“Promises that Induce are Different from Promises to Perform” – The Tenth Circuit Clarifies Colorado’s Independent-Duty Exception to the Economic-Loss Rule in City of Fort Collins v. Open International

Introduction

In a dispute that pitted a Colorado municipality against a Florida software vendor and its parent guarantor, the United States Court of Appeals for the Tenth Circuit was asked to decide whether tort claims for fraudulent inducement and negligent misrepresentation can survive the economic-loss rule, a broad merger clause, and a limitation-of-liability provision when those torts arise from pre-contract representations. The case arose out of a failed $10-million+ project to implement a utility-billing platform for Fort Collins’ new broadband service, “Connexion.” When the City discovered that the vendor’s software could not deliver most of the promised functionalities, it sued, won a jury verdict on fraud, elected rescission, and obtained nearly $20 million in restitution. The Tenth Circuit – applying Colorado substantive law – affirmed in full, issuing an opinion that will reverberate through commercial-contract drafting, technology procurement, and litigation strategy alike.

Summary of the Judgment

• Economic-Loss Rule: The Court held that Colorado’s economic-loss rule does not bar tort claims premised on pre-contractual misrepresentations; such claims arise from duties independent of any contractual promises.
• Merger / Integration Clause: A general merger clause that incorporates all RFP materials into the contract does not, by itself, waive or disclaim fraud and negligent-misrepresentation claims unless it expressly says so.
• Evidentiary Sufficiency: The jury had ample evidence – including conflicting testimony about an internal functionality matrix – to conclude that Open International graded its software capabilities fraudulently.
• Waiver & Rescission: A party waives the right to rescind only when it continues performance with full knowledge of the material facts constituting the fraud; mere suspicion or awareness of performance problems is not enough.
• Parent-Company Liability: Open Investments’ challenge to rescission liability was waived because it was not raised in the Rule 50(a) motion, illustrating the importance of preserving issues for appeal.
• Result: All district-court rulings and the $20 million restitution award were affirmed; a late-filed supplemental appendix was denied.

Analysis

Precedents Cited and Their Influence

1. Town of Alma v. AZCO Construction, 10 P.3d 1256 (Colo. 2000)
   Introduced the “independent-duty” formulation of the economic-loss rule. The Tenth Circuit relied on it to frame the three-factor BRW test for identifying independent tort duties.
2. BRW, Inc. v. Dufficy & Sons, 99 P.3d 66 (Colo. 2004)
   Provides the three-factor analysis (relief sought, existence of common-law duty, and whether the duty differs from the contractual duty). The Court walked through each factor to show why Fort Collins’ fraud claim passed the test.
3. Van Rees v. Unleaded Software, 373 P.3d 603 (Colo. 2016)
   A technology-services case holding that fraudulent inducement is an independent tort; expressly distinguished performance promises from inducing promises. The Tenth Circuit called it “on point” and used it as the linchpin for rejecting the economic-loss defense.
4. Elk River Assocs. v. Huskin, 691 P.2d 1148 (Colo. App. 1984) & Gladden v. Guyer, 426 P.2d 953 (Colo. 1967)
   Supply the rule that waiver requires “full knowledge” of the fraudulent facts before affirming a contract. The Court used these cases to uphold the jury’s finding that the City had not waived rescission.
5. Federal Rules Precedent: Perez v. El Tequila (Rule 50 procedure), Therrien v. Target (raising new arguments in Rule 50(b)), Knowlton v. Teltrust (waiver on appeal). These cases guided the procedural holdings, especially the waiver of Open Investments’ arguments.

Legal Reasoning

1. Economic-Loss Rule. The Court emphasized that the “key” inquiry is the source of the duty. Fraudulent inducement arises from the common-law duty not to lie, which exists independently of any later-formed contract. Even where the RFP response was incorporated into the contract, the Van Rees distinction controls: misstatements that bring a contract into being are analytically separate from promises to perform under that contract.

