d 507, 511 (Tex. App. Austin 2006, no pet.)). 116 Carlton, 311 S.W.3d at 659 (quoting Schneider, 147 S.W.3d at 269). 117 Carlton, 311 S.W.3d at 659 (citing City of Tyler v. Likes, 962 S.W.2d 489, 503 (Tex.1997)). 118 Carlton, 311 S.W.3d at

29 1. For almost eight months, Carlton s crew worked to construct the stormdrainage culvert, using heavy equipment to excavate through 12 to 13 feet of limestone and hard clay. The record showed this construction activity occurred approximately 20 feet from Rivera s [one of the homeowners] house and in close proximity to the Sosa s and the Blanchards residences, which are contiguous to Rivera s house. 2. Vibrations from the Project caused each homeowner s residence to experience large cracks in the foundation, leaks in the roof, and cracks in the interior and exterior walls. 3. These vibrations also caused the Blanchards house to have broken floors and their bathroom tubs to separate from the pipes; Rivera s bathroom ceiling to fall; and Sosa s master bedroom, kitchen, and guest bathroom to have water damage from broken pipes. 4. When it became apparent that it had fallen behind schedule and would have to pay KB $1,000 a day in liquidated damages, Carlton brought in three or four large, bright lights, positioned them directly behind the homeowners homes, and began working around-the-clock for approximately four months, including weekends and holidays, to finish the job. Annoyed and stressed from the lights, the vibrations, the pounding, and the noise, the Homeowners testified they lost sleep. 119 KB and Carlton unsuccessfully argued that their conduct was normal because the City of Austin had approved KB and Carlton s engineering plans, gave KB and Carlton a permit to construct public improvements, and inspected the Project during construction. 120 The court of appeals rejected this argument because even if a commercial enterprise holds a valid permit to conduct a particular business, the manner in which it performs its activity may give rise to an action for nuisance. 121 The take away from Carlton might just be that a builder should only be concerned about a potential nuisance claim when there are abnormal facts like those in Carlton, e.g., large cracks in the foundation of adjoining homes. 122 But the Carlton opinion really just discusses what a nuisance is; it does not really give a bright line example of what will not be considered a nuisance. For example, the court of appeals 119 Id. 120 Id. at Id. at 660 (citing Manchester Terminal Corp. v. Texas TX TX Marine Transp., Inc., 781 S.W.2d 646, 650 (Tex. App. Houston [1st Dist.] 1989, writ denied). 122 Id. at

30 noted in its discussion of the facts that early in the Project Carlton s crews worked steadily, from early morning until about six in the evening for at least five days a week, constructing the storm-drainage culvert. 123 But the court did not emphasize or discuss that fact during the analysis portion of its opinion. Does that mean working those hours will never be considered a nuisance? Relatedly, how broadly can a plaintiff homeowner apply the court s definition of a nuisance, i.e., what other facts will be considered a condition that substantially interferes with the use and enjoyment of land by causing unreasonable discomfort or annoyance to persons of ordinary sensibilities? 124 What else might be considered foul odors, dust, noise, and bright lights that are sufficiently extreme to be considered a nuisance? 125 Can Carlton be applied equally to contractors who work on commercial projects that just happen to be close to/ adjoining residential property? Unfortunately, these are questions that essentially remain unanswered. Owner v. Subcontractor: Breach of Contract Third Party Beneficiary Sometimes, the owner desires to reach out and touch someone that the owner is not in contractual privity with in the traditional sense. If breach of contract is the cause of action of choice because, for example, the statute of limitations on a tort theory has expired, the owner will assert it is a third party beneficiary of the agreement between the general contractor and subcontractor. This is not an easy task. The Texas Supreme Court consistently reaffirms the presumption against conferring third-party-beneficiary status on non-contracting parties. 126 In deciding whether a third-party may enforce or challenge a contract between others, the contracting party s intent will control. 127 The intent to confer a direct benefit upon a third-party must be clearly and fully spelled out or enforcement by the third-party must be denied. 128 Incidental benefits flowing from a contract to a third-party will not confer the right to enforce the contract. 129 A third-party may only enforce a contract when the contracting parties intend to secure some benefit for the third-party and entered into the contract directly for the 123 Id. at Id. at Id. 126 S. Tex. Water Auth. v. Lomas, 223 S.W.3d 304, 305 (Tex. 2007) (hereinafter Lomas). 127 Id. (citing Corpus Christi Bank & Trust v. Smith, 525 S.W.2d 501, (Tex. 1975)). 128 Lomas, 223 S.W.3d at 305; (citing MCI Telecomms. Corp. v. Tex. Utils. Elec. Co., 995 S.W.2d 647, 651 (Tex. 1999)). 129 Lomas, 223 S.W.3d at 305 (citing MCI Telecomms. Corp., 995 S.W.2d at 652)). 27

31 third-party s benefit. 130 To qualify as one for whose benefit a contract was made, the third-party must be more than an incidental beneficiary. Rather, he must generally fall into one of two categories: 1) donee beneficiary; or 2) creditor beneficiary. 131 A contract benefits a donee beneficiary if the performance promised in the contract will, when rendered, be a pure donation to the third-party. 132 If performance of the contract will satisfy a duty or legally enforceable commitment owed by the promisee, then the third-party is considered a creditor beneficiary. 133 Texas courts often state that an owner is generally considered only to be an incidental beneficiary to the contract between a general contractor and a subcontractor. Therefore, the owner cannot sue as a third-party beneficiary in these instances. In the frequently cited case of Thomson v. Espey Huston & Associates, Inc., M.D. Thomson and Austin Banister Joint Venture ( Thomson ) sued Espey Huston & Associates, Inc. ( Espey ) for breach of contract and negligence for Espey s role in the construction of an apartment complex. Thomson had contracted with Hamilton- Woodard Company for the construction of an apartment complex on land owned by Thomson. Hamilton-Woodard entered into two subcontracts with Espey, an engineering consulting firm. By 1986, Espey had performed all of its services, and the apartment complex was substantially complete. Thomson alleged that, over the next two years, the complex became riddled with design and construction defects relating to drainage and water run-off. 134 Thomson eventually sued Espey alleging breach of contract and negligence in the performance of both of Espey s subcontracts, allegedly causing 933 individual items of deficient construction. 135 The Espey court noted the presumption against third-party beneficiary agreements: [W]e must begin with the presumption that parties contract for themselves, and a contract will not be construed as having been made for the benefit of third parties unless it clearly appears that such was the intention of the contracting parties. 136 Thus, for Thomson to prevail on his contract claims, the intent to benefit him must be clearly apparent; any doubt must be resolved against finding that he is a 130 Lomas, 223 S.W.3d at 305 (citing MCI Telecomms. Corp., 995 S.W.2d at 651; Stine v. Stewart, 80 S.W.3d 586, 589 (Tex. 2002)). 131 Lomas, 223 S.W.3d at 305 (citing MCI Telecomms. Corp., 995 S.W.2d at 651). 132 Lomas, 223 S.W.3d at 306 (citing MCI Telecomms. Corp., 995 S.W.2d at 651). 133 Lomas, 223 S.W.3d at 306 (citing MCI Telecomms. Corp., 995 S.W.2d at 651) S.W.2d 415, 417 (Tex. App. Austin 1995, no writ). 135 Id. at and n Id. at 418 (citing Corpus Christi Bank & Trust, 525 S.W.2d at ). 28

32 third-party beneficiary. 137 Thomson argued that he was a third-party beneficiary because one of the subcontracts required the owner to provide Espey with certain information necessary for Espey s engineering services, and because the subcontract s title indicating that the construction project in question was located on property owned by Thomson. 138 The court of appeals dismissed these arguments by stating that the present case was governed by the generally prevailing rule that, in the construction context, a property owner is ordinarily not a third-party beneficiary of a contract between the general contractor and a subcontractor. 139 Citing Corbin on Contracts, the court stated that the owner has no right against the subcontractor, in the absence of clear words to the contrary. The owner is neither a creditor beneficiary nor a donee beneficiary; the benefit that he receives from performance must be regarded as merely incidental. 140 The court also cited the illustration from the Restatement (2 nd ) of Contracts whereby: A contracts to erect a building for C. B then contracts with A to supply lumber needed for the building. C is an incidental beneficiary of B s promise, and B is an incidental beneficiary of C s promise to pay A for the building. The court noted that the general rule was grounded in the interest of the property owner, general contractor and subcontractors. That is, the contract between the owner and the general contractor gives the owner the right to a finished building. Subsequent contracts between the general contractor and subcontractors add nothing to this entitlement; the owner is still entitled to the same building, regardless of the means by which it is constructed. 141 Thus, [i]f the subcontractors performance falls short of what the owner is entitled to, it is the general contractor who has to make up the difference. From the subcontractor s perspective, as well as the general contractor s, subcontracts are intended primarily to benefit those parties rather than the property owner. The court concluded its discussion with strong language: Absent clear evidence to the contrary, a property owner is not a third-party beneficiary of a contract between the general contractor and a subcontractor. 142 Applying this standard to the facts, the court noted that while Thomson benefited indirectly from the subcontracts, real estate development almost always 137 Espey, 899 S.W.2d at Id. at Id. at Id. at 419 (citing 4 ARTHUR L. CORBIN, CORBIN ON CONTRACTS, 779d (1951)). 141 Espey, 899 S.W.2d at Id. at 420 (citing B&C Constr. Co. v. Grain Handling Corp., 521 S.W.2d 98, 101 (Tex. Civ. App. Amarillo 1975, no writ)). 29

33 benefits the property owner. However, this merely establishes that Thomson was an incidental beneficiary, and incidental beneficiaries may not sue on a contract. 143 To sue on the contract, Thomson thus had to establish not only that he benefited from the contract, but also that the general contractor and subcontractor contracted directly and primarily for his benefit. 144 The court presumed that the general contractor and the subcontractor did not do so, and thus affirmed the trial court s granting of summary judgment for Espey on the breach of contract issue. 145 The holding and reasoning in Espey was reaffirmed in Raymond v. Rahme. 146 There, Curtis Raymond ( Raymond ) was the concrete subcontractor on a construction project to build a gas station on property owned by Marcel Rahme ( Rahme ). Rahme had hired JMT, Inc. as a general contractor for the project, who then entered into an oral subcontract with Raymond. 147 After a payment dispute arose, Raymond sued for breach of contract and sought to foreclose a mechanic s lien on the property. Rahme answered that Raymond had not used the proper grade or thickness of concrete in his scope of the work and had improperly poured and graded the concrete. Raymond eventually entered into a settlement agreement with JMT and non-suited JMT, and proceeded to trial against Rahme to foreclose on the lien. 148 Rahme had considered suing JMT but decided against it because JMT eventually went bankrupt. 149 The court of appeals held that Rahme could not recover from Raymond for breach of contract due to the lack of privity between the two parties. 150 Relying on the standards delineated in Espey, the court noted that there was no evidence to support a finding that Rahme was a third-party beneficiary of the subcontract. The court noted that Rahme in fact denied having a contract with Raymond, and the trial court sustained Raymond s objection to Rahme s attempts to show he was a third-party beneficiary to Raymond s contract with JMT. 151 That Raymond s subcontract with JMT was oral, no doubt made it difficult for Rahme to prove that he had expressly been named as a third-party beneficiary. 143 Id. at 420 (emphasis in original). 144 Id. (emphasis in original). 145 Id S.W.3d 552 (Tex. App. Austin 2002, no pet.). 147 Id. at Id. at Id. at 562 and n Id. at Id. at

34 At least one court has held that an owner was a third-party beneficiary of a subcontract where the subcontract contained an indemnity provision expressly indemnifying the owner for the damages at issue in the case. In Derr Construction Company v. City of Houston, an accident involving a crane occurred at the construction site at the George R. Brown Convention Center in Houston in The site was owned by the City of Houston, who had contracted with Blount Brothers Corporation ( Blount ) as general contractor with Gilbane/Mayan Joint Venture, Gilbane Building Company, and Mayan Contractors, Inc. ( Gilbane ) to act as the construction administrator. Blount subcontracted with Derr Construction Company ( Derr ) to perform steel erection on the project. 152 The Blount-Derr subcontract contained an indemnity provision which stated: Subcontractor hereby assumes full responsibility and liability for the work to be performed hereunder and hereby releases, relinquishes and discharges and agrees to indemnify, protect and save harmless Contractor, the City, the Architect, Construction Administrator, and any of their agents, servants and employees of and from all claims, demands and causes of action of every kind and character, including the cost of defense thereof, for any injury to, including death of, persons and any loss of or damage to property caused by or alleged to be caused by, arising out of, or in connection with Subcontractor s work to be performed hereunder. 153 Derr sued Blount, Gilbane and the City for damages to its crane. The defendants asserted the exculpatory language in Derr s subcontract released them from liability. Derr argued that the City and Gilbane were not parties to the contract between Derr and Blount, and thus could not rely on any of the contract provisions to escape liability. Derr further argued that the City and Gilbane were not third-party beneficiaries to the subcontract but merely incidental beneficiaries. 154 The court acknowledged case law cited by Derr giving the standard that parties are presumed contracted only for themselves unless it clearly appears that they intended a third-party to benefit from their contract. 155 However, the court held that the Derr case was distinguishable because it clearly appears from the terms of the provision that the City and Gilbane were intended to benefit from the contract. The City and Gilbane are specifically mentioned in the release. Thus, by the terms of the S.W.2d 854, 856 (Tex. App. Houston [14th Dist.] 1992, no writ). 153 Id. at Id. at Id. (citations omitted). 31

