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Check the terms of the contract in cases of contractual breach

legal matters

Sums that are recoverable for breach of contract are measured by trying to put the claimant in the position he would have been in if the contract had been performed properly. Regular readers will recall the exploration in this column of how this can work in practice, illustrated by Hoadley v Edwards (see AJ 26.7.02).

In many negligence cases concerning defective property, which include claims against architects as well as engineers, surveyors and contractors, there is a debate as to whether the proper measure of damages should be the diminution in the value of the property (in other words, the difference in value of the property as it should have been and its actual value) or the cost of repairs. In October last year, the Court of Appeal in Smith v Peter North and Partners reviewed how damages are measured in such cases.

There are cases in which the cost of repair is effectively the same as the diminution in value.

For example, in Hoadley , the house that the Hoadleys bought was worth less than the surveyor's description of it. The judge awarded the cost of the repairs plus an allowance for the effect that past structural works might have on the future value of the house, which made up the difference.

But the facts of Smith provide a clear example of how diminution in value and remedial costs can be very different.

Peter North and Partners prepared a report for the Smiths before they bought their new house.

They eventually bought the house for £330,000.

After buying, the Smiths claimed that Peter North and Partners had been negligent in preparing their report.

The Smiths wanted to recover the cost of repairs to the house, which they said was at least £130,000. A single joint valuation expert prepared a report for the proceedings. He concluded that the value of the property in its true condition at the time of sale was £340,000, and that the value of the property as described in Peter North and Partners' report was also £340,000. It followed that if the correct measure of damages was diminution in value (the difference between what the property was really worth as opposed to what the Smiths were led to believe it was worth), the Smiths would recover nothing. On the other hand, if the Smiths were successful in recovering £130,000 for repairs, their net outlay on a house said to be worth £340,000 (but bought for £330,000), would be £200,000.

The general rule in such cases is that diminution in value is the proper measure of loss. The Court of Appeal decided that Smith was a straightforward case to which that rule applied.

However, the court made it plain that the rule should not be applied as a matter of course, but only where it meets the need to put the claimant in the position he would have been in had there been no breach. Plainly, had the Smiths been awarded damages on the basis of the repair costs, they would have been far better off than they would have been had there been no complaint about the report. The court will not award damages that give rise to that result.

But what is the measure of damages if, rather than advising on value as in Smith , the defendant has caused damage to the claimant's property?

In giving his judgment in Smith , Lord Justice Jonathan Parker described such cases as being of 'an entirely different character'. If the contract had been properly performed, there would be no need for repairs. As a result, such cases often lead to damages being measured by the repair costs.

However, it is important to remember that in any case concerning contractual breach, the terms of the contract will inform the damages that might be recovered. The Smiths contended that Peter North and Partners had been asked to advise on the question of repairs rather than to provide a valuation, and suggested the possibility that Peter North and Partners had warranted that no repairs were necessary other than those mentioned in the report.

Had there been such a warranty, clearly the measure of damages may well have been different.Damages that put a claimant in the position that they would have been in, had a contract been properly performed, will depend on what the defendant contracted to do in the first place.

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