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Kaloti Enterprises7/8/2005
market for reselling the Kellogg products, took place before Kaloti entered into the May 14, 2001 contract.
Finally, the intentional misrepresentation alleged by Kaloti is extraneous to, not interwoven with, the contract. It does not concern Kellogg and Geraci's performance of the contract with Kaloti, and it does not regard the quality or character of the NutriGrain and Rice Krispie Treat products that Kellogg sold Kaloti. Rather, the alleged misrepresentation concerned a matter whose risk was never contemplated to be a part of the contract to purchase Kellogg's products. The fact that Kellogg and Geraci allegedly knew that Kellogg's change in marketing scheme would largely prevent Kaloti from being able to resell the Kellogg products as a secondary supplier, is not a matter that was dealt with in the contract, nor would one expect it to be dealt with in the contract.
Additionally, this limited fraud in the inducement exception to the economic loss doctrine serves the policies underlying that doctrine. First, the narrow fraud in the inducement exception applied here maintains the fundamental distinction between tort law and contract law. Matters that are expressly or implicitly dealt with in the contract, such as the performance or the quality or character of the goods sold, still must be addressed by contract law. See Daanen, 216 Wis. 2d at 404 (noting that "the individual limited duties implicated by the law of contracts arise from the terms of the agreement between the particular parties").
However, "Wisconsin has a long-standing principle that parties need a background of truth and fair dealing in commercial relationships." Van Lare, 274 Wis. 2d 631, . Where the matter in question falls outside the contract, courts should be able to address a party's failure to act honestly with tort law, even if the parties are engaging in a commercial transaction. See Digicorp, 262 Wis. 2d 32, (observing that "a party engage in fraud should not be allowed to hide behind the protections of the economic loss doctrine"); see also Budgetel Inns, Inc. v. Micros Sys., Inc., 34 F. Supp. 2d 720, 724-25 (E.D. Wis. 1999).
Second, the limited fraud in the inducement exception adopted today promotes the economic loss doctrine's goal of protecting parties' freedom to contract. As to the terms of the contract, as well as those matters that one would expect to be addressed in contract terms, parties are expected to negotiate and will be held to their agreements, as required by the law of contract. See Daanen, 216 Wis. 2d at 407 (" t is more appropriate to enforce [commercial parties'] bargain than to allow an end run around the bargain through tort law." (quotation omitted)).
Tort law will apply only under circumstances, such as the one allegedly before us, where one party induces another to enter into a contract by representing (or failing to disclose) a fact that would be material to the other party's decision to enter into the contract, but that concerns matters extraneous to the contract's terms.
Finally, the economic loss doctrine is meant to encourage "the party with the best understanding of the attendant risks of economic loss, the commercial purchaser, to assume, allocate, or insure against" such risk. Daanen, 216 Wis. 2d at 410. However, where, as here, the purchaser's risk of loss is precipitated by the seller's intentional misrepresentation prior to execution of the contract, and that risk concerns matters extraneous to the contract, it is actually the seller who has the best understanding of the attendant risk of economic loss. The purchaser should not be expected to assume, allocate or insure against the risk of the seller's intentional
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