No. 81-265 

IN THE SUPREME COURT OF THE STATE OF MONTANA 

SHELDON CHANDLER and MARILYN 

CHANDLER, husband and wife, 

Plaintiffs land Respondents, 

ROBERT H. MADSEN, 

Defendant and Appellant. 

Appeal from: District Court of the Thirteenth Judicial District, 

In and for the County of Yellowstone 

Honorable Robert Wilson, Judge presiding. 

Counsel of Record: 

For Appellant: 

Hibbs, Sweeney, Colberg, Jensen and Koessler, 

Billings, Montana 

Maurice Colberg argued, Billings, Montana 

For Respondents: 

Crowley, Haughey, Hanson, Toole & Dietrich, Billings, 

Montana 

Bruce Toole argued, Billings, Montana 

Submitted: December 4, 1981 

Decided: nRp 15 @tl 

Filed. MAR 1 5 7982 
Mr. Justice John Conway Harrison delivered the Opinion of 

the Court. 

'This appeal arises from a complaint by Sheldon and 

Marilyn Chandler, husband and wife, against Robert Yladsen, 

seeking damages for negligence, breach of implied warranty 

of habitability and strict liability in tort. 

In April 1977, respondents, the Chandlers, entered 

into a buy-sell agreement with the appellant, Madsen, to 

purchase a house, built by him, at 3203 Silverwood Street 

near Billings, Montana. The agreed purchase price was 

$90,280, which was paid when the building was transferred. 

At the time of this agreement, the framework on the house 

was in place, but the building was not completed. 

Madsen, a civil engineer working for the United 

States Government, had constructed a number of buildings for 

sale on his own, including single family residences. 

In the summer and fall of 1977, the Chandlers completed the final. landscaping of the lot and installed a 

swimming pool and sprinkling system. 

In June 1977, the Chandlers moved into the house and 

immediately experienced problems with doors and windows 

sticking and locks failing to operate. The Chandlers 

noticed cracks in the bedroom walls and a hump in the living 

room floor which was above a supporting partition in the 

basement. Through his employees, Madsen made adjustments to 

the doors, but they continued to stick. 

By May 1978, additional settling had caused severe 

cracks in most rooms of the house, bending and bulging of 

the floors, broken windows, inoperative doors and door 

locks, bowed decorative room dividers, bent plumbing, badly 

cracked basement walls and floors, separation between fire- 
place masonry and the house structure, cracked bathroom 

tiles, separation between bathtubs and walls, uneven 

basement floors and general unsightly interior of the house. 

The settlement developed so that parts of the foundation on 

the west side of the house were as much as 3.6 inches lower 

than the foundation on the east side. 

A depression extends along the north end of the lot 

in question in an east-west direction. The depression 

collects water periodically and has done so since before 

the Chandlers took possession of the house. Former nextdoor neighbors of the Chandler house testified via deposition that they had to refrain from watering their lawn to 

prevent "ponding" in the depression both during and after 

construction of the Chandler house and that water collected 

periodically in the depression before any landscaping was 

done. According to the landscaper, Jim Sturn, the only 

change in grade he made near the north end of the lot was 

the removal of some earth near the deck, which would have 

tended to improve drainage out of the depression. 

Piadsen testified he created a depression extending 

east and west to collect water and constructed a swale on 

the east side of the house to drain the area. The depression Madsen created was such that it would be difficult to 

observe with the naked eye. He did not use any survey 

instrument or transit to determine if in fact the area would 

drain, nor did he inform the Chandlers they should proceed 

to create drainage. 

The house is located on moisture-sensitive soil 

which, when wet, becomes compressible. The presence of 

water in the soil caused settling of the footings, founda- 
tions, and other parts of the house which in turn caused the 

extensive damage to the structure. 

Testimony showed an estimated cost of repairing the 

house was $65,000. This estimate was calculated on a cost 

plus overhead basis with a 12% contingency allowance for 

certain portions of the work. Further testimony revealed, 

however, that a firm price contract for the repair would 

cost 50% more than the estimate, or $97,500, considering the 

contingencies of the work. The repairs would require the 

Chandlers to move out of their home for three to four 

months. 

The case was heard by the District Court sitting 

without a jury. On January 15, 1981, the District Court 

issued findings of fact and conclusions of law holding 

Madsen liable to the Chandlers on the theories of implied 

warranty and negligence and awarding damages of $107,462.51. 

