Norwood v. Service Distributing, Inc.

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No. 99-024

IN THE SUPREME COURT OF THE STATE OF MONTANA

2000 MT 4

297 Mont. 473

994 P.2d 25

E. EARL NORWOOD,

Plaintiff and Appellant,

v.

SERVICE DISTRIBUTING, INC.,

a Montana corporation, ULTRAFOODS, INC.,

a dissolved Montana corporation, STEVEN E. BUCKNER,

ANN E. BUCKNER, EDWARD BUCKNER and

JEANNE T. BUCKNER,

Defendants and Respondents.

APPEAL FROM: District Court of the Thirteenth Judicial District,

In and for the County of Yellowstone,

The Honorable Diane G. Barz, Judge presiding.

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COUNSEL OF RECORD:

For Appellant:

James M. Ragain, Ragain Law Firm, Billings, Montana

For Respondent:

James M. Kommers, Kommers, Steele & Bentson, Bozeman, Montana

Submitted on Briefs: May 27, 1999

Decided: January 6, 2000

Filed:

__________________________________________

Clerk

Justice James C. Nelson delivered the Opinion of the Court.

¶1.E. Earl Norwood (Norwood) appeals the judgment of the Thirteenth Judicial District
Court, Yellowstone County. On November 6, 1998, the District Court issued its Findings
of Fact, Conclusions of Law and Order in favor of the defendants, Service Distributing,
Inc., (SDI), Ultrafoods, Inc., (Ultrafoods) and Steven E. Buckner, Ann E. Buckner,
Edward Buckner, and Jeanne T. Buckner (Buckner).

¶2.We affirm in part, reverse in part, and remand.

¶3.On appeal, Norwood raises the following issues:

1. Did the District Court err in adopting findings of fact, which were essential to SDI's
burden of proof, even though no evidence was offered to support those findings?

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2. Did the District Court err by finding a failure of consideration where the uncontroverted
evidence established that SDI waived its right to claim failure of consideration?

3. Should this matter be remanded with instructions to enter judgment for Norwood when
the trial court record established that SDI did not meet the burden of proof on its alleged
defense?

Factual and Procedural Background

¶4.This dispute can be traced back to May of 1993, when Steven Buckner, on behalf of
(1)
SDI, began negotiating with E. Earl Norwood for acquisition of Norwood's businesses,
Kay's Novelties, Inc., and Norwood & Associates, Inc., (previously Ultrafoods). Kay's
Novelties, Inc., held distributorships for Dreyer's and Dove ice cream products, and
Norwood & Associates, Inc., held the distributorship for Haagen-Dazs ice cream products.
The undisputed facts show that both businesses--which covered distribution in much of
Montana and Wyoming--had been profitable for Norwood, who in 1993 wished to retire.

¶5.At the time, the Buckners desired to increase the product line of SDI, a wholesale food
distributor in Bozeman, Montana, by acquisition of the rights to distribute these premium
brands of ice cream. Steven Buckner, along with family members Ann, Edward and
Jeanne, were shareholders in SDI. Both parties were represented by counsel during
negotiations.

¶6.Because Norwood had set up the ice cream distributorships with two separate
businesses, the Buckners created Ultrafoods, Inc., (which is the same name of a company
once owned by Norwood). Accordingly, SDI purchased the Dreyer's and Dove
distributorships from Kay's Novelties, Inc., and Ultrafoods purchased the Haagen-Dazs
distributorship from Norwood & Associates, Inc. Following acquisition, the three
distributorships were consolidated under SDI, and Ultrafoods was dissolved. The Dove
and Haagen-Dazs distributorships are not in dispute here.

¶7.The parties agreed to a total purchase price of $575,000. The transaction would include
not only the "distributorship rights," but other business assets as well, including delivery
vehicles, office equipment, accounts receivable, and inventory. A purchase and sale
agreement, dated September 13, 1993, was executed to transfer the Dreyer's and Dove
distributorships along with the other assets of Kay's Novelties, Inc., to SDI. The purchase
price, $125,000, was paid at closing on October 15, 1993. Another purchase and sale

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agreement, also dated September 13, 1993, was executed to transfer the Haagen-Dazs
distributorship along with the other assets of Norwood & Associates, Inc., to Ultrafoods.
The purchase price for this second agreement, $250,000, was likewise paid at closing.

¶8.On October 1, 1993, SDI and Norwood entered into another agreement for "consulting
services" because the Buckners were unable to borrow enough money to pay the entire
purchase price. The consulting agreement allowed Norwood to finance the remaining
$200,000 of the $575,000 purchase price. In exchange for SDI's payment of 48 equal
monthly payments of $4,166.67 to Norwood, commencing October 31, 1993, and
concluding on September 30, 1997, Norwood agreed to act "as an independent business
consultant and advisor to SDI." The consulting agreement was personally guaranteed by
all of the Buckners.

