Economic loss doctrine applies to real estate

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“We have a written, bargained-for contract for the sale of commercial-use land between two sophisticated parties represented by counsel during the negotiation process. This is the kind of situation that is tailor made for the application of traditional contract law.” Hon. David T. Prosser Jr. Wisconsin Supreme Court

The Wisconsin Supreme Court held on July 9 that the economic loss doctrine bars a claim for strict responsibility misrepresentation in a commercial real estate transaction between parties represented by counsel.

On June 22, 1993, Terry D. Van Lare and Norman J. Wachtl entered into a written contract with Vogt, Inc. (Vogt) to purchase a 55-acre parcel of real property in Waukesha County. The property in question was the site of a gravel pit owned and operated by Vogt.

The option to purchase contained a clause in which Vogt warranted and represented to the buyers that Vogt had no notice or knowledge of any defects of material significance affecting the property.

The option to purchase also contained an “as is” provision which stated: “Upon closing, Buyer accepts this property in ‘as is’ condition and represents to Seller that their purchase of the property is made on the basis of their own investigation and testing.” Both parties to the contract were represented by counsel.

In September 1993, the parties amended the option to purchase when the parties became aware that a parcel of the property had previously been conveyed to another party, and reduced the purchase price by $20,000.

By November 1993, the buyers purchased the property for $213,000. Prior to buying the property, they were aware that illegal dumping of refuse had occurred on a regular basis near the entrance of the gravel pit, but the only tests they conducted prior to the closing were to determine if there was mineable bank-run material in the gravel pit.”

The buyers operated a landscaping business on the site until 1999, when they applied to build a residential development on the property. The application was denied, when it was discovered that construction debris had been buried on the site.

Although the discovery was made before expiration of the 6-year statute of limitations for contract claims, the buyers did not sue Vogt until after it expired, instead alleging intentional misrepresentation, negligent misrepresentation, and strict liability misrepresentation (incorporating a statutory claim for fraudulent misrepresentation under sec. 100.18).

Prior to trial, Vogt filed a moved the court to allow the buyers to submit evidence only on the intentional misrepresentation claim, asserting that the economic loss doctrine barred recovery under the other claims, but Waukesha County Circuit Court Judge Patrick L. Snyder denied the motion.

At the conclusion of the trial testimony, Vogt renewed the motion. Again, the court denied the motion, whereupon the buyers opted to submit only the strict liability claim to the jury.

The jury awarded the buyers $375,000 in damages. Following the verdict, Vogt moved for judgment notwithstanding the verdict. Contrary to its earlier rulings, this time, the court granted the motion, holding that the strict liability misrepresentation claim was barred by the economic loss doctrine.

The buyers appealed, and the court of appeals certified the case to the Supreme Court, which affirmed, in a unanimous decision by Justice David T. Prosser. Justice Ann Walsh Bradley wrote a concurring opinion, as did Justice N. Patrick Crooks, whose concurrence was joined by Justice Jon P. Wilcox. Justice Diane S. Sykes did not participate.

Economic Loss Doctrine

The court held it was appropriate to extend the economic loss doctrine from contracts for products to contracts for commercial real estate.

The doctrine holds that a commercial purchaser of a product cannot recover solely economic losses from the manufacturer under negligence or strict liability theories, particularly where the warranty given by the manufacturer specifically precludes the recovery of such damages.

While the court stated the rule narrowly in Sunnyslope Grading, Inc. v. Miller, Bradford & Risberg, Ins., 148 Wis.2d 910, 437 N.W.2d 213 (1989), in which it first adopted the doctrine, the court noted it had referred to it more broadly earlier this term, as “a judicially-created remedies principle that operates generally to preclude contracting parties from pursuing tort recovery for purely economic or commercial losses associated with the contract relationship.” Tietsworth v. Harley-Davidson, Inc., 2004 WI 32, par. 23, 270 Wis. 2d 146, 677 N.W.2d 233.

The court also noted that numerous other courts applying Wisconsin law have concluded that the doctrine applies to commercial real estate contracts. Kailin v. Armstrong, 2002
WI App 70, 252 Wis. 2d 676, 643 N.W.2d 132; Mose v. Tedco Equities-Potter Rd. Ltd. P’ship, 228 Wis. 2d 848, 859, 598 N.W.2d 594 (Ct. App. 1999); Metal Processing Co. v. Amoco Oil Co., 926 F. Supp. 828, 832 (E.D. Wis. 1996); Raytheon Co. v. McGraw-Edison Co., 979 F. Supp. 858, 870 (E.D. Wis. 1997).

Although the court declined to decide whether all real estate transactions are covered by the doctrine, the court did conclude, “the economic loss doctrine may not be discarded simply because a transaction involves real estate.”

The court reasoned, “In this case, we have a written, bargained-for contract for the sale of commercial-use land between two sophisticated parties represented by counsel during the negotiation process. This is the kind of situation that is tailor made for the application of traditional contract law.”

