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  • Application of economic waste rule does not require evidence of diminished value

    The economic waste doctrine will prevent a party from obtaining a windfall for construction defects. But an appeals court recently clarified that evidence of a property's diminished value as a result of the defect is not necessary in the damages equation.

    Joe Forward

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    Application of economic waste rule 
does 
not require evidence of 
diminished value Dec. 30, 2010 – In determining whether a defendant must fully replace a construction defect or simply repair it, application of the economic waste rule does not require the defendant to present evidence of the property’s diminished value.

    Champion Companies of Wisconsin Inc. sold bricks to Stafford Development LLC, which Ricky Zanow owned. Glen-Gery Corp. manufactured the bricks. Stafford Development used the bricks to build Zanow’s home. Turns out, the bricks had cosmetic defects.

    Zanow sued Glen-Gery seeking $344,000 in damages to replace every brick. Glen-Gery argued that repairing the bricks was the proper remedy, and repairs would cost less than $7,500. Neither party offered credible evidence as to the diminished value of the property.

    The circuit court awarded Zanow $11,000 to re-stain the bricks, ruling that the damages were cosmetic, not structural, and the cost of replacing every brick would constitute unreasonable economic waste. Zanow appealed, arguing that the economic waste rule does not apply if there is no evidence of the property’s diminished value to weigh against the cost of repair.

    In Zanow v. Glen-Gery Corp., 2009AP2891 (Dec. 22, 2010), the District II Wisconsin appeals court affirmed the circuit court’s decision, ruling that the economic waste rule does not require a party to produce evidence of the diminished value of the property.

    Under the economic waste rule, the court may calculate damages based on the cost to replace, the cost to repair, or the diminished value of the property, the appeals court explained. Any party may offer estimates as to all three.

    “The economic waste rule provides that when faced with multiple measures of damages, a fact finder may determine whether a proposed repair or restoration would result in unreasonable destruction of the property and thus constitute economic waste,” Judge Paul Reilly wrote.

    That might happen, Reilly explained, if the repair or restoration amount exceeds the property’s diminished value. But the analysis doesn’t require proof as to diminished value.

    That is, a fact finder may compare repair and restore costs alone to determine whether economic waste would result, Judge Reilly explained.

    Because the defect was cosmetic in nature, not structural, the appeals court ruled that it was not error to conclude that re-staining the bricks “placed Zanow in as good a position as if the contract had been fully performed.”

    By Joe Forward, Legal Writer, State Bar of Wisconsin