¶9.Of critical relevance are the following provisions found in the Kay's Novelties, Inc.
purchase and sale agreement with SDI:

1. Seller agrees to sell, transfer, assign and deliver to Purchaser . . . . All of Seller's right,
title and interest in and to the Dreyers and Dove distributorships.

6.1 Seller is the owner of the Assets and the business being purchased pursuant to this
Agreement and has the authority to enter into this Agreement and all agreements and
documents contemplated hereby, to consummate the transactions contemplated hereby,
and to perform the obligations to be performed by them hereunder and under all
agreements and documents contemplated hereby.

It is undisputed, however, that assignment of the written distributor agreement between
Dreyer's and Kay's Novelties, Inc., which SDI claims it should have received upon
closing, could not be assigned "without the prior written consent of Dreyer's." SDI alleges
that Norwood did not obtain this written consent, and thereby did not assign the agreement
as contemplated by the buy-sell agreement. Section three of the purchase and sale
agreement states that "Purchaser shall be entitled to possession of the Assets immediately
upon closing." Section eight states that "The transfer of all of the Assets shall be
effectuated and confirmed at closing by such bills of sale, assignments or other
instruments of transfer as shall be appropriate to carry out the intent of this Agreement and
shall be sufficient to vest in Purchaser all right, title and interest of Seller is [sic] such
Assets, free and clear of any and all liens, security interest, charges or encumbrances
whatsoever." A pre-closing condition required SDI to "have been approved by the relevant

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authorized representatives or officers of Dreyers . . . for the transfer of the Distributorship
of Purchaser." The agreement also includes an integration clause that states that the
agreement was the entire agreement of the parties and "supersedes any and all prior
agreements or understandings, written or oral."

¶10.Nevertheless, Norwood contends that at closing, when the assets were "effectuated
and confirmed," SDI understood it would not receive the Dreyer's distributor agreement by
assignment on closing; rather, SDI would have to negotiate its own agreement with
Dreyer's. There is no evidence that SDI objected at closing to the omission of Norwood's
assignment of the Dreyer's distributor agreement. Furthermore, according to Norwood's
testimony at trial, he personally arranged for meetings between the Buckners and Dreyer's
representatives prior to the sale's closing date. According to District Court findings,
Dreyer's did not express any objections to the proposed transfer between Norwood and
SDI.

¶11.Additionally, Norwood claims that the Dreyer's distributor agreement provided
absolutely no guarantee of distribution rights to its holder and therefore was of little or no
value. The $125,000 purchase price for the Dryer's and Dove distributorships, in fact, was
expressly allocated between "Equipment" at $43,000 and "Inventory" at $82,000. Further,
the agreement, which SDI had the opportunity to review three months prior to closing,
included the following conditions in addition to the assignment provision: 1) it was not an
exclusive agreement, i.e., Dreyer's reserved the right to sell to anyone including other
distributors within the described territory; 2) either party could terminate by giving 30
days written notice; 3) if Dreyer's found the distributor was not complying with the terms
of the agreement it could cancel without notice; 4) Dreyer's was under no obligation to
extend the agreement; 5) Dreyer's had the discretion to unilaterally raise the distributor's
purchase price at any time; 6) Dreyer's could reject a distributor's order in whole or in part
at any time.

¶12.It is undisputed that from the closing date, October 15, 1993, up to the time that
Norwood filed suit in May of 1997, SDI did not once notify Norwood that he had
breached the agreement by not assigning or otherwise transferring the Dreyer's distributor
agreement, or that it wished to rescind the agreement due to this failure. Norwood would
testify at trial that he learned for the first time during a meeting with Steven Buckner in
May of 1994 that SDI had not successfully negotiated a written distributor agreement with
Dreyer's. Norwood claims that during the meeting--where the parties discussed
refinancing SDI's obligation--he offered to assist in obtaining the agreement, and Steve

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Buckner declined this offer.

¶13.Although the monthly payments were cut nearly in half as a result of refinancing,
Norwood alleges that by the end of the 1994, SDI still owed him $14,236.11 in past-due
payments. By the end of November 1995, SDI allegedly owed $36,607.14. It is
uncontested that SDI stopped making payments altogether in December of 1996. Norwood
filed suit on May 27, 1997, to recover the remaining $104,715 balance owing.

¶14.SDI timely answered and raised several affirmative defenses including failure of
consideration. SDI also counterclaimed for breach of contract. Although SDI claimed that
Norwood's failure to assign or otherwise transfer the Dreyer's distribution agreement gave
rise to SDI's right to stop making payments and rescind the contract, SDI nevertheless
admitted that it had in fact distributed Dreyer's ice cream for more than two years.
According to SDI, its business relations with Dreyer's was terminated in January 1996, by
Dreyer's. No evidence was offered showing why this alleged termination occurred--
whether Dreyer's was dissatisfied with SDI's performance or simply sought relations with
another party.

