Laurie Choi, Amanda E. McKinlay and Joe Layzell | Snell & Wilmer
In the recent decision of Veolia Water Tech., Inc. v. Antero Treatment LLC, 2024 COA 126 (Colo. App. 2024), the Colorado Court of Appeals addressed the “murky” application of the economic loss rule to the intentional tort of fraud. The Court separately affirmed the use of the benefit-of-the-bargain measure of damages approach to calculate market value. The Court rejected the argument that this measure of damages was actually a form of “lost profits” damages or “consequential damages” which were expressly waived under the applicable construction contract. This article addresses key takeaways of the decision for consideration by Colorado construction professionals.
Veolia involved a contract to design and construct a facility to treat wastewater. Veolia and Antero first agreed for Veolia to conduct preliminary testing and analysis of the proposed treatment system before the parties were to enter into a final Design/Build Agreement (DBA). There were two key requirements in the DBA. First, Veolia guaranteed its design would separate a completely solid waste byproduct from the wastewater that would be stable and nonhazardous. Second, Veolia guaranteed the process would only consume a certain amount of power. Neither of those guarantees were met, and Antero alleged that Veolia knew that it would not be able to meet these requirements prior to the time of contracting. There were also mechanical failures at the facility and schedule delays. Antero sued Veolia for breach of contract and fraud. As relevant here, the DBA contained a waiver of consequential damages and a limitation of liability provision, but included an exception to the limitation of liability for liability arising from “gross negligence, fraud or willful misconduct.”
Economic Loss Rule
Under Colorado’s economic loss rule, “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.” Town of Alma v. AZCO Construction, Inc., 10 P.3d 1256, 1264 (Colo. 2000). In addressing whether the economic loss rule applied, the Veolia Court posed two questions: (i) were the contracts at issue an “interrelated network” of contracts so that they acted as a “single contract”; and (ii) whether the legal duties associated with fraud in the inducement were independent of the contractual duties and, therefore, not barred by the economic loss rule.
The Court answered the first question in the affirmative, finding that while Veolia’s initial proposal did not require the parties to engage in any further business or contracts, it did contain representations relevant to the DBA which were subsequently incorporated in the DBA. However, the Court’s conclusion did not necessarily mean the economic loss rule barred Antero’s fraud claims. Next, the Court turned to its second question, which it answered by way of a three-part analysis: (i) whether the relief sought via the breach of contract and fraud claims were the same; (ii) whether there was a recognized common law duty of care to avoid fraudulently concealing or misrepresenting material facts; and (iii) whether the duty in tort was independent of the contractual duties, including the implied duty of good faith and fair dealing. The Court found that Veolia had some degree of discretion in how it designed the facility (noting the limits of its discretion were evident from the fact that it had to seek a change order for certain processes). The Court found that this discretion, in turn, gave rise to an implied duty of good faith and fair dealing in Veolia’s exercise of its discretion. Conversely, the challenged misrepresentations giving rise to Antero’s fraud claim concerned the waste salt and power consumption guarantees to which Veolia had no discretion to change.
Under these circumstances, the Court held that the economic loss rule did not apply to bar Veolia’s fraud claims because (1) the fraud concerned aspects of Veolia’s performance over which Veolia had no discretion, thus undermining the implied duty of fair dealing’s application; (2) Antero was not using tort claims to pursue damages explicitly prohibited by the DBA; and (3) the DBA, entered into by two sophisticated commercial parties, explicitly permitted additional damages in the event of fraud.
Benefit-of-the-Bargain Damages for Design and Construction Defects
The Court held that “it is within the district court’s discretion to determine which measure of damages is appropriate []”; finding no issue with the selection of market value (opposed to cost of repair) as the appropriate measure of damages because Antero provided sufficient evidence that repairing the facility would constitute economic waste. The Court further affirmed the use of the benefit-of-the-bargain measure of damages approach to calculate market value, rejecting the argument that this method was actually a form of “lost profits” damages or “consequential damages” which were barred under the applicable construction contract, noting that income is but one factor to determine fair market value.
The Veolia decision may affect damages consideration for Colorado construction cases in two ways. First, a trial court may exercise discretion in determining which measure of damages applies for claims for defective design and construction. Second, even if a construction agreement prohibits recovery of lost profits, parties might nevertheless recover damages through the benefit-of-the-bargain measure of damages approach to calculate market value, which can take into consideration loss of anticipated profits.
The facts of the Veolia matter appeared to be critical to the Court’s decision, so further analysis and review is necessary before broadly applying the holding to all situations involving allegations of defective design and construction.
When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.