Insurance Co. of North America v. Cease Electric Inc.

• Decision Date: 09 November 2004
• Docket Number: No. 03-0689.,03-0689.
• Parties: INSURANCE COMPANY OF NORTH AMERICA, Plaintiff Respondent, COLD SPRING EGG FARM, INC., Involuntary-Plaintiff Respondent, v. CEASE ELECTRIC INC., d/b/a Zillmer Electric and Pekin Insurance Company, Defendants Appellants-Petitioners.
• Court: Wisconsin Supreme Court

276 Wis.2d 361

2004 WI 139

688 N.W.2d 462

INSURANCE COMPANY OF NORTH AMERICA, Plaintiff Respondent, COLD SPRING EGG FARM, INC., Involuntary-Plaintiff Respondent, v. CEASE ELECTRIC INC., d/b/a Zillmer Electric and Pekin Insurance Company, Defendants Appellants-Petitioners.

No. 03-0689.

Supreme Court of Wisconsin.

Oral argument September 10, 2004.

Decided November 9, 2004.

For the defendants-appellants-petitioners there were briefs by Monte E. Weiss and Weiss Law Office, S.C., Milwaukee; and J.P. Fernandes and Hale & Wagner, S.C., Milwaukee, and oral argument by Monte E. Weiss.

For the plaintiff-respondent and involuntary plaintiff-respondent there was a brief by Timothy A. Bascom, Richard E. Ceman, Jr., Amy J. Wilkinson and Bascom, Budish & Ceman, S.C., Wauwatosa, and oral argument by Timothy A. Bascom. An amicus curiae brief was filed by E. Campion Kersten and Kersten & McKinnon, S.C., Milwaukee; and William C. Gleisner, III, and Law Offices of William Gleisner, Milwaukee, on behalf of the Wisconsin Academy of Trial Lawyers.

An amicus curiae brief was filed by Thomas P. Godar, John D. Finerty, Jr., and Michael Best & Friedrich, LLP, Madison; and Michele Odorizzi and Mayer, Brown, Rowe & Maw, LLP, Chicago, on behalf of Associated General Contractors of America, AGC of Wisconsin, Inc., and Associated General Contractors of Greater Milwaukee, and oral argument by Michele Odorizzi.

¶ 1. ANN WALSH BRADLEY, J.

The petitioners, Cease Electric Inc., d/b/a Zillmer Electric and Pekin Insurance Company seek review of a court of appeals' decision affirming a circuit court judgment awarding Cold Spring Egg Farm, Inc., and its insurance carrier, Insurance Company of North America, damages for losses sustained due to the failure of a barn ventilation system.¹ Cease Electric, a contract electrician, asserts that it was retained to manufacture a product, namely the ventilation system. Accordingly, it contends that the economic loss doctrine precludes Cold Spring's recovery under tort.

¶ 2. We agree with Cold Spring that its contract with Cease Electric was one for services and not for a product. Because we determine that the economic loss doctrine does not apply to contracts for services, we conclude that Cold Spring is entitled to its recovery under tort for the negligent performance of services. We therefore affirm the decision of the court of appeals.²

I

¶ 3. Cold Spring raises chickens to produce eggs. It had a long-standing business relationship with Cease Electric. In the summer of 1996, Cold Spring entered into an oral contract with Cease Electric to upgrade the ventilation system in one of its barns. Ventilation systems are required to bring fresh, cool air into the barns so that the chickens have sufficient oxygen to live.

¶ 4. Prior to installation of the new system, Cold Spring had manual ventilation systems in its barns. Under the manual system, each individual fan had its own thermostat control independent of the other fans. If one individual fan failed, the remaining fans would continue to operate.

¶ 5. The new system was designed so that a single controller would operate all fans in stages. As the temperature in the barn rose, the fan control would engage different fans to bring fresh air into the barn. Conversely, when the temperature in the barn fell, the controller would turn off fans accordingly.

¶ 6. The "brains" of the new ventilation system was the main fan control unit: the ST-4026. Cold Spring purchased this component from Aerotech, Inc. Aerotech designed the system to have a backup thermostat as a safety device in the event the primary fan control failed. It recommended wiring the backup thermostat separately from the power source for the primary fan control.

¶ 7. Included with the ST-4026 was a one-page wiring schematic. Based on this diagram, Cold Spring asked Cease Electric to wire the ventilation system's component parts, including the primary fan control and the backup thermostat. Upon completion of the job, Cold Spring terminated its relationship with Cease Electric because it believed that Cease had not completed the project correctly or in a timely fashion.

¶ 8. On January 8, 1997, the ventilation system in Cold Spring's barn failed, resulting in the loss of nearly 18,000 chickens. Within a week of the loss, Cold Spring hired Al Dittmar, an electrician with Carroll Electric, to investigate why the fans malfunctioned.

