Commercial litigation claims may be subject to contracts or torts depending on the nature of loss or damage

by John Chapman

“The acts of a party may breach duties in tort or contract alone or simultaneously in both.” Jim Walter Homes, Inc. v. Reed, 711 S.W.2d 617, 618 (Tex. 1986). To determine whether claims sound in tort or contract, courts examine (1) the source of the duty allegedly breached and (2) the nature of the injury claimed. Sw. Bell Tel. Co. v. DeLanney, 809 S.W.2d 493, 494 (Tex. 1991).

Contractual duties are those that arise from an agreement between parties. Tort duties are those imposed by law—apart from and independent of promises made in a contract—to avoid injury to others. If the defendant’s conduct would give rise to liability only because it breaches the parties’ agreement, the plaintiff’s claim generally sounds in contract. If the defendant’s conduct would give rise to liability independent of the fact that a contract exists between the parties, the plaintiff’s claim may also sound in tort.

Where the only loss or damage is the subject matter of the contract, the plaintiffs action is ordinarily on the contract. On the other hand, when the loss or damage is not the subject of the contract, the plaintiff’s action is one in tort.

For example, in DeLanney, the plaintiff sued the defendant telephone company for negligence, alleging that it had negligently failed to perform its contract to publish an advertisement in its telephone book. The jury found that the defendant was negligent in omitting the plaintiff’s advertisement and awarded lost-profit damages (i.e. money lost because the advertisement was not published). However, the Texas Supreme Court held that, because the plaintiff sought to impose liability for the breach of a duty created under the contract, rather than a duty imposed by law, and sought only damages for a failure to perform the contract, the claim sounded in contract. In more practical terms, this means the plaintiff might have sued to recover the money he had paid to the phone company to publish the advertisement but he could not sue to recover the lost profits suffered as a consequent of the company failing to perform the contract.

In contrast, a negligence tort claim was allowed in Montgomery Ward & Co. v. Scharrenbeck, 204 S.W.2d 508 (Tex. 1947). The case involved a contract for the repair of a heater in the plaintiff’s house. The defendant performed his work so poorly that the house burned down. A jury found that the plaintiff’s loss was proximately caused by the defendant’s negligence. On appeal, the defendant argued that it had not breached any duty to the plaintiff, but the Texas Supreme Court disagreed. It held that a “duty arose by implication” and that “[h]aving undertaken as an expert and for a consideration to repair and adjust the heater, [the repairman] owed [the homeowners] the duty, as a matter of course, not negligently to burn their house in the undertaking.”

The Texas Supreme Court was recently called upon to again consider the economic loss rule, DeLanney and Scharrenbeck in Chapman Custom Homes, Inc. v. Dallas Plumbing Co., No. 13–0776 (August 22, 2014). The case was file by a property owner who had contracted with a builder to build a home. The builder, in turn, contracted with a plumbing company to put in the plumbing at the new house. The plumbing company allegedly failed to install the hot water heating system properly, resulting in water flooding the house and damaging the structure. According to the lawsuit, the plumbing company’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 trial court granted summary judgment in favor of the plumbing company and the Dallas Court of Appeals affirmed. The court of appeals concluded that the “only duty” allegedly owed the owner was “a duty to perform … the [plumbing] contract with care, skill, reasonable expedience and faithfulness.” Therefore, according to the court of appeals, the plaintiff did not “allege violation of any duties imposed by law that were independent of the contract.” The Texas Supreme Court granted a petition to review the case and has now reversed the judgment for the plumbing company and reinstated the lawsuit.

Although the economic loss rule generally precludes recovery in tort for economic losses resulting from a party’s failure to perform under a contract when the harm consists only of the economic loss of a contractual expectancy, the rule does not bar all tort claims arising out of a contractual setting. The Texas Supreme Court repeated its statement 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.” Chapman Custom Homes, supra, quoting Sharyland Water Supply Corp. v. City of Alton, 354 S.W.3d 407, 419 (Tex.2011). Accordingly, 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.

In Chapman Custom Homes, the Texas Supreme Court ruled that, like the situation in Scharrenbeck, the plaintiffs had properly alleged a duty independent of the contractual undertaking and the harm that was not merely the economic loss of a contractual benefit.

“[T]he plumber’s duty not to flood or otherwise damage the house is 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.” Chapman Custom Homes, supra.

Because the court of appeals erroneously concluded that the pleadings and summary judgment evidence negated the existence of a negligence claim, the Texas Supreme Court granted the petition for review and reversed the court of appeals’ judgment and remanded the case to the trial court. As illustrated by the court of appeals applying the same rules to reach a different result in this case, the sometimes overlapping area between contract and tort law continues to a complex and evolving issue.

If you have questions about whether another (such as a neighbor, a contractor,or some other third-party party) may have injured your property in violation of the law, in Texas or wherever your property is located, contact the lawyers at Heygood, Orr & Pearson by calling toll-free at 1-877-446-9001, or by filling out our free online case evaluation form located on this page.