No. 84-247
I N THE SUPREME COURT O THE STATE O MONTANA
F F
1985
A A D.
L N NICHOLSON,
P l a i n t i f f and Respondent,
-vs-
U N I T E D PACIFIC INSURANCE COMPANY,
Defendant and A p p e l l a n t .
APPEAL FROM: D i s t r i c t Court o f t h e F i r s t J u d i c i a l District,
I n a n d f o r t h e County o f Lewis & C l a r k ,
The H o n o r a b l e Henry L o b l e , J u d g e p r e s i d i n g .
COUNSEL O RECORD:
F
For Appellant:
George T . Bennett; John R . Kline argued, Helena,
Monta.na.
For Respondent:
Luxan & M u r f i t t ; Gary D a v i s a r g u e d & T e r r y C o s g r o v e
a r g u e d , H e l e n a , Montana
Submitted: June 1 8 , 1 9 8 5
Decided: December 1 7 , 1985
Filed: DEC 1 1 1985
----& +*--.
<:
Clerk
Mr. Justice L. C. Gulbrandson delivered the Opinion of the
Court.
The defendant, United Pacific Insurance Company (UPI)
appeals from a. judgment entered upon a jury verdict, and the
subsequent denial of its motion for a judgment
notwithstanding the verdict, in the District Court of the
First Judicial District, Lewis and Clark County.
Nicholson, the plaintiff, instituted suit against UP1
following a notice of default. He alleged several causes of
action, including breach of contract, negligent
misrepresentation, and fraud and deceit. He requested
specj-fic performance, compensatory damages and an a.ward of
punitive damages for breach of the implied covenant of good
faith and fair dealing. UP1 answered and counterclaimed
alleging breach of contract, fraud in the inducement and
breach of the implied covenant of good faith and fair
dealing. We affirm the judgment and the denial of UPI's
motion for a judgment notwithstanding the verdict .
UPI, a Washington ba.sed insurance company, has a branch
office in Helena, Montana. Although subsequently renewed,
UPI's lea.se on its space was due to expire September 30,
1982. UP1 desired to locate new and larger office space in.
Helena.
Nicholson owns a building in downtown Helena called the
New York Block. He also owns two construction companies,
Nicholson, Inc. and Alan D. Nicholson, Inc. One of
Nicholson's construction companies did the construction work
in the New York Block.
In late 1980 or early 1981, Nicholson learned of UPI's
desire for new office space. He contacted Jess Starns, the
Helena branch manager, and suggested UP1 consider locating in
the New York Block. James Heath, facilities vice-president
for UPI, came to Helena in July 1981 and toured the space
offered by Nicholson. Thereafter, Nicholson wrote a series of
letters to Starns and Heath encouraging UP1 to rent space in
the New York Block. Along with the letters, Nicholson
forwarded various draft proposals for both the New York Block
and the surrounding downtown mall area. Additionally,
Nicholson represented to UP1 that he would remodel the New
York Block to UPI1s specifications at his own cost.
In January 1982 both parties executed a letter of
intent to enter a lease. Nicholson then proposed and
circulated a draft lease. After negotiations, the parties
both signed the lease by April 14, 1982. Two key conditions
of the lease agreement were the requirement that Nicholson
confer with UP1 about the renovation of the New York Block
space and that the final plans were subject to mutual-
approval.
While work progressed, disputes arose between Nicholson
and UP1 over the renovation project. These disputes revolved
around interpretation of the renovation plans and about
aspects of the project that had not been included within
them. Nicholson and his architect were constantly in contact
with the UP1 planner in Seattle, Washington and the company
architect in New York City.
On July 29, 1982, John Heath visited Helena. At this
time he told Nicholson that UP1 had never approved the
construction plans. After the Heath visit, more problems
arose. In addition to the problems with interpreting the
construction plans, Nicholson and UP1 began noting difficulty
in dealing with each other. Nicholson had increasing trouble
in communicating with the appropriate authorities within the
UP1 corporate structure to gain approval of his proposals.
