Ruxley Electronics and
Construction Ltd v Forsyth
Laddingford Enclosures Ltd v Forsyth [1995]
3 All ER 268
HOUSE OF LORDS
27, 28, 30 MARCH, 29 JUNE 1995
The defendant (the owner) contracted with the
two plaintiff companies, R and L (the builders), to build a swimming pool in his garden
and a building to enclose it for a total price of £70,178·74. The contract expressly
provided that the maximum depth of the pool should be 7 ft 6 in. After the work had been
completed, the owner discovered that the maximum depth was only 6 ft 9 in and that at the
point where people would dive into the pool the depth was only 6 ft. The owner paid
various sums on account and after certain agreed credits the balance of the price due for
the construction of the pool and the enclosure amounted to £39,072. The builders claimed
the balance of the contract price and the owner counterclaimed for breach of contract.
Although it was accepted that the failure to provide the required depth was a breach of
contract, the trial judge found that the shortfall in depth had not decreased the value of
the pool and gave judgment for R in the sum of £3,903 and for L in the sum of £36,874
but awarded the owner £2,500 general damages for loss of amenity on his counterclaim. The
owner appealed, contending that the judge should have awarded damages in respect of the
breach or deducted a sum from the contract price to reflect the cost of reconstructing the
swimming pool to conform to the original contractual specification and that by itself the
award of general damages was too low if he received no other compensation for the breach.
The Court of Appeal allowed the appeal, holding that it was not unreasonable to award as
damages the cost of replacing the swimming pool in order to make good the breach of
contract, even though the shortfall in the depth of the pool had not decreased its value.
The court awarded the owner £21,560 damages against R. R appealed to the House of Lords.
Held – In assessing damages for breach of contract for defective building
works, if the court took the view that it would be unreasonable for the plaintiff to
insist on reinstatement because the expense of the work involved would be out of all
proportion to the benefit to be obtained, then the plaintiff was confined to the
difference in value. Furthermore, the plaintiff’s intention, or lack of it, to
reinstate was relevant to reasonableness and hence to the extent of the loss which was
sustained, since if the plaintiff did not intend to rebuild he had lost nothing except the
difference in value, if any. However, where the diminution in value caused by the breach
was nil, it was not correct to award the cost of reinstatement as an alternative to the
difference in value, since it could not be right to remedy the injustice of awarding too
little by unjustly awarding too much. The cost of reinstatement and diminution in value
were not the only available measures of recovery for breach of contract for defective
building works and the court was not confined to opting for one or the other. Where there
had been a breach of performance resulting in loss of expectation of performance,
satisfaction of a personal preference or a pleasurable amenity but there had been no
diminution in value the court could award modest damages to compensate the plaintiff. The
judge’s finding that the owner’s loss did not extend to the cost of
reinstatement because it would be unreasonable to incur the cost of demolishing the
existing pool and building a new and deeper one would be upheld and since there had been
no challenge to the award of £2,500 general damages for loss of amenity the appeal would
be allowed and the judge’s judgment restored.
Decision of the Court of Appeal [1994] 3 All ER 801 reversed. ...
LORD JAUNCEY OF TULLICHETTLE. My Lords, the respondent entered into a contract with
the appellant for the construction by them of a swimming pool at his house in Kent. The
contract provided for the pool having a maximum depth of 7 ft 6 in but, as built, its
maximum depth was only 6 ft. The respondent sought to recover as damages for breach of
contract the cost of demolition of the existing pool and construction of a new one of the
required depth. The trial judge made the following findings which are relevant to this
appeal: (1) the pool as constructed was perfectly safe to dive into; (2) there was no
evidence that the shortfall in depth had decreased the value of the pool; (3) the only
practicable method of achieving a pool of the required depth would be to demolish the
existing pool and reconstruct a new one at a cost of £21,560; (4) he was not satisfied
that the respondent intended to build a new pool at such a cost; (5) in addition such cost
would be wholly disproportionate to the disadvantage of having a pool of a depth of only
6ft as opposed to 7 ft 6 in and it would therefore be unreasonable to carry out the works;
and (6) that the respondent was entitled to damages for loss of amenity in the sum of
£2,500.
