Construction & Public Contract Law Section Blog: The Importance of Integration and Non-Reliance/Disclaimer Clauses in Construction Contracts:

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  • Construction & Public Contract Law Section Blog
    May
    04
    2020

    The Importance of Integration and Non-Reliance/Disclaimer Clauses in Construction Contracts

    Scott J. Thomsen

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    Carefully crafted, an integration clause with non-reliance and tort disclaimer language may avoid common law and statutory misrepresentation claims. Scott J. Thomsen discusses a recent Wisconsin Supreme Court decision and highlights how current standard form construction contract language may not sufficiently protect the contracting parties.

    The Wisconsin Supreme Court’s recent decision in Hinrichs v. Dow Chemical Company1 highlights extra-contractual liability for common law misrepresentation and statutory misrepresentation in violation of Wis. Stat. section 100.18, which may be pursued against construction parties.

    Hinrichs v. Dow Chemical Company

    Plaintiff Chris Hinrichs and his company Autovation, Ltd. (Hinrichs) develops, manufactures, and installs a product called “JeeTops,” an after-market acrylic skylight panel which can be installed on Jeep Wranglers with a certain type of hardtop. Installation of JeeTop involves application of an adhesive manufactured by Dow Chemical Company (Dow), which had the function of attaching the JeeTop panel to the existing hardtop while maintaining a water-tight seal.2

    In 2013, an agent of Dow informed Hinrichs that a new primer was available for use with the Dow adhesive being used to install the JeeTops panels.3 Soon after the new primer was used in the installation process, Hinrichs reported to Dow that its customers were experiencing cracks in the JeeTop panels.4 Dow lab tested the interaction between the acrylic used in JeeTops with its primer, and reported to Hinrichs that its adhesive was properly functioning and not the cause of the cracking and failures experienced by Hinrichs’ customers.5

    Scott J. Thomsen gov scott.thomsen fcpotawatomi-nsn Scott J. Thomsen, Drake 2003, is an in-house counsel in Milwaukee for the Forest County Potawatomi Community, where he practices in commercial contracting and transactions including construction and real estate development.

    Based on this, Hinrichs continued to purchase Dow adhesive for use in the JeeTop installation process.6 By late 2014, one-third of all JeeTops installed using the Dow adhesive had failed.7 Subsequent analysis determined the Dow adhesive was attacking the integrity of the acrylic, causing the cracking, leaks, and failure of the panels.8

    By this time, JeeTop had received negative publicity and dealers had dropped JeeTops from their product lines, and ultimately, Hinrichs was unable sell the product because of the perception of unreliability.9

    Procedural History

    Hinrichs brought suit against Dow in Waukesha County Circuit Court, alleging claims for common law misrepresentation (negligent, intentional, and strict responsibility misrepresentation) and a claim for statutory misrepresentation in violation of section 100.18 (Fraudulent Representations).10

    The circuit court granted Dow’s motion to dismiss, finding that the economic loss doctrine barred Hinrichs’ common law and statutory misrepresentation claims.11

    With respect to the common law misrepresentation claims, the circuit court held the “fraud in the inducement” and “other property” exceptions to the economic loss doctrine were inapplicable.12 Holding that Hinrichs could not be considered “the public” given the existing relationship with Dow, the circuit court dismissed the statutory misrepresentation claim.13

    On appeal, the Wisconsin Court of Appeals District II affirmed that the economic loss doctrine barred Hinrichs’ common law misrepresentation claims, likewise concluding that neither the “fraud in the inducement” and “other property” exceptions were applicable.14

    The court of appeals reversed the circuit court on the statutory misrepresentation claim and remanded to the circuit court for additional fact finding, concluding that dismissal was improper, as it was fairly debatable whether Hinrichs could be considered “the public.”15

    Both parties petitioned the Wisconsin Supreme Court.

    Analysis of the Supreme Court Ruling

    On Jan. 9, 2020, the Supreme Court ruled that Wisconsin’s economic loss doctrine barred the common law misrepresentation claim but did not bar the statutory claim.

    A four-justice majority also ruled that a heightened pleading standard for claims of fraud does not apply to statutory claims under section 100.18.

