Case Title: Daanen & Janssen, Inc v. Cedarapids, Inc

Citation: 

Docket Number: 1997AP001320-CQ

State: wisconsin

Court: Wisconsin Supreme Court

Date: 1998-02-26T00:00:00Z

Document:
SUPREME COURT OF WISCONSIN 
 
 
Case No.: 
97-1320-CQ 
 
 
Complete Title 
of Case: 
 
 
Daanen & Janssen, Incorporated, a Wisconsin 
Corporation, 
 
Plaintiff-Appellant, 
 
v. 
Cedarapids, Incorporated, an Iowa Corporation,  
 
Defendant-Appellee.  
 
CERTIFIED QUESTION FROM 7TH CIRCUIT 
 
 
Opinion Filed: 
February 26, 1997 
Submitted on Briefs: 
 
Oral Argument: 
December 15, 1997 
 
 
Source of APPEAL 
 
COURT: 
 
 
COUNTY: 
 
 
JUDGE: 
 
 
 
JUSTICES: 
 
Concurred: 
 
 
Dissented: 
 
 
Not Participating:  
 
 
ATTORNEYS: 
For the plaintiff-appellant there were briefs by 
George Burnett and Liebmann, Conway, Olejniczak & Jerry, S.C., 
Green Bay and oral argument by George Burnett. 
 
 
For the defendant-appellee there were briefs by 
Ronald R. Ragatz and DeWitt Ross & Stevens, S.C., Madison and 
oral argument by Ronald R. Ragatz. 
 
No. 97-1320-CQ 
 
1 
 
NOTICE 
This opinion is subject to further editing and 
modification.  The final version will appear in 
the bound volume of the official reports. 
 
 
No. 97-1320-CQ 
 
STATE OF WISCONSIN               :        
        
 
 
 
 
IN SUPREME COURT 
 
 
Daanen & Janssen, Incorporated, a  
Wisconsin Corporation,  
 
          Plaintiff-Appellant, 
 
     v. 
 
Cedarapids, Incorporated, an Iowa  
Corporation,  
 
          Defendant-Appellee.  
FILED 
 
FEB 26, 1998 
 
Marilyn L. Graves 
Clerk of Supreme Court 
Madison, WI 
 
 
 
 
 
CERTIFICATION of a question of law from the United States 
Court of Appeals for the Seventh Circuit.    Certified question 
answered in the affirmative and remanded.     
¶1 
DONALD W. STEINMETZ, J.   This case is before the 
court on a certified question from the United States Court of 
Appeals for the Seventh Circuit, pursuant to Wis. Stat. § 821.01 
and Circuit Rule 52.  The question certified to this court is:  
In the absence of privity,1 does the economic loss doctrine bar a 
remote commercial purchaser from recovering economic losses from 
                     
1 For the purposes of this opinion, the term "privity," used 
with respect to contract, implies "a connection, mutuality of 
will, and interaction of parties," Wrenshall State Bank v. 
Shutt, 202 Wis. 281, 283, 232 N.W. 530 (1930); it is that 
"connection or relationship which exists between two or more 
contracting parties."  Black's Law Dictionary 1199 (6th ed. 
1990).  Both parties in this case agree that, as to the sale and 
purchase of the allegedly defective pitman, no privity of 
contract exists between them. 
No. 97-1320-CQ 
 
2 
a 
manufacturer 
under 
theories 
of 
strict 
liability 
and 
negligence?  After reviewing the policies on which this and 
other courts have relied when employing the economic loss 
doctrine, and applying those underlying policies to this case, 
we answer the certified question in the affirmative. 
¶2 
The following facts were taken from the Joint Proposed 
Statement of Relevant Facts issued, pursuant to Wis. Stat. 
§ 821.03(2), by the United States Court of Appeals for the 
Seventh Circuit.  The plaintiff, Daanen & Janssen, Inc. 
(hereinafter "Daanen"), a commercial business, is a Wisconsin 
corporation that operates several quarries in Brown County, 
Wisconsin.  As part of its operations, Daanen crushes and sells 
the rock it removes from the quarries.  To crush the rock, 
Daanen utilizes machines known as primary, secondary, and 
tertiary crushers that include a component called a "pitman." 
¶3 
The 
defendant, 
Cedarapids, 
Inc. 
(hereinafter 
"Cedarapids"), is an Iowa corporation that manufactures and 
sells new crushing equipment and spare parts to distributors 
that then resell the products to quarry owners.  One of 
Cedarapids' distributors is Aring Equipment Co. (hereinafter 
"Aring").   
¶4 
In January 1991, Daanen's pitman failed, necessitating 
replacement.  Daanen purchased from Aring a replacement pitman 
manufactured by Cedarapids.  In its distributorship agreement 
with Aring, Cedarapids provided Aring with a standard express 
warranty which applied to all of Cedarapids' products, including 
the pitman eventually sold to Daanen; the warranty states that 
No. 97-1320-CQ 
 
