No. 84-247 

IN THE SUPREME COURT OF THE STATE OF MONTANA 

1985 

ALAN D. NICHOLSON, 

Plaintiff and Respondent, 

-vsUNITED PACIFIC INSURANCE COMPANY, 

Defendant and Appellant. 

APPEAL FROM: District Court of the First Judicial District, 

In and for the County of Lewis & Clark, 

The Honorable Henry Loble, Judge presiding. 

COUNSEL OF RECORD: 

For Appellant: 

George T. Bennett; John R. Kline argued, Helena, 

Monta.na. 

For Respondent: 

Luxan & Murfitt; Gary Davis argued & Terry Cosgrove 

argued, Helena, Montana 

Filed: 

Submitted: June 18, 1985 

Decided: December 17, 1985 

DEC 1 1 1985 

--- <:-& +*--. 

Clerk 
Mr. Justice L. C. Gulbrandson delivered the Opinion of the 

Court. 

The defendant, United Pacific Insurance Company (UPI) 

appeals from a. judgment entered upon a jury verdict, and the 

subsequent denial of its motion for a judgment 

notwithstanding the verdict, in the District Court of the 

First Judicial District, Lewis and Clark County. 

Nicholson, the plaintiff, instituted suit against UP1 

following a notice of default. He alleged several causes of 

action, including breach of contract, negligent 

misrepresentation, and fraud and deceit. He requested 

specj-fic performance, compensatory damages and an a.ward of 

punitive damages for breach of the implied covenant of good 

faith and fair dealing. UP1 answered and counterclaimed 

alleging breach of contract, fraud in the inducement and 

breach of the implied covenant of good faith and fair 

dealing. We affirm the judgment and the denial of UPI's 

motion for a judgment notwithstanding the verdict . 

UPI, a Washington ba.sed insurance company, has a branch 

office in Helena, Montana. Although subsequently renewed, 

UPI's lea.se on its space was due to expire September 30, 

1982. UP1 desired to locate new and larger office space in. 

Helena. 

Nicholson owns a building in downtown Helena called the 

New York Block. He also owns two construction companies, 

Nicholson, Inc. and Alan D. Nicholson, Inc. One of 

Nicholson's construction companies did the construction work 

in the New York Block. 

In late 1980 or early 1981, Nicholson learned of UPI's 

desire for new office space. He contacted Jess Starns, the 

Helena branch manager, and suggested UP1 consider locating in 

the New York Block. James Heath, facilities vice-president 
for UPI, came to Helena in July 1981 and toured the space 

offered by Nicholson. Thereafter, Nicholson wrote a series of 

letters to Starns and Heath encouraging UP1 to rent space in 

the New York Block. Along with the letters, Nicholson 

forwarded various draft proposals for both the New York Block 

and the surrounding downtown mall area. Additionally, 

Nicholson represented to UP1 that he would remodel the New 

York Block to UPI1s specifications at his own cost. 

In January 1982 both parties executed a letter of 

intent to enter a lease. Nicholson then proposed and 

circulated a draft lease. After negotiations, the parties 

both signed the lease by April 14, 1982. Two key conditions 

of the lease agreement were the requirement that Nicholson 

confer with UP1 about the renovation of the New York Block 

space and that the final plans were subject to mutualapproval. 

While work progressed, disputes arose between Nicholson 

and UP1 over the renovation project. These disputes revolved 

around interpretation of the renovation plans and about 

aspects of the project that had not been included within 

them. Nicholson and his architect were constantly in contact 

with the UP1 planner in Seattle, Washington and the company 

architect in New York City. 

On July 29, 1982, John Heath visited Helena. At this 

time he told Nicholson that UP1 had never approved the 

construction plans. After the Heath visit, more problems 

arose. In addition to the problems with interpreting the 

construction plans, Nicholson and UP1 began noting difficulty 

in dealing with each other. Nicholson had increasing trouble 

in communicating with the appropriate authorities within the 

UP1 corporate structure to gain approval of his proposals. 

