Ruxley Electronics & Construction Ltd v Forsyth [1995] UKHL 8 (29 June 1995)

A contractor built a swimming pool shallower than specified. As there was no loss in financial value, the court denied the full rebuilding cost, instead awarding damages for 'loss of amenity'. This established a reasonableness test for contractual damages.

Facts

Ruxley Electronics and Construction Ltd (the appellant builders) entered into a contract with Mr Forsyth (the respondent owner) to construct a swimming pool in his garden for £17,797.40. The contract specified that the pool should have a diving area with a depth of 7 feet 6 inches. After completion, it was discovered that the diving area was only 6 feet 9 inches deep at its deepest point. The pool was, however, perfectly safe for diving and the shortfall in depth had no adverse effect on the property’s value. The builders sued for the outstanding balance of the contract price. Mr Forsyth refused to pay and counterclaimed for breach of contract, seeking £21,560, the estimated cost to demolish the existing pool and reconstruct it to the specified depth.

Issues

The central legal issue before the House of Lords was the correct method for assessing damages for the breach of contract. The key questions were:

1. Measure of Damages

Should the damages be measured by the ‘cost of cure’ (i.e., the £21,560 required for reinstatement), even if that cost was wholly disproportionate to the benefit to be obtained and the actual loss suffered?

2. Diminution in Value vs. Loss of Amenity

If the cost of cure was inappropriate, was the correct measure the diminution in value of the pool (which was nil), or could the court award damages for the owner’s non-financial loss, such as disappointment and loss of a personal preference, often termed ‘loss of amenity’?

Judgment

The House of Lords unanimously allowed the appeal, overturning the Court of Appeal’s decision and restoring the trial judge’s original award. The court held that awarding the full cost of reinstatement would be unreasonable and disproportionate to the loss Mr Forsyth had actually sustained. Instead, the trial judge’s award of £2,500 for ‘loss of amenity’ was affirmed as a fair and appropriate sum.

Reasoning of the Court

Lord Jauncey of Tullichettle and Lord Lloyd of Berwick provided the leading speeches. Their reasoning centred on the principle of reasonableness in the assessment of damages.

Lord Jauncey emphasised that the purpose of damages is to compensate for loss, not to provide a windfall. He stated:

Damages are designed to compensate for an established loss and not to provide a gratuitous benefit to the aggrieved party from which it follows that the reasonableness of an award of damages is to be linked directly to the loss sustained. If it is unreasonable in a particular case to award the cost of reinstatement it must be because the loss sustained does not extend to the need to reinstate.

Lord Lloyd of Berwick argued that the ‘cost of cure’ is not an automatic remedy and its application depends on the circumstances. He highlighted that the owner’s intention to use the damages for reinstatement was a relevant factor in determining reasonableness, though not decisive. He affirmed the legitimacy of awarding damages for non-pecuniary losses when a contract’s object is to provide pleasure or amenity:

The test of reasonableness plays a central part in determining the basis of recovery, and will indeed be decisive. …if the cost of reinstatement is not the appropriate measure of damages, then the court must do its best to rectify the situation by awarding some general damages for the loss of amenity…

The court concluded that Mr Forsyth had received a perfectly functional swimming pool. His actual loss was not a financial one, but the disappointment of not receiving the exact depth he had contracted for. To award the cost of rebuilding would be contrary to common sense and fairness. The £2,500 award was a recognition of his lost ‘consumer surplus’—the subjective value he placed on the specific contractual promise.

Implications

The decision in Ruxley v Forsyth is of major significance in the English law of contract. It firmly established that the assessment of damages for breach of contract is governed by a test of ‘reasonableness’. It confirmed that a court is not limited to a binary choice between awarding the ‘cost of cure’ or ‘diminution in value’. Where the cost of cure is out of all proportion to the benefit to be gained, it will not be awarded. The case gave significant judicial weight to the concept of awarding damages for ‘loss of amenity’ or ‘loss of enjoyment’ in contracts where personal preference, pleasure, and amenity are key components, preventing claimants from securing an unjust windfall while still acknowledging their non-financial loss.

Verdict: The appeal was allowed. The House of Lords set aside the Court of Appeal’s order and restored the trial judge’s award of £2,500 to the respondent for loss of amenity.

Source: Ruxley Electronics & Construction Ltd v Forsyth [1995] UKHL 8 (29 June 1995)