Legal: Damages for Breach of Contract

When a construction contract is breached by a contractor, the usual remedy is for the owner to receive damages. How will the damages generally be measured? What about circumstances where the building was com­pleted contrary to the specifications in the contract, but is only marginally less valuable?

The general approach to damages when a building contract is not fulfilled in accordance with original specifications is to place the owner in the position she or he would have been in had the contract never been breached. This is referred to as the “costs of performance” or “cost of reinstatement.” The owner would recover the costs of rectifying those parts of the building that are not to specifications.

So if the contractor installs lami­nate flooring when the contract specifies that the flooring must be hardwood, the owner is awarded the cost of replacing the laminate with hardwood. In other words, the damages under the “cost of reinstate­ment” method amount to the cost of remedying the deficiency.

This general approach is not always fol­lowed. In certain circumstances, an award of damages is based on other methods of measurement. When the owner’s personal preferences are not met, the court may award a nominal amount based on the loss of amenity. Alternatively, as illustrated below, damages may be awarded based on the diminution of the capital value of the property caused by the breach.

A recent Canadian case confirmed that where a contract has been breached and the court is determining the measure of damages, it may ask, “Is it reasonable to award damages equal to the cost of rein­statement given the nature of the defect?” (Diotte v. Consolidated Development Co, 2014 NBCA 55).

In this case, under the construction contract, the builder agreed to erect an office building and garage for the owner in accordance with certain specifications required by the future tenant that agreed to lease the building after completion. As-built, the garage was 70 sq. ft. less than was specified in the contract. This resulted in a 4.33 per cent loss of leasable floor space. The tenant of the building accepted the premise as-built and paid the pre-nego­tiated rent. No appraisal evidence was pro­vided to allow for a measurable estimate of any effect on the property’s market value.

In these circumstances, following the general approach to measuring damages, the contractor would have to pay the cost to rectify the breach, increasing the square footage of the garage by 70 sq. ft. at an estimated $53,932.51.

The New Brunswick Court of Appeal declined to measure the damages based on the cost of reinstatement, finding that awarding damages equivalent to the amount of remedying the breach would be unreasonable. Instead, the Court conclud­ed that the owner was entitled to a nominal damages award of $2,000 for lost expecta­tions or a presumed diminishment in value.

An earlier judgment in British Colum­bia, 514953 B.C. Ltd. v. Leung, 2007 BCCA 114 provides another example. This case was regarding the construction of a residential home. Upon completion of the house, the owner refused to pay the final invoice until all alleged deficiencies in con­struction were remedied to his satisfaction. The builder admitted to some deficiencies, but stated that the majority were due to either authorized changes or matters that caused the homeowner no loss.

In this case the diminution in value test was again adopted. The Court looked at the lack of evidence put forward regarding the cost of remedying many of the alleged de­ficiencies and the fact that the owner, over several years, had failed to remedy a number of them – signaling that he had no intention of remedying the deficiencies. There was an agreement between both parties that a column was missing from the house. For this item, as in the case above, the Court held that the costs of demolition and reconstruc­tion would render construction of the miss­ing item unreasonable. Further, there was no evidence to indicate the effect on the quality or character of the house.

In conclusion, although generally the remedy awarded to an owner when a con­tractor has breached its contract is to award the cost of making good the defects and omissions, this may not always be the result. More specifically, Canadian courts have in­dicated that where the cost of rectifying the breach would be disproportionate in light of the defect, the courts may award nominal damages based on diminishment in value.

(This article is for information purposes only and may not be relied on for legal advice.)

Lauren E. Kristjanson and Grant H. May­ovsky are lawyers at the law firm of Borden Ladner Gervais LLP. They both practice in the area of commercial litigation with an emphasis on contract and construction disputes.