CONSTRUCTION DEFECT DAMAGES: BENEFIT-OF-THE-BARGAIN OR RELIANCE RECOVERY

In the preceding article, I discussed a case where an owner sued its contractor and design professional for construction defects and design defects that contributed to the same damage.   There was a valuable discussion in this case as to the measure of damages in a construction defect dispute.  It is a discussion that construction defect parties and practitioners need to know.  A plaintiff needs to know for purposes of proving damages at trial and working with an expert in furtherance of proving their damages.   A defendant needs to know for the same reasons and to work with experts in establishing defenses to an owner’s construction defect and design defect damages.

 

 “The proper measure of damages for construction defects is the cost of correcting the defects, except in certain instances where the corrections involve an unreasonable destruction of the structure and a cost which is grossly disproportionate to the results to be obtained.”  Stated another way, “the measure of damages for breaching a construction contract is the reasonable cost of construction and completion in accordance with the contract, if this is possible and does not involve unreasonable economic waste.”  However, “[i]f in the course of making repairs the owner elects to adopt a more expensive [i.e., a better] design, the recovery should be limited to what would have been the reasonable cost of repair according to the original design.”  [This measure of damages is known as benefit-of-the-bargain damages.]

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As an alternative to benefit-of-the-bargain damages, an injured party has a right to damages based on its reliance interest, including expenditures made in performance or in preparation for performance, the recovery of which will place the injured party in the position it occupied before entering into the contract.  However, “[a]ny benefit retained from the expenditures made in reliance on the contract must be offset against the injured party’s damages.”  In other words, a reliance recovery may be reduced to the extent that the breaching party can prove that a “deduction” is appropriate for any benefit received by the injured party. [This measure of damages is referred as a reliance recovery to damages.]

Broward County, Florida v. CH2M Hill, Inc., 45 Fla. L. Weekly D1736a (Fla. 4th DCA 2020) (internal citations omitted).

In this case, the appellate court held that the trial court erred in its measure of damages because the owner’s damages were based on a redesign that was a different, better design than the bargained for original design (as there was evidence that the original design was doomed from the get-go even if constructed correctly).   Thus, benefit-of-the-bargain damages did not apply–the owner did not present damages to correct defects per the original design but put on damages associated with its different and better redesign.  Yet, the appellate court maintained that if the public owner could not repair the defects in the original design, “a viable alternative measure of damages [under the reliance recovery] was the [owner’s] out-of-pocket costs, less any benefits the [owner] received from the contracts.”  Broward County, supra.   For this reason, the Fourth District remanded back to the trial court to enter judgment based on the owner’s reliance recovery based on the evidence already presented at trial relating to the owner’s out-of-pocket costs for the original design and construction and a potential deduct for the benefit the owner received relative to the original design and construction.

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

 

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