Groves v. John Wunder Co.

STONE, Justice.
Action for breach of contract. Plaintiff got judgment for a little over $15,000. Sorely disappointed by that sum, he appeals.

In August, 1927, S. J. Groves & Sons Company, a corporation (hereinafter mentioned simply as Groves), owned a tract of 24 acres of Minneapolis suburban real estate. It was served or easily could be reached by railroad trackage. It is zoned as heavy industrial property. But for lack of development of the neighborhood its principal value thus far may have been in the deposit of sand and gravel which it carried. The Groves company had a plant on the premises for excavating and screening the gravel. Nearby defendant owned and was operating a similar plant.

In August, 1927, Groves and defendant made the involved contract. For the most part it was a lease from Groves, as lessor, to defendant, as lessee; its term seven years. Defendant agreed to remove the sand and gravel and to leave the property 'at a uniform grade, substantially the same as the grade now existing at the roadway on said premises, and that in stripping the overburden it will use said overburden for the purpose of maintaining and establishing said grade.'

Under the contract defendant got the Groves screening plant. The transfer thereof and the right to remove the sand and gravel made the consideration moving from Groves to defendant, except that defendant incidentally got rid of Groves as a competitor. On defendant's part it paid Groves $105,000. So that from the outset, on Groves' part the contract was executed except for defendant's right to continue using the property for the stated term. (Defendant had a right to renewal which it did not exercise.)

Defendant breached the contract deliberately. It removed from the premises only 'the richest and best of the gravel' and wholly failed, according to the findings, 'to perform and comply with the terms, conditions, and provisions of said lease with respect to the condition in which the surface of the demised premises was required to be left.' Defendant surrendered the premises, not substantially at the grade required by the contract 'nor at any uniform grade.' Instead, the ground was 'broken, rugged, and uneven.' Plaintiff sues as assignee and successor in right of Groves.

As the contract was construed below, the finding is that to complete its performance 288,495 cubic yards of overburden would need to be excavated, taken from the premises, and deposited elsewhere. The reasonable cost of doing that was found to be upwards of $60,000. But, if defendant had left the premises at the uniform grade required by the lease, the reasonable value of the property on the determinative date would have been only $12,160. The judgment was for that sum, including interest, thereby nullifying plaintiff's claim that cost of completing the contract rather than difference in value of the land was the measure of damages. The gauge of damage adopted by the decision was the difference between the market value of plaintiff's land in the condition it was when the contract was made and what it would have been if defendant had performed. The one question for us arises upon plaintiff's assertion that he was entitled, not to that difference in value, but to the reasonable cost to him of doing the work called for by the contract which defendant left undone.

Defendant's breach of contract was wilful. There was nothing of good faith about it. Hence, that the decision below handsomely rewards bad faith and deliberate breach of contract is obvious. That is not allowable. Here the rule is well settled, and has been since Elliott v. Caldwell, that, where the contractor wilfully and fraudulently varies from the terms of a construction contract, he cannot sue thereon and have the benefit of the equitable doctrine of substantial performance. That is the rule generally. . . .

Jacob & Youngs, Inc. v. Kent, is typical. It was a case of substantial performance of a building contract. (This case is distinctly the opposite.) Mr. Justice Cardozo, in the course of his opinion, stressed the distinguishing features. 'Nowhere,' he said, 'will change be tolerated, however, if it is so dominant or pervasive as in any real or substantial measure to frustrate the purpose of the contract.' Again, 'the willful transgressor must accept the penalty of his transgression.'

In reckoning damages for breach of a building or construction contract, the law aims to give the disappointed promisee, so far as money will do it, what he was promised It is so ruled by a long line of decisions in this state, beginning with Carli v. Seymour, Sabin & Co., where the contract was for building a road. There was a breach. Plaintiff was held entitled to recover what it would cost to complete the grading as contemplated by the contract. . . .

Never before, so far as our decisions show, has it even been suggested that lack of value in the land furnished to the contractor who had bound himself to improve it any escape from the ordinary consequences of a breach of the contract.

