The Economic Loss Rule

Generally, a breach of contract claim cannot lead to a court awarding any sort of punitive damages (also referred to as exemplary damages). As the name suggests, punitive damages are used by courts to punish offenders beyond what is required to make the injured party whole. As courts are more likely to award punitive damages when dealing with tort claims, one might prefer to pursue a tort claim rather than a breach of contract claim. The economic-loss rule, however, acts as a barrier to a party recovering in tort absent an injury or a breached duty not contemplated in the contract at hand.

The United States Supreme Court in East River S.S. Corp v. Transamerica Delaval, Inc., stated that “[w]hen a product injures only itself the reasons for imposing a tort duty are weak and those for leaving the party to its contractual remedies are strong.” 476 U.S. 858, 872–73 (1986). In 1988, The Texas Supreme Court created an exception to the economic-loss rule that allowed injured parties to recover in tort when they were fraudulently induced into a contract. This exception allows plaintiffs to recover not only the economic loss of the contract but also punitive damages. See Formosa Plastics Corp. USA v. Presidio Eng’rs & Contractors, Inc., 960 S.W.2d 41, 46–47 (Tex. 1998). Currently, Texas Appeals Courts are split as to whether to extend the Texas Supreme Court’s pre-contract formation fraud exception to post-contract formation fraud. Should this exception to the economic-loss rule indeed be extended to post-contract formation fraud, punitive damages would become widely available and utilized in contractual settings. The Texas Supreme Court seems wary of such an extension, as noted by some language in both Haase v. Glazner and LAN/STV v. Martin K. Eby Const. Co. Haase v. Glazner, 62 S.W.3d 795, 798 (Tex. 2001); LAN/STV v. Martin K. Eby Const. Co., 435 S.W.3d 234, 239–40 (Tex. 2014).

Haase v. Glazner (2001)

Here, the Court stated that “Although economic losses may be recoverable under either fraud or fraudulent inducement, [Presidio] should not be construed to say that fraud and fraudulent inducement are interchangeable with respect to the measure of damages that would be recoverable.” The Court drew an explicit line between pre-contract formation fraud (fraudulent inducement) and other types of fraud.

LAN/STV v. Martin K. Eby Const. Co. (2014)

Here, the Court stated ““Determining whether a provision for recovery of economic loss is better left to contract helps delineate between tort and contract claims.” This particular case did not involve post-contractual fraud, but the language clearly shows that the Court prefers that the economic-loss rule continues to have some teeth.

But the economic loss rule does not bar all claims arising out of a contractual setting, a Texas Court of Appeals recently confirmed. Simply entering into a contract that not make a party immune to all non-fraud related tort liability. A claim outside of breach of contract can be alleged when the duty breached by the offending party is one outside of the responsibilities in the contract and the harm suffered is not solely the economic loss of a contractual benefit. See Hilburn v. Storage Trust Properties, LP, 586 S.W.3d 501 (Tex.App.—Houston [14th Dist.] 2019, no pet.). However, as recently as of May of 2022, the Texas Supreme Court continues to apply the economic-loss rule to restrict tort claims in a contractual setting. Rosetta Resources Operating, LP v. Martin, 645 S.W.3d 212, 216-227 (Tex. 2022).

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