DEVELOPMENTS IN THE TEXAS CONTORT DISTINCTION JENNIFER BRUCH HOGAN MATTHEW E - PDF document

“CONTORT” DISTINCTION JENNIFER BRUCH HOGAN INTHROP Two Houston Center Houston, Texas 77010 State Bar of Texas PERSONAL INJURY LAW COURSECHAPTER 13 Matthew E. Coveler| Senior Associatematthew.coveler@pillsburylaw.com22nd Floor (2 Houston Center)Houston, TX 77010-1014Ph +1.713.425.7351Fax +1.713.425.7373Environment, Land Use & Natural Resources Mr. Coveler is a senior associate in the Litigation section of the Houston office of PillsburyWinthrop Shaw Pittman. His practice focuses on class actions, complex litigation, productliability, energy, environmental, land use, insurance and re-insurance matters. J.D., Georgetown University Law Center, 1999 Finalist, Wechsler First Amendment Moot Court Competition B.A., History, Northwestern University, 1996 AffiliationsAdmitted to practice: State of Texas Admitted in: U.S. Supreme Court, U.S. Court of Appeals for the Fifth Circuit, U.S. District Courts for Northern, Southern and Eastern Districts of Texas Member of: Houston Bar Association; Pro Bono College of the State Bar of Jennifer Bruch Hogan| Partner22nd Floor (2 Houston Center)Houston, TX 77010-1014Ph +1.713.425.7383Fax +1.713.425.7373 appellate practice team. Mrs. Hogan handles a wide variety of complex civil cases for bothplaintiffs and defendants, appellants and appellees, in the appellate and trial courts. The w symposium on tort reform, entitled “Charging the Court in Changing Times.” In addition, Mrs. Hogan is a frequent speaker at Charge: Charging the Jury in Changing Times.” Her other recent topics have included “Seeking and Avoiding Supreme Court Review” for the State Bar of Texas, 2005; “Supreme Court Update” for the Houston Bar Association Impact on Broad Form Submission” and “Jury Charge Under HB4” for the State Bar of Texas,2004; “Broad Form: The Labyrinth Deepens” for the University of Texas, 2004; “Charge Error on Appeal” for the South Texas College of Law, 2004; “The New Jury Charge” for the Houston Bar Association, 2004; “Preserving Error in the Trial Court—Top Ten Things to Remember” for the Houston Bar Association, 2003; “Appealing Actual/Punitive Damages” for the State Bar of Texas, 2001; “Effective Motions for Rehearing” for the Houston Bar Association, 2001; “Doing the Right Thing: Ethics appellate firm in Houston. Before forming her own firm in 1995, she was co-leader of Fulbright and Jaworksi’s appellate group. She has been recognized by Texas Monthly magazine as a Texas Super Lawyer every year since 2003, an in appellate practice in the Houston area in 2004, 2005, and 2006 by magazine. Following her law-school graduation, Mrs. Hogan served as a Briefing Attorney on the TexasSupreme Court during the 1985-86 court term. Mrs. Hogan has served on the Board of Trustees of the Awty International School in Houstonsince 1997, and she was elected Chair of the Board in June 2005. EducationJ.D., University of Texas, 1985 with honors B.A., Harvard University, 1982AffiliationsAdmitted to practice: State of Texas Admitted in: U.S. Supreme Court, U.S. Court of Appeals, Fifth, Seventh, Tenth, and Federal Circuits, U.S. District Court, Southern and Northern Districts of Texas American Bar Association, Litigation Section (Appellate Practice Committee), Tort Trial and Insurance Practice Section (Appellate Advocacy Committee), Appellate Judges Conference (Council of Appellate Lawyers); Bar Association of the Fifth Federal Circuit; State Bar of Texas, Litigation Section, Appellate Section; Houston Bar Association, Appellate Practice Section (Section Council Fellow: American Bar Association; Texas Bar Foundation, Houston Bar Board Certified: Civil Appellate Law, Texas Board of Legal Specialization Contorts UpdateChapter 13 TABLE OF CONTENTS THE IMPORT OF CONTORT...............................................................................................................................1Foreseeability of Consequential Damages......................................................................................................1Recoverability of Punitive Damages...............................................................................................................1al Anguish Damages...................................................................................................1`Enforceability of Limitations of Liability Provisions....................................................................................1DISTINGUISHING BETWEEN A CONTRACT AND TORT CASE: JIM WALTER HOMESCRAWFORD, AND DEWITT COUNTY............................................................................................2Jim Walter Homes and Define the Two Part Test of “Economic of the Duty.”