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Construction and Public Contract Law Section Newsletter
Volume 5, No. 1, Spring 1998

In this issue...

Editor's Overview

By Jeff Aiken

Input from Section Members - Articles, Ideas, Case Anecdotes
The success of this newsletter is dependent on direct input from each member of our section. You can enhance the quality of the newsletter by taking the time to send in articles, suggestions, or short practice tips. It may be you have just run into a practical problem with no clear legal answer. We encourage you to jot it down and send it in with a description of how you handled it. Also, if you have just briefed an issue that may interest other section members, take a few minutes and send an explanation or note. By improving the exchange and sharing of our experiences, all members of the section can benefit.

Please mail or fax your letters, notes, comments, or articles to: Jeff Aiken, Whyte Hirschboeck Dudek, S.C., 111 E. Wisconsin Ave. Milwaukee, WI 53202 [FAX: 414-223-5000].

Nominations to Board and Section Election
The nominating committee of the board has nominated the following individuals for the three vacancies on the board:

Bruce T. Block
Reinhart, Boerner, VanDeuren,Norris & Rieselbach, S.C.
Milwaukee

David J. MacDougall
Brennan, Steil, Basting, & MacDougall, S.C.
Janesville

William E. McCardell
Dewitt Ross & Stevens, S.C.
Madison

Richard C. Yde
City Attorney
West Bend

The term of the three persons elected runs through June 30, 2001.

Legislative Update
Jenny Boese, State Bar government relations coordinator, issued a practice update for section members on the recent enactment of 1997 Wisconsin Act 187. This new law increases the time to serve a summons and complaint and responsive pleading. Under the bill's provisions, the time allowed to serve a summons and complaint is increased from 60 to 90 days after filing, and the time to answer the complaint is increased to 45 days. The act applies to actions commenced on or after May 12, 1998. A copy of the act is available online at www.legis.state.wi.us/billtext/97acts.html.

Jenny Boese also reports that the Assembly and Senate have passed SB369 which establishes a commercial real estate broker's lien. The bill is awaiting the governor's signature. The section opposed this legislation. The bill requires a broker to record an intent to file an actual lien with the register of deeds 30 days before closing; requires a broker to file an actual lien three days before closing; clarifies that a broker's lien does not take priority over a construction lien; and clarifies that a lien for a primary mortgage and liens that are filed or recorded before the broker commission lien have priority over the broker's lien.

A copy of this enrolled bill is available online at the address listed above.

Membership Directory Being Compiled
The board has begun work on a section membership directory. It is hoped that making this list available to section members will encourage networking and communication among members. This goal of providing a "current and readily accessible network" for members has been identified in the section's mission statement. (See ahead.)

Interesting, Fast-Paced Section Program Planned for State Bar Convention - June 25, 1998
Kim Hurtado and Robert Smith will present a lively, practice-oriented section CLE program on June 25, 1998, at the State Bar Convention in Lake Geneva. The program will encourage participation and comments from the audience and, members are encouraged to attend. More information on this program appears later in this column.

Section's Home Page to be Enhanced
As part of its ongoing initiative to provide better service to section members, the board is working to improve the value of its home page for section members. Plans to improve the home page include: publishing convention outlines, adding lien forms and other practice-related forms, publishing an index of construction-related statutes, and collecting useful construction law WEB sites and setting a link to these sites. The board encourages members to check out the site and give the board suggestions and feedback for improving the section's home page.

Groundbreaking for New State Bar Headquarters Set for June
The State Bar of Wisconsin will officially begin ushering in its future on June 18 at 2:00 p.m. with a groundbreaking ceremony for the new State Bar headquarters.

All lawyers and judges are cordially invited to attend. The building will be constructed at the American Center on the northeast side of Madison near the interstate.

The 40,000 square foot office building will allow the association to move into the next century fully equipped to deliver quality services to its members and the public, especially in the areas of technology, CLE seminars, books and programs.

Contact Tom Watson, Public Relations Coordinator, for more information at 608-250-6180.

