Is the proper measure of damages for a lessee's breach of a covenant to perform remedial work at the end of a coal mining lease the reasonable cost of performance, even when that cost is grossly disproportionate to the resulting increase in the value of the land?

Willie and Lucille Peevyhouse owned a farm containing coal deposits and, in November 1954, leased the premises to Garland Coal & Mining Company for five years for strip-mining. In addition to the usual coal mining covenants, Garland agreed to perform restorative and remedial work at the end of the lease, including making fills in the pits, smoothing the tops of spoil banks, leaving the creek in a proper condition, and leaving no shale or dirt on the high wall of the pits. The work involved moving many thousands of cubic yards of dirt and was estimated by expert witnesses to cost about $29,000.

It was stipulated that both parties had fully performed all covenants except the remedial work, which Garland conceded it had not done. The Peevyhouses sued for $25,000, the cost of performance. Garland introduced expert testimony that the remedial work would increase the value of the farm by only about $300. The evidence showed the farm's value would have been less than the cost of the remedial work even if the work had been done.

The Peevyhouses sued Garland Coal & Mining Company in the Oklahoma trial court for breach of contract, and originally also pleaded a second cause of action for damage to their water well and home from blasting, which they dismissed without prejudice at trial. Over plaintiffs' objections, the trial court admitted defendant's evidence of diminution in value, directed a verdict for plaintiffs on liability, and instructed the jury that it could consider the cost of performance together with all other evidence offered by either party. The jury returned a verdict for plaintiffs for $5,000, far less than the cost of performance. Plaintiffs appealed, and defendant cross-appealed, to the Oklahoma Supreme Court. The Oklahoma Supreme Court modified the judgment to $300 and affirmed as modified. On rehearing, plaintiffs argued they were denied an opportunity to present evidence of the total diminution in value, and amici curiae argued that the decision impaired the obligation of contract. The court denied the petition for rehearing, and a second rehearing was also denied.

(Jackson, J.)

No. Where a coal mining lease contains a covenant to perform remedial work, and the covenant is merely incidental to the main purpose of the lease, and the economic benefit of performance to the lessor is grossly disproportionate to its cost, the lessor's damages are limited to the diminution in value of the premises caused by the nonperformance, not the cost of performance.

The usual rule is that the reasonable cost of performance measures damages for breach of a covenant to perform work. That rule does not apply here. The primary purpose of the lease was the economical recovery and marketing of coal, not building, construction, or grading. The remedial provisions were incidental to that purpose. Awarding about $29,000 for work that would add roughly $300 to a farm worth far less than that cost would produce an unrealistic and unreasonable result. Courts in three of four comparable jurisdictions applied the diminution in value rule in similar circumstances, while Groves v. John Wunder Co., 205 Minn. 163, 286 N.W. 235 (1939), stands as the lone cost-of-performance outlier.

The Restatement of Contracts § 346 and McCormick on Damages § 168 support considering unreasonable economic waste and the relationship between the expense and the end to be attained. Jacob & Youngs, Inc. v. Kent, 230 N.Y. 239, 129 N.E. 889 (1921), likewise denies cost of completion when it is grossly and unfairly out of proportion to the good attained.

Oklahoma statutes confirm this result. 23 O.S. 1961 § 96 bars recovery of more than full performance would have gained, and § 97 requires damages to be reasonable and prohibits unconscionable and grossly oppressive damages contrary to substantial justice. Allowing cost of performance would give plaintiffs a greater benefit from the breach than from performance. These statutes operate like 15 O.S. §§ 214-215, which limit stipulated damages to actual damages.

Where the parties actually intend improvements that reduce property value as a main purpose, cost of performance would remain the measure. The record shows diminution in value of only $300, so the judgment is modified to $300. On rehearing, plaintiffs tried their case solely on a cost-of-performance theory, excluded evidence outside the pleaded 60 acres was proper, and a state court decision does not impair contracts under the Contract Clause.

Dissent (Irwin, J.) The lease terms were specifically bargained for, and plaintiffs would not have agreed to the lease without the restoration covenants. Garland knew the approximate cost of performance when it signed, received its full benefits under the lease, and willfully refused to perform even though nothing prevented it. Applying a diminution-in-value measure rewrites the contract for the parties and gives the breaching party the benefit of its breach. The majority answered that Oklahoma's damages statutes limit recovery despite the parties' agreement. Courts enforce contracts as written absent fraud, mistake, or accident, as in Goble v. Bell Oil & Gas Co., Cities Services Oil Co. v. Geolograph Co., and Great Western Oil & Gas Co. v. Mitchell. Section 96 does not apply. Groves v. John Wunder Co. should be followed, and a willful breach forfeits any equitable doctrine of substantial performance. Plaintiffs were entitled to specific performance, and absent performance, the cost of performance is the proper measure of damages.

Dissent (Williams, C.J.) Williams, C.J., dissented without a written opinion.

Dissent (Blackbird, V.C.J.) Blackbird, V.C.J., dissented without a written opinion.

Dissent (Berry, J.) Berry, J., dissented without a written opinion.