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Economic loss doctrine does not apply to service contracts

The economic loss doctrine, barring recovery in tort when a contract is in place between the parties — does not apply to contracts for services, rather than goods, the Wisconsin Court of Appeals held on Dec. 17.

Cold Spring Egg Farm, Inc., raises chickens to produce eggs at its egg farm. In 1996, Cold Spring hired Cease Electric, Inc., to upgrade the ventilation system in one of its barns.

The ventilation systems are required to bring fresh, cool air into the barns so that the birds have sufficient oxygen. Cold Spring purchased new fans for the system from Aerotech, Inc., and Cease Electric was hired to install them.

Prior to installation of the new ventilation system, each fan had its own individual thermostat and operated independently of all other fans. The new ventilation system was designed so that a single controller would operate all of the fans in stages. In addition to the primary fan control, the ventilation system was designed by the manufacturer to have a backup thermostat.

Approximately three months after Cease Electric had completed wiring the ventilation system in the barn, that system failed. As a result of this failure, approximately 17,000 chickens died.

The same day, Cold Spring hired Carroll Electric, a competitor of Cease Electric, to repair the ventilation system. The backup thermostat was lost in the process.

Within the week, Cold Spring hired the same competitor to conduct a diagnostic investigation to determine why the fans did not operate. Al Dittmar, who performed the investigation, reported that he believed Cease Electric had improperly wired the ventilation system, by wiring the main fan control unit to the same power circuit as the backup thermostat. Thus, if the circuit breaker tripped, shutting off power to the circuit, then neither the main fan control unit nor the backup thermostat would have the power to turn on the fans.

Cold Spring’s insurer brought suit against Cease Electric, and damages were stipulated at $198,805.11. Cold Spring and its insurer filed a joint statutory offer of settlement for $198,000 — $159,000 for the insurer and $39,000 for Cold Spring. Cease Electric rejected the offer.

Cease Electric moved to sanction Cold Spring for spoliation of evidence, based on the disappearance of the backup thermostat, but the court denied the motion.

The jury ruled in favor of Cold Spring and Walworth County Circuit Court Judge John R. Race inserted the stipulated amount of damages into the verdict, adding double costs pursuant to sec. 807.01(3).

What the court held

Case: Insurance Company of North America v. Cease Electric, Inc., No. 03-0689.

Issue: Does the economic loss doctrine bar recovery in tort for damages allegedly caused by the negligent performance of a service contract?

Holding: No. Unlike a contract for goods, a contract for services does not limit a party’s remedies to those sounding in contract.

Counsel: Monte Weiss, Milwaukee; J.P. Fernandes, Milwaukee, for appellant; Timothy A. Bascom, Milwaukee; Amy J. Wilkinson, Milwaukee, for respondent.

Cease Electric appealed, but the court of appeals affirmed in a decision by Judge Richard S. Brown.

Spoliation

The court first held that the trial court acted within its discretion in denying sanctions for spoliation of evidence.

In reviewing a claim of spoliation, a court should consider not only whether the party responsible for the destruction of evidence knew, or should have known, at the time it destroyed the evidence that litigation was a distinct possibility, but also whether the offending party destroyed documents which it knew, or should have known, would constitute evidence relevant to the pending or potential litigation.

In affirming the finding of no spoliation, the court reasoned, “when Cold Spring authorized Dittmar — the Carroll Electric electrician called to the site on the day of the loss — to rewire the barn, its only concern was to save the remaining birds by making certain that the ventilation system did not fail again and that the thermostat, which Dittmar gave to Hartwig, disappeared long before anyone was even thinking of a lawsuit. … There simply was no reason for Cold Spring, at the time the evidence of the miswiring was destroyed, to have foreseen that litigation concerni
ng the loss was a distinct possibility let alone that the evidence would be relevant to such litigation.”

Economic Loss Doctrine

The court next held that the transaction was one for services, rather than goods, and thus, Cold Spring’s tort claims are not barred by the economic loss doctrine.

The court noted that, other than some wiring, Cease Electric did not sell any of the ventilation system’s component parts to Cold Spring. Instead, Cease Electric was hired to take component parts purchased from Aerotech and wire them into a ventilation system.

In addition, Cold Spring did not allege that any parts were defective, only that Cease Electric’s employees improperly wired the backup thermostat and failed to perform tests that would have revealed their errors. Thus, the court concluded that the transaction was a service contract, rather than a contract for goods.

Turning to the applicability of the doctrine, the court noted that the Wisconsin Supreme Court has not yet addressed whether it covers the negligent provision of services, but instead expressly reserved the issue, in Daanen & Janssen, Inc. v. Cedarapids, Inc., 216 Wis.2d 395, 417, 573 N.W.2d 842 (1998).

Links

Wisconsin Court of Appeals

Related Article

Case Analysis

The court acknowledged that, in Digicorp, Inc. v. Ameritech Corp., 2003 WI 54, 262 Wis. 2d 32, 662 N.W.2d 652, a case arguably involving a service contract, the Supreme Court applied the doctrine. However, the issue in that case was whether to recognize a claim for fraud in the inducement, and the decision contained no discussion whether the doctrine applies to service contracts.

Instead, the Supreme Court has frequently allowed purely economic damages stemming from negligence claims involving parties who predominantly provide services, such as accountants and architects. The court concluded, “Thus, for us to decide that the economic loss doctrine applies when the underlying contract is one for services rather than goods would be an expansion of the economic loss doctrine. We are primarily an error-correcting court, not a law-declaring court. The Wisconsin Supreme Court is the appropriate body to make that determination. Accordingly, we hold that the economic loss doctrine does not bar Cold Spring’s claims for negligent provision of services.”

Double Costs

Finally, the court affirmed the assessment of double costs pursuant to sec. 807.01(3). Cold Spring argued that, because the offer of settlement was made on behalf of two separate plaintiffs, it ran afoul of the statute. How-ever, Cold Spring failed to raise the issue with the trial court. Accordingly, the court held the issue waived, and affirmed.

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David Ziemer can be reached by email.

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