¶15.Related to these facts is SDI's central contention that it was never able to obtain a
distribution contract with Dreyer's. Equally noteworthy, however, is the fact that no
evidence was offered showing that SDI did not have a distribution contract with Dreyer's.
Additionally, there was no evidence offered specifically describing the nature of the
business relations between SDI and Dreyer's.

¶16.At trial, held September 14, 1998, Norwood called one witness, E. Earl Norwood.
Following direct and cross examination, counsel for SDI rested without calling any
witnesses. Counsel for Norwood requested that he be allowed to reopen, so that he could
call his other named witnesses, whom he had anticipated counsel for SDI would call. The
District Court denied this request. The District Court issued its Findings of Fact,
Conclusions of Law, and Order on November 6, 1998, and entered a judgment in favor of
SDI.

¶ 17.The court concluded that all of the above agreements were in fact one agreement with
the total consideration of $575,000, and that the consulting agreement was "entered into as
a fiction for the purpose of allowing Norwood to finance $200,000 of the purchase price in
a fashion which is actually structured as a promissory note."

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¶18.The District Court found that Norwood's corporation, Kay's Novelties, Inc., did not
deliver to SDI the distributorship rights for Dreyer's products pursuant to the promise to
sell, transfer and deliver "all of the Seller's right, title and interest in and to the Dreyer's
and Dove distributorships." Accordingly, the court found that SDI never received a written
distributor agreement from either Kay's Novelties, Inc., or Dreyer's. The District Court's
findings indicate that Norwood made no effort to secure the written distributorship for the
Dreyer's food products in the same manner as he had helped Ultrafoods obtain the Haagen-
Dazs distributorship.

¶19.The District Court concluded that Norwood promised to deliver the Dreyer's
distributorship to SDI, a promise that he never had the ability to fulfill. As a result, the
District Court concluded that Norwood's consideration for the transaction had failed. Due
to this failure of consideration, SDI was relieved of the obligation to make any further
payments to Norwood as of December 1996. At the time this dispute arose, SDI had paid
Norwood $95,285, leaving a balance of $104,715. This amount owing is undisputed. The
District Court concluded that the contract was voided, and the agreement could be
rescinded by SDI back to the date it had stopped making payments in December of 1996.

¶20.The District Court ordered that the Buckners, as guarantors of the consulting
agreement, were released from any obligation to Norwood, and that because the contract
was void, the attorney's fee provision was inapplicable.

Standard of Review

¶21.This Court reviews the findings of a trial court sitting without a jury to determine if
the court's findings are clearly erroneous. Rule 52(a), M.R.Civ.P. A district court's
findings are clearly erroneous if they are not supported by substantial credible evidence, if
the trial court has misapprehended the effect of the evidence, or if a review of the record
leaves this Court with the definite and firm conviction that a mistake has been committed.
Whalen v. Taylor (1996), 278 Mont. 293, 299, 925 P.2d 462, 465. Additionally, in
determining whether the trial court's findings are supported by substantial credible
evidence, this Court must view the evidence in the light most favorable to the prevailing
party. Roberts v. Mission Valley Concrete Indus. (1986), 222 Mont. 268, 271, 721 P.2d
355, 357.

¶22.We review a district court's conclusions of law to determine whether those
conclusions are correct. Hollister v. Forsythe (1995), 270 Mont. 91, 93, 889 P.2d 1205,

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1206 (citation omitted).

Discussion

¶23.We will not disturb the District Court's finding as well as its conclusion that the three
agreements here comprise one transaction with a total purchase price of $575,000. The
evidence is substantial that the three separate agreements memorialized one transaction for
the sale and purchase of the respective ice cream distributorship businesses. Further, it is
undisputed that the "consulting agreement" was merely a promissory note, whereby
Norwood agreed to finance the $200,000 balance of the $575,000 purchase price. Finally,
we conclude that there is substantial evidence that Norwood did not "sell, transfer, assign
and deliver" Kay's Novelties, Inc.'s distributor agreement with Dreyer's to SDI as
promised. To this extent, we affirm the findings and conclusions of the District Court.

¶24.Before addressing the specific issues raised by Norwood, however, a preliminary
review of the law under which the District Court entered judgment in favor of SDI is
necessary.

¶25.The District Court concluded that Norwood's failure to deliver the Dreyer's distributor
agreement to SDI--which was "one part of his obligation"--constituted a failure of
consideration. The court granted SDI the right to rescind the contract, concluding that the
contract "was rendered void by this failure of consideration." Thus, the court concluded
that SDI was relieved of its obligation to further perform under the "consulting
agreement," thereby canceling SDI's $104,000 debt to Norwood.

