In New York, the general rule of damages for breach of a construction contract is that the injured party may recover those damages which are the direct, natural and immediate consequence of the breach and which can reasonably be said to be in the contemplation of the parties when the contract is made. In the usual case where the contractor's performance is defective or incomplete, the reasonable cost of replacement or completion is the measure of damages. When, however, there is a substantial performance of the contract made in good faith but defects exist, the correction of which would result in economic waste, courts measure the damages as the difference between the value of the property as constructed and the value if performance is properly completed.
A property owner hired a contractor to excavate a site that was previously industrial. The contractor agreed to demolish structures on the property and grade the property. After the contractor failed to complete the work, the property owner filed suit for contractual damages. The trial court entered a jury verdict in favor of the property owner. The contractor appealed, arguing that the trial court should have charged the jury that the property owner suffered no loss, as there was "substantial performance" of the contract, and that the proper measure of damage was diminution in value because the cost of completion was out of proportion to the good to be attained. On appeal, the Supreme Court entered a jury verdict in favor of the property owner. The judgment in favor of the property owner was affirmed by the Appellate Division.
Was the cost of completion the proper measure for the award of damages?
The cost of completion, not the difference in value, was the proper measure of damages. The property owner's proof showed a substantial deviation from the required grade lines and the existence above grade of structures, and supported the finding, implicit in the jury's verdict, that the contractor failed to perform as agreed.