No. 90-519
IN THE SUPREME COURT OF THE STATE OF MONTANA
MARTEL CONSTRUCTION, INC.,
Plaintiff and Respondent,
THE STATE OF MONTANA, ACTING BY AND
THROUGH THE DEPARTMENT OF HIGHWAYS
OF THE STATE OF MONTANA,
Defendant and Appellant.
APPEAL FROM: District Court of the First Judicial District,
In and for the County of Lewis and Clark,
The Honorable Dorothy McCarter, Judge presiding.
COUNSEL OF RECORD:
For Appellant:
Hon. Marc Racicot, Attorney General, Helena,
Montana; W. D. Hutchinson, Assistant Attorney
General, Helena, Montana.
For Respondent:
Richard J. Andriolo, Attorney at Law; Bozeman,
Montana; Patrick A. Sullivan; Winston & Cashett,
Spokane, Washington.
Submitted on Briefs: April 12, 1991
Decided: August 30, 1991
Filed:
P
Clerk
Justice Karla M. Gray delivered themOpinion of the Court.
The appellant, State of Montana, appeals from a judgment
entered on a jury verdict rendered in the District Court of the
First Judicial District, Lewis and Clark County, awarding the
respondent, Martel Construction, Inc., $549,000 in damages for
breach of contract. We affirm in part, reverse in part and remand
for a new trial.
The sole issue for review is whether the District Court erred
in ruling that Martel could recover, as an element of damages
against the State, the interest expense paid on funds it was
allegedly required to borrow in order to finance extra work caused
by the State.
In June, 1984, the appellant, State of Montana, acting by and
through the Montana Department of Highways, solicited bids for the
reconstruction of the existing Burlington Northern Railroad
overpass at Havre, Montana. The project called for the complete
refurbishment of the existing railroad overpass and the addition
of two more traffic lanes. The end result was to be a four-lane
overpass consisting of a new bridge built immediately adjacent and
attached to the refurbished old bridge.
The Department of Highways did not make a new survey of the
existing bridge prior to putting the project out for bid. Instead,
it used the plans prepared for construction in 1936 which the
Department believed actually represented the elevation and
dimensions of the bridge in 1984. The 1936 data was transposed
onto the contract drawings sent o i to contractors for bidding
lt
purposes. Martel, relying upon the accuracy of the contract
drawings, submitted the lowest bid and was awarded the contract on
July 27, 1984.
Martel began construction on September 12, 1984. When Martel
started to construct the new bridge to attach to the old bridge,
it discovered that the elevation of the old bridge and certain
other dimensions were not as represented on the contract drawings.
Martel was required to perform extra work not contemplated under
the contract in order to make the new bridge fit. Martel completed
the contract on August 1, 1986.
On January 16, 1986, prior to completing the contract, Martel
submitted a series of claims associated with extra work in
performing the contract to the Department of Highways for
administrative resolution. Some of the claims were allowed; most
were denied by the Department on April 17, 1986. Martel appealed
the denial of the claims to the Department's Board of Contract
Appeals on May 9, 1986. The Board affirmed the original denial on
December 31, 1986.
On March 26, 1987, Martel filed suit in the District Court
against the State of Montana seeking damages for breach of
contract. Martel sought to recover its actual construction costs
for the extra work it had performed under the contract as well as
the interest it had paid on funds allegedly borrowed to finance the
extra work. Martel denominated the interest it had paid on the
borrowed funds as I1moratory interest."
Prior to trial, the District Court requested briefs from
counsel on the issue of whether nnmoratoryinteresttncould be
recovered as an item of damages in a contract action against the
State. The District Court ruled, as a matter of law, that the
Itmoratoryinterestnn
claimed by Martel is part of the actual damages
claimed to have been incurred by Martel, rather than prejudgment
interest; thus, it could be recovered as an item of special or
general damages for breach of contract.