.....................................................................................................................2Jim Walter Homes, Inc. v. Reed, 711 S.W.2d 617 (Tex. 1986)..............................................................2Southwestern Bell Tel. Co. v. DeLanney, 809 S.W.2d 493 (Tex. 1991)..................................................2, 917 S.W.2d 12 (Tex. 1996).........................................2Formosa Plastics Corp. USA v. Presidio Eng’rs and Contractors, Inc., 906 S.W.2d 41 (Tex. 1997).................................................................................................................................................3Tightening the Contort Distinction – , 1 S.W.3d 96 (Tex. 1999) .................................................................................................................................................................3RECENT CASES IN THE LOWER COURTS......................................................................................................4Exxon Mobil Corp. v. Kinder Morgan Operating L.P. “A”, 192 S.W.3d 120 (Tex. App. [14th Dist.] 2006, no pet. hist.).....................................................................................................................................................4Turner Constr. Co. v. Pharr-San-Juan-Alamo Indep. School Dist., No. 13-03-520-CV, 2006 WL 648210 (Tex. App. – Corpus Christi, March 16, 2006, pet. filed)...............................................................................4, 191 S.W.3d 805 (Tex. App. – Fort Worth 2006, pet. filed).....................................4TESTING THE BOUNDS OF THE CONTORT RULES: AND....4Lamar Homes, Inc. v. , 428 F.3d 193 (5th Cir. 2005), 05-0832 (Nov. 04, 2005).................................................................................................................................4Equistar Chemicals, L.P. v. Dresser-Rand Co., 123 S.W.3d 584 (Tex. App. – Houston [14th Dist.] 2003), , 04-0121, 48 Tex. Sup. Ct. J. 383 (Feb. 11, 2005)......................................................................5 Contorts UpdateChapter 13 DEVELOPMENTS IN THE TEXAS In a series of decisions spanning the last 20 years, the Texas Supreme Court has provided a framework for evaluating the bounds of contract and tort, or “contort.” Essentially, the Court has instructed that one examine both the basis of the defendant’s duty and the nature of the plaintiff’s alleged injury (the “economic loss” rule) in order to determine what causes of action should and should not stand. This analysis is easier said than done. See Jim Walter Homes, Inc. v. Reed, 711 S.W.2d 617, 617 (Tex. 1986) (“Although the principles of contract and tort causes of action are well settled, often it is difficult in practice to determine the type of action that is brought.”). Even recently, there have been several lower courts that have grappled with the contort distinction. And two cases presently pending before the Texas Supreme Court illustrate the myriad of issues raised by the Court’s contort framework and the sometimes difficult task of applying it. See Lamar Homes, Inc. v. Mid-Continent Cas. Co., 428 F.3d 193 (5th Cir. 2005), certified question accepted, 05-0832 (Nov. 04, 2005) and Equistar Chems., L.P. v. Dresser-, 123 S.W.3d 584 (Tex. App. – Houston [14th Dist.] 2003), pet. granted, 04-0121, 48 Tex. Sup. Ct. J. 383 (Feb. 11, 2005). THE IMPORT OF CONTORT. If a plaintiff has a perfectly good contract claim, why would he or she resort to a claim sounding in tort? Certain types of damages, such as lost profits, are recoverable only if contemplated by the parties to a contract. “[T]he damages which the other party ought to receive in respect of . . . breach of contract should be either as may fairly and substantially be considered as arising naturally, i.e., according to the usual course of things, from such breach of contract itself, or such as may reasonably be supposed to have been in the contemplation of both parties at the time they made the contract, as the probable result of the breach of it.” Hadley v. Baxendale, 9 Exch. 341 (quoted by Martin v. , 357 S.W.2d 457, 460 (Tex. Civ. App. – San Antonio 1962, writ ref’d n.r.e.)). See also Whiteside v. , 170 S.W.2d 195, 197 (Tex. 1943) (holding that lost profits are only recoverable if such damages were within the contemplation of the parties at the time the contract was made). But for claims under the Texas Deceptive Trade Practices Act, “foreseeability is not an element of producing cause . . . .” Andersen & Co. v. Perry