Essential law: Defects, part four

Damages for breach of contract usually seek to compensate the claimant for the loss caused by the breach. But where a builder carries out work defectively, how should those damages be assessed? Some principles are set out below.

The aim of awarding damages is to put the claimant into the same financial position as if the contract had been properly performed.

The general rule is that damages compensate for financial loss, such that damages are not awarded for mental distress or other non-financial losses. This is subject to some limited exceptions, one of which is considered below.

Cost of rectification versus diminution in value

So, what is the measure of damages where a builder carries out work defectively?

In seeking to put the owner into the same position as if the contract had been properly performed, the owner might be awarded a “cost of rectification” measure or a “diminution in value” measure.

>>Also read: Essential law: Defects, part one

>>Also read: Essential law: Defects, part two

>>Also read: Essential law: Defects, part three

The former is where the owner is awarded the cost of engaging someone else to complete or rectify the work. The latter is where the owner is awarded the difference in value between the property as it should have been if the contract had been properly performed and its actual value.

Where there is a choice between the two measures in a defects claim, the cost of rectification will generally be awarded unless it would be so wholly disproportionate to the benefit of remediating the defects as to make it unreasonable.

Even where the cost of rectification greatly exceeds the difference in the property’s value, on certain facts the owner may be entitled to that cost, provided that:

• The owner has rectified or intends to rectify. (Where the court is basing itself on the owner’s intention to rectify, it cannot be absolutely sure that this is what the owner will do although the court has found that probable intention would be sufficient. That said, there is of course no claw-back of damages if ultimately the owner decides to spend them on something else); and

• It would not be unreasonable in the circumstances to award the higher cost of rectification.

These principles are illustrated in the leading case of Ruxley Electronics and Construction Ltd vs Forsyth.

Mr Forsyth contracted to have a swimming pool built with the depth at the deep end of 7ft 6in. When built, the pool was in fact only 6ft 9in at the deep end. Nevertheless, it was still perfectly safe for swimming and diving so that the resale value of the property was not affected by the admitted breach of contract. By contrast with the nil difference in value, the cost of rectification (to increase the depth of the pool to the agreed depth) would be £21,000.

The House of Lords refused to award Mr Forsyth the cost of rectification of £21,000; that would be unreasonable, because it was disproportionate to the nil difference in value. In addition, it was relevant that the first instance judge had found that Mr Forsyth had no intention to use the damages to rebuild the pool.

Loss of amenity

Somewhat controversially, rather than awarding Mr Forsyth no damages at all, the House of Lords awarded damages of £2,500 for “loss of amenity”. This appears to fall within the category of damages for mental distress where the predominant (or an important) object of the contract is mental satisfaction – one of the limited exceptions where non-financial loss can be recovered. Mr Forsyth’s diving was not as pleasurable as it would have been had the pool been the depth contracted for.

As a general rule, an award of loss of amenity would only be available to an individual, not a company, because non-financial loss is, by its very nature, only capable of being experienced by humans.

Can a claimant be entitled to rectification costs and damages for diminution in value? Yes, there are circumstances where even though a defect has been rectified, the property has been blighted such that its value is less than would have been the case if there had been no defect in the first place.

Other types of damages

There are other types of losses that may be suffered by a claimant (in addition to the cost of reinstatement or diminution in value) that could be recovered in a defects claim.

These include loss of profit, alternative accommodation costs, management expenses, and damages for “distress and inconvenience”. Such damages are not ordinarily recoverable in a commercial contract but could be recovered in a residential context.

Mel Tomlin is a senior associate at Charles Russell Speechlys