The Court of Appeal by a majority (Staughton and
Mann LJ; Dillon LJ dissenting) ([1994] 3 All ER 801, [1994] 1 WLR 650) allowed the appeal,
holding that the only way in which the respondent could achieve his contractual objective
was by reconstructing the pool at a cost of £21,560 which was accordingly a reasonable
venture.
...
Damages are designed to compensate for an established loss and not to provide a gratuitous
benefit to the aggrieved party, from which it follows that the reasonableness of an award
of damages is to be linked directly to the loss sustained. If it is unreasonable in a
particular case to award the cost of reinstatement it must be because the loss sustained
does not extend to the need to reinstate. A failure to achieve the precise contractual
objective does not necessarily result in the loss which is occasioned by a total
failure....
I take the example suggested during argument by
my noble and learned friend Lord Bridge of Harwich. A man contracts for the building of a
house and specifies that one of the lower courses of brick should be blue. The builder
uses yellow brick instead. In all other respects the house conforms to the contractual
specification. To replace the yellow bricks with blue would involve extensive demolition
and reconstruction at a very large cost. It would clearly be unreasonable to award to the
owner the cost of reconstructing because his loss was not the necessary cost of
reconstruction of his house, which was entirely adequate for its design purpose, but
merely the lack of aesthetic pleasure which he might have derived from the sight of blue
bricks. Thus in the present appeal the respondent has acquired a perfectly serviceable
swimming pool, albeit one lacking the specified depth. His loss is thus not the lack of a
usable pool with consequent need to construct a new one. Indeed were he to receive the
cost of building a new one and retain the existing one he would have recovered not
compensation for loss but a very substantial gratuitous benefit, something which damages
are not intended to provide.
What constitutes the aggrieved party’s loss is in every case a question of fact and
degree. Where the contract breaker has entirely failed to achieve the contractual
objective it may not be difficult to conclude that the loss is the necessary cost of
achieving that objective. Thus if a building is constructed so defectively that it is of
no use for its designed purpose the owner may have little difficulty in establishing that
his loss is the necessary cost of reconstructing. Furthermore, in taking reasonableness
into account in determining the extent of loss it is reasonableness in relation to the
particular contract and not at large. ...
However, where the contractual objective has been achieved to a substantial extent the
position may be very different.
It was submitted that where the objective of a building contract involved satisfaction of
a personal preference the only measure of damages available for a breach involving failure
to achieve such satisfaction was the cost of reinstatement. In my view this is not the
case. Personal preference may well be a factor in reasonableness and hence in determining
what loss has been suffered but it cannot per se be determinative of what that loss is.
My Lords, the trial judge found that it would be
unreasonable to incur the cost of demolishing the existing pool and building a new and
deeper one. In so doing he implicitly recognised that the respondent’s loss did not
extend to the cost of reinstatement. He was, in my view, entirely justified in reaching
that conclusion. It therefore follows that the appeal must be allowed.
It only remains to mention two further matters. The appellant argued that the cost of
reinstatement should only be allowed as damages where there was shown to be an intention
on the part of the aggrieved party to carry out the work. Having already decided that the
appeal should be allowed I no longer find it necessary to reach a conclusion on this
matter. However, I should emphasise that in the normal case the court has no concern with
the use to which a plaintiff puts an award of damages for a loss which has been
established. Thus, irreparable damage to an article as a result of a breach of contract
will entitle the owner to recover the value of the article irrespective of whether he
intends to replace it with a similar one or to spend the money on something else.
Intention, or lack of it, to reinstate can have relevance only to reasonableness and hence
to the extent of the loss which has been sustained. Once that loss has been established
intention as to the subsequent use of the damages ceases to be relevant.
The second matter relates to the award of £2,500 for loss of amenity made by the trial
judge. The respondent argued that he erred in law in making such award. However, as the
appellant did not challenge it, I find it unnecessary to express any opinion on the
matter.
LORD MUSTILL. My Lords, I agree that this appeal should be allowed for the reasons
stated by my noble and learned friends Lord Jauncey of Tullichettle and Lord Lloyd of
Berwick. I add some observations of my own on the award by the trial judge of damages in a
sum intermediate between on the one hand the full cost of reinstatement and on the other
the amount by which the malperformance has diminished the market value of the property on
which the work was done: in this particular case, nil. This is a question of everyday
practical importance to householders who have engaged contractors to carry out small
building works, and then find (as often happens) that performance has fallen short of what
was promised. I think it proper to enter on the question here, although there is no appeal
against the award, because the possibility of such a recovery in a suitable case sheds
light on the employer’s claim that reinstatement is the only proper measure of
damage.
