10-3762 Schreiber Foods v. Wang

Listen to this article

Contracts
Fraud; economic losses

Where plaintiff dairy products supplier substituted ingredients in a whey product shipment without disclosing it to the purchaser, who refused the shipment and it could not be re-sold by plaintiff, plaintiff’s lawsuit seeking payment of the purchase price by alleging misrepresentation under tort law by defendant/trader regarding whether the purchaser was committed to buy the shipment is barred under the economic loss doctrine because the fraud alleged was not extraneous to the contract but rather was interwoven with it.

Several states, including Wisconsin, recognize only a very narrow fraud exception to the denial of recovery for economic loss. These states hold that the fraud must be “extraneous” to the contract, rather than “interwoven” with it, to be actionable as a tort.

“The falseness of a false representation by Lei Wang that Yili wanted the 200 metric tons of (supposed) D70 would undoubtedly reduce the probability that Schreiber would ever collect the $603,000 sale price. But that probability was always well below 100 percent. The contract was with Mature Sky, an obscure middleman in a foreign country, and had been procured for the trader by the owner of a company in a business (auto parts) unrelated to that of Schreiber or Mature Sky. The trader was expecting to resell the product to another Chinese company, one with which Schreiber had no contract; and as far as Schreiber knew, if that company (Yili) refused to buy the product from Mature Sky, the latter would be unable to sell it to anyone else, and if it became stuck with the product it might be unable or unwilling to pay Schreiber. And finally Schreiber did not ship the product that it had contracted to sell, and thus assumed the risk that the product it did ship would turn out not to be salable in China at all, which would justify Mature Sky in refusing to accept it; and if it refused, the product, being perishable, might be worthless and so a dead loss to Schreiber—as it turned out to be.

“Schreiber acted recklessly in failing to take steps to protect itself against a range of risks of nonpayment, of which fraud by Lei Wang, one of the go-betweens, was only one. The risk of nonpayment was so salient a risk that one would expect it to have been dealt with in the contract. It’s not as if contract law contains no resources for dealing with such a matter. Schreiber could have done many things to protect itself, such as requiring Mature Sky or Yili to obtain a letter of credit for Schreiber’s benefit guaranteeing payment by Mature Sky; or obtaining a contractual guaranty from Yili; or at the very least warning Mature Sky that it was shipping RMW-2 rather than D70. Schreiber failed in negotiating the contract to take elementary precautions for an international shipment and now wants the judiciary to bail it out.
“Schreiber’s conduct thus came within the ‘interwoven’ exception to Wisconsin’s fraud exception to the doctrine of economic loss and more broadly within the theory behind the doctrine, which as we said is to require private ordering of commercial relations where feasible and not harmful to third parties.”

Affirmed.

10-3762, Schreiber Foods v. Wang

Eastern District of Wisconsin, Griesbach, J., Posner, J.

Full Text