In August, Nicholson called the UP1 architect directly in New 
York City and discovered that he was out of the office until 

August 25, three days before the project was to have been 

completed. On August 24 Nicholson sent his final revised 

plans to UPI. On August 27 Nicholson received a letter from 

UP1 rescinding the lease. The letter alleged Nicholson's 

latest architectural drawings were incomplete and. lacking in 

proper specification and detail, that the circumstances had 

changed materially and that the New York Block area was 

blighted. 

UP1 concluded: 

Our investment in time and money 

continues to be greater than yours; 

therefore, from a business standpoint we 

have no choice but to rescind our lease. 

We will cease further activity on this 

project . 

Up to this point Nicholson had expended $91,783 in remodeling 

costs. Nicholson then attempted to contact the president of 

UPI. Failing that, Nicholson sent UP1 a notice of default on 

September 10, 1982 and then filed a complaint. 

During discovery it became apparent that, at the time 

the events surrounding this action occurred, a "secret" UP1 

task force had made several recommendations about 

reorganizing the company. Most pertinent to this ca.se was 

the recommendation that many of the functions and employees 

of the Helena office be transferred to Salt Lake City, Utah. 

Thus, UP1 would have no need for the expanded office space in 

the New York Block. Nichol-son argued that when UP1 realized 

this, it became intransigent and threw obstacles in his path 

to cause him to breach the lease agreement. Nicholson also 

argued that UPI's concern with alleged "urban blight" in the 

downtown area had never been made known to him until he 

received word of rescission. In response to UPI's 

allegations that he did not meet all of the specifications of 
the architectural plans, he contended that he had difficulty 

in communicating and gaining approval for any final 

decisions; that UP1 was intransigent on several aspects of 

the project which were merely being held as "bargaining 

chips;" and that, as with any renovation of an old building 

such as the New York Block, unforeseen difficulties arose. 

Based on all of this, Nicholson alleged UP1 rescinded the 

lease without justification and thus, in addition to being 

liable for breach of contract, should he held liable for 

exemplary damages for a breach of the implied covenant of 

good faith and fair dealing. 

In its answer and counter-suit UP1 alleged Nicholson 

fraudulently misrepresented the conditions existing in both 

the New York Block and the downtown area and failed to 

fulfill the requirements called for in the architectural 

plans incorporated in the lease agreement. UP1 contended 

Nicholson did this because he was in financial trouble and 

could not perform his contractual duties. Thus, UP1 alleged, 

Nicholson began to "cut corners" thereby breaching the 

agreement. Further, UP1 alleged Nicholson began to use items 

not specifically mentioned in the lease agreement or 

architectural plans as a tactic to bargain against the more 

costly aspects of the remodeling project. Finally, UP1 

attempted to portray Nicholson's work as shoddy. 

The case went to trial on February 21, 1984. At the 

end of plaintiff's case UP1 moved for a directed verdict and 

renewed this motion at the close of the evidence. The court 

denied UPI's motions and submitted the case to the jury. The 

jury returned a verdict in favor of Nicholson, assessing 

compensatory damages of $211,105 and exemplary damages of 

$225,000 against UPI. UP1 then filed a motion for judgment 
notwithstanding the verdict or, in the alternative, for a new 

trial. 

Hearings were held on UPI's motion, on Nicholson's 

motion for interest to be assessed at 18% and his request for 

attorney's fees and costs. On May 4, 1984, the District 

Court entered an order denying UPl's motion for a judgment 

notwithstanding the verdict and new trial, setting the 

judgment interest rate at lo%, a-warding Nicholson attorney's 

fees of $75,000 to bear interest at 10% and awarding him 

$858.70 of the requested $20,000 for costs. The District 

Court entered final judgment on May 23, 1984. On that same 

day, UP1 filed notice of appeal and on May 24, 1984, 

Nicholson filed a notice of cross-appeal. 

Appellant raises the following issues: 

(1) Whether UP1 was entitled to a directed verdict. 

(2) Whether there was any basis in law for the jury's 

award of punitive damages. 

(3) Whether the compensatory damages awarded to 

Nicholson were excessive as a matter of law. 