3 
it applies to Aring's customers.  At the time it purchased the 
pitman, Daanen apparently was unaware of Cedarapids' warranty, 
and Aring did not pass this warranty to Daanen.  In addition, 
Daanen did not request or receive from Aring a warranty on the 
replacement pitman; Daanen's invoice from Aring stated that 
Aring disclaimed all warranty and liability. 
¶5 
Soon after Daanen installed the replacement part in 
two of its crushers, the machines began to break down.  From the 
1991 purchase until 1993 there were five or six serious 
breakdowns of the crushing equipment.  These breakdowns were 
eventually attributed to manufacture and design problems in the 
Cedarapids' pitman. 
¶6 
After examining the defective pitmans, Cedarapids 
ordered replacement parts for Daanen.  Daanen declined to accept 
the replacements and eventually filed suit in the Brown County 
Circuit Court, alleging that Cedarapids sold it a defective 
product that caused over $400,000 in damages, including repair 
costs, 
lost 
revenue, 
and 
prejudgment 
interest. 
 
Daanen 
originally alleged claims against Cedarapids based in both 
contract and tort law, but has since dropped the contract claims 
so that only tort claims of common law negligence and strict 
liability remain.  Daanen has not alleged that the defective 
pitman caused personal injury or damage to property other than 
the pitman.  
¶7 
Pursuant to 28 U.S.C. § 1332, and based on diversity 
of citizenship, Cedarapids removed the case to the United States 
District Court for the Eastern District of Wisconsin, John W. 
No. 97-1320-CQ 
 
4 
Reynolds, J., presiding.  Cedarapids then filed a motion for 
summary judgment, arguing that under Wisconsin law Daanen could 
not recover in tort for solely "economic losses."  The federal 
district court recognized that this court has not yet considered 
whether to apply the economic loss doctrine in the absence of 
privity, and that other courts have disagreed as to whether this 
court would apply the doctrine when squarely confronted with the 
issue.2  The district court, postulating as to how this court 
would determine the issue, granted Cedarapids' motion for 
summary judgment and concluded that the "economic loss" doctrine 
precludes the plaintiff's tort claims, even in the absence of 
privity between the plaintiff and defendant.  Daanen appealed 
this ruling to the United States Court of Appeals for the 
Seventh Circuit, which then certified to this court the issue 
now before us.  We answer the certified question in the 
affirmative: even in the absence of privity, the economic loss 
doctrine bars a remote commercial purchaser from recovering 
economic losses from a manufacturer under tort theories of 
strict liability and negligence. 
                     
2 Compare Midwest Knitting Mills, Inc. v. United States, 950 
F.2d 1295, 1300 (7th Cir. 1991)(concluding that this court would 
apply doctrine in the absence of privity), Miller v. U.S. Steel 
Corp., 902 F.2d 573, 574-75 (7th Cir. 1990)(same) and Midwest 
Helicopters Airways, Inc. v. Sikorsky Aircraft, 849 F. Supp. 
666, 671 (E.D. Wis. 1994)(same) with Hap's Aerial Enterprise, 
Inc. v. General Aviation Corp., 173 Wis. 2d 459, 463 n.4, 496 
N.W.2d 680 (Ct. App. 1992)(concluding this court would not apply 
doctrine in absence of privity). 
No. 97-1320-CQ 
 
5 
¶8 
The question whether a complaint has stated a claim 
for relief is a pure question of law, which we review de novo.  
See Sunnyslope Grading, Inc. v. Miller, 148 Wis. 2d 910, 915, 
437 N.W.2d 213 (1989); First National Leasing Corp. v. Madison, 
81 Wis. 2d 205, 208, 260 N.W.2d 251 (1977).  This court is not 
bound by a federal court's interpretation of Wisconsin law.  See 
State v. Webster, 114 Wis. 2d 418, 426 n.4, 338 N.W.2d 474 
(1983). 
¶9 
The economic loss doctrine is a judicially created 
doctrine providing that a commercial purchaser of a product 
cannot recover from a manufacturer, under the tort theories of 
negligence or strict products liability, damages that are solely 
"economic" in nature.  See Sunnyslope, 148 Wis. 2d at 921.  As 
other courts have recognized, defining "economic loss" is 
difficult. See Stoughton Trailers, Inc. v. Henkel Corp., 965 F. 
Supp. 1227, 1230 (W.D. Wis. 1997).3  Economic loss is generally 
defined as damages resulting from inadequate value because the 
product "is inferior and does not work for the general purposes 
for which it was manufactured and sold."  Northridge Co. v. W.R. 
                     
