CONSEQUENTIAL AND SIMILAR DAMAGE CLAIMS
AND APPLICATION OF THE ECONOMIC LOSS RULE

1. Introduction
2. Consequential Damages in Construction Law
1. History of Consequential Damages
2. Types of Consequential Damages
3. Evidentiary Issues
4. The U.C.C. and Consequential Damages
5. Contractual Limiting Provisions
6. Specific Examples of Consequential Damages Related to Construction Projects
3. The "Economic Loss" Rule
4. The "Contort" Dilemma
1. Introduction
2. Development
5. The "Contort" Analysis
1. Jim Walter Homes
2. Southwestern Bell v. DeLanney
6. Contorts Post-Delanney
1. Negligence and Contract
2. Independent Torts
3. Fraudulent Inducement
4. Split of Opinions
5. Conflict Resolved
7. Conclusion
8. Appendix

Alabama
Alaska
Arizona
Arkansas
California
Colorado
Connecticut
Florida
Georgia
Illinois
Iowa
Indiana
Kansas
Louisiana
Maryland
Michigan
Minnesota
Missouri
Nebraska
New Mexico
New York
North Carolina
North Dakota
Oklahoma
Oregon
Pennsylvania
South Carolina
Virginia
Washington
West Virginia
Wisconsin
9. Index of Authorities

Notes

Whether representing an owner, contractor, subcontractor, vendor, supplier or others connected to a construction project, claims for potential damages arising from default may be escalated considerably by various theories of recovery, two of which include claims for consequential damages and claims arising from a variety of tort causes of action. Depending on the facts giving rise to the claim, claims for consequential damages as well as recovery of independent torts may be allowed, the former being much more likely than the latter. This paper will, first, address recovery of consequential damages arising from construction related claims and, secondly, the limitations established by the Texas Supreme Court by litigants seeking to recover damages arising from an independent tort theory of recovery or what has been referred to as "contorts". Understanding Texas jurisprudence in these areas will allow you to properly evaluate your client's claims or risks.

The common tort claims which generally accompany a breach of contract cause of action in commercial and construction-related cases include: negligence, gross negligence, negligent misrepresentation, fraud, fraudulent inducement and tortious interference. Before litigants assert any of these tort claims along with a breach of contract action, the cases above strongly suggest an examination of the tort claims with a "contort" analysis in mind and an understanding of whether the tort claims are "independent" of a contract claim. While the "contort" analysis should not be applied in a formulaic fashion, the following examples are indicative of the solution derived from such an analysis.

As between parties to a contract, it seems clear negligence or gross negligence claims will fail unless the recovery sought is for injury to person or property outside the scope of the contract. Scharrenbeck; Espey. Whether such a negligence claim can be asserted against a third party to the contract (e.g., an architect or engineer) remains largely unanswered. However, because of doctrines of agency and third-party beneficiary, such a claim could likewise be precluded. See, Bernard Johnson, Inc.

On the other hand, tortious interference, by its very nature, should pass muster outside of a "contort" analysis. In a properly pleaded tortious interference case, the defendant is a third party to the contract charged with interfering with such contract. A plaintiff's recovery for benefit of the bargain flows from the defendant's wrongful interference. Use of the "benefit of the bargain" measure of damages label should no longer prompt a "contort" challenge.

An improperly pleaded claim of negligent misrepresentation will also fail a "contort" analysis. Specifically, the negligent misrepresentation doctrine as adopted in Texas restricts a claimant to pecuniary loss sustained in reliance on the representation and expressly precludes recovery of "benefit of the bargain" type damages. Thus, if recovery of "benefit of bargain" damages is sought in a negligent misrepresentation case, the claim will not only fail a "contort" analysis but, more importantly, is also improperly pleaded.

Finally, as resolved by Formosa, a party induced into a contract by fraud may pursue a contract claim and an alternative fraud claim subject to proper pleading and proof. The law imposes a duty to refrain from fraudulent conduct regardless of whether the fraud results in a contract and without regard to a similar measure of damage for both fraud and contract actions. The Economic Loss Rule remains vital and viable in Texas. However, like other rules, it cannot be applied in a vacuum.

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