Cost of Performance vs Diminution in Value

Just outside the outskirts of Haskell County in Fish Creek, Oklahoma an area of land is home to the Peevyhouse family. On this land, Willie and Lucille Peevyhouse reside on a farm that was known to have coal deposits. In 1954, Garland Coal Company approached the Peevyhouse in an attempt to gain access to mine the coal deposits on their property. In November of this same year they entered into a contract with Garland Coal & Mining Co. which gave Garland a five year lease to strip mine the coal, in return for a royalty and the promise that the land would be restored once they were done.

The next few pages will analyze the case Peevyhouse v. Garland Coal & Mining Co., 382 P.2d 109 a contract law case that was decided by the Supreme Court of Oklahoma. This court case has been given the name “The Ballad of Willie and Lucille” to illustrate the collective tale of their passage in and out of the courts to have justice prevail. An IRAC method will help illustrate and specify the legal principles involved and also specific factors that determined the outcome of the case. The ethical components will also be addressed and will discuss the factors most contributing to this case. Lastly, my own opinion will be discussed on how I may have handled this legal issue differently.

Willie and Lucille Peevyhouse entered into a contract with Garland Coal & Mining Co in November of 1954. Garland Coal & Mining Co was given permission to strip the coal off the land instead of digging out shafts underground since it was cheaper. After 5 years Garland Coal & Mining Co was to fill in the pits and smooth out the land and essentially restore the land to what it was before the mining operation started. Below is what was stated in the lease agreement:

7b Lessee agrees to make fills in the pits dug on said premises on the property line in such manner that fences can be placed thereon and access had to opposite sides of the pits.

7c Lessee agrees to smooth off the top of the spoil banks on the above premises.

7d Lessee agrees to leave the creek crossing the above premises in such a condition that it will not interfere with the crossings to be made in pits as set out in 7b.

7f Lessee further agrees to leave no shale or dirt on the high wall of said pits. (Peevyhouse)

At the end of the lease, Peevyhouse demanded that Garland Coal & Mining Co finish the requirements of the contract and to complete the restoration of the land. Garland Coal & Mining Co. refused to finish out the contract by arguing that it would have cost $29,000 to properly restore the land, but doing so would only increased the value of the land by $300. Peevyhouse in turn sued for $25,000. During the trial, it was determined that all agreements in the contract had been completely fulfilled by both parties, except the work of the restoration of the land. Garland Coal accepted that this work was not completed. In a surprising display the judge instructed the jury that as an alternative they should think about the “diminution of value” of the property along with the “cost of restoration” in awarding damages. Peevyhouse was awarded by the jury the amount of $5,000, that was financially better than the decline in value of the land if not restored, but which quite a bit less than the cost of the property being properly restored.

Disposition: Trial Court Award $5000

Both parties appealed, with Peevyhouse in dispute with the court’s decision and that he felt he was entitled to the cost of performance of the restoration while Garland Coal argued that they should only have to pay the difference in market value from the its current condition with no work being done and what the property would be worth if they performed the restoration as indicated in the contract. They insisted that the restoration would only add about $300 dollars of value to Peevyhouse’ land and this is what the damages should be with the idea that this is all that Peevyhouse would have lost. It had seemed that the majority, noted by the court, went with the diminution in value rule when the cost of performance was considerably higher than the diminution in value.

The court’s interpretation to the purpose of the contract was that the strip mining of coal from the property was the primary basis of the contract while the restoration of the property after the mining of the property was incidental. They went on to give an example that in construction and building contracts they apply “consideration of unreasonable economic waste” when deciding damages. This consideration of economic waste and relative economic benefit has been used in many other cases when considering damages. The court agrees that the true measure of damages in a contract involving personal property is that the, “cost of performance is limited to the total difference in the market value of the land before and after the work was performed, if that contract provision is merely incidental to the main purpose of the contract, and the cost of full performance is grossly disproportionate to the increase in value.”

The court also went on to point out that if this was the result of the main or principal purpose of the contract, the cost of performance would be the measure of the breach.

Disposition: Award reduced to $300.

The issue presented in this case would be to what damages is the Peevyhouse entitled to since a breach pertains to only incidental part of the contract and not to the main purpose of the contract, and where performance would be disproportionately costly.

