July 12, 2017

Limitations on Contract Damages: The ‘Betterment' Argument

A fundamental purpose of contract damages is to place a non-breaching party in the same position that it would have been in had its contract not been breached. Accordingly, remediation “enhancements” that give the non-breaching party more than was intended in the original scope of work must be credited to the damages claimed. These types of enhancements are known in the construction industry as “betterment.”

Betterment can exist throughout a construction project. It appears most frequently in the context of (1) repair of defective work, (2) correction of defective design and (3) substitution of materials. The analysis of whether betterment exists generally begins with the owner’s original project scope requirements and design intent — the theory is that the owner’s expectations are identified and described in the original design and construction contracts. Subsequent enhancements that give the owner a “better” project than that for which the owner originally bargained must be excluded from the owner’s contract damages. Such subsequent enhancements most frequently result from directed or constructive changes in design standards and improvements in materials and workmanship, which (1) permit a better or different use of the project than originally contemplated; (2) provide a more durable project than originally contemplated; or (3) otherwise enhance the value of the project beyond original design intent. 

Indeed, betterment can exist in many forms. As a result, the typical analysis involves evaluating subcategories of betterment. 

Usage Betterment

“Usage betterment” results from changes in design standards that permit a better or different use of the project than originally intended. For example, suppose a concrete deck on a commercial building is initially designed and constructed to merely facilitate the delivery of items that would be stored inside the building, and the owner subsequently decides to use the deck as an area to actually store items of a significant size and weight. If that deck later collapses and the owner brings an action, the owner will not be entitled the damages to replace the deck with the increased load-bearing capacity. The design professionals and contractor can argue that the change in usage is outside the original intended design requirements for the project, therefore such changes would constitute betterment. The proper measure of damages, therefore, should be the amount necessary to restore the deck to its original condition and intended use. The owner would be responsible for the costs incurred in increasing the load capacity of the deck.

Quality Betterment

In any dispute over repairs, one betterment question is whether the demanded repairs, although not altering usage, will nevertheless result in work that exceeds the owner’s original expectations regarding the agreed scope of and requirements for the completed project. Reasonable repairs that merely effectuate the owner’s original intent do not constitute betterment. But repairs that enhance original design standards and thereby increase the project’s value or extend the project’s original product warranties can constitute betterment. For example, if an owner contracts for the construction of a single-ply roofing system to be installed on a building, and subsequent efforts to replace the allegedly defective roof involve the installation of a four-ply roof, the roofer could argue that the owner is not entitled to their full replacement cost. The improvement in the quality of the roofing materials would constitute betterment, for which the owner could not recover. 

Durability Betterment

Even when a replacement product is of the same quality as originally specified, betterment may be found where the replacement product extends the useful life of the work beyond that originally contemplated. The roofing example can also be used to illustrate this point. If the roofing contract specified that the roofing system would be watertight for 10 years, and the system does not begin leaking until the fifth year, the owner may not be able to recover its full replacement cost. The contractor could argue that the owner already had five years use out of the old roof and should not be able to reap the full benefits of a new 10-year roof, because that would effectively extend the expected roof’s life five years beyond the original warranty.

In the end, betterment is a key concept to keep in mind in evaluating potential contract damages in construction disputes. If the damages include an amount for enhancements that give the non-breaching party more than what was originally bargained for or more than what was intended, that amount will likely need to be credited to the damages claimed. 

For an in-depth discussion of the concept of betterment, see Sections § 19:26-29 of Bruner & O’Connor on Construction Law.

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