¶ 9. Dittmar concluded that Cease Electric had improperly wired the main fan control unit to the same power circuit as the backup thermostat. He also determined that Cease Electric's employees had failed to test the new system, which would have revealed that the backup thermostat was not functioning.

¶ 10. Pursuant to its insurance contract, Insurance Company of North America (INA) paid Cold Spring $118,339.20 for the loss of income and $40,704.89 for the loss of chickens. Cold Spring, meanwhile, sustained a loss of $39,761.02 due to its policy deductible. Both INA and Cold Spring commenced this action in June 1999, alleging that the failure of the ventilation system was the result of the negligence of Cease Electric in its performance of services.

¶ 11. At the conclusion of a two-day trial, a jury found that the employees of Cease Electric were negligent and that their negligence had caused the plaintiffs' loss. The circuit court inserted the stipulated amount of damages into the verdict. It then entered judgment in the total amount of $204,065.29, representing the amount of stipulated damages plus double costs awarded pursuant to Wis. Stat. § 807.01(3) (2001-02).³ Cease Electric appealed.

¶ 12. On appeal, Cease Electric maintained that the plaintiffs' negligence action was precluded by the economic loss doctrine.⁴ It argued that it had provided a product to Cold Spring, the ventilation system. According to Cease Electric, as the plaintiffs' case was one of disappointed expectations resulting in only economic losses to the product, the economic loss doctrine barred recovery in a tort action.

¶ 13. The court of appeals affirmed the circuit court. It concluded that the economic loss doctrine did not bar Cold Spring's recovery under tort. Insurance Co. of North America v. Cease Electric Inc., 2004 WI App 15, ¶ 1, 269 Wis. 2d 286, 674 N.W.2d 886. Specifically, the court of appeals determined that Cease Electric had provided only services to Cold Spring and that, under Wisconsin law, the economic loss doctrine did not extend to service contracts. Id. Cease Electric and its insurer, Pekin Insurance Company, petitioned this court for review.

II

[1]

¶ 14. This case provides us with an opportunity to further define the parameters of the economic loss doctrine in Wisconsin. Before doing so, however, we must first determine whether the transaction at issue was one for goods or services. Interpreting the nature of a contract presents a question of law subject to independent appellate review. See Micro-Managers, Inc. v. Gregory, 147 Wis. 2d 500, 507, 434 N.W.2d 97 (Ct. App. 1988)

.

[2, 3]

¶ 15. The economic loss doctrine is a judicially created doctrine that seeks to preserve the distinction between contract and tort. Daanen & Janssen, Inc. v. Cedarapids, Inc., 216 Wis. 2d 395, 403-04, 573 N.W.2d 842 (1998). From its inception, the doctrine has been based on the understanding that contract law, and particularly the law of warranty, is better suited than tort law for dealing with purely economic loss in the commercial arena. Id. Its application to a set of facts also presents a question of law subject to independent appellate review. See Sunnyslope Grading, Inc. v. Miller, Bradford & Risberg, Inc., 148 Wis. 2d 910, 915, 437 N.W.2d 213 (1989)

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III

¶ 16. Our discussion begins with an examination of the nature of the contract at issue. Cease Electric contends that the court of appeals erred in characterizing its contract with Cold Spring as one for services. It asserts that it was hired to manufacture a unique ventilation system for Cold Spring's barn. According to Cease Electric, it fashioned this system by providing additional component parts that Cold Spring did not have.⁵

¶ 17. The circuit court rejected Cease Electric's claim that it provided a product to Cold Spring. Similarly, the court of appeals determined that Cease Electric had mischaracterized its role in the agreement. Insurance Co. of North America, 269 Wis. 2d 286, ¶ 20. It concluded that Cold Spring had hired Cease Electric to provide the service of installing the new ventilation system. Id.

[4]

¶ 18. Like the court of appeals, we determine that the contract at issue was for services, and not for a product. Here, it was Aerotech's ST-4026 that created the ventilation system in the barn, not Cease Electric. All Cease was required to do was to follow the one-page wiring schematic to ensure that the controller was properly wired to ventilation fans and a power source. It failed to do so, and Cold Spring brought suit, alleging negligent performance of services.

[5]

¶ 19. A review of the record supports our conclusion. To begin, Cease Electric did not charge Cold Spring a one-time fee for the price of a "system." Rather, the electricians who did the work for Cease Electric kept time sheets and billed their time out on an hourly basis. Evidence of billing is a relevant consideration when determining the nature of a contract. Micro-Managers, 147 Wis. 2d at 508.

¶ 20. Furthermore, the testimony of Robert Cease, a principal of Cease Electric, belies Cease Electric's assertion that it "manufactured" Cold Spring's ventilation system. After discussing the manual system in place before the installation of the Aerotech system, Cease made the following observation about the new fan controller: "The unit itself is sophisticated, but the wiring of it is very simple. You bring power in, you take power out to a fan or a stage of fans. So it's basically inputs and outputs."

¶ 21. Finally, although Cease...