The Economic Waste Doctrine: Limit Risk in Litigation

By Susan MacKay
October 29, 2015
COLUMN : Legal | Strategies & Practices

Picture this scenario: a property owner finds one or more things actually “wrong” with his house. He ultimately sues the developer and general contractor, but expands his list to include the original items, plus a number of smaller things that, “could have been better.”

The original defendants turn around and sue every entity who performed labor or supplied product to the project. The scene extends to the inclusion of the window manufacturer being sued directly by the developer or general contractor, or perhaps brought in as a third-party by its distributor.

Not too hard to imagine, right? Actually, it may be very familiar, as it seems that litigation is, at one point in time or another, a given for all medium to large-sized window manufacturers.

And, after you were served with legal papers, how often has your expert inspected the property only to report back that there’s nothing really wrong with the windows—only some imperfection, or maybe a couple warranty items? On cue, the plaintiff then produces an exaggerated scope and cost of repair that includes replacement of all the windows and doors.

If there really is nothing substantially wrong with the windows, the defense presented by Economic Waste Doctrine can be used in some circumstances to decrease (often dramatically) the amount of damages a plaintiff ultimately recovers. A majority of jurisdictions recognize the doctrine, albeit to varying degrees.

ECONOMIC WASTE, DEFINED

“Economic waste” can occur where either the scope of the repair would result in unnecessary and unreasonable destruction of the structure, or the cost of repair is disproportionate to the value of the correction. If the claimant’s scope or cost of repairs would result in a waste of money, a defendant may introduce evidence of the diminished value of the property with the defective characteristic as the proper measure of damages. This is often a small fraction of the cost in comparison to the grossly inflated cost of window removal and replacement proposed by the plaintiff.

As an example, say a contract for replacement windows specifies foam-enhanced frames. The windows that are supplied and installed do not have foam-filled frames but otherwise meet all other requirements of the window specifications. The absence of foam in the windows may result in a slightly higher U-value than windows that meet all the window specifications, but the actual increased energy cost over the years to the homeowner would be negligible compared to the cost of removing and replacing all the windows in the house.

In this case, assuming the window manufacturer was made aware of the specifications or otherwise had reason to know that foam-filled frames were being sought, it should argue that the cost of replacing the windows is grossly disproportionate to the difference in the value of the house windows with foam-filled frames. Awarding plaintiff the cost to replace the windows would result in economic waste and damages should be limited to the difference between the value of the home with windows contracted for and the windows actually received.

The window manufacturer will need an expert to calculate the alternative measure of damages which, in this case, could be derived from the energy savings potentially lost by the homeowner over a specified time period due to the windows not having a foam-filled frame.

The Economic Waste Doctrine is not available in all circumstances. However, when there is an argument where it does apply, it can introduce a sense of reality into what is often a surreal situation.

Susan MacKay is an attorney with The Gary Law Group, a law firm based in Portland focusing on legal issues facing manufacturers of windows and doors. Contact her at 503/620-6615 or susan@prgarylaw.com.