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Economics Analysis

By: dmc-admin//July 14, 2004

Economics Analysis

By: dmc-admin//July 14, 2004

The decision casts into doubt two recent decisions of the court of appeals. The first is Insurance Co. of North America v. Cease Elec., Inc., 2004 WI App 15, 269 Wis.2d 286, 674 N.W.2d 886 (petition for review granted, Feb. 24, 2004), in which the court held that the economic loss doctrine only applies to contracts for products.

Cease Electric involved a mixed contract, one for both services and goods. After determining that the primary purpose of the contract was for services, however, the court held that, as a result, the doctrine did not bar suit in tort, because the doctrine only applies to contracts whose primary purpose is the sale of products. Id., 674 N.W.2d at 892-893.

As noted, the case is currently pending before the Supreme Court, and in light of the decision in the case at bar, it appears likely that the court will reverse.

A number of statements by the court are equally applicable to service contracts between two commercial entities: “Tort recovery in a contract case can only be justified in circumstances such as intentional misrepresentation that undermine the foundation of the economic loss doctrine”; “Under existing law, there is no exception to the economic loss doctrine for strict liability misrepresentation in a purely commercial setting.”

The second suspect case is Noonan v. Northwestern Mut. Life Ins. Co., 2004 WL 1418075 (Wis.Ct.App., June 22, 2004)(recommended for publication, decision pending). In Noonan, the court of appeals held that an annuity policyholder could sue a mutual insurance company for breach of fiduciary duty.

Briefly discussing the doctrine, the court stated, “the economic loss doctrine, when it applies, bars recovery in tort for damages resulting from a product not performing as intended, including damages to the product itself or economic losses caused by the defective product. Here, the Noonans do not allege a product failed to perform as intended. Thus, the economic loss doctrine does not apply (cite omitted).” Noonan, par. 34.

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Economic loss doctrine
applies to real estate

Arguably, the court is correct in its ultimate conclusion that the doctrine does not apply, because the Noonans were not sophisticated commercial entities. The decision in the case at bar repeatedly emphasizes that it involved a contract between commercial parties. Thus, the difference in sophistication between the parties may still justify permitting tort remedies.

However, the reasoning in Noonan is clearly no longer sound. The court in the case at bar stated, “the economic loss doctrine may not be discarded simply because a transaction involves real estate.” Likewise, the simple fact that an annuity contract is not a traditional product should not be grounds for discarding the doctrine.

A question raised by the case at bar is the significance of the fact that the buyers were represented by counsel in the transaction. The court was careful to emphasize that fact, whenever it stated its ultimate holding, even though the presence of counsel was not included in the issue certified by the court for review.

Arguably, therefore, a purchaser of commercial real estate could avoid application of the doctrine if he was not represented by counsel, even though adoption of such an exception would create a perverse incentive for parties to disregard their best interests.

– David Ziemer

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David Ziemer can be reached by email.


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