Economic Loss Rule in Construction Defect Actions

The Economic Loss Rule is a judicially created doctrine representing courts’ efforts to maintain clear boundaries between tort and contract law. The purpose of this rule is to prevent parties from expanding the scope of their bargained-for remedies under a contract. Essentially, the courts look to limit tort actions when a contract addresses reasonably foreseeable damages regardless of how the conduct is characterized. The rule is designed to honor the age-old notion that parties are encouraged to carefully allocate risks, rights and remedies when negotiating contracts.

The Colorado Supreme Court adopted the economic loss rule in two decisions—Town of Alma v. Azco Const., Inc. and Grynberg v. Agri Tech, Inc. The court in Town of Alma explained that the rule “is intended to maintain the boundary between contract law and tort law.” “[T]his principle that parties must be able to confidently allocate their risks and costs in a bargaining situation underlies the necessity for the economic loss rule.” The court later explained that the economic loss rule comes down to one fundamental question: can the plaintiff show a duty independent of the contract that supports its tort claim?

Therefore, if you can show that there is an independent duty outside of the contract, a homeowner can sue not only in contract, but tort as well.

Do Construction Professionals Have an Independent Duty of Care to Homeowners Outside of Their Contract?

The statutes and case law concerning defective residential construction arise from a construction professional’s superior knowledge and non-delegable tort duties of reasonable care when contributing to the construction of what is typically both a new and secondary homeowner’s most significant investment and asset, their home.

In Colorado, “the economic loss rule has no application” to “claim[s] . . . based on a recognized independent duty of care.” It is well-settled Colorado law that “[t]he economic loss rule does not bar negligence claims brought by homeowners against builders for latent construction defects, because the ‘builder has an independent duty to act without negligence in the construction of a home.’”

Other construction professionals owe the same independent tort duties as developers and general contractors. The existence and scope of a tort duty is a question of law to be determined by the court. ‘The determination that a duty does or does not exist is an expression of the sum total of those considerations of policy which lead the law to say that the plaintiff is [or is not] entitled to protection.’” 

Colorado courts have identified several policy reasons supporting construction professionals’ independent tort duties “to protect homeowners,” including the following:

• To prevent “overreaching” by construction professionals, who are “comparatively more knowledgeable” and “in a far better position to determine structural conditions” than most buyers;
• Ordinary homebuyers are not qualified to determine when or where a defect exists;
• Ordinary homebuyers rarely have access to make any inspection of the underlying structural work;
• The magnitude of investment made when purchasing a home;
• The foreseeability that a construction professional’s work on residential property “is, ultimately, for the benefit of homeowners and that harm to homeowners from negligent construction is foreseeable”; and
• “An independent duty discourages misconduct and provides an incentive for avoiding preventable harm.”

To better protect Colorado homebuyers making one of the most important financial decisions in their lives, Courts have sought to add protections to ensure full recovery not limited by any contract. By creating an independent duty in construction defect actions, Colorado courts ensure that the economic loss rule does not hinder a homebuyer’s action related to construction defect.

Therefore, in any construction defect action, homebuyers are not limited to just bringing a breach of contract claim but can also assert claims, such as negligence, that are based on tort law.

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1 Town of Alma, 10 P.3d 1256, 1259 (Colo. 2000).

2 Id. at 1261.

3  See BRW, Inc. v. Dufficy & Sons, Inc., 99 P.3d 66, 72 (Colo. 2004).

4 A.C. Excavating v. Yacht Club II Homeowners Ass’n, 114 P.3d 862, 865 (Colo. 2005); accord Town of Alma v. AZCO Constr., Inc., 10 P.3d 1256, 1263 (Colo. 2000).

5  Gattis v. McNutt (In re Estate of Gattis), 2013 COA 145, ¶ 14 (emphasis added) (quoting Town of Alma, 10 P.3d at 1265-66); Cosmopolitan Homes, Inc. v. Weller, 663 P.2d 1041, 1045 (Colo. 1983) (accord).

6  See, e.g., Cosmopolitan Homes, 663 P.2d at 1042 (defining the defendant contractors, subcontractors, and engineers collectively as “the builders,” and applying independent tort duties to each, including engineering firm Builders Research and Engineering Co.); A.C. Excavating, 114 P.3d at 865 (holding “subcontractors owe homeowners a duty of care, independent of any contractual obligations, to act without negligence in the construction of homes”).

7  A.C. Excavating, 114 P.3d at 866 (quotations and citations omitted; emphasis added).

8  Gattis, 2013 COA 145, ¶ 15 (citing Cosmopolitan Homes, 663 P.2d at 1045; Yacht Club II

Homeowners Ass’n v. A.C. Excavating, 94 P.3d 1177, 1181 (Colo. App. 2003), aff’d, A.C.

Excavating, 114 P.3d 862).