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Where a subcontractor on a construction project sued another subcontractor on that project for $1 million in delay damages caused by negligence, it was held that the economic loss doctrine prohibited the suit. Although the subcontractors had no contractual privity, each had a subcontract with the general contractor that addressed their individual obligations including scheduling, duty of care, and a no damage for delay clause. “Regardless of the absence of a vertical chain of contracts between the horizontal subcontractors, the economic loss doctrine bars a negligence claim for economic loss solely between them. The network of interrelated contracts contained their duties of care and contractual remedies. Thus, there is no independent tort duty owing from Mechanical to Venture to timely perform its contract with [General Contractor], or to avoid the risk of economic loss to Venture. Finding otherwise would eliminate the contract/tort distinction. It would undermine the expectancy protection afforded to GC and Mechanical when they agreed upon and defined the duties, risks, and costs. Finally, letting Venture ignore its own contract to prosecute a tort claim would discourage other parties who are typically best situated to evaluate the risk of economic loss and take appropriate measures. Because the reasons for the doctrine are present, the doctrine bars the tort claim.” Mechanical, Inc. v. Venture Electrical Contractors, Inc. 392 Wis.2d (2020).

Both subcontractors executed contracts with the general contractor agreeing to a no-damage-for-delay clause. As stated by the court, “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.” The only relief would be a time extension.

Venture Electrical alleged that its work was delayed by Mechanical, Inc. and that Mechanical owed it a duty to comply with Mechanical’s schedules under its subcontract and to timely perform its project work. The trial court granted summary judgment against the suit on the basis that negligence claims for purely economic losses between the subcontractors was barred by the economic loss doctrine – and the court went on to explain in quite some detail the background on the economic loss doctrine and why it must be applied in this case. The court explained as follows:

“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.” (citation omitted). (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 (citation omitted).

A struck bargain is the source of the legal obligation imposed in contract law. See id. at 404, 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.

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.

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 has been applied in Wisconsin to parties in a direct two-party contract where the parties have an opportunity to negotiate the terms of their bargain with each other. At issue in this case is whether the doctrine also applies to interrelated subcontracts where the parties didn’t negotiate directly with each other. The court held it does, and explained its reasoning as follows:

“The State’s purpose in hiring Cullen was to construct a building, just as in Linden. Here, the prime contract of the bargaining owner (State) was with the general contractor (Cullen), and indeed, the prime contract was incorporated into each of the subcontracts, explicitly providing that duties and remedies owing between the State and Cullen would also apply to the subcontractors, to the extent of their work. We agree with the circuit court’s analysis that the owner contracted to build a $36 million construction project for a building, an addition to the Great Lakes Research Facility.

The application of the economic loss rule to the general contract, and by extension, these two non-contracting subcontractors, encourages the subcontractors on construction projects with interrelated contracts to protect themselves from risks, holds them to the terms of their bargain, enforces their expectancy interests, and maintains the boundary between contract and tort law. “It is more appropriate to enforce a bargain than to allow an end run around a contract by using tort principles.” (citation omitted).

As in Linden, Venture had the opportunity to address the risk of the economic loss it claims in this case. It had the opportunity to bargain and to define its rights and remedies, allocate risks and costs, or to decline to contract if unsatisfied with the terms. This is a commercially sophisticated party with notice that there were no direct contractual relationships with other subcontractors.

More to the point, here, Venture decidedly was aware that it would be bound by the duties and remedies associated with delays in its subcontract with Cullen. Venture’s subcontract made clear that the subcontractors’ work, and potential delays, were interrelated—as a practical matter and by contract. The subcontracts each addressed in identical fashion the claimed breach here, the duties and standards of care: with provisions addressing timeliness, work schedules, changes, and delays, requesting change orders, extensions, and remedies in the event of delays. In short, although their contractual duties ran to Cullen/UWM, the network of interrelated contracts addressed the duties that Mechanical allegedly breached and Venture’s rights in the event of delays. We see no reason to free Venture from its contractual bargain and allow it to pursue a tort claim to recover what are effectively contract damages.”

For these reasons, the court concluded that regardless of the absence of a vertical chain of contracts between the horizontal subcontractors, the economic loss doctrine bars a negligence claim for economic loss solely between them.

 

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 ConstructionRisk 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 Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932.  This article is published in ConstructionRisk Report, Vol. 22, No. 6 (Jul/Aug 2020).

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