While the cost of performing the work to make good the defects is a measure frequently applied, it is not one which must be applied and has been authoritatively said not to be the ordinary measure in certain cases.

Homeowner recovers only nominal damages for deficiencies not corrected before Trial

by Michael MacKay

Building contracts • Owner’s damages for deficient work • Measure of damages • Rectification cost not appropriate measure for deficiencies owner does not intend to rectify

514953 B.C. Ltd. (c.o.b. as Gold Key Construction) v. Leung

On September 23, 1998, a homeowner, Mr. Yin Sing Leung, hired a contractor, 514953 BC Ltd. also known as Gold Key Construction, to build a house in Burnaby, British Columbia for $272,800.

The contract said that: after Burnaby issued the occupancy permit, Mr. Leung’s architect would prepare a deficiency list; Gold Key would have 30 days to correct the deficiencies; in the meantime, Mr. Leung would be entitled to withhold the cost of remedying defects plus 50 per cent as a deficiency holdback; and if Gold Key didn’t correct the deficiencies, Mr. Leung could retain another contractor to do so.

In August 1999, Burnaby issued an occupancy permit, and Gold Key sent Mr. Leung its final invoice, for $67,493.15.

Rather than follow the contract, Mr. Leung told Gold Key he would not pay any amount until all deficiencies were remedied. Rather than have his project architect prepare a deficiency list, Mr. Leung retained another architect to do so. It listed about 40 deficiencies with an estimated repair cost of $62,000.

In response, Gold Key retained its own expert, who found 24 deficiencies that would cost $6,600 to fix. Gold Key filed a builder’s lien for just over $60,000: its outstanding invoice minus $6,600.

After a five-day trial, Justice Goepel of the British Columbia Supreme Court gave judgment in December 2004.

The Law of Damages and the Trial Judge’s Decision

In 1848, the English Exchequer Court decision Robinson v. Harman articulated the general rule for calculating damages for breach of contract: “…he is, so far as money can do it, to be placed in the same situation … as if the contract had been performed.”

Gold Key’s failure to perform the work precisely as specified in the contract is a breach of contract. Mr. Leung is clearly entitled to a deduction for damages for the deficiencies.

The not-quite $64,000 question was how to determine the proper measure of damages. The law provides two options:

• rectification cost — the cost to do the work as specified in the contract; or
• an amount equal to the diminution in the property’s market value because of the deficiencies.

The homeowner, Mr. Leung, argued that the cost to rectify the deficiencies was the proper measure of damages: “If [Gold Key] had properly performed the contract, the [deficiencies] would have been constructed in accordance with the contract specifications.”

The damages should be the amount required to make the house exactly as specified — namely $62,000.

Justice Goepel disagreed, citing the British Columbia Court of Appeal’s opinion in the 1987 case Strata Corp. NW 1714 v. Winkler:

The fallacy in that analysis is that it equates the amount required to bring the building up to specification with the general measure of damages. While the cost of performing the work to make good the defects is a measure frequently applied, it is not one which must be applied and, indeed, has been authoritatively said not to be the ordinary measure in cases of this kind. [Emphasis added.]

The authority that diminution in value is the ordinary measure is the 1924 Supreme Court of Canada decision in Cunningham v. Insinger: “…the measure of damages for breach by a defendant of a contract to perform work on the plaintiff’s land is the actual pecuniary loss … i.e., the difference between what would have been the value of the premises had the work [contracted] for been done and their value with it unperformed.”

Justice Goepel relied on precedent decisions for guidance on when to apply which alternative. He said: “In McGarry v. Richards, Ackroyd & Gall Ltd., …Davey J. (as he then was) held that the cost of re-instatement is not the proper measure of damages where the owner does not intend to rectify the defective work, or where he would be acting unreasonably or oppressively in doing so.” [Emphasis added by the court.]

There was no evidence that the deficiencies made the house worth less than if Gold Key had built it strictly in accordance with the specifications. Justice Goepel refused to award the homeowner $62,000 to correct deficiencies, saying that Mr. Leung:

…has now occupied the premises for more than five years. He has not remedied any of the alleged deficiencies and there is no evidence that he intends to do so. The cost of remedying the… claims would clearly exceed any diminution in value.

Justice Goepel only allowed Mr. Leung the $6,700 credit that Gold Key had already conceded, plus a $2,000 penalty for delay (in accordance with the terms of the contract) for Gold Key’s two months’ delay in completing the house. He awarded Gold Key damages of $58,876.15, plus interest.

Mr. Leung appealed.

The Court of Appeal’s Decision

The issue of which alternative to apply is a question of law, so the Court of Appeal had to satisfy itself that Justice Goepel’s choice was not simply reasonable, but was in fact the correct one. The Court of Appeal thus looked very closely and thoroughly at the legal principles and precedents.

