No. 90-281
IN THE SUPREME COURT OF THE STATE OF MONTANA
1991
HAINES PIPELINE CONSTRUCTION, INC.,
Plaintiff, Respondent and Cross-Appellant,
-vs-
MONTANA POWER COMPANY,
Defendant and Appellant.
APPEAL FROM: District Court of the Second Judicial District,
In and for the County of Silver Bow,
The Honorable Thomas Olson, Judge presiding.
COUNSEL OF RECORD:
For Appellant:
Bruce R. Toole argued and Donald L. Harris argued;
Crowley Law Firm, Billings, Montana
For Respondent:
Sam E. Haddon argued and Randy J. Cox argued; Boone,
Karlberg & Haddon, Missoula, Montana
DEC 1 6 1991 Submitted: October 31, 1991
tEk2
>kith SUPREME COURl
Decided: December 16, 1991
SPATE QP MONTANA
Clerk
Justice R. C. McDonough delivered the Opinion of the Court.
This is an appeal from a bench trial and judgment in the
Second Judicial District Court, Silver Bow County. Defendant,
Montana Power Company (MPC), appeals the judgment awarding Haines
Pipeline Construction, Inc. (Haines), $502,361.26 in compensatory
damages and $1,000,000 in punitive damages for MPCts breach of a
construction contract to build a natural gas pipeline. Haines has
cross-appealed the portion of the judgment failing to award Haines
damages for its lost profits. Regarding the judgment for
compensatory damages we affirm in part and reverse in part. As to
the punitive damages we reverse and remand, granting the parties
leave to amend their pleadings in light of our decision in Story v.
City of Bozeman (1990), 242 Mont. 436, 791 P.2d 767. In regards to
the cross-appeal, we affirm the District Court's judgment denying
Haines recovery for lost anticipated profits.
MPC raises the following issues on appeal:
I. Did the District Court err by admitting into evidence MPCts
internal audit regarding its construction contract with Haines?
11. Did the District Court err in concluding that MPC, rather
than Haines, was liable for breach of the construction contract?
111. Did the District Court err in awarding Haines
compensatory damages including $16,000 in travel expenses and
$50,000 in unspecified general damages?
IV. Did the District Court err in awarding punitive damages
for breach of the implied covenant of good faith and fair dealing?
Haines raises the following issue on cross-appeal:
V. Did the District Court err in failing to award ~aines
damages for its lost profits?
On June 16, 1983, Haines as contractor and MPC as owner,
entered into a written contract for the construction of the
southern half of a 16 inch natural gas pipeline from Warm Springs
to Cut Bank, Montana. Walter Kelley, MPCfs chief operating officer
and a director, was MPCfs agent responsible for administration of
the contract.
In lieu of a construction bond, the parties required Haines to
post an irrevocable letter of credit for $750,000 in favor of MPC,
and to maintain such letter of credit until final acceptance and
payment of the work under the contract. The terms for drawing on
the letter of credit were as follows:
"We hereby certify that Haines pipeline ~onstruction,
Inc. has failed to comply fully with the terms of our
contract, dated June 18, 1983 covering their laying of
the 200 mile 16 inch pipeline between Warm Springs and
Cutbank. We are therefore entitled to this drawing of
I1
$
The original expiration date of the letter of credit was January
15, 1984.
Construction of the pipeline required welding sections of pipe
in accordance with procedures developed by MPC and in compliance
with federal regulations. MPC entered into a contract with Gamma
Sonics (Gamma), to provide x-ray inspection of the welds made by
Haines. Welds identified by Gamma as insufficient were immediately
marked and repaired by Haines. No welds were buried unless they
had been x-ray inspected and approved by Gamma and MPC inspectors.
The project had regulatory problems brought to the attention
of the Montana Public Service Commission (PSC) by labor leaders and
the Department of Transportation. Hearings were held on several
alleged federal safety violations, regarding primarily the padding
of the bed underneath the pipeline. At the time of the hearings,
MPC declined to hold Haines harmless for these violations although
Kelley testified that MPC accepted responsibility and paid costs
for padding the pipeline. To avoid further hearings MPC developed
a l1plan to demonstrate fitness for service" of the portion of the
pipeline that had been constructed and agreed to postpone further
construction.
