10 P.3d at 1262. The court noted, as an example, that a party to a contract might properly agree to accept the risk that a product would not meet his expectations in exchange for a lower price. Id. Thus, the ELR "serves to ensure predictability in commercial transactions." Id.

This limitation is significant because tort actions have advantages over breach of contract actions. Tort remedies are broader than breach of contract remedies. Damages such as mental anguish and inconvenience can only be recovered in breach of contract actions if the breach is willful and wanton. Decker v. Browning Industries of Colorado, Inc., 931 P.2d 436 (Colo. 1997). Punitive damages are allowed in tort actions, but not breach of contract actions. Colorado Interstate Gas v. Chemco, 833 P.2d 786 (Colo.App. 1991). Additionally, in some situations, statute of limitations issues may preclude breach of contract actions, while tort actions are still available. See, e.g., East River Steam Ship Corp. v. Transamerica Delaval, Inc., 476 U.S. 858, 861 (1986).

The Economic Loss Rule Under Azco

Azco states the ELR as follows:

[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. Economic loss is defined generally as damages other than physical harm to persons or property.

Id. at 1264. To determine whether there is an "independent duty," Azco instructs us to "focus on the source of the duty alleged to have been violated."⁽³⁾ Id. at 1263. The court stated:

A breach of a duty which arises under the provisions of a contract between the parties must be redressed under contract, and a tort action will not lie. A breach of a duty arising independently of any contract duties between the parties, however, may support a tort action.

Id. at 1262 (quoting Tommy L. Griffin Plumbing & Heating Co. v. Jordan, Jones & Goulding, Inc., 463 S.E.2d 85, 88 [S.C. 1995]; emphasis added by the Colorado Supreme Court). Where there is a duty independent of any contractual relationship, the ELR will not prevent recovery on a tort theory. Id.

Torts Which Are Designed to Remedy Economic Loss

Fraud and professional negligence are examples of torts that impose duties independent of any contractual relationship. These torts are "expressly designed to remedy pure economic loss." Id. In Tommy L. Griffin Plumbing and Heating Co. v. Jordan, Jones & Goulding, Inc., 463 S.E.2d 85, 89 (S.C. 1995), the South Carolina Supreme Court conducted an extensive analysis of the ELR and concluded that a claim against an engineer was not barred by the ELR because the engineer's duty to act as a reasonably prudent professional was a duty independent of his contract. See also, Mattox v. O'Brein, P.C., 990 P.2d 78, 83 (Colo. 1999) (attorney-client relationship gives rise to a duty of care independent of contractual duties); Greeneberg v. Perkins, 845 P.2d 530, 534 (Colo. 1993)(physician-patient relationship creates an independent duty of care); Farmer's Group, Inc. v. Trimble, 691 P.2d 1138, 1141-42 (Colo. 1984)(independent duty of care arises from insurer-insured relationship). Colorado Courts have also held that fraud and negligent misrepresentation arise independent of contractual duties. See, Brody v. Bock, 897 P.2d 769, 776 (Colo. 1995)(common law fraud); Keller v. A.O. Smith Harvestor Products, Inc., 819 P.2d 69, 73 (Colo. 1991)(negligent misrepresentation); see generally, Azco, at 1263.

Duty Imposed by Law vs. Duty Imposed By Contract

Where the terms of the contract impose a duty of care, there is no duty of care independent of the contract and the ELR bars negligence claims. Such was the case in Azco. The defendant contractor had agreed to build a waste water distribution system for the plaintiff town. The contract stated that the work would be "free from all defects due to faulty materials or workmanship" and would "fully meet all requirements of the contract as to the quality of workmanship and materials." Azco, at 1258. The court held that this language imposed a duty to use due care. Id. at 1264. Since this duty arose from the contract, a breach of the duty would have to be remedied by a breach of contract action. Thus, there was no duty independent of the contract and the ELR applied to bar tort claims. Id.