Plan to Attend the Section's Program at the State Bar Annual Convention
9:00 a.m. - 12:15 p.m.
June 25, 1998
Grand Geneva Resort, Lake Geneva

The New AIA A201 General Conditions: A Review of Critical Changes
Speakers:
Kimberly Hurtado, Michael, Best & Friedrich, Milwaukee
Robert J. Smith, Wickwire Gavin, Madison
In this fast-paced morning program, the speakers will present and analyze the changes in current practice that will result from the new AIA A201 General Conditions. The emphasis of their presentation will be what section members need to know about these changes to better counsel and represent their clients. The audience will be encouraged to ask questions and provide input about the new conditions.

Section Identifies Mission and Outlines Action Plan
As part of the State Bar's planning exercise, the section has approved a revised mission statement and developed its vision statement and action plans. These planning instruments are published below. Comments from section members about these items are encouraged.

Mission of Section

Improving construction and public contracting law by providing:

  • Education to lawyers, the construction industry, and the public
  • Analysis and preparation of construction legislation
  • A current and readily accessible network for section members
  • Facilitation of communication and fair dealing among diverse groups in the construction industry

Section Vision Statement

To provide a highly effective resource for lawyers and others in the construction industry for disseminating information about and advocating improvement of Wisconsin construction and public contracting law.

Strategies, Priorities, and Action Plans

Strategy One
Educate lawyers, the construction industry, and the public.

Priority 1
Maintain and improve the creation and circulation of written materials.

Action Plans

1. Issue periodic "hot topic" newsletters to members.
2. Author articles regarding construction in Wisconsin Lawyer.
3. Prepare a compilation of construction and public contracting law information in popular press and trade publications.
4. Prepare compilation of section's prior program materials.

Priority 2
Maintain and improve web page resources.

Action Plans

1. Provide lien forms and previous newsletters.
2. Expand links on web page.
3. Expand document access on web page.
4. Provide CLE outlines on web page.
5. Coordinate list serv for Wisconsin construction issues and membership list by community.
6. Establish computer data bank where lawyers can assemble or report on cases, decisions, or experiences for access by members.

Priority 3
Expand CLE programming.

Action Plans

1. Work with other sections (for example, International Practice) to sponsor continuing legal education.
2. Bring diverse groups together by sponsoring seminars for trade associations on lien statues.
3. Hold forum sessions for lawyers and the construction industry to hear high quality presentations and exchange ideas.

Strategy Two
Focus on membership recruitment.

Priority 1
Increase the membership of the section.

Action Plans

1. Increase communication regarding contracting issues with groups such as government Lawyers Division and ABA Construction Forum.
2. Analyze the demographics of the section to better determine needs.
3. Add section members who are not standing board members to committees.

Employment Law Issues Every Construction Lawyer Should Know

By Gregory Grobe

Introduction
Many attorneys who advise contractors on construction law issues face the reality that their clients have limited human resources staffing, experience, or expertise. As a result, construction lawyers are often called upon to rescue their contractor clients from legal situations created through an ignorance of the laws and/or a reliance on historical practices.

While some contractors have made great strides in modernizing their personnel practices, most of us still find that there are any number of potential legal violations occurring. One useful tool to address this problem is a self-audit, which both the construction lawyer and the contractor can review periodically to evaluate the level of compliance of noncompliance and determine the steps which need to be taken to update the contractor's employment practices.

The following outline presents a basic checklist for construction lawyers to review with their contractor clients. Where specialized problems are identified, it may be advisable to bring the experience of an attorney who focuses on employment and labor law to assist in bringing the contractor into compliance. In other cases, obtaining the proper forms and understanding the proper procedures may be sufficient. Importantly, these issues, unless otherwise noted, apply uniformly to both union and non-union employers.

Hiring Practices
The first step in the audit process is the examination of your contractor client's hiring practices. (Usually you will get a good idea of your client's level of overall compliance after completing the first few steps of the audit.)

Required Posters. A good place to begin is by determining whether your contractor is complying with the Wisconsin and federal posting requirements. Employers are required to display, in a conspicuous place where employees are most likely to view them (which may include multiple work-sites), an array of federal and state employment posters. Information and copies of the posters can be obtained from the Wisconsin Department of Workforce Development (DWD) at (608) 267-4444.