On April 16, 1984, the letter of credit which was previously
extended, was reduced to $250,000 and the expiration date extended
again, by agreement of the parties, from July 15, 1984, to November
15, 1984. On April 23, 1984, the construction contract having been
suspended pursuant to the fitness plan, MPC entered a settlement
agreement with Haines covering all work done to that date. As part
of that agreement, Haines would release all claims against MPC.
MPC hired Southwest Research Institute (SRI) to re-check the
x-ray inspection of Gamma. On May 8, 1984, Haines and MPC entered
into a second contract whereby Haines was to assist MPC in doing
miscellaneous repair work on the completed portion of pipeline
including repair of buried pipeline identified by SRI as defective.
Under the contract Haines was paid as an independent contractor on
an hourly basis.
On October 15, 1984, MPC Chief Executive Officer, Paul
Schmechel, distributed a memorandum in response to the board of
directors1 concerns about the pipeline. The memorandum indicated
that MPC would Ilmove Haines off the job" by mid-~ovember.
Furthermore, the memorandum indicatedthat the letter of credit was
set to expire on November 15 and that the circumstances surrounding
repair work were being reviewed to determine if claims should be
made against Haines. Lastly, the memo noted that hydrostatic
testing of the south half of the pipeline had been completed
without failure.
On October 22, 1984, Haines as a "good faith gesturev1
extended the letter of credit until May 15, 1985, at the request of
MPC. On November 16, 1984, MPC terminated the June 1983 contract
with Haines, pursuant to paragraph 31.0, allowing MPC to terminate
at its convenience, and setting forth the amounts which Haines
could recover upon such termination. Paragraph 31.0 (c)(iii) of the
contract specifically stated "the Contractor shall make no claim
for lost anticipated profits.l1 The reason given by MPC for the
termination was Itseverecash problem^.^^
MPC conducted an internal audit of the pipeline construction.
The audit focused on the shortcomings of MPC1s supervision of
Haines and Gamma. One of the recommendations of the audit was to
proceed against Gamma for the cost of digging up the pipeline and
making the necessary repairs. It was later determined that Gamma
had insufficient assets to pursue.
In January of 1985, MPC retained a law firm to advise the
company if it had a claim against Haines for the cost of fixing
defective welds. MPC did not provide the firm with the audit
report nor did they make Chief Operating Officer Kelley available
to the firm. MPC received an opinion letter from the law firm on
May 10, 1985, advising MPC that it could assert both contractual
and negligence claims against Haines to recover the costs MPC would
incur in repairing defective welds.
Subsequently, MPC attorney, Robert Gannon, recommended to
MPC's vice chairman, Jack Burke, that MPC draw upon the $250,000
letter of credit which was due to expire Wednesday, May 15. Gannon
concluded that the costs of repairing the welds would substantially
exceed the value of letter of credit. On Tuesday, May 14, Gannon
and Burke met with MPCts CEO, Paul Schmechel, to obtain authority
to draw upon the letter of credit.
On May 15, 1985, MPC drew upon the letter of credit after
informing Haines that it had failed to perform proper welding under
the contract. Haines responded stating that it had no further
responsibility for the welds once they had been x-rayed, approved,
and the pipe buried.
Haines initiated this action to recover damages against MPC
for breach of the construction contract. MPC answered and
counterclaimed for damages alleging defective work. After a bench
trial in February 1989, the court entered its findings of fact and
conclusions of law on May 3, 1990, and entered judgment in favor of
Haines on May 21, 1990. Among its findings and conclusions, the
court held that MPC had accepted Hainesfs work, had no authority to
draw upon the letter of credit and that presentment of the letter
of credit constituted a breach of the construction contract.
Furthermore, the court concluded that MPC mislead Haines into
extending the letter of credit constituting a breach of the implied
covenant of good faith and fair dealing. Finally, the court
concluded that the breach was oppressive conduct justifying the
imposition of punitive damages. From this order MPC appeals.
I.
Did the District Court err by admitting into evidence MPC's
internal audit regarding its construction contract with Haines?
MPC contends that the District Court erred in admitting MPC's
internal audit into evidence. Several theories are offered. First
MPC argues that the audit is hearsay and is not within any hearsay
exception. They further argue that the audit is hearsay within
hearsay, as it was written by one MPC employee from information
gathered by other individuals. Lastly, MPC argues that the
probative value of the audit is outweighed by the prejudice MPC
experienced due to its admission. Haines asserts that the audit is
admissible because it is relevant, and that the audit is not
hearsay because it is both a prior inconsistent statement and an
admission by a party opponent.
