Colorado's Current Formulation of the Economic Loss Rule Bars Claims for Post-contractual Fraud
| Jurisdiction | Colorado,United States |
| Citation | Vol. 41 No. 12 Pg. 33 |
| Pages | 33 |
| Publication year | 2012 |
2012, December, Pg. 33. Colorado's Current Formulation of the Economic Loss Rule Bars Claims for Post-Contractual Fraud
December 2012
Vol. 41, No. 12 [Page33]
The Civil Litigator articles address issues of importance and interest to litigators and trial lawyers practicing in Colorado courts. The Civil Litigator is published six times a year.
Coordinating Editor
Timothy Reynolds, Boulder, of Bryan Cave HRO-(303) 417-8510, timothy.reynolds@bryancave.com
About the Authors
N. Reid Neureiter is Senior Counsel with Husch Blackwell LLP's Denver office. He is a litigator practicing complex commercial litigation. Rebecca Graves Payne is an attorney with Wheeler Trigg O'Donnell LLP, where her practice focuses on commercial litigation, including insurance liability defense-(303) 244-1831, payne@wtotrial.com.
Historically in Colorado, claims for intentional fraud have not been precluded by the economic loss doctrine. In other words, the existence of a contractual relationship between two parties has not traditionally been viewed as a bar to a claim for fraud. Recent Colorado Court of Appeals cases indicate that claims for fraud committed during the course of and in connection with the performance of a contract (so-called intrinsic fraud) likely are precluded by the economic loss doctrine.
In a decision issued by the Colorado Court of Appeals in 2009, the court succinctly enunciated its current view of the economic loss rule as it pertains to claims for fraud committed during the course of a contractual relationship. It stated:
Applying the economic loss rule to claims for post-contractual fraud does not contravene public policy where the alleged fraud relates to the performance of the contract. . . . [T]he parties to a contract can allocate the risk of intentional concealment or misrepresentation in the performance of a contract.(fn1)
Introduction to the Economic Loss Rule
The economic loss rule-or the "independent duty" rule, as it often has been called since its adoption in Colorado in 2000-is seemingly straightforward.(fn2) At its most basic, the doctrine precludes a party who suffers only economic loss as a result of the breach of an express or implied contractual duty from pursuing a tort claim for such breach, absent an independent duty of care.(fn3) The apparent simplicity of this principle, however, is belied by the challenges courts have faced in trying to consistently apply it in various situations.(fn4) The result is a doctrine that continues to evolve based on various judicial interpretations and reformulations. As discussed in this article, the current articulation of the economic loss rule in Colorado bars most claims for fraud that occur during the course of a contractual relationship.(fn5)
There is no shortage of cases evidencing the "fraud in the performance of the contract" fact pattern. One example is where a party breaches the underlying contract and, rather than disclosing the breach, actively conceals it or misrepresents the breach to the other party. A company may, for example, produce billing statements on a monthly basis and, pursuant to contract, deliver those bills to the client for payment. If the company intentionally inflates its bills, presents them as accurate, and then knowingly accepts more in payment than is actually owed, this conduct would constitute fraud that arguably should carry with it the potential for a punitive damages award.(fn6) However, such conduct also would constitute a breach of contract because, pursuant to the contract, the biller should have submitted bills only for money actually owed. Another example is a manufacturer who is obligated by contract to include an expensive component in a finished product, but who instead intentionally replaces the expensive part with a less expensive substitute, unbeknownst to the buyer.(fn7)
These situations certainly are breaches of the underlying contract, but they also meet the generally accepted criteria for fraudulent conduct-that is, intentional misrepresentations (or omissions) coupled with reliance and damages. These circumstances also are distinct from an intentional breach (sometimes called an "efficient breach"), where a party purposefully discontinues performance but does not conceal the breach or otherwise make misrepresentations to the other party concerning the breach.(fn8) In light of the economic loss rule, Colorado courts have grappled with the question of whether, in these situations, where the fraudulent conduct arguably is intertwined with the contractual breach, a fraud claim may be brought in addition to a breach of contract claim.
