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No matter the delivery method, contractors and subcontractors spend countless hours (and dollars) interpreting and executing a project’s specifications before and during the construction process. At the conclusion of the project, contractors or owners may uncover construction defects of varying magnitude. Litigation may ensue, and owners will likely feel confident that they are owed damages by their general contractor or construction manager. However, there are a couple of legal doctrines which may limit a contractor’s liability for defects.
1. Owners have a responsibility to mitigate damages
An owner may be entitled to certain damages depending on the nature of the defects incurred. These might include compensatory damages — money intended to cover any loss or injury sustained by the owner which was caused by the mistake.
Subsets of compensatory damages may include costs of increased labor or materials to correct the mistake. Another category of damages would include consequential damages — money intended to cover those indirect costs which arise as a result of a construction mistake.
However, owners have an affirmative duty to take reasonable steps to mitigate damages. This means that, in order for damages to be recognizable by law, the owner must minimize the amount by which the builder’s mistake injures the owner.
How contractors can reduce risk
Contractors can best protect themselves from the risk of damages by:
- Providing notice of the defect to the owner
- Documenting that notice
- Providing a plan of action to minimize the damage caused by the defect
For example, take the 1986 case of Weill Const. Co., Inc. v. Thibodeaux (“Weill”).
In Weill, the owner hired contractors to build a skating rink. A drainage issue was detected in the final phase of the building process, and the builders made immediate recommendations to the owner on how the drainage issue could be alleviated.
However, no corrective measures were taken, and subsequent heavy rains caused heavy seepage and damage to the structures in place. The court held that the contractors were not liable for the water damage, because the owner:
- Was aware of the existing defects
- Knew of corrective measures which would mitigate damages caused by the defects
- Failed to take any corrective measures
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Contractors have a responsibility to mitigate damages, too
On the other side of the coin, contractors should be aware that this doctrine works both ways – and also applies to delays. A contractor cannot necessarily sit back and rack up labor and equipment costs just because an excusable and compensable delay has occurred.
For example, consider a scenario where a defect prevents a contractor from working on one part of a project. The contractor may have an obligation to continue working on an area of the project which has been unaffected by the delay if it would mitigate damages owed by the owner to the contractor.
When any party — whether the owner or a contractor — does not undertake reasonable efforts to mitigate damages, that party runs the risk of losing the right to recover damages at all.
At the very least, that party will potentially lose the right to recover any portion of the damages it suffered, if the opposing party can show that reasonable efforts would have avoided those damages.
2. The cost of correcting a defect shouldn’t be excessive
Traditionally, the basic measure of damages for defects is the cost of repair or correction. However, this might not be the case in scenarios where the cost to repair the defect would be excessive. This is a legal doctrine known as economic waste, which prevents unnecessary damages for the correction of a defect.
Whether or not a correction is considered economic waste is determined by considering:
- The nature of the damage
- The total value of the project
- The proportional value of the defect compared to the total project value
- The amount by which the product has lost value as a result of the defect
If, in light of these considerations, a court determines that the cost of repair would be excessive or disproportionate compared to the actual damage resulting from the defect, damages are instead calculated as the project’s loss in market value caused by the defect.
A case of differing specifications
On the extreme end, law students taking Contracts read a case from the 1920s where the project specifications called for a certain brand of wrought iron pipes throughout the building. Upon substantial completion, the owner discovered that, although the builder had used wrought iron pipe of equal quality, certain portions were of a different brand.
The evidence showed that the pipe used in the building was well-galvanized and had the exact same market value and quality as the requested brand. The owner, thus, failed in his request to have the entire structure torn down — at the builder’s expense — in order to have the pipe “defect” remedied.
In today’s terms, a less extreme example might be if the specs called for copper pipes but, upon substantial completion, the owner discovers that the pipes are actually stainless steel.
Depending on the placement of the pipes within the rest of the building, it might be next-to-impossible to replace these pipes without tearing down countless other aspects of the building. So, the cost of repairing the defect might be considered excessive due to the additional time and resources that would be required to do so.
This could be a case of economic waste whereby the owner would instead be entitled to damages in the amount by which the project has dropped in value, rather than the cost of replacing the stainless-steel pipes.
Of course, contractors should still ensure to follow specifications to the most minute details if possible. However, contractors can potentially sleep easier knowing they might not be legally required to start over the entire project in such a scenario.
3. Betterment Doctrine: Defects aren’t the owner’s windfall
The betterment doctrine applies when defects or omissions exist in the original specifications provided to the contractor. The general principle is that the owner’s position should not be improved compared to if the specification error had not occurred.
This means that, if the owner provides the contractor with specifications that omit certain requirements, they cannot gain financially from the fact that contractors bid based on the specifications — not what was actually required to finish the job.
In practice, assuming Design-Bid-Build, the legal system has established that incomplete designs should be handled as follows:
- The owner should pay to cover the cost of the omitted component as if it were included in the original specifications
- The designer should then pay the owner to cover any additional or premium costs associated with the change order
Limitations on recovery
Another common scenario would be if the owner is required to fix or repair defective work originally done by the contractor. It may happen that, in the process of repairing, the new contractor actually improves the quality beyond that of the original specifications.
Similar to the owner’s duty to mitigate damages, the owner cannot recover all costs of repair from the original contractor. Rather, the owner can only recover up to the quality and cost that was called for by the executed contract documents and original specifications.
That is, whatever the cost of the enhancements, the original contractor is only required to pay an amount in damages that would have covered the cost of the original design.
In fact, even in the case where repairs did not involve any enhancements, it is still possible that the original contractor’s damages will be reduced to the extent that the project’s useful life has been extended by the repair.
Defects happen — and contractors should act to mitigate the risk
Construction defects are bound to happen on a job site. There are numerous variables, subcontractors, and sub-subcontractors interpreting the specifications.
First, it is important to document and communicate the detection of defects so that parties are aware of their existence. Then, parties should keep in mind that damages shouldn’t escalate beyond reason — and to consider ways to mitigate these damages before litigation ensues.