35 agreement itself, the City and Gilbane were to benefit from the contract as a matter of law. Unlike the subcontract in other cases, the Blount-Derr subcontract specifically refers to the City and the Construction Administrator, Gilbane, as well as Blount. Therefore, from this express language, it clearly appears that the parties to the subcontract intended to benefit the City and Gilbane by releasing them from liability. Derr s third-party beneficiary argument was thus without merit. 156 The Derr case means that an examination of subcontract documents is critical to any owner s third-party beneficiary claim. Some indemnity/release agreements only bind the subcontractor to indemnify/release the general contractor, while others include the owner, architect, construction manager, or others. How far can the Derr opinion be expanded? Could its reasoning apply where a subcontractor named the owner as an additional insured? Though not a construction case, also of note is Howell v. TS Communications, Inc. There a homeowner contacted TCI Cablevision of Dallas, Inc. to install cable television service in her house. TCI had entered into an agreement with Almar Realty Company for the installation of cable services. Almar Realty in turn subcontracted the installation work to TS Communications, who in turn subcontracted the installation work to John Scott Chiesl, II. During the installation work, the owner was injured when she fell through the opening to the crawl space under her home. She sued TS Communications, alleging TS Communications was negligent in exercising control of Chiesl. 157 The homeowner later amended her petition, alleging that she was a third-party beneficiary to the contract between TS Communications and Chiesl. The court of appeals noted that, to recover as a third-party beneficiary, the homeowner had to show that she was either a donee or creditor beneficiary of, and not an incidental beneficiary of, the contract between TS Communications and Chiesl. The court looked for a clear indication that the contract that [TS Communications] and Chiesl intended to confer a direct benefit to [homeowner]. 158 The contract provided that Chiesl shall provide the insurance coverage as specified in the insurance addendum attached to this Agreement, the terms of which are incorporated herein by reference. However, the summary judgment evidence did not contain the insurance addendum to the contract between TS Communications and Chiesl. Because the terms of the TS Communications-Chiesl subcontract were not established as a matter of law, the court was unable to examine the agreement 156 Id. at S.W.3d 515, 517 (Tex. App. Dallas 2004, no pet.). 158 Id. at

36 looking for a clear indication that TS Communications and Chiesl intended to confer a direct benefit to the homeowner. Therefore, the court could not conclude that TS Communications met its burden as a movant for summary judgment to establish as a matter of law that the homeowner was not a third-party beneficiary to the contract. The court thus reversed the trial court s summary judgment regarding the homeowner s claim that she was a third-party beneficiary to the contract and remanded for further proceedings consistent with the opinion. 159 The issue of third-party beneficiary status often involves cases where the person claiming third-party beneficiary status seeks to arbitrate claims per the arbitration agreement and the contract between the signatories. In In re Palm Harbor Homes, Inc., manufactured home buyers had contracted with Palm Harbor Village (the retailer) to purchase a manufactured home which was to be, and subsequently was, manufactured by Palm Harbor Homes, Inc. 160 In contracting and purchasing the home, the buyers and retailer entered into an agreement providing that all disputes between the buyers and retailer arising out of or in any way relating to the sale, purchase, or occupancy of the home would be resolved through binding arbitration. Moreover, the arbitration agreement provided that it inure[d] to the benefit of the manufacturer of the Home [Palm Harbor Homes, Inc.]. 161 After purchasing the Home, the buyers began experiencing problems with it and eventually sued both the retailer and the manufacturer, alleging breach of contract, breach of warranty, and liability under the Residential Construction Liability Act. 162 The buyers claimed, inter alia, that the arbitration provision was unenforceable because it lacked consideration. The Texas Supreme Court analyzed the manufacturer s standing under the typical third-party beneficiary analysis and stated that [b]y its own terms, the agreement was entered into, in part, directly for the manufacturer s benefit. 163 The manufacturer was not required to give consideration for the agreement which created its third-party beneficiary status because it was not a promisor to the agreement. 164 Therefore, the trial court abused its discretion in failing to order the buyers to arbitrate their claims against the manufacturer. 165 The language of the agreement in Palm Harbor Homes, stating that 159 Id. at S.W.3d 672, 674 (Tex. 2006). 161 Id. at 675, Id. at Id. at Id. 165 Id. at

37 the arbitration agreement inure[d] to the benefit of the manufacturer provides a clear example of a contract intended to secure a benefit to a third party and entered into directly for the third-party s benefit. 166 Owner v. Subcontractor: Negligence If an owner is still within the statute of limitations for a negligence claim against the subcontractor (or if he is not on solid ground as a third party beneficiary), the owner may wish to allege a negligence cause of action against a subcontractor, which might also trigger the subcontractor s insurance. In 2014 in a surprisingly short opinion the Texas Supreme Court addressed a homeowner s negligence claim against a subcontractor in Chapman Custom Homes, Inc. v. Dallas Plumbing Company. 167 There, Chapman Custom Homes, Inc. contracted with Michael B. Duncan, trustee of the M.B. Duncan Trust, to build a home on property owned by the trust. Chapman subcontracted with Dallas Plumbing Company to install the plumbing at the new house. After the home s completion, plumbing leaks allegedly caused extensive damage to the structure. The general contractor and owner sued the plumber for the damage, alleging breach of contract, breach of express warranty, and negligence. The plumber denied liability and moved for summary judgment. The trial court granted summary judgment and the Dallas Court of Appeals affirmed. 168 The posture of the supreme court case was summary judgment: the supreme court considered whether the homeowner had stated a cognizable negligence claim against the plumbing subcontractor involved in the construction of a new home. The supreme court reversed and remanded, stating that the negligent performance of a contract that proximately injures a non-contracting party s property or person states a negligence claim. 169 The supreme court specifically noted that the homeowner s pleadings: 1) alleged that the builder, on its behalf and that of the trust, contracted with Dallas Plumbing to furnish all necessary plumbing labor and materials for the new house; 2) that Dallas Plumbing failed to install the hot water heating system properly, resulting in water flooding the house and damaging the structure; and 3) that Dallas Plumbing s negligent failure to properly join the water system to the hot water heaters was a proximate and foreseeable cause of the water damage to the new house. The supreme 166 Id. at 677 (citing Stine v. Stewart, 80 S.W.3d 586, 589 (Tex. 2002); MCI Telecomms. Corp. v. Tex. Utils. Elec. Co., 995 S.W.2d 647, 651 (Tex. 1999)) S.W.3d 716 (Tex. 2014). 168 Id. at Id. 34

38 court disagreed with the court of appeals conclusion that these allegations asserted only the breach of Dallas Plumbing s contractual duty. 170 In reaching its conclusion, the supreme court relied heavily upon its 1947 opinion in Montgomery Ward & Co. v. Scharrenbeck. 171 The Chapman court stated that, in Montgomery, we observed that a common law duty to perform with care and skill accompanies every contract and that the failure to meet this implied standard might provide a basis for recovery in tort, contract, or both under appropriate circumstances. 172 Noting the similarity in facts between the Montgomery and Chapman cases, the Chapman court reasoned that, having undertaken to install a plumbing system in the house, the plumber assumed an implied duty not to flood or otherwise damage the house while performing its subcontract. Further, although the court of appeals viewed this property damage as a mere economic loss arising from the subject matter of the contract itself, the supreme court held that the economic loss rule did not bar the owner s claim. 173 The Chapman court quoted language from its recent Sharyland opinion that a party [cannot] avoid tort liability to the world simply by entering into a contract with one party [otherwise the] economic loss rule [would] swallow all claims between contractual and commercial strangers. 174 Therefore, a party states a tort claim when the duty allegedly breached is independent of the contractual undertaking and the harm suffered is not merely the economic loss of a contractual benefit. 175 Importantly, the plumber s duty not to flood or otherwise damage the house was independent of any obligation undertaken in its plumbing subcontract with the builder, and the damages allegedly caused by the breach of that duty extend beyond the economic loss of any anticipated benefit under the plumbing contract. 176 One of the more lucid discussions of an owner s negligence claim against a subcontractor is found in Goose Creek Consolidated Independent School District v. Jarrar s Plumbing, Inc. Goose Creek, contracted with Lee Lewis Construction, as general contractor, to furnish all necessary labor and materials for construction of three elementary schools. 177 The general contractor subcontracted with Jarrar s 170 Id. at S.W.2d 508 (Tex. 1947). 172 Chapman, 445 S.W.3d at 718 (citing Montgomery, 204 S.W.2d at 510). 173 Id. at Id. at 718 (quoting Sharyland Water Supply Corp. v. City of Alton, 354 S.W.3d 407, 419 (Tex. 2011)). 175 Chapman 445 S.W.3d at 718 (citing LAN/STV v. Martin K. Eby Constr. Co., 435 S.W.3d 234, (Tex. 2014); Sw. Bell Tel. Co. v. DeLanney, 809 S.W.2d 493, 494 (Tex. 1991)). 176 Chapman 445 S.W.3d at S.W.3d 486, 491 (Tex. App. Texarkana 2002, pet. denied). 35

39 Plumbing to perform the plumbing work at the schools. Soon after the schools were occupied, numerous defects were discovered, including a faulty sewer line and other plumbing defects. The District filed suit five years later against the general contractor and architects on the projects. The general contractor then filed third-party actions against other parties that participated in the design or installation of the defective work, including the plumbing subcontractor. The owner then brought claims directly against the plumbing subcontractor. After the owner released the general contractor and all subcontractors, the only claims that remained were those against the plumbing subcontractor. The owner s primary claims were for negligence and breach of warranty (along with an assigned breach of contract claim). 178 The subcontractor unsuccessfully argued that the owner s direct negligence claim was precluded because there was no evidence that the subcontractor owed a duty to the owner. Relying heavily on Espey and DeLanney, the court of appeals made clear that when a subcontractor undertakes to perform its subcontract, it assumes a duty to all persons to take reasonable care not to injure them or their property in the performance of that contract, and one who is not privy to the contract may assert a claim for negligence for a breach of that duty. 179 Though a property owner is not a third-party beneficiary to a contract between a contractor and subcontractor, a property owner may assert a claim for negligence against a subcontractor based on the subcontractor s performance under the contract where the cause of action is independent of the duties imposed by the contract. 180 The court emphasized the holding in Reed that if an injury is only economic loss to the subject matter of the contract itself, only a breach of contract action will be available. 181 The court used Espey s definition of economic loss as damages for inadequate value, cost of repair and replacement of the defective product, or consequent loss of profits without any claim of personal injury or damage to other property. 182 Importantly, the injury that the District alleged was the invasion of raw sewage and sewer gas into the school buildings, causing portions of the buildings to be unusable. The subcontractor s failure to use reasonable care in installing the 178 Id. at Id. at 494 (citing Espey, 899 S.W.2d at 420; DeLanney, 809 S.W.2d at 494). 180 Goose Creek, 74 S.W.3d at 494 (citing Espey, 899 S.W.2d at ). 181 Goose Creek, 74 S.W.3d at 494 (citing Jim Walter Homes, 711 S.W.2d at 618). 182 Goose Creek, 74 S.W.3d at 494 (quoting Espey, 899 S.W.2d at 421). 36

