Unreported / Non-Citable
Background
Texas One Source Industrial Solutions LLC, a second-tier electrical subcontractor, sued payment-bond surety Euler Hermes North American Insurance Company under the Miller Act. Texas One Source alleges that it furnished labor, materials, and equipment for a Department of Veterans Affairs construction project in San Antonio and remains owed approximately $1.71 million after the prime contractor terminated the first-tier subcontractor.
Euler counterclaimed against Texas One Source for negligence and negligent misrepresentation. It alleged that much of Texas One Source’s work was improperly installed or nonconforming, damaged other trades’ work, and would require substantial repair or replacement. Euler also alleged that Texas One Source overstated its completion percentages in payment applications to the first-tier subcontractor, which incorporated those figures into applications submitted to the prime contractor and caused overpayment.
Texas One Source moved under Rule 12(b)(6) to dismiss both counterclaims, arguing that Texas’s economic loss rule barred them and that Euler had not adequately pleaded negligent misrepresentation.
The Court’s Holding
The court denied the motion to dismiss. On negligence, it held that Euler plausibly alleged an independent common-law duty to perform work with reasonable care and skill. Euler also alleged that defective work damaged other work, leaving it unclear at the pleading stage whether the claimed harm was limited to contractual economic losses.
The court likewise declined to dismiss the negligent-misrepresentation claim under the economic loss rule. It concluded that Euler alleged overpayments resulting from reliance on false completion percentages, not benefit-of-the-bargain damages such as lost profits, and that the pleadings treated those injuries as distinct from Euler’s contract claim against the first-tier subcontractor. The court emphasized that Texas One Source could revisit the economic-loss issue at summary judgment if the evidence showed that the claimed damages were actually contractual and duplicative.
Euler also adequately pleaded the elements of negligent misrepresentation by alleging that Texas One Source supplied false completion percentages through its payment applications, knew those figures would be passed to and relied upon by the prime contractor, failed to use reasonable care, and caused the prime contractor to overpay.
Key Takeaways
- Allegations that defective construction damaged other trades’ work can support a plausible negligence claim notwithstanding the economic loss rule.
- Alleged overpayments made in reliance on false progress representations may qualify as reliance damages rather than barred benefit-of-the-bargain damages.
- The ruling addresses pleading sufficiency only; Texas One Source may renew its economic-loss arguments on a developed summary-judgment record.
Why It Matters
The decision illustrates the fact-intensive nature of applying Texas’s economic loss rule in construction disputes involving multiple contractual tiers. At the dismissal stage, allegations of damage beyond the defendant’s own work and out-of-pocket losses caused by inaccurate payment information may permit tort claims to proceed.
Sureties and project participants should also note that the court required the party invoking the rule to connect specific contract provisions to the disputed damages and explain why a surety should be treated as a construction-project participant subject to the asserted limitation.