~aving
heard these arguments the court admitted the audit into
evidence. ~dmissionof evidence is a discretionary act by a trial
court. The function of this Court in determining if a court
properly admitted evidence is to determine if the trial court
misused or abused its discretion. See Steer, Inc. v. Dept. of
Revenue (1990), 245 Mont. 470, 803 P.2d 601.
MPC notes that traditionally a report from an agent to its
principal, intended to be confidential, was not an admission, and
that commentators disagree whether such reports are admissible
under the rules. See 4 Weinstein's Evidence, fi 801-266, et seq.
(1988). MPC further notes that with the exception of Runkle v.
Burlington Northern (1980), 188 Mont. 286, 613 P.2d 982, this Court
has not addressed the admissibility of an intracorporate document
as an admission. MPC argues that Runkle is not dispositive.
Specifically, MPC characterizes the language in Runkle referring to
the admissibility of intracorporate memorandum as a "throwaway
conclusion^^. We disagree and find Runkle to be dispositive.
In Runkle, this Court specifically held that intracorporate
communications concerning matters relevant to the issue of the case
should have been admitted into evidence as an admission pursuant to
Rule 801(d)(2), M.R.Evid. Runkle was a negligence action in which
a memorandum was offered to demonstrate the railroad's knowledge of
a hazardous crossing condition and the railroad's intent with
respect to the same. MPC argues that the audit in the instant case
is a retrospective study of past events and is therefore
distinguishable from the consideration of the future act of
installing a railroad crossing signal as in Runkle.
One of the purposes of the internal audit was to determine
possible company exposures of any type. Such determination clearly
requires retrospective analysis as argued by MPC; however, it is
equally clear that another purpose of the audit was to aide MPC in
the development of future plans. Similar to the memorandum in
Runkle, the audit report was in response to a problem the company
was experiencing and provided recommendations for future actions.
MPC essentially argues that the audit reflects the opinion of the
reporter and that a principal providing authority to an agent to
investigate a topic, should not be bound by the findings of the
agent.
The internal audit is relevant to the case because it is part
of the information Schmechel had available when he ordered that the
letter of credit be presented. We are not saying that MPC is
committed to accept the audit's conclusions as MPC suggests.
Instead, consistent with our finding in Runkle, we find that the
internal audit is admissible as an admission because it is relevant
to the issue being resolved by the trial court. Schmechel had the
opportunity to weigh the audit along with the opinion letter to
make a considered decision as to what course of action MPC should
take. The District Court should be afforded the same opportunity.
MPC cannot claim unfair prejudice simply because admission of
the audit was adverse to its position. It was within the District
Court's discretion to determine if the prejudice was unfair; it was
also in the court's discretion, as trier of fact, to assign the
audit the weight the court deemed appropriate. When a trial court
determines that the prejudicial effect of evidence does not
outweigh its probative value, pursuant to Rule 403, M.R. Evid. ;
that determination is in the province of the trial court and will
not be disturbed absent abuse. Steer, Inc. v. Dept. of Revenue
(1990), 245 Mont. 470, 803 P.2d 601.
Because we find no abuse of court discretion the decision of
the court to admit the internal audit into evidence is affirmed.
11.
Did the District Court err in concluding that MPC, rather than
Haines, was liable for breach of the construction contract?
The District Court found that MPC breached its contractual
obligations to Haines when they drew on the letter of credit.
9
Specifically, the court found breaches of the implied warranty of
good faith and fair dealing and the implied warranties of transfer
and presentment. The District Court concluded that MPC waived its
right to enforce the specific terms of the contract, that the
pipeline contract had been amended by performance and oral
agreement and that MPC did in fact accept the work of Haines.
Because the welds were accepted, MPC had no right to recover
against Haines for the welds. Therefore, the District Court ruled
that MPC had no authority to draw on the letter of credit and in so
doing breached its obligation towards Haines.
MPC contends the District Court erred in ruling that MPC
breached the contract when allegedly Haines breached the contract
by defectively welding the pipeline. MPC argues that the contract
expressly holds Haines responsible for constructing the pipeline to
meet federal standards that were not met. MPC denies ever
accepting the defective welds suggesting to do so would be absurd.
Furthermore, MPC alleges the District Court erred by allowing par01
evidence to modify the terms of the written contact.
