MORGEN OSWOOD v BIG SKY OF MONTA

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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: Decided : Filed: 2 :' ;g$ September 3 , 1976 NRVZ R ISif; ~ 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 running. 114 day c l o c k 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. 2) 1947? 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 compensation 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 evidence 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 difficult 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 company t o o b t a i n t h e c o n t r a c t of t h e s e . c a r r i a g e s , and y e t t o b i l i t y to. f u l f i l i t a s t o time agreed upon, o t h e r than t o pay damages (not exceeding $35 per were n a t u r a l l y and proximately t o deliver." Here, t h e same statement a p p l i e s . unusual t o allow t h e f o r the construction place i t under no l i a of d e l i v e r y , s p e c i a l l y only those a c t u a l day) t h a t might be proved caused by t h e f a i l u r e 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 substantial 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. However, 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. \ ' Justice W Concur: e Chief J u s t i c e Justices. C J& 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 \ & , &4,5,&/+G, / ?/ & ,

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