Equip. Corp., 945 S.W.2d 812, 816 (Tex. 1997). Recoverability of Punitive Damages. A breach of contract does not support the recovery of exemplary or punitive damages. See Jim Walter Homes, Inc. v. Reed, 711 S.W.2d 617, 618 (Tex. 1986) (“Gross negligence in the breach of a contract will not entitle an injured party to exemplary damages because even an intentional breach will not.”); Underwriters Ins. Co. v. Brown, 704 S.W.2d 742, 745 (Tex. 1986) (“[P]unitive damages are not recoverable for breach of contract.”). But a tort claim allows such recovery, , bounded only by Chapter 41 of the Texas Civil Practice and Remedies Code. And if the claim is made under the DTPA, treble damages are available with only a showing of a “knowing” violation ODE § 17.50(b)(1). Recoverability of Mental Anguish Damages. A plaintiff cannot recover damages for mental anguish in a breach of contract suit. See Stewart Title Guar. Co. v. Aiello, 941 S.W.2d 68, 72 (Tex. 1997) (“[A] breach of contract action will not support mental anguish damages . . . .”). But for a tort claim, mental anguish damages are available. Tyler v. Likes, 962 S.W.2d 489, 495 (Tex. 1997) (“Moreover, even where the defendant’s conduct was merely negligent, ‘Texas has authorized recovery of mental anguish damages in virtually all personal injury actions.’”). Mental anguish is also compensable under the DTPA. at 498 n.1 (“Since 1995, the DTPA expressly provides that mental anguish damages are recoverable only if the defendant acted knowingly or intentionally.”); T`Enforceability of Limitations of Liability In a contract, the parties can circumscribe the amount and type of recoverable damages. See, e.g.. §§ 2.718 (liquidation or limitation of damages; “Damages for breach by either party may be liquidated . . modification of limitation of remedy; “[T]he agreement may limit or alter the measure of damages . . . .”). But under the DTPA, a limitation of liability provision is void. See Southwestern Bell Tel. Co. v. , 811 S.W.2d 572, 576 (Tex. 1991) (“[A] liability limitation would be invalid under § 17.42 insofar as it purported to waive liability for an act These advantages are also reflected in the strategies they make available to a tort plaintiff: the significant threat of a larger verdict during settlement discussions (by reference to punitive and consequential damages); the expansion of the scope of discovery (to include issues well outside the parties’ contractual relationship, including net worth), and avoidance of summary judgment (because, for instance, fraud is much more difficult to disprove then a claim based Contorts UpdateChapter 13 upon an unambiguous contract). As one court has summarized the risk of conflating contract and tort: possess more than mere theoretical minimize their future risks. Importing tort law principles of punishment into contract undermines their ability to do so. Punitive damages, because they depend heavily on an individual jury’s perception of the degree of fault involved, are necessarily uncertain. Their availability would turn every potential 155 F.3d 331, 346-47 (4th Cir. 1998). DISTINGUISHING BETWEEN A CONTRACT AND TORT CASE: WALTER HOMESCRAWFORDFORMOSA, AND DEWITT COUNTY The Texas Supreme Court has provided a series of cases involving negligence, DTPA, and fraud claims to demarcate the “contort” boundaries. In developing its rules for distinguishing between a contract claim and one sounding in tort, the Court’s preference for limiting a party to its contractual rights in the presence of a contract has emerged. Contract versus Negligence – Jim Walter Homes Define the Two Part Test Jim Walter Homes, Inc. v. Reed, 711 S.W.2d 617 (Tex. 1986). Plaintiffs brought suit against a home builder arising out of the sale and construction of a home. 711 S.W.2d at 617. Plaintiffs alleged both breach of warranty and negligence. The Texas Supreme Court explained that “[w]e must look to the substance of the cause of action and not necessarily the manner in which it was pleaded.” To do so, the Court invoked the “economic loss” The contractual relationship of the parties may create duties under both contract and tort law. The acts of a party may breach simultaneously in both. The nature of the injury most often determines which duty or duties are breached. When the injury is only the economic loss to the subject of a contract itself, the action sounds in contract alone. at 618. In plaintiffs’ case, the only injury that they claimed was that the “house they were promised and paid for was not the house they received.” can only be characterized as a breach of contract . . . .” , 809 S.W.2d 493 (Tex. 1991). Plaintiff sued Southwestern Bell for failing to publish its real estate business advertisement in the Yellow Pages as promised. 