Title: James B. Linden v. Cascade Stone Company, Inc.

State: wisconsin

Issuer: Wisconsin Supreme Court

Document:

2005 WI 113 
 
 
SUPREME COURT OF WISCONSIN 
 
 
 
 
 
CASE NO.: 
2004AP4 
 
 
COMPLETE TITLE: 
 
 
James B. Linden and Dianne C. Linden,  
          Plaintiffs-Appellants-Petitioners, 
     v. 
Cascade Stone Company, Inc., West Bend  
Mutual Insurance Company and Rich Fern  
d/b/a Allied Construction,  
          Defendants-Respondents, 
American Family Mutual Insurance Company,  
          Intervening Defendant-Respondent. 
 
 
 
 
REVIEW OF A DECISION OF THE COURT OF APPEALS 
2004 WI App 184 
Reported at:  276 Wis. 2d 267, 687 N.W.2d 823 
(Ct. App. 2004-Published) 
 
 
OPINION FILED: 
July 8, 2005   
SUBMITTED ON BRIEFS: 
        
ORAL ARGUMENT: 
March 30, 2005   
 
 
SOURCE OF APPEAL: 
 
 
COURT: 
Circuit   
 
COUNTY: 
St. Croix   
 
JUDGE: 
Scott R. Needham   
 
 
 
JUSTICES: 
 
 
CONCURRED: 
        
 
DISSENTED: 
BRADLEY, J., dissents (opinion filed). 
ABRAHAMSON, C.J., and BUTLER, JR., J., join the 
dissent.   
 
NOT PARTICIPATING:         
 
 
 
ATTORNEYS: 
 
For the plaintiffs-appellants-petitioners there were briefs 
by Mark A. Seidl and Seidl & Stingl, S.C., Wausau, and oral 
argument by Mark A. Seidl. 
 
For the defendant-respondent, West Bend Mutual Insurance 
Company, there was a brief by R. Michael Waterman and Mudge 
Porter Lundeen & Sequin, S.C., Hudson, and oral argument by R. 
Michael Waterman. 
 
 
 
2
For 
the 
defendant-respondent, 
Rich 
Fern 
d/b/a 
Allied 
Construction, there was a brief by Mark S. Henkel and First Law 
Group, SC, Stevens Point, and oral argument by Mark S. Henkel. 
 
For the intervening defendant-respondent there was a brief 
by Paul E. David and Wendorff, Ellison & David, LLP, Wausau. 
 
 
2005 WI 113
NOTICE 
This opinion is subject to further 
editing and modification.  The final 
version will appear in the bound 
volume of the official reports.   
No.  2004AP4  
(L.C. No. 
2000CV232) 
STATE OF WISCONSIN  
 
 
   : 
IN SUPREME COURT 
 
 
James B. Linden and Dianne C. Linden, 
 
          Plaintiffs-Appellants-Petitioners, 
 
     v. 
 
Cascade Stone Company, Inc., West Bend Mutual 
Insurance Company and Rich Fern d/b/a Allied 
Construction, 
 
          Defendants-Respondents, 
 
American Family Mutual Insurance Company, 
 
          Intervening Defendant-Respondent. 
 
FILED 
 
JUL 8, 2005 
 
Cornelia G. Clark 
Clerk of Supreme Court 
 
 
 
 
 
REVIEW of a decision of the Court of Appeals.  Affirmed.   
 
¶1 
PATIENCE 
DRAKE 
ROGGENSACK, 
J.   James 
and 
Dianne 
Linden seek review of a court of appeals decision affirming the 
grant of summary judgment that dismissed their negligence and 
contract claims against Cascade Stone Company, Inc. (Cascade), 
Rich Fern d/b/a Allied Construction (Fern) and their insurers 
for alleged faulty workmanship in the construction of their 
house.  We conclude that summary judgment is appropriate and 
therefore affirm. 
No. 
2004AP4   
 
2 
 
I. BACKGROUND 
¶2 
On March 24, 1999, James and Dianne Linden entered 
into 
a 
written 
contract 
with 
Groveland 
Craftsman, 
Inc. 
(Groveland), wherein Groveland agreed to construct a new house 
for the Lindens.  Groveland retained various subcontractors to 
assist in the house's construction.  Groveland hired Cascade to 
apply exterior stucco to the house and Fern to shingle the 
house's roof. 
¶3 
On June 5, 2000, the Lindens sued Groveland and its 
insurer, ABC Insurance, alleging breach of contract and warranty 
stemming from alleged defects in the house and delay in 
completion of the project.  The Lindens also alleged Groveland 
was negligent.  The Lindens' amended complaints added Vetter 
Windows, Fern, Cascade, and Cascade's insurers, West Bend Mutual 
and Western National, as defendants, and Fern's insurer, 
American Family, intervened.1  The Lindens alleged that Groveland 
was negligent in allowing water to infiltrate into the house, 
causing deterioration, mold and deficient air quality in the 
house.  The Lindens alleged that Cascade's negligent stucco 
application allowed substantial water infiltration, and that 
Fern provided negligent roofing services that also led to water 
infiltration. 
                                                 
1 The Lindens settled with Vetter, Groveland and ABC.  The 
claims against Western were dismissed.  We address only the 
claims against the remaining parties, Cascade and its insurer, 
West Bend Mutual, and Fern and its insurer, American Family. 
No. 
2004AP4   
 
3 
 
¶4 
The circuit court granted summary judgment in favor of 
Fern and Cascade, holding that the economic loss doctrine barred 
the Lindens' tort claims against the subcontractors.  The court 
also concluded that there was no coverage for the contract claim 
under Cascade's West Bend policy, and denied the Lindens' motion 
to add a contract claim against Fern.2  The Lindens appealed, and 
the court of appeals affirmed.  We granted the Lindens' petition 
for review, limiting the issues to the following:  (1) whether a 
general contract to complete a described project, whereunder the 
general contractor subcontracts with others to assist in 
completing the project and a claim is made for negligent 
services provided by the subcontractors, controls the analysis 
of whether the contract is primarily for goods or primarily for 
services; (2) whether an objective test should be used by 
Wisconsin courts to determine if the predominant purpose of a 
mixed contract was for the sale of a product or to provide 
services; and (3) whether the "integrated system limitation" of 
the "other property exception" to the economic loss doctrine 
applies to bar a negligence claim against a subcontractor who 
provided services in the construction of a house. 
                                                 