A jury trial was held May 28 through June 8, 1990. At trial,
Martel presented testimony and exhibit evidence that it incurred
an actual expense of $170,841.46 through the payment of interest
on funds borrowed during the period 1985-1990 in order to finance
the construction project and that the average interest rate during
this time was 10 3/4%. During closing argument Martelns counsel,
stated:
You will also have with you exhibit number 126 which is
the moratory interest calculations. . . . That is the
actual money that Bill Martel paid out of his pocket to
a bank to finance this job. And whatever money you
determine that he is entitled to you should add a factor
of interest and I would suggest that once you have come
up with a lump sum for delays and the . . . [extra
construction] costs, that you can apply the 10 point
three quarter percent interest.
Later, in discussing the verdict form, counsel stated:
I have not filled in any amounts for moratory interest
because I trust that on any amounts that you find that
Martel is entitled to you can apply the 10 point three
quarter interest factor and come up with your own amount.
In addition, Jury Instruction No. 23 instructed the jury that:
Martel Construction.is seeking ttmoratoryinterest"
damages from the State of Montana. Moratory interest is
interest allowed in actions for breach of contract as
damages for unlawful detention of money found due.
As a jury, you may award moratory interest damages
to Martel Construction if you find that the State of
Montana caused Martel Construction to borrow money to pay
for extra work or delays ordered by or caused by the
State of Montana.
At the conclusion of the trial the jury found the State had
breached the contract between the parties and awarded Martel
damages in the amount of $384,000 for extra work and $165,000 for
I1moratory interest,lV for a total award of $549,000. The State
appeals the portion of the judgment relating to the vlmoratory
interest.
Contract actions against the State of Montana are governed by
Title 18, Chapter 1, part 4, MCA. The extent of the State's
liability in contract actions is set out in 5 18-1-404, MCA, which
provides, in pertinent part:
Liability of state--limitations--costs. (1) The state
of Montana shall be liable in respect to any contract
entered into in the same manner and to the same extent
as a private individual under like circumstances, except
the state of Montana shall not be liable for interest
prior to or after judgment or for punitive damages.
As quoted above, except for the prohibition against interest
prior to or after judgment and punitive damages, 5 18-1-404 (1),
MCA, renders the State liable for damages in contract cases to the
same extent as a similarly situated private litigant. The general
measure of damages for breach of contract, including a breach of
contract by the State, is set out in 5 27-1-311, MCA.
Breach of contract. For the breach of an obligation
arising from contract, the measure of damages, except
when otherwise expressly provided by this code, is the
amount which will compensate the party aggrieved for all
the detriment which was proximately caused thereby or in
the ordinary course of things would be likely to result
therefrom. Damages which are not clearly ascertainable
in both their nature and origin cannot be recovered for
a breach of contract.
In Ehly v. Cady (1984), 212 Mont. 82, 97, 687 P.2d 687, 695,
we made the following observation regarding the types of damages
recoverable for breach of contract:
An examination of Section 27-1-311, MCA, ... will
reveal two kinds of damages recoverable from breach of
contract. Damages Itforall the detriment caused thereby"
include all damages which in the ordinary and natural
course of things are proximately caused by the breach
itself. These damages are the natural result of the
breach. Damages under the statute may also be recovered
Ifwhich in the ordinary course of things would be likely
to result therefrom. Our court, and courts everywhere,
recognize this provision as permitting recovery for
consequential damages within the contemplation of the
parties when they entered into the contract, and such as
might naturally be expected to result from its violation.
Myers v. Bender (1913), 46 Mont. 497, 508, 129 P. 330,
333. These damages are the contemplated result of the
breach.
We note, in addition, that all damages for breach of contract,
whether natural or contemplated, require proof of causation,
certainty and foreseeability. Ehly, 212 Mont. at 97, 687 P.2d at
695. Furthermore, damages must be reasonable. Section 27-1-302,
MCA.
