On January 14, 2021, a division of the Colorado Court of Appeals released its opinion in McWhinney Centerra v. Paog & McEwen, 2021COA2, which extends the Colorado Supreme Court's opinion in Bermel v. BlueRadios, Inc., 2019 CO 31. Bermel put restraints on the tort-killing judge-made doctrine known as the economic loss rule by restricting its power to bar tort claims that were created by state statute.
The Court of Appeals, however, extended Bermel to include many common law intentional tort claims as well. The eye-popping conclusion: “in most instances the economic loss rule will not bar common law intentional tort claims.”
This is a ground shaking change to Colorado's Economic Loss Rule and creates a split with other divisions of the Court of Appeals. This is controversial stuff likely to be heavily litigated in the future. For now, it is welcome news for plaintiffs.
What is the Economic Loss Rule?
The Colorado Supreme Court adopted the economic loss rule in Town of Alma v. AZCO Constr., Inc., 10 P.3d 1256 (Colo. 2000). The policy reasons behind the rule were to “maintain the distinction between contract and tort law.” Alma, 10 P.3d at 1262. As stated in Alma, “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.” Id. at 1264. In 2000, at the time of the Alma decision, the Court was concerned about defendants being subject to both contract and tort liability for the same economic injury. The Court reasoned that “limiting the availability of tort remedies for economic losses when a contract exists between the parties holds parties to the terms of their bargain and serves to encourage parties to confidently allocate risks and costs without fear that unanticipated liability may arise in the future”.
The economic loss rule has long been a bane to Colorado plaintiffs trying to recover tort damages where the claimed conduct also constituted a breach of contract.
Back to McWhinney Centerra v. Paog & McEwen
The case arose from a land development deal that went sour during the real estate collapse of 2008.
The plaintiff alleged, among other things, the intentional torts of fraudulent concealment, intentional interference with contractual obligations, and intentional inducement of breach of contract. The district court dismissed the intentional tort claims because of the economic loss rule. However, when the Colorado Supreme Court rolled back the reach of the economic loss rule in Bermel v. BlueRadios, Inc., the plaintiff in McWhinney asked the trial court to reconsider its earlier decision dismissing the tort claims. The trial court denied the motion.
After a bench trial, the plaintiff won a substantial breach of contract claim which was appealed by the defendants. Plaintiff cross-appealed contending that the district court erred in dismissing the plaintiff's intentional tort claims by way of the economic loss rule.
Although the parties had a choice of law provision in their contract applying Delaware law, the appellate panel concluded the choice of law provision only applies to the contract claim and not the tort claims. By extending Bermel to non-statutory tort claims, the Court of Appeals reasoned “[w]hile the supreme court's decision in Bermel was limited to statutory tort claims, we conclude that court's opinion is instructive on the economic loss rule's applicability to common law intentional tort claims. Notably, the Bermel court observed that although our cases have emphasized the need to prevent tort law from swallowing the law of contracts, we have been equally clear that we must also be cautious of the corollary potential for contract law to swallow tort law.” Further, the Bermel court recognized that “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.”
Although the Court of Appeals reinstated the tort claims (of fraudulent concealment, intentional interference with contractual obligations, and intentional inducement of breach of contract), it did not reinstate the civil conspiracy claim. The panel concluded that the defendants had no independent duty in tort law not to conspire to breach the contract with another signatory to the agreement. That is, the contractual agreement already assumed a duty that the parties would act in good faith and would not conspire to breach the agreement. Therefore, under the economic loss rule, such a claim would be barred.
The McWhinney decision is contrary to a string of earlier decisions by the court of appeals that concluded that the economic loss rule barred common law intentional tort claims. Likely, the split will eventually need to be settled, clarified and revisited by the Colorado Supreme Court.
The appellate opinion also notes that when the supreme court reviewed its own case law on the economic loss rule, the state high court had only ever applied the economic loss rule to bar common law tort claims of negligence and negligent misrepresentation. These categories stem from duties created by a contract between parties and therefore the economic loss rule will often apply to bar such claims.