2 The circuit court also dismissed the contract claim 
against Cascade.  On appeal, the Lindens argued that the court 
erroneously dismissed this claim, but the court of appeals did 
not address this argument, noting that Cascade had not been 
served with notice of the appeal and had not appeared in the 
appeal. 
No. 
2004AP4   
 
4 
 
II.  DISCUSSION 
A. 
Standard of Review 
¶5 
Whether the trial court properly granted a motion for 
summary judgment is a question of law we review de novo, valuing 
the previous courts' analyses.  Biese v. Parker Coatings, Inc., 
223 Wis. 2d 18, 21, 588 N.W.2d 312 (Ct. App. 1998).  "In 
determining 
if 
the 
trial 
court 
properly 
granted 
summary 
judgment, we apply the same methodology as the trial court."  
Id. at 22.  "[S]ummary judgment is appropriate when there is no 
genuine issue of material fact and the moving party is entitled 
to judgment as a matter of law."  Id. (citing Wis. Stat. 
§ 802.08(2)).  Interpreting the nature of a contract——whether it 
is primarily one for goods or primarily one for services——
presents a question of law subject to independent review.  Ins. 
Co. of N. Am. v. Cease Elec. Inc., 2004 WI 139, ¶14, 276 Wis. 2d 
361, 688 N.W.2d 462.  Whether the economic loss doctrine bars a 
claim under a given set of facts is also subject to independent 
review.  Id., ¶15. 
B. 
Economic Loss Doctrine 
¶6 
"The economic loss doctrine is a judicially created 
doctrine under which a purchaser of a product cannot recover 
from a manufacturer on a tort theory for damages that are solely 
economic."  Bay Breeze Condo. Ass'n v. Norco Windows, Inc., 2002 
WI App 205, ¶9, 257 Wis. 2d 511, 651 N.W.2d 738 (citing Kailin 
v. Armstrong, 2002 WI App 70, ¶27, 252 Wis. 2d 676, 643 N.W.2d 
132).  Economic damages are those arising because the product 
does not perform as expected, including damage to the product 
No. 
2004AP4   
 
5 
 
itself or monetary losses caused by the product.  Biese, 223 
Wis. 2d at 23.  Economic damages do not include losses due to 
personal injury or damage to other property.  Id. 
¶7 
The economic loss doctrine preserves the distinction 
between contract and tort law; the doctrine seeks to avoid 
drowning contract law in "a sea of tort."  Daanen & Janssen, 
Inc. v. Cedarapids, Inc., 216 Wis. 2d 395, 403-04, 410, 573 
N.W.2d 842 (1998) (citing East River S.S. Corp. v. Transamerica 
Delaval, Inc., 476 U.S. 858, 866 (1986)).  In protecting the 
distinction between tort and contract law, the economic loss 
doctrine recognizes: 
In contract law, the parties' duties arise from the 
terms of their particular agreement; the goal is to 
hold parties to that agreement so that each receives 
the benefit of his or her bargain.  The aim of tort 
law, 
in 
contrast, 
is 
to 
protect 
people 
from 
misfortunes which are unexpected and overwhelming.  
The law imposes tort duties upon manufacturers to 
protect society's interest in safety from the physical 
harm 
or 
personal 
injury 
which 
may 
result 
from 
defective products.  Thus, where a product fails in 
its intended use and injures only itself, thereby 
causing only economic damages to the purchaser, "the 
reasons for imposing a tort duty are weak and those 
for leaving the party to its contractual remedies are 
strong." 
Wausau Tile, Inc. v. County Concrete Corp., 226 Wis. 2d 235, 
247-48, 593 N.W.2d 445 (1999) (citations omitted). 
C. 
Predominant Purpose Test 
¶8 
Some contracts encompass both products and services.  
We use the predominant purpose test to determine whether a mixed 
contract for products and services is predominantly a sale of a 
product and therefore subject to the economic loss doctrine, see 
No. 
2004AP4   
 
6 
 
Biese, 223 Wis. 2d at 26, or predominantly a contract for 
services and therefore not subject to the economic loss 
doctrine, see Cease Electric, 276 Wis. 2d 361, ¶52. 
¶9 
The predominant purpose test was developed in the 
Uniform Commercial Code (UCC) context when contracts that were 
alleged to be sales (Wis. Stat. ch. 402) occurred.  Because the 
sales chapter of the UCC applies to transactions in goods, Wis. 
Stat. § 402.102, and many contracts involved both goods and 
services, it was necessary to determine which component was 
predominant.  See Bonebrake v. Cox, 499 F.2d 951 (8th Cir. 
1974).   
¶10 Van Sistine v. Tollard, 95 Wis. 2d 678, 291 N.W.2d 636 
(Ct. App. 1980), was the first Wisconsin case to apply the 
predominant purpose test in order to determine whether a mixed 
contract was predominantly for goods or for services.  In that 
case, the dispute concerned a contract to install windows, 
install 
stucco 
siding, 
reposition 
appliances 
and 
perform 
finishing.  The court considered subjective factors, such as the 
contractor being described as a "siding contractor" and the 
tasks to be undertaken were described as services such as 
"'install', 'reposition,' 'move' and 'finishing.'"  The contract 
did not speak in terms of a sale.  Id. at 685.  The court also 
considered that more than half of the cost of the project was 
for labor, with a lesser amount expended for materials.  Id.  
Given the totality of services provided, the court concluded 
that the contract was primarily for services.  Id.  
No. 
2004AP4   
 
