Peevyhouse v. Garland Coal Mining Co.
382 P.2d 109 (1963)
Rule of Law:
Where a contract provision is merely incidental to the main purpose of the contract, and the economic benefit of performance is grossly disproportionate to the cost of performance, damages are limited to the diminution in value of the property due to the non-performance, not the full cost of performance.
Facts:
- Willie and Lucille Peevyhouse owned a farm containing coal deposits.
- In November 1954, the Peevyhouses leased their farm to Garland Coal & Mining Company for a five-year period for the purpose of strip-mining coal.
- The lease contract included specific covenants, which the Peevyhouses insisted upon, requiring Garland to perform certain restorative and remedial work on the land at the end of the lease term.
- Garland performed all parts of the contract, including paying royalties, except for the restorative and remedial work.
- The estimated cost to perform the agreed-upon remedial work was approximately $29,000.
- Garland's failure to perform the remedial work resulted in a diminution in the fair market value of the Peevyhouses' farm of only $300.
Procedural Posture:
- Willie and Lucille Peevyhouse filed a lawsuit against Garland Coal & Mining Company in an Oklahoma trial court for breach of contract.
- At trial, the court instructed the jury that it could consider both the cost of performing the remedial work and the diminution in the farm's value.
- The jury returned a verdict for the Peevyhouses, awarding them $5,000 in damages.
- The Peevyhouses, as plaintiffs-appellants, appealed the judgment to the Supreme Court of Oklahoma, contending the damages were insufficient.
- Garland Coal & Mining Company, as defendant-appellee, filed a cross-appeal.
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Issue:
When the cost to perform a remedial provision in a lease is grossly disproportionate to the resulting increase in the property's market value, are damages for breach of that provision limited to the diminution in market value rather than the cost of performance?
Opinions:
Majority - Jackson, J.
Yes. Where a contract provision breached is merely incidental to the main purpose of the contract, and the economic benefit of full performance is grossly disproportionate to the cost, damages are limited to the diminution in value resulting from the non-performance. The court reasoned that the primary purpose of the contract was the economical recovery of coal, and the remedial provisions were incidental. Citing Oklahoma statutes that prohibit unconscionable damages and prevent a party from recovering more from a breach than they would have from full performance, the court found that awarding $29,000 for a breach that only diminished the property's value by $300 would be 'unconscionable and grossly oppressive.' To award the cost of performance would give the Peevyhouses a greater benefit from the breach than they could have gained from full performance, which violates the statutory principle of reasonable damages and avoids 'unreasonable economic waste'.
Dissenting - Irwin, J.
No. The proper measure of damages should be the cost of performance, as the defendant willfully breached specific provisions that were knowingly and deliberately bargained for by the plaintiffs. The dissent argued that the defendant had full knowledge of the potential costs when it entered the contract, reaped the benefits of mining the coal, and should not now be excused from its solemn obligations. The remedial provisions were not incidental but a key part of the consideration for the lease. To limit damages to diminution in value is to ignore the express terms of the contract, reward the breaching party for its bad faith, and make a new, better contract for the defendant at the expense of the plaintiffs.
Analysis:
Peevyhouse establishes a highly influential and controversial exception to the standard 'expectancy' or 'benefit of the bargain' measure of contract damages. By prioritizing 'relative economic benefit' and avoiding 'economic waste' over the literal terms of the agreement, the decision limits recovery when performance costs are grossly disproportionate to the objective economic benefit. This ruling significantly impacts contracts involving land restoration, construction, or any agreement where a party may have a subjective, non-economic value for performance. It sets a precedent that courts may refuse to enforce a bargained-for promise if it deems enforcement to be economically inefficient, thereby potentially undermining the principle of freedom of contract.
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