Independent Duties and Colorado's Economic Loss Rule - Part Ii - March 2006 - the Civil Litigator

JurisdictionColorado,United States
CitationVol. 35 No. 3 Pg. 33
Pages33
Publication year2006
35 Colo.Law. 33
Colorado Lawyer
2006.

2006, March, Pg. 33. Independent Duties and Colorado's Economic Loss Rule - Part II - March 2006 - The Civil Litigator

The Colorado Lawyer
March 2006
Vol. 35, No. 3 [Page 33]

Articles
The Civil Litigator
Independent Duties and Colorado's 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 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 attorney specializing in civil and commercial litigation. Readers who wish to contact the author may do so at clawler75@yahoo.com or through the Editorial Staff of The Colorado Lawyer.

This article surveys Colorado appellate cases applying the economic loss rule and recognizing independent duty exceptions to the rule.

Part I of this article, published in the January 2006 issue of The Colorado Lawyer,(fn1) provided an overview of Colorado's economic loss rule, focusing on the four cases that set forth the Colorado Supreme Court's "independent duty" approach to the economic loss rule. 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 unless he or she can establish the breach of an independent duty of care under tort law.(fn2) Part I suggested that independent tort duties are legal shorthand for the policy determination that plaintiffs should be protected from economic loss under tort law.

Part II of this article provides a comprehensive survey of Colorado appellate cases applying the economic loss rule and its exceptions in lawsuits between contracting parties. It then discusses a trilogy of cases decided before the advent of the economic loss rule that potentially conflict with the rule. Finally, it examines the relationship between tort duties and "contorts" - nonconsensual theories of liability that combine aspects of contract and tort law.

This article examines only common law exceptions to the economic loss rule; it does not discuss statutory exceptions.(fn3) It also does not delve into the nuances surrounding property damage and the economic loss rule.(fn4) Finally, it does not address tort claims asserted by third-party strangers - that is, plaintiffs who have no contract or interrelated contracts with the defendant,(fn5) who are not third-party beneficiaries to a contract with the defendant,(fn6) and who otherwise lack contractual privity with the defendant.

Reinterpreting Declarations of "Independence"

As discussed in Part I of this article, the Colorado Supreme Court has adopted an "independent duty" approach to the economic loss rule. Under this approach, the availability of tort recovery for damages related to economic loss depends on the source of the duty allegedly breached - that is, whether the duty was created by the parties in contract or whether the duty arises from an "independent duty" created by statute or recognized by common law.

As Part I explained, the focus on the source of a duty can be misleading because the question of who creates the duty begs the question of why the duty is legally enforceable. Functionally speaking, a duty is legal shorthand for the policy decision to provide a remedy.(fn7) A court's selection of contract law or tort law to remedy economic loss ultimately is based on an analysis that weighs the contract policies that favor enforcing the parties' agreement against the tort policies that favor protecting plaintiffs from economic harm. This policy analysis determines whether to apply contract law or tort law; to say that the parties' duties of care "arise in contract" or "exist independently in tort" merely states the conclusion of this analysis.

When divorced from such policy considerations, the source of a duty is a distinction without a difference. In particular, pointing to the source of the parties' duties does not fully answer two policy questions that run throughout the case law on the economic loss rule:

1. Under what circumstances is it justified to protect contracting parties against economic loss through tort law?

2. When should parties be free to contract around tort liability for economic loss?

As a consequence, Colorado law reflects a tension between cases providing tort protection for economic loss and cases finding that parties have contracted around tort liability for economic loss - even with respect to traditional economic torts such as intentional interference with economic relations, negligent misrepresentation, and breach of fiduciary duty.

The Model of "Perfect Bargaining"

The economic loss rule and the independent duty approach are better explained by referring to the model of perfect bargaining at the heart of contract law - sophisticated parties of equal bargaining power bargaining at arm's length over the risks and costs related to the contract.(fn8) This model helps answer the implicit policy questions raised by Colorado's independent duty approach to the economic loss rule.

As discussed below, Colorado appellate courts typically apply the economic loss rule in cases where sophisticated commercial parties have allocated the risk of economic loss in contract and warranty under conditions approximating perfect bargaining. Likewise, some courts have allowed sophisticated commercial parties in perfect bargaining conditions to contract around tort liability.

Of course, most real-world contractual negotiations are less than perfect, even when commercial parties are involved. Moreover, some personal and dignitary interests are thought to deserve protection regardless of a contract. Not surprisingly, common law exceptions to the economic loss rule fit into two categories: (1) torts that protect non-economic interests (for example, personal and dignitary torts); and (2) torts that protect business and pecuniary interests when bargaining is less than perfect (for example, economic torts).

In short, when bargaining conditions are close to perfect, contract policies favoring the freedom of contract and the enforcement of agreements outweigh tort policies favoring protection against economic harm. Conversely, when bargaining is imperfect, tort policies favoring protection of plaintiffs tend to prevail. The remainder of this article examines Colorado's economic loss rule cases in light of this model.

Perfect Bargaining: Where the Economic Loss Rule Applies

Under conditions of perfect bargaining, the economic loss rule assumes that sophisticated commercial parties can adequately address the risk of economic loss through express contract and warranty terms.(fn9) Thus, Colorado appellate courts typically apply the economic loss rule to bar tort claims (particularly negligence claims) brought by sophisticated commercial parties in a contractual relationship. Colorado courts generally refuse to recognize independent duties of care to protect sophisticated commercial parties against economic loss. In this way, the economic loss rule encourages parties to self-protect against economic loss through contract and warranty terms rather than resorting to tort law as a secondary form of insurance.(fn10)

Examples where Colorado courts have barred recovery of economic loss in tort include the following causes of action, relationships, and fact patterns:

negligence actions by general contractors against subcontractors, or subcontractors against general contractors, in the context of commercial construction(fn11)

negligence actions by commercial owners against general contractors in the context of commercial construction(fn12)

negligence and negligent misrepresentation actions by a subcontractor against an engineer and an inspector related to the construction of a city bridge(fn13)

negligence actions by cities and residents against general contractors for defects in public works construction projects(fn14)

negligence action by a distributor against a manufacturer relating to a commercial transaction subject to the Uniform Commercial Code(fn15)

negligence action by commercial borrowers against commercial lenders(fn16)

negligent termination,(fn17) negligent nondisclosure,(fn18) and bad faith breach of contract actions(fn19) by employees against employers in an at-will employment relationship, with the exception of wrongful discharge actions for violation of public policy(fn20)

negligence action by investors against sellers of a commercial cattle-feeding operation for failure to receive an anticipated rate of return(fn21)

action for civil conspiracy to breach contract alleged by a manufacturer against a former board member of a corporation(fn22)

action for intentional interference with prospective business advantage by a commercial lessee against a corporate lessor and officer related to the assignment of a lease.(fn23)

In addition, the Colorado Supreme Court in BRW, Inc. v. Dufficy & Sons, Inc. further suggested that the economic loss rule applies where sophisticated commercial parties had the opportunity to bargain for protection against economic loss.(fn24) If a sophisticated commercial party foregoes an opportunity to protect against economic loss through contract or warranty, the law assumes this to be a deliberate business decision for which the party must bear the economic consequences.

Finally, as discussed in more detail below, some courts have allowed sophisticated commercial parties in conditions of perfect bargaining to contract around tort liability, including traditional torts such as intentional interference with economic relations, negligent...

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