7 
 
¶11 In Micro-Managers, Inc. v. Gregory, 147 Wis. 2d 500, 
434 N.W.2d 97 (Ct. App. 1988), the court of appeals again 
employed the predominant purpose test to determine whether the 
UCC applied to the transaction.  There, Gregory contracted with 
Micro-Managers to develop software for a programmable controller 
for manufacturing equipment.  The court reasoned that "all . . . 
charges to Gregory would be on the basis of time, at stated 
rates, and materials."  Id. at 508.  The contract described time 
components and tasks to be accomplished, using such words as 
"'man-days,' 'development,' 'time,' 'design,' etc."  Id. at 508-
09.  The court concluded that the words chosen connote the 
provision of services and not the sale of goods.  Id. at 509.  
The court also considered billing evidence, and concluded that 
$55,968 of the $59,828 total bill was for services.  Id. at 508.  
After considering the totality of services, the court concluded 
that the contract was predominantly for services.  Id. at 509. 
D. 
Which Contract Controls 
¶12 Before we employ the predominant purpose test, we must 
determine which contract controls, the general contract between 
the Lindens and Groveland, or the subcontracts between Groveland 
and Cascade and Fern.  The Lindens argue that we should examine 
the subcontracts that are predominantly for services, which 
exempts them from the economic loss doctrine.  Cascade and Fern 
argue the general contract is the controlling contract here, and 
it is a contract for a product, the finished house. 
¶13 The Lindens cite three cases for the proposition that 
the subcontracts rather than the general contract should be the 
No. 
2004AP4   
 
8 
 
contracts to which the predominant purpose test is applied.  
However, those cases do not provide clear support for their 
position.  They first cite Biese.  In that case, Biese owned a 
sports bar and hired A to Z Epoxy Coatings to install an epoxy 
floor in the bar.  Biese, 223 Wis. 2d at 20.  Parker Coatings 
supplied A to Z with the flooring materials.  Biese had problems 
with the floor and eventually sued Parker for negligence.  The 
court held that Parker provided both goods and services, but 
that the underlying transaction between Biese and Parker was 
predominantly for a product.  Id. at 28-29.  Based on Biese, the 
Lindens argue that we should examine the subcontracts in this 
case.  We do not read Biese so broadly.  The relevant 
transaction was not disputed by the parties in Biese, and the 
decision is unclear because while the court looked at the 
"transaction between Parker and Biese," it also stated that the 
"entire underlying transaction" was at issue.  Id. at 27.  
Accordingly, we conclude Biese is not a guide for deciding which 
contract controls. 
¶14 The Lindens also cite Cease Electric, where a chicken 
farmer bought a ventilation system for a barn and hired Cease 
Electric to wire the system's components.  Cease Elec., 276 
Wis. 2d 361, ¶¶3, 7.  After the system failed, the farmer sued 
Cease.  We concluded that Cease contracted to provide services, 
with goods being incidental.  Id., ¶18.  Cease Electric is 
inapposite to the current discussion because there are two 
separate contracts here, while Cease was the sole contractor 
that the farmer hired to wire the components of a ventilation 
No. 
2004AP4   
 
9 
 
system the farmer provided.  There was no contract-subcontract 
situation as we have here. 
¶15 Finally, the Lindens cite Hap's Aerial Enterprises, 
Inc. v. General Aviation Corp., 173 Wis. 2d 459, 496 N.W.2d 680 
(Ct. App. 1992), where a buyer of an aircraft was allowed to sue 
a third party in tort for a negligent inspection the seller 
hired the third party to perform.  Hap's Aerial is different 
factually from the subcontractor situation presented by the case 
at bar, as the inspection in Hap's Aerial was not tied to the 
sale of the plane, unlike the situation before us, where the 
subcontract 
is 
part 
of 
the 
relevant 
transaction, 
the 
construction of the Lindens' house. 
¶16 All parties argue that the policies behind the 
economic loss doctrine are furthered by their positions.  The 
policies behind the economic loss doctrine are:  (1) to maintain 
the "fundamental distinction between tort law and contract law"; 
(2) to protect the "parties' freedom to allocate economic risk 
by contract"; and (3) to encourage the purchaser, as the "party 
best situated to assess the risk of economic loss, to assume, 
allocate, or insure against that risk."  Wausau Tile, 226 
Wis. 2d at 247. After considering these policies, we conclude 
they are best furthered by examining the general contract rather 
than the subcontracts. 
¶17 Cascade and Fern argue that examining the service 
subcontracts rather than the Lindens' contract with the general 
contractor, Groveland, would allow the Lindens to make an end 
run around the contract for which Groveland and the Lindens 
No. 
2004AP4   
 
10 
 
bargained.  We agree.  Focusing on the contract for which the 
purchaser bargained maintains the distinction between tort and 
contract for the purchaser who is in the best position to 
bargain for coverage of the risk of faulty workmanship in any 
part of the house.  The Lindens did exactly that here.  They had 
contractual remedies against Groveland, who in turn had its own 
remedies against the subcontractors.  We also agree with the 
court of appeals reasoning that "[a]t its core, the Lindens' 
complaint is that the house they received is not the house for 
which they contracted."  Allowing the Lindens to maintain a tort 
claim against the subcontractors for services rendered to the 
general contractor would undermine the distinction between 
contract law and tort law that the economic loss doctrine seeks 
to preserve.  We also conclude that allowing the Lindens to 
maintain a tort action against the subcontractors harms the 
Lindens' and Groveland's freedom of contract, because permitting 
the Lindens to maintain a tort claim would get around the 
warranties and remedies they had already bargained for with 
Groveland.  Because we conclude that according the general 
contract control over this transaction better meets the policies 
underlying the economic loss doctrine, we apply the predominant 
purpose test to the contract between the Lindens and Groveland. 
E. 
Predominant Purpose Test:  Objective/Subjective Factors 
¶18 The Lindens argue that we should adopt a rebuttable 
presumption in favor of the use of a quantitatively objective 
test when determining the predominant purpose of a mixed 
contract.  Application of the test the Lindens suggest would 
No. 
2004AP4   
 
11 
 
require totaling the costs of the project associated with 
materials and comparing it to the total cost of labor, in order 
to determine which contract component cost the most.  The 
Lindens contend that (1) there is a need to select a given type 
of test because courts that have used both objective and 
subjective tests in previous applications of the predominant 
purpose test have rendered confusing decisions; and (2) adopting 
a quantitatively objective test would make court decisions 
consistent and predictable.  The Lindens make good arguments, 
but we conclude that the totality of the circumstances test, 
which includes both quantitatively objective and subjective 
factors, should be applied to determine the predominant purpose 
of a contract. 
¶19 Prior cases give guidance on how to employ the 
predominant purpose test.  Three reported Wisconsin cases have 
applied the test; but only Biese has applied it in a context 
where the economic loss doctrine was raised as a defense.  As we 
explained above, the court concluded that although both goods 
and services were involved, the transaction was predominantly 
for goods.  The court focused on the purpose for which the 
parties entered into the contract:  "[Biese's] claim is that he 
did not get what he bargained for, either at the time of the 
original installation or at reinstallation.  . . .  Biese 
contracted with Epoxy for the floor and received a one-year 
warranty."  Id. at 28, 30. 
¶20 In Van Sistine, the court reviewed a contract to do 
home remodeling to determine whether it was predominantly for 
No. 
2004AP4   
 
