The economic loss doctrine precludes parties to a contract from bringing tort claims to recover purely economic or commercial losses associated with their contractual relationship. The parties are thus limited to their contractual remedies. This sounds simple enough in theory, but, in practice, the economic loss doctrine has proven to be quite a trap for the unwary.
This has been especially true as the reach of the economic loss doctrine has expanded in construction disputes. In recent decisions, the Wisconsin Supreme Court held that general contractors who agree to provide a home or a building are providing a “product” and, therefore, the property owners who hired them may only sue for breach of contract and not tort if the home or building delivered is not as it was promised. The court further expanded the economic loss doctrine in Linden v. Cascade Stone Co., Inc., 2005 WI 113, to bar property owners from bringing similar suits against subcontractors, even though the owners have no contract with the subcontractors themselves.
Most recently, in United Concrete & Constr., Inc. v. Red-D-Mix Concrete, Inc., 2013 WI 72, 2013 WL 3482135, the economic loss doctrine caught both a contractor and several homeowners unaware. In that case, the contractor, United, provided several homeowners with outdoor concrete installations using concrete supplied by Red-D-Mix. Eventually, the homeowners began complaining about various defects, including pitting, discoloration, and crumbling. United brought suit against Red-D-Mix for, among other things, breach of contract, breach of implied warranty, indemnification and contribution. United brought these claims in its own name, and in the name of 22 homeowners who had purportedly assigned their claims to United.
The Supreme Court of Wisconsin affirmed the dismissal of each of these claims to the extent they were based upon the assignments from the homeowners. According to the court, the homeowners had no claims to assign to United because “the three parties stood in the same position as those in Linden.” As a supplier, Red-D-Mix stood in the same position as the subcontractor in Linden. Thus, because the homeowners had a contract with United for the delivery of a product — that is, their concrete — they were barred by the economic loss doctrine from bringing tort claims against either United or its supplier/subcontractor, Red-D-Mix. The homeowners also had no contract claim to assign because they had no contract with Red-D-Mix. (The court left open the question of whether homeowners might have a claim as a third-party beneficiary of the contract between United and Red-D-Mix.) The bottom line was that United could not pursue claims, in the name of its customers, based on their purported assignments, because its customers had no claims to assign in the first instance.
Lessons Learned: The United decision makes clear that suppliers enjoy the protections of the economic loss doctrine. The deeper lesson, however, is that the economic loss doctrine continues to expand in Wisconsin, and it continues to trap the unwary. In this case, the hardest lesson was likely learned by the property owners — only two of whom bargained with United for a reservation of rights or a promise that United would repair or replace their concrete. If you are involved in a construction dispute — whether it be as an owner, contractor, subcontractor, supplier, lender, or the like — the last thing you want to do is learn your lessons the hard way, like the property owners did in United. Make sure you understand what rights each of the parties to the dispute may, or may not, have before you take a step like filing a lawsuit, settling a claim, or entering into an assignment of rights.