Martel Const., Inc. v. State By and Through Dept. of Highways

• Decision Date: 30 August 1991
• Docket Number: No. 90-519,90-519
• Parties: MARTEL CONSTRUCTION, INC., Plaintiff and Respondent, v. The STATE of Montana, Acting BY AND THROUGH the DEPARTMENT OF HIGHWAYS of the State of Montana, Defendant and Appellant.
• Court: Montana Supreme Court

Page 677

817 P.2d 677

249 Mont. 507

MARTEL CONSTRUCTION, INC., Plaintiff and Respondent, v. The STATE of Montana, Acting BY AND THROUGH the DEPARTMENT

OF HIGHWAYS of the State of Montana, Defendant and

Appellant.

No. 90-519.

Supreme Court of Montana.

Submitted on Briefs April 12, 1991.

Decided Aug. 30, 1991.

Marc Racicot, Atty. Gen. and W.D. Hutchinson, Asst. Atty. Gen., Helena, for defendant and appellant.

Richard J. Andriolo, Bozeman, Patrick A. Sullivan, and Winston & Cashett, Spokane, Wash., for plaintiff and respondent.

GRAY, Justice.

The appellant, State of Montana, appeals from a judgment entered on a jury verdict rendered in the District Court of the First Judicial District, Lewis and Clark County, awarding the respondent, Martel Construction, Inc., $549,000 in damages for breach of contract. We affirm in part, reverse in part and remand for a new trial.

The sole issue for review is whether the District Court erred in ruling that Martel could recover, as an element of damages against the State, the interest expense paid on funds it was allegedly required to borrow in order to finance extra work caused by the State.

In June, 1984, the appellant, State of Montana, acting by and through the Montana Department of Highways, solicited bids for the reconstruction of the existing Burlington Northern Railroad overpass at Havre, Montana. The project called for the complete refurbishment of the existing railroad overpass and the addition of two more traffic lanes. The end result was to be a four-lane overpass consisting of a new bridge built immediately adjacent and attached to the refurbished old bridge.

The Department of Highways did not make a new survey of the existing bridge prior to putting the project out for bid. Instead, it used the plans prepared for construction in 1936 which the Department believed actually represented the elevation and dimensions of the bridge in 1984. The 1936 data was transposed onto the contract drawings sent out to contractors for bidding purposes. Martel, relying upon the accuracy of the contract drawings, submitted the lowest bid and was awarded the contract on July 27, 1984.

Martel began construction on September 12, 1984. When Martel started to construct the new bridge to attach to the old bridge, it discovered that the elevation of the old bridge and certain other dimensions were not as represented on the contract drawings. Martel was required to perform extra work not contemplated under the contract in order to make the new bridge fit. Martel completed the contract on August 1, 1986.

On January 16, 1986, prior to completing the contract, Martel submitted a series of claims associated with extra work in performing the contract to the Department of Highways for administrative resolution. Some of the claims were allowed; most were denied by the Department on April 17, 1986. Martel appealed the denial of the claims to the Department's Board of Contract Appeals on May 9, 1986. The Board affirmed the original denial on December 31, 1986.

On March 26, 1987, Martel filed suit in the District Court against the State of Montana seeking damages for breach of contract. Martel sought to recover its actual construction costs for the extra work it had performed under the contract as well as the interest it had paid on funds allegedly borrowed to finance the extra work. Martel denominated the interest it had paid on the borrowed funds as "moratory interest."

Prior to trial, the District Court requested briefs from counsel on the issue of whether "moratory interest" could be recovered as an item of damages in a contract action against the State. The District Court ruled, as a matter of law, that the "moratory interest" claimed by Martel is part of the actual damages claimed to have been incurred by Martel, rather than prejudgment interest; thus, it could be recovered as an item of special or general damages for breach of contract.

A jury trial was held May 28 through June 8, 1990. At trial, Martel presented testimony and exhibit evidence that it incurred an actual expense of $170,841.46 through the payment of interest on funds borrowed during the period 1985-1990 in order to finance the construction project and that the average interest rate during this time was 10 3/4%. During closing argument Martel's counsel, stated:

You will also have with you exhibit number 126 which is the moratory interest calculations.... That is the actual money that Bill Martel paid out of his pocket to a bank to finance this job. And whatever money you determine that he is entitled to you should add a factor of interest and I would suggest that once you have come up with a lump sum for delays and the ... [extra construction] costs, that you can apply the 10 point three quarter percent interest.

