Mech., Inc. v. Venture Elec. Contractors, Inc.

• Decision Date: 22 April 2020
• Docket Number: Appeal No. 2018AP2380
• Citation: 392 Wis.2d 319,944 N.W.2d 1,2020 WI App 23
• Parties: MECHANICAL, INC., Plaintiff-Respondent, v. VENTURE ELECTRICAL CONTRACTORS, INC., Defendant-Appellant.
• Court: Wisconsin Court of Appeals

392 Wis.2d 319

944 N.W.2d 1

2020 WI App 23

MECHANICAL, INC., Plaintiff-Respondent,

v.VENTURE ELECTRICAL CONTRACTORS, INC., Defendant-Appellant.

Appeal No. 2018AP2380

Court of Appeals of Wisconsin.

Submitted on Briefs: September 12, 2019

DATED AND FILED April 22, 2020

On behalf of the defendant-appellant, the cause was submitted on the briefs of Scott R. Halloin of Halloin Law Group, S.C., Milwaukee.

On behalf of the plaintiff-respondent, the cause was submitted on the brief of Roy E. Wagner, Smitha Chintamaneni, and Lauren A. Triebenbach of von Briesen & Roper, S.C., Milwaukee.

Before Neubauer, C.J., Reilly, P.J., and Gundrum, J.

NEUBAUER, C.J.

¶1 At issue in this construction dispute is whether the economic loss doctrine bars a negligence claim seeking purely economic losses—delay damages—by one subcontractor against another with whom there was no contract. Each subcontractor did enter a subcontract with the general contractor that addressed their individual obligations, duties of care, schedules of work, changes, and remedies for delays. Because the complaining subcontractor's negligence claim is rooted in the duties imposed by the interrelated construction contracts, contract law provides the remedies for the economic loss at issue, foreclosing tort remedies. The economic loss doctrine bars the negligence claim. We affirm.

BACKGROUND

¶2 Rising three stories high, spreading over 92,000 square feet, the construction project at issue involved $36,436,603 for design, labor, and material work to build an integrated research laboratory addition to the existing Great Lakes Research Facility for the University of Wisconsin-Milwaukee. In 2012, the State of Wisconsin by the Department of Administration, and represented by the Wisconsin Division of State Facilities (State) awarded the prime construction contract to J.P. Cullen & Sons, Inc., as the general contractor. Cullen hired Mechanical, Inc., to install the HVAC systems, and Venture Electrical Contractors, Inc., to install the electrical systems, under separate but similar subcontracts, both dated August 20, 2012. Venture's subcontract was for $4,491,812 and Mechanical's was for $9,190,000.

¶3 Identical in all relevant respects, both subcontracts incorporated the prime contract between the State and Cullen.¹ The subcontracts identified the standard of care: Each subcontractor was required to "use its best care, skill, and diligence in supervising, directing, and performing" its work.

¶4 The subcontracts specified the duties and obligations each subcontractor owed associated with the timely performance of the work, including a schedule of work and a commitment to perform the work in a timely manner.² Both subcontracts addressed work and schedule changes in an identical manner.³

¶5 Both subcontractors "recognize[d]" that delays could occur. In that event, extensions were to be provided, but that was the subcontractor's "sole remedy." Each subcontractor expressly agreed that it would not be entitled to make a claim for "damages or additional compensation based on delay, hindrance of work, impacts on progress, season changes, disruption, loss of productivity or efficiency, or schedule changes resulting from any cause whatsoever."

¶6 Under its subcontract, Venture sought recovery of over $1,000,000 from Cullen for costs it incurred because of delays and untimely performance. In addition to Mechanical, Venture blamed other subcontractors for its losses. Cullen denied the claim on the grounds that it was untimely, Venture's damages were self-induced, and the subcontract precluded recovery for delay. Venture did not persist in asserting this claim against Cullen.

¶7 Unrelated to Mechanical's work for Cullen, Venture asked Mechanical to install concrete embeds to support electrical conduit. Mechanical billed Venture $11,961.31 for this work but allegedly did not get paid. When Mechanical subsequently brought this suit against Venture seeking to recover its $11,961.31, Venture counterclaimed in negligence, now seeking almost $1,100,000 for delay-related damages solely from Mechanical.

¶8 Venture alleged that Mechanical owed Venture a duty to comply with Mechanical's schedules under its subcontract and to timely perform its project work. Venture contended that Mechanical's performance was untimely and out of sequence, breaching its duties and causing Venture to incur delay-related losses from overtime hours and cost overruns.

¶9 Mechanical moved for summary judgment dismissal of Venture's negligence claim on the ground that it was barred by the economic loss doctrine. The circuit court granted Mechanical's motion. Venture appeals.