An independent duty exists where the terms of the contract do not impose a duty of care and, in such cases, negligence claims may be asserted. The Azco court distinguished several earlier cases on this basis. Azco, at 1265-66 (discussing Lembke Plumbing & Heating v. Hayutin, 366 P.2d 673 (Colo. 1961); Metropolitan Gas Repair Service, Inc. v. Kutlik, 621 P.2d 313 (Colo. 1981); and Cosmopolitan Homes, Inc. v. Weller, 663 P.2d 1041 (Colo. 1983)). Unlike the parties in Azco, these parties had not bargained away the normal duty of care imposed by the law. Because the contracts did not provide a duty of care, the duty arose from the law. Thus, the duty was independent of the contract and the ELR did not bar recovery in tort. Azco, at 1265-66.

Grynberg v. Agritech, 10 P.3d 1267 (Colo. 2000), Azco's companion case, indicates that the ELR does not bar tort claims where the defendant performs services different from those called for in the contract. In Grynberg, the defendant contracted with the plaintiff to design and administer a cattle feed system. When the health of the cattle deteriorated, the plaintiff sued for breach of contract and negligence. Finding that the contract specifically required the defendant to "care for the cattle according to the customary standards of the cattle industry," the court held that the duty of care arose from the contract, not tort law. Id. at 1270. Therefore, the ELR prohibited the plaintiff from recovering on tort theories.

Grynberg distinguished Cooley v. Big Horn Harestore Systems, Inc., 813 P.2d 736 (Colo. 1991). There, the defendant had contracted with the plaintiff to build a grain storage facility. The contract explicitly required the defendant to provide a grain storage system that was free from defects. After the system was installed, the health of the plaintiff's cattle deteriorated. When the plaintiff confronted the defendant about this, the defendant provided advice about the system and advice concerning various nutritional programs. The plaintiff alleged that the defendant's advice on the latter subject was negligent and harmful to the cattle. The Grynberg court opined that the plaintiff's negligence claim was proper, because nothing in the contract required the defendant to provide general advice on nutritional programs. Id. The defendant had a duty to use care in providing such advice that was separate from the contract. Since the duty was independent of the contract, the ELR did not bar the plaintiff's tort action. Id.

Conclusion

Lawyers drafting contracts for clients who are to receive services must be aware that by including language in the contract that imposes a duty of care, they are limiting their client's damages to breach of contract remedies. Conversely, lawyers representing parties that will be performing services may want to include such language to avoid tort liability. The salient point is that lawyers who are aware of this issue can counsel their clients to demand concessions if they are going to subject themselves to tort liability or forego tort remedies as the case may be.

NOTES:

1. The Colorado Court of Appeals had addressed the ELR in a number of situations, including: Terrones v. Tapia, 967 P.2d 216, 220 (Colo. App. 1998) (holding that the rule bars negligence claim for lost profits as a result of restaurant owner's inability to use drive-through window); Chellsen v. Pena, 857 P.2d 472, 477 (Colo. App. 1992) (citing economic loss rule to bar action for negligent termination of employment); Scott Co. of California v. MK-Ferguson Co., 832 P.2d 1000, 1005 (Colo. App. 1991) (holding that the rule bars subcontractor's negligence claim because no independent duty was breached); Centennial Square, Ltd. v. Resolution Trust Co., 815 P.2d 1002, 1004 (Colo. App. 1991)(upholding dismissal of borrowers' negligence claim against lender because no independent duty was breached); Consolidated Hardwoods, Inc. v. Alexander Concrete Constr., Inc., 811 P.2d 440, 443 (Colo. App. 1991)(allowing homeowner's negligence claim against subcontractor because independent duty was breached). Back to text

2. As opposed to causing injury to persons or property, for which strict liability in tort is appropriate.Back to text

3. The court stated that the term "economic loss rule" is misleading and suggested that "independent duty rule" would be more appropriate.Back to text

This Article is published for general information, not to provide specific legal advice. The application of any matter discussed in this article to anyone's particular situation requires knowledge and analysis of the specific facts involved.

Copyright © 2001, Fairfield and Woods, P.C.,
ALL RIGHTS RESERVED.

Comments or inquiries may be directed to:
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