¶26.First, as a matter of law, the District Court erred by concluding that, under the
equitable doctrine of rescission, SDI could be excused from further performing without
making a requisite finding that SDI had in fact been damaged. As this Court has often
stated "courts of equity, like courts of law . . . do not concern themselves with wrongs
which do not produce injury." Beierle v. Taylor (1974), 164 Mont. 436, 440-41, 524 P.2d
783, 785 (citations omitted).

¶27.In Beierle, we affirmed summary judgment for the sellers of a motel who, similar to
Norwood, failed to deliver as promised a particular document at closing. We agreed with
the district court that this alleged "partial failure of consideration," resulted in no damage
and therefore could not support a claim for rescission. Beierle, 164 Mont. at 441, 524 P.2d
at 785.

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¶28.Here, Norwood admits that he failed to assign the Dreyer's distributor agreement at or
prior to closing in October of 1993. The District Court nevertheless found that a
"distributorship interest" between SDI and Dreyer's began in October, 1993, and continued
for more than two years. The court found that this "distributorship interest" or "operating
privileges" ended in January 1996, after Dreyer's notified SDI that it would no longer
allow SDI to distribute its products. There is no further indication in the court's findings or
conclusions that SDI was in any manner damaged, or otherwise "disturbed in his
possession" by the failure of Norwood to assign the distributor agreement. See Beierle,
164 Mont. at 440, 524 P.2d at 785 (citations omitted). Absent such a finding, the District
Court's conclusion that SDI could rescind the contract was incorrect. This critical
oversight must be properly addressed upon remand.

¶29.Of further relevance to our preliminary discussion, this Court recently restated certain
indelible guiding principles that originally appeared in Montana case law at mid-century:

A breach which goes to only part of the consideration, is incidental and subordinate to the
main purpose of the contract, and may be compensated in damages does not warrant a
rescission of the contract; the injured party is still bound to perform his part of the
agreement, and his only remedy for the breach consists of the damages he has suffered
therefrom.

Flaig v. Gramm, 1999 MT 181, ¶ 27, ___ Mont. ___, ¶ 27, 983 P.2d 396, ¶ 27 (citations omitted). The
foregoing principle has survived verbatim since it was quoted from 12 Am.Jur. Contracts § 440 in 1946.
See Johnson v. Meiers (1946), 118 Mont. 258, 263, 164 P.2d 1012, 1014. We explained this principle by
stating that "[a] substantial or material breach is one which touches the fundamental purposes of the
contract and defeats the object of the parties in making the contract." Flaig, ¶ 25 (quoting Rogers v.
Relyea (1979), 184 Mont. 1, 8, 601 P.2d 37, 41). See also Restatement (Second) of Contracts § 241
(1981) (identifying five significant circumstances in determining whether a failure to render
performance is material).

¶30.On the other hand, § 28-2-1711, MCA, states: "[a] party to a contract may rescind the
same in the following cases only. . . . (2) if, through the fault of the party as to whom he
rescinds, the consideration for his obligation fails in whole or in part." Unchanged since it
was first codified in 1895, this statute was followed in Van Hook v. Baum (1990), 245
Mont. 407, 411, 800 P.2d 151, 153, which is the one case cited in the District Court's
Conclusions of Law.

¶31.Therefore, our case law flowing from Johnson v. Meiers is seemingly at odds with the

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foregoing statute and related case law. On the one hand, a breach which goes to only "part
of the consideration" does not warrant rescission; on the other, consideration for an
obligation that fails "in part" may give rise to rescission as a remedy. This apparent
conflict not only confuses the issues presented here--both parties here agree that the failure
was "partial"--but has led to a similar degree of confusion in much of our case law.
Compare Turner v. Ferrin (1988), 232 Mont. 146, 152-54, 757 P.2d 335, 338-40
(concluding that pursuant to § 28-2-1711(2), a claim for rescission was properly denied
where there was no showing of a material or substantial lack of consideration), with
Beierle, 164 Mont. at 440-41, 524 P.2d at 785 (suggesting that partial failure of
consideration, pursuant to § 13-903, RCM, now codified under § 28-2-1711, may warrant
rescission upon showing that buyer was "disturbed in his possession" or damaged).