A case presently as interesting as any of our own, is Sassen v. Haegle. The defendant, lessee of a farm, had agreed to haul and spread manure. He removed it, but spread it elsewhere than on the leased farm. Plaintiff had a verdict, but a new trial was ordered for error in the charge as to the measure of damages. The point was thus discussed by Mr. Justice Holt . . . 'But it is also true that the landlord had a perfect right to stipulate as to the disposal of the manure or as to the way in which the farm should be worked, and the tenant cannot evade compliance by showing that the farm became more valuable or fertile by omitting the agreed work or doing other work. Plaintiff's pleading and proof was directed to the reasonable value of performing what defendant agreed but failed to perform. Such reasonable cost or value was the natural and proximate damages. The question is not whether plaintiff made a wise or foolish agreement. He had a right to have it performed as made, and the resulting damage, in case of failure, is the reasonable cost of performance. Whether such performance affects the value of the farm was no concern of defendant.'

Even in case of substantial performance in good faith, the resulting defects being remediable, it is error to instruct that the measure of damage is 'the difference in value between the house as it was and as it would have been if constructed according to contract.' The 'correct doctrine' is that the cost of remedying the defect is the 'proper' measure of damages.

Value of the land (as distinguished from the value of the intended product of the contract, which ordinarily will be equivalent to its reasonable cost) is no proper part of any measure of damages for wilful breach of a building contract. The reason is plain.

The summit from which to reckon damages from trespass to real estate is its actual value at the moment. The owner's only right is to be compensated for the deterioration in value caused by the tort. That is all he has lost. . . . But not so if a contract to improve the same land has been breached by the contractor who refuses to do the work, especially where, as here, he has been paid in advance. The summit from which to reckon damages for that wrong is the hypothetical peak of accomplishment (not value) which would have been reached had the work been done as demanded by the contract.

The owner's right to improve his property is not trammeled by its small value. It is his right to erect thereon structures which will reduce its value. If that be the result, it can be of no aid to any contractor who declines performance. As said long ago in Chamberlain v. Parker,: 'A man may do what he will with his own, and if he chooses to erect a monument to his caprice or folly on his premises, and employs and pays another to do it, it does not lie with a defendant who has been so employed and paid for building it, to say that his own performance would not be beneficial to the plaintiff.' To the same effect is Restatement, Contracts, sec. 346. . . .

Suppose a contractor were suing the owner for breach of a grading contract such as this. Would any element of value, or lack of it, in the land have any relevance in reckoning damages? Of course not. The contractor would be compensated for what he had lost, i. e., his profit. Conversely, in such a case as this, the owner is entitled to compensation for what he has lost, that is, the work or structure which he has been promised, for which he has paid, and of which he has been deprived by the contractor's breach.

To diminish damages recoverable against him in proportion as there is presently small value in the land would favor the faithless contractor. It would also ignore and so defeat plaintiff's right to contract and build for the future. To justify such a course would require more of the prophetic vision than judges possess. This factor is important when the subject matter is trackage property in the margin of such an area of population and industry as that of the Twin Cities. . . .

The objective of this contract of present importance was the improvement of real estate. That makes irrelevant the rules peculiar to damages to chattels, arising from tort or breach of contract. Crowley v. Burns Boiler & Mfg. Co., dealt with a breach of contract for the sale of a steam boiler. The court observed: 'If the application of a particular rule for measuring damages to given facts results in more than compensation, it is at once apparent that the wrong rule has been adopted.'

That is unquestioned law, but for its correct application there must be ascertainment of the loss for which compensation is to be reckoned. In tort, the thing lost is money value, nothing more. But under a construction contract, the thing lost by a breach such as we have here is a physical structure or accomplishment, a promised and paid for alteration in land. That is the 'injury' for which the law gives him compensation. Its only appropriate measure is the cost of performance.

It is suggested that because of little or no value in his land the owner may be unconscionably enriched by such a reckoning. The answer is that there can be no unconscionable enrichment, no advantage upon which the law will frown, when the result is but to give one party to a contract only what the other has promised; particularly where, as here, the delinquent has had full payment for the promised performance.

