Court Opinion

ID: 9658728
Source: CourtListenerOpinion
Date Created: 2023-08-23 21:10:09.793962+00
Date Added: 2024-06-11T18:13:58.323859
License: Public Domain

DIANE S. SYKES, J.
¶ 73. (concurring in part, dissenting in part). I would not adopt a fraud exception to the economic loss doctrine. The economic loss doctrine precludes commercial contracting parties from recovering tort damages for purely economic losses associated with the contract relationship. That is, the doctrine restricts commercial contracting parties to contract remedies when they allege an economic loss stemming from the contract relationship.1
*64¶ 74. As the lead opinion notes, the economic loss doctrine promotes three important policies: 1) it preserves the fundamental distinction between contract and tort law; 2) it protects the freedom of commercial contracting parties to allocate economic risk by contract; and 3) it encourages the parties best situated to assess the risk of economic loss — the contracting parties themselves — to assume, allocate, or insure against that risk. Lead op., ¶ 35. See also Wausau Tile, Inc. v. County Concrete Corp., 226 Wis. 2d 235, 247, 593 N.W.2d 445 (1999) (citing Daanen & Janssen, Inc. v. Cedarapids, Inc., 216 Wis. 2d 395, 403, 573 N.W.2d 842 (1998)).
¶ 75. "From its inception the economic loss doctrine has been 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." Danaan & Janssen, 216 Wis. 2d at 403-04. The distinction between contract and tort law is based fundamentally on their different concepts of duty: "contract law rests on bargained-for obligations, while tort law is based on legal obligations." Wausau Tile, 226 Wis. 2d at 247. These differences in the source and nature of duty in contract and tort law produce different rules regarding remedy and damages (punitive damages are not recoverable in contract actions, for example), and the economic loss doctrine exists in large part to keep each in its proper sphere.
¶ 76. The creation of a fraud exception to the economic loss doctrine undermines these important *65purposes and distinctions. A contracting party who alleges that he was fraudulently induced to enter into the contract already has adequate contract remedies: he can affirm the contract and seek damages for breach, or he can pursue the equitable remedy of rescission and seek restitutionary damages. See Harley-Davidson Motor Co. v. Powersports, Inc., 319 F.3d 973, 978 n.7 (7th Cir. 2003) (collecting Wisconsin cases and holding that the economic loss doctrine does not apply to an equitable action in contract for rescission/restitution). A contract fraudulently induced is void or voidable; a party fraudulently induced to enter into a contract "has the election of either rescission or affirming the contract and seeking damages." First Nat'l Bank & Trust Co. of Racine v. Notte, 97 Wis. 2d 207, 225, 293 N.W.2d 530 (1980); see also Eklund v. Koenig & Assocs., 153 Wis. 2d 374, 381, 451 N.W.2d 150 (Ct. App. 1989) ("When a party discovers an alleged fraud ... he may affirm the contract and sue for damages, or he may disaffirm and seek restitution."). This election of remedies requirement does not confer upon the aggrieved party the option of pursuing either contract or tort remedies, but, rather, involves a choice between two different contract remedies: damages for breach or rescission/restitution.2
¶ 77. Notte was decided before this court adopted the economic loss doctrine in Sunnyslope Grading, Inc. v. Miller, Bradford & Risberg, Inc., 148 Wis. 2d 910, 437 *66N.W.2d 213 (1989). In Notte, this court specifically-distinguished between tort remedies for misrepresentation, and contract remedies for breach or rescission in the context of a fraudulently induced contract. Notte, 97 Wis. 2d at 212-14. The court concluded that tort remedies are inapplicable, and required an election of remedies in contract. Id. at 225-26.
¶ 78. The court of appeals' decision in Douglas-Hanson Co. v. BF Goodrich Co., 229 Wis. 2d 132, 598 N.W.2d 262 (Ct. App. 1999), was based in part upon a misinterpretation of the election of remedies doctrine. There, the court held that "[t]he economic loss doctrine does not apply to fraudulently induced contracts because the person fraudulently induced to enter the contract can affirm or avoid the contract, and in so electing, has the option of selecting tort or contract damages." Id. at 145. But the election to either affirm or rescind a fraudulently induced contract is an election between two different contract remedies, one at law for breach and the other in equity for rescission and restitution; it is not an election between tort and contract remedies. Notte, 97 Wis. 2d at 225-26.
