The Colorado Supreme Court considered on Tuesday whether it is possible for a corporate plaintiff to pursue fraud claims over conduct that could be covered by a contract or by a set of interrelated business agreements leading up to the contract.

Previously, the Court of Appeals found that Veolia Water Technologies, Inc. had a duty, independent from any contract, to avoid misrepresenting or fraudulently concealing its ability to provide an agreed-upon wastewater project with a solid salt byproduct. Consequently, the court upheld a $215 million damages award to plaintiff Antero Resources Corp. based on Veolia’s fraud and its breach of contract.

During oral arguments to the Supreme Court, Veolia maintained that the fraud findings were improper. Further, the liability created consequences for its insurance and government contracting abilities, even if the breach-of-contract damages remained intact.

“This was a project with a new technology. And Veolia tried hard to make this work,” said attorney Nicole A. Saharsky. But “the remedy that Antero is seeking are fraud remedies beyond what the contract provides.”

“There is a huge difference between producing salt in a way that they could dispose of it as a solid versus what’s been described — kind of like this soupy mush,” said Justice Susan Blanco. “So, at the level that you knew that you can’t perform, and you’re negotiating and withholding that information, I mean, you are talking about this as if it’s just a performance issue. The problem is, you knew you couldn’t perform, from the sound of the record, before you negotiated the contract, right?”

Veolia entered into a contract to build a wastewater treatment facility for the hydraulic fracturing operations of Antero in West Virginia. The final product fell short, however, and Antero canceled the contract after the treated water produced “soupy” salt, rather than solid salt that could be placed in landfills.

After a three-week trial, Denver District Court Judge Marie Avery Moses found Veolia breached its contract and committed fraud. Antero received approximately $215 million in damages.

Among other things, Veolia raised the “economic loss rule,” which dictates that litigants who suffer financial losses from a breach of contract must stick to that claim, and cannot sue on other grounds unless the law provides a basis for doing so.

Although there were various documents between the parties prior to the master design-build agreement, Moses did not believe they were a “network of interrelated contracts.” Therefore, she concluded Veolia’s fraudulent misrepresentations occurred before the execution of the design-build agreement, so the rule did not apply.

A three-judge Court of Appeals panel disagreed with her reasoning, concluding the various agreements were interrelated after all. However, the panel determined the rule did not block the fraud claims because Veolia’s misrepresentations pertained to things it had no discretion to alter.

Further, the contract “explicitly permitted additional damages in the event of fraud — an intentional decision bargained for by two sophisticated commercial parties that would be greatly undermined if all fraud claims were barred,” wrote Judge Terry Fox.

Veolia turned to the Supreme Court, arguing the fraudulent conduct was covered under the contract. Finding the economic loss rule did not apply would “undermine the certainty and predictability of Colorado contracts and risk turning every breach of contract case into a fraud case,” Veolia wrote.

The justices seemed hesitant to agree with the Court of Appeals that all of the companies’ interactions before the design-build agreement amounted to a single contractual arrangement.

“Don’t we create an incentive for parties to intentionally defraud the opposition after the two initial, preliminary contracts have been entered into?” asked Justice Carlos A. Samour Jr.  “These parties are in a contractual relationship, so there’s no more fraud in the inducement. So, at that point, your client has every incentive to defraud the other side intentionally. What do they have to lose?”

Marie R. Yeates, representing Antero, suggested the interrelatedness of the agreements would not make a difference to the assertions of fraud.

“The fraudulent inducement is wrongfully inducing us into a contract we wouldn’t have made,” she said. “We wouldn’t have entered into a contract with them if they told us the truth.”

Blanco appeared to agree that the fraudulent behavior could be separated from Veolia’s contractual breaches.

“The problem is that it seems like nobody was really honest about the inability to deliver. And so that’s the fraudulent inducement, which is really different than failure to perform, right?” she said.

Justice Brian D. Boatright did not attend the arguments. In response to a question from Colorado Politics, the court’s clerk said Boatright was “not available.”

The case is Veolia Water Technologies, Inc. v. Antero Treatment LLC et al.