40 plumbing system directly and proximately caused these injuries. By failing to comply with all applicable plumbing codes, and by failing to properly install certain component parts of the plumbing, such as trap primers and vacuum breakers, the District alleged the subcontractor failed to use reasonable care. Based on the above argument, the court of appeals affirmed the trial court s holding that the District had properly maintained a tort action for negligence against the subcontractor. 183 Importantly, the negligence action was not prevented by the economic loss rule. The court acknowledged that the subcontractor s acts may also have breached its subcontract with the general contractor. However, the injury the District alleged, the invasion of sewage and sewer gas into the school buildings, constituted an injury to property that was not the subject matter of the contract, that portion of the contract [District] had with [general contractor] for which [general contractor] contracted with [subcontractor], namely the plumbing. 184 Thus, the injury did not constitute pure economic loss for which the District could recover only in contract. Owner v. Subcontractor: Express and Implied Warranties Recall that in Raymond v. Rahme the owner asserted that the subcontractor failed to use the proper grade or thickness of concrete and had improperly poured and graded the concrete as part of a gas station construction project. 185 In addition to denying the owner s third-party beneficiary breach of contract claim, the court of appeals held that there was insufficient evidence to support the owner s claim for breach of express and implied warranties. 186 The subcontractor essentially extended his warranty to two years in a letter he wrote to the owner after agreeing to the subcontract, in which the subcontractor explicitly warranted the concrete against major cracking. 187 The court first noted a statement made by a seller after a contract has been made is usually not an express warranty because the buyer has already agreed to the basis of the bargain and cannot argue he relied on the statement in entering into the contract. 188 But a post-contract statement modifying a pre-existing contract may still be considered an express 183 Id. at Id. 185 Rahme, 78 S.W.3d at Id. at Id. at Id. at 562 (citing Harris Packaging Corp. v. Baker Concrete Constr. Co., 982 S.W.2d 62, 67 (Tex. App. Houston [1st Dist.] 1998, pet. denied)). 37

41 warranty. 189 Nevertheless, the owner proffered no evidence that the concrete had suffered major cracking. In fact, the owner s primary complaints pertained to water pooling and the thickness of the concrete. Further, there was no evidence that the owner made any complaints within the two year warranty period. Because a subcontractor s warranty extends only as far as his express representation, the evidence did not support the owner s claim for breach of express warranty. There was also no evidence to support the owner s claim for breach of implied warranty of good and workmanlike performance, due to the owner s lack of privity with the subcontractor. The court of appeals cited its recent holding Codner v. Arellano that a property owner may not recover under an implied warranty theory from a subcontractor with whom the owner has no direct contractual relationship. 190 Its reasoning was that, because a property owner has recourse against the general contractor with whom he contracted, there was no compelling public policy reason to impose an implied warranty against a subcontractor. 191 This reasoning was also followed in Pugh v. General Terrazzo Supplies, Inc. (discussed below) where the Houston Court of Appeals discounted, on privity grounds, the owners breach of implied warranty claims against a subcontractor. The court noted that: Texas courts have consistently held that a property owner may not recover under an implied warranty theory from a subcontractor with whom the owner had no direct contractual relationship. 192 Thus, the trial court properly granted General Terrazzo s summary judgment motion on the owners claims for breach of implied warranties of good and workmanlike service and habitability. 193 Owner v. Lower Tier Supplier: Express and Implied Warranties Suppliers to the general contractor or a subcontractor are often held to provide at least three implied warranties: (1) the implied warranty of good and workmanlike performance, (2) the UCC implied warranty of fitness for a particular purpose, and (3) the UCC implied warranty of merchantability. Texas courts often hold that a property owner may not recover under an implied warranty theory from a 189 Id at Id. (citing Codner, 40 S.W.3d 666, (Tex. App. Austin 2001, no pet.). 191 Rahme, 78 S.W.3d at 563 (citing Codner, 40 S.W.3d at 674); see also P. McGregor Enterps., Inc. v. Hicks Const. Group, LLC, 420 S.W.3d (Tex. App. Amarillo 2012, no pet.) (similar holding and rationale). 192 Terrazzo, 243 S.W.3d at 89 (citing J.M. Krupar Const. Co. v. Rosenberg, 95 S.W.3d 322, 332 (Tex. App. Houston [1st Dist.] 2002, no pet.); Rayon v. Energy Specialties, Inc., 121 S.W.3d 721 (Tex. App. Fort Worth 2002, no pet.); Rahme, 78 S.W.3d at 563; Codner, 40 S.W.3d at ) S.W.3d at

42 subcontractor with whom the owner had no direct contractual relationship. 194 This is in line with the Austin Court of Appeals holding against the imposition of an implied warranty from a subcontractor to a homeowner. 195 Contrast this with the breach of an implied warranty of merchantability, under which the Texas Supreme Court has held that privity of contract is not required to recover purely economic losses resulting from the breach. 196 Nevertheless, the UCC allows subcontractors to disclaim these implied warranties. 197 The Texas Supreme Court reaffirmed the application of the economic loss rule to products liability causes of action (as previously stated in Nobility Homes, Signal Oil & Gas Co., and Mid-Continent Aircraft) in the case of Equistar Chemicals, L.P. v. Dresser-Rand Co.; that case involved the defective supply and repair of empellers (essentially large fan blades) in gas compressors of a chemical manufacturing plant. 198 The case focused on the supplier s failure to properly preserve error to challenge the jury instruction related to economic loss. But the supreme court noted that the economic loss rule applies when losses from an occurrence arise from failure of a product and the damage or loss is limited to the product itself. 199 It acknowledged the rule does not preclude tort recovery if a defective product causes physical harm to the ultimate user or consumer or other property of the user or consumer in addition to causing damage to the product itself. 200 The supreme court referred to its previous statement in Signal Oil & Gas Co. that where only the product itself is damaged, such damage constitutes economic loss recoverable only as damages for breach of an implied warranty under the [U.C.C.] Id. at 89 and n.5 (stating that the suggestion of an implied warranty of good and workmanlike performance between a subcontractor and a homeowner in Thomas v. Atlas Foundation Co., Inc., 609 S.W.2d 302, 303 (Tex. Civ. App. Fort Worth 1980, writ ref d n.r.e.), was merely dicta because the subcontractor did not appeal the issue of its liability to the homeowners). 195 Codner, 40 S.W.3d at 673 n Nobility Homes of Tex., Inc. v. Shivers, 557 S.W.2d 77, 81 (Tex. 1977). 197 Vaughn Bldg. Corp. v. Austin Co., 620 S.W.2d 678, 680 (Tex. Civ. App. Dallas 1981), aff d 640 S.W.2d 113 (Tex. 1982) (noting exclusional modification of implied warranties must be conspicuous) S.W.3d 864, 865 (Tex. 2007). 199 Id. at 867 (citations omitted). 200 Id. (citations omitted). 201 Id. (quoting Signal Oil & Gas Co., 572 S.W.2d 320, 325 (Tex. 1978)). 39

43 Owner v. Sub-Subcontractor/ Supplier: Negligence Can an owner bring negligence claims against subcontractors and suppliers of a subcontractor? Recall that in Pugh v. General Terrazzo Supplies, Inc., home owners contracted with a general contractor (Westbrook) to build their home. A subcontractor (RBS) applied the EIFS veneer on the home. General Terrazzo supplied and manufactured the essential materials to RBS, instructed RBS on the application process, and inspected the work. The homeowners later discovered damage to the home when the EIFS system was removed, exposing decayed wood framing, water damage, and mold. 202 The owners sued General Terrazzo for negligence, products liability (marketing defect), and breach of the implied warranties of good and workmanlike service and habitability. The negligence claim asserted that General Terrazzo breached its duties by supplying an EIFS system that was incompatible with the architectural plans and by failing to properly supervise the application, properly instruct or train applicators, properly manufacture the EIFS system, provide proper instructions and warnings for applying the EIFS, properly inspect the completed application, and instruct the [owners] as to the proper long-term maintenance of the EIFS system to avoid water penetration. In their products liability claim, the owners asserted that General Terrazzo knew or should have known of a potential risk of harm presented by the EIFS but marketed EIFS without adequate warnings or instructions. The implied warranty claims asserted that General Terrazzo participated in the construction of the home, the construction of the EIFS system was not performed in a good and workmanlike manner, and General Terrazzo created a defect in the home through defective construction methods in the application of the EIFS system. 203 The owners argued that the economic loss doctrine did not bar their negligence claims because they were not seeking damages for loss of the product provided by General Terrazzo alone and that General Terrazzo s duties were outside the scope of its contract to provide product. The owners cited deposition testimony stating that General Terrazzo provided brochures and instructed the subcontractors how to do it and how to mix it, and General Terrazzo sent a representative to make sure that the subcontractor did it right. The court then dismissed the owners negligence and strict liability claims based on the economic loss doctrine. The court noted that the economic loss doctrine applies to both negligence and strict liability claims, and that the doctrine has been expressed and applied by Texas courts in two related concepts: First, the doctrine has been applied to preclude tort claims brought to recover economic losses when those losses are the subject matter of a contract... Second, the economic loss doctrine S.W.3d at Id. at

44 has been applied to preclude tort claims brought to recover economic losses against the manufacturer or seller of a defective product with the defects damages only the product and does not cause personal injury or damage to other property. Regarding losses that are the subject matter of a contract, the court noted that the doctrine has been applied to preclude tort claims between parties who are not in privity. Among other cases, the court noted the Hou-Tex, Inc. v. Landmark Graphics, where the court held the economic loss doctrine precluded an oil and gas company s negligence claims against a software developer who provided defective computer software to a geological contractor who had contracted with the oil and gas company to assist in choosing a drilling site. 204 As for economic loss in defective product cases, the court cited Texas case law rejecting the argument that damage to a finished project caused by defective component part constituted damage to other property, so as to permit tort recovery for damage to the finished product. 205 The court also noted that the economic loss doctrine has been applied to preclude tort claims for economic losses made directly against a manufacturer or supplier of a defective component part that causes damage to the finished product into which the component is incorporated. 206 Under this standard, the court emphasized that the owners had no direct contacts or contractual relationship with General Terrazzo. Indeed, the owners did not even have a direct contract or contractual relationship with the subcontractor, RBS, whom the owners allege negligently applied the EIFS. There was no evidence that the owners separately negotiated with General Terrazzo for the EIFS system or for General Terrazzo s supervision of or instruction on the application of the EIFS system. Additionally, there was no evidence that General Terrazzo was obligated to control the subcontractor. There was no evidence that the owners sustained any personal injuries due to the improper installation of the EIFS system. Perhaps most important, the court held there was no damage to other property that would have permitted the [owners] to assert a tort claim, because all of the alleged damages are property damages to [the owners ] home. 207 The court thus held that the owners negligence and strict liability claims were barred by the economic loss doctrine. 204 Id. at (citing Hou-Tex, 26 S.W.3d 103, (Tex. App. Houston [14th Dist.] 2000, no pet.)) S.W.3d at 92 (citing Murray v. Ford Motor Co., 97 S.W.3d 888, 891 (Tex. App. Dallas 2003, no pet.)) S.W.3d at Id. at 94 (citations omitted). 41

45 The court also rejected the owners negligent undertaking claim. As noted above, to establish a claim for negligent undertaking, a plaintiff must show: (1) Defendant undertook to perform services that it knew or should have known were reasonably necessary for Plaintiff s protection, (2) Defendant failed to exercise reasonably care in performing those services, and either (3) Plaintiff relied upon Defendant s performance, or (4) Defendant s performance increased Plaintiff s risk of harm. 208 The court rejected the owners claim because there was no evidence that General Terrazzo undertook the task of rendering services to the owners. Again, the worker indicated that the owners contracted with Westbrook, who contracted with RBS, who purchased the EIFS materials from General Terrazzo. The owners failed to cite any authority for stretching a negligent undertaking claim so far as to apply to General Terrazzo under these facts. 209 In footnotes, the court acknowledged that the Texas Supreme Court, in Jim Walter Homes, had already adjusted the economic loss rule in the context of defective home construction. Further, the court acknowledged that Reed was instructive on the basic principles of the economic loss doctrine, the case before the court of appeals was distinguishable because the party asserting the economic loss doctrine (General Terrazzo) was not a homebuilder with whom the owners contractually built the house, whereas in Reed the purchasers of the home sued the homebuilder with whom they were in direct privity. Nevertheless, the General Terrazzo court noted the economic loss doctrine does not apply only to bar claims against those in a direct contractual relationship. 210 Owner v. Architect: Breach of Contract and Negligence An owner often will not just bring claims against the general contractor and its subcontractors in a construction defect lawsuit. The contractor s side of the lawsuit will often assert the plans and specifications provided by the owner were deficient. So the owner will often also include the architect in the lawsuit. The easiest claim for the owner against the architect is often for breach of contract. That claim tends to have the longest statute of limitations (unless reduced in the contract), the owner often does not have to worry about the economic loss doctrine, and the claim will often (not always) trigger the architect s professional liability insurance. In Ryan v. Morgan Spear Associates, Inc., a veterinarian sued the architect who designed the animal hospital where the veterinarian s business was located. 211 The S.W.3d at Id. at Id. at 90 and n S.W.2d 678, 680 (Tex. Civ. App. Corpus Christi 1997, writ ref d n.r.e.). 42

