Last week, in an opinion authored by Justice Caughey and joined by Justices Rivas-Molloy and Guerra, the First Court reversed a ten-million-dollar jury verdict for negligent misrepresentation based on application of the economic loss rule. The opinion reaffirms the rule's expansive application in breach-of-contract actions and limits the scope of the rule's exceptions, providing critical guidance to participants in industries where multi-party suits are common. 

The case, Asset Risk Management, LLC v. Comal Energy Services, LLP, arose out of a contractual dispute between Comal Energy Services and Asset Risk Management (ARM) over ARM's alleged misrepresentations for failing to pay invoices issued by Comal. In a complex, multiparty proceeding, Comal brought a cross-claim against ARM for negligent misrepresentation. ARM asserted these claims were barred by the economic loss rule, but the trial court disagreed, and the jury returned a verdict of $9.3 million for Comal on the claim. 

On appeal, the First Court reversed, concluding Comal's claim was barred by the economic loss rule. As the Court explained, Comal's negligent-misrepresentation claim was “a repackaged breach of contract claim" because the alleged representations came about “only because Comal performed work and sought payment under the contract," and Comal's “asserted losses flow[ed] directly from [its] contractual expectancy of timely payment for work performed.” In other words, if there had been no contract between Comal and ARM, “there would be no claim” at all, and the economic loss rule is intended to apply in just these circumstances. 

Nor did it matter that Comal lacked contractual privity with ARM: As long as a party claims damages that are covered by a contractual obligation, the economic loss rule applies to avoid the “indeterminate and disproportionate liability” that would otherwise result from a privity requirement. And the Court also rejected Comal's contention that tort damages were available based on ARM's failure to meet the “general duty not to make misrepresentations.” Adopting this principle, the First Court reasoned, would “essentially preclude the economic loss rule from applying in any negligent misrepresentation case,” a result foreclosed by precedent.

Key takeaways:

• There may be only one exception to the economic loss rule: fraud. Precedent has long held that tort claims may be brought when the defendant breaches a duty that arises independent of a contract, such as the duty to avoid fraud. In refusing to apply that exception here, the First Court signaled its limits: The economic loss rule will apply even if the conduct breaches a generalized duty if the claimed damages are the loss of a contractual expectation.
• Counsel in multiparty litigation must do careful pre-suit analysis on what claims are available against each potential defendant. Attorneys that advise parties in the energy, construction, or insurance industries must have a firm grasp of the background facts and relationships between the entities prior to filing suit, as basic considerations such as contractual privity may not always inform the proper cause of action.
• One way to avoid tort liability? Draft expansive contracts. The broader the coverage of the contract, the harder it will be to successfully bring a tort claim in a breach of contact action.