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Drawing the Line Between
Contract and Tort Theories
Under the Economic Loss Doctrine

Anticipating future applications

So far, the Wisconsin Supreme Court and Court of Appeals have applied the economic loss doctrine only to negligence or strict liability claims arising out of the sale of a product in a commercial transaction. However, recent federal court decisions applying Wisconsin law have extended the doctrine to claims for negligent services and pollution. Federal courts also have addressed how the doctrine applies to fraud claims. In addition, courts in some other jurisdictions have applied the doctrine to consumer transactions.

Negligent services.Wisconsin courts have suggested that the economic loss doctrine may not apply to claims for negligent services, particularly professional services. In Sunnyslope the Wisconsin Supreme Court distinguished prior case law allowing recovery of economic losses in tort where the claim was for negligent services.¹² Similarly, the Wisconsin Court of Appeals declined to apply the economic loss doctrine to a case involving negligent services.¹³ In Daanen & Janssen the Wisconsin Supreme Court stated that "we have not addressed nor do we address here whether the doctrine applies with equal force to damages resulting from the provision of services."¹⁴

There are reasons to distinguish between claims for services and claims for defective products. A substantial body of law has been developed in the Uniform Commercial Code to deal with allocation of risk in the sale of products, including implied warranties where the parties have not expressly allocated risks. There is no corresponding body of law that has been developed to the same extent with respect to negligent services.

Nonetheless, federal courts applying Wisconsin law have predicted that the supreme court would apply the economic loss doctrine to claims for negligent services.¹⁵ As noted by Judge Barbara Crabb, "sophisticated parties are just as capable of allocating the risk of economic loss in a contract for services as in a contract for a product."¹⁶

Further, even though Wisconsin courts have not applied the economic loss doctrine to claims for negligent services, Wisconsin caselaw has limited the scope of tort claims arising in the context of contracts for services. There must be a duty existing independently of the contract in order for a cause of action in tort to arise.¹⁷ These decisions are consistent with the policies articulated in Daanen & Janssen. Since Wisconsin courts have held already that a mere contractual duty will not support a claim in tort, applying the economic loss doctrine to claims for negligent provision of services may be a logical next step.

Environmental claims. Federal courts also have applied Wisconsin's economic loss doctrine to tort claims by owners of contaminated land, even though the Wisconsin courts have not yet done so.¹⁸ In those cases, the current landowners brought claims in tort, including nuisance, trespass, negligence, and ultrahazardous activity, to recover cleanup costs from past owners who caused the contamination.

The federal courts held that Wisconsin's economic loss doctrine barred the tort claims. In one case,¹⁹ the court rejected claims that there was damage to "other property" because of groundwater contamination, despite Wisconsin caselaw that groundwater is not owned by the landowner, but rather is public property.²⁰ In Northridge the supreme court declined to apply the economic loss doctrine to bar tort claims arising from asbestos in a shopping center building, ruling that such claims involve damage to other property and implicate the type of health and safety concerns that are the proper subject of tort claims. Nonetheless, the federal court rejected arguments that tort claims were proper because of health concerns caused by groundwater contamination.

The application of the economic loss doctrine to environmental cases extends the economic loss doctrine beyond its traditional boundaries, particularly where the cases involve groundwater contamination. In some cases, it will not be a problem because the landowner will have a remedy under federal environmental laws.²¹ However, in other cases, there will be a real impact, because of limitations in those federal laws.²²

Ronald R. Ragatz, U.W. 1977, is a shareholder at DeWitt Ross & Stevens S.C., Madison. He was attorney of record for Cedarapids Inc. in Daanen & Janssen v. Cedarapids.

The Wisconsin Supreme Court probably would agree that claims for fraud in the inducement are not barred, because the doctrine is intended to promote freedom of commercial parties to allocate risks, but such fraud can defeat informed contractual allocation of risks. How the supreme court would treat the latter category of fraud is unclear.

Consumer claims. Finally, some jurisdictions have applied the economic loss doctrine even to consumer transactions.²⁶ However, in the decisions of the Wisconsin Supreme Court on the economic loss doctrine to date, the sophistication of commercial purchasers and their relatively equal bargaining power with sellers and manufacturers has been an important consideration in applying the doctrine. It seems unlikely that the Wisconsin Supreme Court would apply the doctrine to consumer claims.

Conclusion

The Wisconsin Supreme Court has just made the line between contract and tort in product liability cases clearer. In coming years, look for the court to begin drawing such a line in other areas, including claims for negligent services, contamination, and fraud.

Endnotes

¹Daanen & Janssen Inc. v. Cedarapids Inc., 216 Wis. 2d 394, 573 N.W.2d 842 (1998).

