Application of the Economic Loss Doctrine in Wisconsin
One issue that frequently arises in commercial litigation is the application of the economic loss doctrine. Generally speaking, the economic loss doctrine is a legal defense that prevents contracting parties from pursuing tort claims against one another for commercial losses associated with a transaction. The damaged party is limited to its contractual claims. The classic example where the economic loss doctrine comes into play is when the purchaser of a product seeks to hold the manufacturer or seller of the product responsible for any economic losses associated with the product’s deficiencies.
To illustrate, assume a trucking company purchases a large volume of oil to use in its truck engines and the oil becomes defective, causing injury to the truck engines, resulting in decreased fleet, and consequently, decreased sales. In that instance, the trucking company may seek to hold the manufacturer of the oil responsible in contract by bringing a breach of contract claim, a breach of warranty claim, and breach of implied warranty claims. The trucking company may also be inclined to bring tort claims, such as negligence, strict product’s liability, and misrepresentation. Under the economic loss doctrine, the purchaser would be precluded from pursuing the tort claims and limited to its contractual claims.
Wisconsin courts have explained that the primary reasons for the economic loss doctrine are to maintain the separateness of tort law and contract law, as well as to protect commercial parties’ freedom to allocate risk by contract and not disturb those agreements by operation of other law.
Economic loss doctrine benefits for the defending party:
- Limits the claims and liability considerations by barring the tort claims
- Dismissal of the tort claims may limit a defendant’s damage exposure because tort law often provides a broader array of damages, including consequential damages, and if the alleged conduct is proven to be willful, punitive damages
- Tort claims may not be subject to any contractual limitations regarding consequential or incidental damages
From the defending party’s perspective, usually the manufacturer or seller, the economic loss doctrine offers several powerful benefits. First, it limits the claims and liability considerations by barring the tort claims. In practice, it may be easier for a plaintiff to establish the elements of the tort claims in comparison to the contract claims, so obtaining dismissal of the tort claims will be beneficial to the defendant. Second, dismissal of the tort claims may limit a defendant’s damage exposure. Tort law often provides a broader array of damages, including consequential damages, and if the alleged conduct is proven to be willful, punitive damages. Similarly, those tort claims may not be subject to any contractual limitations regarding consequential or incidental damages.
From a purchaser’s perspective, he or she will want to analyze whether the economic loss doctrine applies to the transaction at issue and determine whether it may be limited to contractual based claims. If that is the case, the purchaser should assess whether the subject contract contains any contractual limitations on certain types of damages and seek to have that language removed. In this regard, the better practice is to be out in front of such issues in the contract negotiation stage rather than responding to the issue after the contract has been signed.
There are several important exceptions to the economic loss doctrine that parties in a contractual relationship will want to be aware of. For conciseness purposes, I will touch on just a few of the main exceptions. To begin, Wisconsin law has established an “other property” exception to the doctrine. Tort claims may be permitted when a defect in a product causes damage to “other property.” Wisconsin courts principally apply the integrated system test to determine whether damage to property constitutes “other property.” Under this test, if the damaged property is part of an integrated system with the defective product, any damage to that property is considered to be damage to the product itself and the economic loss doctrine still applies. For example, oil in truck engines would be sufficiently integrated with the engines. Thus, any damage to the engines would not be other property damage and the exception would not apply. Conversely, imagine a water softener leaks causing damage to drywall and the woodwork of a house. The water softener would not be sufficiently integrated with the drywall and woodwork. As a result, the “other property” exception would apply and the tort claims would survive.
Courts apply a “predominant purpose test” to determine whether a contract is one for products or services. This is a highly factual inquiry based on several factors, including:
- Cost breakdown between products and services in the contract
- Nature of the obligations contained in the contract
- Subjective intent of the parties
- Link between the plaintiff’s claim and the subject of the contract
Also, the economic loss doctrine does not apply to contracts for services, such as those often provided by a real estate agent, engineer, or other professionals. Rather, the doctrine applies to contracts for products. Courts apply a “predominant purpose test” to determine whether a contract is one for products or services. This is a highly factual inquiry based on several factors, including the cost breakdown between products and services in the contract, the nature of the obligations contained in the contract, the subjective intent of the parties, and the link between the plaintiff’s claim and the subject of the contract.
In sum, parties to any commercial transaction—whether the seller, manufacturer, or the purchaser—should be aware of the potential application of the economic loss doctrine. Sellers and manufacturers will want to include language regarding limitations on consequential damages and other contractual remedies, whereas purchasers will want to push back against such contractual language. If you have any questions regarding the economic loss doctrine or commercial litigation more generally, please don’t hesitate to call.
For more information on the economic loss doctrine, please contact Dieter at firstname.lastname@example.org or by calling (414) 273-1300.