46 owner sued the architect for breach of contract and negligence, after the building began deteriorating roughly three months after completion. Evidence indicated that the defects were due to massive water migration under the building caused primarily by roof drainage from the adjacent building. 212 The court held that the plaintiff could not recover damages due to breach of contract because the contract s terms were so general that the only implication arising from them was that the design professional would use reasonable care in the preparation of the plans and supervision of the project. 213 The contract between the owner and architect provided only that the architect would furnish; the preparation of preliminary studies, working drawings, specifications, large scale and full size detail drawings, for architectural, structural, plumbing, heating, electrical, and other mechanical work; assistance in the drafting of forms of proposals and contracts; and the general supervision through construction of the project. 214 Absent language to the contrary in the contract, the standard of care for an architect for breach of contract will be the same as the negligence standard. Owners should thus take care in drafting their contracts with architects to specify a standard of care. The court of appeals also affirmed the jury s verdict that the architect was not negligent in performance of its professional duties. The court stated the rule that an architect must use the skill and care in the performance of his duties commensurate with the requirements of his profession, and he is liable in damages if he is negligent in performing such duties. In the absence of special agreement, the court noted, an architect is not liable for faults resulting from defects in the plans, and does not imply or guarantee a perfect plan or a satisfactory result, it being considered enough that the architect himself is not the cause of any failure, and there is no implied promise that miscalculations may not occur. 215 The court held there was ample evidence of probative value to support the jury s finding that the architect was not negligent. 216 An additional hurdle to a claim against a design professional was of course added by the Texas Legislature s 2003 revision to the Civil Practices and Remedies 212 Id. at Id. at Id. at 680; see also Palmer v. Espey Huston & Associates, Inc., 84 S.W.3d 345, 349 (Tex. App. Corpus Christi 2002, pet. denied) (breach element not fulfilled in owner s breach of contract claim against original engineer on project, where original engineer s design was modified by replacement engineer s design). 215 Morgan Spear, 546 S.W.2d at Id. at

47 Code, requiring the filing of a certificate of merit for such claims. The current statute provides: In any action or arbitration proceeding for damages arising out of the provision of professional services by a licensed or registered professional, the plaintiff shall be required to file with the complaint an affidavit of a third-party licensed architect, licensed professional engineer, registered landscape architect, or registered professional land surveyor who: (1) is competent to testify; (2) holds the same professional license or registration as the defendant; and (3) is knowledgeable in the area of practice of the defendant and offers testimony based on the person s: (A) knowledge; (B) skill; (C) experience;(d) education;(e) training; and(f) practice. 217 Certificate of Merit issues of course remain hot items in construction defect cases involving causes of action against design professionals. A worthwhile detailed discussion of the statute and related case law cannot be given here; but several recent conference papers and journal articles covering this topic provide good and much needed guidance to construction practitioners regarding the ever-changing landscape of this area of law. Owner v. Architect s Sub-consultant: Breach of Contract An architect often uses sub-consultants to perform the mechanical, electrical, plumbing, structural, and civil engineering for projects. Of course, the owner cannot assert a traditional breach of contract claim against a design professional s subconsultant because the first element, the existence of a valid and enforceable contract, is missing. This was the holding of the court in Palmer regarding the owner s claims against the design professional s engineering sub-consultants. Courts are often reluctant to confer third-party beneficiary status upon the owner in this situation. In an analogous case, Hunt v. De Leuw, Cather & Co., an engineer sub-consultant brought a breach of contract action against the engineer she had contracted with, asserting that she was a third-party beneficiary of the contract between the owner and the engineering contractor. The court delineated the standard three classes of contract beneficiaries: (1) Donee beneficiaries; (2) Creditor beneficiaries; and 217 TEX. CIV. PRAC. & REM. CODE ANN (a) (Vernon 2014). 44

48 (3) Incidental beneficiaries. 218 It noted that only donee and creditor beneficiaries qualify as third-party beneficiaries who may enforce a contract. Similar to the third party beneficiary cases discussed above, the Hunt court noted that a creditor beneficiary is a third-person to whom the contract promise owes a debt, contractual obligation, or other legally enforceable commitment; accordingly, to establish creditor beneficiary status, the promise must seek to discharge or protect the commitment by stipulating in the contract that the promisor shall deliver a contract performance to the third-party. 219 The Hunt court held that the sub-consultant was not a third-party beneficiary because she failed to overcome the presumption against finding third-party beneficiary status. The sub-consultant failed to point to any language in the contract which showed a clear intent to contract for [the] direct benefit of the sub-consultant. 220 Owner v. Architect s Sub-consultant: Negligence Lacking contractual privity with an architect s sub-consultant, the next alternative for an owner is to assert a claim against the sub-consultant for negligence, which obviously does not require contractual privity. The Thompson v. Espey Huston & Associates, Inc. case also provides guidance for an owner s negligence claim against a design professional s sub-consultant. 221 Citing Scharrenbeck, DeLanney, and Jim Walter Homes, the court of appeals held that Espey s (the engineering sub-consultant) negligence in performing its contract could give rise to a tort cause of action for damage to Thomson s (owner) property: Espey had an independent duty not to negligently damage Thomson's property or the property of his neighbors. If, as Thomson alleges, incompetent engineering services have damaged his building, then Espey may be liable for that negligence in tort. 222 The court of appeals distinguished Espey from Jim Walter Homes, noting that Thomson alleged that Espey s negligence had caused damage to other parts of the apartment complex, causing cracking walls, doors which will not fit properly, mildew, standing water, shifting and other problems in other buildings in the complex. This 218 Hunt v. De Leuw, Cather & Co., No CV, 2002 WL , at *2 (Tex. App. Dallas, Aug. 1, 2002, pet. denied) (not designated for publication). 219 Id. 220 Id. at * Though, technically, Thompson (owner) was suing the general contractor s (Hamilton-Woodard) engineering sub-consultant (Espey), nothing in the opinion indicates that it should not apply also to a design professional s sub-consultant. 899 S.W.2d 415, 417 (Tex. App. Austin 1995, no writ). 222 Id. at

49 damage beyond the subject of the contract itself, unlike Jim Walter Homes, where the defendant was contractually obligated to provide the entire house. 223 Had Thomson merely complained that Espey s drainage system was inadequate and that Thompson had been forced to repair or improve it, or had Thompson only complained that the soil testing services were inadequate and that he had been forced to supplement Espey's services, he would have only a contractual claim. 224 But unlike Jim Walter Homes, the general contractor s contract with Espey provided only one portion of a larger whole, and damage to other parts of the complex [was] not merely economic loss to the contract itself. 225 III. General Contractor s Causes of Action General Contractor v. Owner : Breach of Contract Substantial Performance If an owner decides not to pay the general contractor and the general contractor sues for non-payment, a claim of construction defect is often asserted by the owner. Further, if during the construction process a defect is found, payment will often stop. Therefore, the construction lawyer must understand the substantial performance doctrine. In RAJ Partners, Ltd. v. Darco Construction Corp., RAJ obtained a franchise to build a Holiday Inn Express Hotel in Lubbock, and eventually contracted with Darco as its general contractor. RAJ initially paid off the first ten pay applications from Darco, but withheld pay applications 11 and 12, totaling $189,271.04, alleging it withheld payment due to its belief that Darco had failed to perform as required under the contract. Darco filed suit, and the trial court eventually found that Darco had substantially complied with RAJ s plans by constructing the Holiday Inn under the terms and conditions set forth within the contract. 226 The Amarillo Court of Appeals affirmed. The court of appeals noted that [s]ubstantial performance is an equitable doctrine that allows breaching parties who have substantially completed their obligations to recover on a contract. 227 The court cited Vance in noting that the doctrine of substantial performance recognizes that the contractor has not completed 223 Espey, 899 S.W.2d at 422 (citing Jim Walter Homes, 711 S.W.2d at 617). 224 Espey, 899 S.W.2d at Id S.W.3d 638, (Tex. App. Amarillo 2006, no pet.). 227 Id. at 643 (citations omitted). 46

50 construction and, therefore, is in breach of the contract. 228 Nevertheless, under the doctrine of substantial performance, the owner cannot use the contractor s failure to complete the work as an excuse for non-payment. 229 The RAJ court relied heavily on the trial court s findings that Darco had substantially complied with defendant s plans, that RAJ occupied the rooms in the entire hotel and opened it for business before final completion, and that the hotel s brick veneer was not installed in a good and workmanlike manner as required by the contract, but that the defects in the brick construction are esthetic and not structural. 230 In footnotes, the court referenced the construction contract s definition of substantial completion as: [A]ll systems in construction included in the Work are completed and operational as designed, all designated or required governmental inspections and certifications have been made and posted, any designated instruction of Owner s personnel in the operation of systems has been completed, and all final finishes within the Contract Documents are in place. In general, the only remaining Work shall be minor in nature, so that the Owner could occupy the building on that date and the completion of the Work by the Contractor would not materially interfere or hamper the Owner s normal business operations. 231 The footnotes stated also that it was undisputed that the City of Lubbock issued a Certificate of Occupancy for the hotel and that the evidence demonstrated that some of the brick work on the building is noticeably crooked and uneven. 232 Construing the trial court s findings, the court stated we read the finding that the defects in the brick work were aesthetic to indicate the brick work, although not installed in a good and workmanlike manner, was not in need of remedy. 233 Because the brick work was not in need of remedy, Darco did not have the burden to prove the remedial cost. This undercut RAJ s argument that Darco s failure to introduce evidence and obtain a finding on the cost to remedy the defects precluded recovery on a substantial performance theory Id. (citing Vance v. My Apartment Steakhouse of San Antonio, Inc., 677 S.W.2d 480, 482 (Tex. 1984)). 229 Id. (citations omitted). 230 Id. at Id. at 644 n Id. at 644 n.5 and Id. at Id. at

51 The court also dismissed RAJ s argument that if the brick construction cost exceeded mere remediation, then substantial performance was legally impossible. The court cited the seminal case of Hutson v. Chambless, which stated that there is no substantial performance when it is necessary, in order to make the building comply with the contract, that the structure, in whole or in material part, must be changed, or there will be damage to parts of the building, or the expense of such repair will be great. 235 The RAJ court emphasized that under the trial court s findings, the defects in the brick work were only aesthetic in nature, and did not impair the structure as a whole, and thus did not render legally impossible the trial court finding that Darco substantially performed. 236 Finally, RAJ contended that Darco s failure to meet the difference-in-value measure of damages also negated recovery. Citing the seminal Jim Walters Homes, Inc. v. Gonzalez case, the RAJ court noted that the difference-invalue measure is applicable where there has not been substantial performance. 237 Since Darco had substantially performed under the contract, however, the Jim Walter Homes analysis was inapposite. General Contractor v. Owner - Fraudulent Inducement into Contract There are different levels of quality when talking about the preparation of plans and specifications for a construction project. The levels of quality are often driven by price (or vice versa). Unsophisticated owners may desire to save money in the development of design documents, which could lead to inferior design. The owner knows it procured a less expensive set of documents, but the general contractor might not find this out until it is too late. When a general contractor points its finger at the owner in a construction defect case, the general contractor might assert a fraudulent inducement cause of action, though it may be a difficult burden to carry. In RAJ, Darco (general contractor) brought a fraudulent inducement claim against RAJ (owner), which the trial court rejected. 238 Darco argued RAJ fraudulently induced Darco to enter the construction contract by 1) misrepresenting the quality and character of the plans; and 2) by concealing from Darco a letter from Holiday Inn specifying certain required architectural features. The court of appeals listed the elements of fraud: S.W.2d 943, 945 (Tex. 1957). 236 RAJ, 217 S.W.3d at Id. at 645 (citing Jim Walter Homes v. Gonzalez, 686 S.W.2d 715, 717 (Tex. App. San Antonio 1985, writ denied)). 238 RAJ Partners, 217 S.W.3d at