Following post-trial motions the District Court amended its 

order on February 26, 1981, deleting the finding of negligence and reducing the damage award to $99,975.00. The 

reduction deleted $4,000 previously awarded for temporary 

rental and $3,487.51 previously awarded for moving and 

storage. From this order, both parties appeal. 

The issues before this Court are: 

1. Whether appellant, as a builder-vendor of a 

residence which he sold to respondents, may be held liable 

to respondents under the doctrine of implied warranty of 

habitability? 

2. Whether the District Court erred in not allowing 

appellant to recover the amount claimed on his counterclaim? 

3. Whether the District Court erred in deleting its 
finding that the appellant's negligence was the proximate 

cause of respondents' damages? 

4. Whether appellant is liable unJer the doctrine of 

strict liability in tort? 

5. Whether the District Court erred in the award of 

damages? 

IMPLIED WARRANTY OF HABITABILITY 

The question of the liability of a builder-vendor of 

a new residence to the first purchaser under an implied 

warranty of habitability is one of first impression before 

this Court. 

Caveat emptor, which traditionally has applied to 

sal.es of real estate, developed at a time when a buyer and 

seller were in equal bargaining positions. They were of 

comparable skill and knowledge and eacn could protect 

himself in a transaction. 

In the modern marketplace that equality of position 

no longer necessarily exists, and a growing number of jurisdictions have abandoned caveat emptor in favor of implied 

warranties where a builder-vendor sells a new residence. 

Yepsen v. Burgess (1974), 269 Or. 635, 525 P.2d 1019; 

Pollard v. Saxe & Yoll- Development Co. (1974), 115 =. 

Cal.Rptr. 648, 12 Cal.3d 374, 525 P.2d 88; Hanavan v. Dye 

(1972), 4 Ill.App.3d 576, 281 N.E.2d 398; Bethlahmy v. 

Bechtel (1966), 91 Idaho 55, 415 P.2d 698; Carpenter v. 

Donohoe (1964), 154 Colo. 78, 388 P.2d 399. 

We agree with the Oregon Supreme Court which stated 

in Yepsen that the essence of the transaction between a 

builder-vendor and a buyer is an implicit agreement that the 
seller will transfer a house which is suitable for habitation. The buyer is not in an equal bargaining position and 

is essentially forced to rely on the seller's skill and 

knowledge regarding the habitability of the house. In 

addition, the builder is in a better position to examine and 

discover defects. Yepsen v. Burgess, 525 P.2d at 1022. 

The doctrine of caveat emptor no longer serves the 

realities of the marketplace. Therefore, we hold that the 

builder-vendor of a new home impliedly warrants that the 

residence is constructed in a workmanlike manner and is 

suitable for habitation. 

Madsen argues that even if the implied warranty of 

habitability is adopted, it should not apply in this case 

because the defect which caused the damage here is not 

structural but rather is inherent in the land. 

In this claim, Madsen relies primarily on Beri, Inc. 

v. Salishan Properties, Inc. (1978), 282 Or. 569, 580 P.2d 

173, where the plaintiffs leased buildings constructed by 

the defendant on oceanfront lots which subsequently began 

eroding. The Oregon court found an implied warranty did not 

apply because the defect--susceptibility to erosion--had 

solely to do with the inherent nature of the land and was 

not a product of the builder's work on the land. 

In Beri, supra, the land in question was on the 

oceanfront where the prospect of erosion should have been, 

if not certain, at least equally as apparent to buyerlessees as to seller-lessors. In addition, the Beri opinion 

gives no indication that the erosion was furthered by 

anything other than the natural action of the ocean. 

That is not so in the present case. Here, the 
District Court found the cause of settling damage to the 

Chandler house was the presence of water in the moisturesensitive soil upon which the house was built. The fact of 

the moisture-sensitive soil was not the sole defect. The 

"pooling" of water at the north end of the house was also 

part of the defective condition. The District Court also 

found that, if water collected at the north end of the 

house, it did so before any landscaping by the Chandlers and 

was not caused by the Chandlers. 

A basic concern in applying the implied warranty is 

whether the defect relates essentially to useful occupancy 

of the house. Mazurek v. Nielsen (1979), 42 Colo.App. 386, 

599 P.2d 269; Yepsen, supra. Sometimes a defect is essential to occupancy but is not strictly structural. See: 

Yepsen, supra (defect involved improper construction of 

septic tank and drainfield); Tavares v. Horstman (Wyo. 