It is said by the Restatement, Contracts, 346, comment b: 'Sometimes defects in a completed structure cannot be physically remedied without tearing down and rebuilding, at a cost that would be imprudent and unreasonable. The law does not require damages to be measured by a method requiring such economic waste. If no such waste is involved, the cost of remedying the defect is the amount awarded as compensation for failure to render the promised performance.'

The 'economic waste' declaimed against by the decisions applying that rule has nothing to do with the value in money of the real estate, or even with the product of the contract. The waste avoided is only that which would come from wrecking a physical structure, completed, or nearly so, under the contract. The cases applying that rule go no further. Illustrative are Buchholz v. Rosenberg, Burmeister v. Wolfgram. Absent such waste, as it is in this case, the rule of the Restatement, Contracts, 346, is that 'the cost of remedying the defect is the amount awarded as compensation for failure to render the promised performance.' That means that defendants here are liable to plaintiff for the reasonable cost of doing what defendants promised to do and have wilfully declined to do.

It follows that there must be a new trial. The initial question will be as to the proper construction of the contract. Thus far the case has been considered from the standpoint of the construction adopted by plaintiff and acquiesced in, very likely for strategic reasons, by defendants. The question has not been argued here, so we intimate no opinion concerning it, but we put the question whether the contract required removal from the premises of any overburden. The requirement in that respect was that the overburden should be used for the purpose of 'establishing and maintaining' the grade. A uniform slope and grade were doubtless required. But whether, if it could not be accomplished without removal and deposit elsewhere of large amounts of overburden, the contract required as a condition that the grade everywhere should be as low as the one recited as 'now existing at the roadway' is a question for initial consideration below.

The judgment must be reversed with a new trial to follow.

JULIUS J. OLSON, Justice (dissenting).
. . . . The involved lease provides that the granted premises were to be used by defendant 'for the purpose of removing the sand and gravel therefrom.' The cash consideration was $105,000, plus defendant's covenant to level and grade the premises to a specified base. There was no segregation or allocation of the cash consideration made applicable to any of the various items going into the deal, and the instrument does not suggest any sum as being representative of the cost of performance by defendant of the leveling and grading process. Nor is there any finding that the contractor 'wilfully and fraudulently' violated the terms of its contract. All that can be said is that defendant did nothing except to mine the sand and gravel purchased by it and deemed best suited to its own interest and advantage. No question of partial or substantial performance of its covenant is involved since it did nothing in that behalf. The sole question here is whether the rule adopted by the court respecting recoverable damages is wrong. The essential facts, not questioned, are that 'the fair and reasonable value as of the end of the term of said lease, May 1, 1934, of performing the said work necessary to put the premises in the condition in which they were required by the terms of said lease to be left, is the sum of $60,893.28,' and that if defendant 'had left said premises at a uniform grade as required by said lease, the fair and reasonable value of said premises on May 1, 1934, would have been the sum of $12,160.' In that sum, plus interest from May 1, 1934, plaintiff was awarded judgment, $15,053.58. His sole contention before the trial court and here is that upon these findings the court, as a matter of law, should have allowed him the cost of performance, $60,893.28, plus interest since date of the breach, May 1, 1934, amounting to more than $76,000.

Since there is no issue of fact we should limit our inquiry to the single legal problem presented: What amount in money will adequately compensate plaintiff for his loss caused by defendant's failure to render performance?

We have here then a situation where, concededly, if the contract had been performed, plaintiff would have had property worth, in round numbers, no more than $12,000. If he is to be awarded damages in an amount exceeding $60,000 he will be receiving at least 500 per cent more than his property, properly leveled to grade by actual performance, was intrinsically worth when the breach occurred. To so conclude is to give him something far beyond what the parties had in mind or contracted for. There is no showing made, nor any finding suggested, that this property was unique, specially desirable for a particular or personal use, or of special value as to location or future use different from that of other property surrounding it. Under the circumstances here appearing, it seems clear that what the parties contracted for was to put the property in shape for general sale. And the lease contemplates just that, for by the terms thereof defendant agreed 'from time to time, as the sand and gravel are removed from the various lots leased, it will surrender said lots to the lessor' if of no further use to defendant 'in connection with the purposes for which this lease is made.'