DISCUSSION

Standard of Review

¶10 Under a given set of facts, whether the economic loss doctrine applies to bar a claim and whether a contract is primarily for goods or services are questions of law which we review de novo. Linden v. Cascade Stone Co. , 2005 WI 113, ¶5, 283 Wis. 2d 606, 699 N.W.2d 189.

The Economic Loss Doctrine

¶11 A judicially created doctrine, the economic loss rule was first adopted in Wisconsin in Sunnyslope Grading, Inc. v. Miller, Bradford & Risberg, Inc. , 148 Wis. 2d 910, 437 N.W.2d 213 (1989). In Sunnyslope , when a backhoe failed to perform properly, the buyer sued the manufacturer in tort, seeking damages for costs of parts, extra labor, and lost profits. Id. at 914-15, 437 N.W.2d 213. The manufacturer had provided a limited warranty, which also limited its liability for costs and disclaiming other consequential damages. Id. at 913-14, 437 N.W.2d 213. The supreme court rejected the buyer's claim that the manufacturer owed, beyond the warranty, an independent or additional duty to the buyer for the claimed damages. Id. at 915, 437 N.W.2d 213. The court held that a buyer cannot recover solely economic losses under a tort theory, particularly when, as in that case, the manufacturer's warranty had addressed and precluded such losses. Id. at 921, 437 N.W.2d 213.

¶12 The subject of much litigation since, the economic loss doctrine 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." Ferris v. Location 3 Corp. , 2011 WI App 134, ¶12, 337 Wis. 2d 155, 804 N.W.2d 822 ; see Hinrichs v. DOW Chem. Co. , 2020 WI 2, ¶31, 389 Wis. 2d 669, 937 N.W.2d 37 (describing the "upshot" of the doctrine as the requirement that dealing parties must "pursue only their contractual remedies" when seeking economic loss) (citation omitted). The doctrine was born out of the bedrock distinctions between contract and tort law and the intent to sustain them, and these distinctions arise chiefly from the source of the party's duty. The sources differ markedly. See Daanen & Janssen, Inc. v. Cedarapids, Inc. , 216 Wis. 2d 395, 404, 573 N.W.2d 842 (1998).

¶13 A struck bargain is the source of the legal obligation imposed in contract law. See id. , 573 N.W.2d 842. Aiming to facilitate exchanges and to protect the interests expected by each party to the bargain in allocating risks and costs, contract law holds the parties to their mutual, consensual promises, ensuring that each negotiated benefit is received. Id.

¶14 On the other hand, the protection of society is the source of the legal obligations imposed in tort law. Id. at 405, 573 N.W.2d 842. "Tort law is rooted in the concept of protecting society as a whole from physical harm to person or property," and it aims to guard against unexpected or overwhelming misfortunes. Id. ; Linden , 283 Wis. 2d 606, ¶7, 699 N.W.2d 189.

¶15 Honoring the distinction between tort and contract law, the economic loss rule generally holds purchasers to their contract remedies for loss to the product or work itself (i.e., economic loss), but not losses due to other property damage or physical injury. Secura Ins. v. Super Prods. LLC , 2019 WI App 47, ¶13, 388 Wis. 2d 445, 933 N.W.2d 161. Applicable here, economic losses arising from alleged inadequate performance of a contract include costs associated with delays and lost profits. Id.

The Economic Loss Doctrine Applies to Interrelated Contracts

¶16 Sunnyslope applied the economic loss doctrine to parties in a direct two-party contract. Here, Venture did not have a contract with Mechanical. Venture argues the doctrine is inapplicable because they were contractual strangers with no opportunity to allocate economic risk. We disagree.

¶17 Under Wisconsin law, the economic loss doctrine applies when the claimant seeks economic loss that arises from duties under interrelated contracts, even where there is no direct two-party contractual relationship. See Linden , 283 Wis. 2d 606, ¶¶17, 32, 699 N.W.2d 189.

¶18 In Linden , the supreme court held that the economic loss doctrine applied even if there was no direct contract, or privity, with the defendant when the duties of the defendant arose out of interrelated contracts. In that case, the contractual relationships were interrelated through a "vertical" chain: the homeowners contracted with a general contractor to build a house, who in turn contracted with several subcontractors, including one to apply stucco to the exterior and another to place shingles on the roof. Id. , ¶2. Subsequently, the homeowners sued the general contractor, asserting contract and negligence claims for alleged defects in the house, particularly water infiltration. Id. , ¶3. They also sued the subcontractors, asserting that the stucco and shingle subcontractors negligently caused the water infiltration damages. Id.

¶19 The supreme court held that the economic loss doctrine precluded the homeowners' claims against the subcontractors. Id. , ¶32. The court found that the controlling contract was the one entered into between the homeowners and the general contractor, and under that contract the homeowners had the ability to bargain for coverage of the risk of faulty workmanship in any aspect of the house. Id. , ¶17. The homeowners had contractual...