As we've previously discussed, the aim in awarding expectation damages is to put the injured party in as good a position as she would have been in had the contract been performed. This can be difficult when the injured party possibly has a subjective value in the other side's performance that exceeds the economic value of performance. And this is illustrated in the 1962 Oklahoma case called Peeveyhouse versus Garland Coal Company. The Peeveyhouse case is incredibly famous, and it provokes passionate responses in generations of law students. In the Peeveyhouse case, the Peeveyhouses signed a contract allowing the defendant, Garlan Coal and Mining Company to stripmine a portion of their property in exchange for royalties on the proceeds. A contractual covenants specified however, that the defendant was required to restore the property after the completion of the mining. After the mining was completed, Garland refused to restore the land as specified in the contract. The plaintiffs sued for $25,000 in damages, slightly less than the $29,000 cost of performance. At trial, the jury awarded the plaintiff's $5,000, far less than the cost of performance, but more than the diminution in market value as a result of the breach, which was found to be only $300. Plaintiffs and defendants both appeal the damage award, claiming respectively that the damage award was inadequate or excessive. The incident court ruled in favor of the defendant. The central issue is this, is the measure of contract damages the cost of performance or the diminution in market value as a result of the breach? The court held that when the cost of performance is disproportionately greater than the economic value of performance, as it was in this case, damages are limited to the diminution in value caused by the breach. To reach this result, the court relied on Oklahoma statutes which according to the court, "Limit the damages recoverable to a reasonable amount not contrary to substantial justice", and "Prevent plaintiffs from recovering a greater amount in damages for the breach of an obligation than they would have gained by the full performance thereof." The court then awarded $300. The diminution in value resulting to the premises because of nonperformance of the remedial work under the most liberal view of the evidence. This holding was accompanied by a sharp dissent by Justice Erwin. The dissent noted that the defendant had knowledge when it prevailed upon the plaintiffs to execute the lease, that the cost of performance might be disproportionate to the value or benefits received by plaintiff for the performance. "There were several negotiations between the plaintiff and defendant before the contract was executed. Therefore, the dissent would award damages equal to the cost of performance." So, let's take a short detour to answer a pop quiz. A construction company contracts to build a summer home for a property owner. The contract specifies that all plumbing must use Reading pipe. The company unintentionally installs some pipe by another manufacturer. After the building is complete, the property owner refuses to pay the $3,500 balance due on a $77,000 contract price and sues for the cost to replace the pipes. Because most of the plumbing is encased in the walls, the cost to replace the plumbing would be very high. The value of the property would only slightly increase, if at all, with Reading pipes. What result under the Peeveyhouse decision? Well, under the Peeveyhouse rule, the property owner would only be entitled to damages equal to the diminution in value of the property due to non-compliant performance. Since the diminution in value is much lower because the diminution in value is so much than that cost of performance. You should remember that this hypothetical is based on Jacob & Youngs versus Kent, which we already studied at the very beginning of this course. If you didn't remember it, you might consider stopping and reviewing the course more generally. The Jacob & Young's case is a good application of the economic waste doctrine referenced by the majority in Peeveyhouse. The court points to section 346 subparagraph 1A of the first restatement which concerns damages for defective or unfinished construction available for a breach by one who has contracted to construct a specified product. According to that section, the promisee is entitled to the reasonable cost of construction and completion in accordance with the contract, if this is possible and does not involve unreasonable economic waste. Or the difference between the value that the product contracted for would have had, and the value of the performance that has been received by the plaintiff; if construction and completion in accordance with the contract would involve unreasonable economic waste. However, the court notes that the restatement makes it clear that the economic waste referred to consists of the destruction of the substantially completed building or other structure, and that no such destruction was involved in the Peeveyhouse case. So, the provision is at most persuasive as an analogy. If the change in the value of the land from nonperformance was so much lower than the cost of restoration, why might the contract have included this seemingly irrational provision of requiring restoration of the land? Well, perhaps, the Peeveyhouse has had a very high subjective value for their land that was considerably greater than the market value. If the Peeveyhouses subjective value exceeded the cost of restoration but was less than the value of the contract to Garlan, then the restoration provision was a value adding addition to the contract. There are other possibilities, however. The cost of performance may have just become unexpectedly high. As a result, Garlan preferred to breach and pay damages rather than to perform. Another possibility which comes closer to promissory fraud, is that Garlan in making the promise to restore never intended to perform. Perhaps Garlan knew the value of the land to the Peeveyhouses was less than the expected cost of restoration of $29,000. But the Garland never anticipated performing the restoration clause, it expected that a court if push comes to shove, would only award damages that were equal to this diminution in value. Judith Maute has unearthed additional facts surrounding the Peeveyhouse dispute. In her historical analysis, she learned that the Peeveyhouses apparently waived the right to receive $3,000 in cash upon executing their lease, in exchange for a special promise from Garlan to repair the property. In other words, the remedial work Garlan agreed to was priced into the contract. That Garlan was then able to breach without repaying at least the $3,000 originally waived by the Peeveyhouses suggests that the Coal company received a windfall under the holding. The Peeveyhouses case has been criticized on the grounds that the diminished value award undercut both the landowners subjective value in having his or her land reclaimed, and a broader public interest in achieving the same result. In 1967, the Oklahoma legislature imposed a duty upon mine operators to reclaim the land after work was done, and authorized the state to contract for the work to be done if the operator defaulted. A procedural side note. The Peeveyhouses may have strategically chosen not to present any evidence of subjective value, so as to leave the jury with an all or nothing choice of cost of performance damages or nothing, hoping that the jury would pick the larger amount. Maybe the land did have sentimental value to the plaintiffs because, oh, they were engaged to be married there. But sometimes, it might strategically be in a plaintiffs interest to withhold evidence of certain types of damage. If credible subjective value evidence were introduced, a diminution in value award might include it. Finally, you might ask yourself whether the Peeveyhouse rule is merely a default. The language of the opinion seems to be couched as a mandatory limitation on damages. But if future parties made clear that because of subjective value they wanted cost of performance or even specific performance of the restoration promise, there is at least some chance that courts would enforce it notwithstanding a substantially smaller diminution in market value. Let's review. Today, we've considered a case in which a court awarded the economic diminution in market value in the plaintiff's property due to a defendant's breach because the ammunition in value measure was considerably less than the cost of performance damage measure. But just maybe, this outcome is merely a default rule.
