Litigating Multiparty Construction Disputes After Trinity Lutheran v. Dorschner Excavating, Inc.

WDC Journal Edition: Summer 2009
By: Michael J. Cerjak

I. Introduction

The economic loss doctrine prohibits the purchaser of a product from recovering damages in tort when a product defect or failure causes damage only to the product itself.[1] A common refrain is that the doctrine serves to prevent contract law from drowning in a “sea of tort,”[2] but at its essence, the doctrine demarcates the boundary between two competing concerns—one private, one public.[3] The private concern, which arises from contract law, is ensuring that parties are held to the terms and conditions of a product sale so that each party receives the benefit of his or her bargain.[4] The public concern, which arises from tort law, is keeping society members safe from the personal injury or property damage that can result from a defective product.[5] Wisconsin courts apply the doctrine when the private concern—enforcing agreements—outweighs the public concern—protecting individuals from injury or harm—and do so based on the type of damage sustained when a product does not meet contract specifications.[6] If a defective product causes damage only to itself, Wisconsin courts conclude that the dispute is essentially a private matter between contracting parties and so find that their contractual duties must control the dispute.[7] If a defective product causes personal injury or damage to other property, however, the public concern is implicated and so courts resolve the parties’ dispute as a matter of tort.[8]

In short, Wisconsin courts apply the doctrine if doing so advances its underlying purposes:

(1) to maintain the distinct functions of tort law and contract law;

(2) to protect the freedom of commercial parties to allocate economic risk between them by contract; and

(3) to encourage a commercial purchaser—the party typically best suited to assess the risk of economic loss—to assume, allocate, or insure against a risk of loss.[9]

Though the doctrine can be difficult to explain,[10] it is more difficult to apply. The Wisconsin Supreme Court has found that the doctrine applies in cases involving product contracts,[11] but not service contracts;[12] in cases where a product defect results in damage to other property in the same integrated system as the defective product,[13] but not in cases where the defective product damages any other property;[14] and to fraud claims where the fraud is interwoven with a contract, [15] but not to claims where the fraud is extraneous to the contract.[16] The doctrine is intricate[17] with courts and lawyers alike often struggling to determine when the doctrine applies and when it does not.

In Trinity Lutheran Church v. Dorschner Excavating, Inc., the Wisconsin Court of Appeals refused to apply the doctrine to bar tort claims made between parties in horizontal privity[18] of contract,[19]though the Wisconsin Supreme Court has recognized that the doctrine applies to bar tort claims between parties in vertical privity[20] of contract.[21] The court’s trifling analysis in Trinity Lutheran, however, leaves the decision with dubious precedential value. This article discusses the decision, analyzes its precedential value, and then examines the arguments that can—and often should—be made in multiparty construction disputes arising after Trinity Lutheran.

II. Trinity Lutheran

1. The Trinity Lutheran decision arises out of a church-renovation project. For the project, Trinity Lutheran Church hired a general contractor to coordinate the construction of an addition to its church building and separately hired a subcontractor to excavate for the project’s footings.[22] After the project was completed, a crack in a water pipe flooded the church, and Trinity’s expert opined that the pipe cracked when the teeth of a backhoe[23] struck it.[24] Since the excavator was the last party to use a backhoe in the pipe’s area, Trinity and its insurer sued the excavator alleging claims for negligence and breach of contract.[25] In relevant part, the excavator then filed a third-party complaint for contribution against the general contractor, claiming that the general contractor negligently failed to mark the location of the water pipe or to pressure test the pipe before allowing water to run through it.[26] For clarity, Diagram 1 describes the parties, contracts, and claims involved in the Trinity Lutheran case:

Diagram 1 –Parties’ Relationships in Trinity Lutheran

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At the circuit court, the general contractor moved to dismiss the excavator’s contribution claim as a matter of law.[27] To maintain a contribution claim, a party must establish that it paid more than its fair share of a joint liability,[28] and the general contractor argued that it and the excavator could not share joint liability in either contract or tort; it claimed that the doctrine precluded it from any liability in tort and that it could not share joint liability with the excavator in contract because the parties shared neither a contractual right to contribution nor a contractual agreement.[29] The trial court denied the general contractor’s motion, and on appeal, the court of appeals affirmed the trial court’s decision.[30]