In August, Nicholson called the UP1 architect directly in New
York City and discovered that he was out of the office until
August 25, three days before the project was to have been
completed. On August 24 Nicholson sent his final revised
plans to UPI. On August 27 Nicholson received a letter from
UP1 rescinding the lease. The letter alleged Nicholson's
latest architectural drawings were incomplete and. lacking in
proper specification and detail, that the circumstances had
changed materially and that the New York Block area was
blighted.
UP1 concluded:
Our investment in time and money
continues to be greater than yours;
therefore, from a business standpoint we
have no choice but to rescind our lease.
We will cease further activity on this
project .
Up to this point Nicholson had expended $91,783 in remodeling
costs. Nicholson then attempted to contact the president of
UPI. Failing that, Nicholson sent UP1 a notice of default on
September 10, 1982 and then filed a complaint.
During discovery it became apparent that, at the time
the events surrounding this action occurred, a "secret" UP1
task force had made several recommendations about
reorganizing the company. Most pertinent to this ca.se was
the recommendation that many of the functions and employees
of the Helena office be transferred to Salt Lake City, Utah.
Thus, UP1 would have no need for the expanded office space in
the New York Block. Nichol-son argued that when UP1 realized
this, it became intransigent and threw obstacles in his path
to cause him to breach the lease agreement. Nicholson also
argued that UPI's concern with alleged "urban blight" in the
downtown area had never been made known to him until he
received word of rescission. In response to UPI's
allegations that he did not meet all of the specifications of
the architectural plans, he contended that he had difficulty
in communicating and gaining approval for any final
decisions; that UP1 was intransigent on several aspects of
the project which were merely being held as "bargaining
chips;" and that, as with any renovation of an old building
such as the New York Block, unforeseen difficulties arose.
Based on all of this, Nicholson alleged UP1 rescinded the
lease without justification and thus, in addition to being
liable for breach of contract, should he held liable for
exemplary damages for a breach of the implied covenant of
good faith and fair dealing.
In its answer and counter-suit UP1 alleged Nicholson
fraudulently misrepresented the conditions existing in both
the New York Block and the downtown area and failed to
fulfill the requirements called for in the architectural
plans incorporated in the lease agreement. UP1 contended
Nicholson did this because he was in financial trouble and
could not perform his contractual duties. Thus, UP1 alleged,
Nicholson began to "cut corners" thereby breaching the
agreement. Further, UP1 alleged Nicholson began to use items
not specifically mentioned in the lease agreement or
architectural plans as a tactic to bargain against the more
costly aspects of the remodeling project. Finally, UP1
attempted to portray Nicholson's work as shoddy.
The case went to trial on February 21, 1984. At the
end of plaintiff's case UP1 moved for a directed verdict and
renewed this motion at the close of the evidence. The court
denied UPI's motions and submitted the case to the jury. The
jury returned a verdict in favor of Nicholson, assessing
compensatory damages of $211,105 and exemplary damages of
$225,000 against UPI. UP1 then filed a motion for judgment
notwithstanding the verdict or, in the alternative, for a new
trial.
Hearings were held on UPI's motion, on Nicholson's
motion for interest to be assessed at 18% and his request for
attorney's fees and costs. On May 4, 1984, the District
Court entered an order denying UPl's motion for a judgment
notwithstanding the verdict and new trial, setting the
judgment interest rate at lo%, a-warding Nicholson attorney's
fees of $75,000 to bear interest at 10% and awarding him
$858.70 of the requested $20,000 for costs. The District
Court entered final judgment on May 23, 1984. On that same
day, UP1 filed notice of appeal and on May 24, 1984,
Nicholson filed a notice of cross-appeal.
Appellant raises the following issues:
(1) Whether UP1 was entitled to a directed verdict.