(4) Whether Nicholson was entitled to an award of 

attorney's fees. 

Nicholson presents the following issue on cross-appeal: 

(1) Whether the District Court erred in setting the 

pre- and post-judgment interest rate at 10% and erred in its 

award of costs. 

UP1 characterizes the lease agreement as an executory, 

unilateral contract and argues that since Nicholson failed to 

perform, judgment should be granted to UP1 as a matter of 

law, citing Rogers v. Relyea (1979), 184 Mont. 1, 601 P.2d 

37. Further, it claims Nicholson did not prove that UP1 

wrongfully prevented his performance, thus, McFarland v. 

Welch (1913), 48 Mont. 196, 136 P. 391, mandates a verdict j.n 
UPI's favor. In response, Nicholson argues the agreement 

required concurrent performance by UP1 and he presented 

substantial evidence it wrongfully failed to do so. 

considering motions for directed verdict its 

procedural successor, a judgment notwithstanding the verdict, 

the District Court must view the evidence in a light most 

favorable to the plaintiff. MacDonald v. Protestant 

Episcopal Church (1967), 150 Mont. 332, 435 P.2d 369. If a 

prima facie case is made out, the motion should be denied. 

Motions made pursuant to Rule 50(b), M.R.Civ.P., cannot he 

granted if there is substantial conflict in th.e evidence. 

Like any form of directed verdict, it rests on a finding that 

the case of the party against whom it is directed is 

unsupported in some necessary particular. Jacques v. Montana 

Nat. Guard (1982), 199 Mont. 493, 649 P.2d 1319; Yetter v. 

Kennedy (1977), 175 Mont. 1, 571 P.2d 1152. 

UP1 interprets the contract too narrowly. Rather tha.n 

simply calling for Nicholson to provide possession and 

adequate plans, the lease set up a bilateral obligation on 

UP1 to -- work with Nicholson in designing and approving the 

remodeling plans. Thus, Rogers, 184 Mont. 1, 601 P.2d 37, 

which considers unilateral or "dependent" contract 

obligations, does not apply. 

Section 4.01 of the lease specifies as follows: 

Landlord agrees, at its sole cost and 

expense, to make the space ready for 

occupancy by the Tenant to the Tenant's 

normal specifications for leased space as 

indicated on the Tenant's final plans 

which plans will be mutually approved by 

the Tenant and Landlord before work 

commences on the space. 

The work to be done by the Landlord, at 

it [sic] sole cost and expense, to make 

the space ready for occupancy will 

include the cost of architectural 

construction and layout and furniture 

arrangement documents mutually acceptable 
to Landlord and Tenant . . . If Tenant 

requests changes, Landlord's time to 

complete the premises will be 

appropriately extendbed. (Emphasis 

added. ) 

This language imposed on UP1 an obligation to deal with 

Nicholson. In any satisfaction-type contract there is an 

obligation to act reasonably if withholding approval. Taking 

UPI's argument to its logical conclusion points to its 

weakness. Even assuming that Nicholson, in the middle of 

July, had forwarded to IJPI remodeling plans that were 

adequate, would UP1 still be able to avoid its obligation by 

refusing to approve them? No. The lease agreement put the 

parties into a situation where both had independent 

obligations to perform by dealing reasonably with the other 

over the precise details of the remodeling. The obligation 

each assumed in this regard was the obligation to 

co-operate--that co-operation was a condition to the other's 

performance. Therefore, we hold that the District Court 

properly denied UPI's motions for a directed verdict. 

In the second issue, UP1 argues punitive damages were 

not available to Nicholson as a matter of law. It bases this 

argument on the absence of any Montana cases imposing an 

obligation of good faith and fair dealing independent of a 

contract where the parties are in substantially equal 

bargaining power. This issue contains two separate parts. 

First, whether the implied convenant of good faith and fair 

dealing applies to the case at bar. Second, assuming the 

implied covenant applies and was breached by UPI, whether 

punitive damages are available. 

