Analysis of Oregon's Economic Waste Doctrine in Construction Defect Cases

Curtis A. Welch

503.972.2529

    Determining whether a remedy of repair or replacement will generate undue economic waste, and thus whether the economic waste doctrine applies, is done on a case-by-case basis with guidance from the rules and the factors discussed in the cases below.

    In Beik, supra, the Court compared the $8,700 cost of repairing defective sliding glass doors and defective air conditioners in each condominium unit to the $40,000 purchase price of each condominium. Beik, 280 Or. at 555. The Court held that even though the cost of those repairs was over 21% of the purchase price of each condominium, "[t]he relationship of cost of repair to purchase price is not disproportionate here, especially considering the lack of need for a structural change, the loss of habitability suffered by the plaintiffs, and the almost $65,000 that the defendants testified that they saved by installing the inferior doors and air conditioners." Id. Further, the court noted that an award of diminution in value would leave the plaintiffs with an inferior condominium and inadequate funds to bring the condominium up to specifications. Id.

    In Montara, supra, the Oregon Supreme Court stated the principle as follows: "Economic waste occurs where ‘the defect in material or construction is one that cannot be remedied without an expenditure for reconstruction disproportionate to the end to be attained, or without endangering unduly other parts of the building'." Montara, 357 Or. at 346 (citing Schmauch, 274 Or. at 447 and Restatement (Second) of Contracts § 348 (2)(b) (1979)). The Montara court held that the "end to be attained" by repair or reconstruction is restoring the loss in value resulting from the defect at issue. Montara, 357 Or. at 346-47 (citing Jacob & Youngs v. Kent, 230 N.Y. 239, 244, 129 N.E. 889 (1929)) (referring to the restoring of the loss in value as "the good to be attained").

    In Bhattarai v. Stein, 119 Or. App. 136-37, 849 P.2d 1153 (1993), the end to be attained by awarding damages for repairs was restoring the resale marketability and value of the claimant's home, and was also correcting a serious safety problem resulting from the defective construction.

    The dispute in that case was the repair of a driveway which a home builder had constructed at a slope of 37.5%, which was almost twice the maximum grade of 20% allowed by city ordinance. Id. at 135. Because of the overly steep grade, drivers driving up the driveway could not see if children or others were present in the garage, and when backing down the driveway, drivers could not see if anyone was present on the road. Id. The Court noted that while the claimants "may learn to live with the problem, no one knows if a deliveryman, visitor or some other person using the driveway may cause injury to the claimant's family, themselves, or some other member of the public." Id. at 137. The Court affirmed the order of the Construction Contractors Board for the home builder to pay the claimants $21,250 to repair the driveway, and rejected the home builder's contention that such repair would create economic waste when compared to the $124,618 price for construction of the home. Id.

    Similarly, in Schmauch, the Court stated the test for determining economic waste in terms of the end to be attained, holding that "if on the other hand, the defect in material or construction is one that cannot be remedied without an expenditure for reconstruction disproportionate to the end to be attained, or without endangering unduly other parts of the building, then the damages will be measured not by the cost of remedying the defect, but by the difference between the value of the building as it is and what it would it would have been worth if it had been built in conformity with the contract." Schmauch, 274 Or. at 447.

    The Schmauch court awarded repair costs, noting that the "defects could be remedied in a feasible manner." Id. at 446-47.

    However, to the extent the "end to be attained" is primarily an improvement in esthetics of the project or structure, courts are more likely to find that an expensive repair or replacement would generate undue economic waste, and thereby award diminution in value damages, as demonstrated by the cases of Thomas v. Schmidt, 58 Or. App. 343, 345-46, 648 P.2d 376 (1982), Wilkinson v. Jay's Contracting, Inc., 85 Or. App. 516-17, 737 P.2d 631 (1987), and Jacob & Youngs, supra.