(2) Whether there was any basis in law for the jury's
award of punitive damages.
(3) Whether the compensatory damages awarded to
Nicholson were excessive as a matter of law.
(4) Whether Nicholson was entitled to an award of
attorney's fees.
Nicholson presents the following issue on cross-appeal:
(1) Whether the District Court erred in setting the
pre- and post-judgment interest rate at 10% and erred in its
award of costs.
UP1 characterizes the lease agreement as an executory,
unilateral contract and argues that since Nicholson failed to
perform, judgment should be granted to UP1 as a matter of
law, citing Rogers v. Relyea (1979), 184 Mont. 1, 601 P.2d
37. Further, it claims Nicholson did not prove that UP1
wrongfully prevented his performance, thus, McFarland v.
Welch (1913), 48 Mont. 196, 136 P. 391, mandates a verdict j n
.
UPI's favor. In response, Nicholson argues the agreement
required concurrent performance by UP1 and he presented
substantial evidence it wrongfully failed to do so.
considering motions for directed verdict its
procedural successor, a judgment notwithstanding the verdict,
the District Court must view the evidence in a light most
favorable to the plaintiff. MacDonald v. Protestant
Episcopal Church (1967), 150 Mont. 332, 435 P.2d 369. If a
prima facie case is made out, the motion should be denied.
Motions made pursuant to Rule 50(b), M.R.Civ.P., cannot he
granted if there is substantial conflict in th.e evidence.
Like any form of directed verdict, it rests on a finding that
the case of the party against whom it is directed is
unsupported in some necessary particular. Jacques v. Montana
Nat. Guard (1982), 199 Mont. 493, 649 P.2d 1319; Yetter v.
Kennedy (1977), 175 Mont. 1, 571 P.2d 1152.
UP1 interprets the contract too narrowly. Rather tha.n
simply calling for Nicholson to provide possession and
adequate plans, the lease set up a bilateral obligation on
UP1 to - with Nicholson in designing and approving the
work -
remodeling plans. Thus, Rogers, 184 Mont. 1, 601 P.2d 37,
which considers unilateral or "dependent" contract
obligations, does not apply.
Section 4.01 of the lease specifies as follows:
Landlord agrees, at its sole cost and
expense, to make the space ready for
occupancy by the Tenant to the Tenant's
normal specifications for leased space as
indicated on the Tenant's final plans
which plans will be mutually approved by
the Tenant and Landlord before work
commences on the space.
The work to be done by the Landlord, at
it [sic] sole cost and expense, to make
the space ready for occupancy will
include the cost of architectural
construction and layout and furniture
arrangement documents mutually acceptable
to Landlord and Tenant . . If Tenant .
requests changes, Landlord's time to
complete the premises will be
appropriately extendbed. (Emphasis
added. )
This language imposed on UP1 an obligation to deal with
Nicholson. In any satisfaction-type contract there is an
obligation to act reasonably if withholding approval. Taking
UPI's argument to its logical conclusion points to its
weakness. Even assuming that Nicholson, in the middle of
July, had forwarded to IJPI remodeling plans that were
adequate, would UP1 still be able to avoid its obligation by
refusing to approve them? No. The lease agreement put the
parties into a situation where both had independent
obligations to perform by dealing reasonably with the other
over the precise details of the remodeling. The obligation
each assumed in this regard was the obligation to
co-operate--that co-operation was a condition to the other's
performance. Therefore, we hold that the District Court
properly denied UPI's motions for a directed verdict.
In the second issue, UP1 argues punitive damages were
not available to Nicholson as a matter of law. It bases this
argument on the absence of any Montana cases imposing an
obligation of good faith and fair dealing independent of a
contract where the parties are in substantially equal
bargaining power. This issue contains two separate parts.
First, whether the implied convenant of good faith and fair
dealing applies to the case at bar. Second, assuming the
implied covenant applies and was breached by UPI, whether
punitive damages are available.
