The economic loss doctrine is a judicially created rule that prevents parties from pursuing tort claims, such as negligence or misrepresentation, when the only damages they have suffered are financial in nature and stem from a breach of contract.

The doctrine aims to maintain the distinct boundaries between contract law and tort law, ensuring that contractual remedies are used to address economic losses arising from agreements between parties.

Development Through Case Law

Wisconsin's economic loss doctrine is among the most developed in the nation, and has evolved through a series of court decisions that have shaped its scope and application. Key cases include:

Sunnyslope Grading, Inc., v. Miller, Bradford & Risberg, Inc., 148 Wis. 2d 910, 437 N.W.2d 213 (1989): This landmark case established the economic loss doctrine in Wisconsin, holding that a party to a contract cannot pursue tort remedies for solely economic losses arising from the contract's performance or nonperformance.

Kaloti Enters. v. Kellogg Sales Co., 2005 WI 111, 283 Wis. 2d 555, 699 N.W.2d 205: The Supreme Court clarified the "fraud in the inducement" and "other property" exceptions to the economic loss doctrine, holding that they apply only when the fraud or damage is extraneous to the contract. To be extraneous to the contract, the misrepresentation must concern matters whose risk and responsibility did not relate to the quality or the characteristics of the goods for which the parties contracted or otherwise involve performance of the contract.

Linden v. Cascade Stone Co., 2005 WI 113, 283 Wis. 2d 606, 699 N.W.2d 189: The Wisconsin Supreme Court extended the doctrine to apply even in the absence of a direct contractual relationship, so long as the duties of the defendant arose out of interrelated contracts. Further, the doctrine does not apply to contracts for services. In the instance of a “hybrid” contract for goods and services, the doctrine applies if the contract is primarily for goods. To determine this, the court may consider the following objective and subjective factors: (1) the amount charged for services and the amount charged for materials, (2) whether the purpose or "thrust" of the contract was for goods or for services, and (3) the language used in the contract to describe the project.

1325 North Van Buren, LLC v. T-3 Group, Ltd., 2020 WI App 44, 393 Wis. 2d 231, 946 N.W.2d 813: The court of appeals further refined the doctrine's application, emphasizing that it applies to claims arising from the performance or nonperformance of a contract, regardless of how the claim is characterized.

Applies to Torts, Not Statutory Claims

The economic loss doctrine in Wisconsin applies specifically to tort claims, not statutory claims.

This means that if a claim is based on a violation of a statute, rather than a breach of a common law duty, the doctrine will not bar recovery for economic losses. This has been determined by case law, including:

Daanen & Janssen, Inc. v. Cedarapids, Inc., 216 Wis. 2d 395, 573 N.W.2d 842 (1998): The Wisconsin Supreme Court held that the economic loss doctrine does not bar claims brought under the Wisconsin Fair Dealership Law, as it is a statutory claim, not a tort claim.

Estate of Miller v. Storey, 2017 WI 99, 378 Wis. 2d 358, 903 N.W.2d 759: Statutory civil theft claims under Wis. Stat. section 895.446 are not torts, though the similar claim of conversion is a tort. (Note this ruling determined the claim is not a tort for purposes of Wis. Stat. chapter 799 small claims).

But beware citation of Dow v. Poltzer, 364 F. Supp. 2d 931 (2005): The U.S. District Court for the Eastern District of Wisconsin ruled that claims under Wis. Stat. section 895.446 were essentially torts, and therefore were barred by the doctrine. It seems this issue is not entirely settled but the author believes Wisconsin courts will maintain their position that statutory claims are not torts and therefore exempt from the doctrine.

Hinrichs v. Dow Chemical Co., 2020 WI 2, 390 Wis. 2d 658, 939 N.W.2d 533: The Supreme Court held that the economic loss doctrine does not bar claims brought under Wis. Stat. section 100.18, Fraudulent Representations.

This distinction is crucial because it allows parties to pursue statutory remedies for economic losses even if they are precluded by contract. Note that pleading deadlines may be different for these statutory claims. For example, Wis. Stat. section 100.18 carries a statute of repose of three years from the date of the misrepresentation, regardless of the discovery rule.

Does Not Preclude Tort Claims for Bodily Injury or Property Damage

The economic loss doctrine does not apply to claims involving bodily injury or property damage. This is a fundamental exception to the doctrine, recognizing that tort law plays a vital role in protecting individuals and their property from harm. In the instance the plaintiff can show any bodily injury or property damage, the economic loss doctrine has been overcome, and all of their damages may be recovered in tort.

