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Kaloti Enterprises7/8/2005
c., 2000 WI App 194, , 238 Wis. 2d 777, 618 N.W.2d 201, and strict responsibility, Van Lare, 274 Wis. 2d 631, . However, we have not heretofore decided whether and to what extent the economic loss doctrine bars claims for fraud in the inducement, as alleged here. See Tietsworth, 270 Wis. 2d 146, -35. Liability for fraud in the inducement requires that the five elements of an intentional misrepresentation claim for relief, as discussed above, are satisfied, and in addition, that the misrepresentation has occurred before contract formation. See Digicorp, Inc. v. Ameritech Corp., 2003 WI 54, , 262 Wis. 2d 32, 662 N.W.2d 652.
Courts have generally taken three different approaches in determining whether and to what extent there is a fraud in the inducement exception to the economic loss doctrine: (1) no exception; (2) a general exception for all fraud in the inducement claims; and (3) a narrow exception for fraud in the inducement where the fraud is not interwoven with the quality or character of the goods for which the parties contracted or otherwise involved performance of the contract.
In Huron Tool, the defendant had agreed to provide the plaintiff with a computer software system, but the plaintiff later alleged that the system was defective and asserted a number of claims against the defendant, including fraud. Huron Tool, 532 N.W.2d at 543. The Huron Tool decision discussed the policy rationale for the economic loss doctrine, explaining that the doctrine "encourages parties to negotiate economic risks through warranty provisions . . . shield a defendant from unlimited liability for all economic consequences of a negligent act, . . . thus keeping the risk of liability reasonably calculable." Id. at 545 (citations omitted). However, the court held that there was a narrow exception to that doctrine for fraud in the inducement. Id. at 545.
Huron Tool defined fraud in the inducement, for the purpose of describing it as an exception to the economic loss doctrine, as follows:
Fraud in the inducement presents a special situation where parties to a contract appear to negotiate freely----which normally would constitute grounds for invoking the economic loss doctrine----but where in fact the ability of one party to negotiate fair terms and make an informed decision is undermined by the other party's fraudulent behavior.
Id. The court also described a type of misrepresentation that, although it could take place before a contract is entered into and for the purpose of inducing another to enter into the contract, was not included in its conceptualization of the fraud in the inducement exception: "In contrast, where the only misrepresentation by the dishonest party concerns the quality or character of the goods sold, the other party is still free to negotiate warranty and other terms to account for possible defects in the goods." Id. (emphasis added).
The Huron Tool decision characterized the distinction between these two types of fraud as that between fraud that is "interwoven with the breach of contract," which is barred by the economic loss doctrine, and fraud that is "extraneous to the contract," which is not barred by that doctrine. Id. As to fraud that is "interwoven," "the misrepresentations relate to the breaching party's performance of the contract and do not give rise to an independent cause of action in tort." Id. (emphasis added).
The Huron Tool decision concluded that the fraudulent representations alleged by the plaintiff concerned the quality and characteristics of the software system sold by the defendants. Id. at 546. As such, the representations were "indistinguishable from the terms of the contract and wa
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