Job Applications/Interview Processes. The second step is to quiz your client on the client's job application and interview procedures, determine whether they understand the "illegal" questions under state and federal law, and review their job application forms. Many contractors use standardized job applications which are outdated and which contain questions now prohibited under state and federal law. (For example, many applications still contain questions regarding past worker's compensation claims, disabilities, or handicaps.) We recommend that all employers obtain a copy of the DWD pamphlet entitled "Avoiding Loaded Employment Application Questions Which May Lead To Discrimination. " Your investigation should also determine whether your client is complying with the federal Americans with Disabilities Act (ADA) with respect to pre-employment physical examinations or questionnaires. A key point of the ADA is that pre-employment physical exams are not allowed unless a conditional job offer has been made and the exam is either given uniformly to all employees in the same job category or due to business necessity. The federal government has issued a helpful pamphlet discussing disability-related questions and medical examinations entitled "ADA Enforcement Guidance: Pre-employment Disability-Related Questions and Medical Examinations."

Fair Credit Reporting Act Restrictions. Some of your contractor clients may routinely obtain background reports on job applicants including criminal arrests and convictions, credit worthiness, prior drug and alcohol testing, and similar background information. If this information is obtained from a third party, your client needs to be aware of the new amendments to the Federal Fair Credit Reporting Act which became effective on September 30, 1997. The Fair Credit Reporting Act (15 U.S.C. § 1681 et seq.) provides specific procedures and forms that employers must now use in obtaining personal background information about job applicants from third party sources.

New W-4T Forms. The next step in the audit is to review the actual hiring process. There are a number of forms which contractors must complete as part of the hiring process. For example, beginning on January 1, 1998, Wisconsin employers are required to have employees complete a new W-4 tax form (called the "W-4T" form). This form contains more information than previous W-4 forms, primarily in order to assist Wisconsin in the collection of unpaid child support from "deadbeat dads. " If your client is not using the new forms, you can obtain more information from the DWD at (608) 267-9015.

I-9 Forms. Another form which is required to be completed at the time of hiring is the federal Immigration and Naturalization Form (I-9). With the current worker shortage, some contractors are taking dangerous shortcuts and ignoring the I-9 requirement during the hiring process. This can lead to serious penalties and should be discussed with your client.

Personnel Files. The next step in the audit process is to determine where and how your client stores information concerning its employees (such as the I-9 form, W-4T form, job application, etc.). Contractors have historically neglected the importance of personnel files for their employees, particularly contractors who routinely employ numerous seasonal employees throughout the year. Nevertheless, proper record-keeping for all employees is essential. One important point is that any contractor subject to the ADA (more than 15 employees) must have separate personnel files for each employee for the purpose of segregating medical information from non-medical information. The medical information files must be maintained in a safeguarded place, and access to the files must be limited to those persons authorized under the ADA to obtain such medical information.

Record-keeping Requirements. In addition to maintaining the forms describes above, employers are required under state and federal law to maintain specific information about each employee they employ. These records are required to be kept for at least three years. The requirements are set forth in the regulations under the federal Fair Labor Standards Act (FLSA), 29 C.F.R. § 516.2(a), and the Wisconsin Administrative Code, DWD 270.14.

Handbooks and Manuals. You should also verify that your non-union contractors are taking steps to preserve the "at-will" status of their employees. The easiest way to inadvertently lose the "at-will" protection and create a contract is to verbally promise employment for a specific length of time through employee handbooks or manuals, (including safety manuals). In order to avoid the inadvertent creation of contract employees, you should counsel the contractor on avoidance of oral promises and review all existing personnel manuals and handbooks to ensure that they contain appropriate disclaimer language and do not contain mandatory disciplinary and termination procedures.

Compensation Issues
The next step in the audit is to review your contractor's compensation procedures.

Minimum Wage. The general minimum wage requirement, as of September 1, 1997, is $5.15 per hour, which must be complied with except for certain classifications of employees.

