The LAW
Essentially, the economic loss rule states that with regard to unintentional torts such as negligence, and negligent misrepresentation, there can be no recovery for the plaintiff unless the plaintiff suffers some form of physical injury. See LAN/STV v. Martin K. Eby Const. Co., Inc., 11-0810, 2014 WL 2789097 (Tex. June 20, 2014). Purely financial loss is insufficient. See Id.
WHAT HAPPENED
When analyzing the latest Texas Supreme Court case on the issue, it becomes apparent that contractors should beware! In LAN/STV, an architect completed plans for a project on behalf of the owner. The owner then incorporated those plans to solicit competitive bids. Naturally the contractors based their bids on the architect’s plans and one contractor was awarded the project. However, early into the project the contractor realized that the plans were completely flawed. The flawed plans delayed the job and cost the contractor 14 million in revenue.
The contractor sued the owner for breach of contract but eventually settled out of court for 4.7 million. The contractor then tried to sue the architect but as is typical in the construction industry, the contractor did not have a contractual relationship with the architect because the contractor only entered into an agreement with the owner. Consequently, there was no contract remedy such as breach of contract through which the contractor could obtain damages from the architect.
The contractor decided to sue under a tort theory of negligent misrepresentation. The Texas Supreme Court Stated that “the law has long limited the recovery of purely economic damages in an action for negligence”, and concluded that “the economic loss rule does not allow recovery.” LAN/STV v. Martin K. Eby Const. Co., Inc., 11-0810, 2014 WL 2789097 (Tex. June 20, 2014).
WHAT IT MEANS FOR YOU
What this means for you is that you must protect yourself during the bargaining process. If you are the general contractor, it is probably wise that while bargaining with the owner, you insist on protection from the architect. This protection can come in the form of insurance, which you can include in the cost of your bid or a indemnification clause that you put in the contract. The same applies to sub-contractors.
Nothing here is intended to be legal advice nor should it be construed as such. If you have questions or would like to discuss an issue with your company, please call 832-930-0529 or visit http://www.kestephenslaw.com.
Stephens PLLC Construction Law Blog 
As a former General Contractor I have always been aware that the standard contract for services in our industry has almost always been the “Standard AIA” contract. This always made me thinks of the act of “swimming with the sharks”. The sharks don’t “always” bite you, but when they do you are helpless because “You chose to swim with the sharks”. Politicians are Lawyers, Lawyers write the laws for their own protection and then hire other lawyers to defend them based on an one-sided contract which “Always” hold the architect’s harmless, Period! And, Lawyers only can become Judges…………..What a corrupt system we have allowed to be weaved!
LikeLike
Your analysis that the “Architect Screwed up the Plans…” leaves me wandering what really happened..
Is there such a thing as a perfect set of plans? Yes. I drew a perfect set of plans once…but my dog didn’t like the design. Other than that one set…there is not a set of plans without some error.
The first question in the case you cited, or any other project, is whether the deficiency in the plans is an error or an omission. If an error, then there may be some legal action against the Architect. (You’re welcome to pay my E&O insurance if you like…). If an omission, legal recourse may still be had, depending on the resulting damages (costs) of “back-tracking” to remedy the missing element(s). Who initiates that legal action and how it unfolds can get pretty involved…but the fact remains that Architects are sued (or leveraged into some settlement) every day.
In any case however, there are major components of the construction process your discourse misses completely.
The general contractor is bidding on the plans with the intention of making a profit. The profit is most influenced by the (1) management and construction proficiency of the General Contractor during construction and (2) his ability to negotiate his subcontracts. Rarely does a mistake in the architectural or engineering plans significantly affect that bottom line profit if the G.C. resolves the issue with a small thing called a “change order”. But the bottom line is that he is taking a RISK with the hope of a (often hefty) reward.
Let’s assume the plans you mentioned were truly “screwed up”. First the contractor has the responsibility to review the plans in the preparation of his bid–and if there is a problem (and an experienced general contractor should be able to spot major flaws) then he has the opportunity to inform the Owner and resolve those issues prior to submitting his bid, or to qualify his bid relating to what he perceives as a problem in the plans.
If the G.C. misses the problem during the bidding process, he still has the option during construction to go to the owner with a change order that remedies the problem. The Owner may take issue with the General Contractor’s difference in opinion as to appropriate materials, or construction assemblies, or whatever–, shown in the plans and consult back with the Architect to provide information to help the Owner sort the issue out. In any case, the Change Order request has to be dealt with; and an Owner is unlikely to tell the G.C. to proceed with the plans if the G.C. has adequately exposed the problem. The change order is the vehicle by which the G.C. can be compensated for “making the plans right”.
As both a G.C. (first) and an Architect (second), I’ve seen a lot of problems arise during my 40 years in construction. (Some so involved, so out-of-left-field that only God could foresee them.) And I’ll be the first to agree that the Architect’s plans are often (way too often) lacking. But the fact remains that the General Contractor has opportunity (and we will assume the expertise) to find the problems before entering into a contract; or, if necessary, utilize a change order to correct (and be compensated for) “screwed up plans” that would otherwise cost him.
As to the AIA contracts…if you don’t like the language in the contract, negotiate. That is generally the first and best talent of a good General Contractor.
LikeLike
Randy, great comments and great points. I really appreciate your post. The change order is indeed an excellent tool for the G.C. I hope to see more of your expertise on future posts.
–Ken
LikeLike
Some good comments..yes. But not necessarily reality. First of all, many documents and clarifications are provided to bidders giving very little time to react. So many ambiguities will be missed. Secondly, if an estimator searches for a detail and finds it, he/she has no obligation to continue searching for something that may refute it. After all, the bid documents are posted or sold as being complete. The contractor may not be aware of conflicts until they start to receive submittals. And thirdly, many owners will allow additional compensation for bid document errors, but many will NOT. They will hang their hats on weasel phrases such as those directing contractors – if ambiguities exist, they are to base their pricing on the more stringent of the two. To take it to an extreme, I have seen compensation withheld for latent conditions based solely on the fact that bid documents instructed contractors to inspect the properties and existing structures prior to bidding. Is it reasonable to expect a contractor to be aware of thousands of cubic yards of contaminated soils under an existing structure after a site visit, when the owner and design team do not…and furthermore to have remediation included in his price?
LikeLike