Economic Loss Doctrine, what is it and how does it apply in Business lawsuits

In Brew City Redevelopment Group, LLC v. Ferchill Group 297 Wis.2d 606, the Wisconsin Supreme Court defines the economic loss doctrine as

“a judicial doctrine intended to preserve the fundamental distinction between contract and tort. It works to prevent a party to a contract from employing tort remedies to compensate the party for purely economic losses arising from the contract.” citing Grams v. Milk Prods., Inc., 2005 WI 112, ¶ 2, 283 Wis.2d 511, 699 N.W.2d 167

How this is actually applied to business litigation however is a constantly changing and liquid concept. The Court seems to be moving towards a hybrid approach of not banning Tort completely, but trying to ensure that anything that could be plead under contract law is not simply plead in Tort law.

In Brew City Redevelopment Group, LLC there was a tort claim through Wis. Stat. § 134.01 for injury to business and restraint of will, as well as several breach of contract claims. The Wisconsin Supreme Court held that the economic loss doctrine did not apply to BrewCity’s Wis. Stat. §134.01 claim for three reasons,

First, § 134.01 claims do not depend on a contract in order to lie. Second, the allegations underlying BrewCity’s § 134.01 claim are different allegations than those underlying BrewCity’s breach of contract claims. Finally, the damages BrewCity alleges under its breach of contract claims are different from the damages it alleges under the malicious injury claim. Brew City Redevelopment Group, LLC at ¶ 25

The Court goes on to point out

“[t]hat BrewCity seeks financial recovery is not tantamount to its losses being economic losses for the purposes of the economic loss doctrine. An injury is not ‘economic’ simply because it is monetary. All losses-even those stemming from injuries to the person or damage to property-are monetary in nature” Id. at ¶ 32

This analysis by the Wisconsin Supreme Court is especially telling as it shows that the Court is not willing to limit tort cases, even in contract disputes, if the allegations fall clearly outside of the realm of contract.

Where it gets really interesting for Business lawsuits is that the Wisconsin Supreme Court has also held that the Economic Loss Doctrine does not apply to contracts relating solely to services.

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.’ ” (citation omitted). As tort law generally offers a “broader array of damages than contract[, t]he economic loss doctrine precludes parties under certain circumstances from eschewing the more limited contract remedies and seeking tort remedies.” This is a reasonable and unsurprising policy in light of the protections afforded by the U.C.C.

That is, [p]rotection against damages caused by a defective product injuring itself is the purpose of express and implied warranties provided for in the U.C.C. When a product fails to operate as warranted or expected, the proper avenue for relief is a breach of warranty claim. Alternatively, customers can reject the product or revoke their acceptance and sue for breach of contract.¶ 29, 688 N.W.2d 462 (citations omitted). Moreover, the U.C.C. provides protections for manufacturers as well–manufacturers can limit their risks and exposure by disclaiming warranties or limited remedies. ¶ 31, 688 N.W.2d 462. Thus, ‘if a commercial purchaser were allowed to sue in tort to recover solely economic loss, the U.C.C. provisions designed to govern such disputes could be circumvented entirely. In that event, the U.C.C. would be rendered meaningless and ‘contract law would drown in a sea of tort.’ ” (citation omitted).

Given the above rationale for why the Economic Loss Doctrine applies in UCC cases, the Court when on to state:

Unlike contracts for products or goods, which enjoy the benefit of well-developed law under the U.C.C., no such benefit exists for contracts for services. This is because the U.C.C. does not apply to service contracts. As a result, the built-in warranty provisions that the U.C.C. may provide in a contract for the sale of products or goods would not apply to a contract for services.

So, while the Economic Loss Doctrine does prevent some claims, specifically suing for tort for defective products, the WIsconsin Supreme Court has cut away a lot of its applicability to most business lawsuits. While it is something to keep in mind when beginning any suit, it is good to know that businesses are still able to bring claims in tort that involve business relationships.