Peevyhouse v. Garland Coal & Mining Co.

Supreme Court of Oklahoma · 1962 · Contracts

Contractsdamagescost of completiondiminution in valueeconomic wasteexpectation damagescost of performancediminution in value

Facts

Plaintiffs owned a farm containing coal deposits and leased the premises to defendant for strip-mining for five years. In addition to usual lease covenants, defendant specifically agreed to perform restorative and remedial work at the end of the lease, and it was stipulated at trial that all obligations had been performed except that remedial work. Expert testimony estimated the cost of the remedial work at about $29,000, while defendant introduced evidence that the failure to perform caused only a small diminution in the farm's value. The jury returned a verdict of $5,000.

Issue

When a lessee under a coal mining lease breaches a covenant to perform remedial work at the end of the lease, is the lessor's damages measure the cost of performance or the diminution in value of the premises where the cost of performance greatly exceeds the economic benefit from performance?

Rule

In an action for breach of a coal mining lease covenant requiring remedial work, the ordinary measure of damages is the reasonable cost of performance. However, when the breached provision is merely incidental to the contract's main purpose and the economic benefit to the lessor from full performance is grossly disproportionate to the cost of performance, damages are limited to the diminution in value of the premises caused by nonperformance.

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Nora and Eli Benton leased 80 acres outside Tulsa, Oklahoma, to Red Mesa Minerals, LLC for limestone extraction. The lease required Red Mesa to regrade the surface and remove spoil piles when operations ended; doing so would cost $180,000, but appraisers testified that full completion would increase the land's market value by only $4,000, and the lease's central purpose was profitable mineral recovery.

If Red Mesa breaches only the restoration promise, what is the proper measure of damages under the majority rule?

Explanation. The majority held that cost of performance is ordinarily the measure, but not when the breached provision is merely incidental to the contract's main purpose and the economic benefit from full performance is grossly disproportionate to the completion cost. In that setting, damages are limited to diminution in value of the premises caused by nonperformance.