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

by Elizabeth A. Phelan

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.

Reproduced by permission. ©2005 Colorado Bar Association, 34 The Colorado Lawyer 81 (Jan. 2005). All rights reserved.

In BRW, the Court applied the economic loss rule to the tort claims of a subcontractor against both the engineer who prepared the plans and specifications for a public construction project and the inspector who inspected the work to assure its compliance with the plans and specifications. The subcontractor sought to avoid the economic loss rule by arguing that the engineer and inspector had an independent duty of care under tort law to prepare the plans and specifications non-negligently and that the economic loss rule applies only when there is direct contractual privity between the parties. The Court rejected both arguments. Thus, the BRW decision confirms that the economic loss rule:

1) turns on the source of the duty that was allegedly breached, not on the professional status of the defendant;
2) applies not only where commercial parties are in direct contractual privity, but also where they are bound by the series of interrelated contracts that frequently characterize commercial and public construction projects; and
3) ensures that commercial parties' contractual allocation of duties, rights, and remedies will be enforced, not altered, by the courts.

A closer view of the BRW case sheds light on these key dimensions of the economic loss rule.

BRW Case: Subcontractor's Tort Claims

The BRW case arose from a contract between the City and County of Denver ("City") and BRW, Inc. ("BRW). The parties entered into a Design Services Agreement ("Contract") for the design and construction of a public works project known as the Speer Boulevard bridges ("Project"). Under the Contract, BRW agreed that it would perform its services "in accordance with the standards of care, skill and diligence provided by competent professionals who perform work or services of a similar nature. . . ."10

BRW promised that the plans and specifications would "represent a thorough study and competent solution for the Project as per usual and customary professional standards" and reflect "all [applicable] architectural and engineering skills. . . ."11 BRW further agreed to "observe and systematically review the performance of the construction contract(s) . . . as is necessary to determine that the work has been or is being installed in conformance with the Contract Documents."12

Using BRW's design drawings and specifications, the City solicited bids for the Project. The successful bidder, Kraemer & Sons, Inc. ("Kraemer"), entered into a contract with the City to serve as the general contractor. Kraemer...

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