Exemptions and Overtime. The most common compensation problems are the misclassification of exempt employees and the improper calculation of overtime. The rules for exempt-non-exempt classifications and overtime calculation requirements are found in the Wisconsin Administrative Code, DWD 274.04, and in the FLSA regulations found at 29 C.F.R. 541 et seq. There is a helpful brochure published by the Wisconsin Department of Labor Standards entitled "Hours of Work and Overtime Law, " which describes the exemptions and overtime rules. Copies of the brochure can be obtained by calling (608) 266-6860. During your audit, you identify which employees are not paid overtime, and you should question the rationale used to make this determination. Many employers erroneously consider the term "salaried employee" to be synonymous with "exempt employee" and any misunderstanding on this point must be clarified. Common violations of the overtime laws include various piece meal, per diem, flat fee or percentage wage rates which fail to a account for overtime. You should review the payment procedures to make sure that the federal and state overtime laws are being followed.

Timekeeping. Both state and federal law require employers to verify the time worked by all employees (including exempt employees) through the use of either time clocks or time cards.

Wage Deductions. Another common violation involves improper wage deductions. Pursuant to Wis. Stat. § 109.455, it is generally illegal for a contractor to unilaterally deduct sums from employee's paychecks for such items as missing tools and equipment, negligent work, or other damages suffered by the employer, unless specific procedures are followed.

Leave and Return to Work Obligations
One of the most increasingly complex and confusing areas of employment law is the employer's obligation to provide leave to its employees and its obligation to rehire employees following approved leave. In addition to being confusing, this area of law reflects some of the largest potential monetary exposures.

Worker's Compensation Leave. Most contractors are familiar with the requirements of the Wisconsin Worker's Compensation law as it applies to workplace injuries. Unfortunately, many contractors delegate complete responsibility for workplace injuries to their insurance administrator and may pay little attention to the status of injured employee, particularly in cases involving seasonal employees. A frequently overlooked provision of the worker's compensation law is the requirement that employers rehire employees following their recovery from the injury. The obligation for rehiring employees with workplace injuries is set forth in Wis. Stat. § 102.35. Importantly, this is an uninsured obligation of the employer. If liability is found, the employer can be liable for one year's wages to the employee.

Family and Medical Leave Acts. Contractors with over 50 employees must comply with the Wisconsin and the federal Family and Medical Leave Acts (FMLA). Unlike other laws, the federal FMLA does not supersede the state FMLA, and contractors must be aware of the provisions of each. There are mandatory forms and notices which must be used in conjunction with FMLA leave, and there are mandatory rehiring obligations under each law. If your contractor is subject to these acts, you should carefully review the forms and procedures under each law with your contractor and verify compliance.

Americans with Disability Act. Another overlooked law with respect to potential leave obligations is the ADA. Some courts consider that leave, with the corresponding obligation to rehire the employee, is a "reasonable accommodation" required under the ADA. For contractors subject to the ADA (over 15 employees), you must make sure that your client understands and evaluates whether leave may be required for employees under the ADA. (Many contractors also mistakenly assume that leave is only required for workplace injuries. However, both FMLA and ADA leave may be available for non-work-related illnesses and injuries.)

Short-Term/Long-Term Disability Policies. Your client may also maintain short-term disability and long-term disability policies for the benefit of its employees. With the advent of the ADA, FMLA, and other laws, these policies should be carefully reviewed to make sure that your client understands its rehire obligations under each of the policies, how the policies fit with each other, and how they work in conjunction with worker's compensation, ADA, and FMLA (as well as any collective bargaining agreements).

Reporter's Note
This outline was originally presented during the 1998 Midwinter convention. The remainder of this outline will be published in the next newsletter. In that next part of the outline, Mr. Grobe covers EEO and Fair Employment Laws and miscellaneous issues, such as independent contractors and drug and alcohol testing of CDL-licensed employees.

Recent Wisconsin Decisions

Construction by Private, Nonprofit Corporation -- "Public Work" Status -- Wage Rate Statute
This decision involved River Walk, a development project in downtown Milwaukee consisting of a system of sidewalks, decorative lighting, and landscaping along the Milwaukee River. The city entered into agreements to provide grant money to the two entities who were developing the project. One entity was a business improvement district, governed by a board of directors appointed by Milwaukee's mayor and confirmed by the common council. The agreement for the project gave the business improvement district the authority to obtain property for the project and to construct, as well as "control or own, operate and maintain or cause to be operated and maintained, " the project segments that were not designated for control by the city. Private property owners had petitioned for the creation of the business improvement district. The other entity involved was a nonprofit Wisconsin corporation. It was funded by a grant from the city of Milwaukee and a Milwaukee-based corporation. The nonprofit corporation agreed to further River Walk construction and development along segments of the Milwaukee River.

