Kalahari lawsuit offers defect lessons

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Statutes of limitation, Economic Loss Doctrine offer resort little recourse

By Brian R. Zimmerman

The recent decision by the Wisconsin Court of Appeals in Kalahari Development, LLC v. Iconica Inc., 340 Wis. 2d (Ct. App. 2012), underscores the two biggest legal obstacles to claims for latent construction defects: the Economic Loss Doctrine and statutes of limitation.

In the case, the Kalahari Resort & Conference Center’s claims against the design/builder for leaks and other construction defects in the resort were barred because they were brought after applicable project warranties and the statutes of limitation had expired.

In May 1999, Kalahari Development Inc. contracted with Iconica Inc., Madison, to design and build the Kalahari Resort & Conference Center. The project included an indoor water park, hotel rooms, a lobby, retail space and restaurants in the Wisconsin Dells.

The project reached substantial completion in May 2000. In May 2008, there were moisture and water problems in the building.

In April 2010, almost 10 years after substantial completion, Kalahari sued Iconica for “defectively designed and/or defectively installed vapor barriers in the walls … causing moisture damage.” The lawsuit against Iconica alleged breach of contract and negligence in the performance of architectural and construction services.

The court awarded summary judgment in favor of Iconica. In upholding the award of summary judgment, the Wisconsin Court of Appeals provided a thorough analysis of the relevant statutes of limitation affecting construction defect claims, as well as the application of the economic loss doctrine to construction projects.

Statutes of limitation

Wisconsin statutes of limitation and repose bar a party from bringing a lawsuit after a specified period of time. The longest of these periods related to construction claims is Wis. Stat. §893.89, which bars any lawsuit against an owner or any person involved in the improvement of real estate that is not brought within 10 years from the date of substantial completion.

A second statute of limitation, Wis. Stat. §893.43, bars breach-of-contract claims that are not commenced within six years of the alleged breach. Since the alleged breach was the result of defectively constructing the buildings, the court found the breach could have happened no later than the date of substantial completion and that the claim was barred by the six-year statute of limitation.

Kalahari argued the 10-year period under §893.89 extended the limit for bringing construction defect claims. The appellate court rejected the theory and confirmed that §893.89 sets the absolute maximum time in which to bring a claim involving improvement to real estate.

Although in Kalahari’s case, it had brought its action less than 10 years after substantial completion, the period did not grant a right to bring a claim for 10 years but provided an absolute deadline for any claims it might have arising out of the construction.

Therefore, because Kalahari’s claim was brought in the seventh year, the six-year statute of limitation for breach of contract controlled and barred its claims.

Economic Loss Doctrine

Negligence/tort claims have a six-year statute of limitation beginning upon discovery of the defect, so Kalahari’s claim for negligent construction was not barred by a statute of limitation.

Iconica, however, argued the claims were barred by Wisconsin common law under the Economic Loss Doctrine. It’s a complex doctrine that generally provides that when a person buys a product, claims against the seller based on negligence are barred unless that product damages a person or something other than the product itself.

When there is no injury arising out of the product, the buyer’s only recourse against the seller is a claim for breach of the purchase contract.

As a result, Kalahari’s claim for negligence hinged on whether the court found the design/build contract with Iconica to be for a product or for services. In making a determination, courts will look to the predominant purpose of the contract.

The appellate court in Kalahari analyzed the predominant purpose of Kalahari’s contract in the context of two prior cases, both of which held the construction contracts at issue predominantly were for products.

In the first case, the Wisconsin Supreme Court found the purpose of a contract for construction of a custom-built house was for a finished product. In the second case, the court found renovation of an existing industrial warehouse into a 42-unit condominium building also was predominantly for a product.

In light of the two cases, the appellate court in Kalahari determined that, the predominant purpose of the contract was for a water park resort and convention center. Therefore, because the alleged defects only damaged the resort itself, Kalahari’s damages solely were economic and barred by the Economic Loss Doctrine. Because the contract warranty had expired and all other claims for breach of contract were barred by statutes of limitation, Kalahari was left with no legal recourse against the design/builder.

Lessons from Kalahari

The case should motivate contractors and owners to carefully review the warranty provisions in any contracts they enter to ensure the warranties apportion the risk of latent defects pursuant to the parties’ expectations.

This especially is true for design/build contracts in which the architectural services, are incorporated into the contract for the entire project. Should defects surface after the contractual warranty and the statutes of limitation already have run, an owner might have no legal right to recovery against the contractor and designer.