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.

What is a letter of intent?

A "typical" "simple" real estate purchase in Wisconsin generally involves the use of a form "offer to purchase" contract.  Once accepted and delivered, this contract is binding upon both buyer and seller.  Subject to specified contingencies, according to the terms of the accepted offer, the buyer shall buy and the seller shall sell the subject property.

In more complicated transactions, the parties may enter into a preliminary agreement which is often called a letter of intent (or a term sheet).  Typically, the parties do not intend to create a binding contract during this phase of the negotiations.  Rather, the seller and the buyer intend to set forth a set of key terms on which they agree.  However, they agree upon these key terms subject to the condition that they come to agreement on the remaining terms.

For example, the buyer and the seller may agree on a price, a closing deadline, and a general set of contingencies.  It may be of benefit to both parties to document where there appears to be agreement before proceeding with the expense and effort of finalizing the purchase contract.  However, the parties should be careful that they do not create a binding contract if their objective is to only document part of what may be the final contract.

Landmark Borrower Relief? Biggest Settlement Ever?

On Thursday, the US Attorney General and several state AGs announced that they finalized an agreement for $26 billion with five major home mortgage lenders.  See WSJ  This "settlement" was touted in various sources as punishing foreclosure abuses and as providing homeowner relief and was generally reported as a landmark agreement representing the largest settlement since Tobacco if not ever.

There are a few flaws with this narrative.  First, both sides do not agree that an agreement has been "finalized."  To the contrary, the major banks are reporting an "agreement in principle." See Bank of America Announces Agreements in Principle With Federal and State Authorities on Mortgage Matters While this distinction between a finalized settlementn agreement and an agreement in principle might seem relatively insignificant, there are two key points to remember:  1) this settlement relates to numerous alleged violations and unfair practices involving millions of borrowers. There are hundreds if not thousands of unresolved issues still to be negotiated (such as, keep your eye on this one, the extent to which lenders will be immune from future private suit).  2) These government attorneys' public statement, "a historic deal has been reached, please congratulate us," makes it politically impossible for them to end up without a deal.  We should expect all of the myriad final details to be dictated by the banks.  The banks still have the leverage to say "no."

Second, this settlement is no major victory for tax-paying consumers.  As noted by Michael Hiltzik for the LA Times in Mortgage settlement is great — for politicians and banks ,

There certainly are some big winners in the deal, which has the approval of 49 of the 50 state attorneys general. Start with its godfathers. President Obama took to the podium a couple of hours after the deal's announcement to declare that it will "speed relief to the hardest-hit homeowners."

California Atty. Gen. Kamala D. Harris went before the cameras soon after that, taking credit for "a tremendous victory for California," which has been perhaps the hardest-hit state in the foreclosure crisis.

Then there are the banks. The signatories to the deal are Bank of America, Citibank, Wells Fargo & Co., JPMorgan Chase and Ally Financial (formerly GMAC), which handle payments on more than half the nation's outstanding 27 million home loans and therefore have been at the center of the servicing and foreclosure abuses the settlement is supposed to end.

If you don't listen too closely, it sounds as if they're putting up the $25 billion. Not so. The only cold cash the banks are paying is a combined $5 billion, including $1.5 billion to compensate borrowers whose homes were foreclosed on from 2008 through the end of last year, with the rest going to the federal and state governments to pay for regulatory programs.

Most of the balance is in mortgage relief for stressed or underwater mortgage holders, including principal reductions, refinancings and other modifications.

How much of this will translate into an outlay of cash by the five banks? Not much, if any.

The banks want a settlement.  They have a massive set of massive problems (which they created), and no real solution.  For example, I am familiar with many cases where discovery has determined that the lender who claims to hold a note and mortgage cannot produce proper evidence that it owns the note, owns the mortgage, or can document the borrower's payments received and therefore cannot prove the balance due.  I do not know where the evidence went if it ever existed, but I know that the lender now cannot prove its case.  That means that the lender cannot sue the borrower for repayment and foreclosure in a Court of law.

I have been predicting for at least a year that the way that the banks would resolve this dilemma would be by accepting a "punishment" from the federal and state governments.  We will see what this agreement provides with respect to bar of private suits.  My latest prediction is that we won't be privvy to the details on this point until after the agreement is actually finalized, signed, and approved by a Court.

Not only do the banks want a settlement, the Obama administration obviously wants a deal.  This is a great photo op and an excuse for self-congratulation on the part of administration officials.  A more sinister motive for the Obama "rush to announcement" is suggested by blogger Yves Smith at naked capitalism

Maybe the Administration believes its own PR and thinks this measley program will help the housing market, or more important, secure the fealty of banks. But my guess is that the fact that 15 AGs concerned about the negotiations had met is what pushed the Administration into high gear. They did not want a meaningful, cohesive opposition forming. In addition, I am certain some evil genius in the Administration understood full well the value of destroying the AGs’ bargaining leverage before the final phase of negotiations.

Stay tuned as we find out how much the banks extract in protections, waivers and immunity after the settlement is finalized.