Both Nicholson and UP1 requested instructions on the 

implied covenant of good faith and fair dealing. Montana has 

long adhered to the rule that an instruction given without 

objection becomes the "law of the case." See e.g., Melzner 
v. Chicago, Milwaukee & St. P. Ry. Co. (1915) , 51 Mont. 487, 

153 P. 1019, and Bolstad v. Groskurth (1961), 139 Mont. 64, 

360 P.2d 101. UP1 did not object to the instructions on the 

implied covenant and, further, the District Court gave one of 

the instructions offered by UPI. However, in order to 

properly address the question of whether a basis for punitive 

damages exists, we must discuss whether the implied covenant 

of good faith and fair dealing applies in this case and 

whether the covenant was breached. 

In First Security Bank of Bozeman v. Goddard (1979), 

181 Mont. 407, 593 P.2d 1040, we observed that the "special 

considerations" giving rise to the implied covenant in 

consumer insurance contra.cts "do not apply to an ord.inary 

contract between businessmen." 181 Mont at 419, 593 P.2d at 

1047, quoting Battista v. Lebanon Trotting Associati.on (6th 

Cir. 1976), 538 F.2d 111, 117-118. ~uch has happened to 

Montana case law on this issue since Goddard and Battista. 

See, Graham and Luck, The Continuing Development --- of the Tort 

-- of Bad Faith - in Montana, 45 Mont.L.Rev. 43 (1984) and Harman, 

- An Insurer's Liability ----- for the Tort of Bad Faith, 42 

M0nt.L. Rev. 67 (1981) . Here, the District Court interpreted 

our recent cases as implying the covenant of good faith and 

fair dealing into the contract between Nicholson and UP1 and 

allowed Nicholson to recover for the correlative tort. The 

District Court may have been motivated by the fact that both 

parties originall-y alleged the other to have acted in breach 

of the implied covenant and the case went to the jury on 

instructions from both parties. 

We recognize the call of commentators and attorneys 

alike for this Court to address the uncertainty this new area 

of law has engendered. We observe though, that uncertainty 

is characteristic of any new area of law in our common law 
system. Nonetheless, the time is appropriate to more fully 

articulate our conception of what has been termed loosely as 

"bad faith," but is termed more accurately as the tort of 

breach of the implied covenant of good faith and fair 

dealing. 

In Montana, we have not expressly extended this tort to 

all contract breaches. In Reiter v. Yellowstone Co. (Mont. 

1981), 627 P.2d 845, 38 St.F.ep. 686, this Court began the 

process of implying the covenant in some contracts. There, 

we found "some basis for implying covenants of good faith in 

contracts," Reiter, 627 P.2d at 849, citing S 28-1-201, MCA, 

but went no further. Thereafter, we began finding the 

covenant present in a variety of contractual situations, 

characterized by aspects of adhesion or inequity. In Owens 

v. Parker Drilling Co. (Mont. 1984), 676 P.2d 162, 41 St.Rep. 

66; and Goddard, 181 Mont. 407, 593 P.2d 1040, this Court 

found these aspects indicated in the particular contra-ctual 

relationship by the fact that the legislature had enacted 

laws setting forth a specific duty on the part of one of the 

parties to redress the inequities of the situation. In 

Owens, 676 P.2d 162, the employer allegedly violated 

49-4-101 and -102, MCA, prohibiting an employer from 

discharging an employee solely because he was handicapped. In 

Goddard, 593 P.2d at 1047, the insurer violated the specific 

statutory duty in S 33-21-105, MCA, to settle valid cia-ims 

promptly. 

The covenant of good faith and fair dealing has been 

implied in situations where there is no specific statutory 

duty, but where similar indicia of adhesion or inequality is 

present. In Weber v. Blue Cross of Montana (1982), 196 Mont. 

454, 464, 643 P.2d 198, 203, this Court ruled: 
Blue Cross has an obligation to act in 

good faith with its members. This is 

especj-ally true beca.use Blue Cross is in 

a -much better bargaining position than 

those applying for membership in its 

program. (Emphasis added.) 