Until relatively recently, it appeared that Colorado courts and commentators were of the view that a claim for certain intentional torts, including fraud, would not be barred by the economic loss rule-at least under certain circumstances.(fn9) The common law duty not to commit fraud historically has been deemed independent of any contractual duty and, therefore, not barred by the economic loss rule.(fn10) However, in 2009, the Colorado Court of Appeals ruled otherwise in two decisions, Hamon Contractors, Inc. v. Carter and Burgess, Inc. and Makota USA, Inc. v. Russell. In both of these cases, the court held that the independent duties not to commit fraud may be subsumed by the contractual covenant of good faith and fair dealing, or otherwise "implicated by" the parties' contracts.(fn11)
Read broadly, these and subsequent Colorado appellate decisions indicate an unwillingness to allow a claim for fraud where the party committing the fraud also is breaching a contract (so-called post-contractual or intrinsic fraud). This is significant because it means that punitive damages may not be available in Colorado to punish fraud committed during a contractual relationship.
Overview of Colorado's Economic Loss Rule
The Colorado Lawyer previously published four extensive articles addressing Colorado's adoption of the economic loss rule, the doctrine's underlying policy rationales, and the various independent duty exceptions courts have applied to it.(fn12) Without repeating the content of those articles, a brief primer is appropriate.
At its most basic, the economic loss rule serves to maintain the boundary between contract and tort law.(fn13) This goal-maintaining the distinction between contract and tort law by not allowing parties to dress up a breach of contract claim as a tort claim-is one of three primary policy interests served by the economic loss rule.(fn14) The rule also "encourage[s] the parties to build the cost considerations into the contract because they will not be able to recover economic damages in tort."(fn15) In addition, by enforcing contracts as written, and only permitting the recovery of contract damages, courts ensure that the expectancy interests of contracting parties are not undermined.(fn16)
The genesis of the economic loss rule is found in products liability cases.(fn17) Plaintiffs suing manufacturers for injuries caused by malfunctioning products originally were awarded damages under a theory of implied warranty, even though no contract existed between the parties.(fn18) In an effort to facilitate these claims, courts adopted the tort theory of strict liability applicable to sellers of products that caused physical harm to consumers.(fn19)
A concern existed, however, that if this theory were not limited, it could swallow up contract law. In response, courts held that tort theories of recovery (primarily negligence) are not available where a plaintiff suffers purely economic or commercial loss based on a contractual relationship. In these situations, contract law alone should apply because, where a contract exists, the parties have the ability to allocate their respective risks of nonperformance through bargaining.(fn20) The economic loss rule emerged to protect the sanctity of contracts by holding parties to the terms of their negotiated agreements.
In this same vein-and as previously noted-courts began to differentiate between duties arising as a result of the parties' contractual relationship-that is, those duties that the parties expressly bargained for-and duties that are deemed "independent"-that is, duties imposed by law that the parties have not addressed in the contract. The difficulty, of course, is in ascertaining what duties are, in fact, independent of the duties imposed by the parties' contract.
Duties Independent of Contract
Generally, where tort law has created an independent duty that exists separate from a contract, the economic loss rule is not supposed to apply.(fn21) The underlying rationale is that these independent tort duties address public policy concerns that ordinarily are separate and apart from the interests and duties of the parties, as reflected by the negotiated terms of their contract.
The term "independent duty" underscores the primary focus of Colorado courts on the source of the duty, rather than on the type of damages suffered. If the source of an alleged duty is found only in the underlying contract-that is, the parties created the duty-any breach of that duty can give rise to only a breach of contract claim and the predictable and anticipated contract remedies, as negotiated by the parties, apply. If, on the other hand, a party breaches a duty that is independent of the underlying contract-that is, one imposed or created by law or via court decisions or the legislature-and that the parties did not address in their contract, tort remedies also may apply.(fn22) According to the Colorado Supreme Court, when an independent duty exists, the economic loss rule should not apply to bar the tort...
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