Whether the contract was administered as written and the
determination of whether there is a breach of the contract are
questions of fact to be determined by the trial court. The findings
of a trial court in a non-jury trial will not be overruled unless
they are clearly erroneous. Rule 52(a), M.R.Civ.P.
Section 28-2-1602, MCA, states:
A contract in writing may be altered by a contract in
writing or by an executed oral agreement, and not
otherwise.
An oral agreement modifying a written agreement is executed when
its terms have been fully performed. Lemley v. Allen (1983), 203
Mont. 37, 659 P.2d 262.
The testimony of Walter Kelly establishes not only that it was
standard practice to vary from the letter of the contract but also
as the number one MPC man on the project he altered the terms of
the contract on behalf of MPC on several occasions. When asked
what role the written contract played in the administration of the
contract and the construction project, Kelly testified:
Well, the contract is a point of beginning. You've got to
start someplace, as we do on any job. And then you
negotiate on a daily basis and do the job.
In addition, Brad Haines, president of Haines Pipeline, testified
to instances when changes in the contract were made that were not
committed to writing.
Substantial evidence exists to support the District Court's
finding that the pipeline contract was amended by performance and
oral agreement of the parties. Furthermore, when a written
contract is altered or modified by an executed oral agreement,
par01 evidence of the alteration or modification can be heard.
Jensen v. Olson (1964), 144 Mont. 224, 395 P.2d 465.
The District Court ruled and we agree that MPC waived or
modified contract provisions regarding inspection and acceptance of
Haines' work and did in fact accept the welds prior to Haines
burying them in the ground. Waiver and acceptance of the welds was
determined on the basis of Kelly's testimony that he did accept
Haines' work; the second contract whereby MPC hired and paid Haines
to make repairs to the pipeline; and the standard business
practice.
MPC argues that the contract expressly provides inspection of
the work by MPC shall not constitute nor imply acceptance by MPC,
and that this provision prevails over any industry standard to the
contrary. MPC further contends the District Court erred in
concluding that MPC waived its rights under the inspection clause
by failing to demand Haines repair the welds and then paying Haines
to repair welds under a separate repair contract. MPC argues that
a waiver can occur only when the party clearly manifests such an
intention and it never had any intention of the sort.
The District Court's findings are supported by the testimony
of Walter Kelly, who was in a position to accept Haines' work on
behalf of MPC and did in fact accept it. That it is standard
practice to accept the welds prior to their burial is substantiated
by the testimony of B.G. Simpson, an expert in the field. It is
undisputed that MPC entered a second contract with Haines and paid
Haines to repair faulty welds.
Waiver may be proven by express declarations or by a course of
acts and conduct so to induce the belief that the intention or
purpose was to waive. Northwestern Fire and Marine Insurance v.
Pollard (1925), 74 Mont. 142, 238 P.2d 594. Mathis v. Daines
(1982), 196 Mont. 252, 639 P.2d 503. In the instant case, waiver is
supported by both the express declarations of Kelly and by MPC's
entering the second contract. Paying Haines to repair buried welds
is indicative of MPC assuming responsibility for the buried welds
and constitutes waiver of contract provisions to the contrary.
12
The District Court's findings that the contract was not
administered as written and that MPC accepted the welds and waived
the contract provision holding Haines responsible for repair costs
is not clearly erroneous and is therefore affirmed.
Presentment of the letter of credit warranted that Haines had
not fully complied with the terms of the contract. Because Haines
had not breached the contract, the District Court concluded that
MPC1s presentment of the letter of credit breached warranties of
presentment attendant to letters of credit and the implied warranty
of good faith and fair dealing.
Section 30-5-111, MCA, provides that by demanding payment, a
party warrants that the necessary conditions prior to presentment
of the credit have been met. In this case, MPC was required to
certify that Haines had failed to comply with the terms of the
contract. The District Court having found that Haines had complied
with the contract, as modified by Walter Kelly for MPC, determined
the necessary conditions were not met prior to MPC1s presentment of
the letter of credit. Therefore, the court ruled that MPC breached
the warranty of presentment, entitling Haines to compensatory
damages. Furthermore, the court found that MPC1s conduct breached
the implied warranty of good faith and fair dealing.
The District Court's conclusion that MPC breached the
construction contract entitling Haines to compensatory damages is
supported by substantial evidence, is not clearly erroneous and
therefore is affirmed.
