Cost to complete vs. diminution in value
Remedies & Third Parties · Apr 5
Floor. ~40 min: R2d § 348 + Peevyhouse. The doctrine the next class assumes you have covered.
Target. ~75 min: Floor + Synthesis + worked example.
(1) If a breach delays the use of property and the loss in value to the injured party is not proved with reasonable certainty, he may recover damages based on the rental value of the property or on interest on the value of the property.
(2) If a breach results in defective or unfinished construction and the loss in value to the injured party is not proved with sufficient certainty, he may recover damages based on
(a) the diminution in the market price of the property caused by the breach, or
(b) the reasonable cost of completing performance or of remedying the defects if that cost is not clearly disproportionate to the probable loss in value to him.
(3) If a breach is of a promise conditioned on a fortuitous event and it is uncertain whether the event would have occurred had there been no breach, the injured party may recover damages based on the value of the conditional right at the time of breach.
382 P.2d 109 (Okla. 1962)
Supreme Court of Oklahoma
Rule. When a breach of contract involves a defective or incomplete performance and the cost of completing the performance is disproportionate to the resulting increase in the value of the property, damages are measured by the diminution in value rather than the cost of completion. The proportionality principle limits cost-of-completion damages.
230 N.Y. 239, 129 N.E. 889 (1921)
Court of Appeals of New York (Cardozo, J.)
Rule. Where a contractor substantially performs and the defect is the substitution of material of equal quality and utility (Reading vs. non-Reading pipe), the measure of damages is the difference in value, not the cost of tearing out and replacing — because the cost of completion would be "grossly and unfairly out of proportion to the good to be attained." The willful transgressor, however, is denied the doctrine.
The proportionality rule is justified by economic waste: the law will not order a party to spend $29,000 (Peevyhouse) or tear out sound walls (Jacob & Youngs) to produce a gain worth a fraction of that cost.
The R2d § 348 narrowing. The Restatement comment confines true "economic waste" to the destruction of a substantially completed structure. Peevyhouse itself conceded no such destruction was involved — it reached diminution on a broader "relative economic benefit" rationale, drawn from Jacob & Youngs and McCormick.
The counterweight. Diminution-in-value can systematically under-compensate an owner whose interest is genuine but non-market (the homeowner who wants the kitchen to look right). That is why personal/aesthetic value and willful breach pull back toward cost of completion.
Facts. Maria contracts Elite Builders for a $50,000 kitchen renovation. Elite finishes; countertops misaligned, backsplash uneven. Repair = $10,000; diminution = $2,000.
Question. What does Maria recover?
Analysis. Default under R2d § 348(2)(b): cost to complete. Maria recovers $10,000 unless that cost is clearly disproportionate to the loss in value to her.
Cost ($10,000) is 5x diminution ($2,000). Not the 100:1 ratio of Peevyhouse, but pressure on the line. If Maria's expectation was aesthetic (a kitchen that looks right), the court is more likely to award cost; aesthetic is a personal value the diminution figure does not capture. If purely cosmetic with no functional impact, courts may cap at $2,000.
Punchline. "Cost to complete unless clearly disproportionate." The word "clearly" does real work.
Variation on Maria. Elite knew the contract specified marble and deliberately substituted granite to save $4,000. The functional defect is none; the diminution is zero; the cost to swap is $9,000.
Under R2d § 348 cmt. c and J&Y: willful breach removes the disproportionality defense. The breaching party who knowingly disregards a specification cannot then invoke economic waste. Maria recovers $9,000.
Why? The doctrine protects against good-faith waste, not against deliberate deviation that the breacher could have avoided at no cost.
Facts. Blake orders a luxury car loaded with accessories from Yugo for $66,000. Four ordered features are missing. Yugo refuses to take the car back.
Question. Damages?
Answer. Blake keeps the car and sues for the difference: value as warranted ($69,000) − value as delivered ($63,000) = $6,000 under UCC § 2-714(2). This is the breach-of-warranty measure for accepted goods, parallel to R2d § 347's expectation rule for services. Both ask the same question: what is the gap between the bargain and the delivery?
Subject to the provisions of this Article on breach in installment contracts (Section 2-612) and unless otherwise agreed under the sections on contractual limitations of remedy (Sections 2-718 and 2-719), if the goods or the tender of delivery fail in any respect to conform to the contract, the buyer may
(a) reject the whole; or
(b) accept the whole; or
(c) accept any commercial unit or units and reject the rest.
Common law forgives a minor breach (substantial performance). The UCC starts stricter: under § 2-601 a buyer may reject goods that "fail in any respect to conform."
But the rule is softened by three levers:
88 N.J. 277 (1982)
Supreme Court of New Jersey
Facts. The Ramirezes contracted for a new camper van, trading in their old van. At delivery the van had scratched paint, missing hookups, uninstalled hubcaps, and (on a later date) soaking-wet cushions. After repeated failed pickups and "discourtesy," the buyers rejected and sued.
Holding. The buyers rightfully rejected within a reasonable time; the seller failed to cure. The UCC preserves the perfect-tender rule (reject for any nonconformity), but rejection does not end the contract because the seller has a right to cure. Where the seller does not cure, the buyer may cancel and recover what was paid — here, the fair market value of the traded-in van ($4,700).
697 F. Supp. 163 (S.D.N.Y. 1988)
Facts. A buyer of blackjack games repudiated mid-contract. The seller resold the remaining units only slowly, over roughly three years, and claimed storage, insurance, and interest as incidental damages.
Holding. An aggrieved seller may recover incidental damages (storage, insurance, finance/interest costs) on wrongfully rejected goods — but only to the extent the delay in reselling was commercially reasonable. A seller must mitigate by reselling within a reasonable time; interest runs only for the period a reasonable resale would have taken.
Rules. R2d § 348(2) (cost-to-complete vs. diminution); UCC § 2-714 (warranty measure); UCC § 2-601 (perfect tender, softened by cure and the acceptance/impairment line).
Cases. Peevyhouse v. Garland Coal & Mining (diminution applied; 100:1 ratio); Jacob & Youngs v. Kent (diminution where defect was substitution of equal-utility pipe; the parent of the proportionality rule); Ramirez v. Autosport (rightful rejection where seller fails to cure).
Punchline. Common law: default is cost to complete; disproportionality is the exception; willful breach removes the exception. UCC: perfect tender lets the buyer reject for any nonconformity, but cure and substantial-impairment keep trivial defects from unwinding the deal.
Open question. Foreseeability filters loss in; cost-vs-diminution sizes the loss; what filters strip the loss back out? Next class: mitigation.
Next class: Limits on Damages I: Foreseeability + Mitigation
_Remedies & Third Parties_ · Apr 8
Re-read Hadley with mitigation in mind. The carrier could foresee the loss only if told; the miller, if told the carrier might fail, could have arranged a spare. Which party bears the burden of avoiding the loss, and what does the answer assume about commercial sophistication? Come ready to answer. You may be called.