We have held previously that interest paid by a plaintiff to
a third party as a result of a defendant's breach of contract is
a proper element of damages. In Popp v. Gountanis (1986), 221
Mont. 267, 718 P.2d 340, Popp leased land from the defendant and
planted and harvested crops on the land for several years. The
defendant enrolled the land in a federal "payment in kind" (PIK)
program and, without Popp's knowledge or permission, received the
entire PIK payment. Popp sued for breach of the lease seeking,
among other damages, the increased interest incurred as a result
of his inability to pay off the balance of his loan covering his
farming operations, which he intended to pay with the PIK payments.
The District Court awarded such damages and this Court affirmed,
stating:
The District Court found that Popp's inability to
satisfy the loan balance of $32,694.92 was directly
related to Frank and Gountanis' refusal to pay Popp his
two-thirds share of the PIK benefits. Frank and
Gountanis received payment for their PIK bushels in
December, 1983, at which time Popp's share became
certain. Had Popp received his proper share, he would
have been able to pay the loan entirely and avoid further
interest charges. The accrued interest on PODPIS loan
balance from that date was clearly part of his damases
and we uphold the District Court award.
Popp, 221 Mont. at 271, 718 P.2d at 343 (emphasis added). See
also, Bolz v. Meyers (1982), 200 Mont. 286, 651 P.2d 606; Lee v.
Andrews (1983), 204 Mont. 527, 667 P.2d 919. It is clear,
therefore, that in a suit between private litigants or, indeed,
against the State absent the exception in 18-1-404, MCA,
increased interest payments by a plaintiff which result from a
defendant's breach of contract, are a recoverable item of damages.
The plain language of 5 18-1-404(1), MCA, makes it clear,
however, that the intent of the legislature was to prohibit State
1 iability for prejudgment or post-judgment interest in contract
cases where a similarly situated private litigant would be liable
for such interest. This Court upheld the constitutionality of the
statutory prohibition against State liability for prejudgment and
post-judgment interest in Leaseamerica Corp. v. State (1981), 191
Mont. 462, 468-69, 625 P.2d 68, 71.
This Court has referred to interest as Ifdamage for delay in
payment of the principal obligation. Jacques v. Montana Nat 1
Guard (1982), 199 Mont. 493, 507, 649 P.2d 1319, 1327. The
statutory definition of interest is Itthe compensation allowed by
law or fixed by the parties for the use or forbearance or detention
of money." Section 31-1-104, MCA. Most cases dealing with the
recoverability of interest involve claims for interest allegedly
due as compensation for the detention of money. In other words,
the interest sought is money which the injured party hypothetically
could have earned, through investment or otherwise, if the injury-
causing party timely had paid compensation for the harm. This
usual approach to interest is reflected in our discussion of the
general prejudgment interest statute, 5 27-1-211, MCA, in Price
Building Service, Inc. v. Holms (1985), 214 Mont. 456, 468-69, 693
P.2d 553, 559-60, in which we stated:
The prejudgment interest statute, in existence since
1895, merely sets forth a broad area in which the
legislature has determined prejudgment interest should
be allowed as a matter of right .... It is merely part
of the law of damages that has, as its objective, that
of making the injured person whole.
Determining whether a cause of action fits within the
framework of the statute; particularly the question of
whether the claim is determined or can be determined by
calculation, is not always an easy one. However, the
overridins purDose of the statute can be best preserved
if it is remembered that its purpose is to fully
compensate the injured partv for the loss of use of his
money durins the period in which a valid claim was not
paid. [Emphasis added.]
Bearing in mind this usual approach to interest, the
prohibition against the State's liability for interest contained
in § 18-1-404(1), MCA, refers to delay damages or compensation for
the loss of use or detention of money. Therefore, whether referred
to as prejudgment interest, moratory interest or otherwise, amounts
claimed against the State for the loss of use or detention of money
within the meaning of 5 18-1-404(1), MCA, and thus,
are "interesttt
not recoverable under the statute.