1975), 542 P.2d 1275 (septic drainfield installed in gumbo 

clay so it would not drain); Forbes v. Mercado (1978), 283 

Or. 291, 583 P.2d 552 (well water unusable because of high 

iron content). 

Madsen argues he had no reason to suspect there was a 

moisture-sensitive soil which would cause settling. But that 

is not the issue. The concept here is not one of fault or 

wrong-doing but, rather, where one of two innocent parties 

will suffer, which was in the better position to prevent the 

harm? 

Whether or not there was reason for Madsen to suspect 

the problem, as the builder-vendor he clearly was in the 

better position to prevent the problem. We, therefore, 

affirm the District Court regarding Madsen's liability under 
the implied warranty. 

COUNTERCLAIM 

Madsen counterclaimed for $637 which the Chandlers 

agree remained unpaid for specific "extras" completed by 

Madsen. 'The District Court concluded that Madsen was not 

entitled to the counterclaim because of failure of 

consideration. Madsen argues this conclusion was incorrect 

because the defense of failure of consideration was not 

alleged by the Chandlers as an affirmative defense or raised 

in their pretrial order and because there is no evidence 

that Madsen did not perform the work for those extras. 

Failure of consideration is an affirmative defense 

which must be pleaa affirmatively. Rule 8(c), M.R.Civ.P. 

If an affirmative defense is not plead, it is generally 

waived. Camalier & Buckley-Madison, Inc. v. Madison Hotel, 

Inc. (D.C. Cir. 1975), 513 F.2d 407. The key to determining 

the sufficiency of the pleading of an affirmative defense is 

whether it gives fair notice of the defense. Wyshak v. City 

National Bank (9th Cir. 1979), 607 F.2d 824. 

Here, the Chandlers did not specify their reliance on 

failure of consideration as a defense to Madsen's counterclaim either in the pleadings or their pretrial memorandum. 

Sheldon Chandler testified at trial that among the items 

purchased for the house in addition to those included in the 

purchase price were "extras" from Madsen. Chandler also 

testified that he had paid Madsen $1,500 and still owed 

$637. The evidence does not specify what "extras" were 

involved nor does it establish that those "extras" were not 

supplied. 
We find the Chandlers' failure to plead failure of 

consideration here was fatal to that defense, and the 

District Court's conclusion is unsupported by the evidence. 

NEGLIGENCE 

In its original findings of fact and conclusions of 

law the District Court found that Madsen had a responsibility of providing drainage around the house to prevent 

damage to the house and that Madsen negligently failed to do 

so. Further, the District Court found Pladsen's negligence 

caused or contributed to cause the water to enter the 

subsoil and the house to settle. 

The amended findings and conclusions stated the 

Chandlers failed to carry their burden of proof that 

Madsen's negligence was the proximate cause of the damage. 

The Chandlers argue that given the District Court's finding 

that the most probable cause of the damage to the house was 

water under the footings, the only explanation is Pladsen's 

conduct. 

On review, the standard we must apply is whether the 

District Court's conclusion is supported by substantial 

credible evidence and the law. If so, this Court will not 

disturb it. Woodahl v. Matthews (1982), - Mont. -, - 

P. 2d , 39 St.Rep. 238; Lauterjung v. Johnson (1977), 175 

Mont. 74, 572 P.2d 511. 

Although our weighing of the facts might have 

resulted in a different conclusion, we find the District 

Court ' s findings and conclusions regarding negligence are 

supported by substantial evidence that the Chandlers failed 

to prove Madsen's negligence. 
STRICT LIABILITY 

Since we have determined liability here on the theory 

of implied warranty, we find it unnecessary to discuss the 

strict liability doctrine. 

DANAGES 

Macisen claims the District Court's finding of the 

cost of repairs at $97,500 is punitive, speculative and 

unsupported by the evidence. He relies heavily in his claim 

on Spackman v. Ralph M. Parsons Co. (1966), 147 Mont. 500, 

414 P.2d 918, in which the plaintiff sought damages 

resulting from sewage flooding to personal and real 

property. Madsen argues that Spackman forges a strict rule 

of law in Montana that the measure of damages is the cost of 

repair if the cost is less than the diminution in value of 

property but in no case will the recovery exceed the value 

of the property before injury. 

