Compensatory Damages - Breach of Contract by Supplier of Goods, Services, or

Construction
Note: Peevyhouse v. Garland Coal & Mining Co. is a famous case.

Case: Peevyhouse v. Garland Coal & Mining Company (1962, OK) [pp. 936-941]

Facts: The plaintiff leased half their farm that had coal deposits to the
defendant for strip mining. Part of the agreement was that the mining company
would fill in the pits and smooth out the land. The defendant breached. It would
have cost $29,000 (per an expert witness) to fill in the pits, but doing so would
have only increased the value of the land by $300. Pl sued for $25,000. The jury
awarded the Pls $5,000, which was much less than the cost of performance, but more
than the total value of the farm even after the remedial work was done. Plaintiffs
appealed.

Issue: What measure of damages should be applied; the value rule or the cost of
performance rule? - The value Rule

Holding: Damages given in lower court changed to $300.

Reasoning:
○ In contract law, no one should be awarded more than he would have gained
if there was full performance.
§ If we use the cost of performance rule, Pl would be awarded $25,000.
But the actual value they would have gained if there were no breach is $300.
§ Therefore, the value rule should be used.
○ § 348 - where the cost of correcting is much more than the increase in
value to the Pl (subjective test), the award should not be made. This is b/c if
Pl would be awarded these damages , the Pl will not pay to correct the defects,
b/c it will cost him more to do that than the resulting increase in value to Pl.
§ Court said it was unlikely that an owner would agree to pay $29,000
for construction of improvements that would increase the value of the property by
only $300.
○ Conclusion: So instead, the damages would be the objective diminution in
value of market price. The land, while destroyed, had only lost $300 in value.
The Court found that to pay the Peevyhouses to restore their land would be an
economic waste, since the $25,000 in labor would result only in a $300 improvement
of the land.
Dissent: During negotiations, Pls said they would not agree to the K unless the
provision for the remedial work was included (they also waived $3k cash
customarily paid in order to have this provision). The cost for Df to perform
could have been established when K was formed, since there is nothing that
happened that could not have been foreseen by Df, so they knew the consequences. K
was not entered into by mistake, fraud, etc.; it was voluntarily entered into by
both parties. So the damages should be specific performance.

RULE: Where the breach of a construction K causes a defect, and the cost of
correction is more than the increase in value of the structure, then damages
should be measured by the diminution in value, not the cost of performance.

Notes:
○ This case has been criticized on the ground that the diminished value
award undercut both the landowner's "subjective" value in having his land
reclaimed and a broader "public interest" in achieving the same results.
○ In 1967, OK legislative imposed a duty upon mine operators to reclaim the
land after work was done
§ In light of this, the OK Supreme Court would probably no longer
follow Peevyhouse.