NO. 91-466 IN THE SUPREME COURT OF THE STATE OF MONTANA 1992

CAROL FARRIS

### , Plaintiff and Appellant,

JOHN M. HUTCHINSON, individually and in the capacity of COMMISSIONER OF HIGHER EDUCATION, MONTANA, BOARD OF REGENTS OF HIGHER EDUCATION, Defendants and Respondents.

APPEAL FROM: District Court of the First Judicial District, In and for the County of Lewis and Clark, The Honorable Thomas C. Honzel, Judge presiding.

COUNSEL OF RECORD: For Appellant: Peter Michael Meloy argued, The Meloy Law Firm, Helena, Montana For Respondents: LeRoy 

### H. Schramm argued, Montana University System, Helena, MontanaJustice R. C. McDonough delivered the Opinion of the Court.

This is an appeal from an order and entry of judgment of the First Judicial District Court,Lewis and Clark County, granting a motion to dismiss in favor of John M. Hutchinson and the Commissioner of Higher Education. We affirm. We decide the following issues on appeal: 1. Did theDistrictCourt err indismissing Farris'scause of action for breach of the implied covenant of good faith and fair dealing; 2. Did the District Court err in dismissing the wrongful discharge claim and the claim under the Wrongful Discharge from Employment Act of 1987; and 3. Did the District Court err in finding appellant had no entitlement to property under a written contract for a specified term when the contract is not renewed at the expiration of the term? On April 10, 1989, Carol Farris was hired as a gender equity coordinatorby theCommissioner ofHigherEducation fora federally mandated affirmative action program for the vocational technical education system inMontana. Farris alleged inher complaint that she received objective manifestations of job security when shewas hired. Specifically, she contends that she was told the position was permanent, even though it was governed by a yearly term contract. Farris quit her job in Great Falls, sold her home and moved to Helena for the position. Throughout the course of her employment, Farris signed three 2ttproEessionalemployment contractsttprepared by the Montana University System. The contractswere term contracts, lasting one year. Thecontractsprovided fornon-renewalwith adequatenotice. The last contract was effective between July 1, 1990 and June 30, 1991. Pursuant to the contract, on February 5, 1991, the Commissioner notified Farris that her contract would not be renewed. 

### No reason was provided for the non-renewal, nor was one required under the termsof the contract. Farris filed a complaint against the Commissioner of Higher Education and the Board of Regents. TheDistrict Courtgranted defendants' motion todismiss. This appeal followed. In considering a Rule 12 (b) (6) motion to dismiss, the allegations must be viewed in a light most favorable to the plaintiff, admitting and acceptingas true all factswell-pleaded. Devoev. Missoula County (1987),226Mont. 372, 374, 735 P.2d 1115, 1116; United States Nat'l Bank of Red Lodge 

### v. DOR (1977), 175 Mont. 205, 207, 573 P.2d 188, 190. Further, a court should not dismiss a complaint for failing to state a claim unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his or her claim which would entitle him or her to relief. Proto v. Missoula County (1988), 230 Mont, 351, 353, 749 P.2d 1094, 1095, quoting Conley v. Gibson (1957), 355U.S. 41, 45- 46, 78 S.Ct. 99, 102, 2 L.Ed.2d 80, 84;Marshall v. State (1992), Mont. 

## , 830 P.2d 1250, 49 St.Rep. 336. I Did the District Court err in dismissing Farris's cause ofaction 

### for breach 

### of the implied 

### covenant 

### of good faith 

### and fair dealing? It first should be noted Farris has not pled an action for fraud and does not comply with Rule 9(b) of the Montana Rules of Civil Procedure. TheDistrict 

### Court relying onNordlund 

### v. School District No. 14 (l987), 227 Mont. 402, 738 P.2d 1299, found that because the Commissioner did not breach the employment contract, there could be

### no breach of the implied covenant. Nordlund at 406, 738 P.2d at 1302. This characterization is 

### not exactly correct. Under Story

### v. City of Bozeman (lggo), 242Mont. 436, 791 P.2d 767,

a breach of the underlying contract is not a prerequisite 

### to a breach 

### of the implied covenant of good faith and fair dealing. Farrisarguesthat 

### if shecan showobjective manifestations of job security beyond the term contract,shemaymaintain abreach of the implied covenant of good faithand fairdealing. Farris relies

on Dare v. Montana Petroleum Marketing (1984),212 Mont. 274, 282, 687 P.2d 1015, 1020, 