Later, in discussing the verdict form, counsel stated:

I have not filled in any amounts for moratory interest because I trust that on any amounts that you find that Martel is entitled to you can apply the 10 point three quarter interest factor and come up with your own amount.

In addition, Jury Instruction No. 23 instructed the jury that:

Martel Construction is seeking "moratory interest" damages from the State of Montana. Moratory interest is interest allowed in actions for breach of contract as damages for unlawful detention of money found due.

As a jury, you may award moratory interest damages to Martel Construction if you find that the State of Montana caused Martel Construction to borrow money to pay for extra work or delays ordered by or caused by the State of Montana.

At the conclusion of the trial the jury found the State had breached the contract between the parties and awarded Martel damages in the amount of $384,000 for extra work and $165,000 for "moratory interest," for a total award of $549,000. The State appeals the portion of the judgment relating to the "moratory interest."

Contract actions against the State of Montana are governed by Title 18, Chapter 1, part 4, MCA. The extent of the State's liability in contract actions is set out in § 18-1-404, MCA, which provides, in pertinent part:

Liability of state--limitations--costs. (1) The state of Montana shall be liable in respect to any contract entered into in the same manner and to the same extent as a private individual under like circumstances, except the state of Montana shall not be liable for interest prior to or after judgment or for punitive damages.

As quoted above, except for the prohibition against interest prior to or after judgment and punitive damages, § 18-1-404(1), MCA, renders the State liable for damages in contract cases to the same extent as a similarly situated private litigant. The general measure of damages for breach of contract, including a breach of contract by the State, is set out in § 27-1-311, MCA.

Breach of contract. For the breach of an obligation arising from contract, the measure of damages, except when otherwise expressly provided by this code, is the amount which will compensate the party aggrieved for all the detriment which was proximately caused thereby or in the ordinary course of things would be likely to result therefrom. Damages which are not clearly ascertainable in both their nature and origin cannot be recovered for a breach of contract.

In Ehly v. Cady (1984), 212 Mont. 82, 97, 687 P.2d 687, 695, we made the following observation regarding the types of damages recoverable for breach of contract:

An examination of Section 27-1-311, MCA, ... will reveal two kinds of damages recoverable from breach of contract. Damages "for all the detriment caused thereby" include all damages which in the ordinary and natural course of things are proximately caused by the breach itself. These damages are the natural result of the breach. Damages under the statute may also be recovered "which in the ordinary course of things would be likely to result therefrom." Our court, and courts everywhere, recognize this provision as permitting recovery for consequential damages within the contemplation of the parties when they entered into the contract, and such as might naturally be expected to result from its violation. Myers v. Bender (1913), 46 Mont. 497, 508, 129 P. 330, 333. These damages are the contemplated result of the breach.

We note, in addition, that all damages for breach of contract, whether natural or contemplated, require proof of causation, certainty and foreseeability. Ehly, 212 Mont. at 97, 687 P.2d at 695. Furthermore, damages must be reasonable. Section 27-1-302, MCA.

We have held previously that interest paid by a plaintiff to a third party as a result of a defendant's breach of contract is a proper element of damages. In Popp v. Gountanis (1986), 221 Mont. 267, 718 P.2d 340, Popp leased land from the defendant and planted and harvested crops on the land for several years. The defendant enrolled the land in a federal "payment in kind" (PIK) program and, without Popp's knowledge or permission, received the entire PIK payment. Popp sued for breach of the lease seeking, among other damages, the increased interest incurred as a result of his inability to pay off the balance of his loan covering his farming operations, which he intended to pay with the PIK payments. The District Court awarded such damages and this Court affirmed, stating:

The District Court found that Popp's inability to satisfy the loan balance of $32,694.92 was directly related to Frank and Gountanis' refusal to pay Popp his two-thirds share of the PIK benefits. Frank...