Foreseeability and the Economic Loss Rule-part Ii

• Publication year: 2004
• Pages: 71

33 Colo.Law. 71 Colorado Lawyer 2004.

2004, September, Pg. 71. Foreseeability and the Economic Loss Rule-Part II

Vol. 33, No. 9, Pg. 71

The Colorado Lawyer
September 2004
Vol. 33, No. 9 [Page 71]

Specialty Law Columns
The Civil Litigator
Foreseeability and the Economic Loss Rule - Part II
by Craig K. Lawler

The Civil Litigator column addresses issues of importance and interest to litigators and trial lawyers practicing in Colorado courts. The Civil Litigator is published six times a year

Column Editor

Richard L. Gabriel of Holme Roberts & Owen LLP, Denver - (303) 861-7000, richard.gabriel@hro.com

Craig K. Lawler

About The Author

This month's article was written by Craig K. Lawler, Denver, an associate with Sherman & Howard LLC - (303) 297-2900, clawler@sah.com.

This article examines the relationship between the policy rationales underlying the economic loss rule and independent duties based on the foreseeability of economic harm. It analyzes whether an independent duty is still good law, which is integral to holding that such a duty is an exception to the economic loss rule.

In two cases decided by the Colorado Supreme Court in 2000, Town of Alma v. AZCO Construction, Inc.1 and Grynberg v. Agri Tech, Inc.,2 the Court formally adopted the "economic loss rule," a judicially-created rule of law that polices the boundary between tort and contract law. According to the rule,

a party suffering only economic loss from the breach of an express or implied contractual duty may not assert a tort claim for such a breach absent an independent duty of care under tort law.3

The AZCO and Grynberg decisions were discussed in Part I of this article, which was published in this column in July 2004.4 Part I also provided an overview of the multiform nature of economic loss, the rationales behind the economic loss rule, and the lingering questions surrounding the "source of the duty" approach.

Part II offers a survey of independent duties, mostly in the area of negligence, that permit recovery of economic loss primarily because the loss is foreseeable. It also provides an assessment of tensions among these independent duties, economic loss rule precedent, and the law of implied warranties.

Independent Duty
Exceptions to the
Economic Loss Rule

In AZCO, the Colorado Supreme Court joined a growing number of authorities in insisting that the focus of the economic loss rule should not be on the type of damages suffered, but on the "source of the duty" allegedly breached.5 The key inquiry in this approach is whether the duty allegedly breached arises from duties specified in contract and warranty or from an independent tort duty imposed by law.

Colorado courts have recognized independent duty exceptions to the economic loss rule in a variety of circumstances. AZCO identified several broad categories of common law claims as exceptions to the economic loss rule,6 including professional negligence, fraud,7 breach of fiduciary duty,8 and negligent misrepresentation.9 In addition, AZCO identified "special relationships" that give rise to an independent duty of care notwithstanding contractual duties, such as the attorney-client,10 patient-physician,11 and insurer-insured relationships.12 Colorado courts also have recognized independent tort duties where contracts are silent as to duties of care13 or where the defendant performs extra work or an undertaking beyond its contractual duties.14 Statutory claims are another broad exception to the economic loss rule.15

In practice, the "source of the duty" approach to the economic loss rule turns an independent duty into something of a "magic bullet": Once an independent duty is identified in existing precedent, the economic loss rule inquiry comes to an end and the tort claim is allowed. However, Colorado law is replete with independent tort duties tucked away in cases that, although decided long before the advent of the economic loss rule and often at odds with the policies behind that rule, have not been expressly overruled.16 This holds the potential for inconsistency in Colorado's "source of the duty" approach to the economic loss rule.

Duties Based on
Foreseeability of
Economic Loss

As explained in Part I of this article, the economic loss rule arose as a response to the expansion of tort liability for economic loss that followed the abandonment of the privity defense in negligence and strict liability law. In the case of negligence actions, the privity problem was overcome chiefly through the principle of foreseeability.

Some form of foreseeability is present in the negligence concepts of duty and proximate cause,17 as well as the measure of damages in tort.18 For example, under the Colorado Supreme Court's standard in Taco Bell, Inc. v. Lannon,19 foreseeability of harm is one of several factors Colorado courts must consider when recognizing a new duty of care in tort.20 According to the traditional negligence definition of duty, a legal duty to use reasonable care arises in response to a foreseeable and unreasonable risk of harm to others.21

This definition of duty raises concern when economic loss is at issue. It is often argued that extending the scope of negligence duties to economic loss leads to "indeterminate" or "disproportionate" liability for defendants. The concern takes a different form whether the plaintiff is a "first party," who has contracted with the defendant, or a "third party," who lacks contractual privity with the defendant.

In a first-party, contractual setting, it is argued that: (1) foreseeability alone cannot be the measure of tort duty, because every party to a contract is obviously a foreseeable victim of economic loss; and (2) recovery of economic loss in negligence, however foreseeable the loss, introduces unanticipated liability that undermines the parties' allocation of risk in the contract.22 In a third-party setting, it is argued that: (1) foreseeability is an "inadequate brake" on liability for economic loss;23 and (2) it leads, as the court stated in Ultramares Corp. v. Touche,24 "to a liability in an indeterminate amount for an indeterminate time to an indeterminate class."25

In the cases discussed below, Colorado courts have turned to the principle of foreseeability as a means of providing a remedy in situations where the plaintiff is a third party lacking privity with the defendant. In each case, a negligence action has been permitted primarily on the grounds that the defendant had an independent duty of care to avoid inflicting foreseeable economic loss on the plaintiff. Although the cases arguably conflict with the economic loss rule policy against indeterminate and disproportionate liability, they potentially may be cited as independent duty exceptions to the economic loss rule under Colorado's "source of the duty" approach.

Webb v. Dessert Seed Co.

Webb v. Dessert Seed Co.26 offers an example of an independent duty of care to avoid foreseeable economic loss in the context of commercial goods. Dessert Seed, a seed distributor, sold a particular variety of onion seed, Zittau seeds, to the Webb onion farm. Webb grew the seeds into small plants and, representing them as "Yellow Spanish" seeds (a different variety of onion), sold them through a produce broker to another set of onion farmers, the Fagerbergs.

When the plants failed to bulb properly and did not produce commercially salable onions, the Fagerbergs brought suit to recover their commercial losses.27 Several additional parties were brought into the suit, as each defendant initiated an intricate series of claims, cross-claims, and third-party claims alleging breach of warranty and indemnity against co-defendants along the stream of commerce.

The Fagerbergs sued the produce broker, Webb, and Dessert Seed for breaches of the implied warranties of both merchantability and fitness for a particular purpose.28 Because Uniform Commercial Code ("UCC") warranties apply regardless of privity, the Fagerbergs arguably could have maintained their warranty claims against parties further up the stream of commerce.29

Significantly, however, the Fagerbergs brought a negligence claim, charging Dessert Seed with failing to follow the customs and practices of the seed industry.30 The Colorado Court of Appeals dismissed the negligence claims on the grounds that Dessert Seed had no duty of care to parties downstream, other than a duty to label the seeds properly, which it had not breached.31 Reversing that decision, the Colorado Supreme Court permitted the negligence claim after recognizing the more general duty of a seed distributor "to exercise reasonable care to avoid foreseeable harm to [seed] users."32

In support of the new duty, the Supreme Court cited case law from other jurisdictions that established a duty of reasonable care owed by seed distributors.33 Each of those cases was decided before the advent of the...