12 
 
goods or predominantly for services.  In concluding it was 
predominantly 
for 
services, 
it 
considered 
the 
following 
objective and subjective factors:  the amount charged for 
services and the amount charged for materials, whether the 
purpose or "thrust" of the contract was for goods or for 
services and the language used in the contract to describe the 
project.  Van Sistine, 95 Wis. 2d at 684-85. 
¶21 The Lindens cite no authority concluding that a 
rebuttable presumption based on quantitatively objective factors 
has merit.  The cases they cite do not rely on quantitatively 
objective factors to the exclusion of subjective evidence.  
Rather, the Bonebrake predominant purpose test that relies on 
both 
quantitative 
and 
subjective 
factors 
is 
used 
widely 
throughout the country.  Specific factors used by courts include 
the language of the contract, the nature of the business of the 
supplier, the intrinsic worth of the materials, Princess 
Cruises, Inc. v. General Electric Co., 143 F.3d 828, 833 (4th 
Cir. 1998), the circumstances of the parties, and the primary 
objective they hoped to achieve by entering into the contract, 
Insul-Mark Midwest, Inc. v. Modern Materials, Inc., 612 N.E.2d 
550, 555 (Ind. 1993).  See also, e.g., BMC Indus., Inc. v. Barth 
Indus., Inc., 160 F.3d 1322 (11th Cir. 1998); Colo. Carpet 
Installation, Inc. v. Palermo, 668 P.2d 1384 (Col. 1983); In re 
Trailer & Plumbing Supplies, 578 A.2d 343 (N.H. 1990). 
¶22 While we agree with the Lindens that reliance on 
quantitatively objective factors would make courts' applications 
of the predominant purpose test predictable, in that courts 
No. 
2004AP4   
 
13 
 
would rely on nothing more than the bills submitted by the 
parties, we disagree that relying solely on quantitative factors 
to the exclusion of subjective factors would make applications 
more consistent, or for that matter, more fair or accurate.  In 
Wisconsin and throughout other jurisdictions, a majority of 
courts examine all the factors before them, both objective and 
subjective, to determine the predominant purpose of a contract.  
We agree with that approach and conclude considering the 
totality of the circumstances presented will give the most 
complete picture of the transaction at issue. 
F. 
The General Contract 
¶23 In the present case, consideration of quantitatively 
objective factors is difficult because the general contract does 
not provide all of the costs broken down into services and 
materials.  There are significant materials costs.  For example, 
the lumber cost is almost $100,000 of the roughly $360,000 total 
cost of the house, but other items listed in the contract use 
language that mixes materials and services, making it impossible 
to separate the cost of the materials from the cost of the 
services, e.g., "roofing labor and installation cost." 
¶24 Turning to the subjective language of the agreement, 
the contract is couched both in terms of service words and 
product words.  For example, it lists services to be provided 
such as "[p]rovide excavation," "drain tile installed," and 
"spray mastic waterproofing applied," and it describes the 
finished product that is being sold to the Lindens, such as 
No. 
2004AP4   
 
14 
 
"[e]xterior finish to be stucco and brick," and "[r]oof system 
to be manufactured trusses." 
¶25 While there is a mixture of service and product words 
in the contract, after examining the entire document and 
considering the purpose for which the contract was made, we 
conclude that the primary reason the Lindens entered into the 
contract was to have a house custom built for them.  The 
contract begins by outlining the specifications of the project: 
"Construct a new two story home, with 1768 sq. ft. finished on 
the first story, 1176 sq. ft. finished on the second story, and 
1768 sq. ft. unfinished on the lower walkout level, with a 984 
sq. ft. garage."  Also, the project's cost was billed using a 
"fixed price contract," not changing based on the hours worked,3 
but only on changes in the specifications.  The contract stated:  
"Any change to specifications that lower cost of project, will 
be 
a 
reduction 
in 
cost 
to 
client, 
and 
any 
change 
in 
specifications that result in a higher cost, will be charged to 
client."  This shows that the parties bargained for costs based 
on the specifications of the house, not the amount of work put 
into completion of the project.  Based on our application of 
quantitative and subjective factors, we conclude that under the 
totality of circumstances, the predominant purpose of the 
                                                 
3 There was a provision for a penalty against Groveland of 
$100 per working day for each day over twenty-six weeks spent on 
the project and a corresponding bonus of $100 per day to the 
contractor for early completion, but these amounts are not based 
on the value of Groveland's services for a day of work. 
No. 
2004AP4   
 
15 
 
contract was for a product, a new house, rather than one for 
services.  
G. 
Integrated Systems Limitation 
¶26 The final issue we consider is whether the integrated 
systems limitation of the "other property" exception to the 
economic loss doctrine applies to cases where the defective 
"component" at issue is predominantly services provided by a 
subcontractor in a mixed contract.  We conclude that it does. 
¶27 As we explained in Wausau Tile, 226 Wis. 2d at 249, 
"[d]amage by a defective component of an integrated system to 
either the system as a whole or other system components is not 
damage to 'other property' [that would preclude] the application 
of the economic loss doctrine."  In that case, Wausau Tile 
manufactured concrete paving blocks made of cement, aggregate, 
water and other materials for use primarily on exterior 
sidewalks.  Id. at 241.  Wausau Tile sued the company it hired 
to supply the cement for its paving blocks, alleging that high 
levels of alkalinity in the cement caused problems with the 
paving blocks, such as excessive expansion and cracking.  Id. at 
242.  Wausau Tile argued on appeal that the cost of repairing 
and replacing the paving blocks did not constitute economic loss 
because the paving blocks themselves were "property other than 
the defective product [the cement]."  Id. at 249.  We rejected 
Wausau Tile's argument and explained:  
"A product that fails to function and causes harm to 
surrounding property has clearly caused harm to other 
property.  However, when a component part of a machine 
or a system destroys the rest of the machine or 
No. 
2004AP4   
 
