CALCULATING DAMAGES IN CONSTRUCTION DEFECT CASES
By Attorney Randall J. Andersen
August, 2012
By Attorney Randall J. Andersen
August, 2012
Disclaimer: The information contained on this page is not legal advice. The information provided on this website is for general informational purposes and is not necessarily updated to account for changes in the law. You should consult with an attorney for legal advice regarding your individual circumstances.
Case law decided by judges and appellate courts over the past 120 years provides the rules for calculating damages awarded to property owners in construction defect lawsuits.
A property owner who brings a lawsuit for construction defects seeks an award of money in compensation for the failure of the contractor to comply with its contractual obligations. In the usual case, the measure of damages is the cost of repairs. The court awards a sum of money which will be required to repair or replace the construction defects.
However, there are exceptions to the “cost of repair” rule. The courts have recognized that in some cases repairing or replacing construction defects would constitute “economic waste.” If repairing the construction defect would result in “unreasonable destruction of the work” or if the cost of the repairs is “materially disproportionate to the value of corrections” then the court has the option of awarding damages based on the “diminished value” rather than the cost of repair. The diminished value is the difference between the value that the building would have had if it had been properly constructed, and the value of the building with the construction defect.
Calculating damages under the economic waste doctrine using the diminished value rule will frequently result in a lower damages award to the owner. The economic waste doctrine has been recognized by the courts in Wisconsin for more than 100 years. It was originally known as the “diminished value rule.” Now it is known as the economic waste doctrine.
One of the best known early cases involving the economic waste doctrine was decided by Justice Benjamin Cardozo, a well known and respected appellate court justice from New York. The name of the case was Jacob & Youngs, Inc. v. Kent, which involved plumbing installed at a “country residence.” The plumber used pipe which did not comply with what had been requested by the owner. The court awarded damages based on the diminution in value of the property (rather than the cost of repair), because the pipe used by the plumber was comparable in quality and appearance to what had been requested by the owner, and because requiring replacement would result in extensive demolition to the completed building, at great expense. The court emphasized that the cost of replacement was “grossly and unfairly out of proportion to the good to be attained.”
Part of the rationale for the economic waste doctrine is that awarding damages based on the cost of repair will, in some circumstances, lead to an economic windfall to the property owner. The concern is that in some cases, if the property owner is awarded the full cost of repair or replacement, he may simply pocket the damages award without actually making the repair or replacement.
A contractor cannot always count on the option of having damages calculated based on the diminished value method, and there are no hard and fast rules as to when the rule will be applied. For example, the diminished value method probably will not be applied if the repairs are required because of a dangerous or hazardous condition, or if the defect or deficiency in the work resulted from the contractor’s bad faith. Also, if the property owner actually makes the repair or replacement prior to or during the litigation, the windfall rationale will probably not apply, in which case the court may be more likely to award damages based on the cost of repair/replacement.
A property owner who brings a lawsuit for construction defects seeks an award of money in compensation for the failure of the contractor to comply with its contractual obligations. In the usual case, the measure of damages is the cost of repairs. The court awards a sum of money which will be required to repair or replace the construction defects.
However, there are exceptions to the “cost of repair” rule. The courts have recognized that in some cases repairing or replacing construction defects would constitute “economic waste.” If repairing the construction defect would result in “unreasonable destruction of the work” or if the cost of the repairs is “materially disproportionate to the value of corrections” then the court has the option of awarding damages based on the “diminished value” rather than the cost of repair. The diminished value is the difference between the value that the building would have had if it had been properly constructed, and the value of the building with the construction defect.
Calculating damages under the economic waste doctrine using the diminished value rule will frequently result in a lower damages award to the owner. The economic waste doctrine has been recognized by the courts in Wisconsin for more than 100 years. It was originally known as the “diminished value rule.” Now it is known as the economic waste doctrine.
One of the best known early cases involving the economic waste doctrine was decided by Justice Benjamin Cardozo, a well known and respected appellate court justice from New York. The name of the case was Jacob & Youngs, Inc. v. Kent, which involved plumbing installed at a “country residence.” The plumber used pipe which did not comply with what had been requested by the owner. The court awarded damages based on the diminution in value of the property (rather than the cost of repair), because the pipe used by the plumber was comparable in quality and appearance to what had been requested by the owner, and because requiring replacement would result in extensive demolition to the completed building, at great expense. The court emphasized that the cost of replacement was “grossly and unfairly out of proportion to the good to be attained.”
Part of the rationale for the economic waste doctrine is that awarding damages based on the cost of repair will, in some circumstances, lead to an economic windfall to the property owner. The concern is that in some cases, if the property owner is awarded the full cost of repair or replacement, he may simply pocket the damages award without actually making the repair or replacement.
A contractor cannot always count on the option of having damages calculated based on the diminished value method, and there are no hard and fast rules as to when the rule will be applied. For example, the diminished value method probably will not be applied if the repairs are required because of a dangerous or hazardous condition, or if the defect or deficiency in the work resulted from the contractor’s bad faith. Also, if the property owner actually makes the repair or replacement prior to or during the litigation, the windfall rationale will probably not apply, in which case the court may be more likely to award damages based on the cost of repair/replacement.