    In Thomas, the plaintiff owner and defendant contractor entered into a contract for defendant to re-roof plaintiff's house and garage. There was evidence that there was some discoloration or shading present on both of those roofs. Thomas, 58 Or. App. at 345. The trial court found that repair of the roofs would require re-roofing, for which plaintiff had obtained a bid for $2,160. Id. at 346. The trial court rejected plaintiff's argument that those repair costs should be awarded, holding that "re-roofing would result in gross economic waste, because the discolorations were barely visible and the damage only ‘esthetic'." Id. The trial court awarded $325 for diminution in value and the Court of Appeals affirmed the trial court's decision. Id.

    In Wilkinson, the primary issue was the defendant builder's failure to construct a sunken living room in the claimant's house, contrary to the building plans which plainly required a sunken living room. The Court noted that the cost of installing a sunken living room after-the-fact would be between $40,000 and $50,000, and affirmed the order of the Construction Contractors Board finding that such a repair "was not feasible" and would "create economic waste." Wilkinson, 85 Or. App. at 516. The Court affirmed the Contractors Board's decision to award "the difference in value between the type of living room required by the contract and the room that was actually built", a difference of $13,085. Id.

    In Jacob & Youngs, which the Oregon Supreme Court cited in Montara, supra, as a "classic case on economic waste" and a decision in "accord with Oregon law", the defendant had contracted to build a home for plaintiff pursuant to a contract requiring the use of "Reading" brand pipe for the plumbing. Jacob & Youngs, 230 N.Y. at 241. After the house was complete, the plaintiff discovered that defendant had instead used "Cohoes" pipe, an equally good brand. Id. (The Court in fact noted that "Reading" pipe was distinguished from "Cohoes" pipe only by the name of the manufacturer stamped on the pipe). The Court (Judge Cardozo) stated that replacing the pipe would require tearing down walls at great expense, and that replacing the pipe would not have increased the market price of the house because using "Cohoes" pipe had not had any effect on the market price of the house. Id. at 241 and 244. Judge Cardozo stated that if the cost of repair is "grossly and unfairly out of proportion to the good to be attained" as it was in that case, the measure is the "difference in value." Id. at 244. Because the difference in value in that case was near zero, the Court awarded only nominal damages. Id.

Rationale behind the economic waste doctrine

    The Court of Appeals in the Montara case, Montara Owners Ass'n v. La Noue Development, LLC, 259 Or. App. 657, 667-68, 317 P.3d 257 (2013) aff'd in part, rev'd in part on other grounds, 357 Or. 333 (2015) explained that the rationale behind the economic waste doctrine is "to limit damages recoverable for a contractor's defective work to those costs necessary to achieve the owner's contract ‘expectancy' and design intent without unjust enrichment or betterment of the work." (citing Philip L. Bruner and Patrick J. O'Connor, Jr., 6 Bruner & O'Connor on Construction Law § 19.30 (West 2010)).

    Thus, it is the contractor who typically invokes the economic waste doctrine, as demonstrated by the cases discussed above in this article, with the exception being the Schmauch case in which the owner's evidence demonstrated that damages for diminution in value were higher than the cost of repairs. Schmauch, 274 Or. at 447.

    The doctrine is also invoked by those other than general contractors, as in the Montara case, in which a subcontractor successfully argued that the economic waste doctrine could legally apply to the general contractor's claims against the subcontractor. Montara, 259 Or. App. at 667-68.

Conclusion

    Justice Cardozo's statement in the Jacob & Youngs case so many years ago that "[i]t is true that in most cases the cost of replacement [or repair] is the measure", still holds true today. There are cases however where a contractor has a realistic opportunity to invoke the economic waste doctrine, but to do so the contractor must plan ahead so as to be able to present evidence at trial or arbitration of diminution of value as an alternative measure. Accordingly, the contractor should at an early point in the case consult with a real estate appraiser or other qualified expert for their evaluation and potential testimony in relation to this important doctrine of damages.

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