The Fraud in the Inducement Exception to the Economic Loss Doctrine

Abstract

The dividing line between contract and tort law has always been a difficult one to draw. The sale of a product generally involves two broad concerns. One concern is a private one that contracting parties can agree on the terms of a private sale within defined limits. The second concern is a public concern that the product sold not cause any injury or damage. The economic loss doctrine follows this public/private line of demarcation. The doctrine draws the line between contract and tort based on the type of damages suffered when the product does not meet contract specifications. The economic loss doctrine concludes that if a defective product causes solely economic loss, the dispute is essentially a private matter between the contracting parties and their contract should control their dispute. The public interest is not sufficiently involved to merit tort involvement. On the other hand, if a defective product causes personal injury or other property damage, then the public interest is involved and a tort approach, free of contractual limitations, is most apt. Difficulties arise, however, when one is fraudulently induced to enter into a contract for a product, and only economic loss is incurred. There is no personal injury or other property damage. How does the fraud impact where the line is drawn under the economic loss doctrine? Is the public interest sufficiently involved to invoke tort law, or is this still a private matter between private contracting parties that invokes only contract law? The states have taken a number of different positions on this issue. Most states have adopted the broad fraud in the inducement exception to the economic loss doctrine. The broad exception provides that the fraud is an intentional tort, and as such, the intentional misrepresentation is actionable as a tort, notwithstanding that the contract losses are solely economic. A small minority of states, including recently Wisconsin, has adopted the narrow fraud in the inducement exception to the economic loss doctrine. The narrow exception provides that if the fraudulent inducement relates to interwoven fraud, then the fraud is not actionable under tort law, only contract law. The only fraud actionable under the narrow fraud in the inducement exception is fraud considered to be extraneous to the contract. The purpose of this Article is to examine the narrow fraud in the inducement exception to the economic loss doctrine under Wisconsin case law, statutes, and public policy to determine if it is a sound principle.