Labor Logic

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John D. Finerty, Jr.

The Wisconsin Supreme Court in Ins. Co. of North Amer. v. Cease Electric, 2004 WI 139 held that the economic loss doctrine did not apply to bar tort claims that arise from contracts to provide services. The Court released its decision Nov. 9, 2004. In my last column, I summarized the case; this week I offer some commentary and critique of the Court’s reasoning.

Summary of the Economic Loss Doctrine

In Cease Electric, the Court reviewed the policies underlying the economic loss doctrine and the limits on it established to date under Wisconsin law. It adopted a description of the doctrine from a recent case, that provided as follows: "This court described the economic loss doctrine as holding 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." Cease Electric, at par. 22 (citing Van Lare v. Vogt, Inc., 2004 WI 110, 18).

The Court went on to note that "the significance of the economic loss doctrine is that it ‘requires transacting parties in Wisconsin to pursue only their contractual remedies when asserting an economic loss claim, in order to preserve the distinction between contract and tort.’" Cease Electric, at par. 24 (citing DigiCorp Inc. v. Ameritech Corp., 2003 WI 54, 34). One more important rule of the doctrine: "the economic loss doctrine precludes parties under certain circumstances from eschewing the more limited contract remedies and seeking tort remedies." Cease Electric at par. 24. With these rules in mind, let us examine whether the holding in Cease Electric fulfills these principles.

Does Cease Electric fulfill the Policy Goals of Wisconsin Law?

In Cease Electric, the parties had an oral contract for the installation of a ventilation system. Cease Electric argued in the case that it also provided and installed a thermostat and electric conduit. These items, together with the ventilation system, Cease Electric argued, constituted a "product" for the purposes of the economic loss doctrine.

The jury, however, found Cease Electric negligent in the installation of the ventilation system, without distinguishing between whether Cease was negligent in how the system was wired, negligent in providing or installing the thermostat, or for some other reason. Therein lies a problem. The jury found negligence, but the Court, ex post, determined that the actual cause of Coldspring Egg Farm’s damages was the service Cease Electric provided.

Consider as an illustration of this problem the case of Seely v. White Motor Co., 403 P.2d 145 (Cal. 1965), cited by the Court as the "seminal case in the economic loss doctrine." Cease Electric, at par. 26. That case held that a plaintiff could not recover in tort after defective brakes installed on a truck failed and caused a rollover accident.

From the Court’s discussion of the case in Cease Electric, however, one is led to believe that if, for example, installation of the brakes was defective, rather than the brakes themselves, the case would have been a service contract case and the economic loss doctrine would not have applied. As such, the distinction between a "service" and a "product" requires, in essence, a court to determine the cause of an accident.

The “Service” vs. “Product” Contract Problem

The distinction between contracts to sell products only and services only will prove problematic in future cases. As an illustration, consider that in Cease Electric the parties had an oral agreement that did not provide which party would carry insurance, what type of warranty accompanied Cease Electric’s services or what remedies, if any, Coldspring would have in the event of an accident or property damage. What if the parties had such a contract? Would the egg farm have been precluded from recovering in tort even though Cease Electric provided services? If so, what effect was Cease Electric’s contract?

The distinction created by Cease Electric between service contracts and those for products is not as clear as it seems. For example, can service providers, such as construction contractors, limit their liability by contract to the cost of the project? Many do already; others attempt to limit exposure with arbitration clauses or by requiring property owners to carry insurance.

Perhaps cases in which parties enter into comprehensive contracts for services that provide warranties, spell out insurance responsibilities and other terms of liability are the "certain circumstances" that the Court was referring to in Cease Electric that would trigger application of the economic loss doctrine. See Cease Electric, at par. 24.

In other words, there appears to be an opening in the decision to apply the economic loss doctrine in cases that involve contracts for services, if such contracts address the risk of loss and available remedies.

The Court also based its decision on the belief that the Uniform Commercial Code does not apply to contracts to render services. This is not entirely true. Although the UCC covers the sale of goods primarily, there are commercial services the UCC covers and provides typical commercial remedies in the event of a dispute. Again, there appears to be an opening here to apply the economic loss doctrine to service contracts, provided they are covered by the UCC or, perhaps, if the parties adopt the UCC as part of their contract.

The State of Wisconsin Law

To date, the economic loss doctrine applies to sale contracts to provide construction equipment, Sunnyslope Grading, Inc. v. Miller, Bradford & Risberg, Inc., 148 Wis. 2d 910 (1989); it does not apply, however, to contracts to provide construction services such as those of an electrician, see Cease Electric.

The doctrine does apply to contracts to buy and sell real estate, see Van Lare v. Vogt, 2004 WI 110, and to employment contracts, e.g. Mackenzie v. Miller Brewing Co., 241 Wis. 2d 700 (2000). Within these cases, there can be no clear distinction between "services" and "products" that the Court found in Cease Electric.

For example, did the holding in Cease Electric overrule, sub silentio, the economic loss doctrines prohibition on tort claims in employment contract cases? After all, employees provide services so, potentially, the doctrine should not apply. Although the Cease Electric case attempted to set a bright line rule, it may prove not as bright than Court would have liked.

For more information on this case or for assistance defending a service contract claim, contact John D. Finerty, Jr. at Michael Best & Friedrich at (414) 225-8269 or on the Internet at [email protected]. In the interest of disclosure, I appeared in Cease Electric as co-counsel for the Amici, Associated General Contractors of American, AGC of Wisconsin and AGC of Greater Milwaukee. We advocated for a rule that applied the economic loss doctrine to construction contracts that involved improvements to real property, without regard to whether the contract called for products, services or both.