### No. 81-265 INTHE SUPREMECOURTOF THESTATEOF MONTANA

SHELDON CHANDLER andMARILYN CHANDLER,husband andwife, PlaintiffslandRespondents,

ROBERTH. MADSEN, Defendantand Appellant.

Appeal from: District Courtof theThirteenth Judicial District, Inand for the CountyofYellowstone Honorable RobertWilson, Judgepresiding. CounselofRecord: ForAppellant: Hibbs, Sweeney, Colberg, Jensenand Koessler,

Billings, Montana Maurice Colberg argued, Billings,Montana ForRespondents: Crowley, Haughey, Hanson,Toole & 

### Dietrich, Billings,

Montana BruceTooleargued, Billings,Montana

Submitted: December 4,

### 1981 Decided: nRp

### 15

### @tl 

## MAR1 

# 57982 Filed.Mr. Justice John Conway Harrison delivered the Opinion 

### of theCourt. '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 strictliabilityin 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 inplace, but thebuilding was not completed. Madsen, a civil engineer working for the United StatesGovernment, had constructed a number of buildings for saleon hisown, 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 inthe bedroom walls and a hump inthe living

room floor which was above a supporting partition in the basement. Through hisemployees, Madsen made adjustmentsto 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 floorsand general unsightly interiorof thehouse. The settlement developed so that parts of the foundation on thewest

### sideof the house were asmuch as3.6 

### inches lower than the foundation on the

### eastside. 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 toimprove drainageoutof thedepression. Piadsen testified he created a depression extending east and west 

### to collect water and constructed a swale on the east side of the house todrain the 

### area. The depressionMadsen created was such that it 

### would be difficult to observe with the naked eye. He 

### did not use any survey instrument or transit todetermine if infactthe areawould drain, nor did he 

### inform the Chandlers they should proceed tocreatedrainage. 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 partsof thehouse which inturn 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 thisorder, both partiesappeal. The issuesbefore thisCourt 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 hiscounterclaim? 3. Whether the DistrictCourt 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. Caveatemptor, 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), 154Colo. 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 abuyer is an implicit agreement that theseller 

### 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, thebuilder 

### is in a better position toexamine and discover defects. Yepsen v. Burgess, 525 P.2d at1022. The doctrine of caveatemptor 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 structuralbut rather 

### is inherent inthe land. In thisclaim, Madsen reliesprimarily 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 thebuilder'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 astoseller-lessors. In addition, theBeri opinion gives no indication that the erosion was furthered by anything other than the natural actionof the ocean. That 

### is not so in the present case. Here, theDistrict Court found the cause of settling damage to the Chandler house was the presence of water in the moisturesensitive soilupon 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 sobefore any landscaping by theChandlers 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 (septicdrainfield 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 ironcontent). Madsen argues he had no reason tosuspect therewas a moisture-sensitive soilwhich 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 willsuffer, which was inthebetter position toprevent the harm? Whether or not therewas reason for Madsen tosuspect the problem, as the builder-vendor he clearly was in the better position to prevent the problem. We, therefore, affirm theDistrictCourt regardingMadsen's liabilityunderthe 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 thatMadsen did notperform thework 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), 513F.2d 407. The key todetermining the sufficiencyof thepleading of an affirmativedefense

### is whether 

### it gives fair notice of the defense. Wyshak v. City National Bank (9thCir. 1979),607 F.2d 824. Here, the Chandlersdidnot specifytheir relianceon failure of consideration as a defense to Madsen's counterclaim either in the pleadings or their pretrialmemorandum. Sheldon Chandler testified at trial that among the 

### items purchased for the house in addition tothose included inthe 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 DistrictCourt'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 thatMadsen negligently failedtodo so. Further, the 

### District Court found Pladsen's negligence caused or contributed to cause the water to enter the subsoil and the house tosettle. 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 themost probable cause of the damage tothe 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 toprove Madsen's negligence.

