Defending service contracts after Cease

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Case law related to the Economic Loss Doctrine and its application to service contracts continues to unfold in Wisconsin. Last year, the state Supreme Court released a decision that found the doctrine did not bar recovery from an electrical contractor who provided services for the installation of a ventilation system.

This year, the Supreme Court is considering application of the doctrine when the contract involves a blend of product and services. At this point, it may be too early to guess what the seven justices will do with the case they are currently considering.

Monte E. Weiss, of Deutch & Weiss LLC in Milwaukee, provided defense in the Insurance Company of North America v. Cease Electric case decided last year. Weiss argued that the Economic Loss Doctrine barred a tort recovery for damages in the case.

Speaking at the Civil Trial Counsel of Wisconsin’ spring conference, Weiss outlined three principles behind the Economic Loss Doctrine. First, he said, the doctrine was designed "to maintain the distinction between contract law and tort law." The second was "to protect the parties’ freedom to contract."

Finally, he observed, the doctrine was established "to encourage the party who is in the best position to understand the risk of economic loss to either assume that loss, allocate that risk in a contract document, or insure against that risk."

"If we allow tort remedies to sneak in, we have expanded and rewritten the contract," Weiss told the group.

In Cease Electric, an egg farmer hired an electrical contractor to install a ventilation system for his chickens. The ventilation system failed and 17,865 hens died, so the farmer sued the electrical contractor on a tort theory. The contractor argued that the Economic Loss Doctrine would bar the claim, but the Supreme Court disagreed.

Discussing the Supreme Court’s reasoning in Cease Electric, Weiss said, the court looked back to its decision in Sunnyslope Grading Inc. v. Miller, 148 Wis. 2d 910, 437 N.W.2d 213 (1989). He pointed to three different elements the court used to support its position.

First, the court explained that when it adopted the Economic Loss Doctrine, there were gap-filling provisions in the Uniform Commercial Code. However, those protections and implied warranties don’t exist in the service contract field.

Second, the court pointed to the informal nature of most service contracts where there is no negotiation ahead of time to allocate the risks.

Weiss said, "What generally happens is that the plumber or the electrician comes in, the homeowner says there’s a problem with whatever it is — go fix it. The person goes in and fixes the problem, hands the homeowner an invoice and on the back there may be some limitations to the warranty or there may not. It’s an informal process."

He noted that the Supreme Court was very concerned that the general homeowner wasn’t really negotiating for those warranties — one of the assumptions of the Economic Loss Doctrine.

Weiss said the Cease Electric situation did not fall into that category of service agreements because his client and the egg farmer had a 20-year history of negotiating and providing all of their electrical work. He tried to make the argument that the two commercial parties could take care of themselves, but the court rejected that position, noting that the decision applied to a broader range of situations.

However, the decision does offer a ray of hope for lawyers defending clients with service contracts, he said. "If you have a written contract with various limitations and restrictions, even though it is a service contract, there may be an argument you could make under Cease Electric that the Economic Loss Doctrine should apply," Weiss said.

Part of the court’s decision states:

"Certainly, parties to service contracts, oral or written, can by means of contractual provisions allocate risk and limit remedies. Yet given the informality of such agreements, few parties actually address the allocation of risk or the limitation of remedies."

Weiss observed, "In one breath they seem to kind of create an exception when you have a contract written out. In the next sentence they seem to take it away."

One of Weiss’ contentions during the case was that the Economic Loss Doctrine presumes that the purchaser is in the best position to determine the potential risks if there is a failure of the purchased product or service. That person can then adjust the contract or insure against the potential loss. In this case, he said, the egg farmer was in the best position to understand what would happen if the ventilation system failed.

"Apparently, the Supreme Court disagreed," Weiss told the group. "They said the electrical contractor was in the best position to figure out what happened and understand the risk of economic loss here."

As a result, Weiss said, lawyers defending similar claims should examine the purchaser’s understanding of the risk of economic loss.

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For example, he said lawyers should ask questions such as, "When you purchased this, you understood
that if it didn’t work, you would have certain things that would go wrong with your business or certain costs? Sure."

Try to establish the specifics of that to meet the Supreme Court’s test on a case-by-case basis.

The Supreme Court is still considering the breadth of the Cease Electric decision in the follow up case, Linden v. Cascade Stone Company, 04-0004. The case involves plaintiffs who hired a general contractor to build their home.

Once the home was completed, the homeowners alleged defects in the home and sought to recover from the general contractor via the contract and from two of the subcontractors under a tort theory for services. The court of appeals dismissed the tort claims determining that the contract was for a product — their home — not services.

The Supreme Court heard oral arguments in the case March 30. The high court is expected to release its decision by the end of June.

Tony Anderson can be reached by email.