The next case American Standard v. Schectman again deals with a case of incomplete performance but it comes to exactly the opposite conclusion from peevyhouse which we saw in the last lecture and Jacob & Young's v. Kent which we saw in the beginning of the course. The plaintiff in this case is American Standard which ran a pig iron manufacturing plant on the Niagara River at the western end of New York State. When they decided to close the plant, they contracted with Harold Schectman, a demolition and excavating contractor who paid $275,000 to buy the buildings and other structures and most of the equipment. In exchange for these, Schectman also promise "to remove the equipment, demolish the structures and grade the property as specified in preparation for American Standard sale of the property". As it turns out, Schectman did not comply with these contractual requirements. There was "a substantial deviation from the required grade lines" and there were still walls, foundations and other structures jutting out from the ground. By the time of trial American Standard had nevertheless succeeded in selling the property for $193,000 which Schectman contended was only $3,000 less than its fair market value. At trial, the judge instructed the jury that the proper measure of damages was the cost of completion not the diminution in the property's value. The jury went on to award American Standard $90,000 in damages rather than the $3,000 that Schectman argued for. We are reading the decision from the appellate division of the Supreme Court of New York. Recall that New York confusingly uses the term Supreme Court for its lowest level of courts. The question on appeal was whether the plaintiff was entitled only to difference in value damages rather than cost of completion. Justice Hancock ruled for the plaintiffs but his opinion is not entirely satisfying. Justice Hancock's reasoning takes cost of completion as the default rule. "In the usual case where the contractors performance has been defective or incomplete, the reasonable cost of replacement or completion is the measure." His task is to figure out whether precedents like Jacob & Young v. Kent require him to deviate from this general rule. Jacob and Young's as a decision of the Court of Appeals of New York was binding precedent for this case. As you'll recall the rule there was that when the cost of completion was grossly and unfairly out of proportion to the good to be attained, the court would calculate damages based on diminution in value rather than cost of completion. In that case, Judge Cardozo found that requiring a contractor to replace an inadvertent substitution of an equally good pipe with the contracted brand would be grossly disproportionate and so Cardozo awarded only the minimal diminution in value. Justice Hancock makes three arguments for distinguishing American Standard v. Schectman from Jacob & Young's. The first argument rests on the distinction between unintentional good faith omissions and intentional ones. He relies on Judge Cardozo's statement in Jacob & Young's that "a contractor who would ask the court to apply the diminution in value measure 'as an instrument of justice' must not have breached the contract intentionally and must show substantial performance made in good faith." In this case the contractor denied that the contract even required him to do the grading. He was now being sued for failing to do. It clearly wasn't an oversight, he intended not to grade the property as the court found the contract required. Academics have supported this distinction as a test for what type of damages to award. In a 1982 article, Patricia Marshall argued that the key factor is whether the breach was willful or not willful. The highest possible damages usually cost of completion should be awarded where the breaching party is willful in order to deter such willful breaches. One thing that may puzzle you about this argument though is that the mining company and peevyhouse seems to have behaved even more egregiously more willfully and yet the peevyhouse has received only damages equal to the diminution in value of their property. We will see that the court's other arguments are similarly out of alignment with peevyhouse. The court's second main argument is about what counts as economic waste for purposes of Jacob and Young's. In this case, the court tells us that disparity in relative economic benefits is not the equivalent of economic waste which was invoked in Jacob & Young's v. Kent, but does it really give us a satisfying substitute rule? Instead it counters with the principle from Chamberlain v. Parker that a landowner is allowed to build a "monument to his caprice or folly and that the court will still enforce the contract even where performance of the contract would diminish the value of the owner's land." At least the market value of the owner's land. It cites a line of cases where like here plaintiffs saw it and received cost of completion damages far exceeding any increase in the land's market value. The problem with this line of argument is that it proves too much. Why wasn't Kent's desire for reading pipe a monument to his caprice or folly and therefore deserving of cost of completion damages? The court attempts to argue that the key distinction of economic waste is defects in construction which are irremediable or which may not be repaired without a substantial tearing down of the structure as in Jacob & Young's. But peevyhouse did not involve any tearing down of structures or irremediable defects. There the mining companies simply failed to fulfill its obligation to remediate and yet it only had to pay for diminishing the value. Timothy Mirus has argued that