Tcl - Independent Duties and Colorado's Economic Loss Rule - Part I - January 2006 - the Civil Litigator

• Publication year: 2006
• Pages: 17

35 Colo.Law. 17 Colorado Lawyer 2006.

2006, January, Pg. 17. TCL - Independent Duties and Colorado's Economic Loss Rule - Part I - January 2006 - The Civil Litigator

The Colorado Lawyer
January 2006
Vol. 35, No. 1 [Page 17]

Articles
The Civil Litigator

Independent Duties and Colorado's Economic Loss Rule - Part I

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 Editors:

Don Kelso, Denver, of Holme Roberts & Owen LLP - (303) 861-7000, kelsod@hro.com; Eric Bentley, Colorado Springs, of Holme Roberts & Owen LLP - (719) 381-8400 bentlee@hro.com

About The Author:

This month's article was written by Craig K. Lawler Denver, an associate with Sherman & Howard L.L.C., where he specializes in commercial litigation - (303) 299-8288, clawler@sah.com.

This article examines the implications of recent Colorado cases concerning the economic loss rule and independent duty exceptions to the economic loss rule.

In two cases decided in 2000, Town of Alma v. AZCO Construction, Inc.(fn1) and Grynberg v. Agri Tech, Inc.,(fn2) the Colorado Supreme Court adopted the "economic loss rule," a rule of law that delineates 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.(fn3)

The Court joined a growing number of authorities(fn4) in asserting that the focus of the economic loss rule should be the source of the duty allegedly breached, rather than the type of damages suffered. Given this focus, the Court explained that the economic loss rule would be more accurately designated the "independent duty rule" rather than the "economic loss rule."(fn5) The key inquiry in the Court's approach is whether the duty allegedly breached arises from contract and warranty, or whether it arises from an "independent duty" imposed by tort law.

In 2004, the Colorado Supreme Court further explained the independent duty approach to the economic loss rule. In BRW, Inc. v. Dufficy & Sons, Inc.,(fn6) the Court applied the economic loss rule to bar tort claims for economic losses arising from a commercial construction project, after determining that the interrelated contracts on the project already contained duties of care. By contrast, in the 2005 case A.C. Excavating v. Yacht Club II Home Owners Ass'n,(fn7) the Court declined to apply the economic loss rule in the context of residential construction after recognizing an independent duty owed by builders to homeowners, notwithstanding the existence of similar duties set forth in the parties' contracts.

These recent decisions create uncertainty for practitioners dealing with the economic loss rule. This two-part article provides practitioners with a practical guide to Colorado's independent duty approach to the economic loss rule. Part I of this article presents an overview of Colorado's independent duty approach to the economic loss rule as set forth in Town of Alma, Grynberg, BRW, and A.C. Excavating. Part II, which will appear in the March 2006 issue of The Colorado Lawyer, will offer a comprehensive survey of Colorado case law on the economic loss rule and provide practical tips for determining when courts will apply the economic loss rule and when they will permit a tort action for economic loss.

Overview of the Economic Loss Rule

Colorado's economic loss rule states that a party suffering only an economic loss as the result of the breach of an express or implied contractual duty may not pursue a tort claim unless tort law provides an independent duty of care.(fn8) Colorado's version of the economic loss rule is a "first-party" rule that bars tort claims for recovery of economic losses brought by parties in a contractual relationship.(fn9) The rule has been extended to third-party beneficiaries(fn10) and parties who enter into an interrelated network of contracts.(fn11) Colorado appellate courts have yet to determine whether the economic loss rule applies to third-party strangers.