¶32.With the intent of clarifying this matter, we first note that "failure of consideration,"
as either a claim or affirmative defense, does not relate to the absence of consideration, or
whether there is "good" consideration necessary for the formation of a valid, enforceable
(2)
contract pursuant to §§ 28-2-102 and 801, MCA. Rather, the term pertains to the failure
of one party's performance, which then suspends or excuses the performance of the other
party pursuant to the terms of a valid contract. Thus, "failure of consideration" is generally
synonymous with a material breach of performance of a contract, rather than whether a
contract was enforceable due to the absence of the essential element of consideration. See
John D. Calamari & Joseph M. Perillo, Contracts § 11-21 (3d ed. 1987). The Restatement
approach, in fact, formally replaced the term "failure of consideration" with "failure of
performance" due to the obvious confusion the term had created in various courts. See
Restatement (Second) of Contracts § 237 cmt. a (1981), and see, e.g., Nordwick v. Berg
(1986), 223 Mont. 337, 340-41, 725 P.2d 1195, 1197 (suggesting that a "failure of
consideration" claim requires analysis under §§ 28-2-102(4) and 801, MCA). Professor
Samuel Williston, a long-time champion of retaining "failure of consideration" as a term
of art, nevertheless provides the following rule:

Failure of consideration exists whenever one who has promised to give some performance
fails, without his fault, to receive in some material respect the agreed exchange for that
performance. Where the counter-promise to perform relates to a material matter, the
disappointed party has the right to rescind the contract.

6 Williston on Contracts § 814, at 12-15 (3d ed. 1962) (emphasis added).

¶33.We conclude that in light of the prevailing authorities on this subject, a claim or

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affirmative defense of "failure of consideration," which gives rise to the equitable remedy
of rescission, requires a showing by the claiming party that the other party's failure to
perform was in fact material to the contract. Whether there was "sufficient" or "good"
consideration pursuant to §§ 28-2-102 and 801, MCA, is therefore immaterial to such an
inquiry.

¶34.To reconcile this holding with § 28-2-1711(2), we conclude that a failure of "part" of
a promised performance may warrant rescission, but only if the claiming party adequately
proves that the deficient "part" of the other party's performance was in fact material to the
contract. According to the District Court, Norwood's promise to assign the Dreyer's
distributor agreement was only one "part" of his obligation. This partial failure to perform
nevertheless may touch the "fundamental purpose of the contract" and defeat the "object
of the parties in making the contract" and thus be deemed a material breach. Flaig, ¶ 25.
See also Berry v. Romain (1981), 194 Mont. 400, 406, 632 P.2d 1127, 1131 (upholding the
district court's determination that failure to deed adequate parking, which was part of a
condominium sale, was a material failure of consideration warranting rescission). If the
failure to perform was not material, however, the remedy of rescission is not available,
performance cannot be excused, and the claiming party may only be entitled to money
damages for breach. If such were the case, Norwood is correct that SDI is still
contractually obligated to pay the remaining $104,715, which could possibly be offset by a
showing of damages due to Norwood's failure to assign the Dreyer's distributor agreement.

¶35.We conclude, therefore, that the District Court erred when it did not determine
whether Norwood's failure to assign the Dreyer's distributor agreement was material to the
transaction as a whole. The determination of whether a material breach exists is a question
of fact. See Flaig, ¶ 25. The District Court's findings and conclusions simply do not set
forth any analysis or indication that Norwood's alleged failure to perform was a breach,
and if so, whether it was material. While this Court adheres to the "doctrine of implied
findings" we cannot conclude that the evidence supports an "implied" finding that a
material breach occurred in support of the District Court's judgment. See Berry, 194 Mont.
at 407, 632 P.2d at 1132 (concluding that implied findings supported district court's
conclusion that a rescission should be granted under § 28-2-1711, MCA). Therefore,
absent such a determination by the District Court, SDI could not, as a matter of law,
rescind the contract and be excused from further performance of its obligation to
Norwood. Again, this critical oversight must be addressed upon remand.

¶36.Finally, the District Court without explanation did not require that SDI return all of its

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other acquired assets, or that Norwood refund the entire purchase price, which would have
been consistent with our statutory doctrine of rescission. See § 28-2-1713(2), MCA,
(requiring rescinding party to restore to the other party everything of value which he has
received from him under the contract). See also Cady v. Burton (1993), 257 Mont. 529,
538, 851 P.2d 1047, 1053 (stating that the objective of rescission is to return the parties to
the same position they would have occupied had they not entered into the contract)
(citation omitted). Again, this critical oversight must be properly addressed upon remand,
should rescission be warranted.

¶37.We now address the issues raised by Norwood.

Issue 1.

Did the District Court err in adopting findings of fact, which were essential to SDI's
burden of proof, even though no evidence was offered to support those findings?

¶38.Having reviewed the record, we agree with Norwood that the District Court's findings
and conclusions are essentially the very same findings and conclusions proposed by SDI
prior to trial. Norwood claims that SDI did not offer any evidence at trial in support of
several of these proposed findings, nor did it file any post-trial findings omitting or
modifying the pretrial proposed findings, which were not supported by substantial
evidence. We conclude that Norwood is correct in these contentions as well.

