The Colorado City of Westminster entered into a contract with J.A. Jones Construction Co. to expand the city's water treatment plant. The project involved the design and construction of three structures, including a 5-million gallon underground concrete tank to hold treated water and a pumping station to move the treated water to the city's distribution system. Major features of the project were designed by engineering firms under contracts with the city.

Work continued on the project beyond the scheduled completion date due in part to disagreements between the city, Jones and the engineers over water leakage from the underground holding tank, which destabilized the bedrock and caused the tank to move. Although Jones had nearly completed the project, the city terminated Jones' contract and hired new engineers.

The new engineers recommended that the city demolish and rebuild both the tank and much of the pumping station using modified designs. Although expenses far exceeded the original construction costs and the new design added features to both structures, the city accepted the recommendations to demolish and rebuild.

The city sued Jones, the original engineers and Jones' surety for breach of contract and negligence, claiming the entire cost of demolition, re-design and re-building as damages. Jones countersued for lost profits resulting from its termination and for nonpayment for work performed.

The trial court granted summary judgment to the original engineers on the breach of contract claim and to Jones on the negligence claim. Following trial, the court entered directed verdicts for the defendants on the remaining claims. The court reasoned that the city failed to present a basis for the jury to apportion damages based on either: (1) the benefit of the bargain to the city from its contract with Jones and the additional benefit from re-building the structures to new specifications or (2) between Jones' breaches and design errors by others for which Jones had no responsibility. The jury awarded Jones payment for work already performed, and the trial court awarded substantial costs to all defendants. The city appealed, arguing that the trial court had erred both in directing a verdict for Jones based on the City's failure to prove damages and in entering summary judgment for Jones on the city's negligence claim.

The Colorado Court of Appeals upheld the trial court's directed verdict for failure to prove damages, explaining that the general measure of damages for breach of a construction contract is not the total cost of completion but the amount required to place the owner in the position it would have been in had the breach not occurred. City of Westminster v. Centric-Jones Constructors, 2003 WL 22098771 (Colo.App. 2003). The reasonableness of rebuilding a defective structure does not entitle a plaintiff to recover more than the benefit of its bargain, and damages must be directly linked to the breach. Because the city improved its position with structural elements that were not part of the original design and because the city could not identify who caused the damages, the court held that the city had failed to provide a reasonable basis upon which the jury could apportion damages. The court refused to entertain the city's argument that the burden rested with Jones to apportion damages under the affirmative defense of mitigation.

Based on the economic loss rule, the appellate court also affirmed the trial court's grant of summary judgment to Jones on the city's negligence claim. As the court explained, under the 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." The economic loss rule does not focus on the type of damages sought but on the source of the duty. Although the contract required that the work be "of good quality and free from faults and defects," the court noted that these duties all arose from the contract, not from any independent duty that Jones owed to the City.

In arguing that the economic loss rule should not apply, the city asserted that three of its damage claims were not the subject of the contract. First, the city claimed that Jones damaged neighboring lands. The court rejected this claim because such damages were consequential to alleged defective construction practices. Second, the city claimed the costs of defending itself against third party claims. The court also rejected this argument, noting that the only third party lawsuit brought against the city had been dismissed with prejudice more than two years before. Finally, the city argued that its damages included remediating the risks of personal injury that were created by defects in the structures. The court rejected this argument, explaining that construction defects often create a risk of personal injury and permitting such an exception would blur the "uneasy boundary between contract and tort law."

The city asserted that a clause in the contract preserved remedies available at law, establishing that the parties bargained for assertion of tort claims. The court held the clause did not show that Jones owed a "duty independent of any contractual obligations."

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©2004 Thelen Reid Brown Raysman & Steiner LLP