111.
Did the District Court err in awarding Haines compensatory
damages including $16,000 in travel expenses and $50,000 in
unspecified general damages?
In its judgment, entered, May 21, 1990, the District Court
awarded compensatory damages to Haines in the amount of
$502,361.26. ~etermination the actual damages suffered Haines as
of
a result of MPCgsbreach is a question of fact to be determined by
the trial court. These findings will not be disturbed unless they
are clearly erroneous. Rule 52 (a), M.R. Civ.P.
MPC contends that the District Court erred in awarding Haines
$16,000 for travel expenses. The District Court awarded Haines
$16,000 for travel expenses that were subsequent to, and determined
to be a result of, MPC's presentment of the letter of credit.
Haines provided an explanation of these expenses which was accepted
by the court. The award of the $16,000 for travel expenses is not
clearly erroneous and therefore is affirmed.
In addition, MPC contends the $50,000 award for "General
Damages to include interest paid by Haines to keep the letter of
credit validgg not supported by the evidence. Haines argues that
is
the record does substantiate the general damage award because
damages are not to be denied even if mathematical precision is
challenged, provided the evidence is sufficient to afford a
reasonable basis for determining the specific amount awarded. See
Cremer v. Cremer Rodeo Land and Livestock Co. (1981), 192 Mont.
208, 627 P.2d 1199. Thus, Haines contends that the testimony
regarding damages, which included over $118,000 in additional
14
damages above those specifically awarded by the court, supports the
award.
The court indicated that the general damages award included
interest paid by Haines to keep the letter of credit valid. MPC
argues that it in fact paid the expenses associated with keeping
the letter of credit valid and point to the testimony of Brad
Haines to support this claim. The record makes clear that MPC paid
the service charges necessary to maintain and extend the letter of
credit, but not interest rates.
It appears the court is referring to the interest paid by
Haines to an individual who guaranteed the letter of credit and
following MPCVs presentment was required to pay the bank the
$250,000. The court awarded Haines interest on the $250,000 from
the time of the presentment of the letter of credit. The interest
award of $125,000 is more than enough for Haines to pay the
interest debt. We find no other basis for the award of general
damages. Therefore, the $50,000 award for general damages is not
allowed and the judgment of the District Court on this point is
reversed.
IV.
Did the District Court err in awarding punitive damages for
breach of the implied covenant of good faith and fair dealing?
The legislature has defined the implied covenant of good faith
and fair dealing as:
The conduct required by the implied covenant of good
faith and fair dealing is honesty in fact and the
observance of reasonable commercial standards of fair
dealing in the trade. 328-1-211, MCA. See also 3 30-2-
103(b), MCA.
The ~istrictCourt awarded Haines $1,000,000 in punitive damages
for MPC1s breach of the implied covenant of good faith and fair
dealing. The court concluded that:
The actions of MPC in drawing on the letter of credit
constituted a tortious breach of the obligation of good
faith and fair dealing in the contract, and was
oppressive. Conclusion of law number 4.
and
The willful conduct of MPC in enticing Haines Pipeline
into renewals of the letter of credit when, in fact, all
MPC was trying to do was gain time to be in a position to
draw on the letter of credit when it already had
determined that it was going to I1moveHaines off the jobn
and re-bid the northern section and to preclude Haines
from building the remaining portion of the pipeline for
its own purposes constitutes a breach of the obligation
of good faith and fair dealing implied in all contracts
between the parties and was oppressive conduct. That
breach caused damages to Haines Pipeline and justifies
the imposition of punitive damages. Conclusion of law
number 9.
On May 9, 1990, this Court handed down an opinion clarifying
the application of the implied warranty of good faith and fair
dealing in contract cases. Story v. City of Bozeman (1990), 242
Mont. 436, 791 P.2d 767. We held that every contract, regardless of
type, contains an implied covenant of good faith and fair dealing
and that a breach of the covenant is a breach of the contract.
Story, 791 P.2d at 775. However, we further held that while a
breach of the covenant entitles a party to contract damages, an
award of tort damages is limited and allowed only in special
circumstances which are not present here.
Until the Story decision was handed down the applicable rule
of law for determining a tortious breach of contract entitling an
award of punitive damages was whether the breach was arbitrary,
capricious, or unreasonable given the justifiable expectations of
the parties in light of their contract. Nicholson v. United Pacific
Insurance Co. (1985), 219 Mont. 32, 710 P.2d 1342. Both parties
relied on the 'justifiable expectations' standard of Nicholson when
presenting their case to the lower court.
