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How to Determine Whether the Economic Loss Rule Bars Your Client’s Tort Claims

Aug 26th, 2015

(The third in our series of three articles on the Economic Loss Rule in Colorado)

By Michael T. Mihm, Esq. and Nicole M. Quintana, Esq.

To determine whether a claim lies in tort (i.e. independent duty of care arising as a matter of law) or contract (duties arising from the parties’ promises), lawyers must focus on the source of the duty breached1. To avoid the Economic Loss Rule, the defendant’s duty must arise from a source other than the contract, and the duty cannot be a duty imposed (or implied) by the contract2. If the duty imposed by contract is identical to the duty imposed by common law, the contract prevails and the Economic Loss Rule bars the tort claim3. However, making this determination is sometimes difficult; the determination necessarily implicates public policy, and Colorado law is far from black and white.

Generally, if the contract spells out the defendant’s duty or the duty is a fundamental component of the terms in the contract, the Economic Loss Rule will apply, and courts will prohibit a plaintiff from bringing a tort claim based upon the same facts4. Colorado courts are relatively consistent when applying the Economic Loss Rule to disputes in which two sophisticated commercial parties have entered into a contract5. Courts recognize that sophisticated commercial parties are generally capable of assessing the transaction’s risks if a party breaches or something goes wrong, and negotiating to allocate those risks and costs amongst themselves and setting the appropriate prices to accommodate the allocation of risks and costs.

More problems arise where one party to the contract has unequal bargaining power or there is a significant disparity in knowledge or experience, or one party is a fiduciary to the other. The line between tort and contract blurs, and Colorado courts look to policy considerations to determine whether to apply the Economic Loss Rule. These policy considerations arise in three main areas: intentional torts, negligent misrepresentation, and special or fiduciary relationships.

Intentional Torts

Because the purpose of the Economic Loss Rule is to protect contract negotiations and bargained for expectations, Colorado courts recognize that a contract may not provide an appropriate remedy where one party has committed an intentional act and or where one of the parties’ actions has compromised the bargaining process. In other words, a party cannot and should not have to protect itself from deliberate acts when negotiating contract terms. Colorado law recognizes an exception to the Economic Loss Rule for fraud and intentional interference with contractual or business relations6, but sometimes not7. In this same vein, Colorado courts will not enforce exculpatory clauses that insulate a party from liability for willful and wanton conduct8. However, where the parties to the contract are both sophisticated commercial parties, the courts do not so generously apply the intentional interference exception9.

Plaintiffs’ lawyers should be aware of the exception for intentional torts because while the exception potentially broadens the damages to which a plaintiff may be entitled, it also expands the facts on which a plaintiff may be able to recover and which should be plead and pursued during the complaint and discovery phase10.

Negligent Misrepresentation

Colorado courts have not fully resolved whether the Economic Loss Rule applies to negligent misrepresentation claims. In one line of cases, the courts seem to suggest that negligent misrepresentation is always an exception to the Economic Loss Rule, but it stopped short of such a finding, as it only stated this in dicta11. In another line of cases, the courts found that the Economic Loss Rule bars negligent misrepresentation claims. The Court reasoned that negligent misrepresentations made during the forming of the contract may give rise to a separate tort claim, but that the Economic Loss Rule may bar negligent misrepresentation claims stemming from the performance of the contract (i.e. already bargained for terms)12. When analyzing whether the Economic Loss Rule applies to negligent misrepresentation claims, plaintiffs’ lawyers must assess the timing of the misrepresentation, as well as the ultimate effect of the misrepresentation. If the misrepresentation induced a plaintiff to enter into the contract, then the Economic Loss Rule likely will not apply to bar the tort claim; however, if the defendant’s misrepresentation pertained to the service or duty imposed by the contract during the period of performance, then the court will likely bar the tort claim and the plaintiff will likely be limited to contract damages.

Special and Fiduciary Relationships

Finally, the Supreme Court in Town of Alma v. AZCO Construction, Inc., recognized that certain “special relationships” give rise to an independent duty of care even where an express contract exists13. Claims for breach of a fiduciary duty are not barred in these instances because courts assume there is unequal bargaining power on account of the fiduciary’s expertise. Examples of these relationships include the attorney-client, doctor-patient, insurer-insured, and homeowner association-homeowner relationships14. In Colorado, this type of relationship does not arise in the context of, for instance, an employer-employee in an at-will employment relationship15. In addition, the Colorado Supreme Court in BRW, Inc. v. Dufficy & Sons, Inc., warned that the mere existence of a professional title does not automatically bar application of the Economic Loss Rule16. Rather, courts are to focus on the contractual relationship and duties owed to each other17. In other words, if the duty of care between the professional and other contracting party is (1) described in the contract and (2) does not vary from the common law duty, then the Economic Loss Rule applies and contract remedies are enforced. In short, the courts will look at the substance over the form of the duty and the parties’ relationship. Thus, plaintiffs’ lawyers must analyze the contract language even if a defendant has a special or fiduciary relationship with the plaintiff.

Other Considerations

Plaintiffs’ lawyers should consider related rules of law when analyzing the Economic Loss Rule. For example, Colorado courts do not recognize a claim for conspiracy related to a breach of contract because there is no independent duty in tort to complete a contract18. Moreover, while Colorado courts do recognize a claim for willful and wanton breach of contract, the parties are still limited in economic damages to those contemplated by the contract19. A willful and wanton breach of contract only entitles a party to seek foreseeable non-economic damages, so a willful and wanton breach arguably does not implicate the Economic Loss Rule.

