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(A revised version of this article appears in The
Construction Lawyer, Volume 21, No. 1, January 2001,
published by the American Bar Association's Forum on the
Construction Industry.)
By John W. Ralls
Howrey LLP
The
Town of Alma, Colorado, entered into a contract with Azco
Construction to build improvements to the town's water distribution
system. Azco installed a number of flared fittings connecting
new water mains to existing service lines. After the work
was completed, some of these connections began to leak.
Azco agreed to repair only the leaks that occurred during
the one-year warranty period. The town sued the contractor
to recover the cost of repairing and replacing the service
line connections, asserting causes of action for breach
of contract and negligence.
The
trial court dismissed the negligence claim on the pleadings,
based on the economic loss rule. The jury returned a verdict
for the contractor on the breach of contract claim. Both
the Colorado Court of Appeal and the Colorado Supreme Court
affirmed. Town of Alma v. Azco Construction, Inc.,
2000 WL 1336285, 2000 Colo. Lexis 1080 (Colo. 2000).
The
issue presented to the Colorado Supreme Court was whether
the plaintiffs' negligence claim was barred by the economic
loss rule. After reviewing the development of the economic
loss rule, the court stated its holding: "[W]e now
expressly adopt the economic loss rule. We hold 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 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."
The
court concluded that the town failed to demonstrate that
the contractor breached any duty independent of its contractual
obligations. The contract contained guaranty and warranty
provisions imposing a contractual duty on the contractor
to install a system free from defects and to repair defects
that manifested themselves in the first year after final
billing. The court also found that the damages were economic
damages for the cost of repair and replacement of property.
In order to recover such damages, there must be an independent
duty of care (that is, independent of the contract). "As
there is no independent duty to support [the town's] negligence
claim, the economic loss rule bars this claim."
The
court distinguished prior cases in which the contracts did
not address the defendant's duty of care or there was a
duty of care independent of contract. For instance, the
court distinguished Lembke Plumbing and Heating v. Hayutin,
148 Colo. 334, 366 P.2d 673 (1961), in which it allowed
a homeowner to pursue a negligence claim against a plumbing
contractor for negligently installing pipes resulting in
damage to the house. In Lembke, the contract imposed
no duty upon the plumbing contractor to exercise due care
and caution. "Because the contract did not address
the defendant's duty of care, we found that the independent
common law duty was not limited."
The
court also reaffirmed its holding in Cosmopolitan Homes,
Inc. v. Weller, 663 P.2d 1041 (Colo. 1983), which involved
a claim by a subsequent purchaser of a home against the
developer. "Relying heavily on policy concerns about
protecting homebuyers, we held that the plaintiffs could
maintain a negligence action for latent defects in the home….
We allowed the negligence claim for latent defects in the
home because we determined that a builder has an independent
duty to act without negligence in the construction of a
home."
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For more information about the issues covered in this report, please contact John Ralls in our San Francisco office at 415-848-3362 or at rallsj@howrey.com or contact your Howrey attorney. For more information about Howrey's Construction Practice Group, click here.
©2001 Howrey LLP
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