Morgen & Oswood Const. Co., Inc. v. Big Sky of Montana, Inc., 12997

• Decision Date: 13 January 1977
• Docket Number: No. 12997,12997
• Parties: MORGEN & OSWOOD CONSTRUCTION CO., INC., a Montana Corporation, Plaintiff and Appellant, v. BIG SKY OF MONTANA, INC., a Delaware Corporation, Defendant and Respondent.
• Court: Montana Supreme Court

Page 1017

557 P.2d 1017

171 Mont. 268

MORGEN & OSWOOD CONSTRUCTION CO., INC., a Montana

Corporation, Plaintiff and Appellant, v. BIG SKY OF MONTANA, INC., a Delaware Corporation, Defendant

and Respondent.

No. 12997.

Supreme Court of Montana.

Submitted Sept. 3, 1976.

Decided Nov. 29, 1976.

Rehearing Denied Jan. 13, 1977.

Jardine, Stephenson, Blewett & Weaver, Jack L. Lewis argued, Great Falls, for appellant.

Landoe & Gary, Bozeman, Joseph B. Gary argued and Stephen Barrett appeared, Bozeman, David J. Penwell, Gallatin Gateway, for respondent.

JOHN C. HARRISON, Justice.

This is an appeal from a judgment of the district court, Gallatin County, for defendant in an action to foreclose on a mechanic's lien.

Plaintiff Morgen & Oswood Construction Co., Inc. (.morgen & Oswood) brought this action to foreclose a mechanic's lien on seventeen buildings containing fifty condominium units at Big Sky of Montana, Inc. (Big Sky) site in the Gallatin Canyon, south of Bozeman. These were the first condominium units built at Big Sky and were built when the area was still relatively primitive.

Big Sky sought bids on the project from several contractors but did not request a bid from Morgen & Oswood. Morgen & Oswood approached Big Sky asking to be allowed to bid. It was given the specifications for the job and informed the time allowed for the completion of the project would be 114 days, which meant the schedule was tight. The specifications contained a clause exacting a $500 per day deduction for each day the project was late. At Big Sky's request an alternative bid was submitted on the project if there would be an extra 46 days added to the completion time. Morgen & Oswood submitted an alternative bid $15,000 lower than the 114 day bid. This alternative bid was rejected by Big Sky.

The contract was awarded to Morgen & Oswood and Big Sky allowed work on the project to begin twelve days before the date called for in the contract, without starting the 114 day clock running.

The questions presented for review are:

1) Was the $500 per day deduction a penalty violative of section 13-804, R.C.M.1947?

2) Did the district court err in finding that January 3, 1972, was the date upon which to end the $500 per day deduction?

3) Did the district court err in finding there was no proof that Big Sky contributed substantially to the delay in the completion of the project?

4) Did the district court err in finding that Big Sky made a valid tender of the money due to Morgen & Oswood?

The first question involves construction of sections 13-804 and 13-805, R.C.M.1947 which provide:

'13-804. Contracts fixing damages void. 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 the next section.'

'13-805. Exception. The parties to a contract may agree therein upon an amount which shall be presumed to be an amount of damage susbtained by a breach thereof, when, from the nature of the case, it would be impracticable or extremely difficult to fix the actual damage.'

The Montana cases interpreting these sections establish that a penalty clause is prima facie void and to come within the exception, facts must be alleged and proven from which the court can say the liquidated damages clause is valid because the damages are by the nature of the case extremely difficult or impracticable to fix. Deuninck v. West Gallatin Irrigation Company, 28 Mont. 255, 72 P. 618; Clifton v. Willson, 47 Mont. 305, 132 P. 424.

Big Sky met this burden. It presented evidence which indicated the $500 per day figure was arrived at by estimating lost rent at $120 per day; interest on money borrowed to build the project at $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, § 1072, 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 days 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. * * *'

In 60 California Law Review 84, 122, Professor Justin Sweet discusses the California case law interpreting §§ 1670, 1971, California Civil Code, identical to sections 13-804, 13-805, R.C.M.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 actually be bargained, the contractor can take this into account when he makes tis 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 and of itself determinative. At 5 Williston on Contracts, Third Edition Section 784, p. 730, it is said:

"(2) The mere denomination of the sum to be paid 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 (Okl.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 States Supreme Court faced a similar problem in United States v. Bethlehem Steel Co., 205 U.S. 105, 120, 27 S.Ct. 450, 455, 456, 51 L.Ed. 731, 737, the Court said that while the word 'penalty' was used and not the term ...