Subcontractor Tort Claims Barred Under the Economic Loss Doctrine
Litigation & Dispute Resolution Alert 04/29/20 Lauren N. Zenk, David P. Muth
Labeling its conclusion as a "natural progression" of case law, the Wisconsin Court of Appeals recently broadened the scope of the economic loss doctrine. See Mechanical, Inc. v. Venture Electrical Contractors, Inc., 2018AP2380 (Wis. Ct. App. 2020). The court held that the doctrine bars negligence claims for pure economic losses between two subcontractors who have not entered a contract with each other, but who share indirect horizontal privity through their agreements with a general contractor. Id. at ¶ 29.
In Venture Electrical, the State of Wisconsin hired a general contractor ("Cullen") to construct an addition to a research facility for the University of Wisconsin-Milwaukee. Cullen hired many subcontractors, including Mechanical and Venture. Mechanical and Venture did not enter into a contract with each other. Alleging that Mechanical caused delays that damaged Venture, Venture brought a negligence claim against Mechanical.
The court briefly discussed the origins of the economic loss doctrine and summarized the doctrine's purpose: it "essentially provides that 'a party to a contract may not pursue tort remedies to recover solely economic losses arising out of the performance or nonperformance of the contract.'" Id. at ¶ 12. Based on this policy and the Wisconsin Supreme Court's decision in Linden v. Cascade Stone, the court extended the doctrine to Mechanical and Venture. Id. at ¶¶ 16-28; Linden v. Cascade Stone Co., 2005 WI 113, 283 Wis. 2d 606, 699 N.W.2d 189.
Linden was not directly controlling, but the Venture Electrical court relied heavily on it. In Linden, the Wisconsin Supreme Court applied the economic loss doctrine to a homeowner's negligence claim against a subcontractor because the homeowner's "core" complaint was contractual. Linden, 2005 WI 113, ¶ 17. The homeowner and subcontractor did not enter into an agreement with each other, but they shared vertical privity through their respective contracts with the general contractor. Permitting the homeowner to bring a tort claim (even against a party with whom it did not enter a contract) would have eroded the distinction between tort and contract law. Therefore, the economic loss doctrine applied.
In Venture Electrical, the court cited Linden to explain that the economic loss doctrine applies to claims between two parties who have not entered a contract if they are nonetheless related by a series of contracts. While the homeowner and subcontractor were related through a vertical chain in Linden, Mechanical and Venture shared horizontal privity. This distinction did not cause the court to hesitate. It simply concluded that Mechanical and Venture's relationship was integrated through a series of contracts where each subcontractor had the opportunity to allocate its risks, duties, and remedies. Id. at ¶ 21. The court dismissed Venture's argument that it and Mechanical were "contractual strangers." Id. at ¶ 16.
Venture also argued that its contract was for services rather than a product, which would typically be outside the economic loss doctrine's grip. The court dismissed this argument by explaining that the purpose of the project was for a building, not a service. Id. at ¶ 25.
Venture Electrical has the potential to be applied broadly so it is important to understand the takeaways. The economic loss doctrine bars tort claims for pure economic losses between subcontractors even when those parties are not in express contractual privity. Therefore, it is important to consider delay and damage allocation in contracting with either the owner or general contractor to allocate risk for potential losses.
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