No. 12997 INTHE SUPREME COURT OF THE STATE OF MONTANA 1976

MORGEN & OSWOOD CONSTRUCTION CO, INC.

## ,A MONTANA CORPORATION, Plaintiff and Appellant,

BIG SKY OF MONTANA, INC

# .,a DELAIJARE CORPORATION, Defendant and Respondent.

Appeal from: District Court of the Eighteenth JudicialDistrict, Honorable

### W. Id. Lessley, Judge presiding. Counsel of Record: For Appellant: Jardine, Stephenson, Blewett & Weaver, Great Falls,

Montana Jack L. Lewis argued, Great Falls, Montana For Respondent

### : Landoe and Gary, Bozeman, Montana Joseph B. Gary argued and Stephen Barrett appeared,

Bozeman, Montana David J. Penwell, Gallatin Gateway, Montana

Submitted: September 

### 3, 1976 Decided:

## NRVZRISif; 

## 2:' 

# ;g$ Filed:

### ~r: Justice John Conway Harrison delivered the Opinion of the Court.

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 seventeenbuildings containing fiftycondominium units atBig Sky of Montana, Inc. (Big Sky) sitein the Gallatin Canyon, south of Bozeman. These were the first condominium units built atBig Sky and were builtwhen the areawas 

### stillrelatively 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 tobe allowed tobid. It was given the specificationsfor thejob 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. AtBig Sky's request analiternativebid was submitted on the project if therewould be an extra 46 days added to the completion time. Morgen & Oswood submitted an alternativebid $15,000 lower than the 114 day bid. This alternative bid was rejected by Big Sky. The contract was awarded toMorgen & Oswood and Big Sky allowed work on the project tobegin 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 districtcourt err in finding that January 3, 1972, .was the dateupon which toend the $500 per day deduction? 

### 3) Did the district court 

### err infinding therewas 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 toMorgen & Oswood?

I The firstquestion 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 tobe paid, or other compensation tobe made, for a breach of an obligation, 

### is determined inanticipation thereof, 

### is to that extent void, except as expressly provided inthe next section.'' "13-805. Exception. The parties to a contract may agree therein upon an amount which shallbe presumed tobe an amount of damage sustainedby a breach thereof, when, from thenature of the case, it would be impracticable or extremely difficult to fixthe actualdamage.'' The Montana cases interpreting these sections establish that a penalty clause 

### is prima facievoid and to come within the exception, factsmust be alleged and proven from which the court can say the liquidated damages clause 

### isvalid 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 thisburden. It presented evidence which indicated the $500 per day figurewas arrived atby estimating lost rent at $120 per day; interest on money borrowed tobuild the project at

### $440per day; and $60per day heating and light expense on the units. Big Sky also considered the harm to its sales effort if the units were not completed inOctober as promised. These estimates were at best guesses,based on some prior experience and knowledge of the project. The totalwas rounded to $500per day as a reasonable conservative estimate of the loss Big Sky would suffer if the project was late. Big Sky also offered evidencewhich indicated that the total damage sufferedby Big Sky exceeded the $500per 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 constructionand delivery of buildings or machinery, it is often provided that a fixed sum shallbe paid for each day's delay in completionbeyond 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 60California LawReview 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 upheldwhere there is an unexcused delay by the contractor: 'I*

# * * First,while the liquidation amountsmay not actually be bargained, the contractor can take this into accountwhen he makes his bid. Second,most construction contractors are not so unsophisticated as to merit specialprotection by the courts. Third, courts enforce these clauses as a means of saving themselves fromhaving 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 considerationwhen 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 whichmeets 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. 15Williston on Contracts, Third Edition Section 784,p. 730, it is said: "'(2) Themere 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 oftenwhen called a "penalty" it may be held to be liquidated damages, where the intention to the contrary is plain."' The Oklahoma Supreme Court inWaggoner v.Johnston (Okla.1965), 

### 408 P.2d 761, 769, when interpreting a contract in light of statutoryprovisions identical to section 13-804and 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 subjectmatter of the contract, the evident intent of the parties and all the facts and circumstances underwhich the contractwas made. Themost important facts to be consideredare 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 inBig 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 inUnited Statesv. Bethlehem Steel Co., 205 U.S. 105, 27 S.Ct. 450, 51L ed 731,737, the Court said thatwhile theword "penalty"

was used and not the term "liquidated damages" that: 

### "*

# ** It was used simply toprovide that the amount named might be deducted if therewere 

### a delay in delivery. Either expression 

### isnot always conclusive 

### as the meaning of the parties. 

# ** * "*

# ** It would have been very unusual toallow the company toobtain the contract for the construction of these.carriages, and yet toplace it under no liability to.fulfil it as to time of delivery, specially agreed upon, other than topay only those actual damages (not exceeding $35 per day) that might be proved were naturally and proximately caused by the failure to deliver." Here, the same statement applies. The completion time was plainly important and was the subject of bidding. Morgen & Oswood offered a $15,000 decrease in the contract price for an increase of 

