Opportunities & Challenges
This is the 43rd in a series of brief articles that Moye White is sending to its clients and friends to provide practical insights into opportunities and challenges in today's business and financial world.
COLORADO COURT OF APPEALS APPLIES ECONOMIC LOSS RULE TO TITLE CLOSING AGENCIES
On June 9, 2011, the Colorado Court of Appeals issued an opinion in A Good Time Rental LLC, et al. v. First American Title Agency, Inc. (the “Opinion”), applying the economic loss rule to title closing agencies in the performance of their duties. The Opinion, a major victory for the title industry, limits the potential legal exposure of closing agents by holding that parties to a real estate transaction may not assert claims under both tort and contract law. Previously, the legal duties of title closing agents occupied an unsettled landscape. Agents are typically given written closing instructions drafted and signed by the parties to a real estate closing, which they are contractually obligated to follow. A failure to follow these instructions subjects an agent to liability for breach of contract. Prior to the Opinion, a title closing agent also frequently faced legal claims under tort law, For example, a party might claim that the agent had been negligent in the performance of his or her duties, or engaged in negligent misrepresentation with regard to certain facts and circumstances of the closing. In 2000 the Colorado Supreme Court adopted a damages doctrine commonly known as the “economic loss rule.” Put simply, the economic loss rule prevents a plaintiff from asserting tort claims which arise out of a breach of contractual obligations. This is significant because, under contract law, a plaintiff’s damages are limited to actual, proven financial losses – either out-of-pocket or benefit-of-the-bargain. In contrast, under tort law, a plaintiff may recover damages for emotional injuries as well as punitive damages, unrelated to actual financial losses. Such damages are disallowed under contract law. Supporting application of the economic loss rule is the belief that parties entering into a contract should be free to negotiate the allocation of legal obligations and risks. Allowing these same parties to later assert negligence or negligent misrepresentation claims would undermine the parties’ bargain and negotiate the allocation risks within the contract, essentially turning every breach of contract claim into a potential tort. Since its adoption in 2000, Colorado courts have struggled with its application across a variety of industries and claims. In the Opinion, the Colorado Court of Appeals expressly adopted and applied the economic loss rule to claims against a title closing agency. The Court held that the title agent was bound by the written closing instructions which constituted a contract between the parties. The existence of this contract expressly precluded the plaintiff from later asserting any claim for negligence, negligent misrepresentation, or breach of fiduciary duty against the title agent since the conduct underlying these claims was nothing more than a repackaging of the contractual obligations set forth in the closing instructions. The Opinion is likely to have a far reaching impact on the industry by clarifying that title agents are essentially contractual agents subject to written closing instructions. This precedent will drastically limit the leverage of plaintiffs, who previously could threaten to pursue potentially expensive claims for negligence, negligent misrepresentation, and breach of fiduciary duty against title agencies. If you have questions about the Good Time Rental Opinion or the economic loss rule, Moye White has experienced trial attorneys with specialized expertise in the application of this doctrine across a variety of industries.
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