#51: Damages for Defective Work
In every lawsuit for breach of contract, both liability (establishing the breach) and resulting damages (the amount of money required to fairly compensate the non-breaching party) must be proven by a preponderance of the evidence. With regard to damages, the law seeks to make the non-breaching party “whole,” i.e., to put him in the financial position he would have enjoyed if the contract had been fully performed. If the contractor is the breaching party by virtue of defects in the work, the measure of damages required to accomplish that goal for the owner is not always obvious. Is cost of correction/completion the right measure? Or is diminished value of the structure the right measure?
The answer is, it depends. “The ordinary measure of damages is the cost of remedying the defective work, but that amount may be withheld if 'physical reconstruction and completion in accordance with the contract (would) involve unreasonable economic waste by destruction of usable property or otherwise.' . . . In that case, the injured party may be awarded the difference between the value the building would have had if constructed as promised and its value as actually constructed.” M. W. Goodell Const. Co., Inc. v. Monadnock Skating Club, Inc., 121 N.H. 320, 322 (1981).
Suppose a house is constructed almost perfectly, except that the required compressive strength of the concrete foundation walls was not met, or the correct rebar was not placed. Sure, the walls are somewhat more likely to crack. But do we really want to make the contractor pay to tear the whole house down and start over? “The defect may be of such a kind as to diminish the value of the house but little, while to make the work conform literally to the contract would involve reconstruction at unreasonable and disproportionate expense.” Danforth v. Freeman, 69 N.H. 466, 469 (1899). An award of damages equal to the cost of correction in such a case would in all likelihood simply be pocketed by the owner, arguably constituting a windfall instead of making him whole.
The determination of whether reconstruction would constitute “unreasonable economic waste” is for the jury to decide. While our Supreme Court has yet to rule on which party has the burden of proof on this issue, other courts suggest that the builder must prove unreasonable economic waste if he wants to avoid the usual repair/replacement measure of damages. Willie's Construction Co., Inc. v. Baker, 596 N.E.2d 958, 962 (Ind.App. 5 Dist. 1992) (“The breaching contractor has the burden of proving that curing defects would cause economic waste and any reasonable doubt will be resolved against him.”); Pennington v. Rhodes, 55 Ark.App. 42, 55, 929 S.W.2d 169, 176 (Ark.App. 1996) (“The seller-builder of the defective new dwelling has the burden of proving that the cost-of-repairs standard is improper.”). If that burden is met, the plaintiff's lawyer had better be prepared to prove diminished value as an alternative measure of damages to the cost of correction. Two experts – one to opine on cost of correction and another to opine on values – may need to be retained.
One rough way to gauge “unreasonable economic waste” is by comparing the cost of repairs/replacement to the original contract price. If such costs are a small fraction of the contract price, chances are that they will be allowed as a proper measure of damages. That was true in the M.W. Goodell case referenced above (“In this case, the cost of doing that work is less than five percent of the total contract price. We agree with the master that the repairs are not economically wasteful and that such an award is proper.”). Conversely, if reconstruction costs would approximate or even exceed the original contract price, closer scrutiny of the net benefit of reconstruction should be expected.
The bottom line is that making an injured party whole requires a common sense approach, fact-specific rather than one-size-fits-all. If the rationale for a rule doesn't fit the facts, the rule will be discarded in favor of one that does.