    Common Law Misrepresentation Claims

    The economic loss doctrine is a judicially-created doctrine that requires contracting parties to pursue only their contractual remedies for economic losses that result from the performance or non-performance of the contract.

    Stated another way, tort remedies, which typically cannot be bargained for, are not available to contracting parties for purely economic losses. Common law misrepresentation claims, which are a tort law remedy, are barred by the economic loss doctrine unless the plaintiff can demonstrate that one or more of the several narrow exceptions apply.

    Hinrichs argued the “fraud in the inducement” and “other property” exceptions to the economic loss doctrine applied, and as a result, his common law misrepresentation claims should be allowed to proceed.

    With respect to the “fraud in the inducement” exception, the Supreme Court held that it was inapplicable, as “the alleged misrepresentation is related to the quality and characteristics of the [adhesive] and is thus not extraneous to the contract.”16

    The Supreme Court likewise held the “other property” exception inapplicable, as Dow’s adhesive and the JeeTop panels constituted an “integrated system” such that “once a part becomes integrated into a completed product or system, the entire product or system ceases to be ‘other property’ for purposes of the economic loss doctrine.”17

    Statutory Misrepresentation Claim Pursuant to Wis. Stat. § 100.18

    Section 100.18, sometimes referred to as Wisconsin’s Deceptive Trade Practices Act (DTPA) or false advertising statute, generally provides remedies to those harmed by the publishing or dissemination of an advertisement to the public which is untrue, deceptive, or misleading, with the intent to induce the public to enter into a contract. The statute can be viewed as pro-consumer, as it provides a private right of action, and violation of the statute carries with it the potential of the award of attorney fees.18

    After first acknowledging divergent decisions between the Wisconsin Court of Appeals and Wisconsin’s Western District, the Supreme Court pronounced “the economic loss doctrine does not serve as a bar to claims made under Wis. Stat. §100.18.”19

    The Supreme Court reaffirmed the Court of Appeals’ decision in Kailin v. Armstrong that “[The DTPA] created a new cause of action, providing ‘protection and remedies for false advertising that do not exist at common law.’”20 In doing so, the Supreme Court rejected Dow’s argument that the sophistication of the commercial relationship should be considered.21

    After addressing the threshold determination of whether the economic loss doctrine could serve to bar Hinrichs’ statutory misrepresentation claim, the Supreme Court further held that Hinrichs, as one person, could be considered “the public,” and that the Court of Appeals dismissal on this ground was in error.22 The determination of whether the plaintiff was a member of the public, or whether a “particular relationship” existed between the plaintiff and defendant, is a fact intense inquiry.23

    As a result, the Supreme Court concluded that Hinrichs’ common law misrepresentation claims could not proceed but, importantly, the statutory misrepresentation was not per se barred by the economic loss doctrine and should be remanded to the circuit court for further fact finding.

    Practical Considerations for Construction Contracts

    While the Hinrichs case does not arise from a construction contract, its central holdings have particular relevance to the construction industry and the construction law practitioner.

    Most notably, a statutory claim for false advertising under section 100.18, will not be barred by the economic loss doctrine. With the potential award of attorney fees, such a claim can often be the driving force in litigation.

    Additionally, the Supreme Court has reaffirmed that causes of action for common law misrepresentation can exist if the “fraud in the inducement” or “other property” exceptions are applicable.

    Construction parties may be alleged to have engaged in conduct giving rise to claims for common law and statutory misrepresentation. While there are numerous factual scenarios where this could arise, on construction projects such claims typically center on qualifications, schedule, cost, and quality and product performance.

    With the potential for extra-contractual tort liability, it is now more critical than ever that those drafting construction contracts consider the inclusion of an integration clause (sometimes referred to as a merger clause) coupled with non-reliance and tort disclaimer language. If included, they should be carefully crafted.

    Standard Form Construction Contract Integration Clauses

    A critical but often-overlooked boilerplate clause, the integration clause is intended to foreclose the possibility of a party later claiming prior or contemporaneous terms or representations outside of the written agreement were agreed upon or help explain the meaning of the agreement.