Before determining whether the doctrine applied to the contract between Trinity and the general contractor, the court of appeals found that the general contractor could not rely upon the doctrine to preclude the excavator’s claim because the parties were not sufficiently linked by contract.[31] The court reasoned that the doctrine does not apply to preclude tort claims between parties in horizontal privity because those parties have not had the opportunity to allocate the economic risk of a product defect or failure between them and, instead, are merely strangers to each other who happen to be working side-by-side on a common project.[32] Though the court acknowledged that the doctrine should be invoked to avoid drowning contract law in a sea of tort when parties are sufficiently linked by a contractual relationship, the court concluded that it is equally important to prevent an allegedly injured party from “falling between the stools of tort and contract when no contractual relationship of any kind exists between two parties.”[33] In other words, the court feared that applying the doctrine would leave the excavator without a remedy against the general contractor: if it applied the doctrine, the excavator could not maintain a tort claim against the general contractor, and because the excavator did not enter into a contract with the general contractor, it could not maintain a contract claim.[34] The court of appeals therefore found that the doctrine does not apply to parties in horizontal privity.[35]

2. Construction contracts are frequently mixed contracts—contracts that involve the creation of a product as well as the performance of a service.[36] A masonry contract for the construction of a brick house, for example, may involve the purchase of bricks, a product, in addition to an agreement with the masons to lay the bricks, a service. Mixed contracts are subject to the economic loss doctrine if the predominant purpose of the mixed contract is for the purchase of a product rather than the performance of a service,[37] and in Trinity Lutheran, the contract between the general contractor and Trinity was a mixed contract.[38]

After stating that the doctrine cannot be applied to bar tort claims between parties in horizontal privity, the court analyzed whether the predominant purpose of the contract between Trinity and the general contractor was for the purchase of a product or performance of a service.[39] Because Trinity separately purchased the bulk of the materials utilized in building the addition and both the general contractor and Trinity separately contracted for other design and construction services, the court of appeals concluded that the contract between the general contractor and Trinity was for the overall coordination of construction services rather than a product sale.[40] It therefore found that the negligence alleged against the general contractor involved services, not goods, and that therefore the doctrine didn’t apply to bar tort claims arising from the general contractor’s contract with Trinity.[41]

III. Litigating Multiparty Construction Disputes After Trinity Lutheran

The Wisconsin Supreme Court has stated that the doctrine precludes a party from recovering in tort when a product defect or failure damages itself and it does so “regardless of whether privity of contract exists between the parties.”[42] The court of appeals’ analysis of whether the doctrine can be invoked to preclude tort claims between parties in horizontal privity from Trinity Lutheran is therefore difficult to reconcile with other Wisconsin case law.[43] But in any event, the court of appeals’ analysis there is dicta: because the contract between Trinity and the general contractor was a service contract, the doctrine could not be invoked to bar tort claims arising from the contract. Indeed, since the decision, circuit courts have found that part of the decision to be dicta and so the decision remains as dubious precedent.[44]

Because the court of appeals’ decision in Trinity Lutheran is not precedential, this article examines the arguments that lawyers can present in cases where the doctrine may apply to parties in horizontal privity. Part I argues that Trinity Lutheran was wrongly decided and that the doctrine should preclude tort claims if a product defect or failure damages only itself regardless of whether privity of contract exists between the parties. Part II offers the counter-argument that Wisconsin courts should allow a party to establish a contribution claim as a matter of equity when parties are in horizontal privity.

