Huron Tool and Engineering Co. v. Precision Consulting Services, Inc.

• Decision Date: 20 March 1995
• Docket Number: Docket No. 161050
• Citation: 532 N.W.2d 541,209 Mich.App. 365
• Parties: , 26 UCC Rep.Serv.2d 703 HURON TOOL AND ENGINEERING COMPANY, Plaintiff-Appellant, v. PRECISION CONSULTING SERVICES, INC., and Joseph B. Wulffenstein, jointly and severally, Defendants-Appellees.
• Court: Court of Appeal of Michigan — District of US

Page 541

532 N.W.2d 541

209 Mich.App. 365, 26 UCC Rep.Serv.2d 703

HURON TOOL AND ENGINEERING COMPANY, Plaintiff-Appellant, v. PRECISION CONSULTING SERVICES, INC., and Joseph B.

Wulffenstein, jointly and severally, Defendants-Appellees.

Docket No. 161050.

Court of Appeals of Michigan.

Submitted Nov. 1, 1994, at Detroit.

Decided March 20, 1995, at 9:25 a.m.

Released for Publication May 24, 1995.

John S. Paterson and Kimberly A. Tomczyk, Sandusky, for plaintiff.

O'Sullivan, Beauchamp, Kelly & Whipple by David C. Whipple and David Allen Keyes, Port Huron, for defendants.

Before FITZGERALD, P.J., and MICHAEL J. KELLY and POST, ^* JJ.

MICHAEL J. KELLY, Judge.

Plaintiff appeals as of right an order of the circuit court granting defendants' motion for summary disposition under MCR 2.116(C)(7). We affirm in part, reverse in part, and remand.

I

The parties entered into an agreement for the sale of a computer software system in November 1986. The agreement provided that defendant Precision Consulting Services, Inc., would provide plaintiff Huron Tool and Engineering Company with "system's design, programming, training and installation services." Plaintiff paid the full purchase price by May 13, 1988. After that date, defendants performed additional work on the system in order to customize the software for plaintiff's use. Each time a modification was made, defendants billed plaintiff separately. Included in the additional work was the installation of a program for job closing in November 1988 and a shop order processing application in July 1991.

Because of alleged defects in the software system, plaintiff filed suit on July 20, 1992, alleging breach of contract and warranty, fraud, and misrepresentation. ¹ Defendants filed a motion for summary disposition under MCR 2.116(C)(7), claiming that plaintiff's claims were barred by the four-year statute of limitation in the Uniform Commercial Code, M.C.L. § 440.2725(1); M.S.A. § 19.2725(1). Plaintiff argued that its claim did not accrue until November 1988 at the earliest. Plaintiff also argued that its fraud claim was independent of its contractual claims and, therefore, outside the scope of the UCC statute of limitation. The circuit court rejected plaintiff's arguments and, applying the UCC limitation period to all of plaintiff's claim, dismissed the entire action under MCR 2.116(C)(7).

II

The central dispute on appeal concerns plaintiff's fraud claim. At issue is whether the economic loss doctrine bars plaintiff from bringing a fraud claim independent of its contractual claims under the UCC. Defendants argue that the economic loss doctrine bars any action in tort, including fraud, where plaintiff suffers only economic damages and has a cause of action in contract under the UCC. Although defendants cite Neibarger v. Universal Cooperatives, Inc., 439 Mich. 512, 486 N.W.2d 612 (1992), in support of their position, that decision only addressed the application of the economic loss doctrine to nonintentional torts. The viability of the doctrine in actions for intentional torts, particularly fraud, remains an issue unaddressed in Michigan. After review of decisions in other jurisdictions and of the history and rationale of the economic loss doctrine in Michigan, we conclude that fraud in the inducement is an exception to the doctrine, but that plaintiff has failed to plead such fraud and, therefore, is restricted to its contractual remedies under the UCC.

A

The economic loss doctrine provides that "[w]here a purchaser's expectations in a sale are frustrated because the product he bought is not working properly, his remedy is said to be in contract alone, for he has suffered only 'economic' losses." Kennedy v. Columbia Lumber & Mfg. Co., 299 S.C. 335, 345, 384 S.E.2d 730 (1989), quoted in Neibarger, supra at 520, 486 N.W.2d 612. Although our Supreme Court's most authoritative pronouncement concerning the applicability of the economic loss doctrine in Michigan did not appear until recently in Neibarger, supra, the doctrine has firm roots in Michigan jurisprudence. See, e.g., McCann v. Brody-Built Construction Co., Inc., 197 Mich.App. 512, 496 N.W.2d 349 (1992); Rust-Pruf Corp. v. Ford Motor Co., 172 Mich.App. 58, 431 N.W.2d 245 (1988); Great American Ins. Co. v. Paty's, Inc., 154 Mich.App. 634, 397 N.W.2d 853 (1986); A.C. Hoyle Co. v. Sperry Rand Corp., 128 Mich.App. 557, 340 N.W.2d 326 (1983); McGhee v. GMAC Truck & Coach Division, 98 Mich.App. 495, 296 N.W.2d 286 (1980) (applying the economic loss doctrine).