The broad general rule is that "A change in the law between a
nisi prius (prior law applied in the trial court) and an appellate
decision requires the appellate court to apply the changed law."
Thorpe v. Housing Authority of the City of Durham (1969), 393 U.S.
268, citing Ziffrin, Inc. v. U.S. (1943), 318 U.S. 73. This Court,
citing Thorpe, has provided that llGenerally,an appellate court
must apply the law in effect at the time it renders its decision."
Lee v. Flathead County (1985), 217 Mont. 370, 704 P.2d 1060.
An exception to the established rule is that it will not be
applied when necessary to prevent "manifest injustice. Thorpe at
282, citing Greene v. U.S. (1964), 376 U.S. 149. In Montana,
manifest injustice can be defined as occurring when application of
the new law impairs a vested right. See Western Montana v. Board of
Health and Environmental Sciences (1985), 217 Mont. 178, 703 P.2d
850. However, "No one has a vested right to any rule of common
law." Meech v. Hillhaven West, Inc. (1989), 238 Mont. 21, 776 P.2d
488. Furthermore, judgment is not a vested right while it is
subject to review or while an appeal is pending. See 46 Am. Jur. ad,
466. Therefore, Haines has no vested right in the application of
the pre-Storv (Nicholson) criteria for awarding punitive damages in
a breach of the duty of good faith and fair dealing. The law of
Story is dispositive of the instant case.
17
There is no dispute that the parties do not meet the special
criteria of Story; therefore, Haines is not entitled to its award
of punitive damages for MPC's breach of the construction contract.
However, it is clear and we reiterate that Story does not preclude
the award of actual damages. Under Story, a breach of the implied
covenant gives rise to contract damages only, unless special
relationship exists.
Haines argues that Story still allows tort type damages in
traditional contract-related torts such as fraud, fraudulent
inducement, and tortious interference with contract. Furthermore
Haines argues, the court's findings of oppression and presumed
malice justify the imposition of punitive damages because they are
findings of tort damages independent of the contract damages
disallowed by Story.
We disagree. 'Oppression' and 'malice' do not constitute
torts; instead, they are adjectives used to characterize
particular conduct. In the past, the legislature used these
adjectives to characterize the type of conduct in which exemplary
damages were allowed. Section 27-1-221, MCA (1985). However,
before exemplary damages can be awarded, a tortious act must first
be independently established. The ~istrict Court used these
adjectives in the instant case to characterize MPC1s conduct in
breaching the contract, not as an independently established tort.
Story makes clear that exemplary damages will not be allowed for
breach of contract alone.
Section 27-1-220, MCA, clearly says exemplary damages are not
allowed for a breach of contract unless otherwise expressly
18
provided by statute. Story further clarifies that the breach of
the implied covenant of good faith and fair dealing constitutes
breach of contract and not a tort.
Each party to a contract has a justified expectation that
the other will act in a reasonable manner in its
performance or efficient breach. When one party uses
discretion conferred by the contract to act dishonestly
or to act outside of accepted commercial practices to
deprive the other party of the benefit of the contract,
the contract is breached. Story, 791 P.2d at 775.
(Emphasis added.)
The basis of the District Court's award of punitive damages is
in its finding that MPC wrongfully induced Haines into extending
the letter of credit, conduct the court described as oppressive.
While it is clear that oppression and presumed malice are not
separate contract-related torts, a question exists whether or not
a tort such as fraud was committed, which would give rise to tort
damages under Story. The District Court awarded punitive damages
because its judgment felt that MPC1s misconduct rose
level deserving of punishment. However, the law has changed.
Under the law of Nicholson the manner in which the court imposed
judgment may have been proper; however, under the controlling law
of Story it clearly is not.
Haines relied on the law as it stood prior to our ruling in
Story and developed its strategy in accordance. Just as MPCts
pleading and trial briefs were void of reference to Story in the
lower court; Haines pleading and trial briefs were void of explicit
references to alternative tort claims that may have been
appropriate. However, both parties throughout the proceedings
addressed the appropriateness of punitive damages and whether MPC1s
conduct rose to a level allowing their imposition.