16 
 
system, the characterization process becomes more 
difficult.  When the product or system is deemed to be 
an integrated whole, courts treat such damage as harm 
to the product itself.  When so characterized, the 
damage 
is 
excluded 
from 
the 
coverage 
of 
[the 
Restatement of Torts].  A contrary holding would 
require a finding of property damage in virtually 
every case in which a product harms itself and would 
prevent 
contractual 
rules 
from 
serving 
their 
legitimate 
function 
in 
governing 
commercial 
transactions." 
Id. at 249-50 (quoting Restatement (Third) of Torts § 21 cmt. e 
(1997)).  We concluded that the paving blocks were "integrated 
systems comprised of several component materials, including 
. . . cement."  Id. at 251. 
¶28 The court of appeals also applied the integrated 
systems exception to a building in Bay Breeze.  In that case, 
defective windows installed in a condominium development led to 
water leakage into the units that damaged the buildings.  Bay 
Breeze, 257 Wis. 2d 511, ¶5.  The court adopted reasoning from 
Casa Clara Condominium Ass'n, Inc. v. Charley Toppino & Sons, 
Inc., 620 So. 2d 1244 (Fla. 1993), where condominium units and 
single-family homes were damaged by defective concrete supplied 
by the defendants:  
"Generally, house 
buyers 
have little 
or no 
interest in how or where the individual components of 
a house are obtained.  They are content to let the 
builder produce the finished product, i.e., a house. 
These homeowners bought finished products——dwellings——
not the individual components of those dwellings.  
They bargained for the finished products, not their 
various components.  The concrete became an integral 
part of the finished product and, thus, did not injure 
'other' property." 
No. 
2004AP4   
 
17 
 
Bay Breeze, 257 Wis. 2d 511, ¶25 (quoting Casa Clara, 620 So. 2d 
at 1247).  The court concluded: 
We adopt the reasoning of Casa Clara as the law 
in Wisconsin.  We hold that the economic loss doctrine 
applies to building construction defects when, as 
here, the defective product is a component part of an 
integrated structure or finished product.  The law of 
Casa Clara is consistent with Wisconsin precedent 
addressing component parts that cause damage to an 
integrated product, which results in only economic 
loss. 
Here, as in Casa Clara, the homeowners purchased 
a finished product, their condominium units, the 
quality of which fell below expectations.  While the 
Association argues that the defective windows caused 
damage to interior and exterior walls and casements, 
these are but other component parts in a finished 
product.  Because of the integral relationship between 
the windows, the casements and the surrounding walls, 
the windows are simply a part of a single system or 
structure, having no function apart from the buildings 
for which they were manufactured.  Although the 
condominium units may have suffered incidental damage 
as a result of the failed windows, this does not take 
a 
commercial 
dispute 
outside 
the 
economic 
loss 
doctrine. 
Bay Breeze, 257 Wis. 2d 511, ¶¶26-27 (citations omitted).  The 
reasoning of Bay Breeze and Casa Clara applies here.  The stucco 
and roof shingling have no independent value or use apart from 
their function as components of the house.  The Lindens 
bargained for the finished product, a house; not its various 
components. 
¶29 The Lindens cite to Jacob v. Russo Builders, 224 
Wis. 2d 436, 592 N.W.2d 271 (Ct. App. 1999), an insurance case 
involving the interpretation of a business risk exclusion in a 
general liability policy, for the proposition that Wisconsin 
No. 
2004AP4   
 
18 
 
courts have already rejected the argument that negligently 
provided services could fall within the integrated systems 
exception.  Jacob provides no support for this assertion because 
it expressly rejected reliance on cases involving the economic 
loss doctrine.  Id. at 453.  The court explained that economic 
loss cases did not assist it in determining how a reasonable 
insured would understand the insurance policy language that was 
at issue.  Id.; see also Bay Breeze, 257 Wis. 2d 511, ¶23 n.5.  
Because the damage caused by the defective stucco and roof 
shingling harmed only other components of the house, we conclude 
the integrated systems exception applies, and the Lindens are 
therefore 
barred 
from 
seeking 
tort 
remedies 
from 
the 
subcontractors. 
¶30 The dissent incorrectly claims that because of our 
conclusion barring a homeowner from suing a subcontractor for 
economic loss under tort law, Wisconsin homeowners "will be 
frustrated at every turn," unable to pursue either contract or 
tort claims against subcontractors.  Dissent, ¶3.  The dissent 
greatly overstates our holding's limitation on suits brought by 
homeowners.  As we explain above, homeowners retain contractual 
remedies against the general contractors, who in turn have their 
own remedies against the subcontractors.   
¶31 Additionally, we have never addressed whether a third-
party beneficiary action by a homeowner could lie against a 
subcontractor, and if so, under what circumstances it would be 
appropriate.  In some jurisdictions when a general contractor is 
insolvent, courts have permitted contract actions against the 
No. 
2004AP4   
 
19 
 
subcontractors under a third-party beneficiary theory.4  Some of 
the jurisdictions that permit claims by a homeowner against a 
subcontractor do so because "the subcontractor has agreed to 
perform an obligation that the [general] contractor owes to the 
owner."  Melvin Aron Eisenberg, Third-Party Beneficiaries, 92 
Colum. L. Rev. 1358, 1403 (1992).5   In Wisconsin, a third-party 
action is not a new theory of recovery.  For example, in Auric 
v. Continental Casualty Co., 111 Wis. 2d 507, 331 N.W.2d 325 
(1983), we addressed whether privity of contract was necessary 
in order to sue an attorney who had not had a will properly 
executed.  Although the words "third-party" do not appear in the 
opinion, we said that the beneficiary of a will did not need 
privity to sue the drafting attorney because it was "clear that 
this 
will 
was intended 
to 
bring 
direct 
benefit to the 
                                                 
4 See Syndoulos Lutheran Church v. A.R.C. Indus., Inc., 662 
P.2d 109, 114 (Alaska 1983) (concluding that owner had a claim 
for relief as a third-party beneficiary against subcontractor); 
Oliver B. Cannon & Son, Inc. v. Dorr-Oliver, Inc., 336 A.2d 211 
(Del. 1975) (concluding that contract between general contractor 
and subcontractor made owner of premises a third-party creditor 
beneficiary thereof); People ex rel. Resnik v. Curtis & Davis, 
Architects & Planners, Inc., 400 N.E.2d 918, 920 (Ill. 1980) 
(concluding that state was a third-party beneficiary of contract 
between Illinois Building Authority and several architects and 
contractors for the construction of a prison). 
5 Melvin Aron Eisenberg, Third-Party Beneficiaries, 92 
Colum. L. Rev. 1358, 1403 (1992), thoroughly discusses the 
occasions 
to 
employ 
third-party 
contract 
actions. 
 
