Wisconsin Supreme Court Rules that Economic Loss Doctrine
Bars Tort Claims for Intentional Misrepresentations
in Real Estate Transactions

Two Bills Introduced to Overturn Court’s Decision

By Andrew Cook

The Hamilton Consulting Group

Jan. 29, 2009

© 2009 The Hamilton Consulting Group

The Wisconsin Supreme Court in July 2008 held (4-3) that the economic loss doctrine bars common-law claims for intentional misrepresentation in real estate transactions. (Below v. Norton, 208 WI 77, 310 Wis.2d 713, 751 N.W.2d 351) As discussed in greater detail below, legislation already has been introduced this session in both the Senate and the Assembly seeking to overturn the court’s decision.

Wisconsin Supreme Court’s Decision
In Below a home purchaser brought a tort claim for intentional misrepresentation for a defect of the home that was not disclosed in the seller’s property condition report. The Wisconsin Supreme Court ruled that the “economic loss doctrine” barred the purchaser’s tort claim for intentional misrepresentation. (The economic loss doctrine is a judicially created doctrine which seeks to preserve the distinction between a contract and tort.) 

Writing for the majority, Justice Patrick Crooks, joined by Justices David Prosser, Patience Roggensack, and Annette Ziegler, ruled that because the purchaser’s alleged damage - the house’s inadequate value - was an economic value, the economic loss doctrine barred a common-law tort claim for intentional misrepresentation.

In reaching its decision, the majority pointed out that the purchaser had other remedies. For example, the court noted that the purchaser could sue under Wis. Stat. § 100.18, which protects purchasers from a seller’s false representations in the sale of real estate. In partially reversing the lower court - which had dismissed the plaintiff’s statutory claim - the Wisconsin Supreme Court returned the case to the trial court explaining that the purchaser would be able to recover on her statutory false advertising claim if she was able to prove her allegations at trial.

The court also declined to address whether the economic loss doctrine bars claims under Wis. Stat. § 943.20(1)(d) because the record before the lower court was unclear as to why the claim was dismissed. The Supreme Court remanded the case back to the trial court instructing the lower court to clearly state its decision as to the second statutory claim.

The court noted that, in addition to statutory remedies, the purchaser had a potential contractual remedy. According to the court:

…if the Nortons [the sellers] knew about the defect with the sewer line and failed to disclose the defect, as required by these statutes, then the Nortons may very well have breached the contract’s terms. As a result, in addition to her pending Wis. Stat. § 100.18 claim, Below might normally have been in a position to pursue a breach of contract claim against the Nortons for which contractual remedies would have been available.

The court ruled, however, that the purchaser failed to allege a breach of contract claim in her original complaint, thus that claim was not before the court.

By finding that the economic loss doctrine barred the purchaser’s tort claim, the court discussed the long line of cases applying the economic loss doctrine in a variety of contexts, including cases involving construction of residential homes[1] and noncommercial real estate transactions.  

In her dissent, Justice Ann Walsh Bradley, who was joined by Chief Justice Shirley Abrahamson and former Justice Louis B. Butler, opined that based on the majority’s decision, a person selling a home “can look the buyer in the eye, lie about the condition of the home, and escape legal consequences in tort for the lie because of the economic loss doctrine.”

The dissenting opinion argued that the economic loss doctrine should not apply to home purchases because: 1) such purchases are not made between commercial parties, 2) a residential real estate transaction is not a contract for a product, and 3) residential real estate transactions are protected by neither manufacturer warranties nor the Uniform Commercial Code.

Legislative Proposals – Adding a Tort Cause of Action for Intentional Misrepresentation
Two bills have been introduced as a result of the Wisconsin Supreme Court’s decision. Senate Bill 9 and Assembly Bill 6, if enacted, would amend Wis. Chap. 895 by adding a tort cause of action for an intentional misrepresentation made by the seller of real estate.

The bills would give purchasers the ability to recoup not only the economic value of the home, but also punitive damages. (Statutory and contractual remedies do not allow punitive damages, but as mentioned above, do provide for attorneys’ fees.) Both bills recognize that there are additional remedies already available even though the purchaser and the dissenting justices in the Below case argued that purchasers are not currently protected. (The opening sentence of both bills begin with the following language: “In addition to any other remedies available under law…”)

While SB 9 and AB 6 are narrowly drafted, if enacted, the bills would lead to an erosion of the economic loss doctrine. As noted in the majority’s opinion, the economic loss doctrine is a well established doctrine that has been applied in similar cases.

In addition, if the bills are enacted, plaintiffs will have a greater incentive to bring tort actions and seek punitive damages as a result of two decisions issued by the Wisconsin Supreme Court in 2005 which weakened the punitive damage statute. In Strenke v. Hogner, et al. and Wischer et al. v. Mitsubishi Industries America, Inc. et al., the Wisconsin Supreme Court was asked to interpret Wis. Stat. § 895.043(3), which sets the standard of conduct for determining whether a plaintiff is entitled to punitive damages.

For more information on these cases, please see Jim Hough’s analysis.

Hamilton Consulting will continue to track SB 9 and AB 6 and provide updates throughout the legislation session as to their progress.