Only the other day, I had the displeasure of having to share with my Fall 2012 Contracts class, the sad tale of the Peevyhouses, the plaintiffs in the well-known Oklahoma case of Peevyhouse v. Garland Coal & Mining Co., 382 P.2d 109 (Okla. 1962).
Ostensibly, the case is about measure of damages. Plaintiffs’ farm in Stigler, Oklahoma contained coal deposits. They leased the farm to Defendant for five years to allow strip-mining on part of their land in return for royalty payments at a rate of 20 cents per ton of coal extracted. Defendant agreed to carry out certain stipulated remedial and restorative works at the end of the five-year period. This work it failed to carry out.
The cost of putting things right in accordance with the lease terms was around $29,000 (although Plaintiffs claimed only $25,000). However, the impact on the value of the parcel of land was minimal. Experts testified that the value of the farm after completion of the remedial works would only be worth around $300 more than the farm in the state that Defendant had left it. At trial, the jury awarded Plaintiffs $5,000, a figure well below the full costs of restoration but higher than the value differential. By 5-4 majority, a sharply divided Oklahoma Supreme Court modified the trial court determination, reducing the award to the meagre $300 value differential.
The legal problem in Peevyhouse is easy to see. To give Plaintiffs the economic equivalent of what they bargained for we could apply either a “cost of repair” or a “value differential” measure of damages. But $25,000 to put things right would only add $300 to the value of the land. The worry is that there may be circumstances where the “cost of repair” measure will overcompensate plaintiffs and waste resources. Precisely this concern animates the majority holding in Peevyhouse that “where the economic benefit which would result to the lessor by full performance of the work is grossly disproportionate to the cost of performance, the damages which lessor may recover are limited to the diminution in value resulting to the premises because of the non-performance.”
One point to emerge from our class discussion was that the Peevyhouses might not have been interested in “economic benefit” in the sense of the sale value of the farm. This was a family farm. It was their home. They may have been more interested in having usable land. So what if what was really at stake in Peevyhouse from Plaintiffs’ perspective was the “use” or “amenity” value of the land rather than its market value? Moreover, shouldn’t we worry about undercompensation because doesn’t a $300 award create perverse incentives for faithless contractors to welch on their promises?
Professor Judith Maute’s wonderful work on the case, which can be accessed here and here, offers powerful support for these intuitions. Crucially, Maute’s work uncovers that the record omitted important background evidence regarding the terms of the deal and how it was negotiated. It turns out that mining companies like Garland commonly paid $50 per acre up front to reflect surface damage caused by strip-mining. In the Peevyhouses case, this amounted to $3,000 for their sixty acres. But the Peevyhouses waived the $3,000 and instead negotiated express remediation provisions, which were added to Garland’s standard lease terms. This indicates that the Peevyhouses specifically bargained to have the land restored at the end of the lease and that this was more valuable to them than getting $3,000 up front. As Maute compellingly puts it:
“In resorting to the diminution measure, the court ignored strong indications in the record of plaintiffs’ higher subjective value for the land. Despite deficiencies in the official record, it was obvious that the leased parcel joined land on which plaintiffs lived. By definition, homestead property embodies personal, moral, and aesthetic concerns distinguishing it from real estate held for commercial purposes. The court should have inferred that the mining impaired both the going concern value of the entire farm and the plaintiffs’ personal valuation of their homestead. The record showed the plaintiff-landowners rejected the standard or “off the rack” agreement, giving valuable consideration to obtain the promised remedial work in order to protect their idiosyncratic moral and aesthetic values.”
Perhaps then it is no surprise that in a poll conducted by PrawfsBlawg in April 2008 an overwhelming majority voted the Peevyhouses The Most Screwed Victims in Case-Law History!!
hat tip to Contracts Prof Blog for this image