None of the improvements which were the subject of this lawsuit was to be owned, leased, or operated by the city. The project segments that were to be owned by the city were governed by the wage rate laws of Wis. Stat. § 66.293 and were not involved in the case.

One of the plaintiffs was the Milwaukee Building and Construction Trades Council. The plaintiffs filed a complaint against the city seeking injunctive relief on the basis that the project was subject to the wage rate laws of section 66.293 because the project was a "public work. " The trial court granted the defendants' motion for summary judgment, ruling that the project did not constitute a "public work" because that term applies only to public improvements performed upon premises owned by the city. The plaintiff appealed.

Plaintiff argued that the project was a "public work" because: (1) it was work done by contract for the city; (2) it was of a public nature and character; and (3) the city provided funding for the project and was exhibiting pervasive control over the project. The city, the business improvement district, and the nonprofit corporation argued that although the project assumed a public purpose, it was not a "public work" because: (1) the project involved improvements to privately owned property; (2) the city would not be using or maintaining the River Walk; (3) neither public financing nor use by the public at large would transform a private construction project into a public work; and (4) the city was not undertaking the work covered by the project.

The court of appeals said the appeal issue presented was whether the city made or entered into a contract for public works. If so, it is subject to both section 66.293(3) and a Milwaukee ordinance and should be required to incorporate the prevailing wage rate into the contract. The court said for this statute to apply, the court must conclude that: (1) the city must have entered into the contract; and (2) the contract involved a "public work. " The court of appeals examined the statute, the legislative policy underlying the statute, and the governing law, and concluded that the portions of the project at issue, the non-city owned segments, did not constitute public works. It said the legislature has not broadened the definition of a "public work" to include any project which receives public funding.

The court of appeals was also persuaded by an attorney general's opinion on the definition of a "public work" in which the attorney general said that the source of funding for a project does not control whether the project is a "public work. "

The court said additional support for its conclusion that the project was not a "public work, " could be found within the Milwaukee ordinances addressing "public works. " An ordinance section makes the department of public works responsible for "all matters relating to the design, construction, maintenance, and operation of the physical properties of the city of Milwaukee. " Another section provides that "any laborer or mechanic employed by any contractor or subcontractor of the city upon any of the public works "of this city" is hereby limited to . . . . " The court of appeals said these references support the conclusion that a public work relates to work done for the city on city-owned property.

The court concluded that in determining whether a project is a public work, each project must be evaluated separately. The factors to consider include the nature and the character of the project, the ownership, use and maintenance of the project, and whether the work is being done for the appropriate municipality.

A dissenting judge agreed with the majority's view that in determining if a project is a project of public works, a court must look at the particular characteristics of the project and evaluate the factors including those the majority discussed. However, the dissenting judge concluded that when he looked at these characteristics, he concluded that the project was a project of public works. Elliott v. Morgan, 214 Wis.2d 253, 571 N.W.2d 866 (Ct. App. 1997).

Building Defect -- Statute of Limitations -- Accrual of Asbestos Damage Claim -- Negligence in Design, Manufacturer, and Sale of Asbestos Fire Proofing
The plaintiff owned a bank and office building in Milwaukee. The building was constructed by a previous owner in 1961 and 1962. The steel frame of the building had been sprayed with fire proofing products manufactured by the defendant. On April 24, 1989, the plaintiff filed a cause of action against the defendant alleging strict liability, negligence, and misrepresentation. The plaintiff claimed: (1) that the defendant was negligent in the design, manufacturer, and sale of the asbestos-laden fire proofing; (2) that the fire proofing was unreasonably dangerous at the time it was sold; and (3) that the defendant misrepresented the health risks associated with the fire proofing. The plaintiff's complaint sought damages for reimbursement of the cost of inspection, operation, maintenance, training, analysis, containment, removal, and replacement of asbestos and asbestos-containing products, replacement of building improvements necessitated by abatement and loss of use of the building. The trial court granted a motion to dismiss the action under the economic loss doctrine, which precludes claims in tort for purely economic loss damages. The defendant moved for summary judgment on the basis that the plaintiff knew or, in the exercise of reasonable diligence, should have known about the presence of asbestos in its building, its potential threat to health, and the certainty of damages as a result of that health threat more than six years prior to the commencement of the action. The trial court agreed and granted the motion to dismiss.

