Ruxley Electronics & Construction Limited v Forsyth

The House of Lords held that the appropriate measure of damages for defective performance of a building contract is the loss actually suffered by the claimant, assessed having regard to established measures such as cost of reinstatement and diminution in value but subject to a reasonableness qualification. Where reinstatement would be wholly disproportionate to the benefit obtained it is not the appropriate measure and the court may award diminution in value or, where appropriate, a modest sum for loss of amenity. Intention to reinstate and the genuineness of that intention are relevant to the question whether reinstatement is a reasonable measure. The Court restored the trial judge's award of damages for loss of amenity and disturbance and set aside the Court of Appeal majority decision awarding the notional cost of complete reinstatement.

Background and parties. The respondent, Mr Stephen Forsyth, contracted with the appellants, Ruxley Electronics & Construction Ltd, to construct a domestic swimming pool to a specified maximum depth of 7 ft 6 in. The completed pool had a maximum depth of about 6 ft 9 in (or 6 ft in evidence summaries). The dispute concerned the proper measure of damages for the builder's failure to achieve the specified depth.

Procedural history. The case was tried before Judge Diamond QC who found (inter alia) that the pool was safe for diving, that the shortfall had produced no diminution in value, that the only practicable method of achieving the contract depth would be to demolish and rebuild at a very high cost (about 21,560), and that such rebuilding would be unreasonable and disproportionate. The trial judge awarded 2,500 for loss of amenity and 750 for disturbance. The Court of Appeal by majority allowed the employer's appeal and held the claimant was entitled to the cost of reinstatement; Dillon LJ dissented. The appellants then appealed to the House of Lords.

Issues framed. (i) What is the correct measure of damages for defective building work where cost of reinstatement is disproportionate to benefit? (ii) What role do reasonableness and the claimant's intention to reinstate play in selecting the measure? (iii) Whether an award for loss of amenity is permissible.

Court's reasoning and decision. The House reviewed authority on measures of damage (including Robinson v Harman; British Westinghouse; East Ham v Bernard Sunley; Jacob & Youngs; Bellgrove; Radford; Tito v Waddell (No 2)) and concluded that the correct enquiry is the claimant's true loss. Cost of reinstatement is the usual measure when it is reasonable to insist on reinstatement, but it is not automatic. If reinstatement would be out of all proportion to the benefit obtained it is unreasonable, and diminution in value (if any) is the appropriate measure. Where neither reinstatement nor diminution in value adequately compensates (for example where a pleasurable amenity has lost some subjective value), the court may award modest damages for loss of amenity. Intention to reinstate is relevant to whether reinstatement represents an actual loss. On these bases the House allowed the appeal, set aside the Court of Appeal order, restored the trial judge's award and remitted the cause for consistency with its judgment.

Appeal allowed. The House held that the correct measure of damages is the claimant's true loss: cost of reinstatement is recoverable only if it is reasonable to insist on reinstatement; where reinstatement would be wholly disproportionate the diminution in value (if any) is the measure, and where neither yields fair compensation the court may award damages for loss of amenity. The trial judge had correctly applied these principles and his judgment was restored.

Trial before Judge Diamond QC (Central London County Court) (judgment restored). Court of Appeal (majority allowed employer's appeal) reported at [1994] 3 All ER 801, [1994] 1 WLR 650 (16 December 1993). Appeal to House of Lords allowed [1995] UKHL 8 (29 June 1995); order restoring trial judge's decision and remitting to Central London County Court. Costs ordered against the respondent to the appellants for Court of Appeal and House of Lords proceedings (to be certified if not agreed).