Imagine that you’re a general contractor responsible for the construction of a large mixed-use development. Now imagine that you mistakenly installed a brand of piping for the plumbing systems that was different from the brand specified by the owner. The pipe you installed was of similar quality to the pipe specified, so you’re thinking no harm no foul. Unfortunately, the owner is particularly litigious and decides to file suit against you for breach of contract hoping to recover damages in the amount it would cost to remove and replace all of the piping with the brand specified by the owner. Is the owner entitled to damages in the amount of the full cost of repair?

Owners are normally entitled to seek the cost of the repairs from the contractor. However, where the cost of repairs is prohibitive or exceeds the diminished value of the facility, measuring damages by the “costs to repair” is not appropriate. In this instance, the accepted measure of damages is the “diminution in value” of the project, which is the difference between the market value of the project as-built and the value had the project been built to contracted specifications.

In our pipe installation example, the cost to repair the defect would clearly be out of proportion to the difference in property value resulting from the defect. As a result, most courts would likely award minimal or no damages to the owner based on the diminution in value, if any, caused by the mistakenly installed off-brand pipes. See, e.g., Jacob & Youngs, Inc. v. Kent, 230 N.Y. 239 (1921).

However, it is vitally important for contractors’ counsel to remember that the contractor bears the burden of presenting evidence of diminution in value damages as an alternative to the owner’s evidence of repair costs.  A recent case decided by the Wyoming Supreme Court serves to remind contractors that failure to provide evidence of diminution in market value could entitle an owner to an award of repair costs, even if it is disproportionate to the lost market value. Legacy Builders, LLC v. Andrews, 2014 Wy. 103, 335 P.3d 1063 (2014); see also John Thurmond & Associates, Inc. v. Kennedy, 284 Ga. 469, 668 S.E.2d 666 (2008).

To present evidence supporting diminution in value requires expert testimony from a professional appraiser. When an owner seeks to recover damages for defective work, therefore, contractors should be prepared to engage a professional appraiser to present evidence supporting an alternative measure of damages where it appears the cost to repair could exceed the diminished value of the project.

For more information on this topic, contact your Construction Law Counsel at Smith, Gambrell & Russell.