²Northridge Co. v. W.R. Grace & Co., 162 Wis. 2d 918, 925-26, 471 N.W.2d 179 (1991).

³Sunnyslope Grading Inc. v. Miller, Bradford & Risberg, 148 Wis. 2d 910, 437 N.W.2d 213 (1989).

⁴East River Steamship Corp. v. Transamerica Delaval Inc., 476 U.S. 858 (1986).

⁵Id. at 868.

⁶Northridge, 162 Wis. 2d 918, 933-34, 471 Wis. 2d 179 (1990).

⁷Miller v. U.S. Steel Corp., 902 F.2d 573 (7th Cir. 1990); Midwest Knitting Mills Inc. v. U.S., 950 F.2d 1295 (7th Cir. 1991); Midwest Helicopters Airways v. Sikorsky Aircraft Inc., 849 F. Supp. 666 (E.D. Wis. 1994), aff'd, 42 F.3d 1391 (7th Cir. 1994).

⁸Daanen & Janssen, 216 Wis. 2d at 402, 573 N.W.2d at 846.

⁹Id. at 405, 573 N.W.2d at 847.

¹⁰Id. at 410, 573 N.W.2d at 849.

¹¹Id. at 413, 573 N.W.2d at 850.

¹²Sunnyslope, 148 Wis. 2d at 918-19, 437 N.W.2d at 216, distinguishing A.E. Investment Corp. v. Link Builders Inc., 62 Wis. 2d 479, 214 N.W.2d 764 (1974).

¹³Hap's Aerial Enter. Inc. v. General Aviation Corp., 173 Wis. 2d 459, 496 N.W.2d 680 (Ct. App. 1992).

¹⁴Daanen & Janssen, 216 Wis. 2d at 416, n. 9, 573 N.W.2d at 852, n. 9.

¹⁵Stoughton Trailers Inc. v. Henkel Corp., 965 F. Supp. 1227 (W.D. Wis. 1997); Wausau Paper Mills Co. v. Chas. P. Main Inc., 789 F. Supp. 968 (W.D. Wis. 1992).

¹⁶Stoughton Trailers, 965 F. Supp. at 1233 (W.D. Wis. 1997).

¹⁷Landwehr v. Citizens Trust Co., 110 Wis. 2d 716, 723, 329 N.W.2d 411 (1983); Greenberg v. Stewart Title Guar. Co., 171 Wis. 2d 485, 492 N.W.2d 147, 152 (1992) (dismissing tort claims against title companies because they "did not assume an independent duty to Greenberg to examine title and conduct a reasonable search."); Madison Newspapers Inc. v. Pinkerton's, 200 Wis. 2d 468, 545 N.W.2d 843 (Ct. App. 1996) (dismissing tort claims for negligent supervision of security personnel, where the security personnel were provided pursuant to contract).

¹⁸Metal Processing Co. v. Amoco Oil Co., 926 F. Supp. 828 (E.D. Wis. 1996); Raytheon Co. v. McGraw-Edison Co. Inc., 979 F. Supp. 858 (E.D. Wis. 1997); DT Inc. v. Avatar Holdings, Case No. 97-C-447 (W.D. Wis. 1997).

¹⁹DT Inc. v. Avatar, Case No. 97-C-447 (W.D. Wis. 1997).

²⁰Lee Associates Inc. v. Perers, 206 Wis. 2d 509, 522, 557 N.W.2d 457 (Ct. App. 1996).

²¹See, the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), 42 U.S.C. §9601, et seq., or the Resource Conservation and Recovery Act (RCRA), 42 U.S.C. § 6901 et seq.

²²For instance, CERCLA does not cover petroleum contamination in the absence of other contaminants. RCRA cannot be used to recover past costs. Meghrig v. KFC Western Inc., ___ U.S. ___, 116 S. Ct. 1251, 134 L. Ed. 2d 121 (1996).

²³Stoughton Trailers, 965 F. Supp. 1227 (W.D. Wis. 1997); Raytheon Co. v. McGraw-Edison Co. Inc., 979 F. Supp. 858 (E.D. Wis. 1997); Cooper Power Sys. v. Union Carbide, 123 F.2d 675 (7th Cir. 1997).

²⁴Stoughton Trailers, 965 F. Supp. at 1236.

²⁵Raytheon, 979 F. Supp. at 870-73; Cooper Power Sys., 123 F.3d at 682.

²⁶See, e.g., Alloway v. New Hampshire Ins. Co., 695 A.2d 264 (N.J. 1997); Danforth v. Acorn Structures Inc., 608 A.2d 1194 (Del. 1992); Dairyland Ins. Co. v. General Motors Corp., 549 So. 2d 44, 46 (Ala. 1989).