Accession Law LLC


Feb 29, 2012

The Wisconsin Court of Appeals again used the “economic loss doctrine” to bar tort claims for construction services

The "economic loss rule" rears its head again in a construction defect case.
In Kalahari Devlopment LLC v. Iconica Inc., 2011AP643 (Feb. 23, 2012), the Wisconsin Court of Appeals, District IV, considered whether to apply a statute of limitation or a statute of repose to a construction defect and whether the "discovery rule" would apply.
Iconica, Inc., designed and built a water park resort and conference center for Kalahari Development, LLC under a contract dated May of 1999 with work completed in May of 2000.  In 2008, Kalahari discovered moisture damage in the walls. Kalahari brought claims for breach of contract and professional negligence against Iconica. The complaint alleged that the damage was caused by a defectively designed and installed vapor barrier.  Installation of a defective barrier was alleged to be both a breach of the construction contract and professional negligence related to Iconica’s performance of architectural and construction services.

 Iconica moved for summary judgment and the circuit court granted the motion. The court concluded that the contract claim was barred by the six-year statute of limitations applicable to contract claims.  A claim seeking damages for breach of contract cannot be brought more than 6 years after the contract date.  The court rejected Kalahari’s argument that the 10 year statute of repose, § 893.89 would permits its claim.  This statute of repose is a broader limitation which requires commencement of suits for improvements to property to be commenced within 10 years.  However, the court ruled that this does not increase the applicable statute of limitation for a contract claim.  The statute of repose is another bar which might work to limit claims, but it does not modify the contract statute of limitations.

As to the tort claim for negligence, Kalahari argued that this claim was valid because tort claims use the "discovery rule."  The claim must be brought within the limitations period, but the period does not commence until the plaintiff discovered the damage.  The defendant argued that, under Wisconsin law, the economic loss doctrine bars tort claims brought for breach of contract.  If the economic loss doctrine applies to bar the tort claim, the discovery rule is irrelevant.

Generally, the economic loss doctrine generally prevents a party from recovering tort damages for what is actually a breach of contract. The economic loss doctrine has been the subject of substantial litigation (and has been modified legislatively as relates to residential purchase contracts, see Sec. 895.10, Stats. ) The current status of the law in Wisconsin is that the economic loss doctrine bars tort claims arising from contracts for products but does not bar tort claims arising from contracts for services.  In cases of contracts for both products and services, the court must determine the predominant purpose of the contract Linden v. Cascade Stone Co., 2005 WI 113, 283 Wis. 2d 606, 699 N.W.2d 189.

The contract in this case contained three components that are key for purposes of resolving Kalahari’s predominant purpose argument. The three components are Iconica’s promise to provide (1) architectural and engineering services, (2) other services necessary for construction, including supervision and labor, and (3) construction materials. As we explain below, two supreme court cases addressing substantially similar situations have concluded that the contracts in those cases were predominantly for a product. Because Kalahari fails to persuasively distinguish those cases, we conclude that we are bound to follow
their result here. 
Although short on the reasoning behind its finding, the court concluded that the plaintiff's tort claim was barred by the economic loss doctrine, so the discovery rule does not apply.