Law Week Colorado - Opinion - October 30, 2023
David Holman | Crisham & Holman LLC
Colorado’s economic loss rule — a judge-made principle preventing tort law from “swallowing” contract law — appeared to be on uncertain footing following decisions issued by the state’s appellate court between 2019 and 2021. However, two recent Court of Appeals decisions suggest the economic loss rule is making a comeback, which could be a promising development for businesses relying on the risk allocations and damages limitations in their contracts.
The Colorado Supreme Court’s decisions in Town of Alma v. AZCO Construction, Inc. (2000) and BRW, Inc. v. Dufficy & Sons, Inc. (2004) form the touchstone of Colorado’s economic loss rule. Town of Alma barred tort claims where the plaintiff “suffer[ed] only economic loss from the breach of an express or implied contractual duty . . . absent an independent duty of care under tort law.”
Four years later, in BRW, the Supreme Court confirmed the economic loss rule, and adopted a three-factor test for whether the contract established the duty of care: “(1) whether the relief sought in negligence is the same as the contractual relief; (2) whether there is a recognized common law duty of care in negligence; and (3) whether the negligence duty differs in any way from the contractual duty.” Generally, if the duty of care “was memorialized in the [parties’] 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.”
As in Town of Alma and BRW, the stereotypically barred claim is a negligence claim against a construction contractor where the parties have a contract providing the standard of care. If a plaintiff claims the architect negligently drafted the construction plans, for example, and the contract provides for standards of care, then the rule bars the plaintiff from avoiding the contract’s limitations by pleading negligence or other tort claims.
The rule was relatively stable until 2019, when the Colorado Supreme Court exempted an entire category of claims. In Bermel v. BlueRadios, Inc., a company sued its independent contractor for taking company emails containing proprietary information, asserting breach of contract and a statutory claim for civil theft. The contractor was found liable on all claims, despite his argument that the economic loss rule barred the civil theft claim. Along with lower courts, the Supreme Court affirmed the verdict on the civil theft claim, because it is a statutory creation long predating the economic loss rule, and allowing a judge-made rule to bar a statutory claim “would offend the separation of powers.”
This decision threatened the economic loss rule. In Justice Richard Gabriel’s dissent, he said the ruling revived risks of tort law swallowing contract law. Gabriel pointed out the parties’ contract governed trade secrets, so allowing a civil theft claim — with possible treble damages and fees — for duties and acts expressly covered by the contract would turn many ordinary contract claims into negligence claims, or even civil theft claims with creative pleading.
Second, it could be argued Bermel offered broader dicta in footnote 6. There, the court opined on contractual disclaimers of tort obligations and “note[d] that the economic loss rule generally should not be available to shield intentional tortfeasors from liability for misconduct that happens also to breach a contractual obligation.”
The combination of Bermel’s actual holding and its footnote spawned confusion about the future of the economic loss rule. Multiple state and federal courts interpreted Bermel’s footnote to mean the rule cannot bar intentional torts, including common law claims, that also breach contractual obligations.
In McWhinney Centerra Lifestyle Center v. Poag & McEwen Lifestyle Centers-Centerra LLC (2021), for example, the Court of Appeals followed the Bermel footnote and appeared to bar the application of the economic loss rule to all fraud claims, reasoning they’re intentional torts — even those for post-execution fraud. The Supreme Court upheld the lower court’s decision.
Unsurprisingly, federal courts in Colorado taking Erie guesses took similar approaches. The federal district court in Western State Bank v. Cosey, L.L.C. (2019), for instance, allowed a fraud claim to proceed simply because it “alleges an intentional tort.” The 10th Circuit Court of Appeals in In re Bloom (2022) found Bermel’s footnote means the economic loss rule cannot bar post-contract fraud claims.
Despite these threats, two recent Court of Appeals decisions give hope for a comeback. In Dream Finders Homes LLC v. Weyerhaeuser NR Company (2021), the contract barred consequential damages, but the plaintiffs’ fraud claims sought those same damages, claiming breach of warranty. The Court of Appeals reversed the plaintiffs’ jury verdict on the fraud claim. The court could not reconcile the logic of the economic loss rule with Bermel’s footnote, so it limited the footnote as “dicta.” It noted, “This is one of those cases in which the economic loss rule bars fraud claims, particularly because [plaintiffs] received the full benefit of their bargain documented in the contract and because they seek to recover through their tort claims the very type of damages expressly excluded under the warranty they received from [defendant].”
Dream Finders also revived Town of Alma and BRW’s traditional line between pre- and post- contract fraud claims, allowing the former — because no contract yet existed at the time of misrepresentations — but barring the latter as “subsumed within the contract through the implied duty of good faith and fair dealing.” In September 2022, the Colorado Supreme Court denied the petition for a writ of certiorari.
Another Court of Appeals decision issued this year amplified Dream Finders. In Mid-Century Insurance Company v. HIVE Construction, Inc., the plaintiff insurer brought a subrogation claim against the insured’s contractor, and argued the economic loss rule does not apply to negligence claims involving willful and wanton conduct, citing Bermel’s footnote. The court rejected that argument: “[Bermel’s] statement regarding the frequency with which the economic loss rule should apply to intentional torts was not necessary to its holding, and thus constitutes dictum.”
Surveying Colorado cases applying the rule to intentional conduct, the panel found “application of the economic loss rule depends not on the nature of the defendant’s conduct but on the nature of the duty owed by the defendant.” By treating the Bermel footnote as dicta, HIVE Construction barred the negligence claim and limited the economic losses to the contract claim.
Although Dream Finders seemed reluctant to challenge the Bermel footnote, HIVE Construction was more forceful in rejecting McWhinney and its application of Bermel. The HIVE Construction decision may clear up some confusion in the meantime and clarifies the Bermel footnote was not a hint or a holding, but rather a prognostication about how certain cases may turn out.
– David Holman is a founding partner of Crisham & Holman LLC and represents clients in natural resources litigation, white collar and securities investigations and litigation and general business litigation.
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