Town of Alma v. Azco Const., Inc.

• Decision Date: 18 September 2000
• Docket Number: No. 99SC424.,99SC424.
• Parties: TOWN OF ALMA, Colorado, a Colorado municipal corporation; James J. Shanks, Thomas J. Johnson, Todd Mcmanus, Thomas Sageous Greising, Donald Davis, and Taylor Roberts, Petitioners, v. AZCO CONSTRUCTION, INC., a Colorado corporation, and Employers Mutual Casualty Company, an Iowa corporation, Respondents.
• Court: Colorado Supreme Court

10 P.3d 1256

TOWN OF ALMA, Colorado, a Colorado municipal corporation; James J. Shanks, Thomas J. Johnson, Todd Mcmanus, Thomas Sageous Greising, Donald Davis, and Taylor Roberts, Petitioners, v. AZCO CONSTRUCTION, INC., a Colorado corporation, and Employers Mutual Casualty Company, an Iowa corporation, Respondents.

No. 99SC424.

Supreme Court of Colorado, En Banc.

September 18, 2000.

Hayes, Phillips & Maloney, P.C., Herbert C. Phillips, Kendra L. Carberry, Denver, Colorado, Attorneys for Petitioners.

Meconi & Jackson, P.C., Brenda L. Jackson, Canon City, Colorado, Attorneys for Respondents.

Justice RICE delivered the Opinion of the Court.

We issued a writ of certiorari to review the court of appeals' judgment in Town of Alma v. AZCO Constr., Inc., 985 P.2d 56 (Colo.App. 1999). The Town of Alma, joined by several individual town residents, filed suit against AZCO Construction, Inc. ("AZCO"), asserting claims for breach of contract, breach of the implied warranty of sound workmanship, and negligence. The trial court dismissed Petitioners' negligence and breach of implied warranty of sound workmanship claims and a jury returned a verdict for AZCO on the breach of contract claim. Petitioners appealed the trial court's dismissal of its negligence and breach of implied warranty of sound workmanship claims and the court of appeals affirmed the dismissal of the claims. We granted Petitioners' petition for writ of certiorari to review the court of appeals' judgment affirming the trial court's dismissal of Petitioners' negligence claim. We now affirm the judgment of the court of appeals.

I. FACTS AND PROCEDURAL HISTORY

Petitioners' amended complaint alleged the following facts.¹ On October 28, 1992, the town and AZCO entered into a contract for the construction of improvements to Petitioners' water distribution system. The contract called for AZCO to install new water mains, and to tie those water mains to existing water service lines which served residential properties in the town. Pursuant to the contract, AZCO agreed to furnish all labor, equipment, and materials for the connection of the existing water service lines with the new water mains. The contract contained two separate warranty provisions. Section 29.1 of the contract, titled "GUARANTEE," provided, "[AZCO] shall guarantee all materials and equipment furnished and WORK performed for a period of one (1) year from the date of SUBSTANTIAL COMPLETION. [AZCO] warrants and guarantees. . . that the completed system is free from all defects due to faulty materials or workmanship.. . ." In addition, section 3.3.1 of the "Special Conditions" attached to the contract, titled "MAINTENANCE AND GUARANTY," provided, "[AZCO] hereby guarantees that the entire work constructed by [it] under the contract will fully meet all requirements of the contract as to quality of workmanship and materials. . . . [AZCO] hereby agrees to make at [its] own expense, any repairs or replacement made necessary by defects in materials or workmanship supplied by [it] that become evident within one year after the date of final payment. . . ."

In 1993, AZCO installed 115 flared fittings for the water service line connections. In June 1995, Petitioners discovered leaks in three water service line connections that AZCO installed pursuant to the contract. AZCO repaired those three leaks under the one-year warranty provision of the contract. In November 1995 and June 1996, additional leaks in water service line connections were discovered but AZCO refused to repair these leaks on the basis that the one-year warranty provision had expired. The leaks were repaired at the expense of individual town residents.²

Petitioners filed suit against AZCO on November 27, 1996, asserting claims for breach of contract, breach of the implied warranty of sound workmanship, negligence per se, and negligence. Two more leaks were discovered in June 1997, after Petitioners had filed their original complaint against AZCO, and AZCO again refused to repair the leaks. Petitioners subsequently filed an amended complaint seeking damages for the cost to repair or replace every water service line connection installed or repaired by AZCO.

Petitioners voluntarily dismissed their negligence per se claim and AZCO moved to dismiss the breach of implied warranty of sound workmanship and negligence claims. The trial court granted AZCO's motion to dismiss these claims and the case proceeded to trial on the breach of contract claim only, with the jury returning a verdict for AZCO on this claim. AZCO moved unsuccessfully for an award of attorney's fees based on a provision of the contract providing that the successful party in any litigation shall be entitled to reasonable legal expenses as part of any judgment.

