Vermont Court Reverses Award Of Consequential Damages To Owner In Construction Defect Case

EBWS, LLC v. Britly Corporation
2007 VT 37; 2007 Vt. LEXIS 69 (Vt. May 25, 2007)

The Vermont Supreme Court held that the cost of an owner’s anticipated voluntary payments of employee wages and for product purchases during the temporary shutdown of a creamery pending repair of construction defects were not recoverable consequential damages because they could not reasonably have been within the contemplation of the defendant when it contracted to build the creamery.

EBWS filed suit against Britly for damages resulting from defective design and construction of a creamery in Strafford, Vermont. EBWS’ Complaint included causes of action for: (1) negligent design and execution, (2) negligent supervision, (3) consumer fraud, (4) breach of express warranties, (5) breach of contract, (6) breach of fiduciary duty, and (7) unjust enrichment. All claims except for breach of contract and warranty were, however, dismissed before trial.

At trial, the jury found Britly had breached the contract and its express warranty, and awarded EBWS: (1) $ 38,020 in direct damages for anticipated costs to repair the defects, and (2) $ 35,711 in consequential damages, consisting of wages which the owner anticipated paying its employees and payments it anticipated making to a neighboring dairy for milk during the period of shut down. At trial, the owner’s CEO had testified that the wage and product payments were not compelled by contract, but were voluntary. On appeal, Britly contended that because there was no contractual or legal obligation for EBWS to purchase milk or pay its employees, those damages were not foreseeable. EBWS countered that it is common knowledge that cows continue to produce milk, even if the processing plant is not working, and thus it is foreseeable that this loss would occur.

The Court concluded that it was not reasonable to expect Britly to foresee that its failure to perform under the contract would result in these types of damages. EBWS maintained no employment agreements with its employees obligating it to pay wages during periods of closure for repairs, dips in market demand, or for any other reason. Any losses EBWS might have suffered in the future because it chose to pay its employees during a plant closure for repairs would have been a voluntary expense and not in Britly’s contemplation at the time it entered the construction contract. Applying the traditional standard for recovery of consequential damages in contract actions, i.e., whether the damages were within the reasonable contemplation of the defendant at the time of contracting, the court held the damages were not recoverable. It stated, “[P]arties are not presumed to know the condition of each other’s affairs nor to take into account contracts with a third party that is not communicated.” The Court found that it was not reasonable to expect Britly to foresee losses incurred as a result of agreements that were informal in nature and carried no legal obligation on EBWS to perform.

Additionally, the Court held that because the actual costs of the wages and milk were uncertain as, the milk and wages were future expenses, this was an additional reason for denying recovery. The Court noted that at the time of the construction contract, EBWS had not yet begun to operate as a creamery and had no history of buying milk or paying employees. Thus, both the cost of the milk and the number and amount of wages of future employees that EBWS might have paid in the event of a plant closure for repairs were uncertain.

The court also rejected the owner’s appeal of the dismissal of its negligence claims against Britly, holding that the damages sought were solely economic in character and thus barred by the economic loss rule. The court rejected the owner’s argument that its claims fell within the professional services exception to the economic loss rule, holding that the contract was for construction services rather than professional services, such as architectural services.

Click here to view full opinion as PDF (provided with the permission of LexisNexis).

This entry was posted in Breach of Contract, Negligence, Owner and tagged , , , , . Bookmark the permalink.