- Jeff Vail vail-law.com
Colorado's Economic Loss Rule Does Not Bar Intentional Torts
This article is part of Vail Law’s open-source litigation and legal risk management checklist. Connect with me on LinkedIn.
The ‘Economic Loss Rule’ is a judicially-created doctrine that serves to protect the distinction between contract law and tort law. Colorado first adopted the rule in 1988 in the case Jardel Enters., Inc. v. Triconsultants, Inc., 770 P.2d 1301 (Colo. App. 1988). The court explained:
As a general rule, no cause of 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 failure of the purpose of the contract.
Id. at 1303.
The Colorado Supreme Court embraced the economic loss rule in Town of Alma v. AZCO Construction, Inc., 10 P.3d 1256 (Colo. 2000). Nationally, the concept of the Economic Loss Rule germinated from a short comment in a product liability decision by the California Supreme Court stating that “a manufacturer’s liability is limited . . . [and] there is no recovery for economic loss alone.” Seely v. White Motor Co., 403 P.2d 145 (Cal. 1965). Perhaps as a result of tort reform pressures or simply because it presented an attractive defense, in the years after the Town of Alma decision the Economic Loss Rule became a favorite defense to all manner of torts.
That pendulum, however, having swung to the point where the rationale for the Economic Loss Rule was in danger of defeating itself (and the law of contract threatened to swallow the law of tort), is now definitively swinging back toward centerline. For a period, rulings in Colorado could be somewhat haphazard, and many courts dismissed claims for breach of fiduciary duty, fraud, civil theft, and other potentially (or necessarily) intentional torts where they were closely related to or directly resulted from a breach of contract. The issue came to a head with the issue of whether a statutory claim for civil theft could be defeated by the judicially-created Economic Loss Rule in Bermel v. BlueRadios, Inc., 440 P.3d 1150 (Colo. 2019).
Bermel’s direct holding is that a judicially-created doctrine such as the Economic Loss Rule cannot invalidate the legislatively-created, statutory cause of action such as Colorado’s Civil Theft statute (C.R.S. § 18-4-405). As courts are gradually accepting, however, Bermel’s holding was far broader. As the Colorado Supreme Court stated, “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.” Id., 440 P.3d at 1154 n.6. Bermel also cited a law journal with approval explaining “the well-accepted exclusion of intentional torts from the economic loss rule.” Id. at 1154 n.5 (citing In Search of the Cheapest Cost Avoider: Another View of the Economic Loss Rule, Catherine M. Sharkey, 85 U. Cin. L. Rev. 1017, 1017-18 (2018)).
While these statements are arguably dicta, they do provide clear guidance to the Court’s future rulings, and courts are paying attention. In Western State Bank v. Cosey, L.L.C., Judge Kane relied on Bermel in holding that “[plaintiff’s] fraud claim alleges an intentional tort. So, under Bermel, the economic loss rule would not bar [plaintiff’s] fraud claim.” Id., 2019 WL 5694271, at *4 (D. Colo. Nov. 4, 2019). Likewise, Judge Jackson granted reconsideration and reversed a prior dismissal of a fraudulent misrepresentation claim based on the Economic Loss Rule, stating:
The Bermel footnote [Footnote No. 6] clarifies that intentional torts depend on duties independent of contract and therefore are not barred by the economic loss rule . . . . The plain language clearly indicates the [Colorado Supreme Court] does not believe intentional torts should be covered by the economic loss rule.
Mcwhinney Holding Co., LLLP v. Poag, 2019 WL 9467529, at *2 (D. Colo. Dec. 6, 2019).
In what is now (or at least should now be) clear, the Economic Loss Rule does not bar claims for intentionally tortious conduct because the duty not to engage in such intentional torts always arises independently from any contract.
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