3 In Miller, Judge Posner, writing for the court, explained 
that the cost of replacing a defective product is called an 
"economic loss" but contended that it would be better to label 
such a loss a "commercial loss" both because personal injuries 
and property losses may also be economic losses and because 
"tort law is a superfluous and inapt tool for resolving purely 
commercial [as opposed to purely economic] disputes."  902 F.2d 
at 574.  Although we recognize that the term "commercial loss" 
may more accurately describe the loss alleged here, we continue 
to use the term "economic loss" in our analysis to be consistent 
and to avoid possible confusion in answering the certified 
question.  
No. 97-1320-CQ 
 
6 
Grace & Co., 162 Wis. 2d 918, 925-26, 471 N.W.2d 179 (1991).  It 
includes both direct economic loss and consequential economic 
loss.  See Stoughton Trailers, 965 F. Supp. at 1231; Northridge 
Co., 162 Wis. 2d at 926; see also 1 James J. White & Robert S. 
Summers, Handbook of the Law Under the Uniform Commercial Code 
§§ 11-5, 11-6 (4th ed. 1995).  The former is loss in value of the 
product itself; the latter is all other economic losses 
attributable to the product defect.  See Steven R. Swanson, The 
Citadel Survives a Naval Bombardment: A Policy Analysis of the 
Economic Loss Doctrine, 12 Tul. Mar. L.J. 135, 140 (1987).  In 
Northridge, we explained: 
 
Direct economic loss may be said to encompass damage 
based on insufficient product value; thus, direct 
economic loss may be 'out of pocket'—the difference in 
value between what is given and received—or 'loss of 
bargain'—the difference between the value of what is 
received 
and 
its 
value 
as 
represented. 
. 
. 
. 
Consequential economic loss includes all indirect 
loss, such as loss of profits resulting from inability 
to make use of the defective product. 
Northridge, 162 Wis. 2d at 926 (citing Note, Economic Loss in 
Products Liability Jurisprudence, 66 Colum. L. Rev. 917, 918 
(1966)).   
¶10 The economic loss doctrine, however, does not bar a 
commercial purchaser's claims based on personal injury or damage 
to property other than the product, or economic loss claims that 
are alleged in combination with noneconomic losses.  See 
Northridge, 162 Wis. 2d at 937; see also Stoughton Trailers, 965 
F. Supp. at 1231; Moorman Manufacturing Co. v. National Tank 
Co., 435 N.E.2d 443, 449 (Ill. 1982).  In short, economic loss 
No. 97-1320-CQ 
 
7 
is damage to a product itself or monetary loss caused by the 
defective product, which does not cause personal injury or 
damage to other property. 
¶11 This court first adopted the economic loss doctrine in 
Sunnyslope, 148 Wis. 2d 910.  In Sunnyslope, the plaintiff, a 
commercial contractor, purchased a backhoe directly from the 
defendant manufacturer.  When the backhoe failed to perform 
properly, the plaintiff brought a tort action against the 
manufacturer for damages including the cost of replacement 
parts, labor charges, and lost profits.  See Sunnyslope, 148 
Wis. 2d at 914-15.  At the time of the sale of the backhoe, the 
manufacturer extended to the plaintiff a written warranty, 
limiting the manufacturer's liability for defects in the backhoe 
to repair and replacement costs for a set time period and 
disclaiming all other liability for direct, incidental, and 
consequential damages.  See id. at 913-14.  This court denied 
the plaintiff relief, holding that "a commercial purchaser of a 
product 
cannot 
recover 
solely 
economic 
losses 
from 
the 
manufacturer under negligence or strict liability theories, 
particularly . . . where the warranty given by the manufacturer 
specifically precludes the recovery of such damages."  Id. at 
921. 
¶12 As we recognized in Northridge, our holding in 
Sunnyslope was limited to the question there presented: "whether 
damages to the product itself and economic losses flowing 
therefrom are recoverable in tort when a warranty exists in a 
commercial setting . . . ."  Northridge, 162 Wis. 2d at 927 
No. 97-1320-CQ 
 
8 
(citing Sunnyslope, 148 Wis. 2d at 911)(emphasis added).  One 
significant 
issue 
left 
unanswered 
in 
Sunnyslope 
is 
that 
presented here: whether the economic loss doctrine applies where 
no privity of contract exists between the manufacturer and 
remote commercial purchasers.  See Stoughton Trailers, 965 F. 
Supp. at 1231-32.  Although the facts there presented limited 
our holding in Sunnyslope, the policies underlying the economic 
loss doctrine are not so limited.  Applying those underlying 
policies to this case, we conclude that the economic loss 
doctrine bars Daanen’s tort claims even in the absence of 
privity of contract between Daanen and Cedarapids. 
¶13 Application of the economic loss doctrine to tort 
actions between commercial parties is generally based on three 
policies, none of which is affected by the presence or absence 
of privity between the parties: (1) to maintain the fundamental 
distinction between tort law and contract law; (2) to protect 
commercial parties’ freedom to allocate economic risk by 
contract; and (3) to encourage the party best situated to assess 
the risk economic loss, the commercial purchaser, to assume, 
allocate, or insure against that risk. 
¶14 First, application of the economic loss doctrine is 
justified to maintain the distinct functions of tort and 
contract law.  See East River Steamship Corp. v. Transamerica 
Delaval, Inc., 476 U.S. 858, 866-74 (1986); Miller v. U.S. Steel 
Corp., 902 F.2d 573, 575 (7th Cir. 1990); Northridge, 162 Wis. 2d 
at 932-33; Seely v. White Motor Co., 403 P.2d 145, 151 (Cal. 
1965).  From its inception the economic loss doctrine has been 
No. 97-1320-CQ 
 
