NO. 92-201
IN THE SUPREME COURT OF THE STATE OF MONTANA
BRIEN M. WEBER and GAYLE L. WEBER,
Plaintiffs and Respondents,
v.
J. GEORGE BROADY RIVERA and
MARY VIRGINIA B. RIVERA,
id .!Lit,!
C L E W OF SUPREME CQUR-,
Defendants and ~ p p e l l a n t ~ * STATE OF MONTANA
APPEAL FROM: ~istrictCourt of the Fourth Judicial District,
In and for the County of ~avalli,
The Honorable Jack L. Green, Judge presiding.
COUNSEL OF RECORD:
For Appellants:
Bryan L. Asay, Kelley & Asay, Helena, Montana
For Respondent:
John D. Greef, Attorney at Law, Hamilton, Montana
Submitted on Briefs: August 6, 1992
Decided: November 12, 1992
Filed:
. ,
Clerk
Justice William E. Hunt, Sr., delivered the opinion of the Court.
Appellants George and Mary Rivera appeal from the decision of
the ~istrict
Court of the Fourth Judicial District, Ravalli County.
This dispute arose out of a contract to buy and sell certain land
in Ravalli County, Montana. The District Court refused to grant
Riveras' rescission of the contract and awarded respondents, B r i m
and Gayle Weber, liquidated damages in the amount of $43,000. We
affirm in part and reverse in part.
There are two issues before the Court:
1. Was the District Court clearly erroneous in denying
Riveras the right to rescind the contract?
2. Did the District Court incorrectly find the liquidated
damages clause of the contract valid under § 28-2-721, MCA?
Brien and Gayle Weber listed their ranch property, located in
Ravalli County, for sale in June 1990. The Weber family had owned
the ranch property since 1911 and had lived in the residence
located on the property since 1915. In June 1990, Mary Rivera was
shown several properties in the area by a sales representative of
a local real estate agency, including the Webers' ranch property.
In July 1990, Mary Rivera travelled from California to Montana with
her husband George, to again view several properties in the Ravalli
County area. The Weber property was one of the properties the
Riveras were to view.
The District Court found that prior to viewing the Weber ranch
property, George Rivera questioned the sales representative
concerning the water used for the residence located on the
property. The sales representative replied that although the water
would not "test out," the Weber family had been using it for three
generations and that to the best of their knowledge no one had ever
had any problems. Upon arriving at the property, George Rivera
asked Brien Weber about the water. Weber replied that his family
had been drinking the water for years without any difficulty, but
that it would not test out. It is not clear that the actual source
of the water was adequately explained to the Riveras. The Riveras
deny that at that time they were told the water would not test out.
On July 17, 1990, the same day they both viewed the property,
the Riveras made an offer to purchase the property for $430,000.
They then signed a form contract provided and required by United
National Real Estate, a national company of which the local real
estate agency was a member. The Riveras made an initial deposit of
$5000 earnest money at the time they signed the contract. Shortly
thereafter, the Webers executed the contract. The contract entered
into by the parties had a clause which stated that if either party
failed to complete the transaction they would be required to pay to
the other party ten percent of the purchase price as "liquidated
damages.l a
In early August 1990, Mary Rivera returned to Montana to
obtain water samples for testing. The sales representative told
her that she was wasting her time because, as he had previously
indicated, the water would not check out. On August 7, 1990, the
Riveras received the results of the water tests. The tests
indicated the water was contaminated. On August 13, 1990, the
Riveras communicated to the sales representative their intent that
the contract be voided and that the $5000 deposit be returned. The
Riveras then received several letters from the Webers' counsel.
The Webers denied making any misrepresentations concerning the
quality of the water, but suggested that something could be worked
out regarding the costs of putting a well on the property.
Additionally, the Webers reiterated that the contract called for a
closing date of September 1, 1990, and that they were still willing
to close the transaction on that date. The closing did not occur
on September 1, 1990.
