The Wisconsin Court of Appeals recently issued a decision expanding the economic loss doctrine to horizontal claims by subcontractors who lack contractual privity. See Mechanical, Inc. v. Venture Electrical Contractors, Inc., No. 2018AP2380 (Apr. 22, 2020).
The issue was whether one subcontractor could assert a negligence claim seeking purely economic losses (in this case delay damages) against another subcontractor with whom there was no contract.
Specifically, J.P Cullen & Sons, Inc., was awarded a prime construction contract as the general contractor by the State of Wisconsin to build an integrated research laboratory addition to the existing Great Lakes Research Facility for the University of Wisconsin-Milwaukee. Cullen hired Mechanical, Inc. to install HVAC systems, and Venture Electrical Contractors, Inc. to install electrical systems, under separate but similar subcontracts. Both subcontracts incorporated the prime contract between the State and Cullen as well as provided the duties and obligations owed with respect to timely performance of work, including a schedule. In the event of delay, extensions were permitted, but that was the “sole remedy” of the subcontractors.
A dispute arose between Mechanical and Venture as a result of Mechanical’s alleged delay in completing its work. Among other things, Venture claimed that Mechanical’s negligence caused Venture $1,100,000 in delay related damages stemming from overtime hours and cost overruns.
Mechanical moved for summary judgment on Venture’s negligence claim on the ground that Venture’s claim was barred by the economic loss doctrine. The circuit court granted Mechanical’s motion and Venture appealed.
The Court of Appeals upheld the circuit court’s decision. Citing Linden v. Cascade Stone, Co., 2005 WI 113, the Court of Appeals observed that the Wisconsin Supreme Court has held that the economic loss doctrine applies even if there is no direct contract, or privity, with the defendant where the duties of the defendant arise out of interrelated contracts. Id. ¶18. In Linden, the Court applied the economic loss doctrine to a “vertical” chain of contractual relationships. Specifically, the Court barred a homeowner from asserting a negligence claim against a subcontractor for alleged faulty construction because the homeowner had contractual remedies against the general contractor, who in turn had contractual remedies against the subcontractor. The Court in Linden found that “[a]t its core, the [homeowners’] complaint is that the home they received is not the house for which they contracted.” Id. ¶19.
Relying heavily on Linden, the Court of Appeals held that the economic loss doctrine applies equally to two horizontal subcontractors working on the same construction project. Id. ¶22. The court noted: “[t]he 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.” Id. ¶26. Accordingly, the Court of Appeals found no reason to free Venture from its contractual bargain with Cullen, and by extension, Mechanical.
Mechanical serves as a stark reminder of the importance of a well-written subcontractor agreement because it may very well be the source of sole remedy.