The Economic Loss Rule Continues To Expand – Make Sure Your Contract Addresses Tort Risks

In 2000, the Colorado Supreme Court adopted the “economic loss rule” in Colorado. The rule “provides that 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.” Town of Alma v. AZCO Constr., Inc., 10 P.3d 1256, 1264 (Colo. 2000).

Since the AZCO case, Colorado courts have applied the rule time and time again to bar tort claims (such as negligence, fraud, and the like) by one party to a commercial contract against the other party to the contract. Recently, the Colorado Court of Appeals expanded the breadth of the rule in Colorado, concluding that, under the rule, “no independent duty exists for tort claims of fraud, fraudulent concealment, constructive fraud, or negligent misrepresentation when the alleged misrepresentations and false statements are about the ability to perform contractual duties.” Van Rees, Sr. v. Unleaded Software Inc., No. 12CA1014, 2013 COA 164, ¶ 14 (Colo. App. Dec. 5, 2013). The court’s decision establishes that, in the business-to-business context, recovery of economic loss related to a contract generally will be based solely on the contract. (As reflected in another recent Court of Appeals case, the economic loss rule is not viewed as broadly in the consumer context when form contracts are utilized. See In re Estate of Gattis, 318 P.3d 549 (Colo. App. 2013).)

The Van Rees v. Unleaded case concerned Van Rees’ claims that Unleaded made misrepresentations to him regarding its website design, delivery, and hosting abilities, as well as its SEO capabilities, before the parties entered into three related contracts that required Unleaded to design, build, and host a website, and to perform SEO services for the site. Van Rees claimed Unleaded had a duty independent from the contract not to make the pre-contract misrepresentations Van Rees alleged, but the Court of Appeals determined that accepting his argument “would frustrate the purpose of the economic loss rule.” Accordingly, the court affirmed the trial court’s dismissal of Van Rees’ fraud, negligent misrepresentation, and negligence claims.

In reaching its decision, the Court of Appeals noted that, “[b]y bargaining for contract prices and duties,” Van Rees and Unleaded “had the ability to account for the risk of nonperformance.” For this reason, and because of the parties’ ability to shape the terms of their contract, the court concluded that permitting Van Rees to pursue his tort claims would be inappropriate.

In light of the determination in Van Rees v. Unleaded that the remedy between contracting parties for misrepresentations may be limited to the contract, it is important for contracting parties to account for such potential limitations when negotiating their agreements. In addition, of course, it is important for parties involved in disputes related to contracts to analyze whether the contract provides the sole basis for relief in the dispute.