No. 12997
I N THE SUPREME COURT O THE STATE O M N A A
F F OTN
1976
MORGEN & O W O CONSTRUCTION CO,
S OD
I N C . , A M N A A CORPORATION,
OTN
P l a i n t i f f and A p p e l l a n t ,
B I G SKY O MONTANA, I N C
F
DELAIJAR E CORPORATION,
., a
Defendant and Respondent.
Appeal from: D i s t r i c t Court of t h e Eighteenth J u d i c i a l D i s t r i c t ,
Honorable W. Id. L e s s l e y , Judge p r e s i d i n g .
Counsel of Record:
For Appellant :
J a r d i n e , Stephenson, B l e w e t t & Weaver, G r e a t F a l l s ,
Mon t a na
J a c k L. Lewis a r g u e d , G r e a t F a l l s , Montana
F o r Respondent :
Landoe and Gary, Bozeman, Montana
J o s e p h B. Gary a r g u e d and S t e p h e n B a r r e t t a p p e a r e d ,
Bozeman, Montana
David J. P e n w e l l , G a l l a t i n Gateway, Montana
Submitted: September 3 , 1976
Decided : NRVZ R ISif;
Filed:
2 :' ;g$
~ r J:u s t i c e John Conway Harrison d e l i v e r e d t h e Opinion of t h e
Court.
This i s an appeal from a judgment of t h e d i s t r i c t c o u r t ,
G a l l a t i n County, f o r defendant i n an a c t i o n t o f o r e c l o s e on a
mechanic's l i e n .
P l a i n t i f f Morgen & Oswood Construction Co., I n c . (Morgen &
Oswood) brought t h i s a c t i o n t o f o r e c l o s e a mechanic's l i e n on
seventeen b u i l d i n g s containing f i f t y condominium u n i t s a t Big
Sky of Montana, Inc. (Big Sky) s i t e i n t h e G a l l a t i n Canyon, south
of Bozeman. These were t h e f i r s t condominium u n i t s b u i l t a t Big
Sky and were b u i l t when t h e a r e a was s t i l l r e l a t i v e l y p r i m i t i v e .
Big Sky sought b i d s on t h e p r o j e c t from s e v e r a l c o n t r a c t o r s
b u t d i d n o t request a b i d from Morgen & Oswood. Morgen & Oswood
approached Big Sky asking t o be allowed t o b i d . It was given t h e
s p e c i f i c a t i o n s f o r t h e job and informed t h e time allowed f o r t h e
completion of t h e p r o j e c t would be 114 days, which meant t h e
schedule was t i g h t . The s p e c i f i c a t i o n s contained a c l a u s e
exacting a $500 per day deduction f o r each day t h e p r o j e c t was l a t e .
A t Big Sky's r e q u e s t an a l i t e r n a t i v e b i d was submitted on t h e
p r o j e c t i f t h e r e would be an e x t r a 46 days added t o t h e completion
time. Morgen & Oswood submitted an a l t e r n a t i v e b i d $15,000 lower
than t h e 114 day b i d . This a l t e r n a t i v e b i d was r e j e c t e d by Big
Sky.
The c o n t r a c t was awarded t o Morgen & Oswood and Big Sky
allowed work on the p r o j e c t t o begin twelve days before t h e d a t e
c a l l e d f o r i n t h e c o n t r a c t , without s t a r t i n g t h e 114 day c l o c k
running.
The questions presented f o r review a r e :
1 ) Was t h e $500 per day deduction a penalty v i o l a t i v e of
s e c t i o n 13-804, R.C.M. 1947?
2) Did t h e d i s t r i c t c o u r t e r r i n f i n d i n g t h a t January 3,
1972, .was t h e d a t e upon which t o end t h e $500 per day deduction?
3) Did t h e d i s t r i c t c o u r t err i n f i n d i n g t h e r e was n o ,
proof t h a t Big Sky c o n t r i b u t e d s u b s t a n t i a l l y t o t h e delay i n t h e
completion of t h e p r o j e c t ?
4) Did t h e d i s t r i c t c o u r t e r r i n f i n d i n g t h a t Big Sky
made a v a l i d tender of t h e money due t o Morgen & Oswood?
I
The f i r s t question involves c o n s t r u c t i o n of s e c t i o n s
13-804 and 13-805, R.C.M. 1947 which provide:
''13-804. Contracts f i x i n g damages void. Every c o n t r a c t
by which t h e amount of damage t o be paid, o r o t h e r com-
pensation t o be made, f o r a breach of an o b l i g a t i o n ,
i s determined i n a n t i c i p a t i o n t h e r e o f , i s t o t h a t e x t e n t
void, except a s expressly provided i n t h e next section.''