The court of appeals said the date on which an asbestos property damage claim accrues in Wisconsin for statute of limitation purposes presented an issue of first impression. The plaintiff argued that the mere presence of asbestos in a product is not a tort injury and that its claims could not accrue until it sustained an injury. The court of appeals concluded that because the undisputed material facts established that the plaintiff knew or should have known that its cause of action accrued prior to April 24, 1983, it affirmed the dismissal.

The plaintiff tried to rely on the distinction in some jurisdictions between the presence of asbestos in a product and the release of asbestos fibers from the product which sequentially contaminate and cause injury to property or persons. The court said this proposition ignores the basic tenets of Wisconsin's reasonable discovery rule and the body of case law that has evolved since its creation in A. H. Robbins. The plaintiff conceded however in its complaint that it had knowledge as early as 1961-62 of the presence of asbestos in the building resulting from fire proofing that was purchased from the defendant.

The court concluded by saying that "claimed ignorance, forgetfulness, and ambivalence in the face of undisputed documentary indicia of knowledge does not equate to reasonable due diligence" and therefore the tort claims were barred by the statute of limitations. Banc One Building Management Corp. v. W. R. Grace Co., 210 Wis.2d 62, 565 N.W.2d 154 (Ct. App. 1997).

Safe Place Statute --Requirement of Security Alarm Systems
The plaintiff was working at his place of employment, a grocery and liquor store, and was injured by a person who was attempting to rob the store. The plaintiff filed a lawsuit against the owner of the building alleging that the owner had a duty and obligation to insure that the building was a safe place to work. The complaint alleged that the defendant knew or should have known that the building was located in a high-crime area, which required the owner to equip the building with "security systems, such as alarms and surveillance cameras. " There was also an allegation that an alarm system that was in place was deactivated to perform remodeling to the building.

The defendant-owner filed a motion seeking summary judgment on the basis that as the owner of the building used as a place of employment, his statutory duties were limited to maintaining the building free of structural defects and unsafe conditions associated with the structure. The defendant argued that because the plaintiff's injuries were not related to a structural defect or unsafe condition associated with the structure, summary judgment was appropriate. The trial court ruled that the duty to maintain the security system is a duty associated with conditions of employment and maintaining a safe employment, which is the duty of the employer and not the duty of an owner of a place of employment. The trial court said there is no case that says the owner of the building is responsible to install and maintain a security alarm system for the conduct of a business which is operated by a separate legal entity on those premises. The trial court granted summary judgment and dismissed the case.

The court of appeals in a 2-1 decision affirmed the summary judgment. It said that the obligation of an owner of a public building to furnish a safe place under the safe place statute is limited to structural or physical defects or hazards.

The court said the decisive question is whether the allegations regarding the alarm system and safety devices fall into the category of "safe place of employment" or "safe employment. " If it relates to a safe place of employment, both the owner and employer are responsible. If it relates only to "safe employment, " then only the employer is responsible for the condition. The court said that the supreme court has concluded that an owner's duty is satisfied in making sure a building is safe if the building "is composed of proper materials and is structurally safe, and that the statute does not apply to temporary conditions having no relation to the structure of the building or the materials of which it is composed. "

The court of appeals concluded that an alarm system is not part of the structural composition of the building. It said safety devices that protect employees from criminal activity are usually not part of the structure of the building. (Recommended for publication, Naaj v. Aetna Ins. Co., Case no. 96-3640, filed March 31, 1998, court of appeals).