The proposition that these two measures of damage
represent the only permissible bases of recovery lies at the heart of the employer’s
case. From this he reasons that there is a presumption in favour of the cost of
restitution, since this is the only way in which he can be given what the contractor had
promised to provide. Finally, he contends that there is nothing in the facts of the
present case to rebut this presumption.
The attraction of this argument is its avoidance of the conclusion that, in a case such as
the present, unless the employer can prove that the defects have depreciated the market
value of the property the householder can recover nothing at all. This conclusion would be
unacceptable to the average householder, and it is unacceptable to me. It is a common
feature of small building works performed on residential property that the cost of the
work is not fully reflected by an increase in the market value of the house, and that
comparatively minor deviations from specification or sound workmanship may have no direct
financial effect at all. Yet the householder must surely be entitled to say that he chose
to obtain from the builder a promise to produce a particular result because he wanted to
make his house more comfortable, more convenient and more conformable to his own
particular tastes; not because he had in mind that the work might increase the amount
which he would receive if, contrary to expectation, he thought it expedient in the future
to exchange his home for cash. To say that in order to escape unscathed the builder has
only to show that to the mind of the average onlooker, or the average potential buyer, the
results which he has produced seem just as good as those which he had promised would make
a part of the promise illusory and unbalance the bargain.... If the appellant’s
argument leads to the conclusion that in all cases like the present the employer is
entitled to no more than nominal damages, the average householder would say that there
must be something wrong with the law.
In my opinion there would indeed be something wrong if, on the hypothesis that cost of
reinstatement and the depreciation in value were the only available measures of recovery,
the rejection of the former necessarily entailed the adoption of the latter; and the court
might be driven to opt for the cost of reinstatement, absurd as the consequence might
often be, simply to escape from the conclusion that the promisor can please himself
whether or not to comply with the wishes of the promisee which, as embodied in the
contract, formed part of the consideration for the price. Having taken on the job the
contractor is morally as well as legally obliged to give the employer what he stipulated
to obtain, and this obligation ought not to be devalued. In my opinion, however, the
hypothesis is not correct. There are not two alternative measures of damage, at opposite
poles, but only one: namely the loss truly suffered by the promisee. In some cases the
loss cannot be fairly measured except by reference to the full cost of repairing the
deficiency in performance. In others, and in particular those where the contract is
designed to fulfil a purely commercial purpose, the loss will very often consist only of
the monetary detriment brought about by the breach of contract. But these remedies are not
exhaustive, for the law must cater for those occasions where the value of the promise to
the promisee exceeds the financial enhancement of his position which full performance will
secure. This excess, often referred to in the literature as the ‘consumer
surplus’ (see eg the valuable discussion by Harris, Ogus and Phillips, ‘Contract
Remedies and the Consumer Surplus’ (1979) 95 LQR 581) is usually incapable of precise
valuation in terms of money, exactly because it represents a personal, subjective and
non-monetary gain. Nevertheless, where it exists the law should recognise it and
compensate the promisee if the misperformance takes it away. ... Neither the contractor
nor the court has the right to substitute for the employer’s individual expectation
of performance a criterion derived from what ordinary people would regard as sensible. As
my Lords have shown, the test of reasonableness plays a central part in determining the
basis of recovery, and will indeed be decisive in a case such as the present when the cost
of reinstatement would be wholly disproportionate to the non-monetary loss suffered by the
employer. But it would be equally unreasonable to deny all recovery for such a loss. The
amount may be small, and since it cannot be quantified directly there may be room for
difference of opinion about what it should be. But in several fields the judges are well
accustomed to putting figures to intangibles, and I see no reason why the imprecision of
the exercise should be a barrier, if that is what fairness demands.
My Lords, once this is recognised, the puzzling and paradoxical feature of this case, that
it seems to involve a contest of absurdities, simply falls away. There is no need to
remedy the injustice of awarding too little by unjustly awarding far too much. The
judgment of the trial judge acknowledges that the employer has suffered a true loss and
expresses it in terms of money. Since there is no longer any issue about the amount of the
award, as distinct from the principle, I would simply restore his judgment by allowing the
appeal. ...