1. The doctrine precludes purchasers of products from seeking recovery in tort for solely economic damages, and the Wisconsin Supreme Court has recognized that it does so regardless of whether the seller and purchaser are in privity of contract; this rule has merit and, by example, the reasons why can be more lucidly explained.

i. Assume that a consumer purchases a new car.[45] When the consumer purchases the car, the manufacture provides a contractual warranty for the car, which essentially guarantees that the car is reliable and free from known defects by requiring the manufacturer to repair or replace defective parts—without charge—for a given amount of time or number of miles. Should the car’s transmission fail within the warranty period, then, the consumer would be entitled to have the vehicle repaired without charge pursuant to the warranty. If the transmission fails outside of the warranty period, however, the consumer would not be entitled to have the vehicle repaired without charge by the manufacturer because the warranty was for a limited duration.

The primary purpose of the doctrine is to maintain the distinction between tort law and contract law; the doctrine therefore precludes the car purchaser in this example from subverting the parties’ contractual warranty agreement by bringing a tort claim against the manufacturer to recover losses that he or she sustained due to the car’s transmission failure—a recovery not permitted under the contractual warranty.[46] A second purpose that the economic loss doctrine serves is to protect the parties’ freedom to allocate economic risk by contract, which allows the parties to minimize transaction costs in the event of a product failure.[47] Based on the contractual warranty agreement, for instance, the consumer and manufacturer would have clear rights were the car to fail; if the car failed during the warranty period, the manufacturer would be responsible for the car’s repair, but if the car failed outside of the warranty period, the purchaser would be responsible for repairing the car. In the event that the car failed, then, neither lawyers nor expert witnesses would be required to resolve a product liability dispute as might be necessary if the dispute arose in tort, ultimately lowering the overall cost of resolving the dispute. Finally, the doctrine encourages the consumer to assume, allocate, or insure against the risk of the product’s failure because the consumer is often the party best situated to assess the risks of economic loss.[48] For instance, if the risk of economic loss from a failed transmission were too great, the consumer could easily insure against the risk of the failure by purchasing an extended warranty, whereas the car’s manufacturer could not. When a product defect or failure damages only the product itself, Wisconsin law therefore requires that the dispute be resolved as a matter of contract and does so to prevent a consumer from escaping manufacturer warranties or other contractual remedies.

ii. Now assume that the original consumer sells the car used to a third party, that the manufacturer’s warranty has lapsed, and that the original consumer sells the vehicle without a warranty. As Diagram 2 shows, the manufacturer and third party are in vertical privity:

Diagram 2 –Vertical Privity in Automobile-Purchase Example

2.png

When parties are in vertical privity, the Wisconsin Supreme Court has found that allowing a third-party buyer in the vertical chain to maintain a tort action against the manufacturer would subvert the manufacturer’s freedom to contract with the original buyer.[49] More specifically, allowing the third-party buyer to maintain a tort claim against the manufacturer would allow the third party to escape the warranties and remedies that the manufacturer bargained for with the original consumer. As a result, if the vehicle’s transmission fails while the vehicle is owned by the third-party buyer, the third party—like the original consumer—would not be entitled to have the vehicle repaired without charge by the manufacturer; once again, the manufacturer’s warranty was for a limited duration. Accordingly, under Wisconsin law, the economic loss doctrine precludes purchasers of products from seeking recovery in tort for damages related to the product’s failure, and to ensure that the purposes underlying the economic loss doctrine are not subverted, the doctrine precludes the purchaser from recovering in tort for defects associated with the product even if the parties were not in privity of contract with one another.[50]

iii. As a final example, consider the situation in which a consumer buys the vehicle from the manufacturer and the manufacturer provides the same contractual warranty as in the previous two examples. In this example, however, the vehicle manufacturer separately contracts with a transmission manufacturer to buy transmissions for its vehicles and so the parties have a contractual relationship as illustrated in Diagram 3:

Diagram 3 –Horizontal Privity in Automobile-Purchase Example

3.png

If the consumer purchases a vehicle from the vehicle manufacturer and the vehicle’s transmission fails after the vehicle manufacturer’s warranty expires, should the consumer be entitled to bring a claim against the transmission manufacturer in tort?