¶39.We have discussed a trial court's verbatim adoption of proposed findings of fact and
conclusions of law many times. See, e.g., Baer v. Baer (1982), 199 Mont. 21, 31, 647 P.2d
835, 841 (citing cases). While we have voiced stern disapproval of a court's wholesale
adoption of proposed findings and conclusions, we have also acknowledged that we are
governed by Rule 52(a) M.R.Civ.P. (stating that unless clearly erroneous, findings shall
not be set aside, and a "court may adopt any such proposed findings or conclusions so long
as they are supported by the evidence and law of the case"). See Baer, 199 Mont. at 31,
647 P.2d at 841. Accordingly, we must determine whether SDI's findings adopted
essentially verbatim by the District Court are supported by substantial evidence in the
record.

¶40.Norwood contends that no evidence supports the court's finding that he "made no
effort to secure the written distributorship for the Dreyers food products as he had helped
Ultrafoods obtain the Haagen-Dazs distributorship." We agree. No testimony or other

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evidence alludes to, let alone supports this finding. It is not clear whether a Haagen-Dazs
distributorship agreement--which included the same non-assignability provision--was ever
assigned or transferred by Norwood to Ultrafoods at closing. Further, the evidence clearly
shows that Norwood successfully arranged for meetings between the representatives of
SDI and both Dreyer's and Haagen-Dazs, and SDI later refused Norwood's offer to assist
with obtaining the written agreement with Dreyer's. The evidence additionally shows that
SDI was made aware of the assignment-restriction provisions found in the respective
distributorship agreements well in advance of signing the buy-sell agreements on
September 13, 1993, and the October 15, 1993 closing date.

¶41.Likewise, no evidence supports the finding that "Dreyer's notified SDI that it would
no longer allow SDI to distribute its products." The exact nature of the relationship
between Dreyer's and SDI remains shrouded in mystery due to SDI's failure to support its
affirmative defense and counterclaims with any evidence at trial. Therefore, the court's
findings and conclusion that "SDI never received . . . a written distributorship agreement"
from Dreyer's, and the "business relationship" or "operating privileges" ended without "a
written distributorship ever being obtained by [SDI]," is not supported by substantial
evidence, and is therefore clearly erroneous and legally incorrect.

¶42.Although we have already affirmed the conclusion that the consulting agreement was
nothing more than a promissory note, the District Court nevertheless erred in concluding
that this "loan of money" was for the purchase of "a distributorship right which was not
delivered." The evidence clearly shows that the promissory note for $200,000 covered the
remaining balance of the entire $575,000 transaction, which included three
distributorships, involving numerous business assets. In particular, the uncontested
evidence shows that the only item missing from the transfer of the Dreyer's distributorship
was one document, which would have guaranteed SDI's distribution rights for at the most
30 days, and that this document was not accorded any monetary value in the purchase and
sale agreement. Therefore, the District Court's findings and conclusions suggesting that
the $200,000 promissory note resulted from the purchase of a "distributorship right" is
also clearly erroneous and legally incorrect.

¶43.We also fault the District Court's findings and conclusion that there was a failure of
consideration "due to Norwood's promise to deliver that which he had no right to deliver;
namely, the Dreyer's distributorship." The evidence clearly shows that there was a distinct
difference between selling and thereby transferring the interest in the Dreyer's
"distributorship" and merely assigning the written Dreyer's distributor agreement. The

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evidence shows that SDI agreed to purchase, and Norwood agreed to sell, all "right, title
and interest in and to the assets" of Kay's Novelties, Inc.'s Dreyer's distributorship. In
addition to a written agreement with Dreyer's, the distributorship included furnishings,
equipment, supplies, goodwill, contract rights, accounts receivable, inventory, and
leaseholds. The $125,000 purchase price for the Dreyer's and Dove distributorships was
expressly allocated between "Equipment" valued at $43,000, and "Inventory" valued at
$82,000. That the "right, title and interest" of what was transferred somehow was rendered
valueless without the one written document is clearly contradicted by the admitted fact
that SDI distributed Dreyer's ice cream for more than two years following the transfer of
the distributorship assets.

¶44.In accordance with the foregoing, we hold that, to the extent they have been addressed
above, the District Court's findings of fact are not supported by substantial evidence and
are therefore clearly erroneous, and that its legal conclusions based on these findings are
incorrect.

Issue 2.

Did the District Court err by finding a failure of consideration where the uncontroverted
evidence establishes that SDI waived its right to claim failure of consideration?

