Negligence Claims May Be Barred Through Application Of The Economic Loss Rule

The companion cases of Town of Alma v. Azco Construction, Inc.,10 P.3d 1256 (Colo. 2000 and Grynberg v. Agri Tech, Inc., 10 P.3d 1267 (Colo. 2000) presented the Colorado Supreme Court with an opportunity to address the status of the "economic loss" rule in Colorado. With the judgments in these cases, the Court expressly adopted the rule and barred negligence claims where the Court found that the defendants in the respective cases did not breach any duties that were independent of their contractual obligations.

First applied in Colorado by the court of appeals in Jardel Enterprises, Inc. v. Triconsultants, Inc., 770 P.2d 1301 (Colo. App. 1988), the "economic loss" rule essentially seeks to maintain the boundary between contract and tort law. Although originally developed in the context of product liability jurisprudence, "its application is now much broader." Grynberg at 1269. "As a general rule, no 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 the failure of the purpose of the contract." Town of Alma at 1262. The rationale is that "contract obligations arise from promises made between parties. Contract law is intended to enforce the expectancy interests created by the parties’ promises so that they can allocate risks and costs during their bargaining" Id. Application of the rule is appropriate because it is expected that "rational economic actors" bargain at arms length to shape the terms of a contract which, in turn, provides adequate contractual remedies for the breach of material terms of that contract.

The Court has an obligation "to determine, at the outset of a lawsuit, the type of duty that has allegedly been breached." Town of Alma at 1262. Tort obligations are generally held to arise out of duties imposed by law designed to provide protection from the risk of physical harm to persons or property. These duties are imposed without regard to the need or existence of an agreement between parties. Prior confusion regarding proper application of the "economic loss" rule has arisen where the parties focused on the nature of the damages alleged. The rule does not turn on whether damages alleged are physical or economic. "The proper focus in an analysis under the "economic loss" rule is on the source of the duties alleged to have been breached." Grynberg at 1269. Under the formulation of the "economic loss" rule adopted by the Colorado Supreme Court, a party may not assert a tort claim for a breach of an express or implied contract absent an independent duty of care under tort law. Id. Although, it should be noted that the Court recognized that the Plaintiffs in Grynberg sought the same relief in both their contract and negligence claims, the Court was careful to point out that the decision not based on an analysis of the damages alleged, but was based instead upon a determination that duties alleged to have been breached "were created by the contracts." Id.

Where, as in Grynberg, Id. at 1270, the contract imposed a duty of care to act according to the customary standards of the industry, the Court held that no independent action for negligence would exist. The "economic loss" rule mandated distinction between the sources of duty arising out of the contract or some independent source. In Town of Alma, the Court’s application of the rule even served to bar individual third-parties who were not actually named in the contract in question but were held to be intended third-party beneficiaries.

Having first expressly adopted the "economic loss" rule and having provided analysis for its application, the Court in Town of Alma and Grynberg then recognized that the mere existence of both contract and tort claims in the same action does not automatically bar the tort claims in every instance. Some special relationships between parties will trigger an independent duty of care that may support a tort action even where the parties have a contractual relationship. The Court has likewise recognized that common law claims, such as fraud which are expressly intended to remedy "economic loss," may exist independent of a contract claim and will not be barred. The Colorado Supreme Court refused to adopt the characterization of these types of cases as "exceptions" to the "economic loss" rule as other jurisdictions have done. Rather, the Court stated that they are more appropriately viewed as "outside the scope of the rule," once again stressing that focusing on the source of the duties will lead to a determination as to whether or not the economic loss rule will bar a negligence claim in a particular case.