"Economic loss" is defined as "damages other than physical harm to persons or property."(fn12) As such, economic loss includes damages for pecuniary losses, diminution in value, cost of repair or replacement, and lost profits. It does not include consequential economic losses arising from physical injury(fn13) or damage to property that is not the subject matter of the contract - that is, "other property."(fn14) It also is distinguishable from non-economic damages such as damages for emotional distress, inconvenience, and pain and suffering.(fn15)

At the heart of the economic loss rule is the policy that the risk of economic loss - for example, financial losses from a product's nonperformance - "can be adequately addressed by rational economic actors bargaining at arms length to shape the terms of the contract."(fn16) Thus, the economic loss rule assumes that the risk-spreading features of tort law are not appropriate for protecting against economic loss.(fn17)

By barring tort claims for economic loss, the rule holds contracting parties to the terms of their agreement(fn18) and protects the expectancy interests created by the parties' promises.(fn19) This, in turn, allows contracting parties to bargain confidently without fear that unanticipated liability may arise in the future(fn20) and encourages the parties to self-protect against economic loss by building risk and cost considerations into their contract.(fn21) Contracting parties are held to the Hadley v. Baxendale(fn22) measure of damages, which permits recovery of damages that the parties reasonably contemplated (at the time of contract formation) as the probable result of a breach, rather than the broader tort measure of damages, which permits recovery of reasonably ascertainable damages that are proximately caused by the wrongful act.(fn23)

In short, the economic loss rule embodies the principle that "[a] claim for economic loss on a contract should not be translatable into a tort action in order to escape some roadblock to recovery on a contract theory."(fn24) In this way, the economic loss rule maintains the boundary between contract law and tort law.(fn25) The economic loss rule thus tracks other rules of law that give express contract terms priority over judicially created duties and remedies.(fn26)

Related Rules of Law

The economic loss rule is one of several rules of law that maintain the boundary between contract law and tort law. When considering an action to recover economic loss, practitioners should be aware of the following rules of law that also may apply:

There is no cause of action for "negligent performance of contract" or negligent breach of contractual duty resulting in purely economic damages.(fn27)

There is no cause of action for "conspiracy to breach a contract," because a signatory to a contract has no independent duty in tort to fulfill the terms of the contract.(fn28)

With the exception of insurance bad faith, there is no tort action for breach of the implied covenant of good faith and fair dealing.(fn29)

A claim for fraud or negligent misrepresentation cannot be predicated on the mere nonperformance of a promise or contractual obligation, or on the failure to fulfill an agreement to do something at a future time.(fn30)

A contracting party cannot maintain an action for negligent misrepresentation regarding representations relating to contractual performance.(fn31)

A contracting party cannot bring an action for conversion merely because the other party does not make payments or deliver property pursuant to the contract.(fn32)

A party to a contract cannot be held liable for intentional interference with that contract.(fn33)

A contracting party who bargains away his or her rights through contract provisions cannot assert an action for intentional interference to recover economic losses relating to the same rights.(fn34)

Independent Duty Approach

In Town of Alma, the Colorado Supreme Court explained that the key to determining the availability of a contract or tort action lies in determining the "source" of the duty allegedly breached.(fn35) Following the lead of other jurisdictions,(fn36) the Court found the phrase "economic loss rule" misleading because it implies that the focus of the inquiry is on the type of damages suffered by the aggrieved party.(fn37) In the Court's view, the focus on damages is "inexact at best" because some torts, such as professional negligence, fraud, and breach of fiduciary duty, are expressly designed to remedy economic loss.(fn38)

To avoid this confusion, the Court adopted an "independent duty" approach to applying the economic loss rule. The Court emphasized that the focus of the economic loss rule should be on the "source" of the duty allegedly breached rather than on the type of damages suffered.(fn39) Contract duties are said to arise from promises made between the contracting parties, whereas tort duties are said to arise from duties imposed by law - that is, by judicial decisions and legislative enactments.(fn40) Where the duty allegedly breached arises from, or is contained in, the parties' contract, courts should apply the economic loss rule to bar a plaintiff's tort claims.(fn41) Where the duty arises independently of any contractual obligations, the economic loss rule has no application and does not bar a plaintiff's tort claims.(fn42) This formulation of the economic loss rule resonates with the traditional definition of a "tort" as a civil...