¶45.On appeal, Norwood argues that one party's default in performance of a contract may
be waived by the other contracting party and cites to our decision in Pipe Indus. Ins. v.
Consolidated Pipe Trades Trust (1988), 233 Mont. 162, 760 P.2d 711, which states the
general law of waiver. See also § 28-1-1112, MCA (stating that a person to whom a tender
is made "must at the time specify any objection he may have to the money, instrument, or
property or he must be deemed to have waived it"). Also of critical relevance, however, is
the rule that "[m]ere failure to take steps to enforce a legal right under a contract in a
timely manner is not, by itself, sufficient to constitute proof of waiver." Pipe Industry, 233
Mont. at 170, 760 P.2d at 716. Rather, a party claiming waiver must prove that the
language or conduct by the other party showed, in an unequivocal manner, that the party
voluntarily and intentionally relinquished the right to receive the full benefit of the a
contract. See Pipe Industry, 233 Mont. at 170, 760 P.2d at 716.

¶46.Norwood argues that because SDI was aware that he would not assign the Dreyer's
agreement at or prior to closing, then accepted his performance, and thereafter refused his
assistance in obtaining a written agreement with Dreyer's, it voluntarily and intentionally

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waived the right to later claim that his consideration had failed. Norwood first raised this
issue in his reply to SDI's counterclaim and now contends that this theory was further
developed by the testimonial and documentary evidence. Norwood argues that in light of
such evidence, the District Court erred in finding and concluding that SDI could prevail on
its affirmative defense of failure of consideration.

¶47.In addressing this issue, we first conclude that based on its own Findings of Fact, the
District Court should have determined whether SDI's affirmative defense of failure of
consideration warranting rescission could be sustained as a matter of law. A rescinding
party, under the theory of failure of consideration pursuant to § 28-2-1711, MCA, must
also meet the requirements of § 28-2-1713, MCA, which provides in part:

Rescission, when not effected by consent, can be accomplished only by the use on the part
of the party rescinding of reasonable diligence to comply with the following rules:

(1) He must rescind promptly upon discovering the facts which entitle him to rescind if he
is free from duress, menace, undue influence, or disability and is aware of his right to
rescind.

¶48.Therefore, even though a party may be entitled to rescind a contract due to a failure of
consideration, as we have discussed that concept in our preliminary analysis, the
"rescinding party must use reasonable diligence and take action within a reasonable time
upon discovering the facts which entitle him to rescind." Liddle v. Petty (1991), 249 Mont.
442, 447, 816 P.2d 1066, 1069 (quoting Berry v. Romain (1981), 194 Mont. 400, 632 P.2d
1127).

¶49.In Liddle, which is factually similar to the case here, the buyer, Petty, under a contract
for deed, stopped making installment payments due to what he contended was a material
breach by the Liddles in not helping him obtain a mortgage release from a bank as
promised in the parties' contract. The district court found, however, that Petty did not
notify the Liddles of his inability to obtain the release for more than two years. Even then,
as is the case here, Petty's claim was merely in response to the suit filed by the Liddles for
his default in failing to make the annual loan payments. Liddle, 249 Mont. at 447, 816
P.2d at 1069. We upheld the decision of the district court that concluded Petty was not
entitled to suspend performance of the contract when he "had failed to use reasonable
diligence to rescind promptly upon discovering the facts." Liddle, 249 Mont. at 448, 816
P.2d at 1069.

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¶50.Accordingly, we hold it was in error for the District Court to conclude that SDI could
rescind the contract under a theory of failure of consideration (assuming the court first
determined there was a material breach) without also determining whether SDI had
complied with the mandates of § 28-2-1713, MCA. Again, this critical oversight must be
addressed upon remand.

¶51.As for Norwood's specific contention that the District Court misapprehended the
effect of the evidence pertaining to his waiver theory, our standard of review requires that
we consider the evidence in the light most favorable to SDI. Roberts, 222 Mont. at 271,
721 P.2d at 357. Moreover, we do not have the benefit of specific findings or conclusions
regarding Norwood's waiver theory. Nevertheless, we do not consider the conflicting
evidence raised by Norwood sufficient to support a conclusion that SDI had "voluntarily
and intentionally" waived all of its contractual rights to Norwood's promise to assign the
Dreyer's distributor agreement. We hold that without sufficient findings and conclusions
regarding Norwood's waiver theory, the issue must be further addressed by the District
Court on remand.

Issue 3.

Should this matter be remanded with instructions to enter judgment for Norwood when the
trial court record established that SDI did not meet the burden of proof on its alleged
defense?

¶52.Norwood argues that because there is little or no conflict in the evidence, and because
SDI failed to meet its burden of proof, this Court should determine the rights of the parties
and enter judgment in his favor and against SDI. Norwood contends that pursuant to § 26-
1-402, MCA, SDI had the burden of persuasion as to each fact essential to its claim or
defense, which included the "amount of detriment sustained," and that SDI chose not to
present any evidence at trial supporting its contentions.