52 1. A material representation was made; 2. The representation was false; 3. When the representation was made, the speaker knew it was false or made it recklessly without any knowledge of the truth and as a positive assertion; 4. The speaker made the representation with the intent that the other party should act upon it; 5. The party acted in reliance on the representation; and 6. The party thereby suffered injury. 239 Darco cited the trial court s findings that RAJ made false representations to Darco regarding the adequacy of the plans and specifications and that DARCO relied upon the project plans and Defendants representations concerning the adequacy of the plans and specifications. This was not enough for the court of appeals although the trial court found Darco relied on RAJ s misrepresentations about the plans, it did not find RAJ knew they were false at the time they were made, or made them recklessly without any knowledge of their truth, and thus the third element was not met. 240 Darco relied on evidence showing that, because of the original contractor's failure to complete the job, RAJ was facing imminent deadlines and was over budget at the time it made its deal with Darco. Thus, Darco concluded it was difficult to deny that RAJ knew of its deception of Darco. The court of appeals noted its standard of review was to construe the trial court's findings in a manner that supports its judgment. 241 Under this standard, the court of appeals could not agree with Darco that the jury s conclusion was so against the great weight and preponderance of the evidence that it is clearly wrong and unjust. 242 The court of appeals also affirmed the trial court s finding against Darco on the sixth element of fraudulent inducement, injury. The trial court found RAJ withheld the Holiday Inn letter from Darco until after the contract was signed. But again, the court did not find that Darco suffered injury because it did not see the letter until after the contract was signed. RAJ acknowledged that the primary feature discussed in that letter was that Holiday Inn required coffered ceilings in the hotel. The evidence showed that, despite the letter, Darco did not build coffered ceilings in the hotel. Thus, the great weight and preponderance of the evidence did not demonstrate that withholding the letter caused injury to Darco RAJ, 217 S.W.3d at 651 (citing In re FirstMerit Bank, N.A., 52 S.W.3d 749, 758 (Tex.2001); Formosa Plastics Corp. v. Presidio Engrs. & Contractors, Inc., 960 S.W.2d 41, 47 (Tex. 1998)). 240 RAJ, 217 S.W.3d at 651 (citing FirstMerit Bank, 52 S.W.3d at 758). 241 RAJ, 217 S.W.3d at 651 (citing Rodriguez v. Rodriguez, 860 S.W.2d 414, 418 (Tex. 1993)). 242 RAJ, 217 S.W.3d at 651 (citing Dow Chem. Co. v. Francis, 46 S.W.3d 237, 242 (Tex. 2001)). 243 RAJ, 217 S.W.3d at 651 (citing Dow Chemical, 46 S.W.3d at 242). 49

53 It should be noted that fraudulent inducement and simple fraud are often found to share the same elements, though they are different causes of action. 244 However, the Texas Supreme Court has clarified that the fifth element of simple fraud (reliance) is heightened in fraudulent inducement cases so that the plaintiff must prove it entered into a binding agreement based on the defendant s false representations. 245 The RAJ court did not address this element, instead focusing on elements three (knowledge or reckless disregard for the truth) and six (injury). 246 General Contractor v. Owner: Implied Warranty of Plans Supplied by Owner The more traditional claim asserted by a general contractor against an owner in a construction defect case is breach of the implied warranty of the sufficiency of the plans and specifications provided to the general contractor by the owner (depending on the wording of the parties contract). A somewhat recent case addressing the implied warranty of plans and specifications furnished by an owner to a prime contractor is Alamo Community College District v. Browning Construction Co. 247 There, a community college district contracted with a general contractor for the construction of a new campus. The suit was primarily a breach of contract action for delay damages, but the jury also assessed damages against the owner for breach of contract for failing or refusing to correct design errors. 248 The court of appeals affirmed the verdict because the contract contained language indicating the owner had a duty to the general contractor for design errors. The Browning court relied heavily on the seminal Texas Supreme Court case, Lonergan v. San Antonio Loan & Trust Co., which negated the implied warranty of plans and specifications provided by an owner to a general contractor: [U]nless so expressed in the contract, an owner that furnishes a prime contractor plans and specifications is not a guarantor of the sufficiency of the plans and specifications. 249 The Browning court found that the following language expressly indicated that the owner would be responsible for design errors: 244 See DeSantis v. Wackenhut Corp., 793 S.W.2d 670, 688 (Tex. 1990) (using simple fraud elements while analyzing a fraudulent inducement claim). 245 Haase v. Glazner, 62 S.W.3d 795, 798 (Tex. 2001). 246 RAJ, 217 S.W.3d at S.W.3d 146, 155 (Tex. App. San Antonio 2004, pet. dism d by agr.). 248 Id. at Id. at 155 (quoting Lonergan, 104 S.W. 1061, 1066 (1907)). 50

54 The Contractor shall carefully study and compare the Contract Documents with each other and with information furnished by the Owner pursuant to Subparagraph and shall at once report to the Architect errors, inconsistencies or omissions discovered. The Contractor shall not be liable to the Owner or Architect for damage resulting from errors, inconsistencies or omissions discovered. The Contractor shall not be liable to the Owner or Architect for damage resulting from errors, inconsistencies or omissions in the Contract Documents unless the Contractor recognized such error, inconsistency or omission and failed to report it to the Architect. 250 Nevertheless, adding to a split among the Texas court of appeals, the Austin Court of Appeals in Beard Family Partnership v. Commercial Indemnity Insurance Co., followed the United States Supreme Court opinion, United States v. Spearin, in holding that an owner breached the prime contract by providing inadequate plans and specifications, thus breaching Spearin s implied warranty of adequate plans supplied by the owner (which the owner requires the contractor to follow). 251 The Beard case involved a general contractor who was significantly delayed because the original topography drawings provided by the owner s engineer were miscalculated by six to eight vertical feet. 252 The performance bond surety on the project, who eventually took over after the general contractor went out of business, was awarded damages by the jury due to the delay caused by, inter alia, the miscalculations in the plans. The court of appeals affirmed this holding, noting that delay caused by an owner on a construction project is a breach of contract and that [a]n owner impliedly warrants the adequacy of the plans it supplies and which it requires its contractor to follow. 253 Lonergan is now over a century old. It runs counter to the seminal Spearin opinion. And several Texas courts of appeal appear to have simply declined to follow Lonergan. Yet the Texas Supreme Court may be showing signs of not letting Lonergan go. While arguably not reaching a specific holding on the implied warranty issue discussed above, the supreme court recently indicated it might still follow Lonergan on this issue in El Paso Field Services, L.P. v. Mastec North America, Inc. 254 Though 250 Id. at (noting that such language was nearly identical to the contract in North Harris County Junior College District v. Fleetwood Construction Co., 604 S.W.2d 247, 253 (Tex. Civ. App. Houston [14th Dist.] 1980, writ ref d n.r.e.), holding the same) S.W.3d 839, 847 (Tex. App. Austin 2003, no pet.). 252 Id. at Id. at 847 (citing Spearin, 248 U.S. 132, 136 (1918)) S.W.3d 802 (Tex. 2012). 51

55 focusing primarily on a differing site condition issue, the supreme court nevertheless quoted Lonergan with favor, noting: In Lonergan v. San Antonio Loan & Trust Co., we held that for an owner to be liable to a contractor for a breach of contract based on faulty construction specifications, the contract must contain terms that could fairly imply the owner s guaranty of the sufficiency of the specifications, which were provided to the owner by an architect. 255 The recent developments of this area of law are the subject of a separate presentation at this conference by Amy Wolfshohl. Practitioners would be wise to consult that presentation for greater detail on this issue and to keep an eye on this area of law, which surprisingly is still developing, even after over a century s worth of jurisprudence. General Contractor/ Other Non-Privity Parties Professional: Negligence Theories v. Owner s Design Texas courts often hold that a design professional owes no duty of ordinary care to a contractor not in privity with the design professional, though the jurisprudence on this issue continues to evolve. For example, in I.O.I. Systems, Inc. v. City of Cleveland, the Houston Court of Appeals at least indicated that where an architect or engineer exercises significant supervisory power and control over a contractor or subcontractor, some duties may arise. A general contractor sued the City of Cleveland and its engineers to recover money owed pursuant to a contract between the general contractor and the City for the construction of sanitary sewer improvements. The engineers had designed the plans for the project and served in a supervisory capacity; there was not privity of contract between the engineers and the general contractor. The general contractor sought to be reimbursed for money it expended when it encountered water in the trench where the piping was to be laid and had to purchase additional fill material, along with fixing multiple breaks in the pipeline. 256 The court held against the general contractor on its negligence claim because the general contractor failed to offer sufficient evidence to show that the City or its engineers were negligent. Though the general contractor cited Texas and other state case law for the contention that a duty is owed by the engineer to the owner and the general contractor, and that a supervising engineer may be liable for negligent work or supervision, the court of appeals dismissed these cases as not on point with the case at bar. The court stated the general rule that, in contracting for personal services, an architect s or engineer s duty depends on the particular agreement entered into with his employer. 257 It cited the standard from Morgan Spear that a 255 Id. at 811 (quoting Lonergan, 104 S.W. at 1066) S.W.2d 786, 787 (Tex. Civ. App. Houston [1st Dist.] 1980, writ ref d n.r.e.). 257 Id. at 790 (citing Cobb v. Thomas, 565 S.W.2d 281 (Tex. Civ. App. Tyler 1978, writ ref d n.r.e.)). 52

56 design professional must use the skill and care in the performance of his duties commensurate with the requirements of his profession, and is only liable for failure to exercise reasonable care and skill commensurate with those requirements. 258 The general contractor s negligence argument failed because it offered no witnesses showing that the engineer s conduct was unreasonable under the circumstances, or not compliant with the skill and requirements of registered design professionals. 259 The Austin Court of Appeals, in Bernard Johnson, Inc. v. Continental Constructors, stated that a design professional owed no duty of ordinary care to a contractor not in privity with the design professional. The general contractor contracted with the Texas Parks & Wildlife Department to build a bulk head according to plans and specifications prepared by the department s architect, and the contract contained other provisions giving the architect certain supervisory functions. 260 The court of appeals dismissed the general rule from other jurisdictions that an architect owes a duty of care to the contractor. 261 The court was hesitant to adopt a general rule because [a]ny such rule of general application, based upon an assumed general control of the architect over the contractor, must invariably result in an injustice in a particular case when the contract assigns no [such] control to the architect In Black + Vernooy Architects v. Smith, the Austin court of appeals considered whether a non-party to a contract between an architect and a homeowner could sue the architect for injuries the non-party sustained when a second-floor balcony designed by the architect collapsed. 263 The homeowners in Vernooy hired the architect to design a vacation home for them, which included a balcony off the master bedroom. After hiring the architect, the homeowners hired a contractor to build the new home and balcony. It was uncontested that the general contractor s subcontractor did not build the balcony 258 I. O. I. Systems, 615 S.W.2d at 790 (citing Ryan v. Morgan Spear Associates, Inc., 546 S.W.2d 678 (Tex. Civ. App. Corpus Christi 1977, writ ref d n.r.e.)). 259 I. O. I. Systems, 615 S.W.2d at S.W.2d 365, 366 (Tex. App. Austin 1982, writ ref d n.r.e.). 261 Id. at Id.; see also Romero v. Parkhill, Smith & Cooper, Inc., 882 S.W.2d 522, 525 (Tex. App. El Paso 1994, writ denied) (affirming summary judgment in favor of engineering firm because it had no contractual duty to control job site safety, and therefore, owed no duty to injured subcontractor's employee). 263 Black + Vernooy Architects v. Smith, 346 S.W.3d 877, (Tex. App. Austin 2011, pet. denied). 53

57 according to key components in the architect s design. Only a year after completion, the balcony collapsed while two of the homeowners guests were standing on it, rendering them seriously injured (one was rendered a paraplegic). The families of the injured parties brought a negligence claim against the architect. At trial, a jury found the injuries were partially caused by the negligence of the architects. However, the court of appeals reversed this determination, holding the architect did not have a legal duty either contractual or imposed under common law to the injured third parties. The Texas Supreme Court later denied petition for review of the Austin Court of Appeals opinion in March The Austin Court of Appeals first refused to recognize a contractual duty. The plaintiffs referred to the language of the standard-form contract that the homeowners and architect executed. Under the agreement, in addition to seeking design services, the homeowners also paid the architect for contract administration services during the construction of the residence. With respect to the provision of these services, the contract required the architect to visit the work site, to inform the homeowners regarding the progress of the construction, to generally determine if the construction was being performed in the manner agreed to, to report known deviations from the Contract Documents and from the most recent construction schedule submitted by the Contractor, and to endeavor to guard the homeowners against defects and deficiencies in the Work. Further, the agreement authorized the architect to reject Work that does not conform to the Contract Documents and to inspect or test the Work. While the Vernooy court noted the contract imposed a duty on the architect to protect the homeowners from defects and deficiencies, this duty did not extend to third parties. Specifically, the court of appeals held: Although the [plaintiffs] correctly point out that the contract imposed a duty on the Architects to endeavor to guard against defects and deficiencies in the construction of the home and to generally ascertain whether the home was being built in compliance with the construction plans, those responsibilities were contracted for the benefit of the [homeowners]. Nothing in the language of the contract demonstrates that these duties were to be engaged in for the benefit of third parties. The Vernooy court also cited a portion of the contract between the homeowners and the architect, which provided: Nothing contained in this Agreement shall create a contractual relationship with or a cause of action in favor of a third party against either the [homeowners] or the Architect. The court also refused to impose a common law duty on the architect. Specifically, the injured guests argued the architect owed a legal duty extending to them as house guests because they were foreseeable users of the porch. 264 But the court of appeals rejected this argument, noting: 264 Id. at

