Colorado Supreme Court rules there is no exception to the economic loss rule for willful and wanton conduct

On April 21, the Colorado Supreme Court held that there is no exception to the economic loss rule (“ELR”) for willful and wanton conduct. In Mid-Century Ins. Co., v HIVE Constr., Inc., the court drew an important distinction between intentional conduct (which is an exception the to the rule) and willful and wanton conduct.

Background

Defendant HIVE served as the general contractor for the construction of Masterpiece Kitchen, a restaurant. In the contract governing the restaurant’s construction, HIVE warranted, among other things, that “the Work will conform to the requirements of the Contract Documents.” The contract further specified, “Work not conforming to these requirements, including substitutions not properly approved and authorized, may be considered defective.”

The architectural plans and design for the restaurant, which were part of the contract documents, called for the construction of a wall separating the kitchen and dining area. The contract specified that two layers of drywall, which would increase the wall’s fire resistance, were to be installed on the kitchen side of the wall. When HIVE constructed the wall, however, it installed one layer of drywall and one layer of plywood on the kitchen side. HIVE did not submit a change order for the deviation form the plans. The substituted plywood was combustible and a fire eventually started within the wall, causing damage to the restaurant that forced the restaurant to close.

Mid-Century made payments to and on behalf of its insured, Masterpiece Kitchen, for damages caused by the fire. Mid-Century, as Masterpiece Kitchen’s subrogee, then sued HIVE and the project’s architect, asserting single claims for negligence against each of them.

The Economic Loss Rule

Under the economic loss rule, “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.” The economic loss rule serves several purposes, including maintaining a distinction between contract and tort law, holding parties to the terms of their bargain, and encouraging parties to allocate risks and costs during bargaining without fear of unanticipated future liability that would negate the parties’ efforts to build cost considerations into their contract. By promoting these purposes, the rule “serves to ensure predictability in commercial transactions.”

In the construction industry, the allocation of risk through contracting is of particular importance because architects, contractors, and other construction industry professionals determine the fees to be charged based on their expected liability exposure as bargained and provided for in their contracts.

Whether the economic loss rule applies depends not on the nature of the damages—physical or economic—but rather on the source of the duty allegedly breached—the contract or some other source. Thus, a breach of duty arising from a contract must be redressed under the parties’ contract, and a tort action will not lie. Conversely, a breach of duty arising independently of the parties’ contractual duties may support a tort action.

In determining the source of the duty at issue, courts consider whether (1) the relief sought in negligence is the same as the contractual relief; (2) there exists a recognized common law duty of care in negligence; and (3) the negligence duty and contractual duty differ in any way. If the parties have memorialized the applicable duty of care in their contract (i.e., if the duty is contained within or imposed under the contract), then no duty exists independent of the contract, and the economic loss rule will apply to bar a tort claim.

The court explained that an intentional tort claim is distinct from a willful and wanton tort claim because “intentional conduct requires that the actor intend the result of the conduct or know that the conduct is likely to bring about that result.” “Willful and wanton conduct, in contrast, refers to acts or omissions committed purposely but without regard to the consequences of those acts or omissions. Thus, as we said long ago, “[W]illful and wanton conduct is that which approaches but does not include an intentional tort nor can it be classified as such.”

Thus, the court concluded, willful and wanton conduct is not excepted from the economic loss rule.

Property Damage vs Pure Economic Loss

Notably, the Colorado Supreme Court left unanswered the question of whether the economic loss rule applies where the damage is to property, rather than pure economic loss, stating that because the argument was raised for the first time on appeal, it was not properly before the court. Of course, this leaves another facet of the ELR to be kicked around in the courts over the coming years.

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