The 
development of the economic loss doctrine is one of the areas 
where third-party actions are becoming more common.  Id. (citing 
Sears, Roebuck & Co. v. Jardel Co., 421 F.2d 1048, 1054 (3d Cir. 
1970); United States v. Ogden Tech. Lab., Inc., 406 F. Supp. 
1090, 1092-93 (E.D.N.Y. 1973); Gilbert Fin. Corp. v. Steelform 
Contracting Co., 145 Cal. Rptr. 448, 451 (Cal. Ct. App. 1971)). 
No. 
2004AP4   
 
20 
 
plaintiff."  Id. at 514.  However, because the Lindens did not 
present their contract claim for our review, we take no position 
on whether such a claim could be maintained. 
III. CONCLUSION 
¶32 We conclude that when one contracts with a general 
contractor 
to 
build 
a 
house 
and 
the 
general 
contractor 
subcontracts with others to provide various services, the 
general contract controls whether the economic loss doctrine is 
available as a defense.  We also conclude that courts should 
consider the totality of the circumstances, which includes both 
objective and subjective factors, in determining the predominant 
purpose of a mixed contract.  And finally, we conclude that the 
integrated system limitation of the other property exception to 
the economic loss doctrine is applicable where the subcontractor 
mainly provided services that have no independent value or use 
apart from their function as components of the product into 
which they were incorporated.  In the present case, we conclude 
that the general contract between the Lindens and Groveland was 
primarily for a product, and that the integrated systems 
limitation applies to the damages caused by Cascade and Fern.  
Accordingly, we conclude the court of appeals properly affirmed 
summary judgment dismissing the claims. 
By the Court.—The decision of the court of appeals is 
affirmed. 
 
No.  2004AP4.awb 
 
1 
 
¶33 ANN WALSH BRADLEY, J.   (dissenting).  The unfortunate 
result of the majority opinion today is the limitation of legal 
rights for all homeowners in Wisconsin.   
¶34 Prior to this decision, a homeowner generally could 
not sue a subcontractor under contract law for economic loss 
because of a lack of contract between them.6  For years in this 
state, however, a homeowner could bring a direct claim in 
negligence against the subcontractor for damages sustained from 
faulty workmanship.7 
¶35 Now, following this decision, a homeowner is likewise 
barred from suing a subcontractor under tort law for economic 
loss.  Thus, an aggrieved homeowner seeking to pursue a direct 
remedy for wrongs caused by a subcontractor, will be frustrated 
at every turn.  Because the majority opinion expands the 
economic loss doctrine well beyond its intended purposes, limits 
the rights of homeowners, and encourages needless litigation, I 
respectfully dissent. 
I 
¶36 Although the facts in this case generally can be 
described as routine, the majority's resolution of the parties' 
dispute is far from routine.  The majority uses one party's 
                                                 
6 Unless there is privity of contract, generally there is no 
liability for breach of contract to outsiders.  Prinsen v. 
Russos, 194 Wis. 142, 145, 215 N.W. 905 (1927). 
7 See, e.g., Jacob v. Russo Builders, 224 Wis. 2d 436, 592 
N.W.2d 271 (Ct. App. 1999) (owners of a newly built house sued 
the general contractor, the masonry subcontractor, and the 
subcontractor's comprehensive general liability insurer for 
damages arising from the subcontractor's faulty work). 
No.  2004AP4.awb 
 
2 
 
contract to bar the tort claims of another with whom there was 
no contract.  It concludes that "when one contracts with a 
general contractor to build a house and the general contractor 
subcontracts with others to provide various services, the 
general contract controls whether the economic loss doctrine is 
available as a defense."   Majority op., ¶32.  Accordingly, the 
majority uses the Lindens' contract with Groveland to bar the 
Lindens' tort claims against Cascade and Fern. 
¶37 Through 
its 
decision, 
the 
majority 
effectively 
constructs 
an 
impenetrable 
wall 
between 
homeowners 
and 
subcontractors. 
 
Homeowners 
cannot 
directly 
sue 
the 
subcontractor for economic loss in either contract or tort.  
Instead of being able to sue the subcontractor directly, the 
majority now requires a general contractor to stand in as a 
middleman for purposes of liability.  This new arrangement is 
required, the majority insists, because of the economic loss 
doctrine.  I conclude that the majority has once again expanded 
the economic loss doctrine well beyond its principled origins of 
products liability.  When subjected to the lens of reality, the 
policy considerations underlying the doctrine do not support its 
application here. 
II 
¶38 As noted by the majority, the economic loss doctrine 
is a judicially created doctrine that seeks to preserve the 
distinction between contract and tort.  Id., ¶6.  From its 
beginning, the doctrine "has been based on the understanding 
that contract law, and particularly the law of warranty, is 
No.  2004AP4.awb 
 
3 
 
better suited than tort law for dealing with purely economic 
loss in the commercial arena."  Insurance Co. of N. America v. 
Cease Electric Inc., 2004 WI 139, ¶15, 276 Wis. 2d 361, 688 
N.W.2d 462. 
¶39 Wisconsin first recognized the economic loss doctrine 
in Sunnyslope Grading, Inc. v. Miller, Bradford & Risberg, Inc., 
148 Wis. 2d 910, 437 N.W.2d 213 (1989).  We held, in the context 
of a products liability case, 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.   
 