9 
based on an understanding that contract law and the law of 
warranty, in particular, is better suited than tort law for 
dealing with purely economic loss in the commercial arena.  See 
East River, 476 U.S. at 858; Northridge, 162 Wis. 2d at 933; see 
also Seely, 403 P.2d at 151; Spring Motors Dist. v. Ford Motor 
Company, 489 A.2d 660, 673 (N.J. 1985).  Although policies 
underlying contract law and tort law may overlap, they do 
diverge.  See Spring Motors, 489 A.2d at 672 (citing W. Page 
Keeton et al., Prosser & Keeton on Torts § 92 at 655-56 (5th ed. 
1984)).  At the heart of the distinction drawn by the economic 
loss doctrine is the concept of duty.  See Northridge, 162 
Wis. 2d at 933.4 
¶15 Contract law rests on obligations imposed by bargain. 
 The law of contracts is designed to effectuate exchanges and to 
protect 
the 
expectancy 
interests 
of 
parties 
to 
private 
bargained-for agreements.  See 1 E. Allen Farnsworth, Contracts 
§ 1.3 at 10-11 (1990).  Contract law, therefore, seeks to hold 
commercial parties to their promises, ensuring that each party 
                     
4 For a general discussion of the traditional distinctions 
between contract and tort wrongs see 1 Thomas M. Cooley, A 
Treatise on the Law of Torts, § 2 (4th ed. 1932):  
'Some attributes a tort has in common with a breach of 
contract.  The duty violated in both cases is one owed 
to an individual as such and not to the state . . . . 
But in contract the duty comes into existence only 
when the duty-bearer has voluntarily undertaken to 
assume it; the duty is merely to perform a promise 
. . . In tort, on the other hand, the duty is put upon 
the individual member of the community often merely 
because he is such a member . . . .' (quoting Morgan, 
The Study of Law, 36-37). 
No. 97-1320-CQ 
 
10
receives the benefit of their bargain.  See Swanson, 12 Tul. 
Mar. L.J. at 158.  Accordingly, the individual limited duties 
implicated by the law of contracts arise from the terms of the 
agreement between the particular parties.  See Sunnyslope, 148 
Wis. 2d at 916. 
¶16 The law of torts, on the other hand, rests on 
obligations imposed by law.  Tort law is rooted in the concept 
of protecting society as a whole from physical harm to person or 
property.  See East River, 476 U.S. at 866; see also Keeton, 
Prosser and Keeton on Torts § 1.  Products liability and 
negligence law, in particular, developed to protect consumers 
from unreasonably dangerous goods that cause personal injury and 
damage to other property.  See East River, 476 U.S. at 866.  It 
is society's interest in human life, health, and safety that 
demands protection against defective products, and imposes a 
duty upon manufacturers of those products.  See Northridge, 162 
Wis. 2d at 933; see also W. Prosser, The Assault Upon the 
Citadel, 69 Yale L.J. 1099, 1122 (1960). 
¶17 If, as here, only economic loss is caused to a 
commercial party, the policy arguments for imposing tort 
liability are considerably diminished.  As explained by the U.S. 
Supreme Court in East River: 
 
‘The distinction that the law has drawn between 
tort recovery for physical injuries and warranty 
recovery for economic loss is not arbitrary and does 
not rest on the "luck" of one plaintiff in having an 
accident causing physical injury.  The distinction 
rests, rather, on an understanding of the nature of 
the responsibility a manufacturer must undertake in 
No. 97-1320-CQ 
 
11
distributing its products.’  When a product injures 
only itself the reasons for imposing a tort duty are 
weak 
and 
those 
for 
leaving 
the 
party 
to 
its 
contractual remedies are strong. 
 
East River, 476 U.S. at 871 (quoting Seely, 403 P.2d at 151 
(citations omitted)).  By definition economic loss excludes 
claims for personal injury and damage to other property.  
Recovery of economic loss is intended solely to protect 
purchasers from losses suffered because a product failed in its 
intended use.  See Northridge, 162 Wis. 2d at 933.  As a result, 
the general duty of care to refrain from acts unreasonably 
threatening physical harm is not paralleled by any comparable 
duty when the harm threatened is merely economic.  See 12 Colum. 
L. Rev. at 944.  A manufacturer in a commercial relationship has 
no duty under either negligence or strict liability theories to 
prevent a product from injuring itself.  See East River, 476 
U.S. at 871.  "The duty to provide a product which functions to 
certain specifications is contractual."  Sunnyslope, 148 Wis. 2d 
at 916.  Contract law, therefore, is better suited for enforcing 
duties in the commercial arena because it permits the parties to 
specify the terms of their bargain and to protect themselves 
from commercial risk.  See East River, 476 U.S. at 872-73. 
 ¶18 We do not believe that the absence of privity of 
contract alters this conclusion.  Rather, we agree with the 
reasoning expressed in Sullivan Industries, Inc. v. Double Seal 
Glass Co., 480 N.W.2d 623, 629 (Mich. App. 1991): 
 
The reliance on privity notions to ascertain whether 
tort or commercial law applies serves only to blur the 
No. 97-1320-CQ 
 
