Facts
- Groves owned approximately 24 acres near Minneapolis containing sand and gravel deposits and operated a screening plant on the premises.
- Groves leased the property and plant to John Wunder Co. for seven years in exchange for $105,000 and Wunder’s promise to leave the premises graded at a uniform level, using overburden to establish the required grade.
- Wunder removed the best gravel but willfully failed to perform the promised grading, leaving the land broken, rugged, and uneven.
- The reasonable cost to complete the grading work was found to be over $60,000.
- If Wunder had fully performed, the property’s value would have been about $12,160.
Issues
- For a willful breach of a construction-type obligation to grade land, are damages measured by the reasonable cost of completion or by the diminution in market value?
Decision
- The Minnesota Supreme Court reversed the damages award and ordered a new trial on damages.
- The court held that, given the willful breach, damages should be measured by the reasonable cost of performing the grading work Wunder promised and left undone, rather than by diminution in value.
- The court rejected reliance on substantial performance principles to limit damages in the face of bad-faith nonperformance.
Legal Principles
- A contractor who willfully breaches a construction contract in bad faith cannot invoke the equitable doctrine of substantial performance to reduce liability.
- When performance is willfully omitted, the standard measure of expectation damages is the reasonable cost to complete the promised work, even if that cost exceeds the increase in market value.
- Limiting damages to diminution in value is inappropriate when it would allow a breaching party to benefit from deliberate nonperformance; contract damages protect the promisee’s bargain, not only market valuation.
- The “economic waste” rationale is confined to cases where completion would require destruction of an existing structure; it does not bar cost-of-completion damages for unperformed excavation or grading.
Conclusion
The court required use of the cost-of-completion measure for a willful failure to grade land as promised, rejecting diminution-in-value damages that would reward deliberate breach and denying the breaching party protection under substantial performance.