§ 15.3 Owners' Damages

• Library: Construction Law in Oregon (OSBar) (2019 Ed.)

§ 15.3 OWNERS' DAMAGES

§ 15.3-1 Cost of Repair versus Diminished Value

When a contractor breaches a contract, an owner may recover damages under one of two measures: the cost of repair or the diminished value. When repair or replacement is a prudent remedy, an owner is generally entitled to recover an amount necessary to cure construction defects in construction-defect cases (the same may not be true in a termination case). See Montara Owners Ass'n v. La Noue Dev., LLC, 357 Or 333, 346-47, 353 P3d 563 (2015) (discussing Turner v. Jackson, 139 Or 539, 560, 11 P2d 1048 (1932)). This theory is commonly termed the "cost of replacement or repair" rule. When repair of the property would generate undue economic waste, however, an owner is entitled only to the difference between the actual value of the building as constructed and what its value would have been had it been constructed as required by the contract. Newlee v. Heyting, 167 Or 288, 293, 117 P2d 829 (1941). This concept is often referred to as the diminished-value rule.

In determining whether the cost-of-repair rule is economically unfeasible, the court may consider the relationship between the cost of repairs and the contract price, the amount of money that the contractor saved as a result of the breach, the nature of the repairs required, the usefulness of the building as currently constructed, and a comparison of the cost of repair as to the potential disproportionate end result. See Schmauch v. Johnston, 274 Or 441, 446-47, 547 P2d 119 (1976). Compare Thomas v. Schmidt, 58 Or App 343, 346, 648 P2d 376 (1982) ("re-roofing would result in gross economic waste, because the discolorations were barely visible and the damage only 'esthetic'") with Beik v. Am. Plaza Co., 280 Or 547, 556, 572 P2d 305 (1977) (the cost of repair was not disproportionate to the purchase price, "considering the lack of a need for a structural change, the loss of habitability suffered by the plaintiffs, and the almost $65,000 that the defendants testified they saved by installing the inferior doors and air conditioners"). In Bhattarai v. Stein, 119 Or App 133, 136-37, 849 P2d 1153 (1993), the court affirmed the Construction Contractors Board's award of $21,250 for the replacement or repair of an overly steep driveway in a home costing $124,618. The court held that the damages were not disproportionate to the value of the home, so it did not apply the diminished-value rule. Bhattarai, 119 Or App at 136-37.

§ 15.3-2 Delay—Commercial and Residential

Generally, a commercial owner may recover for "losses caused or for profits and other gains prevented by the breach," as long as the owner can produce evidence sufficient to establish the value of these damages "with reasonable certainty." Stubblefield v. Montgomery Ward & Co., 163 Or 432, 447, 96 P2d 774 (1939), reh'g den, 98 P2d 14 (1940). The owner is entitled to recover at least the value of interest on the capital invested in the project for the period of inexcusable delay caused by the contractor's breach. Stubblefield, 163 Or at 454. If an owner can demonstrate with reasonable certainty that a commercial project would have been completed and usable had the defendant not delayed completion, then the owner should usually recover the reasonable rental value of the completed project, but might or might not be able to recover the anticipated profits lost due to the breach. Stubblefield, 163 Or at 447-48.

As discussed in § 15.2-3 (direct and consequential damages) and § 15.2-7 (lost profits), damages such as lost profits are recoverable only on proof to a reasonable certainty that the breach caused the alleged damage, that a loss of profits was foreseen, and that profits would indeed have been earned. See Randles v. Nickum & Kelly Sand & Gravel Co., 169 Or 284, 286-88, 127 P2d 347 (1942) ("We take judicial notice that the business of building houses for an agreed price is highly speculative in its nature, and we think that to sanction the recovery of damages for which there is no firmer foundation than is found in the present record would be practically to remove all the safeguards which the law has wisely thrown around claims of this character.").

For a residential owner, the proper measure of damages for delay in completion is the rental value of the home, even though the owner did not intend to rent the property to others. Gregory v. Weber, 51 Or App 547, 552-53, 626 P2d 392 (1981).

§ 15.3-3 Concurrent Delay—Limitation on Damages

Concurrent-delay questions arise when an owner and a contractor both contribute to the causes of the delay. This scenario complicates the calculation of damages. In Oregon, an owner can recover only for the period of delay that the owner proves was due solely to the contractor's fault. Valley Inland Pac. Constructors, Inc. v. Clackamas Water Dist. No. 2, 43 Or App 527, 537, 603 P2d 1381 (1979) (the owner's claim for liquidated damages against the contractor failed in the absence of a showing that the contractor was responsible for the delay).

Some jurisdictions and administrative bodies are more generous and allow recovery for concurrent delay even if no precise apportionment can be made of responsibility for the delay. In these cases, if both parties have contributed to a delay that is not segregable, an estimated allocation is made, in the nature of a jury verdict. See, e.g., Raymond Constructors of Africa, Ltd. v. United States, 188 Ct Cl 147, 411 F2d 1227, 1236 (1969) (a precise allocation of responsibility for delay was not possible, so the court estimated that the owner was liable for one-third of the contractor's delay damages); E.C. Ernst, Inc. v. Manhattan Constr. Co. of Texas, 387 F Supp 1001, 1033 (SD Ala 1974), aff'd in part, vacated in part,...