12
distinction 
between, 
and 
the 
applicability 
of, 
commercial law and tort law to economic losses.  
Instead a more logical and conceptionally manageable 
approach is to determine the type of loss a plaintiff 
is alleging. (Citations omitted.)    
Daanen’s allegations are of solely economic loss.  Whether 
alleged against Aring or Cedarapids, Daanen's claims fail to 
implicate any tort law concerns with unreasonably dangerous 
products or public safety.  They do, however, involve contract 
law concerns with failed economic expectations.  In essence, 
Daanen is attempting to recover in tort what are essentially 
contract damages.  We see no reason to extend tort law into an 
area adequately governed by contract law.  See East River, 476 
U.S. at 871-72; Seely, 403 P.2d at 149-51; Spring Motors, 489 
A.2d at 672; Casa Clara Condominium Ass'n v. Charley Toppino & 
Sons, Inc., 620 So. 2d 1244, 1247 (Fla. 1993). 
¶19 Second, application of the economic loss doctrine 
serves to protect commercial parties' freedom to contract.  As a 
matter of policy, in situations in which commercial parties have 
allocated their respective risks through contract, "the economic 
loss doctrine teaches that it is more appropriate to enforce 
that bargain than to allow an end run around the bargain through 
tort law."  Stoughton Trailers, 965 F. Supp. at 1234; see also 
Sunnyslope, 148 Wis. 2d at 919-21. If a remote commercial 
purchaser is given a direct cause of action in tort against the 
manufacturer, the entire risk of economic loss is borne by that 
manufacturer.  See Note, 66 Colum. L. Rev. at 965.  If no such 
action is permitted, the manufacturer and its distributors and 
purchasers are free to allocate the risk of economic loss by 
No. 97-1320-CQ 
 
13
disclaiming 
or 
limiting 
their 
respective 
liabilities 
by 
contract.  See id. 
¶20 If manufacturers are held liable to remote commercial 
purchasers 
under 
tort 
theories 
for 
frustrated 
economic 
expectations, all manufacturers would effectively be prevented 
from negotiating their liability through the bargaining process. 
 Commercial parties, presumably of equal bargaining power, are 
generally free to set terms of their own agreement, including 
warranties, disclaimers, and limitation of remedies.  Subject to 
requirements of good faith and unconscionability, a manufacturer 
can negotiate with its distributors and purchasers to disclaim 
or limit its liability for economic losses.  See, e.g., Wis. 
Stat. § 402.719(3)(1995-96)(allowing disclaimer of consequential 
economic damages).  If a commercial purchaser wants performance 
guarantees 
from 
a 
manufacturer, 
it 
can 
negotiate 
for 
a 
manufacturer's warranty.  In Stoughton Trailers, the district 
court explained:   
 
Courts 
should 
assume 
that 
parties 
factor 
risk 
allocation into their agreements and that the absence 
of comprehensive warranties is reflected in the price 
paid.  Permitting parties to sue in tort when the deal 
goes awry rewrites the agreement by allowing a party 
to recoup a benefit that was not part of the bargain. 
 
Stoughton Trailers, 965 F. Supp. at 1230.  We agree.  The 
contractual allocation of economic risk allows purchasers to buy 
the product at a lower price and in some situations may be the 
only way to encourage manufacturers to produce certain products. 
 If remote commercial purchasers can seek full recovery against 
No. 97-1320-CQ 
 
14
the 
manufacturer 
regardless 
of 
any 
limitation 
in 
the 
manufacturer’s contract with its distributor, manufacturers, in 
effect, would be deprived of their freedom to negotiate, 
allocate, and limit liability.  See Note, 66 Colum. L. Rev. at 
962.   
¶21 In addition, allowing remote commercial purchasers to 
recover in tort for what is a commercial contract claim would 
perversely encourage those purchasers to bargain for no warranty 
or insurance in exchange for a reduced purchase price because 
they could rely on tort remedies as their "warranty."  See 
Dakota Gasification Co. v. Pascoe Bldg. Sys., 91 F.3d 1094, 1100 
(8th Cir. 1996).  Withdrawing application of the economic loss 
doctrine in this situation would encourage a remote commercial 
purchaser, who had been willing to assume the full risk of 
economic loss, to purchase the goods "as is" in exchange for a 
lower price; to roll the dice and hope the product does not 
fail; and to reap initially the financial benefit of a low 
purchase price.  See Bocre Leasing Corp. v. General Motors 
Corp., 645 N.E.2d 1195, 1198 (N.Y. 1995).  If the product does 
fail down the road, the commercial purchaser could still reach 
all the way back through intervening transactions, contracts, 
and warranties to sue the original manufacturer in tort.  See 
id.  This would grant a commercial purchaser more than the 
benefit of the bargain to which it and the seller or 
manufacturer agreed and on which the purchase price was 
negotiated and paid. 
No. 97-1320-CQ 
 