¶40 Three policies serve as a basis for the doctrine's 
application:  "(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 of 
economic loss to assume, allocate, or insure against that risk."  
Cease Electric, 276 Wis. 2d 361, ¶38.  I cannot agree with the 
majority's conclusion that these policies support the result 
reached here.   
A 
¶41 The majority concludes that the first policy of 
maintaining the distinction between tort and contract law is 
furthered by focusing on "the contract for which the purchaser 
bargained."  Majority op., ¶17.  But where does the risk of 
No.  2004AP4.awb 
 
4 
 
blurring that distinction between contract and tort arise when 
there is no contract with the alleged tortfeasor?   
¶42 Allowing the Lindens to maintain tort claims against 
Cascade and Fern would not allow them to make an "end run" 
around their contract.  Indeed, the Lindens brought their tort 
action against Cascade and Fern precisely because there was no 
contract between them and therefore no contractual remedies were 
available to them.   
¶43 In this case, there was no provision in the Groveland 
general 
contract 
prohibiting 
the 
Lindens 
from 
pursuing 
negligence claims against these subcontractors.  By now using 
that contract to preclude the Lindens' tort actions, the 
majority has effectively rewritten its terms.  Such a result 
does nothing to maintain a distinction between tort and contract 
law.  Rather, it serves only to further blur the line.   
B 
¶44 In examining the second policy of protecting the 
"commercial parties' freedom to allocate economic risk by 
contract," the majority ignores the fact that the Lindens are 
not commercial parties.  It warns that allowing the Lindens' 
tort action against the subcontractors would "get around the 
warranties and remedies they had already bargained for" with the 
general contractor.  Id.   
¶45 Apparently, the majority believes that the Lindens 
were free to anticipate the risks with the subcontractors, 
allocate those risks, and bargain accordingly.  This reasoning 
can best be described as "long on philosophy but short on 
No.  2004AP4.awb 
 
5 
 
reality."  State v. Reed, 2005 WI 53, ¶75, __ Wis. 2d __, 695 
N.W.2d 315 (Prosser, J., concurring). 
¶46 The majority would have us pretend that all home 
contracting jobs, regardless of the size, should be handled like 
sophisticated commercial transactions.  What happens when a 
homeowner wants a new deck added to the cottage and hires a 
local carpenter, who in turn will get local subcontractors to do 
the electrical, painting, and landscaping?    
¶47 Before engaging in the negotiations regarding the 
allocation of risk, the carpenter and the homeowner should first 
determine what risks they are allocating.  Is the carpenter 
providing a product (a new deck) or is it a service?  In 
answering this question, the homeowner and carpenter should 
apply the predominant purpose test.  According to the majority, 
they 
should 
consider 
both 
"quantitatively 
objective 
and 
subjective factors." Majority op., ¶18.  They must analyze 
whether the work performed by the local subcontractors is 
subject to the "integrated system limitation of the 'other 
property' exception to the economic loss doctrine."  Id., ¶26.  
This kind of negotiation may be part of the reality of the 
majority's world, but I submit it is not part of the reality of 
many homeowners in this state. 
¶48 In theory, if homeowners want to protect themselves 
against the possibility that the general contractor may be 
financially 
unable 
to 
remedy 
shoddy 
work 
done 
by 
the 
subcontractors, they can seek to obtain contract warranties 
directly from each subcontractor.  In practice, however, this 
No.  2004AP4.awb 
 
6 
 
approach is problematic because homeowners often do not know 
beforehand 
with 
whom 
the 
general 
contractor 
will 
be 
subcontracting.  They may not be able to find out this 
information because general contractors themselves may not yet 
know. 
¶49 Thus, in the present case, the Lindens had no 
opportunity to negotiate with the subcontractors and allocate 
risk accordingly.  Nevertheless, the majority would have the 
Lindens negotiate with the general contractor for contingencies 
that might arise involving the unknown subcontractors.  In 
reality, homeowners likely will fail to allocate risk for an 
unanticipated eventuality and will be limited by this decision 
to recovery based on what they managed to anticipate. 
C 
¶50 The final policy reason on which the majority rests 
its decision is that the economic loss doctrine views the 
purchaser as the "party best situated to assess the risk of 
economic loss, to assume, allocate, or insure against that 
risk."  Id., ¶16.  The Lindens, it is asserted, were in the best 
position to anticipate "the risk of faulty workmanship" and thus 
were in the best position to "bargain for coverage" of that 
risk.  Id., ¶17. 
¶51 But is a homeowner truly the "party best situated" to 
predict and prevent the risk of a subcontractor's sub-standard 
work?  Is it not, in fact, subcontractors who can best 
anticipate and control the quality of their own work?   
No.  2004AP4.awb 
 
7 
 
¶52 In reality, the homeowner is little more than the 
"party best situated" to be damaged by shoddy workmanship.  The 
majority seems to believe that the Lindens, as the party that 
faced the greatest risk, should have accounted for that risk in 
their bargaining with the general contractor.  But applying the 
economic loss doctrine on the assumption that they did account 
for that risk, of course, begs the very question. 
III 
 
¶53 Although limiting the rights of homeowners in this 
state, the majority sees nothing burdensome with such a result.  
It notes that "[The Lindens] had contractual remedies against 
Groveland, who in turn had its own remedies against the 
subcontractors."  Id.  This conclusion casts a world of grays in 
black and white.   
¶54 One can easily imagine scenarios where a homeowner 
does not wish to sue a general contractor.  Maybe the contractor 
is a relative or a family friend.  Perhaps the homeowners are 
generally satisfied with the work of the contractor and do not 
wish to subject an innocent contractor to a bitter legal 
dispute.  Yet the majority insists that a potentially innocent 
third party, the contractor, be brought into litigation as a 
middleman, all in the name of the economic loss doctrine.  It is 
not good public policy to require that suit be brought against 
an innocent party or someone you do not want to sue in order to 
get at the person responsible for the damages.  Such an approach 
encourages needless litigation and discourages settlement.   
No.  2004AP4.awb 
 
8 
 
¶55 Ironically, it was the Lindens' settlement with the 
contractor Groveland that proved to be their greatest mistake 
here.  Because they settled with the one party who, according to 
the majority, could sue the allegedly negligent subcontractors, 
the Lindens will not be made whole.  In fact, when pressed by 
this court at oral argument, counsel for Fern conceded that his 
client had not yet paid anything to anybody.  I conclude that 
discouraging 
settlement 
and 
promoting 
needless 
litigation 
furthers no worthwhile policy goal. 
¶56 Finally, the majority attempts to assuage readers' 
fears by suggesting that homeowners may potentially enforce 
contracts between general contractors and subcontractors as 
third-party beneficiaries of those contracts.  Id., ¶31.  
Although it is true that a third-party beneficiary action is not 
a new theory of recovery in Wisconsin, we have never extended it 
to a context such as this.  Indeed, the majority acknowledges as 
much, noting that this court has "never addressed whether a 
third-party beneficiary action by a homeowner could lie against 
a subcontractor, and if so, under what circumstances it would be 
appropriate."  Id.  
¶57 The majority cites an article for the proposition that 
some jurisdictions permit claims by a homeowner against a 
subcontractor because "the subcontractor has agreed to perform 
an obligation that the [general] contractor owes to the owner."  
Id. (citing Melvin Aron Eisenberg, Third-Party Beneficiaries, 92 
Colum. L. Rev. 1358, 1403 (1992)).  However, the sentence upon 
which the majority relies is taken from a paragraph rejecting 
No.  2004AP4.awb 
 