Spackman does not set this principle out, however, as 

a hard-and-fast rule but, rather, as a guide to common 

sense: 

"Where damage to property is concerned, the 

purpose of awarding damages is to return the 

party injured to the same, or as nearly as 

possible the same, condition as he enjoyed 

before the injury to his property . . . 

"Ingenious men have propounded ingenious 

methods, systems and formulas for determining 

in monetary terms the value of property partially damaged or destroyed. hhile such 

methods serve as useful guides, the final 

answer must rest in good sense rather than 

mechanical application of such formulas." 

Spackman, 147Mont. at 506, 414 P.2d at 

921-922. 

In Bos v. Dolajak (1975), 167 Mont. 1, 534 P.2d 1258, 

this Court recognized that the Spackman rule cannot always 
clearly be applied. In - Bos the defendants contracted with 

plaintiffs to erect for $6,500 a grain silo which plaintiffs 

had purchased secondhand but which was the equivalent of a 

new silo. Defendants secured the raised silo with fewer 

jacks than required by the construction manual and allowed 

the silo to twist so it could not readily be lowered. 

During the process, a windstorm threw the silo off its 

foundation and virtually destroyed it. 

At trial plaintiffs presented damages totaling 

$25,274.61: $15,342.61 was the cost of replacing the silo 

and $9,932 cost from loss of use. The jury awarded 

$17,626.75. 

This Court approved the determination of damages and 

noted that the Spackman rule dealt with readily replaceable 

items with an established market value. vJhere an item was 

not readily replaceable, did not have an established market 

value, and was integral to a larger operation such as the 

plaintiffs' dairy farm, this Court held that other 

considerations were appropriate including compensation for 

loss of use. 

In the case before us, Claude Gerbase, a Billings 

contractor, testified that repair of the Chandler house 

would require drying out the subsoil, cutting the house 

loose from its foundation and bringing it to a level grade. 

Once the house was made level and secure, additional 

cosmetic and structural repairs would be required incl uding 

replacement of sheetrock. 

Gerbase testified his estimated cost of repair of the 

house was $65,000, which included a 12 percent contingency 

factor. He further testified that because of the 
complicated and uncertain nature of the job he would charge 

$91,500 to enter into a fixed price contract for the 

repairs. The District Court awarded damages of $97,500. 

Madsen argues the finding is punitive and contrary to 

law in part because the house was originally sold for less 

than the damage award. We disagree. 

Madsen also claims that if he is liable for any 

damages the proper amount is $65,000 which was Gerbase's 

repair estimate. Madsen argues the $97,500 is speculative 

in that it was quoted by Gerbase as his fixed contract price 

only to guarantee he would lose no money on the job. We 

disagree. 

An estimate, by its very nature, is speculative, 

particularly where, as here, the job is complicated and 

subject to revision as it progresses. It would be of 

questionable value to the Chandlers to receive $65,000 for 

repairs only to discover, once into the project, the cost 

would be significantly more. Given the nature of the damage 

to the Chandler home and the repairs required, we affirm the 

District Court's award for repairs. 

The Chandlers argue that the District Court erred 

when it deleted the costs of temporary rental and moving and 

storage from the damage award. 

The initial question in resolving this issue is 

whether a breach of an implied warranty arises out of a 

contract obligation or some other obligation. That determination will establish what damages are available as a 

result of breach. Sections 27-1-311 and 27-1-317, MCA. 

In Ferguson v. Town Pump, Inc. (1978), 177 Mont. 122, 

580 P.2d 915, this Court found an oral contract for 
construction of gasoline station to carry with it an implied 

term that the work would be performed in a reasonably 

skillful and workmanlike manner. It also found that a 

negligent failure to perform according to the implied term 

resulted in a breach of contract as well as a tort. 177 

Mont. at 131, 580 P.2d at 920. 

Although here we do not have the negligence component 

which sustained the tort theory in Ferguson, we do have a 

breach of an implied term of the contract. Madsen's breach 

of implied warranty is a breach of contract and subject to 

the provisions of section 27-1-311, IJICA. That provision 

sets the measure of damages for breach of an obligation 

arising from a contract as "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." 