    By way of example, General Conditions of the Contract for Construction published by the American Institute of Architects states:

    The Contract represents the entire and integrated agreement between the parties hereto and supersedes prior negotiations, representations, or agreements, either written or oral.24

    Standard General Conditions of the Construction Contract from the Engineers Joint Contract Documents Committee provides:

    The Contract supersedes prior negotiations, representations, and agreements, whether written or oral.25

    Standard Agreement and General Conditions Between Owner and Constructor from ConsensusDocs states in part:

    This Agreement represents the entire and integrated agreement between the Parties, and supersedes all prior negotiations, representations, or agreements, either written or oral.26

    A Recommendation

    The Wisconsin Supreme Court has enforced integration clauses similar to those above, holding that courts may not consider evidence of prior or contemporaneous oral or written agreements between the parties if a contract is fully integrated.27

    This is consistent with Wisconsin’s tradition of applying the parol evidence rule. However, the above standard form construction contract integration clauses may not serve to bar claims for common law and statutory misrepresentation, particularly those premised on alleged fraud. Wisconsin state and federal case law suggests more may be necessary.

    As a best practice for those seeking to protect their client from such claims during the contracting process, the inclusion of non-reliance and explicit tort disclaimer language as either a stand-alone clause or incorporated into the integration clause may be advisable.28

    Such a clause would need to “clearly, unambiguously, and unmistakably” state, in effect, that there have been no understandings, representations, or warranties other than what is contained in the written construction contract, and that the parties disclaim the right to rely on the other parties’ precontract misrepresentations no matter how pled, including fraud and false advertising.29

    As with most commercial contracting, the inclusion of such language is dependent on the sophistication of the parties and their bargaining power.

    This article was originally published on the State Bar of Wisconsin’s Construction and Public Contract Law Section Blog. Visit the State Bar sections or the Construction and Public Contract Law Section web pages to learn more about the benefits of section membership.

    Endnotes

    1 Hinrichs & Autovation Ltd. v. Dow Chem. Co., 2020 WI 2, ¶¶9-10, 389 Wis. 2d 669, 937 N.W.2d 37.

    2 Id. at ¶ 11.

    3 Id. at ¶ 12.

    4 Id. at ¶ 13.

    5 Id. at ¶ 14.

    6 Id. at ¶ 15.

    7 Id.

    8 Id. at ¶ 16.

    9 Id. at ¶¶ 16-17.

    10 Id. at ¶ 18.

    11 Id. at ¶¶ 19-20.

    12 Id. at ¶ 19.

    13 Id. at ¶ 20.

    14 Id. at ¶ 21.

    15 Id. at ¶ 22.

    16 Id. at ¶¶ 38-39.

    17 Id. at ¶ 41 (citing Selzer v. Brunsell Bros., Ltd., 2002 WI App 232, ¶38, 257 Wis. 2d 809, 652 N.W.2d 806).

    18 Wis. Stat. § 100.18(11)(b)2.

    19 Hinrichs & Autovation Ltd., 2020 WI 2, ¶56.

    20 Id. at ¶ 55 (citing Kailin v. Armstrong, 2002 WI App 70, ¶42, 252 Wis. 2d 676, 643 N.W.2d 132).

    21 Id. at ¶¶ 52-55.

    22 Id. at ¶¶ 70-71.

    23 Id. at ¶ 62.

    24 Section 1.1.2, American Institute of Architects (AIA) Document A201-2017.

    25 Section 3.01(D), C-700, Engineers Joint Contract Documents Committee, 2018.

    26 Section 13.1, ConsensusDocs, 2011 (revised June 2019).

    27 See Tufail v. Midwest Hospitality, LLC, 2013 WI 62, ¶¶30-31, 348 Wis. 2d 631, 833 N.W.2d 586; Town Bank v. City Real Estate Dev., LLC, 2010 WI 134, ¶37, 330 Wis. 2d 340, 793 N.W.2d 476.

    28 See Peterson v. Cornerstone Prop. Dev., LLC, 2006 WI App 132, 294 Wis. 2d 800, 720 N.W.2d 716; Le Bleu Corp. v. Fed. Mfg., LLC, 2018 U.S. Dist. LEXIS 174832 * 30-32 (Wis. E.D. 2018).

    29 See Peterson, 2006 WI App 132, ¶¶36-38.

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