The Economic Loss Rule in Colorado, Part 1 – Contract Law vs. Tort Law
The Perils of the Marketplace: Beware the Impact of the Economic Loss Rule When Entering Into Contracts With Others
Before entering into a contract under Colorado law or attempting to enforce your rights when a contract is breached, it is important to know and understand Colorado’s version of the Economic Loss Rule.
The Economic Loss Rule stands for the proposition that sophisticated businesspersons and entities should be free to allocate the risks between themselves by contract, without taking the extra-contractual risk of being sued in tort if the other side sours on the deal it agreed to later.
The importance of this rule arises because parties typically can recover more in damages with a tort claim (including the potential for punitive damages) than they could if limited to recovery for breach of the contract.
The Economic Loss Rule is the “bright line” distinction between contract law and tort law. Tort law is typically focused on protecting ourselves from one another based upon accepted standards of conduct in our society. In tort law, one looks to whether a duty is owed to another (such as the duty one owes to others when driving their car to do so reasonably safely), and whether that duty has been violated causing harm to another (as in when the driver runs a stop sign and causes an accident). The test in tort is typically one of assessing the ‘reasonableness’ of the party’s conduct.
Contract law is a completely different animal.
It has nothing to do with ‘reasonableness’. It has to do with the right of the parties to freely contract between themselves as to what the rules will be if one party believes it is later wronged by the other party to the contract. Pursuant to the Economic Loss Rule, if a party to a commercial contract suffers purely economic harm regarding the subject matter of the contract, then the Economic Loss Rule says that you look to the contract—and the contract alone—for relief. If you haven’t ensured that you will be fully protected and compensated from the potential future loss at the time you entered the contract, you will likely be disappointed (and without the ability to ask the Court for relief) once problems arise later.
The Economic Loss Rule provides that where there is a contract, the breach of any duty that arises from that contract can only be remedied through a breach of contract claim, limited as the parties have agreed within the four corners of the contract. For one to avoid this limitation and bring tort claims, the party must show that the duty breached arises independent from the contract, and was not incorporated into the contract itself.
The Economic Loss Rule and its impact on commerce in Colorado are here to stay. Proper analysis of the Economic Loss Rule, both on the front end—when you are entering into any contract—and after problems arise, are critical. If you have any questions or need legal advice on your contract dispute, please free to email me at firstname.lastname@example.org or call me at 303-792-5595 to discuss this matter further.
And remember, be careful out there!