Drawing Boundaries Between Tortand Contract. the Fluctuating Scope of Colorado's Economic Loss Rule
| Publication year | 2022 |
| Pages | 26 |
CONTRACT LAW
BY MIKE CROSS
This article traces the evolution of the economic loss rule in Colorado.
The economic loss rule is a judicial construct whose fundamental goal is to maintain the distinction between contract and tort law.[1] But currently, its seemingly amorphous scope confounds many practitioners. After the Colorado Supreme Court adopted the economic loss rule in 2000, the line between contract and tort law became blurred with appellate court expansions to the rule's applicability. In more recent decisions, the Supreme Court seems to have pulled back, but its guidance has been inconsistently applied. This article describes the evolution of Colorado's economic loss rule, including ongoing efforts to survey its margins and potential limits to its boundaries that may soon be drawn.
Colorado Adopts the Rule
Generally speaking, the economic loss rule provides that a party suffering only economic loss (damages other than physical harm to a person or property) from the breach of a contractual duty may not assert a tort claim for such breach absent an independent duty of care under tort law.[2] This rule emerged from the development of products liability jurisprudence and was first recognized by the California Supreme Court in Seely v. White Motor Co.[3] In Seely, a consumer brought tort claims against a manufacturer seeking economic losses, including lost profits, resulting from a defective product. The Court emphasized the need to maintain a distinction between the allocation of risk of physical harm versus economic injury, stating "[e]ven in actions for negligence, a manufacturer's liability is limited to damages for physical injuries and there is no recovery for economic loss alone."[4] From this statement, "the economic loss rule was born."[5]
The Colorado Court of Appeals first expressly invoked the economic loss rule in 1988 in Jardel Enterprises, Inc. v. Tri consultants, Inc.[6] to bar a negligence claim seeking lost profits against a subcontractor, stating:
As a general rule, no cause of action lies in tort when purely economic damage is caused by negligent breach of a contractual duty. This economic loss rule prevents recovery for negligence when the duty breached is a contractual duty and the harm incurred is the result of failure of the purpose of the contract.[7]
However, this case ran contrary to prior Colorado appellate decisions permitting overlapping tort and contract theories. The lack of consistency led Judge Phillips of the Denver District Court to pen a Colorado Lawyer article in 1992 where he examined a "series of cases stretching back to 1961 [that left] Colorado law with no well-developed dividing line that distinguishes between tort and contract."[8] He lamented the lack of "an adequate conceptual basis to draw the line of demarcation between overlapping contract and tort theories" and the resulting confusion and unnecessarily complicated lawsuits.[9]
The Colorado Supreme Court finally provided some clarity in 2000 with the simultaneous announcement of two decisions: Town of Alma v. AZCO Construction, Inc.[10]" and Grynberg v. Agri Tech, Inc.[11] In the former, the Town of Alma brought claims against a contractor engaged to construct a water service line. The Town discovered several leaks in the line due to faulty workmanship. The contractor repaired the leaks pursuant to a limited warranty but refused to perform repairs after the one-year warranty term expired. The Town asserted several claims against the contractor, including negligence. The Supreme Court held that the economic loss rule barred the negligence claim.
The Court expressly adopted a "workable" economic loss rule.[12] In doing so, it explored the rule's underlying rationale and the importance of maintaining a distinction between contract and tort law. The Court noted that the essential difference between these areas of law is "the source of the duties of the parties."[13] Tort law imposes duties without regard to any agreement or contract with the goal of protecting citizens from risk, while contract duties arise from promises between parties. The fundamental goal of contract law is to enforce the parties' expectations.
The Court noted that the availability of tort claims to seek redress for breach of contractual duties undermines the goal of contract law by potentially extending liability beyond the contract's negotiated terms and, therefore, the parties' expectations. By limiting tort liability where a contract exists, parties are held to the terms of their bargain. This is consistent with the assumption that rational economic actors can adequately address nonperformance by bargaining at arm's length to shape contract terms. The economic loss rule serves to ensure predictability in commercial transactions by allowing parties to "confidently allocate risks and costs during their bargaining without fear that unanticipated liability may arise in the future, effectively negating the parties' efforts to build these cost considerations into the contract."[14] The Court also expressed concern over the possibility that simultaneous tort and contract liability could generate confusion and unnecessary complexity in litigation.
