Willie and Lucille Peevyhouse leased their coal-bearing farm to Garland Coal & Mining Company for strip mining. The lease required Garland not only to mine the coal and pay royalties, but also to perform specified reclamation work when the lease ended, including filling pits, smoothing spoil banks, preserving crossings, and removing shale and dirt from high walls.
The parties stipulated that every contractual obligation had been performed except the reclamation covenants, which Garland admitted it had not performed. Expert testimony placed the cost of the required work at about $29,000, although the Peevyhouses sought $25,000. Garland introduced evidence that completing the work would increase the value of the 60-acre tract by no more than $300.
The trial court instructed the jury that it could consider both completion cost and the other evidence, including diminution in market value. The jury awarded $5,000. Both sides appealed: the Peevyhouses argued for cost-of-performance damages, while Garland argued that damages could not exceed the land's diminution in value.
Issue #1
Whether damages for Garland's failure to perform the reclamation covenants should be measured by the cost of completing the work or by the diminution in the farm's value.
Holding
Ordinarily, damages are the reasonable cost of performance, but where the breached provision is incidental to the contract's main purpose and completion cost is grossly disproportionate to the economic benefit, damages are limited to diminution in value.
Reasoning
The lease's central purpose was the economically profitable recovery and marketing of coal, not construction or land grading for its own sake. The reclamation provisions were collateral to that central mining purpose. That distinction mattered because the court concluded that a party should not automatically recover a large completion cost for a breach of an incidental provision that produces only a trivial economic gain.
The court declined to follow Groves v. John Wunder Co., which had allowed cost-of-performance damages despite a drastic mismatch between completion cost and increased property value. Instead, the court found more persuasive authorities focusing on the relationship between the expense of correction and the benefit achieved. Although the Restatement discussed economic waste largely in terms of destroying an already completed structure, McCormick and Jacob & Youngs recognized a related principle: diminution in value is appropriate when the completion cost is grossly disproportionate to the end to be attained.
Oklahoma statutes reinforced that conclusion. Under 23 O.S. §§ 96 and 97, damages may not exceed the benefit that full performance would have provided and must remain reasonable rather than unconscionable or grossly oppressive. Awarding approximately $29,000 to obtain an increase in property value of only a few hundred dollars would give the lessors more from breach than from performance and would function like an impermissible penalty.
The rule does not prevent an owner from making an unusual bargain or contracting for work that may not increase market value. If the promised performance is a principal object of the agreement, the usual measure remains cost of performance. But where, as here, the work is merely incidental and its benefit is grossly disproportionate to its cost, diminution in value supplies the reasonable measure.
Issue #2
Whether the $5,000 jury verdict could stand, and what amount of damages the record established.
Holding
No. The verdict was excessive; the Supreme Court reduced the judgment to $300 and affirmed it as modified.
Reasoning
The evidence, viewed most favorably to the Peevyhouses, showed that the omitted reclamation work would increase the value of the 60-acre tract by only $300. The record contained no evidence supporting a greater diminution in value, and the Peevyhouses did not contend on appeal that the diminution was higher.
Because the correct measure of damages was diminution in value and the amount was definitely established by the record, the court exercised its authority to modify the judgment rather than order a new trial. The $5,000 verdict therefore was reduced to $300.
Issue #3
Whether the Peevyhouses were denied a fair opportunity to prove diminution in value on rehearing because evidence concerning their additional land was excluded.
Holding
No. The record showed that the Peevyhouses chose to litigate on a cost-of-performance theory, pleaded only the 60-acre tract, and did not preserve a claim that they had been prevented from proving broader damages.
Reasoning
The petition described only 60 acres, and the trial court properly excluded evidence concerning other land owned or leased by the Peevyhouses because it fell outside the pleadings. The Peevyhouses neither objected on the ground now asserted nor sought leave to amend their petition to include additional acreage.
At trial and on appeal, the Peevyhouses consistently maintained that cost of performance was the only proper measure and objected to Garland's diminution-in-value evidence. They did not cross-examine Garland's valuation witnesses, offer rebuttal valuation evidence, or complain in their new-trial motion that they had been prevented from presenting such proof. A party may not change its theory of the case on appeal or use rehearing to cure a failure of proof.
Their concern that offering valuation evidence would waive their objection to Garland's valuation evidence was unfounded. They could have contested Garland's proof and introduced responsive evidence while preserving their legal objection to the diminution-in-value measure.
Issue #4
Whether applying Oklahoma's statutory limits on damages impaired the parties' contractual obligations in violation of the federal Contract Clause.
Holding
No. The statutes predated the 1954 lease, and the court's decision neither applied a later-enacted law nor overruled prior Oklahoma precedent on which the parties could have relied.
Reasoning
The statutes limiting damages to reasonable amounts and to the benefit obtainable from full performance had been in force since 1911, decades before the parties entered their lease. Their application therefore did not retrospectively alter contractual rights through subsequent legislation.
The court also explained that the federal and state constitutional prohibitions on impairing contracts address legislative action, not an ordinary judicial decision that does not give effect to a later statute. In any event, this decision did not overrule prior Oklahoma authority governing the precise damages question.