809 S.W.2d at 493. The jury found Southwestern Bell negligent and awarded plaintiff both past and future lost profits. at 494. The Court described a two part test, examining both the nature of the defendant’s duty and the nature of the plaintiff’s loss. On the first issue, the Court determined that the duty to publish the advertisement was solely imposed by contract: If the defendant’s conduct – such as negligently burning down a house – 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. Conversely, if the defendant’s conduct – such as failing to publish an advertisement – breaches the parties’ agreement, the plaintiff’ claim ordinarily sounds only in contract. at 494. The Court then went on to describe plaintiff’s damages: “[a]lthough [plaintiff] pleaded his action as one in negligence, he clearly sought to recover the at 495. Plaintiff’s “damages, lost profits, were only for the economic loss caused by Bell’s failure to perform.” And because the parties had included a limitation of liability clause in their contract, such damages were not recoverable. at 496-97 (Gonzalez, J. concurring). Contract versus DTPA – , 917 S.W.2d 12 (Tex. 1996). Plaintiff sued Southwestern Bell and Bell’s employee, Crawford, for failing to publish its Yellow Page advertisement. 917 S.W.2d at 12. Plaintiff claimed negligence, breach of contract, and violation of the DTPA. The Texas Supreme Court formulated the question presented as “[w]hether nonperformance of a contract is actionable under the Texas Deceptive Trade Practices-Consumer Protection Act . . . .” Its In a prior case, Ashford Development, Inc. v. , 661 S.W.2d 933 (Tex. Contorts UpdateChapter 13 1983), the Court had held that “‘[a]n allegation of a mere breach of contract, without more, does not constitute a “false, misleading or deceptive act” in violation of the DTPA.’” , 917 S.W.2d at 14 (quoting Ashford, 661 S.W.2d at 935). So in , the plaintiff sought “to avoid the effects of rule by alleging that Crawford made several misrepresentations during the meeting at which [plaintiff] agreed to renew [its] yellow pages contract.” Crawford made the following representations (1) that [plaintiff]’s ad would be published upon payment of the contract price; (2) that [plaintiff]’s payment history required advanced payment for the (3) that [plaintiff] was heavily dependent on yellow pages advertising; and (4) that a yellow pages ad would increase [plaintiff]’s business. The Court explained that “[t]he essence of [plaintiff’s] allegations is that: (1) the defendants represented that they would perform under the contract, and (2) nonperformance means that they misrepresented that they would perform under the , 917 S.W.2d at 14. The Court held that these allegations did not state a DTPA misrepresentation claim, in part because the themselves did not cause any harm.” (emphasis in original). Instead, “[t]he failure to run the advertisement (the breach of contract) actually caused the loss of profits and that injury is governed by contract law, not the DTPA.” at 14-15. Contract versus Fraud – Formosa Plastics Corp. USA v. Presidio Eng’rs and Contractors, , 906 S.W.2d 41 (Tex. 1997). In what might be described as the exception to the rule favoring contract over tort claims, the Texas Supreme Court has allowed a tort claim in the instance of fraudulent inducement of a contract. Defendant Formosa issued an “invitation to bid” for the construction of 300 concrete foundations. 906 S.W.2d at 43. The included bid package contained “certain representations about the foundation job,” including a discussion about work timing. These representations proved to be false, causing plaintiff “to incur substantial additional costs that were not anticipated when [it] submitted its bid.” Plaintiff sued Formosa for breach of contract and Formosa argued that plaintiff’s claims were barred by the “economic loss” rule – “Presidio’s losses were purely economic losses related to performance and the subject matter of the Id. at 44. The Texas Supreme Court We too reject the application of to preclude tort damages in fraud cases. Texas law has long imposed a duty to abstain from inducing another to enter into a contract through the use of fraudulent misrepresentations . . . . [I]t is well established that the legal duty not to fraudulently procure a contract is separate and independent from the duties established by the contract itself . . . . Our prior decisions also clearly establish that tort damages are not precluded simply because a fraudulent representation causes only an economic loss. Tightening the Contort Distinction – DeWitt County Electric Coop., Inc. v. Parks96 (Tex. 1999). In one of its more recent decisions in the contort arena, the Texas Supreme Court further eliminated any argument for a claim of negligence in the face of an existing contract. The plaintiffs in entered into an easement agreement with the electric utility company. 