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The Economic Loss Rule in Colorado, Part 2 – An Example: Former TCHR, LLC v. First Hand Management LLC, et. al.

By Burg Simpson
September 18, 2012
4 min read

The recent Colorado Court of Appeals decision in Former TCHR, LLC v. First Hand Management LLC, et. al., 2012 COA 129, provides further clarity on this critical rule of Colorado business law and confirms the stark distinction between tort and contract. In TCHR, one party claimed the Economic Loss Rule should not apply where they were induced by fraudulent misrepresentation and concealment to agree to the contract in the first place. While the Court recognized that there are circumstances where fraud and concealment in the formation of a contract may be a valid basis to overcome the Economic Loss Rule and avoid the contract, the Colorado Court of Appeals found that here—where the duties to make the allegedly fraudulent disclosure were specifically made a part of the contract itself—it was not.

‘The economic loss 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 breach absent an independent duty of care under tort law.” Town of Alma v. AZCO Const., Inc., 10 P.3d 1256, 1264 (Colo.2000). The purposes of this rule are to maintain a distinction between tort and contract law, enforce parties’ expectancy interests so that they can reliably allocate risks and costs during their bargaining, and encourage parties to build any cost considerations into their contracts. BRW, Inc. v. Dufficy & Sons, Inc., P.3d 66, 72 (Colo.2004).

Our supreme court has identified three factors that aid in determining whether an allegedly violated tort duty arose independently of the parties’ contract: (1) whether the relief sought in tort is the same as the contractual relief; (2) whether there is a recognized common law duty of care in tort; and (3) whether the tort duty differs in any way from the contractual duty. Id. At 74; see also Makoto, 250 P.3d at 627 (noting that to show that an independent duty of care exists under tort law, two conditions must be satisfied: (1) the duty must arise from a source other than the relevant contract, and (2) that duty must not be a duty also imposed from the contract).

When a tort duty is memorialized in a contract, “it follows that the plaintiff has not shown any duty independent of the [contract] and the economic loss rule bars the tort claim and holds the parties to the [contract’s] terms.” BRW, 99 P.3d at 74. Moreover, a claim for fraudulent misrepresentation or concealment in connection with the performance of a contract does not necessarily arise independently of the duties set forth in the contract. See Harmon Contractors, Inc. v. Carter & Burgess, Inc., P.3d 282, 291 (Colo.App.2009). For example, claims for fraudulent misrepresentation and concealment may be barred if they arise from duties implicated by the contract and relate to the performance of that contract. See id, at 292-93.

Makes sense, right? In our capitalist economic system, the ability of persons in the marketplace to allocate risks and costs as they desire is critical to maximum efficiency. We need rules like this for our economy to operate and thrive. However, as always, the devil is in the details.

In Short

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 dteselle@burgsimpson.com or call me at 303-792-5595 to discuss this matter further.

And remember, be careful out there!

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