End Runs, Piggybacks and Independent Injury

by Daniel F. Shank & James A. Collura, Jr.

Thoughts on the Economic Loss Rule, Out-of-Pocket Losses and Negligent Misrepresentation. Contract claims with an accompanying negligent misrepresentation cause of action are common. Negligent misrepresentation claims in the absence of a contract between the parties are also common. The issue is how does a practitioner identify when the asserting party is attempting an "end run" around the lack of privity of contract to assert a contract claimor when an asserting party is inappropriately "piggybacking" the negligent misrepresentation claim on the contract claim. The answer may be within the economic loss rule.

The economic loss rule or independent injury doctrine is a rule of duty which focuses on the nature of the loss claimed in order to determine the duty in tort owed by the alleged tortfeasor. The rule traditionally bars: (1) the recovery of economic loss in negligence when the loss is the subject matter of a contract and (2) the recovery of economic loss in negligence against the manufacturer or seller of a defective product where the defect results in damage only to the product and not to a person or other property.

Under the economic loss rule, where there is no contract between the parties, the argument goes like this: the economic loss rule precludes recovery of economic damages in a negligence case where the parties are contractual strangers and there is no accompanying claim for damages to a person or property. The policy argument for this application of the rule is straightforward. It can be argued that to permit a party to recover contractual damages under a negligence theory would blur the line between contract and tort. It would also allow a party to recover contract damages without proving the underlying contract. In other words, a party could recover in negligence what it could not recover in contract if there was no privity. This application has been discussed in only two Texas courts of appeal. See Trans-Gulf Corp. v. Performance Aircraft Services, Inc., 82 S.W.3d 691, 695 (Tex. App.--Eastland 2002, no pet. hist.); Hou-Tex, Inc. v. Landmark Graphics, 26 S.W.3d 103, 107 (Tex. App.--Houston [14th Dist.] 2000, no pet.). Whether this application of the economic loss rule would be applied in all Texas courts of appeal or the Texas Supreme Court is yet to be seen.

Where a contract does exist between the parties, the asserting party must still show an independent injury. Unlike fraud in the inducement where the Texas Supreme Court in Formosa Plastics Corp. USA v. Presidio Eng'rs & Contractors, 960 S.W.2d 41, 47 (Tex. 1998) created an exception allowing recovery of pure economic loss absent an independent injury, the Texas Supreme Court refused to expand the exception to negligent misrepresentation. See D.S.A., Inc. v. Hillsboro Indp. Sch. Dist., 973 S.W.2d 662, 663-4 (Tex. 1998). A party cannot assert it was negligently induced into a contract and did not receive the benefit of the bargain. Negligent inducement is not actionable because the duty for negligent misrepresentation does not extend to interference or frustration of a contractual interest. Restatement (Second) of Torts 522B. Instead, the duty commences only where the negligence causes harm independent of the contract such as harm to a person or property. Thus, under negligent misrepresentation a party may only recover out-of-pocket damages. Id. This only makes sense because benefit of the bargain damages should only be available where there is a meeting of the minds (i.e. a contract) or an elevated level of scienter (fraud in the inducement). In a negligent misrepresentation claim, under the economic loss rule where there is no contract, one can assert the claimant must show an injury to person or property causing an out-of-pocket loss.