1 S.W.3d at 98. When the utility company came on to the easement and cut down two trees, plaintiffs sued for negligence and violation of the The court of appeals, following the “source of the duty” test prescribed by DeLanney, determined that “if no agreement had ever existed between the parties, the [utility company] would be liable in negligence if its entered the [plaintiffs’] property and cut down their at 105. It also found that the measure of damages supported plaintiffs’ right to a negligence claim “because the Parkses’ damages were based on the value of the trees and not the value of the easement The Texas Supreme Court, however, stated in very broad language that the contract would control: A person who enters a neighbors property and cuts down trees with no contractual right to do so can be held liable in tort. But when, as here, a contract spells out the parties’ respective rights about whether trees may be cut, the contract and not common-law negligence governs any dispute about whether trees could be cut or how trees were Contorts UpdateChapter 13 We also note that the measure of damages for breach of an easement that restricted a right to cut trees would be the same as the measure for negligently cutting trees. The measure of damages, standing alone, is not always determinative of whether a tort claim can co-exist with a breach of contract claim. 1 S.W.3d at 105 (emphasis added). RECENT CASES IN THE LOWER COURTS Despite multiple Supreme Court cases, the “contort” distinction continues to be an ongoing issue in cases today. Just as examples, listed below are three very recent opinions coming out of the Texas appellate Exxon Mobil Corp. v. Kinder Morgan Operating L.P. “A”, 192 S.W.3d 120 (Tex. App. [14th Dist.] 2006, no pet. hist.). The parties entered into a gas processing agreement. 192 S.W.3d at 122. Exxon attempted to asset a conversion claim for improperly retaining certain propane volumes, arguing that “a legal duty generally exists in tort for one party not to convert the property of another party, which is separate and apart from any contractual relationship.” at 128. Defendants argued that the “independent injury” rule served as a bar. at 126-27. The court of appeals rejected Exxon’s argument that the independent injury rule applied only to claims of negligent performance of a contract; instead, the If there had been no contract, there would have been no extracted propane in [defendants’] possession. Two things are clear: (1) the only loss Exxon Mobil complains of it’s the propane, which is the subject of the contract, , 809 S.W.2d at 494-95; and (2) the contract spells out the parties’ respective rights regarding the processing of the propane, see DeWitt , 1 S.W.3d at 105. 192 S.W.3d at 128. Turner Constr. Co. v. Pharr-San-Juan-Alamo Indep. School Dist., No. 13-03-520-CV, 2006 WL 648210 (Tex. App. – Corpus Christi, March 16, 2006, pet. filed). Turner provides a good example of the import of the contort distinction – because the contribution defendant was a school district, it would only be liable (in abrogation of traditional governmental immunity) if the claim was one sounding in contract. 2006 WL 648210, at *4. And so, in what must be a rather rare instance, the defendant school district tried to characterize the contribution plaintiff’s claim as one for negligence rather than breach of contract. In making its contort determination, the court of appeals examined the source of the parties’ obligations. It held against the school district, finding that, “absent the contractual relationship between the ISD and Turner, there would be no relationship or obligations among these parties and thus, no liability.” Heil Co. v. Polar Corp., 191 S.W.3d 805 (Tex. App. – Fort Worth 2006, pet. filed). Plaintiff asserted a claim for fraud, not fraudulent inducement, against the defendant. 