Measuring Damages for Breach of Contract

A recent British Columbia Court of Appeal decision highlighted what is acknowledged to be a frequent problem in construction cases and “one that has admittedly no easy solution”.  The problem: how to measure damages for breach of a construction contract; in this case, where deficiencies are alleged?

FACTS

A contractor built a home for an owner in 1998/99, experiencing the unfortunately normal lack of signed change orders, delays and deficiencies (which were, as usual, not identified until the end of the job).  The homeowner, ignoring the “walk-through” process identified in a construction contract, hired an architect to prepare a field review report that, conveniently, identified numerous deficiencies estimated to cost approximately the same amount as the contractor had remaining payable; around $60,000.  The contractor acknowledged some deficiencies, having hired his own inspector, but estimated the cost to fix them at about $7,000.  Unresolved, the matter proceeded to court where the trial judge concluded in 2004 that he preferred the contractor’s evidence and found that the cost of remedying deficiencies is not recoverable were a homeowner “does not intend to rectify the defective work, or where he would be acting unreasonably or oppressively in doing so”.  The homeowner appealed the decision.

FINDING

More than eight years after the homeowner had moved into his house (and after considerable money was spent by both sides on legal fees) the Court of Appeal, in agreeing with the trial judge and finding for the contractor, made some helpful pronouncements:

  1. Whether a court uses diminution of value or the cost of repairs as the proper measure of damages depends upon the circumstances of each case.  The real question is: What damage has really been suffered from the breach of contract?
  2. The party wronged must mitigate his or her damages by taking reasonable steps that are in proper proportion to the wrong.  In other words, incurring enormous expense for demolition and rebuilding of an incorrectly constructed part of a home would be unreasonable and unacceptable as a proper measure of damages.
  3. “The cost of repairs may well be an appropriate measure... if a breach of contract is established but there has to be well-defined evidence of cost”.  Since the homeowner had done little, if anything, to remedy a number of the alleged deficiencies, or properly document any costs of having done so, the court was allowed to draw the inference that the homeowner had no present intention of repairing this deficient work.

LESSONS LEARNED

Whenever a contract is breached get advice on how to respond reasonably and carefully.  Even if you are the wronged party, you must do your best to keep your damages in check (mitigation), and ensure that you obtain appropriate expert evidence and maintain accurate documentation to prove your damages.

This article was written by Robert G. Kuhn, a lawyer who practices in construction law at the law firm of Kuhn LLP. It is only intended as a guide and cannot cover every situation. It is important to get legal advice for specific situations. If you have questions or comments about this case or other construction law matters, please contact us at 604-864-8877.