Elaborating on the consequences of the holding, the court stated, “In truth, Van Lare asks us to forgo application of the economic loss doctrine to his strict liability misrepresentation claim because the normal application of the doctrine leaves him without a remedy. However, the economic loss doctrine did not necessarily preclude other claims, e.g., (1) breach of contract; (2) violation of Wis. Stat. sec. 100.18 (fraudulent representation); and (3) intentional misrepresentation in some form. Unfortunately, in the first two of these potential claims, the period of limitation for bringing an action expired. The intentional misrepresentation claim, which offers a narrow, still imprecise exception to the economic loss doctrine, was dropped. We cannot overrule our precedent to allow Van Lare’s tort claim simply because his own action or inaction has barred other claims.”

The court also noted that the buyers could have forced Vogt to allocate the risk in their contract, that they were represented by counsel, and they had the time and opportunity to test the property prior to closing.

The court added, “[The doctrine] forces purchasers in a position to assess the risks of economic loss to insure against those risks. If we were to allow recovery for strict liability misrepresentation in this case, we would seriously undermine a purchaser’s incentive to insure against risks by bargaining for remedies. At the same time, we would impair contracting parties’ freedom to allocate the economic risks of the transaction by subjecting them to potential tort damages even when they agree to forgo such damages.”

Exceptions

The court concluded, “Under existing law, there is no exception to the economic loss doctrine for strict liability misrepresentation in a purely commercial setting.”

The court acknowledged that it has created “a narrow, still imprecise exception” to the doctrine for fraud in the inducement, but that the exception cannot be extended to strict liability misrepresentation in a sale of commercial real estate.

The court explained, “We believe that there are substantial, qualitative differences between the doctrines of intentional misrepresentation and strict liability misrepresentation.”

“Strict liability misrepresentation places the loss flowing from certain types of unintentional misrepresentations on the “innocent” defendant rather than the “innocent” plaintiff. … strict responsibility misrepresentation may well apply in situations where the parties are not in equal bargaining positions or the purchaser may not be in the best position to assess the risk of economic loss — two assumptions upon which the economic loss doctrine rests.”

To prove intentional misrepresentation, however, the plaintiff must prove that the defendant: (1) either knew the representation was untrue or made the representation recklessly without caring whether it was true or false; and (2) made the representation with intent to deceive and induce the plaintiff to act upon it to the plaintiff’s pecuniary damage.

The court noted, “The misrepresentation in strict liability misrepresentation often does not rise to the level of the deceitful behavior exhibited in intentional misrepresentation cases. … If Van Lare believed that the facts of his case constituted “fraud in the inducement,” he was free to pursue a claim alleging intentional misrepresentation. At trial, he withdrew that claim.”

Interest of Justice

Finally, the court declined to order a new trial in the interests of justice. Rejecting the buyers’ argument that the real controversy had not been tried, the court found, “In this case, the ‘real controversy’ was Van Lare’s contract claim. That claim was not tried because the period of limitation ran out. Van Lare then had a choice whether to move forward with an intentional misrepresentation claim or a strict liability claim, or perhaps both. He chose strict liability and that controversy was fully tried, with Van Lare receiving a successful jury verdict. The verdict was ultimately vacated by the circuit court. Had the circuit court not changed its position, the strict liability jury verdict would have been overturned on appeal. It is a bit late now for Van Lare to argue that ‘the real controversy’ was intentional misrepresentation and that intentional misrepresentation was not fully tried. After all, Vogt repeatedly argued that the only claim that should be presented to the jury was intentional misrepresentation. The circuit court, in the pre-trial motions hearing, stated: ‘Well, certainly the case will go forward with the intentional misrepresentation. That’s conceded by the defense.’ Yet, Van Lare sent strict liability to the jury instead. We do not think Van Lare can prevail on grounds that the real controversy was not tried.”

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Accordingly, the court affirmed.

Other Opinions

Justice Bradley wrote separately, “to forestall revisionist interpretations of the holding in Digicorp, Inc. v. Ameritech Corp., 2003 WI 54, 262 Wis. 2d 32, 662 N.W.2d 652, by those of us who participated in the case.”

Bradley repeated footnote 2 of the opinion, explaining the fractured vote, in which 2 justices did not participate, 2 voted to adopt a broad exception for fraud in the inducement, 2 for a narrow exception, and 1 for no exception, at all.

Bradley wrote, “Those of us who participated in Digicorp may offer differing interpretations of the intent and consequences of footnote 2. However, when asked for clarification in the motion for reconsideration, we denied the motion without comment, leaving the interpretation for another day. That day will come when a full court can rule on the issue in a case that properly presents it. This is not such a case.”

Justice Crooks also wrote separately, in an opinion joined by Justice Wilcox, “to stress that the Digicorp majority clearly rejected a broad fraud in the inducement exception to the economic loss doctrine.”

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David Ziemer can be reached by email.