Avoiding Tort Liability in Design, Construction, and Inspection of Commercial Projects

• Publication year: 2005
• Pages: 81

34 Colo.Law. 81 Colorado Bar Journal 2005.

2005, January, Pg. 81. Avoiding Tort Liability in Design, Construction, and Inspection of Commercial Projects

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81

Vol. 34, No. 1, Pg. 81

The Colorado Lawyer
January 2005
Vol. 34, No. 1 [Page 81]

Specialty Law Columns
Construction Law Forum
Avoiding Tort Liability in Design, Construction, and Inspection of Commercial Projects
by Elizabeth A. Phelan

This column is sponsored by the CBA Construction Law Forum Committee. The column addresses various construction-related issues in both public and private areas. The column editor and Committee encourage the submission of substantive law articles addressing issues of interest to practitioners in the field of construction law

Column Editor

James W. Bain of Benjamin, Bain & Howard, L.L.C Greenwood Village - (303) 290-6600, jamesbain@bbhlegal.com

Elizabeth A. Phelan

About The Author:

This month's article was written by Elizabeth A. Phelan, Denver, a partner with Holland & Hart LLP - (303) 295-8087, ephelan@hollandhart.com.

This article examines a recent Colorado Supreme Court decision applying the economic loss rule, BRW, Inc. v. Dufficy & Sons, Inc., and its implications for parties engaged in the construction industry in Colorado.

In 2004, in BRW, Inc. v. Dufficy & Sons, Inc.,1 the Colorado Supreme Court held that a subcontractor on a commercial construction project may not sue the design engineer in tort for the subcontractor's alleged economic losses on the project. The BRW decision turns on a doctrine known as the "economic loss rule" and underscores the importance of this doctrine for parties who are negotiating, drafting, or signing contracts for commercial construction projects.

This article provides an overview of the economic loss rule in the context of commercial construction projects.2 It discusses the BRW case and explains its implications for parties in the construction industry as they negotiate the duties, rights, and remedies that will govern their working relationships.

Overview of Economic Loss Rule

The economic loss rule is triggered when a party to a contract (1) claims that he or she has sustained financial loss or has not realized the full profit expected in performing the contract; and (2) asserts tort claims to recover these alleged economic losses. This strategy may be an attractive course because tort law permits a more expansive measure of damages than contract law.

Under tort law, an injured party can recover all damages proximately caused by the wrongful act. By contrast, contract law permits recovery only for damages that were reasonably foreseeable at the time of the breach.3 In addition, a tort theory of recovery may support a claim for punitive damages, if the conduct required for this remedy is present, while a contract theory of recovery does not.4

However, allowing tort recovery in these circumstances blurs the distinction between contract and tort law and encourages contracting parties to resort to tort law when they are disappointed by the outcome of their contractual undertakings. By prohibiting tort claims in these circumstances, the economic loss rule protects the boundary between tort and contract law and assures that a party cannot obtain through tort law a recovery not permitted under contract law.

In two seminal decisions, Town of Alma v. AZCO Construction Inc.5 and Grynberg v. Agri Tech, Inc.,6 the Colorado Supreme Court formulated the economic loss rule. In those cases, the Court held that a party who sustains only economic loss from the breach of a contractual duty cannot sue in tort for that breach unless the breaching party owes the injured party an independent duty of care under tort law.7

For instance, in Town of Alma, a town and landowners brought negligence claims against the installer of the town's water distribution system, seeking to recover costs of repair and replacement of defective lines, which were not otherwise recoverable under the contract. The Colorado Supreme Court held that the alleged duties of care were not independent of the contract and that the economic loss rule therefore barred the tort claims.8

Similarly, in Grynberg, investors in a cattle investment program who realized less than their expected rate of return brought tort claims against the managers of the program, claiming that the managers' negligence caused the financial losses. Again, the Supreme Court held that the alleged tort duty of care was "created by, and completely contained in, the contractual provisions."9 Because the defendants owed no independent duty of care to the plaintiffs, the economic loss rule precluded the tort claims.

In BRW, the Court applied the...