The theory upon which plaintiff relies for application of the cost of performance rule must have for its basis cases where the property or the improvement to be made is unique or personal instead of being of the kind ordinarily governed by market values. His action is one at law for damages, not for specific performance. As there was no affirmative showing of any peculiar fitness of this property to a unique or personal use, the rule to be applied is, I think, the one applied by the court. The cases bearing directly upon this phase so hold. Briefly, the rule here applicable is this: Damages recoverable for breach of a contract to construct is the difference between the market value of the property in the condition it was when delivered to and received by plaintiff and what its market value would have been if defendant had fully complied with its terms.

The principle for which I contend is not novel in construction contract cases. It is well stated in McCormick, Damages, as follows: 'In whatever way the issue arises, the generally approved standards for measuring the owner's loss from defects in the work are two: First, in cases where the defect is one that can be repaired or cured without undue expense, so as to make the building conform to the agreed plan, then the owner recovers such amount as he has reasonably expended, or will reasonably have to spend, to remedy the defect. Second, if, on the other hand, the defect in material or construction is one that cannot be remedied without an expenditure for reconstruction disproportionate to the end to be attained, or without endangering unduly other parts of the building, then the damages will be measured not by the cost of remedying the defect, but by the difference between the value of the building as it is and what it would have been worth if it had been built in conformity with the contract.' . . .

If this were a case to recover damages for tortious injury the applicable rule is the difference in the market value and not the cost of restoring the premises to the former condition if such exceeds the diminution in value. In Heath v. Minneapolis, St. P. & S. Ste. M. Ry. Co.,. it was held that, 'The rental value plus the cost of restoration is the true measure of damages, in cases of continuing trespass, when it appears that this is less than the difference between the value of the premises before and immediately after the wrong.'. . .

. . . In 1 Restatement, Contracts, 346, Illustrations of Subsection (1), par. 4, the same thought is thus stated: 'A contracts to construct a monumental fountain in B's yard for $5,000, but abandons the work after the foundation has been laid and $2800 has been paid by B. The contemplated fountain is so ugly that it would decrease the number of possible buyers of the place. The cost of completing the fountain would be $4000. B can get judgment for $1800, the cost of completion less the part of price unpaid.' But that is not what plaintiff's predecessor in interest contracted for. Such a provision might well have been made, but the parties did not. They could undoubtedly have provided for liquidated damages for nonperformance . . . or they might have determined in money what the value of performance was considered to be and thereby have contractually provided a measure for failure of performance.

The opinion also suggests that this property lies in an area where the owner might rightly look for future development, being in a so-called industrial zone, and that as such he should be privileged to so hold it. This he may of course do. But let us assume that on May 1, 1934, condemnation to acquire this area had so far progressed as to leave only the question of price (market value) undetermined; that the area had been graded in strict conformity with the contract but that the actual market value of the premises was only $12,160, as found by the court and acquiesced in by plaintiff, what would the measure of his damages be? Obviously, the limit of his recovery could be no more than the then market value of his property. In that sum he has been paid with interest and costs; and he still has the fee title to the premises, something he would not possess if there had been condemnation. In what manner has plaintiff been hurt beyond the damages awarded? As to him 'economic waste' is not apparent. Assume that defendant abandoned the entire project without taking a single yard of gravel therefrom but left the premises as they were when the lease was made, could plaintiff recover damages upon the basis here established? The trouble with the prevailing opinion is that here plaintiff's loss is not made the basis for the amount of his recovery but rather what it would cost the defendant. No case has been decided upon that basis until now.

Plaintiff asserts that he knows of no rule 'giving a different measure of damages for public contracts and for private contracts in case of nonperformance.' It seems to me there is a clear distinction to be drawn with respect to the application of the rule for recoverable damages in case of breach of a public works contract from that applicable to contracts between private parties. The construction of a public building, a sewer, drainage ditch, highway, or other public work, permits of no application of the market value doctrine. There simply is and can be no 'market value' as to such. And for this cogent reason there can be but one rule of damages to apply, that of cost of completion of the thing contracted to be done. I think the judgment should be affirmed.