Colorado Court of Appeals Upholds Summary Judgment Barring Owner Tort Claims Against Service Contractor Pursuant To Economic Loss Rule

Engeman Enterprises, LLC, v. Tolin Mechanical Systems Company
2013 Colo. App. LEXIS 345 (Colo. App. Mar. 14, 2013)

Engeman operates a cold storage facility and Tolin designs, installs, maintains, and repairs cooling systems. In 2008, Engeman engaged Tolin for an emergency repair at Engeman’s facility. The parties entered into two agreements, both of which stated that Tolin would perform its work in a “prudent and workmanlike manner,” and which disclaimed Tolin’s liability beyond repairing issues caused by defective workmanship.

An employee of Tolin caused ammonia from the cooling system to flow backward into the tank, resulting in the tank overfilling and exploding, permeating the cold storage facility with ammonia and causing hundreds of thousands of dollars in cleanup and repairs costs and lost profits.

Engeman sued Tolin for negligence, vicarious liability, and negligent supervision, but not breach of contract. The lower court ruled that the economic loss rule barred Engeman’s claims because the defendant’s duty of care under the parties’ agreement was identical to the tort duty of care Engeman alleged Tolin had breached. Furthermore, the lower court ruled that Engeman’s allegation that Tolin had engaged in willful and wanton conduct did not affect the application of the economic loss rule because there is no independent tort cause of action for such conduct and Engeman had not alleged such conduct in the context of breach of contract.

Engeman argued on appeal that the economic loss rule did not bar its claims because: “(1) defendant owed it an independent duty of care to safely handle ammonia, (2) the damage that its facility sustained is physical harm to property and not ‘economic loss’, (3) defendant owed it an independent duty of care to supervise and train the employees handling ammonia, (4) the economic loss rule should not apply to service contracts, and (5) defendant’s allegedly willful and wanton tortious conduct precludes application of the economic loss rule.” The Court of Appeals upheld the lower court’s ruling.

With respect to the independent duty of care, the Court of Appeals addressed the three BRW factors, taken from a 2004 Colorado Supreme Court case: “(1) whether the relief sought in negligence is the same as the contractual relief; (2) whether there is a recognized common law duty of care in negligence; and (3) whether the negligence duty differs in any way from the contractual duty.” The Court of Appeals finds no independent duty, and further states that “Plaintiff’s reasoning here would render all contracts for the handling of hazardous substances susceptible to superseding tort duties, unless those contracts expressly required the highest degree of care. Such a result is incompatible with Colorado’s commercial jurisprudence, and would strip commercial service and procurement contracts of their predictability in the allocation of risk.”

The Court of Appeals also notes that the economic loss rule does not hinge on the nature of the damages, economic as opposed to physical. Instead, the primary inquiry is about independent duty. While Tolin cites a case in which the court ruled that the economic loss rule does not prevent a negligence action to recover for physical injury to property, the Court of Appeals states that subsequent Colorado Supreme Court decisions have abrogated that language.

The Court of Appeals considers negligent supervision to be a claim arising directly from Engeman’s agreement with Tolin and accordingly does not discern an independent duty justifying the application of the economic loss rule. The Court of Appeals also declines to adopt an approach the Wisconsin Supreme Court took, treating service contracts differently with respect to the economic loss rule.

Joshua A. Roper

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