Construction Law - Under Tennessee law what damages can be recovered for breach of a construction contract?

Analysis:  The recent Tennessee Court of Appeals decision of Brooke Buttrey v. Holloway's, Inc., No. M2011-01335-COA-R3-CV, 2012 WL 6451802 (Tenn. Ct. App. December 12, 2012) considered a case where the defendant failed to construct the home in a workmanlike manner.  The trial court concluded the defendant breached its contract based on the deficiencies in the construction of the home.  The next question was, what are the appropriate damages for the deficient work?  The trial court found the defendant was required to pay back the total amount the plaintiff paid to build her house, $143,272.00. Buttrey at 4.

It is clear under Tennessee law that in a breach of contract action, “damages resulting from the breach are a necessary element of the claim and, therefore, the claimant has the burden of proving damages at trial.”  Buttrey at 7.  Under Tennessee law the purpose of assessing damages in a breach of contact case is to "make the non-breaching party whole, to place the non-breaching party in the same position he would have been in had the contract been performed."  Buttrey at 7. (citing Hiller v. Hailey, 915 S.W.2d 800, 805 (Tenn. Ct. App. 1995)).  As a result, the “damages awarded by the trial court should have been designed to place Ms. Buttrey in the position she would have been in had the contract been performed as contemplated."  Buttrey at 7.

Tennessee courts have adopted specific measures of damages in construction defect cases.  This has been explained as follows:

As a general rule, the measure of damages is the cost of correcting the defects or completing the omissions, rather than the difference in value between what ought to have been done in the performance of the contract and what has been done, where the correction or completion would not involve unreasonable destruction of the work done by the contractor and the cost thereof would not be grossly disproportionate to the results to be obtained. On the other hand, the courts generally adhere to the view that if a builder or contractor has not fully performed the terms of the construction agreement, but to repair the defects or omissions would require a substantial tearing down and rebuilding of the structure, the measure of damages is the difference in value between the work if it had been performed in accordance with the contract and that which was actually done, or (as it is sometimes said) the difference between the value of the defective structure and that of the structure if properly completed.

Buttrey at 8. (citing Edenfield v. Woodland Manor, 462 S.W.2d 237, 241 (Tenn. Ct. App. 1970)). 

As a result, under Tennessee law there are basically two ways to measure damages: the cost of repair or diminution in value.  Buttrey at 8.  Usually the only appropriate way to assess damages is the cost of repair, however diminution in value can be used as a measure of damages in certain limited circumstances.  Buttrey at 8.  The court stated that "[g]enerally, the measure of damages will be the cost [of] repair unless the repairs are not feasible or the cost is disproportionate to the [diminution] in value.  If the cost of repairs is disproportionate when compared with the difference in value of the structure actually constructed and the one contracted for, the diminution value may be used instead as the measure of damages.  Furthermore, ‘the burden is on the defendant to show that the cost of repairs is unreasonable when compared to the diminution in value due to the defects and omissions.”  Buttrey at 8.

The court noted there is precedent under Tennessee law for awarding a homeowner the price that was paid to have the house built, however, the proof must include testimony the house currently has no value or that the cost for repairing the house equals the amount paid to have it built.  Buttrey at 9. (citing Bowling v. Jones, 300 S.W.3d 288, 296 (Tenn. Ct. App. 2008)).  In the Buttrey case, there was no such proof in the record.  Further, the plaintiff has lived in the home since December of 2003 and certainly there was value in living in the residence. 

Ultimately, the appellate court found the plaintiff failed to establish the cost of necessary repairs for the home.  In fact at trial the only direct evidence for the cost of repairs was approximately $36,766.17.  Buttrey at 10.  The appellate court therefore reviewed the record in detail in order to determine if there were other additional repair costs or specific damages.  By examining the record, the appellate court noted there was no specific evidence of the dollar amounts to make additional repairs however it is clear additional repairs were required.  As a result, the appellate court reduced the award from $143,272.00 to $73,532.34.  It appears that the appellate court did its best to review the trial court record in order to determine the correct amount of damages. 

This case shows how important it is to make sure appropriate and proper proof of damages is presented at trial.  Plaintiff has the burden to establish damages as a part of the plaintiff's claim in a construction defect case.  In this case, the damages may have been higher however direct evidence and proof of damages was limited.  As a result, the court was forced to speculate and try to discern from the record the amount of the damages where insufficient proof was offered to determine the amount of damages.  Further, the appellate court rejected the trial court's award providing the total cost of the contract as damages.  This was due to the fact the plaintiffs have lived in the home for almost ten years since construction so there was clearly some value in the home and it was not completely worthless even though the work was not performed in a workmanlike manner.