If a second builder completes a house at higher cost, why would this affect your claim for damages against the first builder?

Question

Here are the facts of a problem question, created by my law teacher.

B1 (Builder 1) had agreed to build four backyard micro-cabins for P (Plaintiff), a developer, at a cost of £5 each. It was agreed that each house would be paid for when it was completed and that Al, an architect, must certify all completions. B1 completed two houses but P refused to pay because, P claimed, the windows were not up to specification. Al died just before the second house was completed and had not issued the certificates of completion. The two houses were each worth £7 on the open market.

Because of P’s refusal to pay, B1 was unable to pay his suppliers what he owed them. In turn, they refused to allow B1 to have more building materials on account. B1 stopped building.

Consequently, P entered the site and used B1’s materials, valued at £1 and completed the third house. P then engaged B2 (Builder 2) to build the fourth house, with B2's own materials, at an agreed contract price of £6. P paid B2 after B2 completed this fourth house.

Advise P. All prices should be multiplied by 1000, but I didn’t write out the 0’s to simplify the facts.

My teacher claims that

About the final house completed by B2, you must consider whether the increased cost of completion would affect P’s claim for damages against B1 by reference to case law relating to the expectation interest.

Can someone explain this? What does my teacher mean?

I know that Expectation Interest equates to the net value of what the innocent party would have received, had the contract been performed. The expectation measure aims to put the claimant in the position that he would have been in had the contract been performed in accordance with its terms (Robinson v Harman (1848)). This measure falls short of achieving this aim in a number of ways: for example, contract law does not compensate for all types of loss, it requires the type of loss to be reasonably foreseeable, it lays down certain causation requirements, and the claimant may be unable to recover if they have not taken sufficient steps to minimise the loss they suffer.

Answer 1

The second builder's higher cost affects the claim for damages because it forces the buyer to pay more than he expected to under the contract.

Generally speaking, the formula for expectation damages is (Cover price - Contract price = Expectation damages). Here, P expected to lose £5 and gain a fourth cabin. So:

• Contract price: P's expected loss if B1 hadn't breached was £5.

• Cover price: P's actual loss to cover for B1 breaching was £6.

• Expectation damages: £6 in cover - £5 contract price = £1 in damages, putting him back at the £5 loss he bargained for.

Answer 2

Damages for breach of contract are to restore the innocent party to the position they would have been in but for the breach

Under the terms of the contract, the buyer was entitled to four (defect-free) micro-cabins and to have spent not more than £20.

At this point, P has 4 micro-houses (2 with alleged defects) and has spent £7. Assuming the defective windows will cost not more than £13 to fix, P has suffered no damage and has no case against B1.

Right now, B1 has a very solid claim against P for £13 less the cost of rectifying the windows.

There's a lot going on here

Let's address the requirement for Al to certify before B1 gets paid. This is a void 'pay when certified' provision in a construction contract under HGCRA 1996, ss110(1A)-(1D). B1 is entitled to payment when each house is completed irrespective of what Al does or doesn't do. The assessment of whether a house is complete or not is a matter for agreement between P & B1 or, failing that, for the dispute resolution procedures of the contract.

P has alledged "the windows were not up to specification"; we do not know if this allegation is true.

If the allegation is true, then it does not necessarily follow that the micro-houses are incomplete. It depends on the definition of complete in the contract or, if the contract is silent, then what "complete" means in general. It is not unusual in construction law for a building to be "complete" notwithstanding defects. If this is the case here, then P has breached the contract by not paying B1 the £10 they were entitled to (less the amount to rectify the defects if the contract provides for that).

If the allegation is false, then the 2 micro-houses were definitely complete and P is definitely in breach.

B1, by stopping building, is probably in breach of their contract. The HGCRA allows contractors to suspend work for non-payment in certain circumstances but it is unclear (and not implied) that B1 availed themselves of that right.

It is a common provision in a construction contract that the principal can remove portions of the work from the contract and even use the contractor's plant, equipment and materials to complete the work. However, the question is silent on if this contract had such provisions and if P followed them. This may have put P in breach again.

The costs of completion have already been discussed.

To this point, it appears that neither party has actually terminated the contract - either by a provision in the contract or by accepting repudiation of the contract by the other party. As such, the rights and obligations of the parties under the contract are ongoing.