Accordingly, the Court set forth a foundational framework that focused on the source of the duty. Though the phrase "economic loss rule" suggests the focus should be on the type of damages, the Court rejected this approach, noting that the relationship between the type of damages suffered and the availability of a tort claim is "inexact at best."[15] The Court noted that a more accurate name for the rule would be the "independent duty rule"[16] because "economic loss rule" is "merely an unfortunate carry-over from its origins in products liability jurisprudence," which the Court maintained only for the sake of consistency.[17] Consistent with this "duty analysis," the Court expressly adopted an economic loss rule that barred tort claims where a party suffered only economic loss from the breach of an express or implied contractual duty unless an independent duty of care existed under tort law.[18] It provided examples of such independent duties that were long recognized by Colorado courts, including duties arising out of attorney-client,[19] physician-patient,[20] and insurer-insured relationships.[21]
Applying this new framework, the Court similarly barred a negligence claim in the companion case, Grynberg. There, the plaintiff alleged contract and tort claims arising out of a cattle investment program. The Court held that there was no duty independent of the contract, relying on the fact that the plaintiff sought the same damages through both contract and negligence claims, and concluding that the applicable duty of care was "created by, and completely contained in, the contractual provisions."[22]
The Rule Expands
Not long after Town of Alma and Grynberg, in 2004 the Colorado Supreme Court revisited the economic loss rule in BRW, Inc. v. Dufficy & Sons, Inc.[23] There, a subcontractor brought negligence and negligent misrepresentation claims against an engineering firm responsible for drafting plans and specifications on a construction project. Despite the absence of direct contractual privity, the engineering firm asserted that the economic loss rule barred the claim. The Court agreed, extending the economic loss rule to "interrelated contracts" in what it described as a "natural progression" from its holdings in Town of Alma and Grynberg.[24] The contractual relationships between the parties were attenuated enough that the Court had to dedicate significant real estate in the opinion to a graphic explaining the connection. It reasoned that parties on larger construction projects typically rely on a network of contracts to allocate their risks, duties, and remedies and, therefore, have an opportunity to bargain for or decline to enter into contractual relationships. The Court thus expanded on the Grynberg rationale to set forth three factors to help determine whether the duty allegedly breached is independent of the parties' contract: (1) whether the relief sought in tort is the same a s the contractual relief, (2) whether there is a recognized common law duty of care, and (3) whether the tort duty differs in any way from the contractual duty.[25] The Court also seemingly created a bright line rule:
If we conclude that the duty of care owed by [defendants] was memorialized in the contracts, it follows that the plaintiff has not shown any duty independent of the interrelated contracts and the economic loss rule bars the tort claim and holds the parties to the contracts' terms.[26] The Court did not weigh in on this issue again until 2016.
In the meantime, appellate courts relied on BRW to offer expansive interpretations of the economic loss rule. For example, in Parr v. Triple L & J Corp.,[27] the Court of Appeals barred a claim for intentional interference with contract. Relying on BRW, it stated:
[T]he existence of [a common law] duty is not determinative, because we are directed first to determine whether the contract requires conformance to a particular standard before turning to an independent duty analysis. If a duty is found in the contract, as here, it is improper further to analyze the existence of an independent tort duty in determining whether an economic loss may be recovered.[28]
Similarly, in Hamon Contractors, Inc. v. Carter & Burgess, Inc.,[29] a division held that the economic loss rule barred a fraud claim. The Court first noted that Town of Alma "did not draw any bright lines among types of torts (e.g., fraud, negligence) that are always barred by the economic loss rule, those that may be barred, and those that are never barred."[30] The Court then engaged in an...
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