"13-805. Exception. The p a r t i e s t o a c o n t r a c t may a g r e e
t h e r e i n upon an amount which s h a l l be presumed t o be an
amount of damage s u s t a i n e d by a breach t h e r e o f , when,
from t h e n a t u r e of t h e case, i t would be impracticable
o r extremely d i f f i c u l t t o f i x t h e a c t u a l damage.''
The Montana cases i n t e r p r e t i n g t h e s e s e c t i o n s e s t a b l i s h t h a t a
penalty c l a u s e i s prima f a c i e void and t o come w i t h i n t h e exception,
f a c t s must be a l l e g e d and proven from which t h e c o u r t can say
t h e l i q u i d a t e d damages c l a u s e i s v a l i d because t h e damages a r e
by t h e n a t u r e of t h e c a s e extremely d i f f i c u l t o r impracticable t o
fix. Deuninck v. West G a l l a t i n I r r i g a t i o n Company, 28 Mont. 255,
72 P. 618; C l i f t o n v. Willson, 47 Mont. 305, 132 P. 424.
Big Sky met t h i s burden. It presented evidence which i n d i c a t e d
t h e $500 per day f i g u r e was a r r i v e d a t by estimating l o s t r e n t a t
$120 per day; i n t e r e s t on money borrowed t o b u i l d t h e p r o j e c t a t
$440 per day; and $60 per day heating and light expense on the
units. Big Sky also considered the harm to its sales effort if
the units were not completed in October as promised. These
estimates were at best guesses, based on some prior experience
and knowledge of the project. The total was rounded to $500 per
day as a reasonable conservative estimate of the loss Big Sky
would suffer if the project was late. Big Sky also offered evi-
dence which indicated that the total damage suffered by Big Sky
exceeded the $500 per day figure. Actual proof of the accuracy
and basis of these estimated figures is very nearly impossible.
As a result, construction contracts often provide for a fixed
sum as damages. In 5 Corbin on Contracts, Damages, 31072, it is
stated:
"In contracts for the construction and delivery of
buildings or machinery, it is often provided that
a fixed sum shall be paid for each day's delay in
completion beyond a date agreed upon. Since the
injury caused by such delay is nearly always diffi-
cult to determine, the courts strongly incline to
accept the estimate as reasonable and to enforce
it. Jc * Jc"
In 60 California Law Review 84, 122, Professor Justin Sweet,
discusses the California case law interpreting 951670, 1671,
California Civil Code, identical to fj&ct%dhs:13-884,13+805,R.C.~.
1947, and points out the reasons that such clauses are usually
upheld where there is an unexcused delay by the contractor:
'* * * First, while the liquidation amounts may not
I
actually be bargained, the contractor can take this
into account when he makes his bid. Second, most
construction contractors are not so unsophisticated
as to merit special protection by the courts. Third,
courts enforce these clauses as a means of saving
themselves from having to decide difficult fact questions
relating to damages. Finally, these clauses are enforced
because delays do cause losses, but the actual loss is
often not provable under traditional damage rules, which
require certainty, proof of causation, and forseeability."
Morgen & Oswood knew of the strict time limits and took them
into consideration when its bid was submitted. It submitted a
bid that was $15,000 less on the same project, if the time were
extended 46 days. It is clear Big Sky suffered damages from the
delay in completion, but it is also true there would be difficulty
in showing the actual amount under the damages rules. The $500
per day deduction is the type of clause courts usually enforce and
one which meets all the requirements of section 13-805, R.C.M.
1947. The only serious impediment to finding that it is a valid
liquidated damages clause is that Big Sky, in its contract, referred
to the $500 per day deduction as a "penalty". This is not in
At
and of itself determinative. 15 Williston on Contracts, Third
Edition Section 784, p. 730, it is said:
" ( ) The mere denomination of the sum to be paid
'2
as "liquidated damages," or as "a penalty," is
not conclusive on the court as to its real character.
Although designated as "liquidated damages" it may
be construed as a penalty, and often when called a
"penalty" it may be held to be liquidated damages,
where the intention to the contrary is plain."'
The Oklahoma Supreme Court in Waggoner v.Johnston (Okla.1965),
408 P.2d 761, 769, when interpreting a contract in light of
statutory provisions identical to section 13-804 and section
13-805, R.C.M. 1947, said:
"Whether the forfeiture provision imposed a penalty,
or provided for liquidated damages, is to be determined
from the language and subject matter of the contract,
the evident intent of the parties and all the facts
and circumstances under which the contract was made.
The most important facts to be considered are whether
the damages were difficult to ascertain, and whether
the stipulated amount is a reasonable estimate of
probable damages or is reasonably proportionate to the
actual damage sustained at the time of the breach.''
Here the "most important facts" are in Big Sky's favor, the damages
were difficult to determine and they proved to be a reasonable
estimate of the damages actually suffered.