The Webers brought suit on October 24, 1990, alleging breach
of contract and seeking to enforce the liquidated damages clause in
the contract. The Riveras filed an answer and counterclaim
alleging that the liquidated damages provision was actually an
invalid penalty clause. The Riveras raised the affirmative
defenses of constructive fraud and mistake of fact. In the
counterclaim, the Riveras alleged negligent representation by both
the Webers and the sales representative. A bench trial was held on
November 22, 1991. The District Court entered judgment for the
Webers on March 3, 1992. The court concluded that the Riveras had
failed to perform their obligations under the contract and awarded
$43,000 in liquidated damages. The Riveras took nothing under
their counterclaim. The Riveras appeal.
I
Was the District Court clearly erroneous in denying the
Riveras the right to rescind the contract?
The District Court found that the Riveras were not entitled to
rescind the contract in question. On appeal, this Court will not
disturb the District Court's findings of fact in a bench trial
unless they are clearly erroneous. In the Matter of the Mental
Health of E.P. (1990), 241 Mont. 316, 787 P.2d 322; Rule 52 (a),
M.R.Civ,P. This Court will also give due regard to the opportunity
of the District Court to judge the credibility of the witnesses.
In the Matter of the Mental Health of R.J.W. (1987), 226 Mont. 419,
736 P.2d 110.
The Riveras contend that pursuant to 5 28-2-401, MCA, their
consent to the contract was neither real nor free because of
constructive fraud on the part of the Webers and because of
mistake. Section 28-2-1711, MCA, allows a party to rescind a
contract if that party's consent was given by mistake or obtained
through fraud. The Riveras argue that the quality of the water was
misrepresented, either intentionally or unintentionally, prior to
the time they entered the contract. They also contend that had
they known the true nature of the water on the Weber property they
would never have contracted to buy the property. At trial, the
parties offered conflicting testimony as to their discussions
concerning the water prior to entering the contract.
The Webers and the sales representative testified that prior
to entering into the contract, the Riveras were told that although
the water would probably not test out, the Weber family had been
drinking it without problems for generations. The Riveras
testified that they were not given this information until after
they had entered the contract. In fact, the ~iveras
testified that
prior to entering into the contract they were led to believe by the
Webers that the water was fine. The record does not indicate that
the source of the water was clearly explained to the Riveras.
However, it was the quality of the water and not its source, which
was the basis for the Riveras' decision to seek rescission of the
contract.
The resolution of this issue depends upon a factual
determination as to what was actually said concerning the water
quality prior to the execution of the contract. If the Webers did
communicate to the Riveras that the water would not test out, then
there is no basis upon which to allow the Riveras to rescind the
contract.
The District Court resolved this factual dispute in favor of
the Webers, finding that they did communicate to the Riveras that
the water would not test out. The District Court, having had the
opportunity to observe and judge both the demeanor and credibility
of the witnesses, was in a position superior to this Court to make
such a factual finding. The District Court was not clearly
erroneous in finding that the Riveras were not entitled to
rescission of the contract.
I1
Did the District Court incorrectly find the liquidated damages
clause of the contract valid under 5 28-2-721, MCA?
The District Court concluded that the Webers were entitled to
$43,000 in liquidated damages. On appeal, the Riveras have
requested that this Court review this conclusion of law. Our
standard of review of questions of law is simply whether the
District Court's interpretation of the law is correct. Schaub v.
Vita Rich Dairy (1989), 236 Mont. 389, 770 P.2d 522. The basis for
this standard of review is that no discretion is involved when a
tribunal arrives at a conclusion of law. The tribunal either
correctly or incorrectly applies the law. Steer, Inc. v.
Department of Revenue (1990), 245 Mont. 470, 803 P.2d 601.
The contract between the Webers and the Riveras contained a
clause which stated that:
It is agreed that if either seller or buyer fails or
neglects to perform his part of this agreement he shall
forthwith pay as liquidated damages to the other party a
sum equal to ten percent of the agreed price of sale.