Given the rationale that the Wisconsin Supreme Court has employed in applying the doctrine, it’s hard to see why. When the consumer purchased the vehicle, the vehicle manufacturer provided a limited contractual warranty for the vehicle, and in a separate agreement, the vehicle manufacturer received contractual remedies against the transmission manufacturer in the event that the transmission manufacturer provided it with defective transmissions. Enforcing each agreement is a private concern, and allowing the consumer to maintain a tort claim against the transmission manufacturer would allow the consumer to escape the warranties and remedies that he or she received from the vehicle manufacturer. Because the public concern has not been implicated—no physical injury or other property damage has occurred—no justification exists for imposing tort duties on the transmission manufacturer; since the private concern is therefore not outweighed by any public concern, the consumer should not be entitled to bring an action in tort against the transmission manufacturer. Under that rationale, the doctrine should preclude a party from recovering in tort when a product defect or failure damages itself regardless of whether vertical of horizontal privity exists between the parties.

2.

Under Wisconsin law, contribution is an equitable principle.[51] As an equitable remedy, all contribution claims have in common the characteristic that the party having a right against another has discharged more than his or her share of liability.[52] The contribution cause of action is therefore separate and distinct from the cause of action giving rise to liability, regardless of whether that liability arises out of tort or contract.[53] In short, then, the contribution action that accrues does not depend on the nature or origin of the underlying cause of action,[54] and the Wisconsin Supreme Court has held that an equitable contribution cause of action is available to parties that have contractual duties arising out of separate contracts.[55]

In one case, Kafka v. Pope, the supreme court held that a guarantor may be entitled to contribution from another guarantor even though their guaranties are evidenced by separate instruments as long as the underlying debt for which they are liable is the same.[56] In the case, Kafka and Pope were each shareholders in a corporation involved in “trucking concerns.”[57] Both Kafka and Pope executed separate personal guaranties for notes with M & I Northern Bank, and the personal guaranties were secured by mortgages on real property owned by each person.[58] Diagram 3 shows the relationships of the parties involved in Kafka:

Diagram 3 –Parties’ Relationships in Kafka

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When the trucking corporation experienced cash flow problems and could not make payments on the notes, M & I foreclosed on two of Kafka’s personal properties, and the proceeds from those properties were applied to the principal owed by the trucking corporation.[59] Because Kafka paid the entirety of the principal from his personal assets and Pope paid nothing, Kafka brought an action seeking contribution against Pope.[60] Before the supreme court, Pope argued—in relevant part—that the co-guarantors could not be jointly liable for the debt because they did not sign the same guaranty and so did not breach any common duty.[61] The court disagreed.[62]

To resolve the issue, the court relied on the rationale underlying the development of the cause of action for contribution: that one party has paid more than a fair share of a common obligation.[63] Recognizing that the doctrine of contribution rested upon principles of unjust enrichment, the court held that it would be inequitable to require Kafka to pay more than half of the mortgage obligation and so permitted Kafka to maintain the contribution cause of action.[64] Notably, the court permitted Kafka to maintain the cause of action even though the parties did not contract directly with one another and so did not share any common duty. Like the court did in Kafka, then, Wisconsin courts should allow parties in horizontal privity to maintain contribution claims against one another when equity so requires.

IV. Conclusion

The Wisconsin Court of Appeals’ analysis in Trinity Lutheran appears out of line with longstanding precedent. For many years, Wisconsin law has found that the doctrine bars tort claims arising from the sale of a product if the product is defective or fails and does damage only to itself, and the Wisconsin Supreme Court has found that the doctrine applies regardless of whether privity of contract exists between the parties. Because the court’s analysis of that issue in Trinity Lutheran is dicta, lawyers litigating multiparty construction disputes at circuit courts should argue that the decision is not controlling precedent if doing so serves their clients. Though the court’s rationale in Trinity Lutheranmay be improper, however, the court could have arrived at the same result it reached by relying on a different theory, equitable contribution. This article presents arguments that advocates on either side of the issue can advance.