Both Nicholson and UP1 requested instructions on the
implied covenant of good faith and fair dealing. Montana has
long adhered to the rule that an instruction given without
objection becomes the "law of the case." See e.g., Melzner
v. Chicago, Milwaukee & St. P. Ry. Co. (1915), 51 Mont. 487,
153 P. 1019, and Bolstad v. Groskurth (1961), 139 Mont. 64,
360 P.2d 101. UP1 did not object to the instructions on the
implied covenant and, further, the District Court gave one of
the instructions offered by UPI. However, in order to
properly address the question of whether a basis for punitive
damages exists, we must discuss whether the implied covenant
of good faith and fair dealing applies in this case and
whether the covenant was breached.
In First Security Bank of Bozeman v. Goddard (1979),
181 Mont. 407, 593 P.2d 1040, we observed that the "special
considerations" giving rise to the implied covenant in
consumer insurance contra.cts "do not apply to an ord.inary
contract between businessmen." 181 Mont at 419, 593 P.2d at
1047, quoting Battista v. Lebanon Trotting Associati.on (6th
Cir. 1976), 538 F.2d 111, 117-118. ~ u c hhas happened to
Montana case law on this issue since Goddard and Battista.
See, Graham and Luck, The Continuing Development - - -
of the Tort
- - Faith - Montana, 45 Mont.L.Rev. 43 (1984) and Harman,
of Bad in
An
- Insurer's Liability - - -Tort - Bad
for the - of Faith, 42
M0nt.L. Rev. 67 (1981) . Here, the District Court interpreted
our recent cases as implying the covenant of good faith and
fair dealing into the contract between Nicholson and UP1 and
allowed Nicholson to recover for the correlative tort. The
District Court may have been motivated by the fact that both
parties originall-y alleged the other to have acted in breach
of the implied covenant and the case went to the jury on
instructions from both parties.
We recognize the call of commentators and attorneys
alike for this Court to address the uncertainty this new area
of law has engendered. We observe though, that uncertainty
is characteristic of any new area of law in our common law
system. Nonetheless, the time is appropriate to more fully
articulate our conception of what has been termed loosely as
"bad faith," but is termed more accurately as the tort of
breach of the implied covenant of good faith and fair
dealing.
In Montana, we have not expressly extended this tort to
all contract breaches. In Reiter v. Yellowstone Co. (Mont.
1981), 627 P.2d 845, 38 St.F.ep. 686, this Court began the
process of implying the covenant in some contracts. There,
we found "some basis for implying covenants of good faith in
contracts," Reiter, 627 P.2d at 849, citing S 28-1-201, MCA,
but went no further. Thereafter, we began finding the
covenant present in a variety of contractual situations,
characterized by aspects of adhesion or inequity. In Owens
v. Parker Drilling Co. (Mont. 1984), 676 P.2d 162, 41 St.Rep.
66; and Goddard, 181 Mont. 407, 593 P.2d 1040, this Court
found these aspects indicated in the particular contra-ctual
relationship by the fact that the legislature had enacted
laws setting forth a specific duty on the part of one of the
parties to redress the inequities of the situation. In
Owens, 676 P.2d 162, the employer allegedly violated
49-4-101 and -102, MCA, prohibiting an employer from
discharging an employee solely because he was handicapped. In
Goddard, 593 P.2d at 1047, the insurer violated the specific
statutory duty in S 33-21-105, MCA, to settle valid cia-ims
promptly.
The covenant of good faith and fair dealing has been
implied in situations where there is no specific statutory
duty, but where similar indicia of adhesion or inequality is
present. In Weber v. Blue Cross of Montana (1982), 196 Mont.
454, 464, 643 P.2d 198, 203, this Court ruled:
Blue Cross has an obligation to act in
good faith with its members. This is
especj-ally true beca.use Blue Cross is in
a -much better bargaining position than
those applying for membership in its
program. (Emphasis added.)
