Contract Law--Nominal Damages Awarded to Plaintiff for Failure to Meet Commercial Contract Specifications--Diotte v. Consolidated Dev. Co., 2014 CarswellNB 410 (Can. N.B.C.A.) (WL).

• Author: Hassell, Alexandra R.

When a breach of a contract occurs, a plaintiff will generally be compensated according to the expectation principle and be placed in the same position as the party would have been in had the defendant complied with the contract. (1) If a building is the subject of the breach, the assessed damages are typically the cost of performance or the cost of reinstatement. (2) In Diotte v. Consolidated Dev. Co., (3) the New Brunswick Court of Appeal-considered whether the appellant owner was entitled to damages in the amount of the cost of reinstatement or nominal damages stemming from the failure of the respondent contractor to adhere to the specifications of the underlying contract. (4) The court found that there was no evidence to establish that the fair market value of the premises in question had been negatively affected as a result of the contractor's breach and that the owner was therefore only entitled to nominal damages. (5)

On November 19,2007, Evariste M. Diotte and E.M. Diotte Construction Inc. (Diotte) and Consolidated Development Co. Ltd. (Consolidated) entered into a contract for Diotteto construct an office building and a garage for Consolidated. (6) The Federal Department of Fisheries and Oceans (DFO) had agreed to lease the premises, and the buildings were to be constructed according to the specifications of the DFO. (7) The original value of the contract for the work that was to be performed by Diotte was USD318,500 and later USD378,377.67. (8) During the construction phase, Consolidated received and paid invoices periodically submitted by Diotte for work performed. (9) The last invoice, including extras that had arisen during construction, was issued on February 4, 2007 in the amount of USD51,181.91. (10) Consolidated refused to pay the last invoice, alleging that Diotte was responsible for "office building fit-ups," despite having paid the invoices previously issued to them for "fit-ups" without incident. (11)

After Consolidated refused to pay the last invoice, Diotte filed a claim under the Mechanics' Lien Act. (12) Consolidated subsequently commenced an action claiming the work that had been performed was deficient and subsequently claimed right to set off. (13) Of the twelve deficiencies alleged, the trial court ruled in favor of Diotte on all but the loss of square footage of the garage claim for which the judge awarded Consolidated nominal damages of USD2,000 and an additional USD8,000 for strengthening a wall of the garage. (14) The trial judge also decided that Diotte had a valid lien in the amount of USD52,318.91. (15) In a matter of first impression, the New Brunswick Court of Appeal chose not to disturb the decision of the trial judge, and also awarded USD7,500 to Diotte in costs on appeal. (16)

Under common law, if a breach of contract occurs, the monetary damages awarded are typically the cost of reinstatement in order to place the plaintiff in the same position he would have been in had the breach not occurred. (17) Depending, however, on the underlying circumstances of the breach, it may be appropriate to use an alternative method of assessing damages resulting from the breach. (18) In the context of a building contract, other possible methods of assessment include diminution in the value, nominal damages for loss of amenity, personal preference and whether or not the builder saved money as a result of the breach. (19)

In Jacobs & Youngs, Inc. v. Kent, (20) Justice Cardozo stated that if the circumstances of the breach arise due to a failure of the builder to adhere to the specifications of the contract, the general rule is that the owner is to be awarded the costs of reinstatement unless the cost would be disproportionate to the benefit received. (21) In such a case, the owner will receive the difference in value between the work contracted for and the work performed, which is usually a nominal amount. (22) Courts have also looked to such factors as reasonableness and the intention of the owner to use the award to rebuild in compliance with the contract specifications. (23)

In order to determine how to properly assess the damages, courts will examine the severity of the failure to meet the specifications of the contract. (24) The decision of Ruxley Electronics & Construction Ltd. v. Forsyth (25) acknowledged that in the event a loss has been suffered that is not monetary in nature, but must be compensated, a flexible approach should be utilized to determine an appropriate award amount. (26) Courts have differed in opinion as to how such nominal awards should be measured economically. (27)

In Diotte v. Consolidated Development Co., the New Brunswick Court of Appeal awarded nominal damages for failure to adhere to the specifications of the building contract in favor of the reinstatement cost. (28) It was determined that Diotte had breached the contract, but it was unclear as to whether or not Consolidated had suffered a loss as a result of the breach. (29) The court considered the issues of contract deviation, defective workmanship, cases involving a consumer and a commercial party versus cases in which both parties are commercial and loss of amenity, or "personal preference," resulting from the builder's contract breach. (30) These factors were addressed in order to highlight the court's difficulty in measuring damages for breach of contract so as not to provide incentive for builders to deviate from the agreed upon terms of the contract. (31) Ultimately, the court applied the reasonableness standard in order to determine the appropriate award for damages. (32) The holding of the Appeal Court did not disturb the decision of the trial judge, and the appellant owner was awarded nominal damages. (33) The court reasoned that as no expert evidence was presented to support a claim of a negative impact to the property's value, it would therefore be unreasonable to award damages in the amount of the cost of reinstatement. (34)

In analyzing whether Consolidated was entitled to the costs of reinstatement or nominal damages resulting from Diotte's deviation from the contract specifications, the New Brunswick Court of Appeal correctly applied the reasonableness standard. (35) The presiding justices accurately established that a breach had in fact occurred and that the owner was entitled to some form of compensation stemming from said breach. (36) Diotte was aptly identified as a commercial case, not one in which the owner lost an amenity or a personal preference. (37) The court then began the difficult process of determining whether reinstatement costs or a lesser sum would be reasonable in light of the circumstances. (38) Contract damages are decided on a case-by-case basis, which has caused courts to struggle to find a suitable, streamlined method of assessment. (39) As there was no expert evidence provided by Consolidated to show the loss suffered, the court correctly awarded nominal damages based on the facts before it. (40) The cost of reinstatement was not clearly incommensurate with the benefit to be received; therefore, the intent of the injured party to use the award to cure the breach and the breaching party's attempt to mitigate damages by performing remedial work were not used to determine the reasonableness of the award. (41)

The well-established common law of contracts framework allowed the Appeal Court to use a wide range of sources from all over the world to determine the outcome of this case. (42) Established legal principles set forth in Jacobs & Youngs Inc. v. Kent and Ruxley Electronics & Construction Ltd. v. Forsyth were primarily relied on in deciding not to disturb the holding of the trial judge. (43) Though Consolidated did receive a nominal award, as compared to the costs of reinstatement, this case is cause for concern, as parties entering into a contract should be entitled to a final structure that is on par with the contract specifications. (44) While it may seem like a simple concept, it is actually quite complex, as is evidenced by the difficulty involved in measuring damages when a contract has been breached. (45) Courts should be searching for a common ground in the often extreme gap between an award of reinstatement damages and nominal damages. (46) Though punitive damages are generally not awarded for breach of contract, perhaps a carefully crafted, modified form of punitive damages would provide an aggrieved party with an award more adequate than nominal damages, while simultaneously serving as a deterrent for breach of contract. (47)

While the court's unanimous decision to award nominal damages was proper in the present case, it was a matter of first impression and has set precedent that could be troubling in terms of future decisions. (48) As Justice Robertson addressed twice in the analysis of his majority opinion, the law must not promote an incentive for builders to stray from...