15
¶22 When Daanen purchased the pitman from Aring, Daanen 
could have requested that Aring provide an express warranty, 
which Daanen could have enforced against Aring in a suit for 
breach of warranty.  Daanen chose not to or failed to do so.  In 
addition, Cedarapids negotiated a separate, express warranty 
with its distributor, Aring, allocating risk between them.  
Daanen 
did 
not 
request 
and 
Aring 
did 
not 
extend 
this 
manufacturer’s warranty as part of their agreement.  We can 
fairly assume that the lack of a seller’s or manufacturer’s 
warranty was reflected in the purchase price paid by Daanen.  
See East River, 476 U.S. at 873; Stoughton Trailers, 965 F. 
Supp. at 1230. 
¶23 If Daanen were permitted to bypass its bargained-for 
agreement with Aring and recover its purely economic losses from 
Cedarapids in tort, the net effect would be to render the 
contract between Daanen and Aring and that between Cedarapids 
and Aring nullities, emasculating the law of contracts in the 
process.  Cedarapids could not invoke against Daanen the 
contractual 
disclaimer 
or 
limitation 
of 
liability 
Aring 
negotiated with Daanen; nor could Cedarapids shield itself with 
the disclaimer of liability Cedarapids included in its contract 
with Aring.  In effect, Cedarapids would be stripped of its 
ability to limit its liability by contract, and Daanen would 
receive a full warranty protection against economic risk without 
having negotiated or paid for that warranty. 
¶24 We see no reason to intrude into the parties’ 
allocations of the risk of economic loss and to extricate the 
No. 97-1320-CQ 
 
16
parties from their bargains.  Daanen should not be permitted to 
opt out of commercial law by refusing to avail itself of the 
opportunities which that law provides.  See Miller, 902 F.2d at 
575.  To extend tort law theories into this situation would 
drown contract law in "a sea of tort."  East River, 476 U.S. at 
866 (citing G. Gilmore, The Death of Contract 87-94 (1974)). 
¶25 Third, application of the economic loss doctrine 
encourages the party with the best understanding of the 
attendant risks of economic loss, the commercial purchaser, to 
assume, allocate, or insure against the risk of loss caused by a 
defective product.  Allowing a remote commercial purchaser to 
recover economic loss in tort claims might needlessly impede the 
efficiency of the commercial marketplace. 
¶26 The economic loss doctrine promotes efficiency and 
predictability 
in 
commercial 
relationships 
by 
delineating 
liability spheres solely by reference to contract.  Commercial 
enterprises allocate the risk of loss due to nonperformance 
among themselves and pass this cost on to the other purchasers 
by way of higher prices.  In this manner, commercial risks and 
problems generally can be solved with predictable consequences. 
 See Sullivan Industries, 480 N.W.2d at 629.  To permit tort 
theories 
of 
economic 
losses 
arising 
out 
of 
commercial 
transactions would undermine the law of contract and make the 
manufacturer of products potentially liable for unbargained-for 
and unexpected risks. 
¶27 Insofar as risk 
allocation 
and distribution are 
concerned, remote commercial purchasers are at least as well if 
No. 97-1320-CQ 
 
17
not better situated than manufacturers to assess the impact of 
economic loss caused by a defective product. Although a 
manufacturer may be better able than a consumer to assess the 
possibility of foreseeable personal injury or property damage, 
it is more difficult for that manufacturer to assess a 
commercial purchaser's disappointed economic expectations.  As 
the United States Supreme Court explained in East River, 476 
U.S. at 874:   
 
Permitting recovery for all foreseeable claims for 
purely economic loss could make a manufacturer liable 
for 
vast 
sums.  
It 
would be 
difficult 
for 
a 
manufacturer to take into account the expectations of 
persons downstream who may encounter its product. 
 
A remote commercial purchaser's expectations may be unrealistic 
or inflated by advertising claims made by someone else in the 
distribution chain over whom the manufacturer has no control.  
If a manufacturer cannot accurately predict the scope or 
purposes for which its goods will be used by all purchasers, 
that manufacturer would face unknown liability against which it 
would be difficult and inefficient for the manufacture to 
insure.  See Note, 66 Colum. L. Rev. at 965.5  Even if a 
commercial purchaser cannot detect product failures before they 
occur, it can at least anticipate problems and insure against 
them 
through 
purchasing 
insurance 
or 
allocating 
risk 
by 
                     
5 For a discussion of the relative insurability of economic 
loss and the "twin risks" a manufacturer faces when purchasing 
insurance or self-insuring against consequential economic loss, 
see Note, Economic Loss in Products Liability Jurisprudence, 66 
Colum. L. Rev. 917, 954-58 (1966).  
No. 97-1320-CQ 
 
18
contract.  See Note, 66 Colum. L. Rev. at 952-58.  In this case, 
even if Daanen could not predict the pitman failure before it 
occurred, it could have anticipated production problems caused 
by equipment failures and guarded against such failures by 
purchasing insurance or through allocating these risks by 
contract.  Forcing commercial parties to negotiate and allocate 
risk gives manufacturers certainty in pricing goods, since they 
can more reliably predict future liability and potential 
damages.  See East River, 476 U.S. at 873. 
¶28 When only economic harm is involved, the question 
whether this court should impose tort liability on manufacturers 
distills to whether the consuming public as a whole should bear 
the cost of economic losses sustained by those commercial 
purchasers who failed to bargain for adequate contract remedies. 
 See Casa Clara, 620 So. 2d at 1246.  Once manufacturers learn 
that courts will impose payments in the form of economic loss 
damages, those manufacturers will include the resulting costs in 
the price of the products, forcing the consuming public to bear 
the very cost the commercial purchaser contractually agreed to 
forego in exchange for a lower price.  Such a rule would 
transform 
all 
manufacturers 
into 
insurers 
with 
seemingly 
unlimited tort liability.  Consumers would then be forced to 
subsidize or pay premiums for commercial purchasers who choose 
not to assume, allocate, or insure against their risk of 
economic loss.  The cost of tort protection for economic 
expectations ultimately would be borne by society.  We do not 
think that the consuming public as a whole should bear the cost 
No. 97-1320-CQ 
 
