[From Singapore Office] Case Update: Cost of Cure as Damages – Are Intention to Cure and Incurrence of Cost Prerequisites to Recovery?

Facts of Terrenus

In Terrenus, the contractor of a solar power plant was required by the contract to install solar panel rods to a minimum depth of 500mm, but failed to do so.

The plant owner commenced an action to claim the cost of cure as damages arising from the defective works. The owner alleged that the failure to achieve the minimum embedment depth caused the risk of structural failure of the solar panels during high winds. The contractor contended that the owner had failed to prove the extent of non-compliance and the risk of structural failure.

The trial judge awarded the owner nominal damages of SGD1,500 as it had failed to show that the works had substantial defects. The owner appealed the decision.

Decision in Terrenus

The appellate court dismissed the appeal, affirming that the owner was not entitled to substantial damages as it had failed to establish the extent of non-compliance.

While the above determination effectively disposed of the owner’s appeal, the court went on to address the second issue of whether the cost of cure would be awarded to the owner if it had established the alleged non-compliance.

The contractor had contended that the cost of cure should not be awarded because: (i) it would be disproportionate and unreasonable to do so as there was no real risk of structural failure, and (ii) further, the owner did not intend to rectify the alleged non-compliance.

The court’s decision: a claimant is, in principle, entitled to the cost of cure because:

1. the objective of damages is to put the claimant in the same situation as if the contract had been performed, i.e. to compensate the claimant for its “expectation loss” (the loss of the contractual bargain/benefit it had expected to enjoy), and
2. the cost of cure was the most logical and straightforward method of compensating the claimant’s expectation loss, since it came closest to giving the claimant actual performance without compelling the breaching party to perform.

As such, an intention to cure is not a prerequisite for awarding the cost of cure.

The court also clarified that it was not necessary for the cost of cure to be incurred in order to be awarded because loss from a contractual breach arises at the time of the breach, hence incurring the cost of cure is irrelevant to recoverability.

However, the court qualified the entitlement to cost of cure with considerations of reasonableness and proportionality. In particular, the quantum of the cost of cure may be disproportionate to the value of the expectation loss such that even though the claimant was in principle entitled to actual performance via the cost of cure, it did not make practical or economic sense to award it.

In this regard, an intention to cure is a relevant factor for assessing the reasonableness and proportionality of awarding the cost of cure, especially where it came to showing the claimant’s “consumer surplus”, i.e. the subjective value of the agreed performance to the claimant over and above the objective value. Other non-exhaustive factors are:

1. the extent of disproportionality between the cost of cure and the benefit that the claimant would derive from it;
2. the extent and seriousness of the damage/defect and its consequences;
3. the nature and purpose of the contract, and the degree to which the contractual objective has been substantially achieved; and
4. any personal subjective value attached to what had been promised under the contract to the claimant.

Conclusion

Circling back to the hypothetical of the house with rectangular pillars, whilst the prima facie remedy for the owner would be the cost of cure in damages, it may be rebutted by considerations of reasonableness and proportionality.

If the rectangular pillars do not materially affect the safety or space of the house, the owner is unlikely entitled to the cost of cure, unless there is some other loss of value to him that is so significant as to justify such cost (despite its excessiveness) – if so, then the spotlight should be cast on whether there is an intention to rebuild the house.