In Neibarger, the plaintiffs, purchasers of allegedly defective products, attempted to circumvent the strict UCC limitation period by pleading claims sounding in tort. ² 439 Mich. at 517, 486 N.W.2d 612. Applying the economic loss doctrine, the Supreme Court determined that the plaintiffs' tort claims were subject to the UCC because they alleged damages amounting to nothing more than economic losses in the form of product defects. Id. at 530, 486 N.W.2d 612. These damages merely reflected a concern about the quality expected by the buyer and promised by the seller, which is the essence of a warranty action under the UCC. Id. at 531, 486 N.W.2d 612. Because the UCC already addressed the plaintiffs' concerns, the Court held that the plaintiffs could not pursue an independent tort claim. Any other holding, the Court added, would render the UCC meaningless and " 'contract law would drown in a sea of tort.' " Id. at 528, 486 N.W.2d 612, quoting East River Steamship Corp. v. Transamerica Delaval Inc., 476 U.S. 858, 866, 106 S.Ct. 2295, 2299, 90 L.Ed.2d 865 (1986).

B

The tort claims asserted by the plaintiffs in Neibarger sounded in negligence and strict liability. Although the Neibarger Court discussed the economic loss doctrine in broad terms, referring generally to the viability of "tort" claims under the doctrine without further distinction, we find nothing in the opinion to suggest that the Court's holding extended beyond the limited facts of that case to address the viability of intentional torts such as fraud. We therefore reject defendants' simple argument that because "tort" claims for economic losses are barred, and because fraud is a "tort," plaintiff's fraud claim is barred. Instead, a more thorough analysis of the issue is appropriate, one that takes into consideration the underlying policies of tort and contract law and seeks to define the meaning of "tort" within the economic loss doctrine. To this end, we consider helpful the decisions of other state and federal courts concerning the same issue.

Although the issue has been addressed in only a handful of jurisdictions, the emerging trend is clearly toward creating an exception to the economic loss doctrine for a select group of intentional torts. See, e.g., Interstate Securities Corp. v. Hayes Corp., 920 F.2d 769, 776, n. 11 (C.A.11, 1991) (defamation); Northern States Power Co. v. Int'l. Telephone & Telegraph Corp., 550 F.Supp. 108 (D.Minn.1982) (fraudulent inducement to contract and misrepresentation); Moorman Mfg. Co. v. Nat'l Tank Co., 91 Ill.2d 69, 61 Ill.Dec. 746, 435 N.E.2d 443 (1982) (intentional misrepresentation); Werblood v. Columbia College of Chicago, 180 Ill.App.3d 967, 129 Ill.Dec. 700, 536 N.E.2d 750 (1989) (tortious interference with prospective economic advantage); Santucci Construction Co. v. Baxter & Woodman, Inc., 151 Ill.App.3d 547, 104 Ill.Dec. 474, 502 N.E.2d 1134 (1987) (intentional interference with contractual relations). With regard to the specific intentional tort of fraud, courts generally have distinguished fraud in the inducement as the only kind of fraud claim not barred by the economic loss doctrine. We believe this distinction is warranted in light of the rationale of the economic loss doctrine:

The distinction is critical, for the essence of the "economic loss" rule is that contract law and tort law are separate and distinct, and the courts should maintain that separation in the allowable remedies. There is a danger that tort remedies could simply engulf the contractual remedies and thereby undermine the reliability of commercial transactions. Once the contract has been made, the parties should be governed by it.

Fraud in the inducement, however, addresses a situation where the claim is that one party was tricked into contracting. It is based on pre-contractual conduct which is, under the law, a recognized tort. [Williams Electric Co. Inc. v. Honeywell Inc., 772 F.Supp. 1225, 1237-1238 (N.D.Fla., 1991).]

The decision of the Florida federal district court in Williams Electric comports with the rationale of the economic loss doctrine as expressed by the Florida Supreme Court in Florida Power & Light Co. v. Westinghouse Electric Corp., 510 So.2d 899 (Fla.1987). There, the court held that the doctrine prohibited a buyer under a contract for goods to recover economic losses in tort without a claim for personal injury or for damage to property other than the goods sold. This holding reflects the rule adopted by our Supreme Court in Neibarger, supra. The Florida Power court explained that the policy behind the doctrine "encourages parties to negotiate economic risks through warranty provisions and price." 510 So.2d at 901. Another Florida court noted that the doctrine "shield[s] a defendant from unlimited liability for all economic consequences of a negligent act, particularly in a commercial setting, thus keeping the risk of liability reasonably calculable." Bay Garden Manor Condominium Ass'n., Inc. v. James D. Marks Associates, Inc., 576 So.2d 744, 745 (Fla.App., 1991), citing Local Joint Exec. Bd., Culinary Workers Union, Local 226 v. Stern, 98 Nev. 409, 410, 651 P.2d 637 (1982). This policy rationale has been recognized by federal courts applying Michigan law. See Neibarger, supra at 525-526, 486 N.W.2d 612, quoting Consumers Power Co. v. Mississippi Valley Structural Steel Co., 636 F.Supp. 1100, 1105 (E.D.Mich., 1986). It also was recognized implicitly by ...