Petitioners appealed the trial court's dismissal of its breach of implied warranty of sound workmanship and negligence claims, and AZCO cross-appealed the trial court's order denying its request for attorney's fees. The court of appeals affirmed the trial court's dismissal of Petitioners' claims, but reversed the trial court's order denying AZCO's motion for attorney's fees and remanded for a hearing on the attorney's fees. In affirming the dismissal of Petitioners' negligence claim, the court of appeals relied on the economic loss rule and stated that "[t]o hold otherwise would permit the non-breaching party to avoid the contractual limitation of remedy." Town of Alma,985 P.2d at 57.

We granted certiorari to review the dismissal of Petitioners' negligence claim and the reversal of the order denying attorney's fees.³

II. ANALYSIS

This case, along with Grynberg v. Agri Tech, Inc., 10 P.3d 1267 (Colo. 2000), presents an opportunity for us to address the status of the economic loss rule in Colorado. The rule has been applied by our court of appeals in various contexts to bar tort claims. As this is a matter of first impression, our analysis encompasses an examination of the development of the rule in other jurisdictions, as well as a discussion of the principles and rationale underlying the rule.

A. Standard of Review

We are reviewing the trial court's grant of AZCO's motion to dismiss Petitioners' negligence claim pursuant to C.R.C.P. 12(b)(5).⁴ This rule is designed to allow defendants to test the formal sufficiency of the complaint. See Coors Brewing Co., 978 P.2d at 665. In evaluating a Rule 12(b)(5) motion, trial courts may consider only those matters stated in the complaint and must accept all allegations of material fact as true and view the allegations in the light most favorable to the plaintiff. See id. When reviewing cases involving a trial court's ruling on a motion to dismiss pursuant to Rule 12(b)(5), we apply these same standards.⁵ See id.

B. Origins of the Economic Loss Rule

Broadly speaking, the economic loss rule is intended to maintain the boundary between contract law and tort law. Although these two areas of law traditionally occupy discrete spheres of legal practice, the distinction between the two blurs. This becomes problematic when, as in this case, a commercial buyer seeks to use a tort theory to recover damages for a defective product.

The economic loss rule emerged largely from the development of products liability jurisprudence. As courts abandoned the requirement for privity in contract, the doctrine of strict liability in warranty developed with the leading case of Henningsen v. Bloomfield Motors, Inc., 32 N.J. 358, 161 A.2d 69 (1960). The Henningsen court held that an automobile manufacturer and a dealer were liable to the automobile purchaser's wife, who was driving the car when she was injured, on a theory of implied warranty of safety. See id. at 84. The Henningsen decision was quickly followed by a flood of cases from other jurisdictions extending the implied warranty theory to many other products. See W. Page Keeton et al., Prosser and Keeton on the Law of Torts § 97, at 690 (5th ed.1984) [hereinafter Prosser and Keeton]. The use of the implied warranty theory, however, generated numerous difficulties as courts struggled to apply contract rules to implied warranty cases. Courts proceeded on the assumption that contract rules must apply because these were "warranty" actions, though there was often no contract involved. See id. at 690-91.

In response to the difficulties of attempting to apply contract rules to products liability cases in the absence of a contract, courts moved away from the implied warranty theory of recovery and adopted a strict liability in tort theory. A tort theory based on the dangerousness of conduct was considered more appropriate and more adaptable than a contract theory because the policy reasons courts were supplying to justify the imposition of strict liability go far beyond any conventional contract notions. See id. at 692. The California Supreme Court led the way with its decision in Greenman v. Yuba Power Products, Inc., 59 Cal.2d 57, 27 Cal.Rptr. 697, 377 P.2d 897, 900 (1963)(holding a manufacturer strictly liable in tort for injury to plaintiff caused by defective power tool), and the American Law Institute followed with the final adoption of section 402A⁶ of the Second Restatement of Torts the following year. See id. at 694.

As courts made the shift to employing tort law for these products liability cases, a need developed to prevent tort law from "swallowing" the law of contracts. After paving the road to allow tort theories to proceed in products liability cases, the California Supreme Court, in Seely v. White Motor Co., 63 Cal.2d 9, 45 Cal.Rptr. 17, 403 P.2d 145 (1965), was the first to adopt the economic loss rule and to recognize the importance of limiting the use of tort theories. In Seely, the plaintiff purchased a truck manufactured by White Motor Company ("White") for use in his business and the truck subsequently overturned when the brakes failed. The plaintiff was not injured but he sued White for damages for the repair of the...