58 [F]oreseeability and likelihood of injury are not the only factors to consider when deciding whether a duty exists. Rather, the risk, foreseeability, and likelihood of injury are to be weighed against the social utility of the actor's conduct, the magnitude of the burden of guarding against the injury, and the consequences of placing that burden on the actor. In addition, a court may consider whether one party has superior knowledge of the risk, whether one party has a right to control the actor who caused the harm, and whether legislative enactments evidence the adoption of a particular public policy significant to the recognition of a new common-law duty. 265 The Vernooy court held the right to control consideration weighed against extending an architect s duty to third parties in the case before it because the agreement between the Architects and the [homeowners] specified that although the Architects had the ability to reject the work done, they had no power to control the actual construction work performed at the site. 266 Further, the court of appeals held that nothing in the record established that the architect had exercised actual control over the construction of the balcony, noting: Although the testimony of various witnesses demonstrates that the Architects performed the functions outlined in the contract, none of the testimony or evidence presented indicated that the Architects exerted the type of control over the manner and method of the construction of the balcony as to warrant the imposition of the duty suggested by the Plaintiffs. 267 Finally, regarding the social utility of the architect s conduct, the court of appeals explained that, while there is significant social utility in having the architect also agree to provide some oversight regarding whether the structure is being built in accordance with the design, 268 the consequences of placing such a burden on architects would likewise be significant, 269 stating: The duty sought by the [plaintiffs] would expose the Architects to lawsuits brought by parties that the Architects could not have identified 265 Id.at Id. at Id. at Noting that in general, homeowners will not have the requisite knowledge or training to be able to ascertain whether the construction is progressing properly or to provide a check to potential builder incompetence, and any involvement by an architect during the construction will provide some potential check and will also encourage adherence to the design. 269 Id. at

59 at the time of entering into the contract. To protect against liability, the Architects would have needed to effectively take on the duty of care of a guarantor so as to ensure that all critical matters were fully observed. 270 After weighing all of these factors, the court held the architect did not owe a duty to the plaintiffs. 271 In reaching its conclusion, the Vernooy court relied heavily upon the 2008 Fort Worth Court of Appeals case Dukes v. Philip Johnson/Alan Ritchie Architects, P.C. 272 In Dukes, the Fort Worth court of appeals declined to impose upon the architect at issue an extra-contractual duty to the general public to report or make safe any hazard the architect may have, or should have, detected in a structure the architect designed or reviewed. 273 The case involved the drowning of several individuals at an outdoor urban park in Fort Worth. The families of the deceased sued the architects that had been hired by the city to restore the park. The contract between the architects and the city stated the architects would provide a review of existing conditions, including the pavement, steps, and railings, the pools surfaces, plumbing and lighting, the changes to the original Water Gardens for compliance with the ADA, and development of appropriate repair options and establishing of repair priorities. 274 Because the contract did not specify that the architects had any contractual obligation to report or make safe any hazards that they may have detected in the water gardens, the court of appeals refused to imply such an obligation. 275 The Dukes court was also not persuaded that the architects assumed a duty under a negligent undertaking theory. The Dukes court listed the following standard elements that a plaintiff must prove to prevail on such a theory: (1) the defendant undertook to perform services that it knew or should have known were necessary for the plaintiff s protection; (2) the defendant failed to exercise reasonable care in performing those services; and either (3) the plaintiff relied upon the defendant s performance; or (4) the defendant s performance increased the plaintiff s risk of harm. 276 The court of appeals held that none of these predicates existed in the case before it and, therefore, the negligent undertaking theory did not apply. In particular, 270 Id. at Id. at S.W.3d 586 (Tex. App. Fort Worth 2008, pet. denied). 273 Id. at Id. at Id. 276 Id. at

60 the court of appeals noted the plaintiff had failed to explain how the architects inspection of the water gardens was anything more than the architects complying with their existing contractual obligation. 277 This area of law continues to develop, but it appears that in each of these cases that analysis of a contractor s claim of negligence against a design professional must at least begin by analyzing the duties established in the design professional s contract with the owner. An additional layer to this analysis has been added by the Texas Supreme Court s Eby opinion and cases like it concerning a contractor s potential negligent misrepresentation claim against a design professional, as discussed immediately below. Contactor v. Owner s Design Professional: Negligent Misrepresentation Recall that in LAN/STV v. Martin K. Eby Construction Company, the Texas Supreme Court held the economic loss rule barred a general contractor s negligent misrepresentation claim against an architect for the contractor s increased costs of performing. 278 The facts are worth repeating: in Eby the Dallas Area Rapid Transportation Authority ( DART ) contracted with LAN/STV to prepare plans, drawings, and specifications for the construction of a light rail transit line from Dallas s downtown West End to the American Airlines Center roughly a mile away. LAN/STV agreed to be responsible for the professional quality, technical accuracy, and... coordination of all designs, drawings, specifications, and other services furnished, and to be liable to the Authority... for all damages to the Authority caused by [LAN/STV s] negligent performance of any of the services furnished. DART incorporated LAN/STV s plans into a solicitation for competitive bids to construct the project. Martin K. Eby Construction Company, which had built two other DART light rail projects, one of which was designed by LAN/STV, was awarded the contract. The contract provided an administrative procedure for Eby to assert contract disputes with DART, including complaints about design problems. Eby and LAN/STV had no contract with each other. Thus, LAN/STV was contractually responsible to DART for the accuracy of the plans, as was DART to Eby, but LAN/STV owed Eby no contractual obligation. 279 Again, days after beginning construction, Eby discovered LAN/STV s plans were full of errors regarding bridge structures, manhole and utility line locations, subsurface soil conditions, an existing retaining wall, and other aspects of the proposed construction. Eby found that 80% of LAN/STV s drawings had to be changed. This disrupted Eby s construction schedule and required additional labor and 277 Id S.W.3d 234, 236 (Tex. 2014) 279 Id. 57

61 materials. Eby calculated it lost nearly $14 million on the project. Relatively early in the project, Eby sued DART and later followed the contractually-required dispute procedures mandated by Eby s contract with DART, eventually leading to a settlement between Eby and DART for $4.7 million. Eby filed its tort suit against LAN/STV, asserting causes of action for negligence and negligent misrepresentation. After Eby and DART settled, the LAN/STV case proceeded to trial, but only on Eby s claim that LAN/STV negligently misrepresented the work to be done in its errorridden plans. The jury agreed and assessed Eby s damages for its losses on the project at $5 million, but they also found that the damages were caused by Eby s and DART s negligence as well, and apportioned responsibility 45% to LAN/STV, 40% to DART, and 15% to Eby. The trial court rendered judgment for Eby against LAN/STV for $2.25 million plus interest, in addition to the amount for which Eby had settled with DART. 280 In reaching its holding, the Texas Supreme Court engaged in a lengthy discussion of the case law history behind the economic loss rule, as well as relying heavily though not entirely upon the recently approved Restatement (Third) of Torts: Liability for Economic Harm. Quoting the Restatement, the supreme court noted [C]ourts generally do not recognize tort liability for economic losses caused by the breach of a contract between the parties, and often restrict the role of tort law in other circumstances in which protection by contract is available. 281 Relying on the Restatement, the supreme court stated it was more probable that a contractor will assume it must look to its agreement with the owner for damages if the project is not as represented, or for any other breach: Though there remains the possibility that a contractor may not do so, we think the availability of contractual remedies must preclude tort recovery in the situation generally because, as stated above, clarity allows parties to do business on a surer footing. Where contracts might readily have been used to allocate the risk of a loss, the Restatement observes, a duty to avoid the loss is unlikely to be recognized in tort not because the economic loss rule applies, but simply because courts prefer, in general, that economic losses be allocated by contract where feasible. We see no reason not to apply the economic loss rule to achieve this end. 282 The supreme court concluded by noting DART was contractually responsible to Eby for providing accurate plans for the job. Eby agreed to specified remedies for disputes, pursued those remedies, and settled its claims for $4.7 million. According to 280 Id. at Id. at 242 (quoting RESTATEMENT (THIRD) OF TORTS: LIABILITY FOR ECONOMIC HARM 1 cmt. c (Tentative Draft No. 1, 2012)). 282 Eby, 435 S.W.3d at 248 (citations omitted). 58

62 the supreme court, had DART chosen to do so, it could have sued LAN/STV for breach of their contract to provide accurate plans. But Eby had no agreement with LAN/STV and was not party to LAN/STV s agreement with DART. Clearly, according to the Eby court, the economic loss rule barred Eby s subcontractors from recovering their own delay damages in negligence claims against LAN/STV. We think Eby should not be treated differently. 283 Outside of Texas, another interesting case to note is Bilt-Rite Contractors, Inc. v. The Architectural Studio. There the Pennsylvania Supreme Court remanded after holding that a general contractor stated a viable claim for negligent misrepresentation against an architect where it was foreseeable that architect s plans would be used and relied upon by third persons. The general contractor had successfully bid on a public construction project and brought a negligent misrepresentation suit against the project architect, seeking damages for increased construction costs after discovering that a special methodology was required to carry out building plans. 284 The court formally adopt section 552 of the Restatement (Second) of Torts as part of its negligent misrepresentation analysis and specifically held there is no requirement of privity to recover under section 552 and that the economic loss rule does not bar recovery in such a case. 285 In McCamish, Martin, Brown & Loeffler v. F.E. Appling Interests, the Texas Supreme Court previously adopted section 552 for negligent misrepresentations made by an attorney to a non client. 286 The supreme court held that a non client may bring a negligent misrepresentation cause of action, as defined by section 552, against an attorney without regard to privity. 287 This is similar to a general contractor bringing a negligent misrepresentation claim against a design professional not in a contractual relationship with the general contractor. Texas law has recognized a section 552 causes of action against other professions, including: 1. Auditors; 2. Physicians; 3. Real-estate brokers 4. Securities placement agents; 5. Title insurers; and 283 Id. at Pa. 454, (Pa. 2005). 285 Id. at S.W.2d 787 (Tex. 1999). 287 Id. at

63 6. Accountants. 288 The supreme court emphasized the distinction between a negligent misrepresentation claim and a professional malpractice claim: [u]nder the tort of negligent misrepresentation, liability is not based on the breach of duty a professional owes his or her clients or others in privity, but on an independent duty to the nonclient based on the professional s manifest awareness of the nonclient s reliance on the misrepresentation and the professional s intention that the nonclient so rely. 289 It arguably follows that a negligent misrepresentation cause of action applies to a general contractor and design professional not in privity because the design professional was manifest[ly] aware of general contractor s reliance on the plans and specifications and intended for the general contractor to so rely. 290 In D.S.A., Inc. v. Hillsboro Independent School District., the Texas Supreme Court concluded that to recover for a negligent misrepresentation claim, there must be an injury independent of the breach of contract. 291 The dispute arose out of a school construction project overseen by D.S.A., a construction management firm, for the Hillsboro Independent School District ( HISD ). The school building suffered several severe defects after it was completed and occupied, including several leaks and the inability to withstand typical Hill Country winds. After HISD spent additional money to repair these defects, it sued D.S.A. for breach of contract, negligent and gross negligent misrepresentation, and DTPA violations in connection with D.S.A. s contract to manage the construction of the school. 292 The Texas Supreme Court noted its previous adoption (in Federal Land Bank Association v. Sloane, 825 S.W.2d 439, (Tex.1991)) of the independent injury requirement of section 552B of the Restatement (Second) of Torts. That section provides: (1) The damages recoverable for a negligent misrepresentation are those necessary to compensate the plaintiff for the pecuniary loss to him of which the misrepresentation is legal cause, including: (a) the difference between the value of what he has received in the transaction and its purchase price or other value given for it; and 288 Id. (citations omitted). 289 Id. at Id S.W.2d 662, (Tex. 1998). 292 Id. at

