(The first in our series of three articles on the Economic Loss Rule in Colorado)
By Michael T. Mihm, Esq. and Nicole Quintana, Esq.
“If all you have is a hammer, everything looks like a nail.” Abraham Maslow1
Plaintiffs’ lawyers tend to see our clients’ cases through the lens of what we know best, that is, tort causes of action. After all, we spend most of our professional time studying tort law and litigating tort cases. However, when focusing primarily on tort claims we are at great risk of employing Maslow’s Hammer in ways that, sometimes, can be fatal to our clients’ cases. Not everything that appears to be a nail is a nail. If we’re not careful, we can find ourselves using a hammer to drive the tort nail when we really should be using a screwdriver to turn the contract screw.
The purpose of this article is to provide a brief introduction to an important legal doctrine known as the “Economic Loss Rule,” sometimes called the “Independent Duty Rule.” The Economic Loss Rule may apply in many cases that, on their face, appear to be routine tort cases but that have a written or oral contract lurking in the background. If the Economic Loss Rule even arguably applies, plaintiff’s counsel can expect that the defendants will file a motion to dismiss or motion for summary judgment based on the rule. Unless plaintiff’s counsel has carefully considered and planned for a motion based upon the Economic Loss Rule, we can find ourselves on the wrong end of an order dismissing our clients’ claim. Moreover, if the court dismisses our client’s claims pursuant to C.R.C.P. 12(b), the court may be required to assess attorneys’ fees and costs against the client2.
What is the Economic Loss Rule?
The Economic Loss Rule is a judicially created doctrine that represents courts’ efforts to maintain clear boundaries between tort and contract law. Tort law is intended to protect individuals from physical harm to their persons or property3. Contract law is intended to enforce parties’ expectancy interests created by the parties’ promises so that they can allocate risks and costs during their bargaining4. The lines between tort law and contract are blurred in some circumstances because the defendant’s actions can appear to be either tortious conduct or breach of a contract or both, and the plaintiff’s damages are reasonably foreseeable regardless of how the conduct is characterized. Thus, courts have developed the Economic Loss Rule to ensure that where parties have allocated risk and cost amongst themselves by contract, the claimant is limited to pursuing contract damages, and may not also seek tort damages5.
In 2000, the Colorado Supreme Court decided two cases, Town of Alma v. AZCO Construction, Inc.6, and Grynberg v. Agri Tech, Inc.7, wherein the Court adopted the Economic Loss Rule. According to the Supreme Court’s definition of 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.8
As adopted by the court, the Economic Loss Rule states that, where a legal duty arises out of a contract—implied or express, written or oral—a party cannot seek recovery of purely economic losses in tort, unless there exists an independent duty of care outside of the contract and which is distinct from any duties of care imposed by the contract.9
The Economic Loss Rule implicates some of the following types of economic harm that are sometimes recoverable through tort claims:
- diminution in value;
- lost profits;
- cost of repair/replacement; and
- 'damage[s] other than physical harm to persons or property.”10
The Colorado Supreme Court has said the term “Economic Loss Rule” is probably a misnomer; the rule should more accurately be called the “Independent Duty Rule” as the focus of the court’s analysis is not on the specific type of damages, but the source of the duty allegedly breached that caused the damages11. In other words, the important question is not whether the harm for which damages sought is an “economic” harm or an injury to person or property, but whether the duty allegedly breached is an independent duty of care imposed by law for public policy reasons (a tort duty), or a duty arising from mutual promises (a contract duty). If the duty breached is one that arises from the contract, regardless of whether it is also a duty of care imposed by law, then the aggrieved party may not pursue a tort claim but must seek recovery through contract claims as, presumably, the parties had an opportunity to allocate the risks and costs of a breach as part of the bargaining process before entering into the contract and priced their contract accordingly. On the other hand, if the duty breached was a duty of care that arises independent of and is different from the duties imposed by contract, then the plaintiff may pursue the claim as a tort claim.
1 “The Psychology of Science,” 1966, pg. 15.
2 Colo. Rev. Stat. Ann. § 13-17-201 (2014).
3 Town of Alma v. AZCO Constr., Inc., 10 P.3d 1256, 1262 (Colo. 2000).
4. Id. 5. Id.; BRW, Inc. v. Dufficy & Sons, Inc., 99 P.3d 66, 72 (Colo. 2004).
6. Town of Alma, 10 P.3d 1256 (Colo. 2000).
7. Grynberg, 10 P.3d 1267, 1269-70 (Colo. 2000).
8. Town of Alma, supra, 1264 (emphasis added).
9. Id.; Steward Software Co., LLC v. Kopcho, 275 P.3d 702 (Colo. App. 2010) rev’d on other grounds, 266 P.3d 1085 (2011).
10. BRW, supra; Parr v. Triple L & J Corp., 107 P.3d 1104 (Colo. App. 2004).
11.Town of Alma, supra, note 8 and 1262.