On this basis, a legal obligation of good faith and fair 

dealing also has been extended to employers dealing with 

employees in Gates v. Life of Montana (Mont. 19831, 668 P.2d 

213, 40 St.Rep. 1287, and Dare v. Montana Petroleum Marketing 

Company (Mont. 1984), 687 P.2d 1015, 41 St.Rep. 1735; to fee 

arrangements between a lawyer and his client, Morse v. 

Espeland (Mont. 1985), 696 P.2d 428, 42 St.Rep. 251; and to 

banks dealing with customers, First National Bank of Libby v. 

Twombly (Mont. 1984), 689 P.2d 1226, 41 St.R.ep. 1948 and 

Tribby v. Northwestern Bank of Great Falls (Mont. 1985) , 704 

P.2d 409, 42 St.Rep. 1133. 

California law implies a covenant of good faith and 

fair dealing into every contract, commercial, insurance, 

employment, or otherwise. Cohen v. Ratinoff (1983), 147 

Cal.App.3d. 321, 195 Cal.Rptr. 84, citing McWilliams v. 

Holton (1976), 248 Cal.App. 447, 451. Recently, in Seaman's 

Direct Buying Service, Inc. v. Standard Oil Co. (Cal. 1984), 

686 P.2d 1158, the California court reaffirmed this, stating 

"the proposition that the law implies a covenant of good 

faith and fair dealing in all contracts is well established." 

686 P.2d at 1166. In Seaman's, the California Supreme Court 

considered whether and under what circumstances the plaintiff 

could recover in tort for the breach of an arms-length 

contract. Seaman's involved a marine fuel dealer who wished 

to lease re-developed wharf space from the city of Eureka, 

California. After negotiations with Standard Oil, the 

parties ultimately signed a letter agreement in which 

Standard promised a ten-year oil supply "subject to our 
mutual agreement on the specific wording of contracts to be 

drawn . . . " 686 P.2d at 1161. On that basis Seaman 

obtained a forty-year lease. One year later Standard 

notified the dealer that it would not proceed with the 

agreement because of market conditions and other factors. 

When pressed, Standard took the position that no contract had 

ever been si-gned. The California Supreme Court invented a 

new tort and held that a defendant would be subject to tort 

remedies when, in addition to breaching the contract, it 

sought to shield itself from liability by denying in bad 

faith and without probable cause, that a contract exists or 

ever existed. The Seaman's court carefully limited the scope 

of the new tort to egregious situations. The California 

Court of Appeals, in Quigley v. Pet, Inc. (1984), 162 

Cal.App.3d 223, 208 Cal.Rptr. 394, explained this new tort as 

"depending upon a special kind of impermissible 

activity . . . " 208 Cal.Rptr. at 402. 

While we decline to extend the breach of implied 

covenant to all contract breaches as a matter of law, as 

California has done, we agree with the statement in Quigley, 

supra, that the tort resulting from its breach depends on 

some impermissible activity. The Montana cases discussed 

above focus on the action of the breaching party in the 

relationship to find a breach of the implied covenant, not 

just the existence of a breach of contract. 

At this point a helpful distinction should be noted 

between an intentional breach or one motivated by 

self-interest, giving rise to only contract damages, and the 

action which would give rise to a breach of the implied 

covenant, resulting in tort damages. Historically, a party 

to a contract generally had the right to breach and pay 

damages rather than perform. The non-breaching party, 
theoretically, is "made v~hole" from the damages paid 

following the breach and thus still receives benefits from 

the agreement. 

Contract law is based in part upon the 

assumption that certain intentional 

breaches are to be encouraged. 

Permitting parties to breach their 

contracts promotes an efficient economy, 

at least when the gains from the breach 

exceed the expected pecuniary injuries of 

the promisee. 

Diamond, ---- The Tort of Bad Faith Breach 7 of Contract: - When, - If 

-- At All, Should 7- 

It Be Extended Beyond Insurance Transactions, 

64 Marquette Law Review 425, 453 (1981). But whether 

performing or breaching, each party has a justifiable 

expectation that the other will act as a reasonable person. 