19
of economic losses sustained by those commercial purchasers who 
fail to bargain for adequate contract remedies. 
¶29 After reviewing the policies underlying the economic 
loss doctrine and applying those policies to this case, we 
conclude that the economic loss doctrine precludes a commercial 
purchaser from recovering in tort from a manufacturer for solely 
economic losses, regardless of whether privity of contract 
exists between the parties. 
¶30 In its briefs and during oral argument Daanen posited 
a number of counter-arguments, which we will address in turn.  
Daanen first argues that because it lacked privity of contract 
with Cedarapids, application of the economic loss doctrine to 
its tort claims would leave it with no alternative remedy 
against Cedarapids to recover its economic losses.  This 
argument does not persuade us that privity should be an element 
of the economic loss doctrine.  As explained above, the economic 
loss doctrine is aimed at encouraging commercial parties ex ante 
to negotiate for warranty protection or to take other steps, 
such as purchasing insurance, to protect their purely economic 
interests.  We will not allow ex post claims of fairness to 
temper our application of the doctrine here. 
¶31 Since Daanen was free to negotiate for warranty 
protection 
with 
both 
Aring 
and 
Cedarapids, 
the 
policies 
underlying the doctrine applied with full force to its claims 
regardless of whether it was in privity with Cedarapids.  When 
Daanen purchased the pitman from Aring, Daanen could have 
negotiated with and paid Aring for an express warranty that 
No. 97-1320-CQ 
 
20
Daanen, in the event of a product failure, could have enforced 
in a suit for breach of warranty.  Daanen chose not to or failed 
to do so.  In addition, Daanen could have negotiated with and 
paid Cedarapids for a manufacturer's warranty of the pitman that 
Daanen could have enforced against Cedarapids if the product 
failed.  Again Daanen chose not to or failed to do so.  Daanen, 
therefore, eschewed the very protections specifically designed 
to shelter it from the particular damages it here alleges. 
¶32 If we were to adopt the "no alternative remedy" rule 
suggested by Daanen, a commercial purchaser could voluntarily 
relinquish its right to sue its privy in contract by agreeing to 
purchase the product "as is" in return for a rock-bottom price. 
The commercial purchaser would then be entitled to sue in tort 
others in the production chain because it has no alternative 
remedy 
even 
though 
it 
consciously 
chose 
to 
forego 
its 
contractual remedies.  Such a result would allow an end run 
around contract law and would all but destroy the economic loss 
doctrine this court adopted in Sunnyslope.  We refuse to adopt 
such an exception to the economic loss doctrine. 
¶33 Daanen next contends that to apply the economic loss 
doctrine to remote commercial purchasers would complicate rather 
than simplify commercial transactions.  We disagree.  By 
answering the certified question in the affirmative, we hope to 
more clearly define the boundaries of the economic loss doctrine 
under Wisconsin law.  In Sunnyslope, we held that a commercial 
purchaser cannot recover solely economic losses from the 
manufacturer under tort, particularly where a warranty is given 
No. 97-1320-CQ 
 
21
by the manufacturer.  See Sunnyslope, 148 Wis. 2d at 921.  Today 
we merely apply the economic loss doctrine we adopted in 
Sunnyslope 
without 
the 
particular 
qualifying 
language 
necessitated by the facts of that case.  This conclusion 
simplifies rather than complicates Wisconsin law; whether or not 
privity of contract exists between the parties, a commercial 
purchaser of a product cannot recover solely economic losses 
from the manufacturer under tort theories of negligence or 
strict liability. 
¶34 Daanen also argues that to apply the economic loss 
doctrine in this case would conflict with prior decisions of 
Wisconsin courts.  Again, we disagree.  To support this 
argument, Daanen primarily relies on two cases, this court's 
decision in City of La Crosse v. Schubert, Schroeder & Assocs., 
72 Wis. 2d 38, 240 N.W.2d 124 (1976), and the court of appeals' 
decision in Hap's Aerial Enterprises v. General Aviation Corp., 
173 Wis. 2d 459, 496 N.W.2d 680 (Ct. App. 1992).6  Each of these 
cases is factually distinguishable from the case at bar, and the 
holding of each is limited to the facts there presented. 
                     