64 (b) pecuniary loss suffered otherwise as a consequence of the plaintiff's reliance upon the misrepresentation. (2) the damages recoverable for a negligent misrepresentation do not include the benefit of the plaintiff's contract with the defendant. 293 The supreme court s policy reason for fixing a narrower scope of liability for negligent misrepresentation than for fraudulent inducement was based on the difference between the obligations of honesty and of care. 294 Negligent misrepresentation implicates only the duty of care in supplying commercial information; honesty or good faith is no defense, as it is to a claim for fraudulent misrepresentation. Repudiating the independent injury requirement for negligent misrepresentation claims would potentially convert every contract interpretation dispute into a negligent misrepresentation claim. 295 Because HISD sought recovery for its costs to replace the roof, repair the plumbing, and re-grade the parking lots, HISD in essence asked for the benefit of its bargain - in this case, the reasonable costs needed to bring the school up to the "bargained-for" standard. Thus, HISD s theory of recovery did not make any distinction between its out-of-pocket damages and benefit of the bargain damages. Therefore, HISD did not meet its burden of proving the independent injury required under section 552 of the Second Restatement and was not entitled to any recovery under a negligent misrepresentation theory. 296 General Contractor v. Owner s Design Professional/ Other Contractors: Third Party Beneficiary Construction commentators have, understandably, focused on the economic loss rule discussion in the 2011 Texas Supreme Court Sharyland opinion discussed above. But often overlooked is the guidance provided by Sharyland regarding third party beneficiary analysis in the construction context. Recall from the above discussion that Alton is a municipality in Hidalgo County. Sharyland Water Supply Corporation is a non-profit rural water supply corporation in the same county. In the early 1980s, Alton constructed a potable water distribution system for its residents. Alton and Sharyland executed a Water Supply Agreement whereby Alton conveyed its water system to Sharyland. In exchange, Sharyland provided potable water to Alton 293 Id. at (citing). 294 Id. at 664 (quoting 552 (comment a.)). 295 Id. 296 Id. 61

65 residents and maintained the system. The Water Supply Agreement gave Sharyland a ten-foot easement and required Sharyland to set rates and regulate the water distribution system s operation. After an initial one-year period, Sharyland was responsible for repairing the system and maintaining the lines in conformity with current or future state agency rules and regulations. In 1994, Alton received federal and local grants to install a sanitary sewer system, consisting of main sewer lines, residential service connections, and yard lines. Alton contracted with construction and design firms (the contractors ) to build the sanitary sewer system. In some locations, Alton s sewer main was installed parallel to Sharyland s water main, so that connecting the sewer main to the residential service line required the sewer line to cross the water main. 297 A year after the project was complete, Sharyland sued Alton for breaching the Water Supply Agreement, alleging Sharyland suffered significant injury because Alton s sanitary sewer residential service connections were negligently installed in violation of state regulations and industry standards. Specifically, Sharyland claimed the location and proximity of the sewer lines to the water system threatened to contaminate Sharyland s potable water supply. Alton counterclaimed, seeking a declaration that the Water Supply Agreement was void. Sharyland also sued the contractors for negligence and breach of contract, contending Sharyland was a third party beneficiary of the contractors agreement with Alton. 298 Sharyland argued there was evidence to support the jury finding that Sharyland was a third party beneficiary of the agreements between Alton and the contractors. The court of appeals disagreed, holding Sharyland was no more than an incidental beneficiary to the contract. The supreme court agreed with the court of appeals; this was primarily because the contracts executed between Alton and the contractors make no reference to Sharyland and indicated no intention to confer a benefit on Sharyland. 299 In reaching its conclusion, the supreme court relied heavily upon its 2007 South Texas Water Authority v. Lomas opinion (also discussed in this paper). The Sharyland court cited the general presumption against conferring third-party beneficiary status on noncontracting parties. 300 The Sharyland court noted that the Lomas opinion considered similar facts, in that the case involved a water supply agreement between a local water authority and a city, under which agreement a citizen organization claimed to be a third party beneficiary. The Sharyland court then quoted the following dicta from Lomas: 297 Id. at Id. at Id. 300 Id. (quoting the court of appeals opinion and citing Lomas, 223 S.W.3d 304, 306 (Tex. 2007)). 62

66 In deciding whether a third party may enforce or challenge a contract between others, it is the contracting parties intent that controls... The intent to confer a direct benefit upon a third party must be clearly and fully spelled out or enforcement by the third party must be denied.... Incidental benefits that may flow from a contract to a third party do not confer the right to enforce the contract... A third party may only enforce a contract when the contracting parties themselves intend to secure some benefit for the third party and entered into the contract directly for the third party s benefit. 301 The supreme court emphasized that the fact that a person is directly affected by the parties conduct, or that he may have a substantial interest in a contract s enforcement, does not make him a third-party beneficiary. 302 Given this framework, the supreme court held Sharyland did not meet the criteria necessary to confer third party beneficiary status. Sharyland was neither mentioned in the contracts themselves, nor is there evidence that Alton and the contractors intended to confer a direct benefit on Sharyland. Alton had contracted with Carter & Burgess to manage construction of the sewer system; with Turner, Collie & Braden to engineer and inspect the system; and with Cris Equipment Company to build the system. 303 While Sharyland might incidentally benefit from the contractors promises to place the sewer lines in accordance with the plans and specifications, the contracts fell far short of clearly and fully spell[ing] out such an intent, 304 noting: The primary purpose of these agreements was to provide for the construction of a sewer system in Alton, not to benefit Sharyland. 305 Therefore, Sharyland was not a third party beneficiary of the agreement between Alton and the contractors Sharyland, 354 S.W.3d at (quoting Lomas, 223 S.W.3d at 306) (emphasis added). 302 Sharyland, 354 S.W.3d at 421 (quoting Fleetwood Enters. Inc. v. Gaskamp, 280 F.3d 1069, 1075 (5th Cir. 2002) (applying Texas law and quoting Loyd v. ECO Res., Inc., 956 S.W.2d 110, 134 (Tex. App. Houston [14th Dist.] 1997, no pet.)). 303 Sharyland, 354 S.W.3d at Sharyland, 354 S.W.3d at 421. (quoting Lomas, 223 S.W.3d at 306). 305 Sharyland, 354 S.W.3d at 421 (emphasis added) (citing Basic Capital Mgmt., Inc. v. Dynex Commercial, Inc., 348 S.W.3d 894, 900 (Tex. 2011) (noting that contract had no purpose whatever other than to benefit third party)). 306 Sharyland, 354 S.W.3d at

67 Contractor v. Sub-subcontractor/Supplier Not in Privity: Breach of Contract and Negligence A contractor suing a sub-subcontractor not in contractual privity will generally have to prove the same breach of contract elements and overcome the same difficult presumption against third party beneficiaries discussed above. That analysis does not need to be repeated here. Regarding negligence, the economic loss rule will again affect the analysis. Some insight can be gleaned in this regard from Harris Packaging v. Baker Concrete Construction Co., involving a first-tier subcontractor s suit against a material supplier not in privity with the subcontractor. 307 Baker, a concrete subcontractor for the construction of a psychiatric unit, contracted with Sheplers, who would provide cardboard forms necessary to pour foundation that would survive soil shifts. Sheplers purchased the unassembled cardboard forms from Harris, who also trained Sheplers on their use. However, the forms did not contain the proper reinforcement, causing them to collapse midconstruction. Baker sought recovery from a variety of parties, including Harris, for Baker s costs in making emergency repairs caused by the collapse of the forms. The court of appeals reversed the trial court s award of strict liability against Harris because Baker had suffered only pure economic loss and because strict liability in tort will not lie unless there is actual physical harm either to persons or to their property. 308 The trial court s finding of negligence was also improper because, inter alia, Harris owed no contractual duty to Baker as a matter of law. 309 The ruling in Harris Packaging may be indicative of the difficulty a contractor will have in bringing a negligence (or a breach of contract) claim against a subcontractor or subsubcontractor with whom it has no privity of contract. General Contractor v. Subcontractor in Privity: Breach of Contract and Negligence The same analysis applied to the owner versus general contractor section above will also generally apply to a general contractor s claims against a subcontractor in privity with the general contractor and does not warrant detailed analysis here. For breach of contract, of course, the subcontract between the general contractor and subcontractor will form the basis of their relationship. Though we list a general S.W.2d 62 (Tex. App. Houston [1st Dist.] 1998, pet denied). 308 Id. at Id. at 67-68; see also Hou-Tex., Inc. v. Landmark Graphics, 26 S.W.3d 103, 107 (Tex. App. Houston [14th Dist.] 2000, no pet.) (economic loss rule precluded any duty in tort by computer software developer to oil company seeking only economic damages for cost of drilling dry oil well, where oil company was not in privity with software developer, who had only subcontracted with oil company s geological contractor). 64

68 contractor s breach of contract cause of action against a subcontractor near the end of this paper, it is obviously the first claim a general contractor should generally consider against a subcontractor. Again, regarding negligence, the contractual relationship of the parties may create duties under both contract and tort law. 310 Any injury to the general contractor will often only result in economic loss to the subject of [the] contract itself, and thus the proper cause of action might often be breach of contract. 311 General Contractor v. Subcontractor/ Supplier in Privity: the Emergence of Chapter 82 Indemnity In recent years, significant discussions have developed regarding the application of Texas Civil Practice and Remedies Code 82 to construction cases. Chapter 82, which primarily concerns products liability, provides: A manufacturer shall indemnify and hold harmless a seller against loss arising out of a products liability action, except for any loss caused by the seller's negligence, intentional misconduct, or other act or omission, such as negligently modifying or altering the product, for which the seller is independently liable. 312 The chapter applies to a products liability action, which is defined as: [A]ny action against a manufacturer or seller for recovery of damages arising out of personal injury, death, or property damage allegedly caused by a defective product whether the action is based in strict tort liability, strict products liability, negligence, misrepresentation, breach of express or implied warranty, or any other theory or combination of theories. 313 Chapter 82 does not define what a product is, but it does define a seller as: a person who is engaged in the business of distributing or otherwise placing, for any commercial purpose, in the stream of commerce for use or consumption a product or any component part thereof. 314 Further, a manufacturer is defined as: a person who is a designer, formulator, constructor, rebuilder, fabricator, producer, compounder, processor, or assembler of any product or any component part thereof 310 Jim Walter Homes v. Reed, 711 S.W.2d 617, 618 (Tex. 1986) (citing Montgomery Ward & Co. v. Scharrenbeck, 204 S.W.2d 508 (Tex. 1947)) S.W.2d at 618 (citing Mid-Continent Aircraft Corp. v. Curry County Spraying Service, 572 S.W.2d 308, 312 (Tex.1978); Nobility Homes of Texas, Inc. v. Shivers, 557 S.W.2d 77 (Tex.1977)). 312 TEX. CIV. PRAC. & REM. CODE (a). 313 Id (2). 314 Id (3). 65

69 and who places the product or any component part thereof in the stream of commerce. 315 In Fresh Coat, Inc. v. K-2, Inc., the Texas Supreme Court examined a synthetic stucco manufacturer s duty to indemnify a contractor under Chapter There, K 2 manufactured synthetic stucco components (exterior insulation and finish systems, or EIFS ). A homebuilder, Life Forms, Inc., executed a contract with Fresh Coat to install EIFS on the exterior walls of several homes that Life Forms was building. Fresh Coat purchased the EIFS and installed it, aided by K 2 s instructions and training. 317 Approximately ninety homeowners later sued K 2, Life Forms, and Fresh Coat for alleged structural damage, termite problems, and mold caused by water penetration. 318 The homeowners alleged the EIFS was defectively designed, manufactured, and marketed, asserting causes of action for negligence, deceptive trade practices, negligent misrepresentation, and breach of warranty. Life Forms sought indemnity from Fresh Coat and K 2, and Fresh Coat sought indemnity from K 2. K 2, Life Forms, and Fresh Coat all settled with the homeowners, the case proceeded to trial on the defendants cross-claims against each other, and the jury found in favor of Fresh Coat as to all damages Fresh Coat requested. On appeal, the issue was Fresh Coat s claims against K 2. The Beaumont Court of Appeals affirmed the trial court s judgment except with regard to the settlement payment Fresh Coat made to the homebuilder, Life Forms. Both K 2 and Fresh Coat filed petitions for review with the Texas Supreme Court. 319 In addressing the issue of whether Fresh Coat, the EIFS installer, was a seller under Chapter 82, the supreme court agreed with the court of appeals determination that Chapter 82 s definition of seller did not exclude a seller who is also a service provider, and that Chapter 82 did not require the seller to sell only the product. 320 The supreme court noted this approach was consistent with the Third Restatement of Torts, which recognizes that a product seller may also provide services. 321 In determining that Fresh Coat was a seller pursuant to Chapter 82, the Supreme Court emphasized that Fresh Coat had installed the EIFS according to K 2 s instructions, and that K 2 trained and certified Fresh Coat personnel in the installation of its EIFS system ; further, the supreme court noted, Fresh Coat s 315 Id (4) S.W.3d 893, 895 (Tex. 2011). 317 Id. 318 Id. 319 Id. at Id. at Id. (citing Restatement (Third) of Torts: Products Liability 19, 20 (1998)). 66