The rule that would be applicable if a breach in the contract pertains to a part that is solely secondary to the primary reason of the contract, and with the consideration that performance would be unreasonably excessive in cost, the correct measure of damages is to use diminution in value.

In analyzing this case the Oklahoma Supreme Court said that the “remedial” work agreed upon in the contract was merely “incidental”.  The courts felt that the sum of $5,000 places the Peevyhouse in a better financial situation than performance would have brought them.

The final phase of the IRAC model would be the conclusion where the Oklahoma Supreme Court reduced the damages to $300.

In one of the articles it read that there were several negotiations between Peevyhouse and Garland Coal before the execution of the contract. In the trial Garland Coal shared with the court that Peevyhouse insisted that all the provisions dealing with the restoration of the land once the mining operation was completed was to be included in the contract. This was a key element of the contract and the Peevyhouse’ would not have granted permission to the strip mining of their property unless the provisions were included.

In further research of this case has provided refreshing information that may play a relevant part in evaluating this case. In one of the articles that I read stated the following, “Two of the judges who sided with the majority in Peevyhouse were later involved in a serious bribery scandal. There is some suggestion that counsel for Garland Coal could have improperly influenced some of the judges in other cases, but there is no suggestion that a bribe affected the outcome in Peevyhouse, a case of relatively little financial consequence to Garland Coal.” As there is no proof to this affecting this case it does have some ethical bearing in the fact that it was the judge that instructed the jury to consider the diminution of value of the land.

After doing my research some of my thoughts for this case is that Garland Coal did admit to their failure to perform their obligations that they agreed upon under the contract. There is nothing in the record which shows that Garland Coal could not perform their part of the contract and made no attempt to even substantially perform. This contract was not tainted with fraud, immoral, not a mistake or accident and does not contradict public policy. This contract is clear and unmistakable and the both Peevyhouse and Garland Coal understood the terms. The estimated cost of satisfying the obligations could have been roughly ascertained and taken into consideration at the time of the contract negotiations. There are no conditions presented which could not have been sensibly predicted when the contract was negotiated and executed. Therefore, the Garland Coal’s breach of the contract was willful and not in good faith. There was an understanding of the benefits Garland Coal would receive under the contract and know the estimated cost of performing the contract. In knowing this it should be recognized that Garland Coal considered that they would have an economic advantage to go into a contract with Peevyhouse and that they would collect benefits from the contract, or else they would not have considered in going through with the contract. Garland Coal could have completed the contract if they preferred. They accepted and reaped the benefits of this agreement and now fight to have Peevyhouse ‘ benefits denied under the same agreement. .

In my opinion, the Peevyhouse’ were entitled to explicit performance in the contract and since Garland Coal failed to carry out this performance the proper determination of compensation should be the cost of performance. By doing it any other way would be neglecting the express requirements of the contract and would be taking from the benefits of the contract from Peevyhouse and placing those benefits in Garland Coal which has failed to perform its obligations. I don’t believe that the true measure should be based on diminution in value. The land “value” was inconsequential to the Peevyhouse and was expressed before the contract was signed that they wanted the land restored once the mining was completed. A vital part of this contract was the aspect of corrective work and was the key reason that gave the permission for Garland Coal to use Peevyhouse’ property for strip mining. Garland Coal had 5 years to plan a way to restore the land after mining was completed, but feel that they knew they courts could rule in their favor if they defaulted on the contract and still received all of the profit from this agreement. The legal task of a court of law is to enforce, as written, a contract. The $29,000 cost was anticipated at the time of contract structure and should be granted to the Peevyhouse’.

A few years later the Oklahoma statue that the Oklahoma Supreme Court relied on in this case stated:

“no person can recover a greater amount in damages for a breach of an obligation than he would have gained by the full performance thereof on both sides.”

This statue was restricted by the Open Cut Land Reclamation Act of 1967 which declared:

“to provide, after mining operations are completed, for the reclamation and conservation of land subjected to surface disturbance by open cut mining.”

I can strongly say that if this case was to happen now that the outcome would be very different. With the extreme growth of environment friendly law, groups and organizations it would imagine that it be without question that the land be restored once mining operations where completed with probable a list of additional requirements such as replanting of trees, the installation of grass and an irrigation system.