Neal v. Farmers Ins. Exchange (Cal. 1978), 582 P.2d 980. The 

nature and extent of an implied covenant of good faith and 

fair dealing is measured in a particular contract by the 

justifiable expectations of the parties. Where one party 

acts arbitrarily, capriciously or unreasonably, that conduct 

exceeds the justifiable expectations of the second party. 

The second party then should be compensated for damages 

resulting from the other's culpable conduct. 

In the case at bar, the jury awarded Nicholson both 

compen.satory and punitive damages as a result of UPI's 

conduct. Section 27-1-221, MCA (1983), in effect at the time 

of trial, provided : 

In any action for a breach of an 

obligation not arising from contract 

where the defendant has been guilty of 

oppression, fraud, or malice, actual or 

presumed, the jury, in addition to the 

actual damages, may give damages for the 

sake of example and by way of punishing 

the defendant. 

As discussed above, the implied covenant of good faith and 

fair dealing is not an obligation arising from a contract. 

In order for punitive damages to be awarded in a tort action 
for a breach of this covenant, the breach must amount to 

oppression, fraud or malice, as stated in the statute. 

Another concern in this issue is whether substantial 

evidence supported the jury's verdict on punitive damages. 

Substantial evidence is relevant evidence which a reasonable 

person could accept as adequate to support a conclusion. 

See, e.g., Harmon v. Deaconess Hospital (Mont. 1981), 623 

P.2d 1372, 38 St.Rep. 65. The District Court, in reviewing 

UPI's motion for judgment notwithstanding the verdict and new 

trial, noted that the parties produced contradictory evidence 

on every substantive fact issue. It also noted: 

At the time the plaintiff (a very 

credible witness) was testifying, at the 

end of his direct, there might have been 

some doubt as to whether he had presented. 

enough facts to justify the awarding of 

exemplary damages. However, after 

intensive and searching cross examination 

of plaintiff, he amplified and enhanced 

his testimony on punitive damages to such 

a degree that there was no doubt that an 

award of such was justified if the jury 

chose so to do. 

We hold the jury had adequate evidence on which to find the 

culpable conduct necessary for an award of punitive damages. 

The jury received instructions discussing malice and 

fraud, several of which were submitted by UPI. UP1 objected 

to an instruction offered by Nicholson which stated. in part: 

Punitive damages may be awarded for 

recklessness, for reckless conduct, for 

willful or wanton misconduct, willful 

disregard of duty, or willful or wanton 

disregard of the rights of others. In 

Montana, the above and foregoing conduct 

may amount to presumed malice which has 

been defined as follows: 

"When a person knows or has reason to 

know of facts which create a high degree 

of risk of harm to the substantial 

interests of another, and either 

deliberately proceeds to act in conscious 

disregard of or indifference to that 

risk, or recklessly proceeds in 

unreasonable disregard of or indifference 

to that risk, his conduct meets the 
standard of willful, wanton, and/or 

reckless to which the law of this State 

will allow imposition of punitive damages 

on the basis of presumed malice." 

This instruction apparently was drawn from Owens v. Parker 

Drilling Co. (Mont. 1984), 676 P.2d 162, 41 St.Rep. 66, where 

this Court adopted a standard for presumed malice expressing 

a "level of conduct . . . so culpable as to warrant an award 

of punitive damages." Owens, 676 P.2d at 164, 41 St.Rep. at 

69. The instructions as a whole given by the court required 

the jury to find egregious conduct before awarding punitive 

damages. We find no error in the giving of this instruction 

under these circumstances. 

The third issue asks whether Nicholson received 

excessive compensatory damages. The jury returned a verdict 

on Nicholson's claim for breach of the lease agreement for 

$211,105. The instruct?ons included requests for $115,572 

for the value of the lease and for $95,533 for remodeling 

expenses and finance charges on those expenses. UP1 argues 

that Nicholson received a double recovery because the verdict 

awarded him both the full lease value, and the remodeling 

expenses he had incurred prior to the breach. This, UP1 

contends, is in violation of 5 27-1-303, MCA, which requires 

that : 

No person can recover a greater amount in 

damages for the breach of an obligation 

than he could have gained by the full 

performance thereof on both sides unless 

a greater recovery is specified by 

statute. 

