August 24, 2019

Colorado Court of Appeals: Contractual Provisions Barred Tort Claims Under Economic Loss Rule

The Colorado Court of Appeals issued its opinion in Engemen Enterprises, LLC v. Tolin Mechanical Systems Co. on Thursday, March 14, 2013.

Economic Loss Rule—Summary Judgment.

Plaintiff Engeman Enterprises, LLC appealed the trial court’s entry of summary judgment in favor of defendant Tolin Mechanical Systems Company. The judgment was affirmed.

Plaintiff operates a cold storage facility that is cooled by an ammonia-charged cooling system. Defendant designs, installs, maintains, and repairs cooling systems. On June 27, 2008, high oil temperatures compromised plaintiff’s cooling system. Defendant inspected the system and recommended adding ammonia to lower the temperature. While defendant began this work,plaintiff’s representatives signed a Service Report and a Refrigeration Report, which stated defendant would perform its work in a “prudent and workmanlike manner” and disclaimed defendant’s liability beyond repairing issues caused by defective workmanship.

Instead of transferring ammonia from a tank into the cooling system, defendant’s employee mistakenly caused ammonia from the cooling system to flow out into the tank. The tank overfilled and exploded, permeating the facility with ammonia and resulting in cleanup costs, repair costs, and lost profits totaling hundreds of thousands of dollars.

Plaintiff alleged claims for negligence, vicarious liability, and negligent supervision, but not breach of contract. Defendant moved for summary judgment, and the district court concluded that the parties were bound by the contracts and the duty of care agreed to therein. Consequently, the court entered summary judgment on plaintiff’s tort claims because they were barred by the economic loss rule. In addition, the trial court found that the willful and wanton conduct of defendant did not affect the application of the economic loss rule, because plaintiff did not assert a claim for willful and wanton breach of contract. Summary judgment was entered in favor of defendant on all of plaintiff’s claims.

On appeal, plaintiff argued its tort claims were not barred by the economic loss rule because: (1) defendant owed it an independent duty of care to safely handle ammonia; (2) the damage that its facility sustained was physical harm to property and not “economic loss”; (3) defendant owed it an independent duty of care to supervise and train the employees handling ammonia; (4) the economic loss rule should not apply to service contracts; and (5) defendant’s allegedly willful and wanton tortuous conduct precludes application of the economic loss rule. The Court of Appeals rejected all these arguments.

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 Court stated that the inquiry is to be focused on the “duty” issue.

The Court first found that contrary to plaintiff’s argument, defendant did not owe plaintiff an independent duty of care beyond its contractual duty to safely handle the ammonia. The Court came to this conclusion after analyzing three factors, (1) whether the relief sought in negligence is the same as the contractual relief; (2) whether there is a recognized common law duty of care in negligence; and (3) whether the negligence duty differs in any way from the contractual duty.

The Court found that the damages that could have been recovered under a tort claim of negligence and a breach of contract claim were identical. The limitation of liability clause did not alter the Court’s analysis because it could apply equally to contract and tort actions. If plaintiff had alleged willful and wanton breach of contract, it might have defeated the limitation of liability clause. Most important in finding the application of the economic loss rule appropriate was the fact of the limitation of liability clause was contractually agreed to by the parties. This demonstrated that the parties could have had a remedy in contract for such damages if they had not chosen to limit it.

Thus, the first factor weighed in favor of finding no independent duty of care. The Court found that because there was a duty of reasonable care in handling a hazardous substance, the second factor weighed in favor of finding an independent duty of care. The Court found the third factor weighed against finding an independent duty of care, because the common law duty of care was the same as the contractual duty and, contrary to plaintiff’s argument, there was no higher tort duty imposed on the handling of a hazardous substance. In essence, the highest standard of care in handling ammonia is precisely the type of care a reasonable person would exercise. In sum, the Court found that defendant owed plaintiff a common law duty of care in negligence, that the duty did not differ from the duty defendant owed plaintiff under the contract, and a breach of that duty would allow the same recovery under both tort and contract law.

Plaintiff argued that the economic loss rule was inapplicable because the damage was to plaintiff’s property. Because the Court had concluded there was no independent duty here, it made no difference whether the damages sought were for property damage.

Plaintiff contended that its claim for negligent supervision was not barred by the economic loss rule because defendant’s common law duty to properly supervise its employees is separate from its contractual obligations to plaintiff. Again, the Court found no difference between the duty of reasonable care defendant owed plaintiff under the contract and defendant’s common law duty of reasonable care to prevent an unreasonable risk of harm to plaintiff from its employees’ conduct.

Plaintiff requested that the Court abolish the economic loss rule as it pertains to service contracts. The Court refused to depart from binding Colorado precedent to the contrary.

Finally, the Court rejected plaintiff’s argument that the economic loss rule should not bar recovery in tort when a defendant commits willful and wanton conduct. Because proof of such conduct is sufficient to defeat a limitation-of-liability clause in both contract and tort, the Court saw no reason that it should prevent application of the economic loss rule. The judgment was affirmed.

Summary and full case available here.