The United S t a t e s Supreme Court faced a s i m i l a r problem
i n United S t a t e s v. Bethlehem S t e e l Co., 205 U.S. 105, 27 S.Ct.
450, 51 L ed 731,737, t h e Court s a i d t h a t while t h e word "penalty"
was used and n o t t h e term " l i q u i d a t e d damages" t h a t :
"* ** I t was used simply t o provide t h a t t h e amount
named might be deducted i f t h e r e were a delay i n
d e l i v e r y . E i t h e r expression i s n o t always conclusive as
t h e meaning of t h e p a r t i e s . ***
"* ** I t would have been very unusual t o allow t h e
company t o o b t a i n t h e c o n t r a c t f o r the construction
of t h e s e . c a r r i a g e s , and y e t t o place i t under no l i a -
b i l i t y to. f u l f i l i t a s t o time of d e l i v e r y , s p e c i a l l y
agreed upon, o t h e r than t o pay only those a c t u a l
damages (not exceeding $35 per day) t h a t might be proved
were n a t u r a l l y and proximately caused by t h e f a i l u r e
t o deliver."
Here, t h e same statement a p p l i e s . The completion time was
p l a i n l y important and was t h e s u b j e c t of bidding. Morgen &
Oswood o f f e r e d a $15,000 decrease i n t h e c o n t r a c t p r i c e f o r an
i n c r e a s e of 46 days i n c o n t r a c t time which amounts t o over $300
per day. This was refused by Big Sky. It i s obvious t h a t Morgen
& Oswood should n o t g e t t h e higher c o n t r a c t p r i c e and a t t h e
same time be a b l e t o avoid t h e time l i m i t which served a s t h e
c o n s i d e r a t i o n f o r t h e higher amount. The use of t h e word "penalty1'
does n o t r e f l e c t c a r e f u l draftmanship b u t i t i s n o t a talisman
which prevents i n q u i r y i n t o t h e r e a l i t y of t h e i n t e n t of t h e
p a r t i e s and t h e f a c t s and circumstances surrounding t h e agreement.
The $500 per day deduction was an amount s t i p u l a t e d a s l i q u i d a t e d
damages and meets t h e requirements of s e c t i o n 13-805, R.C.M. 1947.
I t i s a reasonable e s t i m a t e of damages which were impracticable
o r extremely d i f f i c u l t t o f i x .
The remaining questions on appeal involve t h e determinations
by t h e d i s t r i c t c o u r t 1 ) January 3 , 1972 was t h e proper d a t e t o
end t h e deduction of t h e : l i q u i d a t e d damages; 2) Big Sky d i d n o t
c o n t r i b u t e s u b s t a n t i a l l y t o t h e delay i n completion; and 3)
t h e amount due was v a l i d l y tendered by Big Sky on February 25,
1972. I t i s not a f u n c t i o n of t h i s Court t o make i t s own d e t e r -
mination a s t o t h e f a c t s and t h e law, r a t h e r i t reviews t h e
f i n d i n g s of t h e d i s t r i c t c o u r t , The Court i n Hellickson v.
B a r r e t t Mobile Home Transport, I n c . , 161 Mont. 455, 458, 507
P.2d 523, quoting from Hornung v. E s t a t e of Lagerquist, 155 Mont.
412, 420, 473 P.2d 541, pointed o u t :
".'Our duty i n reviewing f i n d i n g s of f a c t i n a c i v i l
a c t i o n t r i e d by t h e d i s t r i c t c o u r t without a j u r y
i s confined t o determining whether t h e r e i s s u b s t a n t i a l
c r e d i b l e evidence t o support them. I I 1
The Court put i t another way i n Kamp v. F i r s t National Bank and
T r u s t Co., 161 Mont. 103, 106, 504 P.2d 987, quoting from Morrison
v. C i t y of B u t t e , 150 Mont. 106, 112, 431 P.2d 79:
'"This c o u r t w i l l n o t overturn t h e holdings o r f i n d i n g s
of a t r i a l c o u r t u n l e s s t h e r e i s a decided preponderance
of t h e evidence a g a i n s t them, and, when t h e evidence
f u r n i s h e s reasonable grounds f o r d i f f e r e n t conclusions,
f i n d i n g s w i l l n o t be d i s t u r b e d .'"'
Morgen & Oswood argues t h a t some of t h e seventeen b u i l d i n g s
were complete long before t h e d a t e upon which t h e a r c h i t e c t signed
t h e c e r t i f i c a t e of f i n a l completion. I t a l s o p o i n t s out t h a t a
c e r t i f i c a t e of s u b s t a n t i a l completion was signed on December 11, 1971.