### for the proposition that an employerfs objective manifestationsgive

### the employeea 

### reasonablebelief that he or she has job security. Farris argues that Dare should apply to employment relationships not covered under the Wrongful Discharge From Employment Act (Act). Farris also 

### argues that because the Commissioner viewed the contract as exempt from the Act, he was able 

### to terminate her "at will, 

### and for this reason she is 

### an at will employee. Dare involved

### an atwill employeewith nowritten contractwho

was terminated 

### fromher job. Theposition 

### sheheld was not coveredby an employment handbook, Weheld that an employment handbookwas not essential in a cause of action for breach of the implied covenant of good faith and fair dealing in an at will employment relationship. Pare at 283, 687 P.2d at 1020. Dare 

### was decided in 1984 prior to the enactment of the Wrongful Discharge From Employment Act of 1987. Farrisessentiallyargues that Dare stands fortheproposition that a violation of an employment handbook is not essential to maintaining an action forbreach of the implied covenant in an at will situation. Therefore, even though the Commissioner did not breach his own employment regulations (which in Farris's reasoning 

### is likened tohaving no employment handbook) in effect at the time, this does not bar Farrislsclaim. We do not disagree, but such analysis does 

### not apply here. On appeal, Farris argues that prior to being hired she was informed that the Commissioner viewed her position as a permanent position. Farris, upon accepting the position, sold her house in Great Falls and moved to Helena. Further, Farris contends she understood that the signing of the yearly lltemll contracts was merely a formality. Even admitting and accepting the factswell-pleaded in favor of Farris, she cannot overcome the Par01 Evidence Rule. Section 28-2-904,MCA, provides: The execution of a contract in writing, whether the law requires it tobewritten ornot, supersedes all the oral negotiations or stipulations concerning itsmatter which preceded or accompanied the execution of the instrument. Here, the consideration of oral negotiations between the 5Commissioner and Farris prior to the signing of the contracts is barred by the Parol Evidence Rule. The term contracts embody the legal agreement between Farris and the defendant. Farris signed three term contracts each for one year. She was aware that upon adequate notice the contracts could be non-renewed. We do not accept her argument that the Commissioner's adoption of the regulations allowed him to circumvent the Wrongful Discharge From EmploymentAct, thusterminatingher "atwill," therefore mandating

a "just cause" requirement. As to the alleged representations made after the agreements

were entered into, relative to job performance and terms, consideration of these would violate 5 28-2-1602, MCA. An agreement made inwriting cannotbe altered except inwriting orby

an executed oral agreement, and not otherwise. This is thepublic policy of the State of Montana. Therefore, 

### in suits of good faith and fair dealing relative to termination at the expiration of the term, the alleged implied covenant cannot be in direct contradiction of the writtenterm contract. See § 28-2-1602,MCA. Also see Carma Developers (Cal. 1992), 826 P.2d 70, where the Supreme Court of the State of California recently stated how a covenant of good faith should be read as follows: We are aware of no reported case in which a court has held the covenant of good faith may be read to prohibit a party from doing that which is expressly permitted by an agreement. On the contrary,asa general matter, implied terms should never be read to vary expressterms. (TannerV. Title Ins. & Trust Co. (1942) 20 Cal.2d 814, 824, 129 P.2d 383; see,Wal-Noon Cor~. v. 

### sill (1975) 45 Cal.App.3d 605, 613, 119 Cal.Rptr. 646.) "The general rule [regardingthe covenant of good faith] isplainly subjectto theexceptionthat thepartiesmay,by express provisions of thecontract,grant therightto engage in the

### very actsand conduct whichwould otherwise havebeen forbiddenby 

### an implied covenantof good faith 

### and fair dealing. 

# . . . [q]This is in accord with the general principle that, in interpreting a contract 'an implication

# .. . should not bemadewhen the contrary is indicated in clear and express words. I 3 Corbin, Contracts, !j 564,p. 298 (1960).