They also argue that renovation costs are not recoverable as 

special damages for breach of an agreement to enter a lease. 

H.S. & D. Investment Co. v. McCool (Or. 1932), 9 P.2d 809 and 

Brodsky v. Allen Hayosh Industries (Mich. 1965), 137 N.W.2d 

771. Nicholson responds that the jury received proper 
instructions, that the evidence produced at trial supports 

the verdict and that UP1 waived any objection. 

The jury was properly instructed on the amount and type 

of damages it could award. The court gave a general contract 

damages instruction pursuant to § 27-1-311, MCA, followed by 

instructions relating to Nicholson's duty to mitigate the 

damages by attempting to re-lease the premises. Finally, the 

jury was instructed that: 

If you find that Plaintiff made 

alterations in the property to adapt it 

to the special use of the Defendant, and 

that as renovated for Defendant the 

property is not suitable for other 

tenants, then Plaintiff may recover the 

expense of renovation as special damages 

for breach of contract. 

This special damage instruction is adequate in light of 

Purington v. Sound West (1977), 173 Mont. 106, 111, 566 P.2d 

795, 798, where we explained that "special damages are the 

natural but not necessary result of the wrong or breach." 

The District Court, in denying UPI's motion on this 

point observed: 

Defendant claims that the compensatory 

damages were excessive and there was a 

double recovery. There were two 

principal witnesses on this question, 

plaintiff and expert fee appraiser Bob 

White. The jury accepted their 

testimony, as they had a right to 

do. . . Defendant claims: "There was 

absolutely no testimony that any of the 

features of the office space were unique 

to the defendant United Pacific." . . . From this defendant argues that there was 

a double recovery, once for the 

remodeling, and again for the rental. 

However, there was a quantity of 

testimony by plaintiff and by White that 

there was very little, if any, chance of 

leasing this space to any other tenant 

and that the remodeling which had been 

done would have to be torn out and a 

complete new renovation performed for any 

new tenant. Indeed, the testimony was 

that it would be very difficult to get a 

new tenant but that if one was obtained, 

that the renovation would have to be 

completely different and the premises 
rebuilt to meet that new tenant's 

individual taste. Thus the jury could 

have believed that the plaintiff derived 

no benefit whatever from the remodeling 

which he did and which cost him, 

according to his testimony, in excess of 

$90,000.00. 

PITicholson did not receive double recovery under the 

jury verdict. His expectancy, when entering into the lease 

agreement was two-fold. First, he would have the rent 

payments for the term of the lease. Secondly, he would have, 

at the end of that term, a finished office space and for that 

reason would be in a position of comparative advantage 

vis-a-vis any competition for the next lease UP1 would enter 

into. This second expectancy was also damaged by UPI's 

breach. 

We do not rely on the na.rrow rule articulated in 

H. S. & D. Investment, 9 P.2d 809 and Brodsky, 137 N.W.2d. 

771, for two reasons. First, those cases are factually 

distinguishable from the case at bar. In those decisions, 

within 5% and 20 months respectively, new tenants were found 

for the premises at the same rent the defaulting lessees had 

agreed to pay. In H. S. & D. Investment, 9 P.2d at 811, the 

lessor did not request as special damages the costs of 

renovating the premises for the lessee prior to the breach, 

as Nicholson did here. Rather, the lessee requested, and the 

Oregon court held, that the defaulting lessee was not 

responsible for the remodeling costs incurred after the 

breach. In Brodsky, 137 N.W.2d 771, the lessor was not 

required to make any special renovations of the premises for 

the lessee. Here, prior to entering into the lease 

a.greement, UP1 requested, and had a great deal of control 

over, a very specific renovation for its particular purposes. 

