Defective Performance — cost-to-complete vs diminution in value

Total nonperformance is the easy case: the injured party got nothing, so the gap is the whole bargain. Defective performance is harder. Something was delivered, but it falls short. Now the law must choose between two measures that can differ by orders of magnitude.

Two measures of the gap

R2d § 348. When performance is defective or incomplete, the injured party may recover either the cost to remedy the defect (cost of completion) or the diminution in market value the defect causes. Cost to complete is the default; it gives the owner the very performance bargained for. But § 348(2)(b) makes that measure unavailable when the cost is “clearly disproportionate to the probable loss in value” — in which case damages are based on diminution in value instead. The word “clearly” carries the doctrine: a modest disproportion does not displace cost to complete.

Economic waste and its exceptions

The disproportionality limit reflects the economic-waste principle: the law will not force a party to spend $29,000 tearing up and redoing work to capture a $300 gain in value. Two things pull back toward cost to complete even when the gap is large. First, a willful breach — a contractor who knowingly disregards a specification — forfeits the economic-waste defense, because the doctrine guards against good-faith waste, not deliberate deviation the breacher could have avoided at no cost. Second, a genuine personal or non-economic interest in the promised performance may justify cost to complete where market value does not capture what the owner bargained for.

Cases

Peevyhouse v. Garland Coal & Mining Co. awarded the diminution in value — a few hundred dollars — rather than the roughly $29,000 cost of the promised land restoration, because the cost of performance was grossly disproportionate to the increase in the land’s value and the breach was not willful. It matters because it is the high-water mark of the economic-waste limit, and because it remains controversial: the dissent would have enforced the contract as written. Read against Jacob & Youngs v. Kent, where an equal-utility pipe substitution drew the diminution measure, the pair shows the spectrum from trivial defect to disproportionate cure.

Sales-law parallel. For accepted nonconforming goods, the UCC asks the same question through § 2-714: the buyer recovers the value as warranted minus the value as delivered. A buyer may also reject or revoke acceptance for a substantial impairment, subject to the seller’s right to cure.

What you should be able to do

Distinguish total nonperformance from defective performance and explain why the latter needs its own measure. Apply the cost-to-complete-unless-clearly-disproportionate test, and identify when the willful-breach or personal-interest exceptions override diminution. Map the UCC warranty measure onto the common-law framework. Next class returns to Hadley and adds the mitigation filter — the limits that strip recoverable loss back out.