¶ 79. While the lead opinion partially overrules Douglas-Hanson and prefers a narrower fraud exception than that articulated by the court of appeals, lead op., ¶ 51, it nevertheless perpetuates that decision's conceptual confusion. Lead op., ¶ 67. The lead opinion concludes that there is a fraud in the inducement tort but disallows benefit-of-the-bargain tort damages. See Wis JI — Civil 2405. The lead opinion apparently restricts recovery in this new tort to that which would be allowed in an equitable action in contract for rescission and restitution, although it does not directly say so.
¶ 80. I certainly do not disagree with this outcome, because I would leave the parties to their con*67tract remedies in the first place. However, the lead opinion's hybrid cause of action blurs rather than preserves the distinction between tort and contract remedies.
¶ 81. The lead opinion's narrow fraud exception does less damage to the second and third purposes underlying the economic loss doctrine, because it bars a tort claim for fraud in the inducement concerning matters that are "interwoven with" or "expressly or impliedly dealt with in the contract." Lead op., ¶¶ 47-48. I agree that the facts of this case do not support a claim under the lead opinion's narrow exception to the economic loss doctrine. As a general matter, however, we should refrain from attempting to articulate new legal rules where the factual predicates to do so are not present in the case. See Bicknese v. Sutula, 2003 WI 31, ¶ 66, 260 Wis. 2d 713, 660 N.W.2d 289 (Sykes, J., dissenting). Articulating a new common law rule when the facts of the case do not warrant doing so is essentially an exercise in hypothetical decisionmak-ing.
¶ 82. The facts of this case do not warrant the creation of a fraud-in-the-inducement exception to the economic loss doctrine, even one that is narrowly drawn. Digicorp had a pre-existing, ongoing, terminable-at-will distributorship agreement with Ameritech, and there is no evidence that the June 1, 1996, renewal of that agreement was induced by Ameritech's failure to disclose what it knew about the past forgeries of an employee that Digicorp's subdis-tributor, Bacher, had already hired. That is, there is no causal link between the fraudulent nondisclosure and the June 1, 1996, contract, the termination of which provided the premise for the award of lost profits and punitive damages in this case. There is no factual basis *68for the recognition of a fraud exception to the economic loss doctrine in this case, but the lead opinion purports to recognize one anyway.3
¶ 83. Contracting parties can protect themselves against economic losses associated with pre-contract misrepresentations by appropriate contract language, and, in the event that one party's fraud frustrates the other party's ability to do so, contract law renders the contract voidable at the option of the aggrieved party and allows recovery of restitution. I would not adopt a fraud-in-the-inducement exception to the economic loss doctrine. In other respects, I concur in the majority opinion.

In Danaan & Janssen, Inc. v. Cedarapids, Inc., 216 Wis. 2d 395, 414-15, 573 N.W.2d 842 (1998), this court held that the economic loss doctrine applies in the absence of privity of contract: "whether or not privity of contract exists between the *64parties, a commercial purchaser of a product cannot recover solely economic losses from the manufacturer under tort theories of negligence or strict liability." Id. at 414-15.1 agree with the majority's extension of this holding to the distributor/subdistributor here. Lead op., ¶¶ 63-66.

 Restitutionary damages are recoverable in an equitable action in contract for rescission of a contract fraudulently induced. Head & Seemann, Inc. v. Gregg, 104 Wis. 2d 156, 166-67, 311 N.W.2d 667 (Ct. App. 1981). These include " 'any sums that are necessary to restore [the party fraudulently induced] to his position prior to the making of the contract.'" Id. at 166.

 Because of the nonparticipation of two justices and the split decision among the participating justices, this case accomplishes only the rejection of the broad fraud-in-the- inducement exception contained in Douglas-Hanson Co. v. BF Goodrich Co., 229 Wis. 2d 132, 598 N.W.2d 262 (Ct. App. 1999). Neither the broad nor the narrow fraud exception has the support of a majority of this court.