On this basis, a legal obligation of good faith and fair
dealing also has been extended to employers dealing with
employees in Gates v. Life of Montana (Mont. 19831, 668 P.2d
213, 40 St.Rep. 1287, and Dare v. Montana Petroleum Marketing
Company (Mont. 1984), 687 P.2d 1015, 41 St.Rep. 1735; to fee
arrangements between a lawyer and his client, Morse v.
Espeland (Mont. 1985), 696 P.2d 428, 42 St.Rep. 251; and to
banks dealing with customers, First National Bank of Libby v.
Twombly (Mont. 1984), 689 P.2d 1226, 41 St.R.ep. 1948 and
Tribby v. Northwestern Bank of Great Falls (Mont. 1985) , 704
P.2d 409, 42 St.Rep. 1133.
California law implies a covenant of good faith and
fair dealing into every contract, commercial, insurance,
employment, or otherwise. Cohen v. Ratinoff (1983), 147
Cal.App.3d. 321, 195 Cal.Rptr. 84, citing McWilliams v.
Holton (1976), 248 Cal.App. 447, 451. Recently, in Seaman's
Direct Buying Service, Inc. v. Standard Oil Co. (Cal. 1984),
686 P.2d 1158, the California court reaffirmed this, stating
"the proposition that the law implies a covenant of good
faith and fair dealing in all contracts is well established."
686 P.2d at 1166. In Seaman's, the California Supreme Court
considered whether and under what circumstances the plaintiff
could recover in tort for the breach of an arms-length
contract. Seaman's involved a marine fuel dealer who wished
to lease re-developed wharf space from the city of Eureka,
California. After negotiations with Standard Oil, the
parties ultimately signed a letter agreement in which
Standard promised a ten-year oil supply "subject to our
mutual agreement on the specific wording of contracts to be
drawn ... " 686 P.2d at 1 1 6 1 . On that basis Seaman
obtained a forty-year lease. One year later Standard
notified the dealer that it would not proceed with the
agreement because of market conditions and other factors.
When pressed, Standard took the position that no contract had
ever been si-gned. The California Supreme Court invented a
new tort and held that a defendant would be subject to tort
remedies when, in addition to breaching the contract, it
sought to shield itself from liability by denying in bad
faith and without probable cause, that a contract exists or
ever existed. The Seaman's court carefully limited the scope
of the new tort to egregious situations. The California
Court of Appeals, in Quigley v. Pet, Inc. (1984), 1 6 2
Cal.App.3d 223, 2 0 8 Cal.Rptr. 394, explained this new tort as
"depending upon a special kind of impermissible
activity ... " 2 0 8 Cal.Rptr. at 4 0 2 .
While we decline to extend the breach of implied
covenant to all contract breaches as a matter of law, as
California has done, we agree with the statement in Quigley,
supra, that the tort resulting from its breach depends on
some impermissible activity. The Montana cases discussed
above focus on the action of the breaching party in the
relationship to find a breach of the implied covenant, not
just the existence of a breach of contract.
At this point a helpful distinction should be noted
between an intentional breach or one motivated by
self-interest, giving rise to only contract damages, and the
action which would give rise to a breach of the implied
covenant, resulting in tort damages. Historically, a party
to a contract generally had the right to breach and pay
damages rather than perform. The non-breaching party,
theoretically, is "made v~hole" from the damages paid
following the breach and thus still receives benefits from
the agreement.
Contract law is based in part upon the
assumption that certain intentional
breaches are to be encouraged.
Permitting parties to breach their
contracts promotes an efficient economy,
at least when the gains from the breach
exceed the expected pecuniary injuries of
the promisee.
Diamond, - - - - Bad Faith Breach of Contract: - -
The Tort of When, If
7
- - Should It Be Extended Beyond Insurance Transactions,
At All, 7 -
64 Marquette Law Review 425, 453 (1981). But whether
performing or breaching, each party has a justifiable
expectation that the other will act as a reasonable person.
