Any experienced contractor has encountered a situation where its work has been called into question.
In most instances, these matters are resolved on the site, and repairs are made to correct the problem. But, what happens when the costs of repair are significant and, although the contractor admits a defect exists, it argues the end product will still function and serve the purpose for which it was intended? If the contractor is correct, is it nevertheless liable for the costs of performing the expensive repair work?
When a breach of contract involves defective work, the proper measure of damages is the cost of repair. An exception sometimes applies when repair or replacement of defective work leads to unreasonable economic waste. If the repair constitutes economic waste, the proper measure of damages is the difference in market value between the property with the nonconforming work and the property with properly performed work. A recent case, although involving residential work, illustrates the economic waste doctrine.
Short v. Greenfield Meadows Assocs., 2008 WL 2589659 (Ohio App. 2008) involved a contract between a homeowner and a concrete contractor under which the contractor agreed to remove an asphalt driveway and replace it with one constructed of concrete. At completion of the project, the parties were in disagreement over whether the contractor properly backfilled and graded the perimeter of the driveway, and therefore, the homeowner withheld money from the final payment to cover the costs of having that work completed. The contractor filed a mechanic’s lien and subsequently filed a lawsuit to enforce the lien. In the lawsuit, the owner filed a counterclaim for not only the backfill and grading, but also for the full costs of removing and replacing the concrete due to spalling and cracking that had occurred several months after the contractor placed the concrete.
At trial, the homeowner presented an expert who testified that the spalling of the concrete was the result of improper finishing and curing by the contractor. The expert also testified that the cost of removing and replacing the concrete was approximately $29,000. The contractor did not contest the existence of spalling or that it was at fault. Rather, through its own expert, the contractor argued that the spalling was merely cosmetic and the concrete was still structurally sound and capable of performing its intended function.
Consequently, the contractor argued that removal and replacement was an extreme remedy that constituted economic waste and the more appropriate measure of damage is the diminution of value of the property. In this regard, the contractor presented a real-estate expert who opined that although the concrete was an aesthetic concern, it did not materially affect the nearly $600,000 value of the property. The homeowner—apparently unprepared for the economic-waste argument—did not present expert testimony on the diminution-of-value issue and instead insisted that the concrete required removal and replacement. The trial court ruled for the contractor, and the homeowner appealed.
On appeal the Ohio Court of Appeals for the Fourth District examined similar facts from two previous cases in Ohio involving economic waste. In the first one, the appeals court determined that economic waste would not occur and, thus, affirmed the trial court’s decision to award the cost to repair a driveway, even though the damage award exceeded the original contract price. In that case, the driveway the contractor installed caused water to run into the garage, and the court found that to correct the water problem, the driveway had to be removed, graded and redone. The court thus concluded that because the driveway failed to function properly due to water constantly running into the garage, the cost to repair was not grossly disproportionate to the good to be attained.
In the second case, the court determined that unreasonable economic waste would not occur to award the cost to repair masonry work. The evidence showed that in addition to the aesthetic problems the mortar color presented, bricks were missing, and the mortar was so weak in areas that it would eventually deteriorate and cause structural problems.
The Appeals Court observed that unlike the two previous cases, evidence at this trial showed that the driveway was functional and structurally sound. Consequently, it concluded that the trial court’s failure to award the homeowner damages for the cost of replacing the driveway was not against the manifest weight of the evidence. R&B