Second, to hold, under Brodsky, supra, that renovation costs 

are not recoverable would work an injustice and fly in the 
face of strong evidence of injury. We choose to follow the 

more fundamental rule that damages are designed to make the 

injured party whole and to compensate for the injury caused 

by the breach. Agrilease Inc. v. Gray (1977), 173 Mont. 151, 

566 P.2d 1114; Bos v. Dolajak (1975), 167 Mont. 1, 534 P.2d 

1258. 

UP1 argues that since the District Court erred in not 

directing a verdict in its favor, it consequently erred in 

awarding attorney's fees, as provided for in the agreement, 

to Nicholson. Since we ruled above that the District Court 

did not err, UP1 cannot prevail with this argument. UP1 

makes no other allegation that the award of attorney's fees 

is not supported by the evidence or is otherwise flawed, so 

the award stands. 

In the last issue, Nicholson alleges error because the 

District Court set the judgment interest rate at 10% rather 

than the requested 18% and awarded him only $858.70 of the 

requested $20,000 in costs. Nicholson points to Section 

18.09 of the lease agreement which provides that UP1 was to 

indemnify him for finance costs of the construction at a rate 

of 18%. Nicholson argues that this same rate should apply to 

all liabilities under the lease, and cites several cases 

holding that interest rates set in a contract should also 

apply to any pre- and post-judgment liabilities. For 

example, in Pacific States Corporation v. Hall (9th Cir. 

1948), 166 F.2d 668, the plaintiff brought suit on a 

promissory note which was due within five years after the 

date "with interest from date until paid at the rate of seven 

per cent per annum, payable quarterly, in advance." 166 F.2d 

at 672. The court enforced the note as written stating 

"where, as here, there is an express provision requiring a 

certain rate of interest until the principal is paid, the 
contract must be so enforced." (Citations omitted.) 166 

F.2d at 672. The other cases cited by Nicholson are to the 

sa.me effect. Nicholson contends that the court abrogated the 

parties' agreement in setting the interest rate at the lower 

figure. 

An interest rate contained in one relatively minor and 

discrete part of the contract should not be an umbrella over 

the entire obligation. It is contrary to the parties' 

legitimate expectations. The lease agreement was otherwise 

complete in almost every detail. If the parties intended 

Section 18.09 to apply to - all obligations arising from the 

agreement including breach, they could easily have so stated. 

Pacific States, 166 F.2d 668, is not controlling because it 

dealt with a simple obligation, a promissory note. The 

judgment in that case was directly on the note. Here, we 

have damages for breach of contract and, in addition, 

attorney's fees and other costs beyond the contract amount. 

The District Court reasoned that these damages were not 

amounts due under the contract for lease and thus not matters 

envisioned by the parties. We hold that the District Court 

correctly applied the statutory rate of interest provided for 

in § 25-9-205(2), MCA, to the judgment rendered in this case. 

Following the judgment, Nicholson made an application, 

pursuant to $$ 25-10-501, MCA, for statutory costs and 

requested the court award him "expenses and disbursements" 

pursuant to Section 14.03 of the lease. The court awarded 

only the costs recoverable by statute. He elected to claim 

his costs through a cost bill, and the court correctly 

limited him to statutory costs. Nicholson cites authority 

for the proposition that the parties to a contract may agree 

to a recovery of expenses greater than provided by statute. 

Although that is a correct statement of law, see, e.g., 
Leaseamerica Corp. of Wis. v. State (Mont. 1981), 625 P.2d 

68, 38 St.Rep. 398; and Bovee v. Helland (1916), 52 Mont. 

151, 156 P. 416, it does not address the issue presented by 

the District Court's order. We hold that the District Court 

correctly awarded costs. 

The judgment entered on the verdict and the denial of 

the motion for judgment notwithstanding the verdict are 

affirmed. 

t 

We concur: /' 

Mr. Justice John C. Sheehy, specially con.curring. 

I concur with the above opinion of Mr. Justice 

Gulbrandson, especially its result. I have some different 

conceptions of the source and legal effect of the implied 

covenant of good faith and fair dealing in contracts, which I 

will express when necessary. The majority opinion here 

serves well the case before us, and gives direction to courts 

and lawyers in this developing field. 

L.- %aice 

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