Facts
- A contractor agreed to build a residence for homeowners for $26,765; the homeowners paid $20,000 during construction.
- Disputes arose over alleged defects and incomplete work; the homeowners withheld further payment.
- The contractor stopped work and filed a construction lien to recover the unpaid balance.
- The contractor conceded certain omitted items (including kitchen cabinets, gutters and downspouts, sidewalk, closet poles, and an entrance seat) totaling $1,601.95.
- The homeowners claimed numerous additional defects and deviations, emphasizing that an interior wall between the living room and kitchen was misplaced, narrowing the living room by more than one foot.
- Correcting the wall placement would require tearing down and rebuilding the wall at an estimated cost of about $4,000; the house was otherwise finished and occupied by the homeowners.
- Evidence indicated the wall misplacement did not reduce the home’s market value.
Issues
- Whether the contractor’s performance, despite defects and deviations, constituted substantial performance permitting recovery on the contract (subject to deductions).
- What measure of damages applies for defective or incomplete construction after substantial performance: cost of repair/completion or diminution in value, particularly where correction would require major reconstruction.
Decision
- The Wisconsin Supreme Court affirmed the judgment for the contractor.
- The court held the contractor substantially performed the building contract because the homeowners received a usable residence fulfilling the contract’s essential purpose.
- The contractor was entitled to the contract price minus deductions for incomplete or defective items.
- For correctable defects not requiring major destruction, the proper deduction is the reasonable cost of repair/completion.
- For the misplaced wall, awarding the $4,000 repair cost was improper because the correction would cause unreasonable economic waste; absent proof of diminution in value, no damages were allowed for that defect.
Legal Principles
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A contractor cannot recover on a construction contract without substantial performance.
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Substantial performance in home construction is determined by whether performance satisfies the contract’s essential purpose, not strict compliance with every specification.
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Damages for defective or incomplete construction are measured by:
- reasonable cost of completion/repair when feasible without unreasonable economic waste; or
- diminution in value (value as built versus value as contracted) when repair would entail unreasonable economic waste.
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The owner bears the burden to prove the appropriate amount of damages, including diminution in value when that measure applies.
Conclusion
The court concluded the contractor substantially performed because the homeowners received the essential benefit of a livable home, and it limited the owners’ recovery to provable deductions: cost-of-repair for minor items, but diminution in value (and thus no award here) for a major deviation where correction would require wasteful reconstruction and no loss in market value was shown.