### STRICT LIABILITY 

### Since

### we have determined liabilityhereon the theory of implied warranty, we find 

### it unnecessary to discuss the strictliabilitydoctrine.

DANAGESMacisen claims the District Court's finding of the cost of repairs at $97,500 

### is punitive, speculative and unsupported by the evidence. He 

### reliesheavily inhisclaim

on Spackman 

### v. Ralph M. 

### Parsons Co. (1966), 147Mont. 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 inMontana that themeasure of damages 

### is the costof repair if the cost 

### is less than the diminution in value of property but in no case 

### will the recovery exceed the value of theproperty before injury. Spackman doesnot setthisprincipleout, 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 toreturn the party injured to the same, or as nearly as possible the same, condition as he enjoyed before the injurytohisproperty

# . .. "Ingenious men have propounded ingenious methods, systems and formulas for determining inmonetary 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. InBos v. Dolajak (1975),167Mont. 1,

### 534 P.2d 1258, this Court recognized that the Spackman rule cannot alwaysclearly be applied. In 

# - Bos the defendants contracted with plaintiffs toerect for $6,500 a grain silowhich 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 establishedmarket 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 lossof 

### 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 toa level grade. Once the house was made level and secure, additional cosmetic and structural repairs would be required including replacement of sheetrock. Gerbase testified hisestimated costof repair of the house was $65,000, which included a 12 percent contingency factor. He further testified that because of thecomplicated and uncertain nature of thejob he would charge $91,500 to enter into a fixed price contract for the repairs. The DistrictCourt awarded damages of $97,500. Madsen argues the finding 

### ispunitive 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 ashis fixed contractprice 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 significantlymore. Given the nature of thedamage tothe Chandler home and the repairsrequired, 

### we affirm the District Court's award for repairs. The Chandlers argue that the District Court erred when 

### it deleted the costsof temporary rental and moving and storagefrom thedamage 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 resultof breach. Sections27-1-311 and 27-1-317, MCA. InFerguson v. Town Pump, Inc. (1978), 177Mont. 122, 580 P.2d 915, this Court found an oral contract for

### construction of gasoline stationtocarrywith 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 at920. Although here

### we do not have thenegligence 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 "theamount which willcompensate the party aggrieved for all the detriment which was proximately caused thereby or in the ordinary course of things would be likely toresult therefrom." It 

### is apparent that the necessity of moving from a residence undergoing irlassive repairs and of 

### renting a temporary residence 

### is likelytoresult 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 shehad obtained estimates from a Billings real estateoffice that a suitabletemporary 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 tomove 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 ($800per month for four months) for temporary rental and reinstatethe 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, suchdamages need notbe 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£fidavit, Madsen's attorney contacted another contractor who examined the documentary and videotaped evidence and concluded his estimate would not be significantlylessthan $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 intoaccount 

### 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 willwant toadd that on." In addition, Claude Gerbase, by affidavit, stated that according to his recollectionof 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 hisestimate. Surprisehas onlyonce been accepted asthebasis 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 defendantpresented no proof insupportof 

### itscounterclaim. The Court later declared only three of the counterclaims stated

causes of action and entered judgment for the plaintiff. ThisCourt found surprisewhich "ordinaryprudence could not have guarded against." Porter, 26 Mont. 182, 66 P. at841. We 

### do not have such a situation here. iv"e

### find there

was sufficient reference tothe fact a fixed-price contract would be different than the estimate and would be relied on 

### by theChandlers topreclude surprise. This case 

### is remanded to the District Court with instructions to amend 

### its judgment in accordance with this 

### opinion.We 

### concur:

Chief JusticeMr. JusticeJohn C. Sheehy, concurring specially:

I agreewiththeresulthere. I affirmthedamages award of $97,500 forrepairof thehouse because

### we arebound by the appellaterulethatthefindingsof 

### a districtcourt may notbe 

### setasideunlessclearlyerroneous. Rule 52(a), M.R.Civ.P. A finding

### is "clearlyerroneous"when, although there

### isevidence

### to support

### it,thereviewing courton the entireevidence

### isleftwith the definiteand firmconviction thata mistakehasbeen committed. United Statesv. Gypsum Co. (1948),333U.S. 364, 394-395, 68 S.Ct. 525, 92 

### L.Ed. 746. I am pursuaded on thispointby theevidence of thecontractor thathewould notenterintoa firmcontract forrepairatthe figureof $67,500. The burden of proof on theplaintiffswas by a preponderance of theevidence. The Gerbase evidence, beingcredible, 

### issubstantialand therefore 

### itovercomes the "clearlyerroneous"rule. SeeWesternCottonoilCo. 

### v. Hodges (5thCir. 1954),218 F.2d 158. 

# 4; ,,L?hkiL7 Justice