Neal v. Farmers Ins. Exchange (Cal. 1978), 582 P.2d 980. The
nature and extent of an implied covenant of good faith and
fair dealing is measured in a particular contract by the
justifiable expectations of the parties. Where one party
acts arbitrarily, capriciously or unreasonably, that conduct
exceeds the justifiable expectations of the second party.
The second party then should be compensated for damages
resulting from the other's culpable conduct.
In the case at bar, the jury awarded Nicholson both
compen.satory and punitive damages as a result of UPI's
conduct. Section 27-1-221, MCA (1983), in effect at the time
of trial, provided :
In any action for a breach of an
obligation not arising from contract
where the defendant has been guilty of
oppression, fraud, or malice, actual or
presumed, the jury, in addition to the
actual damages, may give damages for the
sake of example and by way of punishing
the defendant.
As discussed above, the implied covenant of good faith and
fair dealing is not an obligation arising from a contract.
In order for punitive damages to be awarded in a tort action
for a breach of this covenant, the breach must amount to
oppression, fraud or malice, as stated in the statute.
Another concern in this issue is whether substantial
evidence supported the jury's verdict on punitive damages.
Substantial evidence is relevant evidence which a reasonable
person could accept as adequate to support a conclusion.
See, e.g., Harmon v. Deaconess Hospital (Mont. 1981), 623
P.2d 1372, 38 St.Rep. 65. The District Court, in reviewing
UPI's motion for judgment notwithstanding the verdict and new
trial, noted that the parties produced contradictory evidence
on every substantive fact issue. It also noted:
At the time the plaintiff (a very
credible witness) was testifying, at the
end of his direct, there might have been
some doubt as to whether he had presented.
enough facts to justify the awarding of
exemplary damages. However, after
intensive and searching cross examination
of plaintiff, he amplified and enhanced
his testimony on punitive damages to such
a degree that there was no doubt that an
award of such was justified if the jury
chose so to do.
We hold the jury had adequate evidence on which to find the
culpable conduct necessary for an award of punitive damages.
The jury received instructions discussing malice and
fraud, several of which were submitted by UPI. UP1 objected
to an instruction offered by Nicholson which stated. in part:
Punitive damages may be awarded for
recklessness, for reckless conduct, for
willful or wanton misconduct, willful
disregard of duty, or willful or wanton
disregard of the rights of others. In
Montana, the above and foregoing conduct
may amount to presumed malice which has
been defined as follows:
"When a person knows or has reason to
know of facts which create a high degree
of risk of harm to the substantial
interests of another, and either
deliberately proceeds to act in conscious
disregard of or indifference to that
risk, or recklessly proceeds in
unreasonable disregard of or indifference
to that risk, his conduct meets the
standard of willful, wanton, and/or
reckless to which the law of this State
will allow imposition of punitive damages
on the basis of presumed malice."
This instruction apparently was drawn from Owens v. Parker
Drilling Co. (Mont. 1984), 676 P.2d 162, 41 St.Rep. 66, where
this Court adopted a standard for presumed malice expressing
a "level of conduct . . . so culpable as to warrant an award
of punitive damages." Owens, 676 P.2d at 164, 41 St.Rep. at
69. The instructions as a whole given by the court required
the jury to find egregious conduct before awarding punitive
damages. We find no error in the giving of this instruction
under these circumstances.
The third issue asks whether Nicholson received
excessive compensatory damages. The jury returned a verdict
on Nicholson's claim for breach of the lease agreement for
$211,105. The instruct?ons included requests for $115,572
for the value of the lease and for $95,533 for remodeling
expenses and finance charges on those expenses. UP1 argues
that Nicholson received a double recovery because the verdict
awarded him both the full lease value, and the remodeling
expenses he had incurred prior to the breach. This, UP1
contends, is in violation of 5 27-1-303, MCA, which requires
that :
No person can recover a greater amount in
damages for the breach of an obligation
than he could have gained by the full
performance thereof on both sides unless
a greater recovery is specified by
statute.