Examining that portion of Martel's overall claim against the
State which is referred to as "moratory interest,Itit appears from
the record that some part of this claim against the State may
constitute actual damages, that is, out-of-pocket expenses incurred
as a result of the State's breach of contract. Martel alleged that
as a result of errors in the contract drawings prepared by the
State and justifiably relied upon by Martel, it had to perform
extra work to complete the project. Martel further alleged that
in order to finance this extra work it was required to borrow money
from its bank, for which the bank charged interest. Interest paid
by Martel to its bank on funds necessarily borrowed to finance the
extra work is an item of actual damages recoverable under 5 27-1-
311, MCA, to the extent that it is ascertainable in both nature
and origin and can be causally and foreseeably related to the
State's breach of contract. Although such payments made by Martel
to its bank were in the form of interest, they are part of its
actual damages, subject to the appropriate proof, and not
chargeable against the State as prohibited by 5 18-1-
vvinterestw
404(1), MCA.
This Court has recently affirmed an award of Ivmoratory
interest" between private litigants in Billings Clinic v. Peat
Marwick Main & Co. (Mont. 1990), 797 P.2d 899, 47 St.Rep. 1464.
In that case, due to the defendantsv breach of an obligation owed
to the plaintiff, the plaintiff incurred an increased interest
expense of $834,533. It was conceded that this amount, the
increase in interest actually paid by the plaintiff as a result of
the defendants1 breach, was an item of actual damages which could
be recovered. However, the plaintiff also sought, and was awarded,
an additional $142,076 in "moratory interest" as compensation for
the loss of use of the money it actually spent in increased
interest expense. In affirming the award of "moratory interestfvv
this Court stated:
When viewed from the prospect of the loss of use of
the increased interest expense which the Clinic had to
pay, the amount claimed as moratory interest does not
exceed the limitation of damages for the breach of an
obligation set forth in 5 27-1-303, MCA, that no person
can recover a greater amount of damages for the breach
of an obligation than he or she could have gained by the
full performance thereof on both sides. Again, the
increased interest already incurred at the time of trial
appears to be reasonably certain, and is capable of
reasonable calculation. Accordingly, we find no error
on this item.
Billinss Clinic, 797 P.2d at '915, 47 St.Rep. at 1482. Thus, in
light of Billinss Clinic, "moratory interestg1 not actual expense
is
incurred, but rather is the additional compensation allowed for the
loss of use of money. It necessarily follows that what this Court
accepted as I1moratory interestw in Billinss Clinic, if claimed in
a contract action against the State, would not be recoverable under
§ 18-1-404 (I), MCA, since it falls squarely within the statutory
prohibition against State liability for interest. Billinss Clinic
further helps clarify, consistent with our holding in PODP, that
the increased interest expense incurred as a result of a breach of
contract is, where appropriately proved, an item of actual damages
recoverable under 5 27-1-311, MCA, and under 5 18-1-404 (1), MCA,
in an action for breach of contract by the State.
We note that both the District Court's ruling on the "moratory
interest" issue and the trial in this case predated our holding in
Billings Clinic. Nonetheless, the pleadings, proof, argument and
instruction in this case are not altogether consistent with
Martells assertion that it sought to recover as Ifmoratoryinterestt1
its out-of-pocket expenses resulting from the Statels breach.
Martells claim for "moratory interestw and the manner in which it
was presented in the District Court appear to reflect an
intermingling of both a recoverable actual damage component and a
prohibited llinterestll
component.
In light of the above, to the extent that Martel utilizes the
term I1moratory interest" to represent compensation for the loss of
use or detention of money,' the I1moratory interest" is not
recoverable against the State. To that extent, it is interest
prior to judgment and prohibited by 5 18-1-404(1), MCA, no matter
what it is called. On the other hand, to the extent that what was
claimed as I1moratory interest" can be proved to be an item of
actual damages resulting from the Statevs breach of contract, it
is recoverable as such, but not as Ivmoratory interest."
Accordingly, we conclude that it is necessary to remand for a new
trial on this item of damages consistent with this opinion.
Affirmed in part, reversed in part and remanded for a new
trial.
We concur: /