70 contract with Life Forms was to provide labor, services and/or materials, equipment, transportation, or facilities necessary to provide synthetic stucco application and finish. and that Fresh Coat was in the business of providing EIFS products combined with the service of EIFS installation. 322 The Fresh Coat court concluded: Chapter 82, like the Restatement, anticipates that a product seller may also provide services. Thus, we conclude that when a company contracts to provide a product that is alleged to be defective like the EIFS system in this case the company s installation services do not preclude it from also being a seller. 323 More recently, the Beaumont Court of Appeals held a general contractor was not entitled to indemnity from a truss manufacturer in Centerpoint Builders GP, LLC v. Trussway Ltd. 324 The case began as a personal injury action filed by Merced Fernandez against Centerpoint, Trussway, and other defendants for injuries Fernandez sustained while installing drywall at an apartment complex construction project; Centerpoint was the general contractor and Fernandez was an independent subcontractor. At the time of the injury, Fernandez was attempting to install a piece of drywall above the second story of the building while standing on top of trusses that were lying in a horizontal position and had not yet been installed. Fernandez was injured when he stepped onto a truss that broke and collapsed, causing him to fall approximately eight to ten feet and rendering him a paraplegic. Fernandez contended the trusses, which were manufactured by Trussway and purchased by Centerpoint directly from Trussway, were defective and unreasonably dangerous. Trussway filed a cross-action against Centerpoint. In its cross-action, Trussway denied that Centerpoint was a seller under Chapter 82 and Trussway contended that as an innocent seller, it is entitled to indemnity from Centerpoint under the provisions of Chapter The Beaumont Court of Appeals first held that Centerpoint was not entitled to indemnity from Trussway under Chapter 82. In reaching its holding, the court of appeals emphasized what it believed were several important distinctions between the current case and the supreme court s Fresh Coat opinion: the first important distinction, according to the court of appeals, was it was undisputed that Fernandez s accident occurred before the trusses were installed at the apartment complex. Unlike Fresh Coat, there is no indication that Centerpoint (or its subcontractors) installed the truss pursuant to training or instructions from Trussway. Second, Centerpoint s contract with the property owner covered innumerable construction products and materials that would be involved in the construction of the apartment complex, as S.W.3d at Id S.W.3d 882 (Tex. App. Beaumont 2014, pet. filed). 325 Id. at

71 opposed to the contract involved in Fresh Coat, in which Fresh Coat merely contracted to install a specific product, the EIFS, from component parts, instructions, and training provided by K Third, though the court of appeals acknowledged the trusses were made a permanent part of the apartment complex upon completion of construction, the court concluded that Centerpoint was not engaged in placing the trusses into the stream of commerce when Fernandez s accident occurred. Fourth, in Fresh Coat, the Texas Supreme Court held that Fresh Coat was a seller under Chapter 82 and noted that the company s installation services did not preclude it from being a seller; however, according to the court of appeals, the Fresh Coat court did not broadly hold that a contractor who installs a product is always a seller for purposes of Chapter The Centerpoint court stated that the Fresh Coat court discussed the common law and upheld our interpretation of the term seller as consistent with the common law. Therefore, we conclude that the Supreme Court did not hold that Chapter 82 expanded the common-law definition of seller. The Beaumont Court of Appeals also rejected Trussway s argument that it was entitled to indemnity from Centerpoint under Chapter 82. The court of appeals noted, among other things, that Fernandez s petition did not allege that a product manufactured or assembled by Centerpoint was defective. Rather, Fernandez s petition alleged only that the uninstalled truss manufactured by Trussway was defective, and the parties stipulated that Trussway manufactured and supplied the truss. Therefore, Centerpoint was not a manufacturer of the truss and, accordingly, was not obligated to indemnify Trussway. 328 As of the writing of this paper, Centerpoint has filed a petition for review of this case with the Texas Supreme Court and the Texas Building Branch of the Associated General Contractors of America have filed an amicus brief in support thereof. Whether the supreme court grants the petition remains to be seen. But either way, construction practitioners would be wise to keep an eye upon this developing area of construction defect law. IV. Conclusion A construction lawyer must be familiar with all the potential causes of action at his/her disposal, the limitations on those causes of action, the parties that can be involved, and the role of insurance, in order to achieve results in a modern construction defect case. Further, a construction lawyer would be wise not to agree to write a paper on a subject this broad. 326 Id. at 888 (citing, Fresh Coat, 318 S.W.3d at 899). 327 Id. 328 Centerpoint, 436 S.W.3d at 889 (citing, inter alia, TEX. CIV. PRAC. & REM. CODE (4)). 68

72 Causes of Action 2015: Construction Defects Mason P. Hester (assistance: Christian Dewhurst) Coats Rose Construction Defects 1780 BC The Code of Hammurabi (Babylon): If a builder build[s] a house and does not construct it properly, and the house that he built fall[s] in and kill[s] its owner, then that builder shall be put to death.if it kill[s] the son of the owner, the son of that builder shall be put to death.

73 Construction Defects 2015 AD The Code of Shidlofsky The builder shall not be put to death, but instead must deal with modern insurance issues, including, but not limited to, exclusions, endorsements, defining an occurrence, etc. Result?... Construction Defects 2015 AD The 2015 builder yearns for the days of Hammurabi.

74 Owner v. Sub: Negligence Chapman v. Dallas Plumbing (445 S.W.3d 716 (Tex. 2014)) (Paper Pg. 34) After home s completion, plumbing leaks damaged structure of home (Chapman cont.) Held: summary judgment improper as owner pleaded cognizable negligence claim against plumbing sub

75 (Chapman cont.) Rationale (relying on Scharrenbeck): having undertaken to install plumbing system, plumber assumed implied duty not to flood/ otherwise damage house while performing (Chapman cont.) Plumber s duty was independent of any obligation undertaken in its plumbing subcontract & damages from the breach of that duty extend beyond the economic loss of any anticipated benefit under the plumbing contract.

76 Owner v. GC: Implied Good & Workmanlike Warranty Gonzales v. SW Olshan, 400 S.W.3d 52 (Tex. 2013) (Pg.12) Homeowner hired Olshan to repair foundation damage caused by water leaks from separate contractor; owner sued Olshan for breach of implied G&W performance warranty (Olshan cont.) So, what is good and workmanlike under the implied warranty?

77 Good and Workmanlike? Probably not this:

78 Nor this: Good and Workmanlike? (Olshan cont.) Good and workmanlike def. for implied warranty: that quality of work performed by one who has the knowledge, training, or experience necessary for the successful practice of a trade or occupation and performed in a manner generally considered proficient by those capable of judging such work. (Olshan quoting Melody Home)

79 (Olshan cont.) Olshan s contract: 1)included lifetime warranty requiring Olshan to adjust foundation due to settling 2)required Olshan to perform all the necessary work in connection with this job... in a good and workmanlike manner. (Olshan cont.) Held: Olshan s contract sufficiently described manner, performance, or quality of services so as to supersede implied G&W performance warranty

80 Non-privity Owner v. GC: Nuisance? Carlton v. Blanchard (311 S.W.3d 654 (Austin 2010, no pet.) (Pg.24) Group of homeowners sued KB Homes for damages suffered during KB s construction of nearby homes, allegedly creating nuisance (Carlton cont.) SOME key defects: vibrations caused homes to experience large cracks in the foundation, leaks in the roof, and cracks in the interior and exterior walls.

81 (Carlton cont.) Affirmed jury holding KB caused nuisance ($200,988 principal damages) Nuisance def.: a condition that substantially interferes with the use and enjoyment of land by causing unreasonable discomfort or annoyance to persons of ordinary sensibilities. (citing Tex. Supr. Ct.) (Carlton cont.) But also cited broad quote from Tex. Supr. Ct.: [t]here is no question that foul odors, dust, noise, and bright lights if sufficiently extreme may constitute a nuisance.

82 Owner v. GC (& Subs?): Code Compliance Tips v. Hartland (961 S.W.2d 618 (San Antonio 1998, no pet.)) (Pg.15) Owner of airplane hanger unable to obtain cert. of occup. from city b/c building did not comply w/ fire codes (Tips cont.) [A] cause of action is available to plaintiffs for breach of contract where a contractor has failed to comply with building codes relevant to the intended use of the structure. An implied covenant to comply will be presumed; may be countered with evidence that the parties agreed differently.

83 (Tips cont.) Contractors, not owners, are in the best position to know about and comply with relevant building codes. Non-privity Parties: 3 rd Party Beneficiary Derr v. City of Houston (846 S.W.2d 854, 856 (Houston 1992, no writ)) (Pg.31) Houston & its constr. manager were intended beneficiaries of subcontract between sub & GC, where subcontract named city/ constr. managers as indemnitees

84 (3 rd Party Benef. cont.) Sharyland v. Alton, 354 S.W.3d 407 (Tex. 2011) (Pg.61) GG had no 3 rd party benef. status as to city s contract w/ its design contractors Sharyland was neither mentioned in contracts & no evidence Alton/ its design contractors intended to confer direct benefit on Sharyland (Sharyland cont.) Intent to confer direct benefit on 3 rd party must be clearly and fully spelled out or enforcement by 3 rd party must be denied Primary purpose of agreements was to provide for the construction of a sewer system in Alton, not to benefit Sharyland.

85 Non-construction Party v. Design Prof l: Negligence Black + Vernooy v. Smith, 346 S.W.3d 877 (Austin 2011, pet. denied) (Pg.53) Guests invited to homeowners newly constructed vacation home severely injured when upstairs bedroom balcony collapsed (Vernooy cont.) Subcontractor failed to construct balcony per key plans & specs provisions Guests assert negligence claim against architect (after settling w/ GC & owners)

86 (Vernooy cont.) No negligence duty from architect to guests, b/c balancing of factors: Foreseeability (+) Likelihood of injury (+) Social utility of actor s conduct (-) Magnitude of burden of guarding against injury (-) Consequences of placing burden on actor (-) Knowledge of the risk (-) Right to control (-) Relying on Dukes v. Johnson, 252 S.W.3d 586 (Fort Worth 2008, pet. denied) (Pg.56) (Vernooy cont.) Some unanswered questions: What if homeowners had been on the balcony w/ their guests during the collapse? What about subsequent homeowners?

87 That provides a nice segue to another case Subsequent Owner v. GC: Implied Warranty of Habitability Old HH v. Henderson, No CV, (Austin 2011, no pet.) (Pg.19): Held: trial court was required to submit to jury question re: builder s implied warranty of habitability to subsequent purchasers, regarding water leaks above front entry

88 (Old HH cont.) Heavy reliance on 1983 Tex. Spr. Ct. Gupta opinion: As between the builder and owner, it matters not whether there has been an intervening owner. The effect of the latent defect on the subsequent owner is just as great as on the original buyer and the builder is no more able to justify his improper work as to a subsequent owner than to the original buyer. (quoting Gupta) GC v. Sub/ Sub-sub Manufact.: Ch. 82 Indemnity (Pg.65) TEX. CIV. PRAC. & REM. CODE (a): A manufacturer shall indemnify and hold harmless a seller against loss arising out of a products liability action, except for any loss caused by the seller s negligence or other act.

89 (Ch. 82 Indemnity cont.) Fresh Coat v. K-2, 318 S.W.3d 893 (Tex. 2010) (Pg.66) Held: EIFS is a product : building materials were products before installed; they don t stop being products GC Fresh Coat was a seller : was engaged in the business of selling EIFS; just b/c Fresh Coat also installed EIFS didn t preclude it from being a seller (Ch. 82 Indemnity (cont.) Centerpoint v. Trussway, 436 S.W.3d 882 (Beaumont 2014, pet. filed) (Pg.67): Held: GC was NOT entitled to Ch. 82 indemnity from truss manufacturer, where sub employee while standing on trusses not yet installed Unlike Fresh Coat, GC had not yet installed trusses per training/ instructions from Trussway & Centerpoint was not placing trusses into stream of commerce when accident occurred