### 46 days incontract time which amounts to over $300 per day. This was refused by Big Sky. It 

### is obvious that Morgen & Oswood should not get the higher contract price and atthe

same time be able toavoid the time limitwhich served as the consideration for the higher amount. The use of theword "penalty1' does not reflect careful draftmanshipbut it 

### isnot a talisman which prevents inquiry into the reality of the intent of the parties and the facts and circumstances surrounding the agreement. The $500 per day deduction was an amount stipulated as liquidated damages and meets the requirements of section 13-805, R.C.M. 1947. It 

### is a reasonable estimate of damages which were impracticable

or extremely difficult to fix. The remaining questions on appeal involve the determinations by the district court 1) January 

### 3, 1972was the proper date to end the deduction of the:liquidated damages; 2) Big Sky didnotcontribute substantially to the delay incompletion; and 3) the amount due was validly tendered by Big Sky on February 25, 1972. It 

### isnot a function of this Court tomake 

### its own determination as to the facts and the law, rather it reviews the findings of the districtcourt, The Court inHellickson v. BarrettMobile Home Transport, Inc., 161Mont. 455, 458, 507 P.2d 523, quoting from Hornung v. Estate of Lagerquist, 155Mont. 412, 420, 473 P.2d 541, pointed out: ".'Our duty inreviewing findings of fact in a civil

action triedby the district court without ajury 

### isconfined todetermining whether there 

### is substantial credible evidence to support them. I I1 The Court put it another way inKamp v. FirstNational Bank and Trust Co., 161Mont. 103, 106, 504 P.2d 987, quoting fromMorrison

v. City of Butte, 150Mont. 106, 112, 431 P.2d 79: '"This court 

### willnot overturn the holdings or findings of a trialcourt unless there 

### is a decided preponderance of the evidence against them, and, when the evidence furnishes reasonable grounds for different conclusions, findings

### willnot be disturbed

## .'"' Morgen & Oswood argues that some of the seventeenbuildings

were complete long before the date upon which the architect signed the certificate of finalcompletion. It alsopoints out that a certificate of substantialcompletion was signed on December 

### 11, 1971. We note the certificate of substantial completion was accompanied by an extensive punch 

### list of unfinished work and

even the finalcompletion certificatewas accompanied by a punch list of unfinished items. One important bit of evidence which supports the January completion date, 

### is the fact that Big Sky had as strong an interest ingetting the certificate of final completion as didMorgen & Oswood.

### The "Unit Ownership Act", Chapter 23,Title 67,

### R.C.M. 1947, as it provided at the time of the contract,required a statementby the architect or professional engineerwho prepared the floor plan, certifying the accuracy of the plans and the date constructionwas 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 therewere buyers who backed out when the completionwas not on time and those sales could have been made final, if the closings had been

on schedule. The architect testified therewas considerable pressure on him fromBig Sky to certify completion. Testifying about the certification that he signedhe said: 

# "**

# * Iwas 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. Penwellwas under pressure to close sales and the check listwas not being completed. So we initiated this agreement in January that would essentiallybe the final completion stillwith the check listwhich was an unorthodoxprocedure just so I could sign them and say theywere completed, 

### I could sign themwith 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. Itwas reasonable for the district court to use the January 3, 1972date as the end datE 

### for the liquidated damages. 60California Law Review 

### 84, 123,points out: "The second interpretationproblem 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 rulewhere the stipulated damages are high and the project is available for use."Here, the damages arehigh but the project was not ready for the use Big Sky intended, the saleof these units. There is

no showing that the evidence preponderates against this finding by the district court and it 

### is supported by substantial evidence. We find no preponderance of evidence against the district court's finding thatMorgen & Oswood failed toprove a substantial interference by Big Sky with the contractor's work and that Morgen & Oswood failed tomake application in compliance with the contract for extension of time. Morgen & Oswood argue that Haggerty 

### v. Selsco, 166 Mont. 492, 534 P.2d 

### 874, which held that delay caused by the owner constitutes a waiver of liquidated damages, applies in the instant case. We do not agree, because there 

### isno finding that Big Sky caused the delay here. It 

### is very difficult topinpoint with any certainty the reasons for the delay, but the inability to get labor, especially skilled labor, and the primative conditions atthejob sitewere 

### a part of the cause. These matters were the contractor's responsibility which had tobe taken into account atthe timethe bids were submitted. The district court's finding therewas 

### a valid tender 

### is supported by substantialevidence on the record. Negotiations between Big Sky and Morgen & Oswood broke down and Big Sky gave

a check toMorgen & Oswood for the balance due on the contract, less the liquidated damages. This check was refused and returned. The mechanic's lienwas filed and this suit instituted. The net amount due toMorgen & Oswood was paid with no strings attached. Since the liquidated damages clause 

### isvalid and the check was for the net amount due after the deduction of the liquidated damages, the lienwas improperly filed.We have examined other issues raised and find no merit in them. The decision of the district court 

### is affirmed. 

# \ &4,5,&/+G, 

# &

,?,&/
' Justice /

We Concur:

Chief Justice

Justices. \ 

# CDJ&& J-Go,d! Jack Shanstrom, District dge, sitting for Justice 

# Fly.