They also argue that renovation costs are not recoverable as
special damages for breach of an agreement to enter a lease.
H.S. & D. Investment Co. v. McCool (Or. 1932), 9 P.2d 809 and
Brodsky v. Allen Hayosh Industries (Mich. 1965), 137 N.W.2d
771. Nicholson responds that the jury received proper
instructions, that the evidence produced at trial supports
the verdict and that UP1 waived any objection.
The jury was properly instructed on the amount and type
of damages it could award. The court gave a general contract
damages instruction pursuant to § 27-1-311, MCA, followed by
instructions relating to Nicholson's duty to mitigate the
damages by attempting to re-lease the premises. Finally, the
jury was instructed that:
If you find that Plaintiff made
alterations in the property to adapt it
to the special use of the Defendant, and
that as renovated for Defendant the
property is not suitable for other
tenants, then Plaintiff may recover the
expense of renovation as special damages
for breach of contract.
This special damage instruction is adequate in light of
Purington v. Sound West (1977), 173 Mont. 106, 111, 566 P.2d
795, 798, where we explained that "special damages are the
natural but not necessary result of the wrong or breach."
The District Court, in denying UPI's motion on this
point observed:
Defendant claims that the compensatory
damages were excessive and there was a
double recovery. There were two
principal witnesses on this question,
plaintiff and expert fee appraiser Bob
White. The jury accepted their
testimony, as they had a right to
do. .. Defendant claims: "There was
absolutely no testimony that any of the
features of the office space were unique
to the defendant United Pacific." ...
From this defendant argues that there was
a double recovery, once for the
remodeling, and again for the rental.
However, there was a quantity of
testimony by plaintiff and by White that
there was very little, if any, chance of
leasing this space to any other tenant
and that the remodeling which had been
done would have to be torn out and a
complete new renovation performed for any
new tenant. Indeed, the testimony was
that it would be very difficult to get a
new tenant but that if one was obtained,
that the renovation would have to be
completely different and the premises
rebuilt to meet that new tenant's
individual taste. Thus the jury could
have believed that the plaintiff derived
no benefit whatever from the remodeling
which he did and which cost him,
according to his testimony, in excess of
$90,000.00.
PITicholson did not receive double recovery under the
jury verdict. His expectancy, when entering into the lease
agreement was two-fold. First, he would have the rent
payments for the term of the lease. Secondly, he would have,
at the end of that term, a finished office space and for that
reason would be in a position of comparative advantage
vis-a-vis any competition for the next lease UP1 would enter
into. This second expectancy was also damaged by UPI's
breach.
We do not rely on the na.rrow rule articulated in
H. S. & D. Investment, 9 P.2d 809 and Brodsky, 137 N.W.2d.
771, for two reasons. First, those cases are factually
distinguishable from the case at bar. In those decisions,
within 5% and 20 months respectively, new tenants were found
for the premises at the same rent the defaulting lessees had
agreed to pay. In H. S. & D. Investment, 9 P.2d at 811, the
lessor did not request as special damages the costs of
renovating the premises for the lessee prior to the breach,
as Nicholson did here. Rather, the lessee requested, and the
Oregon court held, that the defaulting lessee was not
responsible for the remodeling costs incurred after the
breach. In Brodsky, 137 N.W.2d 771, the lessor was not
required to make any special renovations of the premises for
the lessee. Here, prior to entering into the lease
a.greement, UP1 requested, and had a great deal of control
over, a very specific renovation for its particular purposes.
