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Service Contracts Case Analysis

One question the court deliberately left unanswered is whether the economic loss doctrine applies to "mixed contracts" — those for both goods and services — a question it ultimately must answer.

Several methods could be used. The court could simply answer it either yes or no. This seems unlikely, however, as so many contracts, including the one in the case at bar, involve mixed contracts, at least to some degree, and yet, the court here classified the contract as one for services, rather than a mixed contract.

The court could examine whether the policy rationales of the doctrine support application on a case-by-case basis. Such a rule might create the most equitable results of any test, but would have the disadvantage that parties could never know with any real certainty whether the doctrine would be applied in close cases, and maybe even in the majority of cases. To attain the most equitable result in every given case is to provide no rule of law on which parties can rely to govern their actions.

Another approach could look to whether the underlying contract was primarily for a product or a service. As with the last approach, however, there is a great deal of uncertainty for parties with this approach. If the contract truly is a mixed contract, the results would be arbitrary, and parties would have no guidance.

Another approach would look to the nature of the plaintiff’s complaint — whether, at the heart of the suit, the plaintiff is complaining that a product was defective or that services were rendered negligently.

Even then, however, the results would not be wholly predictable. Plaintiffs will always draft their complaints to seek both tort and contract remedies, and parties would be at the whim of juries whether the cause of the plaintiff’s damages was a defective product or negligent service.

Consider the Seventh Circuit case of Rodman Industries, Inc. v. G & S Mill, Inc., 145 F.3d 940 (7th Cir. 1998). There, the defendant contracted to retrofit a boiler for the plaintiff that did not comply with state emission requirements.

However, the retrofitted boiler was not able to pass emissions, any more than the original boiler was.

On its face, the action seems to be based on the negligent provision of a service — retrofitting an old boiler — which is what the plaintiff alleged, in addition to contract claims. Nevertheless, the Seventh Circuit held that the economic loss doctrine applies, concluding that the parties did not contract for a service (retrofitting an existing boiler), but in effect, contracted for a new boiler.

However, that is not the only reasonable interpretation. A different court, or a jury, could reasonably have concluded that the contract was a mixed one for services and a product, rather than a product, especially if the billing was done hourly rather than by the job.

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The Seventh Circuit seemed to acknowledge as much, observing, "It is notoriously difficult to identify the point at which modifications to an existing device become so extensive that the device itself is transformed into a different product." Id., 145 F.3d at 944, fn. 2.

The plaintiff in Rodman alleged both contract theories, and a negligence theory — the defendant negligently failed to test the particleboard materials used to fuel the boiler, which would have revealed the fuel did not burn the same as natural wood. Id., at 942.

An argument could be made that such an allegation is not really one of negligent performance of a service, but one of a defective product design, and thus, clearly within the ambit of the economic loss doctrine.

Thus, even if sound reasons exist in theory for distinguishing between contracts for services and products, the result in practice is likely to be that, regardless of how the Supreme Court ultimately decides to treat mixed contracts, parties will not be able to confidently determine on which side of the line they fall, and uncertainty will be the norm.

– David Ziemer

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David Ziemer can be reached by email.

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