Quick Summary
Willie and Lucille Peevyhouse (plaintiff) owned coal-rich land. They leased the land to Garland Coal & Mining Company (defendant) to mine coal. As per the contract, the defendant agreed to restore the land at the lease end, but he did not restore it. As a result, the (plaintiff) brought suit seeking damages of $25,000.
The court ruled in favor of the (plaintiff) and instructed the jury to award damages due to Garland’s failure to complete the restoration work as agreed. The jury awarded the (plaintiff) $5,000. (Defendant) appealed to Oklahoma’s Supreme Court.
Rule of Law
Damages awarded in a breach of contract must not be so large that they cause economic wastage or result in financial gain for the other party.
Facts of the Case
Willie and Lucille Peevyhouse owned a farm that had coal under it. In November 1954, they leased the land to Garland Coal & Mining Company (defendant) for five years so that they could mine coal there.
A “strip-mining” plan was considered, in which coal would be taken out of surface pits instead of mine shafts from deep underground. In addition to the usual things you’d find in a coal mining lease, the defendant agreed to restore the land after the lease was over.
At the end of the lease, the (defendant) did not restore the land as agreed upon because it cost $29,000, which, if restored, would only increase the land value by $300. The Peevyhouse brought suit seeking damages of $25,000.
The lower court ruled in favor of the Peevyhouse and instructed the jury to award damages based on the whole “diminution in value” of the Peevyhouse’ property due to Garland’s failure to execute the restoration work as agreed upon. The plaintiff received a $5,000 damage compensation from the jury.
The defendant filed an appeal to the Supreme Court of Oklahoma.
Issue
Was it acceptable to seek damages of $5,000 for the breach of contract?
Holding and Conclusion
No.
Even though the Garland coal mining company breached its contract with the Peevyhouse, the Oklahoma Supreme Court ruled that Garland was not required to restore the land or make any repairs; rather, Garland may compensate the Peevyhouse for the decline in property value.
As the restoration would cost a huge sum of $29,000 but it will only increase the land’s value by $300, which would be an economic wastage.
Reasoning and Analysis
The Oklahoma Supreme Court based its decision on state legislation that declares “no person can collect a higher sum in damages for a breach of contract than he would have obtained by the full performance thereof on both sides.” The court stated that this provision was the basis for its decision.
When performance cost exceeded Diminution in Value, the majority adhered to the court-approved measure. The court accepts that the “cost of performance is restricted to the whole difference between the land’s pre and post-work market worth.” The Supreme Court of Oklahoma decided to reduce the damages to $300.
Relevant FAQs of this case
What is Diminution in Value in a Contract?
Diminution in value is used when assessing damages for breach of contract cases that involve real estate, such as home sales or property purchases or lease etc. The idea behind this type of damage assessment is that the plaintiff should be compensated for their loss based on what they would have received had they received what was promised under the contract.
The calculation requires that two main factors be considered:
- The market value of what was actually delivered; and
- The market value of what was promised in terms of performance or quality (also known as “warranties”).
An item’s value can be reduced if one party damages or destroys it, but only if that party breaches the contract.
References
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