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By Laura Kent
Thelen LLP
The City and County of Denver hired BRW to design and inspect the construction of two steel bridges. That contract set out BRW's duty of care. BRW hired Professional Service Industries, Inc. (PSI) to perform the inspections. Denver then contracted with a general contractor to build the projects. The general contractor subcontracted with Anko Metal Services for the fabrication, painting and shipment of structural steel. Anko subcontracted with Dufficy for the fabrication, painting, and shipments of portions of the structural steel. The general contractor and all of its subcontractors and suppliers were obligated to follow BRW's plans and specifications.
Dufficy sued BRW and PSI for negligence and negligent misrepresentation and sought economic damages. Dufficy alleged that BRW negligently specified a coating system for the steel that was inappropriate because of Denver's high altitude and dry climate. As a result, Dufficy alleged, the coatings were slow to cure and cured improperly, causing delays, re-work and lost productivity. Dufficy alleged that PSI was negligent and tardy in performing its inspection duties and engaged in negligent misrepresentation by failing to report properly on its inspections.
Dufficy also pursued flow-up contractual claims against Denver as provided in the general contract. Denver rejected the claims, and Dufficy and the general contractor contested the denial. The contract claims ultimately were settled.
The trial court dismissed all of Dufficy's tort claims against BRW and PSI on grounds that the economic loss rule barred them. The economic loss rule prohibits parties from suing in tort when their injuries arise from breach of contractual duties. Dufficy appealed, and the Court of Appeals reversed, holding that the economic loss rule did not bar the negligence claims. The Court of Appeals concluded that licensed engineers and inspectors owe "an independent duty of care under tort law to the contractors and subcontractors." The Colorado Supreme Court reversed the Court of Appeals. BRW, Inc. v. Dufficy & Sons, Inc., 99 P.3d 66 (Colo. 2004).
The Economic Loss Rule Applies
The Supreme Court held that the economic loss rule applies to interrelated contracts. Dufficy had argued that the economic loss rule could be applied only to contracts in which the parties bargain directly with each other. Here, Dufficy did not "bargain directly with PSI and BRW over the risk of harm which would result from defective specifications and negligent project administration."
The Supreme Court disagreed and applied the economic loss rule differently, holding 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." It wrote:
Our economic loss rule requires the court to focus on the contractual relationship between the parties, rather than their professional status, in determining the existence of an independent duty of care. The interrelated contracts in this case contained BRW's and PSI's duty of care. Dufficy's tort claims are based on duties that are imposed by contract and therefore, contract law provides the remedies. Accordingly, the economic loss rule bars Dufficy's tort claims.
In rejecting Dufficy's position, the Supreme Court wrote that the economic loss rule exists for three reasons, none of which depend upon the breaching party and injured party being parties to the same contract. First, the rule exists to "maintain a distinction between contract and tort law." Second, the economic loss rule allows the parties to allocate risk under the contract, so the parties can be confident that they will be responsible for economic damages in contract law only and not in tort. Finally, the rule "encourages the parties to build cost considerations into the contract because they will not be able to recover in tort."
Regarding larger construction projects that often involve many parties and a network of contracts, the Supreme Court wrote that the economic loss rule "encourages the subcontractor to protect itself from risks, holds the parties to the terms of their bargain, enforces their expectancy interests, and maintains the boundary between contract and tort law." Therefore, it concluded, the economic loss rule serves its purposes, and is applicable even when the contracts at issue are a group of interrelated contracts.
Here, Dufficy could have protected itself when it contracted with Anko, and it also had a separate contract remedy against the City and County of Denver because the city "impliedly warranted the adequacy of the plans and specifications."
Negligence Claims Against BRW and PSI
The Supreme Court held that the Court of Appeals erred when it determined that engineers and inspectors owe a duty of care to contractors and subcontractors in all situations. The Court of Appeals held that such duties existed in tort but did not decide whether the duties were covered by the contractual relationships among the parties. Because the contracts did address and contain the duties that allegedly were breached by BRW and PSI, it would violate the economic loss rule to find that the same duties also were breached in tort.
Negligent Misrepresentation
The Supreme Court held that the negligent misrepresentation claim also arose from a contractual duty - to properly inspect and report on painting. It held that tort remedies are available only for misrepresentations made before the execution of a contract. After the contract is executed, the parties have already "bargained for the allocation of risks, duties and remedies," and the remedies are governed by the contract.
Accordingly, the Supreme Court concluded:
The interrelated contracts in this case contained BRW's and PSI's duty of care. Dufficy's tort claims are based on duties that are imposed by contract and therefore, contract law provides the remedies. Accordingly, the economic loss rule bars Dufficy's tort claims.
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For more information about the issues covered in this report, please contact Laura Kent in our San Francisco office at 415-369-7756 or at lkent@thelen.com or contact your Thelen attorney. For more information about Thelen's Construction and Government Contracts Department, click here.
©2005 Thelen LLP
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