No. 12997 

IN THE 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 

DELAIJAR E CORPORATION, 

Defendant and Respondent. 

Appeal from: District Court of the Eighteenth Judicial District, 

Honorable W. Id. Lessley, Judge presiding. 

Counsel of Record: 

For Appellant : 

Jardine, Stephenson, Blewett & Weaver, Great Falls, 

Mon ta na 

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 : NRVZ R ISif; 

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 

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 

specificationsfor 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 aliternative 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? I 

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 sustained 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, 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: 

'I* * * First, while the liquidation amounts may not 

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: 

"'(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 (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 States Supreme Court faced a similar problem 

in United States v. Bethlehem Steel Co., 205 U.S. 105, 27 S.Ct. 

450, 51 L ed 731,737, the Court said that while the word "penalty" 

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

"* * * It was used simply to provide that the amount 

named might be deducted if there were a delay in 

delivery. Either expression is not always conclusive as 

the meaning of the parties. * * * 

"* * * It would have been very unusual to allow the 

company to obtain the contract for the construction 

of these.carriages, and yet to place it under no liability to. fulfil it as to time of delivery, specially 

agreed upon, other than to pay 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 in contract 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 at the 

same time be able to avoid the time limit which served as the 

consideration for the higher amount. The use of the word "penalty1' 

does not reflect careful draftmanship but it is not 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, 1972 was the proper date to 

end the deduction of the:liquidated damages; 2) Big Sky did not 
contribute substantially to the delay in completion; and 3) 

the amount due was validly tendered by Big Sky on February 25, 

1972. It is not a function of this Court to make its own determination as to the facts and the law, rather it reviews the 

findings of the district court, The Court in Hellickson v. 

Barrett Mobile Home Transport, Inc., 161 Mont. 455, 458, 507 

P.2d 523, quoting from Hornung v. Estate of Lagerquist, 155 Mont. 

412, 420, 473 P.2d 541, pointed out: 

".'Our duty in reviewing findings of fact in a civil 

action tried by the district court without a jury 

is confined to determining whether there is substantial 

credible evidence to support them. I I1 

The Court put it another way in Kamp v. First National Bank and 

Trust Co., 161 Mont. 103, 106, 504 P.2d 987, quoting from Morrison 

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

'"This court will not overturn the holdings or findings 

of a trial court unless there is a decided preponderance 

of the evidence against them, and, when the evidence 

furnishes reasonable grounds for different conclusions, 

findings will not be disturbed .'"' 

Morgen & Oswood argues that some of the seventeen buildings 

were complete long before the date upon which the architect signed 

the certificate of final completion. It also points out that a 

certificate of substantial completion 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 final completion certificate was 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 in getting the certificate of final 

completion as did 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, the damages are high but the project was not ready for 

the use Big Sky intended, the sale of 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 that Morgen & Oswood failed to prove a substantial 

interference by Big Sky with the contractor's work and that 

Morgen & Oswood failed to make 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 is no finding that Big Sky caused the delay here. It is 

very difficult to pinpoint with any certainty the reasons for 

the delay, but the inability to get labor, especially skilled 

labor, and the primative conditions at the job site were a part 

of the cause. These matters were the contractor's responsibility 

which had to be taken into account at the time the bids were 

submitted. 

The district court's finding there was a valid tender is 

supported by substantial evidence on the record. Negotiations 

between Big Sky and Morgen & Oswood broke down and Big Sky gave 

a check to Morgen & Oswood for the balance due on the contract, 

less the liquidated damages. This check was refused and returned. 

The mechanic's lien was filed and this suit instituted. The net 

amount due to Morgen & Oswood was paid with no strings attached. 

Since the liquidated damages clause is valid and the check was 

for the net amount due after the deduction of the liquidated 

damages, the lien was 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 Fly. dge, sitting for Justice