Based on this clause, the District Court awarded $43,000 in
liquidated damages to the Webers. The Webers contend on appeal
that the clause was a valid liquidated damages provision under
Montana law. The Riveras allege the clause was in reality a
penalty clause and is void under existing Montana law. Section
28-2-721, MCA, provides that:
(1) Every contract by which the amount of damage to
be paid or other compensation to be made for a breach of
an obligation is determined in anticipation thereof is to
that extent void, except as expressly provided in
subsection (2).
(2) The parties to a contract may agree therein
upon an amount which shall be presumed to be an amount of
damage sustained by a breach thereof when, from the
nature of the case, it would be impracticable or
extremely difficult to fix the actual damage.
As set out in the statute, a contractual provision in Montana
purporting to set out in advance the amount of damages payable upon
a breach of the contract is void. However, an exception is
provided for situations in which the parties have agreed in advance
on an amount of damages because it would be impracticable or
extremely difficult to fix the actual damages. This Court has
previously explained in interpreting this statute that:
"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
damages sustained at the time of the breach."
Morgan and Osgood v. Big Sky of Montana (1976), 171 Mont. 268, 273,
557 P.2d 1017, 1020 (quoting Waggoner v. Johnston (Okl. 1965), 408
In this case, the provision for liquidated damages was
contained in a form contract prepared and required by United
National Real Estate. There was absolutely no attempt on the part
of the parties prior to entering the contract to reasonably
estimate what the damages might be in the event of a breach. Both
the Webers and the sales representative testified that they had no
idea how the amount in the provision was even chosen. Pursuant to
the provision, the Webers were entitled to $43,000 regardless of
whether they were able to resell the property the next week, the
next month, or the next year. They would have been entitled to the
$43,000 even if they found a subsequent purchaser willing to pay
more than the Riveras. In short, the provision provided for a set
amount of damages without any regard for or attempt to determine
what the actual damages might be.
Despite the lack of any evidence in the record indicating that
an attempt was made to reasonably estimate the damages upon breach
of the contract, the Webers argue on appeal that it would have been
extremely difficult to determine what the actual damages might have
been in this situation. The Webers point out that this Court has
previously upheld a liquidated damages clause in a similar
situation involving a contract for the sale of land. Erickson v.
First Nat'l Bank of Minneapolis (1985), 215 Mont. 350, 697 P.2d
1332. Additionally, the Webers point out that it appears as if the
amount of damages specified in the provision approximate those
actually suffered. The Webers argue that this weighs heavily in
favor of the provision being interpreted as a valid liquidated
damages provision. However, any relationship between the amount of
actual damages suffered and the amount specified in the provision
is merely a fortuitous coincidence and not the result of a
reasonable estimate in advance to determine what the damages might
be. The fact that the liquidated damage provision in this case
may approximate the actual damages suffered, is insufficient by
itself to create a valid liquidated damages provision. Our
decision in Morqan, along with the applicable statute, makes it
clear that other factors must also be considered. In this case, it
is clear from the subject matter, the surrounding circumstances,
9
and the intent of the parties that the provision was simply a
penalty clause and as such is void under Montana law. This matter
must be remanded to the District Court for a determination of the
actual damages suffered by the Webers as a result of the breach of
contract by the Riveras.
This matter is affirmed in part and reversed in part and is
remanded to the District Court for further proceedings consistent
with this opinion.
We concur:
November 12, 1992
CERTIFICATE O F SERVICE
I hereby certify that the following order was sent by United States mail, prepaid, to the
following named:
Bryan L. Asay
Kelley & Asay Law Firm
328 Fuller Ave.
Helena, MT 59601
John D. Greef
Attorney at Law
P.O. Box 1434
Hamilton, MT 59840
E D SMITH
CLERK O F T H E SUPREME COURT
STATE O F MONTANA