The cost of reinstatement is the appropriate measure of damages for the breach of a building contract only if it is reasonable. If the cost of reinstatement is out of all proportion to the loss suffered or the benefit to be obtained, the appropriate measure of damages is the difference in value between the work as built and the work as specified in the contract even if that would result in a nominal award.
The House of Lords allowed an appeal by the builder, Ruxley Electronics, and restored Judge Diamond QC's award of pounds 2,500 damages to the plaintiff, Stephen Forsyth.
Mr Forsyth entered into a contract with the builder for the construction of a swimming pool with a deep end of 7ft 6in. The pool was built with a deep end of 6ft 9in. On the builder's claim for the balance of its account, Mr Forsyth counterclaimed the costs of rebuilding the pool.
Judge Diamond QC found that the pool as constructed was safe for diving, so that the shortfall in depth did not decrease the value of the pool; the only way of increasing the depth was to demolish the existing pool and start again; Mr Forsyth had no intention of building a new pool; taking into account Mr Forsyth's personal preferences it was unreasonable to award the costs of rebuilding the pool as it was wholly disproportionate to any prospective benefit, but an award for the loss of a general amenity of pounds 2,500 should be made. The Court of Appeal (Lord Justices Staughton and Mann, Lord Justice Dillon dissenting)  1 WLR 650 allowed Mr Forsyth's appeal.
Bryan McGuire and Michael Furston (Woolley Bevis & Diplock, Brighton) for the builder; Isaac Jacob and Andrew Bruce (Brook Martin & Co) for Mr Forsyth.
Lord Jauncey said that damages were designed to compensate for an established loss and not to provide a gratuitous benefit to the aggrieved party from which it followed that the reasonableness of an award of damages was to be linked directly to the loss sustained. If it was unreasonable to award the cost of reinstatement it must be because the loss sustained did not extend to the need to reinstate.
Personal preference might well be a factor in reasonableness and in determining what loss had been suffered but it could not per se be determinative of what that loss was. In the normal case the court had no concern with the use to which a plaintiff put an award of damages for a loss which had been established. Intention or lack of it to reinstate had relevance only to reasonableness and hence to the extent of the loss sustained.
Lord Lloyd, concurring, said that the object of damages was to compensate the plaintiff, not to punish the defendant. In building cases the pecuniary loss was almost always measured as either the difference in value of the work done or the cost of reinstatement. Where the cost of reinstatement was less than the difference in value, the measure of damages would invariably be the cost of reinstatement. By claiming the difference in value the plaintiff would be failing to take reasonable steps to mitigate his loss.
In many ordinary cases where reinstatement presented no special problem, the cost of reinstatement would be the obvious measure of damages, even where there was little or no difference in value or it was hard to assess. But Youngs v Kent (1921) 129 NE 889 established that the cost of reinstatement was not the appropriate measure of damages if the expenditure would be out of all proportion to the good to be obtained and that the appropriate measure of damages in such a case was the difference in value, even though it would result in a nominal award. If there was no diminution in value, the plaintiff had suffered no loss. His damages would be nominal.
The fact that the difference in value was assessed as nil could not make reasonable what the judge had found to be unreasonable. Reasonableness was not confined to the doctrine of mitigation.
As to the award of pounds 2,500, the judge took the view the contract was one for the provision of a pleasurable amenity and Mr Forsyth's pleasure was not so great as it would have been if the swimming pool had been 7ft 6in deep. That was a view he was entitled to take.
Lord Keith agreed. Lord Bridge and Lord Mustill concurred.
Ying Hui Tan, Barrister