191 S.W.3d at 816. Although plaintiff’s claims were solely for economic loss, it argued that it should still be entitled to pursue its fraud allegations, arguing that “ holding is not limited to fraudulent inducement claims that that application of the independent injury rule to fraud as a whole has been expressly rejected by the Texas The court of appeals refused to adopt this broad . Instead, it applied and to the fraud – as opposed to fraudulent inducement – claim. at 817. Heil’s alleged damages or losses arise from the subject matter of the contract, and Heil has not alleged that it suffered any loss independent of its contract damages. Therefore, in the absence of any independent injury, Heil’s causes of action sounds only in contract and not in tort. 191 S.W.3d at 817. TESTING THE BOUNDS OF THE LAMAR HOMES ANDEQUISTAR CHEMICALS Pending before the Texas Supreme Court are two cases involving the contract/tort distinction: Lamar Homes, Inc. v. Mid-Continent Cas. Co.428 F.3d 193 (5th Cir. 2005), certified question , 05-0832 (Nov. 04, 2005). Plaintiff was sued by the home purchaser, claiming that plaintiff “was negligent and failed to design and/or construct the foundation of the . . . residence in a good and workmanlike fashion in accordance with implied and express warranties.” 428 F.3d at 195. Plaintiff tendered the claim to its insurer, Lamar Homes, who refused to provide defense or indemnity. A CGL policy provides coverage for “property damage” caused by an “occurrence.” Lamar Homes, Inc. v. Mid-Continent Casualty Co., 335 F.Supp.2d 754 (W.D. Tex. 2004). The understanding of both terms is Contorts UpdateChapter 13 impacted by the contort caselaw described above. This is because, as the federal district court described: [I]f the factual allegations read as a contractual breach for construction defects requiring repair or replacement instead of negligence resulting in property damage, the resulting damage for economic loss does not fall within the coverage of the insurance policy. . at 759. In other words, a breach of contract is not an occurrence and pure economic loss does not constitute property damage. But see, e.g. Lennar Corp. v. Great American Ins. Co., No. 14-02-00860-CV, 2006 WL 406609, at *7 (Tex. App. – Houston [14th Dist.] Feb. 23, 2006) (holding that an accident includes negligent acts of the insured; “There is no tort/contract demarcation in the “insuring agreement,” and “occurrence is not defined by reference to the legal category of the claim.”). The Fifth Circuit identified significant disagreement amongst the lower courts on these CGL See Lamar Homes, 428 F.3d at 197 n.6 & 7 (gathering cases from Texas and federal district courts on the issue of construction errors and “occurrence) and 198 n. 8 & 9 (gathering cases from Texas and federal district courts on the issue of defective workmanship and “property damage”). Accordingly, it certified questions to the Texas Supreme Court, which heard oral argument on February 14, 2006. Equistar Chemicals, L.P. v. Dresser-Rand Co.123 S.W.3d 584 (Tex. App. – Houston [14th Dist.] 2003), pet. granted, 04-0121, 48 Tex. Sup. Ct. J. 383 (Feb. 11, 2005). Plaintiff’s chemical plant used two compressors manufactured and serviced by defendant Dresser. 123 S.W.3d at 585. The impellers for the compressors broke and were replaced on several occasions. at 585-86. Plaintiff brought suit against Dresser for the damage to the compressors, consequential damages for interruption of production, and minor damage to nearby equipment. at 586, 590. The Houston Court of Appeals (Brister, C.J.) determined that plaintiff’s claims for the damage to the compressors and consequential damages sounded in contract, not in tort. So, in an attempt to avoid this result, plaintiff made three arguments. First, plaintiff offered that the subject of the contract was the impeller, rather than the compressors themselves, such that any damages to the compressors would not be “economic loss.” , 123 S.W.3d at 587-88. Second, because the impeller that broke was a replacement part, it should be considered a separate product altogether. at 588-90. And third, because there was some damage to nearby property – damages undoubtedly not excluded under the economic loss rule – all of plaintiff’s losses, including direct damage to the compressors, should be recoverable. None of plaintiff’s arguments were successful. The court held that “damage to the compressors caused by the impellers . . . was not damage to ‘other property.’” Equistar, 123 S.W.3d at 588. On the issue of replacement impellers, the Court stated that “[r]eplacement parts provided by the original seller do not make the original product ‘other property.’” at 589. Finally, “only damage to persons or other property may be brought in tort.” at 591. To hold otherwise “would abandon [the economic loss rule] if there was a scratch to neighboring equipment, or if a single paper clip went down with the ship.” The Texas Supreme Court granted plaintiff’s petition for review and heard oral argument on November 29, 2005.