W n o t e t h e c e r t i f i c a t e of s u b s t a n t i a l completion was
e
accompanied by an extensive punch l i s t of unfinished work and
even t h e f i n a l completion c e r t i f i c a t e was accompanied by a punch
l i s t of unfinished i t e m s . One important b i t of evidence which
supports t h e January completion d a t e , i s t h e f a c t t h a t Big Sky
had a s s t r o n g an i n t e r e s t i n g e t t i n g t h e c e r t i f i c a t e of f i n a l
completion a s d i d Morgen & Oswood.
The "Unit Ownership Act", Chapter 23, Title 67, R.C.M.
1947, as it provided at the time of the contract, required a
statement by the architect or professional engineer who prepared
the floor plan, certifying the accuracy of the plans and the
date construction was completed. This statement accompanied
the recording of the declaration which had to be filed. This
meant that no sale could be closed and recorded until construction
was completed on the entire project. Big Sky indicated there were
buyers who backed out when the completion was not on time and
those sales could have been made final, if the closings had been
on schedule. The architect testified there was considerable
pressure on him from Big Sky to certify completion. Testifying
about the certification that he signed he said:
"* * * I was very hesitant to sign anything until
actually the last final check list item would be
done. However, it could also be taken as substan-
tial completion. And this was not clear to us at
the time. Mr. Penwell was under pressure to close
sales and the check list was not being completed.
So we initiated this agreement in January that would
essentially be the final completion still with the
check list which was an unorthodox procedure just so
I could sign them and say they were completed, I
could sign them with a better conscience .'
I
Big Sky could not, and did not, close any sales until after all
of the buildings were certified as being complete. It was reasonable
for the district court to use the January 3, 1972 date as the end
da tE for the liquidated damages.
60 California Law Review 84, 123, points out:
"The second interpretation problem courts frequently
face is determining when a project is completed for
liquidation purposes. The general answer is that
actual, not substantial, completion is required. How-
ever, courts will be hesitant to apply this rule where
the stipulated damages are high and the project is
available for use."
Here, t h e damages a r e high but t h e p r o j e c t was not ready f o r
t h e use Big Sky intended, t h e s a l e of t h e s e u n i t s . There i s
no showing t h a t t h e evidence preponderates a g a i n s t t h i s f i n d i n g
by t h e d i s t r i c t c o u r t and i t i s supported by s u b s t a n t i a l evidence.
W f i n d no preponderance of evidence a g a i n s t t h e d i s t r i c t
e
c o u r t ' s finding t h a t Morgen & Oswood f a i l e d t o prove a s u b s t a n t i a l
i n t e r f e r e n c e by Big Sky with t h e c o n t r a c t o r ' s work and t h a t
Morgen & Oswood f a i l e d t o make a p p l i c a t i o n i n compliance w i t h
t h e c o n t r a c t f o r extension of time. Morgen & Oswood argue t h a t
Haggerty v. Selsco, 166 Mont. 492, 534 P.2d 874, which h e l d t h a t
delay caused by t h e owner c o n s t i t u t e s a waiver of l i q u i d a t e d
damages, a p p l i e s i n t h e i n s t a n t case. W do n o t a g r e e , because
e
t h e r e i s no f i n d i n g t h a t Big Sky caused t h e delay here. It is
very d i f f i c u l t t o pinpoint with any c e r t a i n t y t h e reasons f o r
t h e delay, b u t t h e i n a b i l i t y t o g e t l a b o r , e s p e c i a l l y s k i l l e d
l a b o r , and t h e primative conditions a t t h e job s i t e were a p a r t
of t h e cause. These m a t t e r s were t h e c o n t r a c t o r ' s r e s p o n s i b i l i t y
which had t o be taken i n t o account a t t h e t i m e t h e b i d s were
submitted.
The d i s t r i c t c o u r t ' s finding t h e r e was a v a l i d tender i s
supported by s u b s t a n t i a l evidence on t h e record. Negotiations
between Big Sky and Morgen & Oswood broke down and Big Sky gave
a check t o Morgen & Oswood f o r t h e balance due on t h e c o n t r a c t ,
l e s s t h e l i q u i d a t e d damages. This check was refused and returned.
The mechanic's l i e n was f i l e d and t h i s s u i t i n s t i t u t e d . The n e t
amount due t o Morgen & Oswood was paid with no s t r i n g s a t t a c h e d .
Since t h e l i q u i d a t e d damages c l a u s e i s v a l i d and t h e check was
f o r t h e n e t amount due a f t e r t h e deduction of t h e l i q u i d a t e d
damages, t h e l i e n was improperly f i l e d .
W have examined o t h e r i s s u e s r a i s e d and f i n d no m e r i t i n
e
them.
The d e c i s i o n of t h e d i s t r i c t c o u r t i s affirmed.
\ &4,5,&/+G, & , ?/
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,
' Justice /
W Concur:
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Chief J u s t i c e
Justices. \
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D&
Fly.
J-Go,d! Jack Shanstrom, D i s t r i c t
dge, s i t t i n g f o r J u s t i c e