The Colorado Supreme Court decided on Tuesday that a corporate plaintiff validly pursued fraud claims over conduct that was not 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.

In a June 23 opinion, the Supreme Court concluded that Veolia’s misrepresentations about its capabilities induced Antero into entering the key, final contract, known as the design-build agreement.

“Specifically, Veolia failed to disclose its inability to meet Antero’s power consumption requirements prior to the execution of the DBA,” wrote Justice Richard L. Gabriel. “And as the trial court found, with ample record support, the power consumption guarantee was critical to Antero and without that guarantee, Antero would not have signed the DBA.”

Veolia entered into a contract to build a wastewater treatment facility for Antero’s hydraulic fracturing operations in West Virginia. The final product, however, fell short, 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.

During oral arguments, 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?”

“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?” added Justice Susan Blanco. “And so that’s the fraudulent inducement, which is really different than failure to perform.”

The Supreme Court ultimately agreed with Moses that there was no “network of interrelated contracts” that would require Veolia’s misrepresentations leading up to the design-build agreement to be litigated only as a breach of contract due to the parties’ exploratory agreements from the beginning.

“Such a rule would require contracting parties to bargain preemptively to allocate risks and costs for unknown future contracts. We have never extended the economic loss rule or the interrelated contracts doctrine that far, and we decline to do so now,” wrote Gabriel.

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