¶53.Norwood correctly states that pursuant to § 3-2-204, MCA, this Court may "affirm,
reverse, or modify any judgment or order appealed from and may direct the proper
judgment or order to be entered or direct a new trial or further proceedings to be had." Our
most recent decisions under this statute, however, involved summary judgments. See, e.g.,
Jarrett v. Valley Park, Inc. (1996), 277 Mont. 333, 922 P.2d 485. In Jarrett we stated:

In the usual summary judgment case where we reverse an order of the district court

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granting summary judgment, that resolution is based on our conclusion that genuine issues
of material fact exist which preclude the moving party's entitlement to judgment as a
matter of law. Under that circumstance, a reversal of the district court necessitates a
remand for trial in which the factual issues will be determined by the trier of fact. Where
all of the facts bearing on the resolution of the legal issues are before us, however, this
Court has the power to reverse a district court's grant of summary judgment and direct it to
enter summary judgment in favor of the other party.

Jarrett, 277 Mont. at 346, 922 P.2d at 492 (citations omitted).

¶54.Without limiting our statutory authority under § 3-2-204, MCA, we nevertheless
conclude that where a district court has issued findings and conclusions, and where
potential factual issues may still exist, those matters are best left for determination by the
trier of fact on remand. Our reasoning is influenced by a caveat that has, over time, been
omitted from the general rule stated in Jarrett. In Alley v. Butte & Western Mining Co.
(1926), 77 Mont. 477, 251 P. 517, we stated substantially the same rule, but added that this
Court could not enter judgment if "such action might, in the opinion of the court, work an
injustice." Alley, 77 Mont. at 497, 251 P. at 524 (emphasis added). Here, due to the
unsupported findings and incorrect conclusions of law previously discussed, we conclude
that such critical questions as whether SDI was damaged, whether Norwood breached and
if so whether it was material, whether SDI diligently rescinded, and whether SDI waived
any of its rights under the contract remain to be determined. These will require new
findings and conclusions by the District Court upon remand. We therefore hold that it
would be improper, at this point, to instruct the District Court to enter judgment for
Norwood.

Conclusion

¶55.As a final matter, we conclude that the District Court erred in determining that
because "the contract is void, the attorney's fees and costs provisions is inapplicable." This
is an incorrect statement of the law. The "consulting agreement" included the following
provision:

In the event litigation between the parties arises out of the performance and/or non-
performance of this Agreement, the prevailing party shall be entitled to recover all costs
and fees, including attorney's fees incurred in such litigation.

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¶56.In identical circumstances, we upheld an award of attorney's fees pursuant to a similar
contract provision, even though the "prevailing party" had in fact succeeded in rescinding
the contract. See Carey v. Wallner (1986), 223 Mont. 260, 267, 725 P.2d 557, 562. While
we did not provide any underlying reasoning in Carey, we now conclude that the
following is persuasive:

[W]hen parties enter into a contract and litigation later ensues over that contract, attorney's
fees may be recovered under a prevailing-party attorney's fee provision contained therein
even though the contract is rescinded or held to be unenforceable. The legal fictions which
accompany a judgment of rescission do not change the fact that a contract did exist. It
would be unjust to preclude the prevailing party to the dispute over the contract which led
to its rescission from recovering the very attorney's fees which were contemplated by that
contract.

Mackintosh v. California Sav. Fed. (Nev. 1997), 935 P.2d 1154, 1162 (quoting Katz v. Van Der
Noord (Fla. 1989), 546 So.2d 1047, 1049). We therefore hold that when a contract is rescinded due to
the material failure of performance by one party, the prevailing party may be awarded attorney's fees
pursuant to an express provision in the contract.

¶57.Based upon the foregoing, the trial court's judgment is reversed and this case is
remanded for further proceedings consistent with this opinion.

/S/ JAMES C. NELSON

We Concur:

/S/ J. A. TURNAGE

/S/ W. WILLIAM LEAPHART

/S/ WILLIAM E. HUNT, SR.

/S/ KARLA M. GRAY

1. At the time of the negotiations, the businesses were owned by Norwood and his former wife.
Subsequent to the division of their marital property following dissolution, Norwood became the sole
owner of the businesses subject to this appeal.

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2. Pursuant to § 28-2-102(4), MCA, it is essential to the existence of a contract that there be "sufficient
cause or consideration." Pursuant to § 28-2-801, MCA, "[a]ny benefit conferred or agreed to be
conferred upon the promisor by any other person, to which the promisor is not lawfully entitled, or any
prejudice suffered or agreed to be suffered by such person, other than such as he is at the time of consent
lawfully bound to suffer, as an inducement to the promisor is a good consideration for a promise."

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