Eastlake Construction Co. v. Hess
686 P.2d 465 (1984)
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Rule of Law:
When a construction contract is breached, the owner may recover the reasonable cost of remedying defects unless that cost is clearly disproportionate to the probable loss in value to the owner, in which case damages are measured by the diminution in the property's market value.
Facts:
- LeRoy and Jean Hess, along with other parents, planned to build a condominium to provide a permanent home for their mentally retarded adult children.
- The Hesses contracted with Eastlake Construction Company to build a 5-unit condominium for $118,600, with construction to be completed within 90 working days.
- The land for the project was sold to the Hesses by a principal in Eastlake on the condition that Eastlake was awarded the construction contract.
- During construction, disputes arose over progress and payments, leading Eastlake to cease work.
- After an architect's inspection revealed numerous defects and incomplete work, Eastlake failed to complete the project as promised.
- Hess undertook completion of the project himself, discovering numerous deviations from the contract specifications, including improper insulation under concrete floors, the wrong kitchen cabinets, and incorrect structural materials.
- Some defects were remediable at a reasonable cost, while others would require substantial demolition and expense to correct, representing significant economic waste.
Procedural Posture:
- Eastlake Construction Company sued LeRoy and Jean Hess in King County Superior Court (a trial court) to recover an unpaid balance on a construction contract.
- The Hesses filed a counterclaim against Eastlake, alleging breach of contract and violations of the Consumer Protection Act (CPA).
- The trial court found that Eastlake had breached the contract, awarded damages to the Hesses (which were offset by the amount they owed on the contract), and dismissed the CPA claim.
- Both parties appealed to the Washington Court of Appeals (an intermediate appellate court). Eastlake was the appellant on the breach finding, and the Hesses were cross-appellants on the damages amount and CPA dismissal.
- The Court of Appeals affirmed the trial court's finding of breach but increased the damages awarded to the Hesses, while also affirming the dismissal of the CPA claim.
- Both parties then appealed the Court of Appeals decision to the Supreme Court of Washington (the state's highest court).
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Issue:
Is the proper measure of damages for a breach of a construction contract with both remediable and irremediable defects the reasonable cost of repair, unless that cost is clearly disproportionate to the probable loss in value to the owner?
Opinions:
Majority - Justice Pearson
Yes. For a breach of a construction contract, the injured party may recover the reasonable cost of remedying the defects unless that cost is clearly disproportionate to the probable loss in value to him. The court adopts Restatement (Second) of Contracts § 348, which replaces the confusing prior doctrines of 'substantial performance' and 'unreasonable economic waste' with a more direct proportionality test. Under this rule, if the cost to remedy a defect is clearly disproportionate to the value the owner would gain from the repair, the proper measure of damages is the diminution in the market price of the property caused by the breach. The case is remanded for the trial court to apply this test to the defective kitchen cabinets and other items for which no damages were previously awarded.
Concurring - Justice Rosellini
This opinion concurs with Justice Dimmick's opinion and focuses primarily on the proper analysis for the Consumer Protection Act claim. It agrees with the majority's interpretation that a contractor's practice of making representations it cannot foreseeably meet can constitute an unfair or deceptive act that induces a consumer to enter a contract, thus satisfying a key element of the public interest test.
Concurring - Justice Dimmick
Yes. While the opinion concurs in adopting the Restatement (Second) of Contracts § 348 as the correct rule, it dissents from the decision to remand the damages issue. The trial court already effectively applied the disproportionality test by awarding damages for defects where repair was cost-beneficial and denying damages for defects where the repair cost would be considerable and the resulting benefit minimal, such as replacing insulation under concrete floors. Because the trial court rejected the testimony on diminished market value, and no other evidence was offered, a remand on the construction defect damages is unnecessary and useless.
Analysis:
This decision formally modernizes Washington's common law on construction contract damages by adopting the Restatement (Second) of Contracts § 348. It abandons the ambiguous and often conflated concepts of "substantial performance" and "unreasonable economic waste" in favor of a more flexible and direct "proportionality" test. This provides clearer guidance to lower courts, focusing the factual inquiry on whether the cost of a given repair is clearly disproportionate to the value conferred upon the owner. The ruling balances the owner's right to the benefit of their bargain with the need to avoid economically wasteful remedies that would provide the owner with a windfall.
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