# . .

# . [BIASto acts and conduct 

### authorized by the express provisions of the contract,

### no covenant of good faithand fairdealing can be implied which forbids such acts and conduct. And if defendants were given the right to do what they did by the express provisions of the contract there can be no breach. (VTR, Incorporated v. Goodyear Tire & Rubber ComDanv (S.D.N.Y. 1969) 303 F.Supp. 773, 777-778.)

We agree with the analysis in Carrna. No obligation can be impliedwhichwould result 

### in the obliteration of a rightexpressly given under a written contract. See Gerdlund 

### v. Electric Dispensers International (1987), 190 Cal.App.3d 263, 235 Cal.Rptr. 279. The implied covenant applies to both employer and employee relative to a contract. See Barrett 

### v. Asarco (1988)

### , 234 Mont. 229, 763 P.2d 27. The right of workers tohave a contract which is governed by Montana law and to have their express rights therein set forth and enforced, also cannot be obliterated by alleged contradictory objective manifestations supportedby oral testimony. Farris argues that Stark v. Circle K Corp. (1988), 230 

### Mont. 468, 751 P.2d 162, and Proutv. Sears,Robuck and Co. (1989),236 Mont. 152, 772 P.2d 288, apply here. In both cases the employee

was anat-will employeeand had signedwritten agreements that they could be terminated with or without cause. In Stark, the alleged

reason for discharge was insubordination, and in Prout, for falsification of time sheets. Both discharges were stated to befor cause. In Stark we allowed the jury to decide whether the covenant of good faithand fairdealingwas breached inview of all the evidence as to whether or not the employer had cause and had followed its own policies. In Prout we gave effect to the written agreements and said the employer could firewithout cause under the agreements, but that if it asserted the termination was for cause, the employee must have an opportunity to prove that the

cause stated was false; and among the issues there was a factual question of the falsity of the cause which precluded summary judgment

# . The eventual determination of these factual issues in Stark and Prout did not and would not contradict the express wording of the respectiveagreements. Theapplication of the implied covenant addressed the interpretation of the words "with cause" and the discretion of the employer thereunder. For the reasons stated above,we affirm the District Court on this issue. I I Did the District Court err in dismissing the wrongful discharge claim and the claim under the Wrongful Discharge From Employment Act? The District Court found that the language of the contract at issuewas clearand unambiguous. Further it found thatnon-renewal

was permissible under the contract. Additionally, the District Court found that the Commissioner followed the defendants'personnel policies in effect at the time. Relying on Nordlund v. School District No. 14 (1987), 227 Mont. 402, 738 P.2d 1299, the District Court concluded the act of the Commissioner was not a wrongful discharge. Farris argues that the personnel policies and regulations allowed the commissioner to depriveher of the remedies available under theWrongful Discharge From Employment Act. This is because the regulations and notice requirements allow the Commissioner to circumventthe justcauserequirementunder theAct. Section 39-2- 901, MCA, et seq., contains Montana's Wrongful Discharge From Employment Act. The purpose of the Act was to set out certain rights and remedies with respect to wrongful discharge. § 39-2- 902, MCA. TheActwasmeant to preempt common law remedies. 

### 5 39- 2-913,MCA. Section 39-2-904,MCA, provides 

### in part: A discharge is wrongful only if:



# . . . (2) the discharge

### was not for good cause 

# . . . (3) 

### the employerviolated the express provisions of its own written personnel policy. Farris argues that theAct imposed a just cause requirement on all employment relationships inplace of common lawremedies. Further, she argues that the Commissioner, by unilaterally adopting the regulation authorizing him, with adequate notice, not to renew a professional contract, violates the public policy of just cause under the Act. Farris relies on Portable Embryonics 

### v. J. 

### P. Genetics (1991), 248Mont. 242, 810 P.2d 1197, for theproposition that the Commissionerls adoption of these regulations has an illegal effect because 

### it violates public policy and 

### is thereforeunenforceable. In Portable the defendants were performing bovine embryo transfers. They were without veterinary licenses 

### in violation of Montana law. We held that due to the illegality, the entire contract was void. Portable at 245, 810 P.2d at 1199. Here the Act itself excludes from the provisions of the Act the discharge of an employee covered under certain written agreements. Section 39-2-912, MCA, of theAct provides in part: This part does not apply to a discharge: 