6 Daanen also relies in part on language in Smith v. Atco 
Co., 6 Wis. 2d 371, 94 N.W.2d 697 (1959); Spychalla Farms v. 
Hopkins Agr. Chem. Co., 151 Wis. 2d 431, 444 N.W.2d 743 (Ct. 
App. 1989); and Fisher v. Simon, 15 Wis. 2d 207, 112 N.W.2d 705 
(1961).  Daanen's reliance on these cases can be dismissed 
without significant discussion.  Both Smith and Spychalla 
involved claims for damage to property other than the defective 
product, and were therefore beyond application of the economic 
loss doctrine.  See Northridge Co. v. W.R. Grace & Co., 162 
Wis. 2d 918, 937, 471 N.W.2d 179 (1991).  Fisher is a pre-
Sunnyslope decision in which privity existed between the 
parties.  The court's decision in Fisher is therefore irrelevant 
to the certified question now before us. 
No. 97-1320-CQ 
 
22
¶35 In La Crosse the plaintiff, a remote purchaser, 
brought an action against the manufacturer of a roof that leaked 
and required replacement.  The court concluded that the 
plaintiff could not advance a contract claim against the 
manufacturer because there was no privity between them.  See 
La Crosse, 72 Wis. 2d at 41-42.  The court, however, held that 
the plaintiff's damages to other property and to the roof itself 
were recoverable in an action based on strict liability in tort. 
 See id. at 44.  Unlike the plaintiff in La Crosse, however, 
Daanen does not allege damage to any property other than the 
pitman.  Since the economic loss doctrine does not bar claims 
based on damage to property other than the defective product or 
economic loss claims that are alleged in combination with 
noneconomic losses, see Northridge, 162 Wis. 2d at 937, the 
court's analysis and holding in La Crosse are inapposite here. 
¶36 In 
Sunnyslope 
we 
expressly 
recognized 
that 
the 
language of La Crosse "was broader than necessary to determine 
the 
issue 
before 
the 
court 
and 
was 
therefore 
dicta."7  
Sunnyslope, 148 Wis. 2d at 917.  Daanen's reliance on the 
contrary dicta in La Crosse makes clear that our "polite formula 
                     
7 In City of La Crosse v. Schubert, Schroeder & Assocs., 72 
Wis. 2d 38, 44, 240 N.W.2d 124 (1976), this court recognized 
that 
the 
economic 
losses 
alleged 
by 
the 
plaintiff 
were 
associated with alleged damages to property other than the 
defective product.  Unnecessary to the determination of that 
case, however, we stated: "We are also of the opinion that a 
strict-liability claim for pure economic loss involving only the 
cost of repair or replacement of the product itself and loss of 
profits is . . . not demurrable."  Id. 
No. 97-1320-CQ 
 
23
for overruling" the language in La Crosse was unavailing. See 
Miller, 902 F.2d at 575.  We therefore conclude that to the 
extent that the language in La Crosse can be read as 
inconsistent with our decision here, that language is expressly 
overruled. 
¶37 Daanen's reliance on Hap's Aerial can similarly be 
dismissed.  In Hap's Aerial the court of appeals held that the 
plaintiff, a remote purchaser of services, was not barred by the 
economic loss doctrine from recovering damages for its economic 
loss.  See Hap's Aerial, 173 Wis. 2d at 463.8  Unlike Daanen, 
however, the plaintiff in Hap's Aerial alleged economic damages 
arising from the defendant's negligent provision of services and 
not from a defective product manufactured by the defendant.  The 
court of appeals' decision in Hap's Aerial was not appealed to 
this court, and since adopting the economic loss doctrine in 
Sunnyslope, we have not addressed nor do we address here whether 
the doctrine applies with equal force to damages resulting from 
the provision of services.9  As with the contrary dicta in La 
                     
8 In Hap's Aerial, responding to the federal courts' 
prediction that this court would apply the economic loss 
doctrine in the absence of privity, the court of appeals stated 
in a footnote that "[t]he Wisconsin Supreme Court has not yet 
declared that to be the law of this state, and we think that 
when presented squarely with the question, it will not."  Hap's 
Aerial, 173 Wis. 2d at 463 n.4. 
9 We recognize that in this opinion and in past opinions we 
have cited to and relied upon cases from other jurisdictions in 
which the transaction giving rise to the claim for economic 
losses was the provision of services and not the sale of goods. 
 Our reliance on such cases is here limited to a general 
discussion of the economic loss doctrine and those policies 
underlying the application of that doctrine. 
No. 97-1320-CQ 
 
24
Crosse, the language in Hap's Aerial, to the extent that it can 
be read as inconsistent with our decision here, is expressly 
overruled. 
¶38 After 
review 
of 
the 
underlying 
reasoning 
and 
application of the economic loss doctrine, we are persuaded by 
the view that contract notions of privity are irrelevant to the 
question whether a commercial manufacturer owes a duty under 
tort law to commercial purchasers of its products to protect 
against the risk that its product, if defective, might damage 
only itself.  Accordingly, we answer the certified question in 
the affirmative.  Under Wisconsin law, the economic loss 
doctrine bars a remote commercial purchaser from recovering 
economic losses from a manufacturer under tort theories of 
strict liability and negligence, even in the absence of privity. 
By 
the 
Court.—Certified 
question 
answered 
in 
the 
affirmative and cause remanded to the United States Court of 
Appeals for the Seventh Circuit.   
  
 
 
1