American Standard v. Schectman

Appellate Division of the Supreme Court of New York, Fourth Department · Contracts

ContractsDamagesConstruction contractsCost of completion vs. diminution in valuecontract damagesconstruction contractcost of completiondiminution in value

Facts

Plaintiffs agreed to convey buildings, structures, and most equipment from their former pig iron plant to defendant, a demolition and excavating contractor, for $275,000 and defendant's promise to remove the equipment, demolish the structures, and grade the property as specified. The contract required removal of all foundations, piers, headwalls, and other structures, including subsurface structures, to approximately one foot below the specified grade lines. Evidence showed substantial deviation from the required grade and the continued existence of walls, foundations, and other structures above grade, and defendant maintained that the contract did not require him to remove all subsurface foundations. Plaintiffs' expert estimated the cost of completion at $110,500, and the jury awarded $90,000.

Issue

When a demolition contractor fails to perform promised grading and removal work, is the proper measure of damages the cost of completion or the difference in the property's market value with and without the promised performance? More specifically, does the economic-waste or substantial-performance exception require use of diminution in value here?

Rule

The general measure of damages for breach of a construction contract is the reasonable cost of replacement or completion as the direct, natural, and immediate consequence of the breach and as within the parties' contemplation at contracting. Diminution in value is used only where there has been substantial performance in good faith and correcting the defects would cause unreasonable economic waste, typically where the defect is irremediable or repair would require substantial destruction of the work. A contractor seeking the diminution-in-value measure must not have intentionally breached and must show substantial performance made in good faith.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

In Cleveland, Orion Metals sold a shuttered warehouse complex and its salvageable machinery to Mason Pike, a demolition contractor, for cash plus Pike's promise to remove all slabs, footings, and visible masonry and leave the parcel graded two feet below a stated line. Pike removed the buildings but left large concrete pads and retaining walls protruding above grade. The owner proves completion will cost $140,000, while experts disagree whether the finished work would increase market value by more than $8,000.

If the owner sues for breach, what is the proper measure of damages?

Explanation. The majority states that in the usual case of defective or incomplete construction performance, the injured party recovers the reasonable cost of replacement or completion. A mere disparity between completion cost and added market value does not itself amount to economic waste. Because the contractor simply left promised grading and removal work undone, the proper measure is cost of completion.