[1] Daanen & Janssen v. Cedarapids, Inc., 216 Wis. 2d 395, 401–07, 573 N.W.2d 842 (1998).

[2] East River S.S. Corp. v. Transamerica Delaval, Inc., 476 U.S. 858, 866 (1986).

[3] Ralph C. Anzivino, The Fraud in the Inducement Exception to the Economic Loss Doctrine, 90 Marq. L. Rev. 921, 922 (2007).

[4] Wausau Tile, Inc. v. County Concrete Corp., 226 Wis. 2d 235, 247–48, 593 N.W.2d 445 (1999).

[5] Id.

[6] See id.; see also Anzivino, supra note 3, at 926–27.

[7] Anzivino, supra note 3, at 927.

[8] Id.

[9] The first Wisconsin case to recognize the three policies underlying the economic loss doctrine is Daanen & Janssen v. Cedarapids, Inc., 216 Wis. 2d 395, 403–04, 573 N.W.2d 842 (1998).

[10] Commentators seem to agree that the doctrine can be stated simply, but that it is difficult to apply and, in fact, some commentators believe that the doctrine “is one of the most confusing doctrines in tort law.” R. Joseph Barton, Drowning in a Sea of Contract: Application of the Economic Loss Rule to Fraud and Negligent Misrepresentation Claims, 41 WM. and Mary L. Rev. 1789, 1789 (2000); F. Malcolm Cunningham, Jr., & Amy L. Fischer, The Economic Loss Rule: Deconstructing the Mixed Metaphor in Construction Cases, 33 Tort & Ins. L.J. 147, 155 (1997).

[11] Sunnyslope Grading Inc. v. Miller, Bradford, & Risberg Inc., 148 Wis. 2d 910, 921, 437 N.W.2d 213 (1989).

[12] Ins. Co. of N. Am. V. Cease Elec., Inc., 2004 WI 139, ¶ 52, 276 Wis. 2d 361, 688 N.W.2d 462.

[13] Wausau Tile, Inc. v. County Concrete Corp., 226 Wis. 2d 235, 249–51, 593 N.W.2d 445 (1999).

[14] Id.

[15] Kaloti v. Kellogg Enterprises Inc., 2005 WI 111, ¶¶ 45–46, 283 Wis. 2d 555, 699 N.W.2d 205.

[16] Id.

[17] Lucas N. Roe, Homebuying After Below: Navigating the Economic Loss Maze, 82 Wis. Lawyer ___ (April 2009), available at http://www.wisbar.org/AM/Template.cfm?Section=Wisc...

&template=/CM/ContentDisplay.cfm&contentid=79658#6 (last visited Aug. 17, 2009).

[18] The term “horizontal privity” refers to the legal relationship between a party and a nonparty who is related to the party. Black’s Law Dictionary 1237 (8th ed. 2004).

[19] Trinity Lutheran Church v. Dorschner Excavating, Inc., 2006 WI App 22, ¶ 20, 289 Wis. 2d 252, 710 N.W.2d 680.

[20] The term “vertical privity” refers to the legal relationship between parties in a product’s chain of distribution. Black’s Law Dictionary 1238 (8th ed. 2004).

[21] Linden v. Cascade Stone Co., Inc., 2005 WI 113, ¶ 17, 283 Wis. 2d 606, 699 N.W.2d 189.

[22] Trinity Lutheran, 2006 WI App 22, ¶ 6.

[23] A backhoe is an excavating machine having a bucket that is attached to a rigid bar hinged to a boom and that is drawn toward the machine in operation. Merriam-Webster Online Dictionary, backhoe – Definition, available at http://www.merriam-webster.com/dictionary/backhoe (last visited Aug. 16, 2009).

[24] Trinity Lutheran, 2006 WI App 22, ¶ 10.

[25] Id. ¶ 11.

[26] Id. ¶ 27.

[27] Id. ¶ 15.

