Hancock v. Northcutt

Supreme Court of Alaska · Contracts

ContractsConstruction contractsDamagesEmotional distress damagesconstruction defectseconomic wastediminution in valuecost of repair

Facts

The Northcutts orally hired the Hancocks to perform structural concrete work on an earth-sheltered concrete house made of seven joined pods. After delays and disputes over defects, the Hancocks were ordered off the job, and the Northcutts later claimed the house leaked and was structurally unsafe. A jury awarded damages including demolition and rebuilding costs, temporary housing and storage during reconstruction, delay costs, and $175,000 for emotional distress. The jury also found that rebuilding the house to promised condition would be impractical and grossly wasteful, but awarded rebuilding costs under an instruction permitting that award if any one of three conditions existed.

Issue

When defective construction of a house makes repair impractical and grossly wasteful, may a jury nevertheless award demolition and rebuilding costs based on special significance, likely rebuilding, or dangerousness stated disjunctively? Also, may plaintiffs recover emotional distress damages for negligent performance or breach of a house-construction contract absent physical injury?

Rule

In construction-contract cases, the preferred measure of damages is the reasonable cost of completion or repair, but if that measure would be impractical and grossly wasteful, damages are measured by the difference between the value the structure would have had if built as promised and its actual value, plus appropriate consequential damages such as demolition costs. Cost-of-cure damages that greatly exceed diminution in value may be awarded only where there are assurances against unjust enrichment—such as findings that the property has special significance to the owner and that the owner is more likely than not actually to cure, or that the structure is dangerous and the owner is more likely than not actually to cure. Emotional distress damages are not recoverable for negligent infliction without physical injury in this context, and breach of a house-construction contract is not a type of contract where serious emotional disturbance is a particularly likely result.

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In Boise, Lena Ortiz hired Summit Hollow Builders, a local contractor, to build a custom garage apartment. The finished structure has major framing defects, and experts agree that making it conform to the contract would require tearing out most of the existing work at a cost of $420,000, while the difference between the structure's value as promised and as built is $95,000.

If Lena sues for breach of the construction contract and proves no additional special circumstances, what is the proper primary measure of damages for the defective work?

Explanation. The majority rule is that cost of completion or repair is generally preferred, but when that measure would be impractical and grossly wasteful, damages shift to the difference between the value the structure would have had if built as promised and its actual value. On these facts, absent further assurance against unjust enrichment, Lena's primary recovery for the defect is diminution in value, not grossly wasteful rebuilding costs. (Derived from Hancock v. Northcutt (n.d.).)