The Court of Appeal cited the observation in the 1993 British Columbia Supreme Court decision Strachan v. Barton that: “[t]here is no inflexible rule dictating the application of … the cost of performance test” or “the diminution of value test as the primary prima facie measure of damages for non-performance or imperfect performance of a contract to build on another’s land”, although Canadian courts tend to favour the latter.

The Court of Appeal also noted that, as Viscount Haldane of the English House of Lords said in British Westinghouse Electric and Manufacturing Co Ltd v. Underground Electric Railways Co of London Ltd. in 1912: “The quantum of damage is a question of fact, and the only guidance the law can give is to lay down general principles which afford at times but scanty assistance in dealing with particular cases.” [Emphasis added by the court.]

The Court of Appeal carefully looked at two English decisions where homeowners claimed the cost to perform work not done.

In Radford v. de Froberville, the contract required the defendant to erect a substantial brick wall. The defendant did not build the wall, and the homeowner sued for the cost to build the wall as specified. The defendant argued that its failure to build the wall had not diminished the value of the homeowner’s land, so that no damages were payable. The trial judge discussed the law as follows:

…in assessing damages for physical injury to land or buildings, no doubt a useful prima facie measure of the plaintiff’s loss will be the amount by which the injury has diminished the value of the land as a commodity. But that is by no means universal…. If, for instance, the building is his family dwelling-house … or the factory where he carries on business (as in Harbutt’s Plasticine Ltd v. Wayne Tank & Pump Co Ltd) …there may be grounds for adopting as the appropriate measure the cost of reconstruction. [Emphasis added by the court.]

In Radford, the trial judge found that the homeowner reasonably intended to build the substantial brick wall specified, and so was entitled to damages equal to the amount needed to build that sort of wall. Only this would put the homeowner in the same position as if the contract had been carried out according to its terms.

On the other hand, in Ruxley Electronics and Construction Ltd. v. Forsyth, the trial judge doubted that the homeowner intended to rectify the deficiency and so refused to award damages calculated according to that measure. Here, the homeowner contracted for a swimming pool seven feet, six inches deep, but it was built to a maximum depth of only six feet. The homeowner claimed £20,000 to demolish the existing pool and build a new one of the specified depth. The trial judge concluded that it would be unreasonable for the homeowner to demolish and rebuild, so he awarded the homeowner only a modest £2,500 for loss of amenity that a deeper pool would provide.

The House of Lords agreed. Lord Lloyd of Berwick said:

This does not mean that in every case of breach of contract the plaintiff can obtain the monetary equivalent of specific performance. It is first necessary to ascertain the loss the plaintiff has in fact suffered by reason of the breach. If he has suffered no loss, as sometimes happens, he can recover no more than nominal damages. For the object of damages is always to compensate the plaintiff, not to punish the defendant…..

In building cases, the pecuniary loss is almost always measured in one of two ways; either the difference in value of the work done or the cost of reinstatement…. In many ordinary cases … the cost of reinstatement will be the obvious measure of damages, even where there is little or no difference in value, or where the difference in value is hard to assess….

But it is not the only measure of damages. Sometimes it is the other way round. This was first made clear in the celebrated judgment of Cardozo J. giving the majority opinion in the Court of Appeals of New York in Jacob & Youngs v. Kent, [which establishes two principles] “first, the cost of reinstatement is not the appropriate measure of damages if the expenditure would be out of all proportion to the benefit to be obtained, and, secondly, the appropriate measure of damages in such a case is the difference in value, even though it would result in a nominal award. [Emphasis added by the court.]

The House of Lords concluded that the homeowner:

…has acquired a perfectly serviceable swimming pool, albeit one lacking the specified depth. His loss is thus not the lack of a useable pool with consequent need to construct a new one. Indeed were he to receive the cost of building a new one and retain the existing one he would have recovered not compensation for loss but a very substantial gratuitous benefit, something which damages are not intended to
provide. [Emphasis added by the court.]

The British Columbia Court of Appeal thus concluded that Justice Goepel was entitled to apply the diminution in value measure of damages, for two reasons.

First, while “the cost of repairs may well be an appropriate measure… there has to be well-defined evidence of cost on which to found an award of damages.” In this case, Mr. Leung’s evidence was “too insubstantial” to warrant “an award beyond the sum the judge did allow….”

Secondly, and more importantly, from a legal standpoint, the evidence at trial permitted Justice Goepel “to draw the inference that the homeowner had no present intention of remedying the alleged deficiencies” so that “it was appropriate for him to determine that the necessary test to adopt was diminution in value.”

Based on the facts, Justice Goepel applied the correct principle. The Court of Appeal dismissed the Homeowner’s appeal.

British Columbia Court of Appeal
   Hall, Prowse, Levine JJ.A
   February 23, 2007