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Wisconsin Courts Further Interpret the Economic Loss Doctrine

Tags: construction law, contract law, economic loss doctrine

Author: Todd Jex

Recently, the Wisconsin Supreme Court narrowly interpreted two exceptions to the Economic Loss Doctrine.  In contrast, the Wisconsin Court of Appeals extended the Economic Loss Doctrine to preclude negligence claims between subcontractors who had “interrelated” contracts with a general contractor.  

In Hinrichs v. Dow Chemical Company, 2020 WI 2, the Supreme Court considered whether two exceptions to the Economic Loss Doctrine, the “Fraud in the Inducement” and “Other Property” exceptions, applied to allow tort claims to proceed.  The Economic Loss Doctrine would ordinarily bar a commercial purchaser of a product from recovering economic losses from the manufacturer under tortious negligence and strict liability theories.  

In Hinrichs, the plaintiffs designed and installed skylights for certain vehicles.  The skylights were installed using adhesive manufactured by Dow Chemical.  In 2013, Dow told the plaintiffs about a new primer product they could use with this adhesive.  After the new primer was used, customers started experiencing cracks in the skylight panels.  Plaintiffs claimed the problems with the primer hindered the reputation of the skylight company, which caused sales to decline.  Plaintiffs then sued Dow for negligent misrepresentation, intentional misrepresentation, strict responsibility misrepresentation, and a violation of Wis. Stat. §100.18.  Dow filed a motion to dismiss claiming the Economic Loss Doctrine barred the plaintiffs' common law tort claims.  The trial court granted the motion, holding the Economic Loss Doctrine barred those claims as the plaintiffs' losses were purely economic in nature and neither the fraud in the inducement, nor the other property exceptions to the Economic Loss Doctrine applied.  The Court of Appeals affirmed that decision.

The Supreme Court then held the fraud in the inducement exception did not apply to the tort claims because the alleged fraud was related to the quality and characteristics of the product, and thus was not extraneous to the contract.  The court also held the other property exception did not apply because the product at issue was integrated into a more complete product and therefore, the completed product ceased to be “other property” for purposes of the Economic Loss Doctrine. This decision further narrowed the application of these two exceptions to the Economic Loss Doctrine, which will have an effect on this common defense used in product defect cases.  

Mechanical v. Venture Electrical Contractors, Inc., 2020 WI App 23, was a Wisconsin Court of Appeals decision applying the economic loss doctrine to bar a subcontractor’s negligence claim against another subcontractor, after both entered into separate subcontracts with a general contractor. Mechanical and Venture had separate subcontracts with the general contractor to provide HVAC and electrical work for an addition to a research laboratory. Both of their respective subcontracts incorporated the terms of the contract between the owner and the general contractor.  

Venture requested that Mechanical perform additional work outside the parties’ respective subcontracts with the general contractor.  After the work was performed, Venture did not pay and Mechanical filed suit.  Venture then filed a counterclaim for delay damages based on Mechanical’s untimely performance.  Mechanical then moved for summary judgment based on the Economic Loss Doctrine to bar Venture’s negligence claim and limit Venture to only contractual remedies. Venture’s subcontract addressed the potential for delay damages and only allowed Venture to obtain additional time for extra work and not monetary compensation. The Circuit Court granted Mechanical’s motion and Venture appealed.  

The Court of Appeals affirmed the Circuit Court decision, stating that because the “complaining subcontractor’s negligence claim is rooted in the duties imposed by the interrelated construction contracts, contract law provides the remedies for the economic loss at issue, foreclosing tort remedies.  The Economic Loss Doctrine bars the negligence claim.”  

This decision will further impact a subcontractor’s ability to recover under tort theories and limit a subcontractor to only those remedies available under a contract. 

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