Monday, September 19, 2022

What is the Economic Loss Rule?

Here in Colorado - home base for Sanderson Law, P.C. - litigants in civil cases are apt to invoke something called The Economic Loss Rule.  

Adopted (and better explained) in Town of Alma v. AZCO Const., Inc., 10 P.3d 1256, 1264 (Colo. 2000), it precludes “a party suffering only economic loss from the breach" of a contract from pursuing "a tort claim [like negligence, interference with contract, most breaches of fiduciary duty, and the like] for such a breach absent an independent duty of care under tort law."  

The ELR is supposed to limit litigation (e.g., head off claims for the higher money damages possibly available for torts when the case more obviously arises from breach of contract between the same parties), and to encourage the parties to contract better (including risk allocation).  

In reality, like so many arguably well-intentioned rules and laws, the ELR's unintended consequences undercut its practicability.  It is confusing to parties, lawyers (especially those not based in Colorado) and even judges.  It leads to resources being spent litigating the rule, exceptions and application rather than the merits of the case.  It impedes settlement discussions with its uncertainty and unpredictability.  Appellate courts struggle with its scope.  The ELR's boundary remains unclear and risks contract law swallowing up tort law.

Tough to say how many other states have an economic loss rule or something like it, but it's not universal and maybe not even the majority.  If you have or are thinking about a case in Colorado, best to brush up on the rule, as you might be spending a lot of time and money arguing about it.

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