the way to distinguish monuments to ones own folly from cases like this one is to look at subjective versus objective value. In peevyhouse the owners intended to keep the property and the main purpose of the restoration was to improve their subjective enjoyment of the property. The same goes for monument to folly cases. Mirus suggests that in these cases the correct measure is cost of completion since the plaintiffs truly want the end result of completion. On the other hand in this case American Standard sold the property immediately and so we can conclude that it's only real interest in the land was it's market value. In cases such as this one Mirus argues the diminution in value of the property is the proper measure of damages. The third distinction the court attempts to draw is between the main purpose of the contract and incidental purposes. Justice Hancock argues that the peevyhouse court gave only diminution of value damages because the failure to restore the land was only incidental to the contract whose main purpose was to extract coal. On the other hand, he views the grading work as central to the purpose of the contract between American Standard v. Schectman. Rather than provide arguments for these positions, Justice Hancock merely says that the grading code cannot be said to be incidental. He claims without justification that Schectman "can hardly assert that what he left unfinished was of trivial or inappreciable importance." But we very much could dispute the court's assertion. Remember who is paying whom here, Schectman paid American Standard more than a quarter of a million dollars to purchase its old equipment. From that perspective the agreement to grade the property seems incidental or no less incidental than the bargain for contract provisions the peevyhouse has had with the Garland coal company. Both the cost of performance and diminution in value damage measures, they can be seen as ways of implementing expectation damages but they do so under different assumptions about what the plaintiff will do with the damage money. Cost of performance implicitly assumes that the plaintiff will take the damages and use it to actually purchase performance. Cost or performance accordingly puts the plaintiff in the position she would have been in if the defendant had performed by giving the plaintiffs sufficient funds to buy substitute performance. Diminution in value damages on the other hand, implicitly assume that plaintiff is not interested in using the money to buy substitute performance and instead tries to put the plaintiff in the same economic position as if performance had occurred by giving her sufficient funds to compensate for any diminution in value caused by the plaintiff's breach. What's particularly perverse about the Schectman decision is that the plaintiff has no opportunity to use the money to purchase substitute performance because American Standard has already sold the property. Giving cost of performance in such a situation can overcompensate providing the plaintiff with a kind of windfall. One idea for how to improve this legal mess is to allow plaintiffs to choose between damages for diminution in value or specific performance but not damages for cost of completion. Where plaintiffs really do want to elect monuments to their own folly they can insist on specific performance by the defendant. But American Standard wouldn't really have wanted specific performance since they didn't have any remaining interest in having the property graded properly. Now that the property had been sold, all it lost was the value of the property. And so it would settle with Schectman for anything over $3,000. Of course plaintiffs like American Standard could still sue for a specific performance and then use that or court order in order to bargain for a significant side payments from the defendants who otherwise would have to pay the entire cost of completing the contract themselves. And now let's look at this quiz. Imagine that Mark hires a contractor to build an incredibly ugly building on his property. If built, the building will actually blight the view and reduce the value of Mark's property. The contractor pours a foundation but then fails to complete the project. In which of the following situations is it more appropriate to calculate damages based on cost of completion? A, Mark is planning to live on the property for the rest of his life. The building has been designed by his favorite modernist architect. Or B, Mark is a misguided real estate developer hoping to flip the property. He thinks the building will give him a better price for it. Well you should see that cost of completion damages are more appropriate in situation A. Here Mark seeks to get the subjective value of the building which she appreciates even if no one else does. In Professor Mirus' view, cases involving subjective value justify damages based on cost of completion. In situation B, the only value of the building to Mark is in its ability to make the property more valuable when sold. This is a matter of objective value and so courts should award damages based on the diminution in market value which in this case is likely to be very small or even zero. We've seen great inconsistency in the cases about when the proper measure of damages is diminution of value as opposed to cost of completion. You should be aware that some considerations that courts take into account when deciding which type of damages to allow are; whether the nonconformity was willful or accidental, whether the case involves subjective or objective value and the centrality of the omission to the original agreement. But keep in mind that the default rule remains cost of completion.