It is apparent that the necessity of moving from a 

residence undergoing irlassive repairs and of renting a 

temporary residence is likely to result from major damage to 

a structure. We, therefore, find that costs for moving and 

storage and temporary rental were improperly deleted from 

the damage award. 

Marilyn Chandler testified she had obtained estimates 

from a Billings real estate office that a suitable temporary 

rental for the Chandlers would cost between $600 and $1,000 

per month. She testified that she also had obtained an 

estimate of $3,487.51 for moving the Chandlers' furniture. 

In addition, Gerbase testified the Chandlers would be 

required to move from their house for three to four months 

during repairs. 
Since the testimony establishes a $400-per-month 

disparity in rental figures, an award of the middle figure 

appears appropriate. Therefore, we award the Chandlers 

$3,200 ($800 per month for four months) for temporary rental 

and reinstate the award of $3,487.51 for moving and storage. 

The Chandlers also argue the District Court erred in 

failing to grant damages for emotional distress. Since we 

have found no liability for negligence or strict 1-iability, 

such damages need not be considered here. 

SURPRISE 

Madsen requests that a new trial be granted on the 

damage issue on the grounds he has been surprised under 

sections 25-11-102(3) and 25-11-103, MCA. This request is 

based on the affidavit of Madsen's attorney, which states 

that an extensive discussion with Claude Gerbase, had in 

lieu of deposition on December 6, 1980, indicated Gerbase's 

estimate for cost of repair would be $65,000. On December 

9, 1980, at the request of Madsen's attorney, Gerbase submitted a detailed breakdown of the estimate. Subsequently, 

according to the a£ f idavit, Madsen's attorney contacted 

another contractor who examined the documentary and videotaped evidence and concluded his estimate would not be 

significantly less than $65,000. 

The Chandlers argue the claim of surprise is 

unfounded. In support of their position, the Chandlers 

refer to a letter of October 29, 1.980, from their attorney 

to Madsen's attorney which stated: "Another item to take 

into account is that the Gerbase estimate is only that. It 

is not an agreement to restore the house. The Chandlers are 
entitled to have their house restored and if a contractor 

requires an additional sum of money for contingencies, such 

as he would regularly charge in the course of his trade, 

then we will want to add that on." 

In addition, Claude Gerbase, by affidavit, stated 

that according to his recollection of the December 6, 1980, 

meeting with the attorneys for both parties, he told all 

those present that he would not enter into a firm contract 

for the amount of his estimate. 

Surprise has only once been accepted as the basis for 

granting a new trial in Montana. Porter v. Industrial 

Printing Co. (1901), 26 Mont. 170, 66 P. 839, modified, 67 

P. 67. The Court found such surprise where the trial court 

had granted default against the plaintiff for failure to 

reply to the defendant's counterclaim. At trial the defendant presented no proof in support of its counterclaim. The 

Court later declared only three of the counterclaims stated 

causes of action and entered judgment for the plaintiff. 

This Court found surprise which "ordinary prudence could not 

have guarded against." Porter, 26 Mont. 182, 66 P. at 841. 

We do not have such a situation here. iv"e find there 

was sufficient reference to the fact a fixed-price contract 

would be different than the estimate and would be relied on 

by the Chandlers to preclude surprise. 

This case is remanded to the District Court with 

instructions to amend its judgment in accordance with this 

opinion. 
We concur: 

Chief Justice 
Mr. Justice John C. Sheehy, concurring specially: 

I agree with the result here. I affirm the damages 

award of $97,500 for repair of the house because we are bound 

by the appellate rule that the findings of a district court 

may not be set aside unless clearly erroneous. Rule 52(a), 

M.R.Civ.P. A finding is "clearly erroneous" when, although 

there is evidence to support it, the reviewing court on the 

entire evidence is left with the definite and firm conviction 

that a mistake has been committed. United States v. Gypsum 

Co. (1948), 333 U.S. 364, 394-395, 68 S.Ct. 525, 92 L.Ed. 746. 

I am pursuaded on this point by the evidence of the contractor 

that he would not enter into a firm contract for repair at the 

figure of $67,500. The burden of proof on the plaintiffs was 

by a preponderance of the evidence. The Gerbase evidence, 

being credible, is substantial and therefore it overcomes the 

"clearly erroneous" rule. See Western Cottonoil Co. v. Hodges 

(5th Cir. 1954), 218 F.2d 158. 

4; ,,L?hkiL7 

Justice