Economic Loss Doctrine -- No Privacy in Contract
A rock quarry operator brought an action against a manufacturer of a rock crusher component, alleging manufacturer's negligence and strict liability for quarry operator's losses due to a defect in the component. The manufacturer removed the case to federal district court which granted the manufacturer's motion for summary judgment. On appeal by the quarry operator, the United States Court of Appeals for the Seventh Circuit certified the following question of law to the Wisconsin Supreme Court: "In the absence of privity, does the economic loss doctrine bar a remote commercial purchaser from recovering economic losses from a manufacturer under theories of strict liability and negligence?" " The Wisconsin Supreme Court answered the certified question in the affirmative. The court said the economic loss doctrine precludes a commercial purchaser from recovering in tort from a manufacturer for solely economic losses, regardless of whether privity of contract exists between the parties. The plaintiff was the operator of a quarry and utilized machines known as primary, secondary, and tertiary crushers which include a component called a "pitman. " The defendant manufactures and sells new crushing equipment and spare parts to distributors who resell the product to quarry operators. In January 1991, the plaintiff's pitman failed, necessitating replacement. The plaintiff purchased a replacement pitman manufactured by the defendant from a distributor. In its distributor agreement, the manufacturer provided the distributor with a standard express warranty which applied to the defendant's products including the pitman sold to the plaintiff.

At the time it purchased the pitman, the plaintiff was unaware of the warranty and the distributor did not pass this warranty to the plaintiff. In addition, the plaintiff did not request or receive a warranty on the replacement pitman. Soon after the plaintiff installed the replacement part in two of its crushers, the machines began to break down. Between 1991 and 1993, there were five or six serious breakdowns of the crushing equipment. These breakdowns were attributed to the defendant's pitman. The plaintiff filed suit alleging that the defendant sold it a defective product that caused over $400,000 in damages, including repair costs, lost revenue, and prejudgment interest.

The supreme court reviewed the application of the economic loss doctrine and said it was persuaded by the view that contract notions of privity are irrelevant to the question of whether a commercial manufacturer owes a duty under tort law to commercial purchasers of its products to protect against the risk that its product, if defective, might damage only itself.

The supreme court said it first adopted the economic loss doctrine in Sunnyslope Grading, Inc. v. Miller, 148 Wis.2d 910, 437 N.W.2d 213 (1989). In that case, the plaintiff, was a commercial contractor who purchased a backhoe directly from the defendant manufacturer. When the backhoe failed to perform properly, the plaintiff brought a tort action against the manufacturer for damages including the cost of replacement parts, labor charges, and lost profits. At the time of sale of the backhoe, the manufacturer gave the plaintiff a written warranty limiting the manufacturer's liability for defects in the backhoe to repair and replacement costs for a set time, and disclaiming all other liability for direct, incidental, and consequential damages. The supreme court denied the plaintiff relief in that case, holding that a commercial purchaser of a product cannot recover solely economic losses from the manufacturer under negligence or strict liability theories, particularly where the warranty given by the manufacturer precludes the recovery of the damages.

The supreme court said that in Sunnyslope a significant issue was left unanswered, namely the one presented by the appeal in this case: whether the economic loss doctrine applies where no privity of contract exists between the manufacturer and remote commercial purchasers.

The supreme court said that if manufacturers were held liable to remote commercial purchasers under tort theories for frustrated economic expectations, all manufacturers would effectively be prevented from negotiating their liability through the bargaining process. In addition, allowing remote commercial purchasers to recover in tort for what is a commercial contract claim would perversely encourage those purchasers to bargain for no warranty or insurance in exchange for a reduced purchase price because they could rely on tort remedies as their warranty. The Wisconsin Supreme Court saw no reason to intrude into the parties' allocations of the risk of economic loss and to extricate the parties from their bargains.

The court said by answering the certified question in the affirmative, it hoped to clearly define the boundaries of the economic loss doctrine under Wisconsin law. In the Sunnyslope decision, it held that a commercial purchaser cannot recover solely economic losses from the manufacturer under tort, particularly where a warranty is given by the manufacturer. In this decision, it applied the economic loss doctrine it adopted in Sunnyslope without the particular qualifying language necessitated by the facts of that case. Its conclusion simplifies Wisconsin law so that a commercial purchaser of a product cannot recover solely economic losses from the manufacturer under tort theories of negligence or strict liability. Daanen & Janssen Inc. v. Cedarapids, Inc. 216 Wis.2d 394, 573 N.W.2d 842 (1998).