9 
 
that very premise.  Although the jurisdictions are split, the 
article explains the "better view": 
It might be argued that an owner is a creditor 
beneficiary 
of 
the 
contract 
between 
the 
prime 
contractor and the subcontractor, on the theory that 
the subcontractor has agreed to perform an obligation 
that the prime contractor owes to the owner.  Although 
the question is certainly not free from doubt, the 
better view seems to be that taken by Corbin: 
[C]ontracts between a principal building contractor 
and 
subcontractors . . . are 
made 
to 
enable 
the 
principal contractor to perform; and their performance 
by the subcontractor does not in itself discharge the 
principal contractor's duty to the owner with whom he 
has contracted.  The installation of plumbing fixtures 
or 
the 
construction 
of 
cement 
floors 
by 
a 
subcontractor is not a discharge of the principal 
contractor's duty to the owner to deliver a finished 
building containing those items . . . .  The owner is 
 . . . [therefore not] a creditor beneficiary . . . . 
Eisenberg at 1403-04 (citing 4 Corbin on Contracts, § 779D, at 
46-47) (emphasis added). 
¶58 Corbin's position that the homeowner is not a third-
party beneficiary is supported by the Restatement (Second) of 
Contracts 
§ 
302 
(1981). 
 
The 
discussion, 
through 
an 
illustration, concludes that the owner is only an "incidental 
beneficiary" of the general contractor's agreement with the 
subcontractor——not a third-party beneficiary.8 
¶59 This discussion of an "incidental beneficiary" is 
consistent with the current law of Wisconsin:  "A third party 
                                                 
8 Illustration 19 from the Restatement (Second) of Contracts 
§ 302 (1981) states an example of an incidental beneficiary:  "A 
contracts to erect a building for C.  B then contracts with A to 
supply lumber needed for the building.  C is an incidental 
beneficiary of B's promise, and B is an incidental beneficiary 
of C's promise to pay A for the building."   
No.  2004AP4.awb 
 
10 
 
cannot maintain an action as a third party beneficiary if under 
the 
contract 
his 
was 
only 
an 
'indirect 
benefit, 
merely 
incidental to the contract between the parties.'"  Pappas v. 
Jack O.A. Nelson Agency, Inc., 81 Wis. 2d 363, 370, 260 N.W.2d 
721 (1978) (quoting Schell v. Knickelbein, 77 Wis. 2d 344, 348-
49, 252 N.W.2d 921 (1977)). 
¶60 Apparently, feeling some unease with the consequences 
of its decision, the majority would now have us recognize a new 
contract theory of recovery in this context.  Although the 
circuit court here dismissed the Lindens' contract action, the 
majority nevertheless suggests that the Lindens could pursue a 
contract action as a third-party beneficiary. 
¶61 Given that the homeowner now can pursue neither a 
traditional tort action nor a traditional contract action, I 
invite in this context the new theory of recovery advanced by 
the majority.  When the issue of whether a homeowner can 
maintain 
a 
third-party 
beneficiary 
action 
against 
a 
subcontractor 
is 
presented, 
the 
majority's 
commitment 
to 
providing such a remedy can be assessed.  We will then be able 
to determine whether its discussion here is more than an 
illusory remedy designed to make the majority's position appear 
more palatable.  
IV 
 
¶62 In 
the 
end, 
the 
majority's 
decision 
excises 
subcontractors from the pool of those who would face tort 
liability and places them safely behind the wall of the economic 
loss doctrine.  Homeowners who were previously without contract 
No.  2004AP4.awb 
 
11 
 
remedies against subcontractors have now lost their direct tort 
claims for economic loss as well.    
¶63 Those dedicated to the unfettered expansion of the 
economic loss doctrine warn of contract law "drowning in a sea 
of tort."  Indeed, that has become their mantra.  Yet, they are 
blind to the excesses of their fervor that results, like here, 
in tort jurisprudence "drowning in a sea of contract."  The law 
is to develop incrementally.  Yet, this recently created 
judicial doctrine has devoured generations of common law. 
¶64 Some courts have declined to adopt the economic loss 
doctrine.9  Others, once advocating its expansion are now 
signaling a retreat.  The Florida Supreme Court, for example, 
readily acknowledged that it has gone too far beyond the 
doctrine's 
original 
purpose. 
 
It 
stated, 
"[u]nfortunately . . . our subsequent holdings have appeared to 
expand 
the 
rule 
beyond 
its 
principled 
origins 
and 
have 
contributed to applications of the rule . . . to situations well 
beyond our original intent."  Moransais v. Heathman, 744 So. 2d 
973, 980 (Fla. 1999). 
¶65 Perhaps a day will come when this court will rein in 
this recent evolution of the economic loss doctrine and "return 
to the doctrine's principled roots."10  Perhaps a day will come 
                                                 
9 See, e.g., Blagg v. Fred Hunt Co., 612 S.W.2d 321 (Ark. 
1981); Jim's Excavating Service, Inc. v. HKM Associates, 878 
P.2d 248 (Mont. 1994). 
10 R. Thomas Cane & Sheila Sullivan, The Future of the 
Economic Loss Doctrine in Wisconsin, 78 Wisconsin Lawyer 5, 63 
(May 2005).   
No.  2004AP4.awb 
 
12 
 
when this court, like the Florida Supreme Court, will realize 
that its holdings "have contributed to applications of the 
rule . . . to situations well beyond our original intent."  Id.  
Unfortunately for homeowners of this state, that day is not 
today.   
¶66 I am authorized to state that Chief Justice SHIRLEY S. 
ABRAHAMSON and Justice LOUIS B. BUTLER, JR. join this dissent. 
 
No.  2004AP4.awb 
 
1