[28] See In re Estate of Rille ex rel. Rille, 300 Wis. 2d 1, 12 n.4, 728 N.W.2d 693 (2007).

[29] Trinity Lutheran, 2006 WI App 22, ¶ 15.

[30] Id. ¶ 20.

[31] Id.

[32] Id.

[33] Id. (citing Miller v. U.S. Steel Corp., 902 F.2d 573, 575 (7th Cir. 1990)).

[34] Id. ¶ 20.

[35] Id.

[36] Linden v. Cascade Stone Co., Inc., 2005 WI 113, ¶ 8, 283 Wis. 2d 606, 699 N.W.2d 189.

[37] Id. ¶¶ 8–9.

[38] Trinity Lutheran Church v. Dorschner Excavating, Inc., 2006 WI App 22, ¶ 22, 289 Wis. 2d 252, 710 N.W.2d 680.

[39] Id. ¶ 25.

[40] Id. It was not initially clear whether the doctrine applied to real-estate contracts instead of only consumer goods, but it is now well settled that real-estate contracts are subject to the doctrine, as the doctrine has been applied to preclude tort claims for the purchase of commercial real estate, Van Lare v. Vogt, Inc., 2004 WI 110, 274 Wis. 2d 631, 683 N.W.2d 46, residential real estate, Below v. Norton, 2008 WI 77, 310 Wis. 2d 713, 751 N.W.2d 351, residential home construction, Linden v. Cascade Stone Co., Inc., 2005 WI 113, ¶ 17, 283 Wis. 2d 606, 699 N.W.2d 189, as well as the new construction of condominiums, Bay Breeze Condominium Ass’n, Inc. v. Norco Windows, Inc., 2002 WI App 205, 257 Wis. 2d 511, 651 N.W.2d 738, and even the renovation of residential condominiums, Grams v. Milk Products, Inc., 2004 WI App 149, 275 Wis. 2d 877, 685 N.W.2d 172.

[41] Trinity Lutheran, 2006 WI App 22, ¶ 25.

[42] Digicorp, Inc. v. Ameritech Corp., 2003 WI 54, ¶ 69, 2003 WI 54; 262 Wis. 2d 32; 662 N.W.2d 652 (“[T]he language of Daanen & Janssen is clear that the economic loss doctrine generally precludes a recovery in tort for solely economic losses, regardless of whether privity of contract exists between the parties.”).

[43] See, e.g., Linden, 2005 WI 113.

[44] See, e.g., Summary Judgment Order, Kenneth F. Sullivan Co. v. Keryluk, et al, No. 2002-CV-002655 (Dane County Wis, Cir. Ct., March 17, 2008 ) (appeal pending on different issue).

[45] This example is based on an example from an article published in this Journal: Monte Weiss, The Economic Loss Doctrine – A Coverage Defense?, Wis. Civ. Trial J. (Winter 2004), available athttp://www.wdc-online.org/journal/winter-04/econom... (last visited Aug. 16, 2009).

[46] See Linden, 2005 WI 113, ¶ 16.

[47] See id.

[48] See id.

[49] See id. ¶ 17.

[50] Digicorp, Inc. v. Ameritech Corp., 2003 WI 54, ¶ 69, 2003 WI 54; 262 Wis. 2d 32; 662 N.W.2d 652 (“[T]he language of Daanen & Janssen is clear that the economic loss doctrine generally precludes a recovery in tort for solely economic losses, regardless of whether privity of contract exists between the parties.”).

[51] Kafka v. Pope, 194 Wis. 2d 234, 242, 533 N.W.2d 491 (1995).

[52] State Farm Mut. Auto. Ins. Co. v. Schara, 56 Wis. 2d 262, 264, 201 N.W.2d 758, 759 (1972).

[53] Kafka, 194 Wis. 2d at 242.

[54] Id.

[55] Id.

[56] Id. at 237.

[57] Id.

[58] Id.

[59] Id.

[60] Id.

[61] Id. at 242.

[62] Id.

[63] Id. at 244.

[64] Id. at 245.