2. Merger Clause and Limited Warranty. The contract’s general integration clause merely folded the RFP materials into the agreement; it did not contain a specific disclaimer of reliance or an express waiver of tort claims. Under Keller v. A.O. Smith and similar authority, such general clauses do not bar fraud claims.

3. Sufficiency of the Evidence. The internal “functionality matrix” showed only 59.4 % readiness while the RFP response touted 89.7 %. The jury was entitled to credit that document, disbelieve the president’s explanation, and infer intentional deception.

4. Waiver / Election of Remedies. Colorado precedents treat waiver identically whether a plaintiff ultimately seeks damages or rescission. The dispositive question is when the plaintiff had “full knowledge of the material facts” constituting the fraud. The City’s awareness of project delays and cost overruns did not equal awareness of fraudulent grading of capabilities, so continuing the project did not forfeit rescission.

5. Procedural Waiver of Parent-Liability Argument. Because Open Investments waited until its post-verdict Rule 50(b) motion to argue that a guarantor cannot be liable in rescission, the matter was not preserved. The Court followed Tenth-Circuit precedent that a new issue in a Rule 50(b) motion is waived if the opponent objects – which Fort Collins did.

Impact of the Decision

• Contract Drafting: Colorado-governed contracts (and by extension contracts in the Tenth Circuit) that intend to bar tort claims must contain explicit anti-reliance language and disclaimers of pre-contract representations. Generic merger clauses are no longer enough.
• Technology Procurement: Vendors responding to RFPs must ensure that capability matrices and sales representations align with internal assessments. Discrepancies can support multimillion-dollar rescission awards even years after contract execution.
• Litigation Strategy: Defendants must raise guarantor-liability and other distinct arguments in Rule 50(a) motions to preserve them. Plaintiffs should scrutinize internal documents to establish independent tort duties.
• Economic-Loss Doctrine: The opinion cements an “inducement” exception to the doctrine under Colorado law and may influence other jurisdictions debating whether fraudulent inducement is per se independent.
• Rescission Timing: The decision clarifies that “full knowledge” means knowledge of the fraud, not merely knowledge of performance problems, giving plaintiffs room to attempt cure before electing rescission.

Complex Concepts Simplified

Economic-Loss Rule

A doctrine preventing parties from turning pure breach-of-contract disputes into tort suits for monetary loss. It has an “independent-duty” exception: if the defendant violated a duty that exists outside the contract, a tort claim survives.

Fraudulent Inducement

An intentional misrepresentation of material fact made to persuade another to enter a contract, causing reliance and damage.

Merger / Integration Clause

A contractual provision stating that the written agreement is the parties’ entire bargain. It can bar reliance on prior statements only if drafted with specificity.

Rescission

An equitable remedy that unwinds a contract, restoring both sides to their pre-contract positions via restitution.

Rule 50(a)/(b) Motions

Requests for judgment as a matter of law before (50(a)) and after (50(b)) the jury verdict. Grounds not raised in 50(a) generally cannot be asserted in 50(b).

Waiver of Rescission

Loss of the right to rescind because the aggrieved party, with full knowledge of the fraud, nevertheless affirms or continues the contract.

Guarantor Liability

A guarantor promises to answer for another’s debt or performance. Whether a guarantor faces tort remedies depends on pleading, proof, and preservation of arguments.

Conclusion

City of Fort Collins v. Open International establishes a robust precedent that pre-contract misrepresentations enjoy special protection from the economic-loss rule and typical contract disclaimers. The decision underscores three practical lessons: (1) truthfulness in RFP responses is non-negotiable; (2) contract clauses must be drafted with surgical precision if parties wish to eliminate tort exposure; and (3) litigants must preserve every theory at each procedural stage. As technology projects grow in complexity and cost, this ruling will likely be cited whenever disappointed customers seek rescission rather than damages, and whenever defendants invoke the economic-loss shield. By affirming that “promises that induce are different from promises to perform,” the Tenth Circuit both protects honest bargaining and delineates clear boundaries for contractual risk-allocation in Colorado and beyond.