Narrow fraud-in-the-inducement exception adopted.

Byline: David Ziemer

The economic loss doctrine bars tort claims for fraud in the inducement of a contract, but only when the fraud is interwoven with the contract, in that it involved matters for which risks and responsibilities were addressed, the Wisconsin Supreme Court held on June 3.

The court also held that the economic loss doctrine precludes recovery in tort for solely economic losses, regardless of whether privity of contract exists between the parties. It also held that recovery of the benefit of the bargain is not permissible where the fraud in the inducement exception applies and tort remedies are sought.

Digicorp, Inc. was an authorized distributor for Ameritech Corporation. Bacher Communications, Inc., was not. Digicorp and Ameritech entered into negotiations for Digicorp to sell Ameritech's calling services and calling plans through Bacher.

Ron Taylor, an Ameritech employee, knew, but failed to inform Digicorp, that one of Bacher's salesmen, Dann Krinsky, had engaged in fraudulent acts of forging customers' signatures when Krinsky had worked for a different Ameritech distributor.

Ameritech and Digicorp signed a contract that superseded an earlier one, and incorporated Bacher into the distribution plan. The contract provided that Digicorp was responsible for the actions of the salespersons.

The contract also provided that either party could terminate the agreement, and that Ameritech could terminate the contract without any notice, in the event that Digicorp submitted any sales agreements subsequently found to contain forged customer signatures. This provision was new and had not been included in previous contracts between Ameritech and Digicorp.

Krinsky forged hundreds of signatures, and Ameritech exercised its right to terminate the contract. Digicorp, Bacher, and Ameritech all subsequently filed assorted claims and crossclaims against each other, in both contract and tort.

The circuit court held that the tort claims were not barred by the economic loss doctrine, because they fall into the fraudulent inducement exception, and permitted the case to go to the jury.

The jury awarded Digicorp damages for Ameritech's breach of contract and intentional misrepresentation; awarded Bacher damages for Ameritech's misrepresentation; and awarded Ameritech damages for Digicorp's breach of contract and Bacher's negligence.

All parties appealed, and the court of appeals agreed with the circuit court that the economic loss doctrine did not bar the tort claims.

The Supreme Court granted Ameritech's petition for review and reversed in a decision written by Justice N. Patrick Crooks, and joined by Justice David T. Prosser. Justice Diane S. Sykes wrote an opinion concurring in the result, but dissenting from the reasoning.

Justice Ann Walsh Bradley wrote a dissenting opinion joined by Justice William A. Bablitch. Chief Justice Shirley S. Abrahamson and Justice Jon P. Wilcox did not participate.

Economic Loss Doctrine

The majority opinion first held that the economic loss doctrine does bar tort claims for fraud in the inducement of a contract, but only where the fraud is "interwoven with the contract, and not extraneous to it," adopting the reasoning of a Michigan Court of Appeals case, Huron Tool and Engineering Co. v. Precision Consulting Services, Inc., 209 Mich. App. 365, 532 N.W.2d 541 (1995).

The economic loss doctrine serves three purposes: to maintain the fundamental distinction between tort law and contract law; to protect commercial parties' freedom to allocate economic risk by contract; and to encourage the party best situated to assess the risk of economic loss, the commercial purchaser, to assume, allocate, or insure against that risk.

The court concluded that the Huron standard best serves those purposes. Distinguishing between interwoven and extraneous fraud, the court quoted the Huron case as follows: "[f]raud in the inducement presents a special situation where parties to a contract appear to negotiate freely -- which normally would constitute grounds for invoking the economic loss doctrine -- but where in fact the ability of one party to negotiate fair terms and make an informed decision is undermined by the other party's fraudulent behavior. In contrast, where the only misrepresentation by the dishonest party concerns the...