Economic Loss Analysis

Listen to this article

Because two justices did not participate, and none of the three opinions garnered a majority, the case engenders more uncertainty than it settles.

Footnote 2 of the lead opinion sets forth the various actual holdings: "A majority of this court, Justices Crooks, Prosser and Sykes, rejects the broad exception that the court of appeals adopted in Douglas-Hanson. However, because Justice Sykes would not adopt any fraud exception, there is also a majority of this court, Justices Bradley, Bablitch and Sykes, that rejects the narrow exception that was adopted by the Huron Tool court. Two Justices, Bradley and Bablitch, dissent stating that the Douglas-Hanson exception should apply. A majority holds that a fraud-in-the-inducement exception to the economic loss doctrine exists, but there is an even split as to what the fraud-in-the-inducement exception entails. While four Justices agree that there should be an exception, only two Justices, Crooks and Prosser, agree that the Huron Tool exception should be adopted. Chief Justice Abrahamson and Justice Wilcox did not participate in this case."

Justice Sykes also wrote in a footnote, "Because of the nonparticipation of two justices and the split decision among the participating justices, this case accomplishes only the rejection of the broad fraud-in-the-inducement exception contained in Douglas-Hanson Co. v. BF Goodrich Co., 229 Wis. 2d 132, 598 N.W.2d 262 (Ct. App. 1999). Neither the broad nor the narrow fraud exception has the support of a majority of this court."

A question raised is whether, as the dissent concluded, the practical result of the Huron test is the same as if the court simply held that there is no fraud-in-the-inducement exception to the economic loss doctrine.

The Bradley dissent noted that, neither in the Huron case itself, nor in any case applying the Huron standard, has any court ever held that tort claims were extraneous and could proceed.

The lead opinion takes issue with this contention, stating in a footnote, "We take strong issue with the broad, sweeping assertion in the dissent that ‘the Huron limitation fatally undermines the viability of the tort of fraud in the inducement.’ The fraud exception to the economic loss doctrine that we adopt is not dead on arrival. We expect that, though the years, there indeed will be circumstances where there is extraneous fraud, concerning matters whose risk and responsibility were not expressly or impliedly dealt with in the contract."

Nevertheless, the lead opinion fails to cite any hypothetical examples, or concrete applications from other jurisdictions.

The real problem with the lead opinion, however, is that it does not even set forth the Huron standard that it purports to adopt.

Repeatedly, the lead opinion states the distinction as whether the fraud is "interwoven with the contract." In the Huron decision, however, the court uses no such language; instead, that court invariably asks whether the fraud is "interwoven with the breach of the contract," or "extraneous to the alleged breach of the contract."

Huron, 532 N.W.2d at 545, 546.

The difference is of enormous import. The Huron distinction between interwoven and extraneous fraud is really nothing more than a recognition of the difference between fraud in the performance of the contract and fraud in its inducement. The Huron court states so explicitly: "The distinction between fraud in the inducement and other kinds of fraud is same as the distinction … between fraud extraneous to the contract and fraud interwoven with the breach of contract." Huron, 532 N.W.2d at 545.

The Huron interwoven/extraneous distinction merely decides whether the fraud is in the inducement; if a fraud is found to be in the inducement after making that determination, the Huron test then asks a second question: whether or not the fraud "concerns the quality or character of the goods sold." If the fraud concerns the quality or character of goods sold, the other party can easily protect itself with warranties and other remedies in the contract itself, and the economic loss doctrine still bars suit in tort. Huron, 532 N.W.2d at 545.

The lead opinion, however, takes the interwoven/extraneous distinction out of the first inquiry, and misplaces it into the second.

The Huron court did not inquire into whether the contract at issue contained provisions for fraud; it asked whether it concerned the quality of the product (in which case, the contract could easily, and should, have provided explicit remedies, and therefore, the economic loss doctrine bars tort suit, regardless of whether the parties actually did provide remedies).

	Links Wisconsin Supreme Court Related Article Narrow fraud-in-the-inducement exception adopted

By placing the extraneous/interwoven distinction into the second part of the inquiry, however, the majority opinion in the case at bar asks not whether remedies for fraud should have been provided in the contract, but whether they actually were.

Following the Huron test could lead to a different result than that reached in the lead opinion. First, any fraud by Krinsky (imputed to Digicorp and Bacher) was interwoven with the breach of the contract by them, and thus, the economic loss doctrine bars recovery against them in tort.

Second, any fraud by Taylor (imputed to Ameritech) predated the contract and is thus extraneous to the breach of the contract. The next step is asking if Taylor’s fraud "concern[ed] the quality and characteristics of the [] system sold by [Ameritech]." Huron, 532 N.W.2d at 546.

The alleged misrepresentations by Taylor did not; they concerned an employee of Bacher. Thus, applying Huron, the fraud claims against Ameritech should be permitted to proceed.

Fortunately, the next time the Supreme Court hears a fraud-in-the-inducement case, all this misunderstanding can be easily corrected merely by tracing its cause to the deletion of the words "the breach of" before the words "the contract," in the Huron standard.

Once the court does that, it can actually decide which of the three standards to adopt.

— David Ziemer

Click here for Main Story.

David Ziemer can be reached by email.