Two important cases on this issue:

Wausau Tile, Inc. v. County Concrete Corp., 226 Wis. 2d 235, 593 N.W.2d 445 (1999): Claims that allege economic loss in combination with noneconomic loss are not barred by the doctrine.

City of Stoughton v. Thomasson Lumber Co., 2004 WI App 6, 269 Wis. 2d 339, 675 N.W.2d 487: The court of appeals reiterated that the economic loss doctrine does not bar recovery for damages to persons or other property resulting from a defective product.

‘Other property’ defined. The term "property damage" in the context of the economic loss doctrine refers to damage to property other than the product or property itself that is the subject of the contract. This means that if a defective product causes damage to other property owned by the plaintiff, the doctrine will not bar a tort claim for those damages.

Wausau Tile, Inc. v. County Concrete Corp., 226 Wis. 2d 235, 593 N.W.2d 445 (1999): Damage by a defective component of an integrated system to either the system as a whole or other system components is not damage to "other property" which precludes the application of the economic loss doctrine.

Application to inconvenience claims. The applicability of the economic loss doctrine to inconvenience claims in Wisconsin is not entirely settled, as they seem like claims for economic losses but have been characterized as “personal damages,” and have been awarded as damages separately from economic damages.

Piorkowski v. Liberty Mut. Ins. Co., 68 Wis. 2d 455, 228 N.W.2d 695 (1975): “Personal damages” may be awarded for “inconvenience, humiliation and emotional strain.” In this instance, when a well stopped working, inconvenience damages were awarded for the plaintiffs’ time spent obtaining water otherwise.

Myriad other cases show juries awarding economic damages and inconvenience damages separately.

I once argued at the court of appeals that the “inconvenience” claim of an individual being required to work 100-plus hours per week was not barred by the doctrine. The matter settled before the court ruled on the case.

Impact on Contract Drafting

The economic loss doctrine has significant implications for contract drafting in Wisconsin. Parties should be aware of the doctrine when negotiating and drafting contracts to ensure that their intended remedies are preserved.

Negligence or other tort provisions and the economic loss doctrine. Contract provisions that allow claims for a party's negligence or intentional torts may undermine the economic loss doctrine. This is because such provisions can be interpreted as creating a contractual duty of care, which could then allow for tort claims even for purely economic losses. Since the doctrine was created to effect the agreement of the parties, there is no reason to believe that the courts would not enforce the agreement to expressly allow tort claims.

However, the appeals court has ruled that this will not occur if the existence of tort claims is not stated expressly.

Insurance Co. of North America v. Cease Electric Inc., 2004 WI App 15, 269 Wis. 2d 286, 674 N.W.2d 886: A contract provision requiring a party to "perform its work in a safe and workmanlike manner" did not create an independent tort duty. However, the court also noted that "the presence or absence of such a provision is a factor to be considered in determining whether a tort duty exists."

It is unknown whether the common commercial real estate lease provision releasing the landlord from all claims other than those arising from its own negligence would waive the economic loss doctrine.

I argued at the court of appeals that such a provision would allow negligence claims, relying on the holdings in Federal and Delaware consumer finance cases. The matter settled before the court ruled.

Contractual disclaimers or affirmations of the economic loss doctrine. For more certainty, the parties should include specific provisions in their contracts to address the applicability of the economic loss doctrine. These provisions can either:

• disclaim the application of the doctrine: this approach aims to preserve the possibility of tort claims even for economic losses; or

• affirm the application of the doctrine: this approach clarifies that the parties intend for the doctrine to apply and that contractual remedies are the exclusive means of redress for economic losses.

Including such provisions can help to avoid ambiguity and ensure that the parties' intentions regarding the economic loss doctrine are clear.

Conclusion: Understanding Is Crucial

Understanding the economic loss doctrine's scope, exceptions, and impact on contract drafting is crucial for any business litigator or transactional attorney.

Failure to consider it in business litigation will likely result in early dispositive motions and amended pleadings and could end up with intercounsel rancor and motions for sanctions.

This article was originally published on the State Bar of Wisconsin’s Business Law Blog. Visit the State Bar sections or the Business Law Section webpages to learn more about the benefits of section membership.