Builders and Contractors Exchange
Weekly Bulletin: 10 Jul 2006
If It Ain't (Completely) Broke, Fix It: Impact of the Economic Waste Doctrine on the Measure of Damages Used in Breach of Contract Cases
By: Michelle Wycinsky
In Virginia, the general rule regarding the measure of damages for breach of contract when a contractor has provided incomplete performance or defective work is the cost of correcting the defective condition, or the “cost measure” of damages. Thus, if the defect is remediable from a practical standpoint, recovery will typically be based on the market price of completing or correcting the performance and this will generally be shown by the cost of getting work done or completed by another person. Kirk Reid Co. v. Fine, 205 Va. 778, 787, 139 S.E.2d 829, 835 (1965).
In Lochaven Company v. Master Pools by Schertle, Inc., 233 Va. 537, 543, 357 S.E.2d 534, 538 (1987), the Supreme Court of Virginia held that the cost measure of damages is appropriate unless the cost to repair would be grossly disproportionate to the benefit(s) to be achieved, or would involve unreasonable economic waste. See also Restatement of Contracts § 346. Consequently, the doctrine of economic waste can potentially limit the owner's right to insist on strict compliance with the contract and, instead, entitle him to the difference between the value of the defective structure and that of the properly constructed structure. Kirk Reid Co., 205 Va. at 787. This is known as the “value measure” of damages. For reference: In Lochaven, the cost to bring the existing structure – valued at $18,000 - within compliance of the original contract would have amounted to $21,500 and would have required substantial demolition of the existing structure. The Supreme Court declined to award Lockhaven the cost of repair.
The bottom line is this: The policy underlying the “cost measure” general rule recognizes the need to avoid economic waste and undue hardship to the defendant contractor when, although the building substantially conforms to the contract specifications, a minor defect exists that does not substantially lower its value. Still, there is no hard and fast rule delineating just what (dollar or percentage) amounts of repair work come within the rubric of “economic waste” and the determination of whether a “cost” or “value” measure of damages will apply may not be readily apparent. In fact, courts in other states have held that the cost of repair amounting to 62% of the original cost to build a structure was not economic waste. However, it appears that the trend behind using the “value measure” of an owner’s damages typically occurs when the defect is irreparable, costs more to repair than to build the original structure, and/or requires substantial demolition of the original structure.
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This article is meant to bring awareness to this topic and is not intended to be used as legal advice.