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Repair or Replace? Understanding the Economic Waste Doctrine

One critical aspect of breach of contract litigation is the computation of damages. Typically, courts serve to create remedies that place the parties in the position they would have been if the contract had been performed. That means, in the case of an uncompleted construction project, that the courts are left to choose between calculating damages based on the diminished value of the project caused by the breach or the cost of repairing the defect. Generally speaking, courts typically go within the latter option to satisfy the project owner’s expectation interests.

However, state and federal courts applying state law recognize an important exception to this cost-of-repair rule — the Economic Waste Doctrine. This doctrine holds that, should granting repair costs to the owner result in “unreasonable economic waste,” then the proper measure of damages is to be the difference between the value of the project outlined in the contract and the value as delivered. In this brief article, we’ll review a brief history behind the doctrine, its role in government contracts, and some considerations that may tip the scale in how the doctrine is applied. If you have been accused of a construction defect claim, consult an experienced and aggressive Indianapolis construction litigation attorney as soon as possible.

Related: What Should You Do If Accused of Negligence-Related Construction Defects

A Brief History of the Economic Waste Doctrine

The Economic Waste Doctrine finds its roots in the well-known 1921 decision of Jacob & Youngs Inc. v. Kent, 230 N.Y. 239 involving a contract for the construction of a $77,000 custom residence. One of the specifications for construction in the contract for the plumbing was that all wrought iron pipe must be well-galvanized, lap welded Reading brand pipe. Unfortunately, through neither fraud nor intent, the builder installed Cohoes pipe, which failed to meet the contract specifications. Upon discovering of this breach, the owner was already occupying the residence and instructed the builder to remove the non-conforming pipe and replace it with Reading pipe. 

The builder, however, refused and requested that the owner instead pay the $3,483.46 balance remaining on the contract, given that the demand would require demolition of substantial portions of the completed structure. When the owner refused and the two parties moved to trial, the builder offered to show that the pipe used in the residence had the same quality, appearance, cost, and value as the Reading pipe requested. The trial court refused to admit this evidence and directed a verdict for the owner. 

The appellate court then reversed this ruling and ordered a new trial where Judge Benjamin Cardozo of the New Year Court of Appeals would deliver his famous decision to affirm the reversal of the appellate court. His reasoning was that the similarities between the pipes were, in fact, relevant and that the cost of remedying the defect was “grossly and unfairly out of proportion of the good to be attained.” He then went on to establish specific criteria for courts to review in determining whether unreasonable economic waste would result from enforcing contract terms, as it would in this famous case. For a legal ally who can help you better understand the ramifications of a famous case like this and any other case pertaining to construction law, turn to an Indianapolis construction dispute attorney.

Related: Defending Against Negligence and Defective Construction Claims

The Role of the Economic Waste Doctrine in Government Contracts

A fundamental principle of government contracts is the rule of strict compliance under which the government is entitled to require the contract to repair any defect at the contractor’s own cost. However, despite the strict compliance rule, the Economic Waste Doctrine has been successfully raised against the government since the 1960s. Unlike state law cases, government cases invoking the Economic Waste Doctrine typically involve situations where the contractor sues to recover costs incurred from repairing a non-conforming structure. In other words, the “economic waste” in question has already occurred, and the contractor is attempting to have the government cover the costs of repairing it. If you are presently involved in a government project and feel as if the proposed repairs will involve economic waste, don’t delay reaching out to one of our Indianapolis construction attorneys.


Related: Are You Ready to Secure More Government Contracts? Follow These Tips

Factors Which May Tip the Scales in How the Economic Waste Doctrine Is Applied

Jurisdictions greatly differ in how they apply the Economic Waste Doctrine, which is why it’s important to keep certain considerations in mind. Below, we’ve outlined just a few of the most crucial factors that can tip the scale in how this doctrine is applied:

  • Change in Value: What would be the change in market value of the property should these repairs be made? Does the cost to repair exceed any decrease in value caused by said defect?
  • Quality, Appearance, and Performance: Does the defect provide similar quality, appearance, and performance to that of which the owner originally contracted for?
  • Effect on Use: Is the property a residence or a commercial place of business? What is the effect of the defect on the use of the building?

This list, of course, is neither comprehensive nor all-inclusive; however, it does demonstrate that not all damages cases are the same. Whether or not the Economic Waste Doctrine will apply will almost certainly depend on one or all of these factors. To know for certain whether the Economic Waste Doctrine will apply to your case, contact an Indianapolis contractor lawyer as soon as you can.

If you would like to speak with an Indianapolis construction litigation attorney, please contact us today.

Disclaimer: The information contained in this article is for general educational information only. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation.