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In Wisconsin, where the economic loss doctrine does not bar malpractice suits against professional service providers such as architects and engineers, a court concluded that a contractor who designed and constructed a resort and conference center that included an indoor water park, hotel units and lobby, and a restaurant, provided a completed “product” to its customer rather than a “professional service”.  Because contract called for a product as well as some professional service, the court evaluated the “predominant purpose” of the contract to determine whether it was predominantly for a product or a service.  Having determined it to be primarily for a “product” the court granted summary judgment (affirmed on appeal) in favor of the contractor by enforcing the 10 year statute of repose applicable to suits based on defective products.  Kalahari Development, LLC v. Iconica, Inc., 811 N.W2d 825 (Wisconsin 2012).

Almost ten years after the design-build project was completed, the developer filed suit against the design-builder alleging that vapor barriers in certain walls were “defectively designed and/or defectively installed” causing moisture damage.  The complaint contained two claims: one for breach of contract and the other for professional negligence related to the contractor’s performance of architectural and construction services under the contract.

In affirming the circuit court’s summary judgment in favor of the contractor, the appellate court first did a thorough review of the state statue of repose and explained that although the statute was “difficult to follow” it must be reasonably interpreted to mean that an action not only must be brought within the 10 year maximum period, but it also must be brought within the time permitted by any relevant statute of limitations.  In this case the six year statute of limitations applicable to breach of contract actions had long since lapsed and the suit was correctly dismissed because “a contract cause of action accrues at the moment the contract is breached.”

On the negligence cause of action, the Developer apparently sought to avoid a short statute of limitations by arguing that it filed within the statutory period permitted after discovery of its injury and basis for claim.  The court did not expressly address that issue, but instead applied the strict statute of repose of ten years.  As explained by the court, the courts of Wisconsin “use the predominant purpose test to determine whether a mixed contract for products and services is predominantly a sale of a product and therefore subject to the economic loss doctrine, or predominantly a contract for services and therefore not subject to the economic loss doctrine.”

The Developer argued that the economic loss doctrine was inapplicable to negligence claims based on “professional services.”  In evaluating that argument, the court considered previous court precedent and stated:  “Our supreme court has addressed construction contracts involving both construction services and materials, and has concluded that those contracts were predominantly for a product, namely, the final structure.”  Developer argued that this precedent was not applicable because it “provided architectural and engineering services.”  The court acknowledged that professional services were indeed provided but stated that the overall amount paid for such services was a little over $1 million of a $26 million contract, or “about 4%”.   Thus, the court concluded that the Developer primarily contracted for a “water park resort and convention center” and not primarily for professional services.

The Developer argued that other case precedent in Wisconsin stood for the proposition that the economic loss doctrine was not meant to bar tort claims for malpractice against professionals such as architects.   Indeed, the Court of Appeals of Wisconsin, in a previous decision, stated that the Wisconsin Supreme Court “has specifically stated that the [economic loss] doctrine should not apply to causes of action in tort for professional malpractice.”   But the court in the instant case said its previous decision which involved one where it had already been determined that the contract was services rather than a completed product, “places an unfortunate emphasis on ‘professional’ but it was not meant to suggest that the economic loss doctrine never applies when alleged negligence involves professional negligence.”  Where, as here, the court determines the predominant purpose of the contract to be for a product, the economic loss doctrine will be applied to prevent a plaintiff from suing based on negligence to recover for economic losses.

About the author: Article written by J. Kent Holland, Jr.,  a construction lawyer located in Tysons Corner, Virginia,  with a national practice (formerly with Wickwire Gavin, P.C. and now with Construction Risk Counsel, PLLC) representing design professionals, contractors and project owners.  He is founder and president of a consulting firm, ConstructionRisk, LLC, providing consulting services to owners, design professionals, contractors and attorneys on construction projects.  He is publisher of ConstructionRisk.com Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932.  This article is published in ConstructionRisk.com Report, Vol. 14, No. 9 (Oct 2012).

Copyright 2012, ConstructionRisk.com, LLC