Colorado courts are inconsistent when determining whether the Economic Loss Rule applies to claims for civil theft and conversion20. But claims for unjust enrichment and quantum meruit, obviously, implicate duties arising outside of a contract and, therefore, will not be barred by the Economic Loss Rule21. Colorado courts have also expanded the application of the Economic Loss Rule to third party beneficiaries to a contract, as well as to parties involved in a related network of contracts22.

Again, when analyzing whether the Economic Loss Rule may affect a client’s tort claim, the plaintiff’s lawyer must carefully examine the terms of any possibly applicable contract. If it appears that the Rule may apply, the lawyer must then carefully analyze the facts and policy considerations limiting application of the Economic Loss Rule to the particular claim. In business litigation, these considerations affect how the plaintiff’s lawyer frames the complaint, what claims that the lawyer brings, how the lawyer pleads those claims, and the damages sought, and they may drive the lawyer’s discovery necessary to prove those claims.

1. Id., supra.
2. Town of Alma, supra, at 1264; Grynberg, 10 P.3d at 1269-70.
3. A Good Time Rental, LLC v. First American Title Agency, Inc., 259 P.3d 534 (Colo. App. 2011); Makato USA, Inc. v. Russell, 250 P.3d 625 (Colo. App. 2009), cert. denied (2010); see also BRW, supra, at 74.
4. Sterling Construction Management, LLC v. Steadfast Insurance Co., 2010 WL 3720064 (Colo. 2010).
5. See, e.g., BRW, supra, at 74.
6. Town of Alma, supra, at 1262.
7. Vanderbeek v. Vernon Corp., 50 P.3d 866 (Colo. 2002).
8. Cf. Colorado Nat. Bank of Denver v. Friedman, 846 P.2d 159, 170 (Colo. 1993); Top Rail Ranch Estates, LLC v. Walker, 327 P.3d 321, 328-329 (Colo. App. 2014)(Economic Loss Rule barred fraud claim because fraud alleged was the same as a breach of covenant of good faith and fair dealing).
9. U.S. Fire Ins. Co. v. Sonitrol Management Corp., 192 P.3d 543, 548 (Colo. App. 2008); Rhino Fund, LLLP v. Hutchins, 215 P.3d 1186, 1191 (Colo. App. 2008).
10. E.g., Top Rail Ranch Estates, LLC, supraRees v. Unleaded Software, Inc., __P.3d __, 2013 WL 6354532 (Colo. App. 12/5/2013).
Because of the pleading requirements of the new Civil Access Pilot Project (CAPP) rules, lawyers should be particularly careful about analyzing the Economic Loss Rule and drafting the complaint if the lawsuit is filed in a CAPP venue.
11. Town of Alma, supra; Jardel Enters., Inc. v. Triconsultants, Inc., 770 P.2d 1301, 1304 (Colo. App. 1988), cert. denied (Colo. 1989); Keller v. A.O. Smith Harvestore Prod., Inc., 819 P. 2d 69, 72 (Colo. 1991).
12. BRW, at 74-75; supra; Keller, supra.
13. Town of Alma, supra, at 1263.
14. Id., supra (citing Bebo Constr. Co. v. Mattox & O’Brien, P.C., 990 P.2d 78, 83 (Colo. 1999)(attorney-client relationship creates independent duty of care); Greenberg v. Perkins, 845 P.2d 530, 534 (Colo. 1993)(physician-patient relationship creates independent duty of care, as does physician’s independent medical examination of non-patient); Farmers Group, Inc. v. Trimble, 691 P.2d 1138, 1141–42 (Colo. 1984)(quasi-fiduciary nature of insurer-insured relationship creates independent duty of care)); Colorado Homes, Ltd v. Loerch-Wilson, 43 P.3d 718, 721-22 (Colo. App. 2001).
15. DerKevorkian v. Lionbridge Technologies, Inc., 2006 WL 197320 (D. Colo. 2006); Wisehart v. Meganck, 66 P.3d 124 (Colo. App. 2002).
16. BRW, supra, at 71.
17. Id.
18. Logixx Automation, Inc. v. Lawrence Michels Family Trust, 56 P.3d 1224, 1231 (Colo. App. 2002).
19. Core-Mark Midcontinent, Inc. v. Sonitrol Corp., 300 P.3d 963, 971 (Colo. App. 2012), cert. denied; Giampapa v. Am. Family Mut. Ins. Co., 64 P.3d 230, 240 (Colo. 2003).
20. Rhino Fund, LLLP v. Hutchins, 215 P.3d 1186, 1193-1195 (Colo. App. 2008); Makoto USA, Inc. v. Russell, 250 P.3d 625, 628-29 (Colo. App. 2009); Brown v. Rennels, 539 P.2d 1312, 1313-14 (Colo. App. 1975).
20. Jorgensen v. Colorado Rural Properties, LLC, 226 P.3d 1255, 1258-59 (Colo. App. 2010).
21. Town of Alma, supra, at 1264, note 12; BRW, supra, at 72-73; Terrones v. Tapia, 967 P.2d 216, 220 (Colo. App. 1998).