We have held that a plaintiff has the right to try a case on
the supposition that a rule announced in a prior case would be
adhered to. Broderick v. Stevenson Consolidated Oil Co. (1930), 88
Mont. 34, 290 Pac. 244. In Broderick, the decision of the district
court was correct on basis of the law as it existed at the time of
trial but erroneous after the case on which it relied was expressly
overruled. In reliance on the old law, plaintiff failed to
introduce evidence that may have enabled her to prevail under the
newly established law. Under the circumstances, the cause was
remanded for a new trial to afford the plaintiff opportunity to
make proof of her allegations. When there is an intervening case,
remand is proper for reconsideration in light of the appellate
court's new decision. Gibson v. Berryhill, Alabama (1973), 411
U.S. 564, 93 S.Ct. 1689, 36 L.Ed.2d 488.
In roder rick, the plaintiff initially plead the cause of
action for which it was allowed to pursue on remand. Ordinarily,
when a party is unsuccessful in trying a case on one theory, a new
trial will not be granted to allow trying the case on an
alternative theory. However, we cannot expect an attorney to
foresee that the contemporaneous causes of action available to his
client will be overturned by the appellate court subsequent to the
trial. When Haines complaint was filed, Haines relied on law
allowing courts to award punitive damages for the contract breach
of the implied warranty of good faith and fair dealing.
When an appellate court reverses and remands for new trial,
the appellate court may, in the furtherance of justice, grant leave
to the parties to amend their pleadings. See 5B C.J.S. 468, 51936
Appeal and Error. Where issues are Iinextricably intertwined8,the
pleadings may be amended on remand. OIMalley v. Casey (1979) 589
P.2d 1388. The issues of fraud and the breach of the covenant of
good faith and fair dealing as applied in this case are
inextricably intertwined.
In light of the Story decision and its applicability to the
present case we reverse and remand this case on the issue of
punitive damges for further proceedings in conformance with this
opinion. Furthermore, in the furtherance of justice, we grant
leave to the parties to amend their pleadings to allege fraud or
other theories of recovery or defense consistent with this opinion.
v.
Did the District Court err in failing to award Haines damages
for its lost profits?
Haines contends that the District Court's sole error was its
failure to award Haines damages for lost profits. Haines argues
that the court's conclusion that MPC's breach "deprived [Haines] of
the benefit of its bargainv8is inconsistent with its denial of
damages for lost profits, which Haines allegedly proved to be in
excess of $1 million. Haines argues that it had at the very least
an implied contract with MPC to build the northern half of the
pipeline based on representations made to it by Kelly. Thus, it is
entitled to its lost profits for MPCts breach of this contract or
at least a remand of the case to determine the extent of such
damages.
The District Court found that "Haines had no contractual
assurance that it would build the north half of the pipeline.'' The
contract was terminated by MPC on September 16, 1984, pursuant to
paragraph 31.0 of the contract which provides in part that:
Should conditions arise which, in the opinion of Owner,
make it advisable to cease work under this Contract,
Owner may terminate this Contract by written notice to
Contractor.
Paragraph 31.0(c)(iii) includes; "The Contractor shall make no
claim for lost anticipated profits." Walter Kelly provided Haines
with a letter that indicated MPC was terminating the contract for
its convenience. The reason for the termination was cited as
economically based and not performance related.
The evidence supports the court's finding that MPC was not
obligated to Haines for the construction of the north loop of the
pipeline. It appears that paragraph 31.0 was properly invoked.
There is no evidence offered to demonstrate that the termination
clause was ever modified or amended in any way. The clause clearly
states that there will be no claims for lost anticipated
profits. The finding of the District Court denying Haines recovery
of lost anticipated profits is affirmed.
Affirmed, reversed and remanded.
We Concur:
Chief Justice
c
Justices
tired D i i t Court Judge
Henry Loble for ~ u s t i c e
Karla M.
Justice Terry N. Trieweiler dissenting in part and concurring
in part.
I would not follow S o y v. Cjly o Bozeman (1990), 242 Mont. 436,
tr f
791 P.2d 767. The tort law of bad faith evolved through careful
reasoning and long experience to take the profit out of dishonest
and oppressive business practices. S o y returned that profit for
ti
those in superior bargaining positions.
Every consumer and small businessman and woman in Montana are
worse off because of S o y
tr.
Therefore, I would affirm the judgment of the District Court.
Other than the majorityts reversal of the judgment for
punitive damages based on Story, I concur in the majority opinion.