THE ECONOMIC LOSS RULE
E. Dwight Taylor, The Rocky Mountain Law Group, LLC.
Borrowers who have complaints against banks often attempt to expand their contract disputes to include claims based upon torts such as fraud, breach of fiduciary duty, intentional interference with contract, negligent misrepresentation and a host of other horrible-sounding claims.
In order to prevent the escalation of a contract dispute into claims that would bear the potential for exemplary damages and attorney fees, thereby changing the relationship between the parties after a dispute has arisen, the Colorado Supreme Court has fashioned the Economic Loss Rule. The Economic Loss Rule draws a bright line between tort law and contract law. The Court has held that when parties have had the opportunity to allocate risks between themselves through a bargaining process, they must be held to their negotiated contractual remedies when conflicts arise. Of course most credit agreements do not spell out all of the remedies, but the Uniform Commercial Code will provide those remedies to the extent they are not provided for in the credit agreement. The Court has said that 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. The Colorado courts have held that an action to recover damages for the loss of a bargain is the exclusive province of contract law. The Economic Loss Rule prohibits a negligence claim when the breach of duty is contractual and the harm incurred is the result of failure of the purpose of contract. If the duty of care owed was memorialized in a contract and there is no duty independent of the contract, the Economic Loss Rule bars the tort claim and holds the parties to the contracts terms. (*Credit agreements cannot be implied.)
Thus, the Economic Loss Rule will bar a tort claim where: 1) the source of duty is contractual; 2) the damages are purely economic; and 3) and no independent duty of care exists.
Of course, that leaves the complaining party the opportunity to assert that there is an independent duty owed by the bank to the borrower arising from the general law. That is where the bank is also protected by the Credit Statute of Frauds, discussed in an earlier article. In almost every conceivable case a bank will not have a relationship with any other entity with respect to a loan that is not based upon a credit agreement. In such instances, the Colorado courts have held that the plain language of the Credit Statute of Frauds applies to bar any action or claim relating to a credit agreement and expressly precludes exceptions by implication or construction. Any tort claim relating to an oral credit agreement involving a principal amount in exceeding $25,000 is barred**. The Colorado courts have also held that the Credit Statute of Frauds is not limited to actions attempting to enforce an agreements terms. Rather, the statute bars suit where there is no written credit agreement any time an action relates to a purported oral agreement. (**Keep this limitation in mindsmall loans can bear risks that larger ones do not. This limitation may, however, help some bank customers with their trade credit.)
This dual effect of law made both by the Colorado legislature and the Colorado courts makes it difficult for a borrower to assert a claim that is not based upon the four corners of the credit agreement. These laws make tort claims difficult but not impossible because borrowers counsel can be imaginative. However, the parade of horribles can be avoided by well-considered and well-written credit agreements and by sound banking practices. Good bank counsel can help, too.
Dwight Taylor can be reached at The Rocky Mountain Law Group, LLC, 10800 E. Bethany Dr., Ste. 550, Aurora, CO 80014, phone: 303.597.0202, fax: 303.597.0235, email: dtaylor@rmlawgrp.com