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Town of Alma v. Azco Construction9/18/2000
iigel v. General Motors Corp., 190 Colo. 57, 64-65, 544 P.2d 983, 989 (1975). Although not reaching as far as the Seely court, we endorsed the principles underlying the economic loss rule when we declined to extend section 402A's strict liability doctrine to allow it to be used as a vehicle to recover commercial or business losses. See id. at 989.
Subsequent to the Seely decision, many jurisdictions adopted a form of the economic loss rule. The United States Supreme Court adopted a version of the rule in East River Steamship Corp. v. Transamerica Delaval, Inc., 476 U.S. 858 (1986). In East River, charter operators of oil supertankers sued the manufacturer of turbines used for ship propulsion after the turbines malfunctioned, seeking damages for the cost of repairing the turbines and for income lost while the ships were out of service. See id. at 861. The suit originally contained both contract and tort claims but the contract claims were subsequently dropped because of a statute of limitations defense, leaving only the tort claims. See id. The Court held that although admiralty law incorporated products liability principles, there was no cause of action in tort, under either negligence or strict liability, for damage caused when a product malfunctions and causes purely economic loss through damage to the product itself. See id. at 876. In reaching its holding, the Court cited Seely and discussed the factors weighing against tort liability:
When a product injures only itself the reasons for imposing a tort duty are weak and those for leaving the party to its contractual remedies are strong . . . . Losses like these can be insured [through warranties] . . . . The increased cost to the public that would result from holding a manufacturer liable in tort for injury to the product itself is not justified. Id. at 871-72. The Court continued by explaining how contract law is designed to account for the costs and risks of a product's nonperformance:
Contract law, and the law of warranty in particular, is well suited to commercial controversies of the sort involved in this case because the parties may set the terms of their own agreements. The manufacturer can restrict its liability, within limits, by disclaiming warranties or limiting remedies. In exchange, the purchaser pays less for the product. Since a commercial situation generally does not involve large disparities in bargaining power, we see no reason to intrude into the parties' allocation of the risk. Id. at 872-73.
As discussed in more detail below, this 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.
Our court of appeals first adopted the economic loss rule in Jardel Enterprises, Inc. v. Triconsultants, Inc., 770 P.2d 1301 (Colo. App. 1988). In Jardel, the court refused to permit a restaurant owner to bring a negligence claim against a subcontractor for lost profits resulting from the delayed opening of the restaurant when the subcontractor misread the building plans and constructed the building foundation in the wrong location. See id. at 1302. The court cited the economic loss rule as the basis for its holding:
As a general rule, no cause of action lies in tort when purely economic damage is caused by negligent breach of a contractual duty. This economic loss rule prevents recovery for negligence when the duty breached is a contractual duty and the harm incurred is the result of failure of the purpose of the contract. Id. at 1303.
A number of courts of appeals cases have applied the economic loss rule in varying contexts since the decision in Jardel. See, e.g., Tow
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