Second, to hold, under Brodsky, supra, that renovation costs
are not recoverable would work an injustice and fly in the
face of strong evidence of injury. We choose to follow the
more fundamental rule that damages are designed to make the
injured party whole and to compensate for the injury caused
by the breach. Agrilease Inc. v. Gray (1977), 173 Mont. 151,
566 P.2d 1114; Bos v. Dolajak (1975), 167 Mont. 1, 534 P.2d
1258.
UP1 argues that since the District Court erred in not
directing a verdict in its favor, it consequently erred in
awarding attorney's fees, as provided for in the agreement,
to Nicholson. Since we ruled above that the District Court
did not err, UP1 cannot prevail with this argument. UP1
makes no other allegation that the award of attorney's fees
is not supported by the evidence or is otherwise flawed, so
the award stands.
In the last issue, Nicholson alleges error because the
District Court set the judgment interest rate at 10% rather
than the requested 18% and awarded him only $858.70 of the
requested $20,000 in costs. Nicholson points to Section
18.09 of the lease agreement which provides that UP1 was to
indemnify him for finance costs of the construction at a rate
of 18%. Nicholson argues that this same rate should apply to
all liabilities under the lease, and cites several cases
holding that interest rates set in a contract should also
apply to any pre- and post-judgment liabilities. For
example, in Pacific States Corporation v. Hall (9th Cir.
1948), 166 F.2d 668, the plaintiff brought suit on a
promissory note which was due within five years after the
date "with interest from date until paid at the rate of seven
per cent per annum, payable quarterly, in advance." 166 F.2d
at 672. The court enforced the note as written stating
"where, as here, there is an express provision requiring a
certain rate of interest until the principal is paid, the
contract must be so enforced." (Citations omitted.) 166
F.2d at 672. The other cases cited by Nicholson are to the
sa.me effect. Nicholson contends that the court abrogated the
parties' agreement in setting the interest rate at the lower
figure.
An interest rate contained in one relatively minor and
discrete part of the contract should not be an umbrella over
the entire obligation. It is contrary to the parties'
legitimate expectations. The lease agreement was otherwise
complete in almost every detail. If the parties intended
Section 18.09 to apply to - obligations arising from the
all
agreement including breach, they could easily have so stated.
Pacific States, 166 F.2d 668, is not controlling because it
dealt with a simple obligation, a promissory note. The
judgment in that case was directly on the note. Here, we
have damages for breach of contract and, in addition,
attorney's fees and other costs beyond the contract amount.
The District Court reasoned that these damages were not
amounts due under the contract for lease and thus not matters
envisioned by the parties. We hold that the District Court
correctly applied the statutory rate of interest provided for
in § 25-9-205(2), MCA, to the judgment rendered in this case.
Following the judgment, Nicholson made an application,
pursuant to $
$ 25-10-501, MCA, for statutory costs and
requested the court award him "expenses and disbursements"
pursuant to Section 14.03 of the lease. The court awarded
only the costs recoverable by statute. He elected to claim
his costs through a cost bill, and the court correctly
limited him to statutory costs. Nicholson cites authority
for the proposition that the parties to a contract may agree
to a recovery of expenses greater than provided by statute.
Although that is a correct statement of law, see, e.g.,
Leaseamerica Corp. of Wis. v. State (Mont. 1981), 625 P.2d
68, 3 8 St.Rep. 398; and Bovee v. Helland (1916), 52 Mont.
151, 156 P. 416, it does not address the issue presented by
the District Court's order. We hold that the District Court
correctly awarded costs.
The judgment entered on the verdict and the denial of
the motion for judgment notwithstanding the verdict are
affirmed.
t
We concur: /'
Mr. Justice John C. Sheehy, specially con.curring.
I concur with the above opinion of Mr. Justice
Gulbrandson, especially its result. I have some different
conceptions of the source and legal effect of the implied
covenant of good faith and fair dealing in contracts, which I
will express when necessary. The majority opinion here
serves well the case before us, and gives direction to courts
and lawyers in this developing field.
L.-
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