## . .

# .

(2) of an employee covered by 

### a written collective bargaining agreement or awritten contract of ern~lovment for a sgecific term. (Emphasisadded.) The District Court found that the contract 

### in question 

### was a written contract for

### a specific

### term as contemplatedunder theAct. Therefore, theAct was not applicable. We agree with the District Court. Farris also essentially argues that the Commissioner, by adopting regulations allowinghim tohireemployeesunder specific term contracts, can escape the just cause requirements imposed under 

### the Act. The effect of this is to terminate an employee by simply not entering into 

### a new contract. Nothing in our 

### law forbids the parties here from entering 

### into such a contractwhere the contract is exempted from the Act. We have previously upheld the discretionary rights of employers to non-renew specific term contracts without a showing of good cause. Leland v. Heywood (19821, 197Mont. 491,497-4530, 643 P.2d 578, 581-582. Inaddition

no otherviolations of public policyhave been asserted whichwould give rise 

### to a wrongful 

### discharge claim. 10For the reasons set forth above,

### we affirm the District Court

on this issue. I11 Did the District Court err in finding appellant had no entitlement to property under a written contract for a specified term when the contract is not renewed at the expiration of the term?Farris based her rights as to a property interest on the breach of the implied covenant of good faith and fair dealing and wrongful discharge and inasmuchas she failed on these issues, the question is moot. For the reasons set forth in the opinion, we affirm the judgment of the District Court. 

### -

We Concur:

Justices

### ~ustice William E. 

### Hunt, Sr., dissents. 

### Idissent. The majority decision of the Court today deals a devastating blow to Montana workers. Under the holding of this case, an employermay make significant oral representations to an employee concerning the terms of the employment, induce the employee to signawritten contract with provisions contraryto the 

### oral representationson the basis that the written contract isonly

a formality, and then completely avoid all liability for the oral misrepresentations which induced the employee to sign thewritten contract in the first place. The majority opinion prohibits an employee from even presenting evidence of the wrongdoing, encourages employerstodeal dishonestlywith employees,and leaves

a large segment of theworking population (destinedto grow larger

as employers familiarize themselves with the majority opinion) without any legal recourse. The decision is not mandated by existing law and is an unacceptable shift in the balance between the rights and protections of employees and employers. This Court must accept as true all facts well-pled by the appellant in her complaint. Appellant alleges that shewas given objective manifestations of job securitybeyond the time specified in the written contract. Appellant argues on appeal that she reliedupon theseextrinsic objectivemanifestations indecidingto accept employment with respondents. Further, appellant contends she was told that the written contract of employment, which containedterms contrarytotheextrinsic oral representations,was merely a formality. Under this factual situation, the matter

### shouldnot havebeendismissed on respondents'Rule 12(b)(6)motion to dismiss. Appellant should havebeen allowed topresent evidence of the extrinsic oral representationsat trial for a determination of the merit of her claim for breach of the implied covenant of good faith and fair dealing. Every contract entered into in Montana, regardless of type, containsan implied covenant of good faithand fairdealing. Story

v. City of Bozeman (1990), 242 Mont. 436, 450, 791 P.2d 767, 775. The majority correctly points out that a breach of the underlying contract is not a prerequisite to a breach of the implied covenant of good faith and fair dealing. Ston, 791 P.2d at 775. In this instance, appellant is not alleging a breach 

### of an express contractual term,but is contending that respondents breached the covenant of good faith and fair dealing by terminating her employment in a manner inconsistent with the representationsmade to her concerning job security. In light of the facts in this case and the applicable law, it is clear that appellant has a cause of action for breach of the covenant of good faithand fairdealing,but themajority concludes that all the evidence necessary for appellant to present her case is excluded by the parol evidence rule found at 5 

### 28-2-904, MCA. However, 28-2-905(2), MCA, provides an exception to the parol evidence rulewhich is relevant inthiscase. Section 28-2-905(2), MCA, provides in part that: This sectiondoes not exclude other evidence of the circumstances under which the agreement was made or to

### which it relates

# . . .or other evidence to explain

# . . . fraud

# . Additionally, § 28-2-1611, 

### MCA, provides that: When, through fraud or a mutual mistake of the parties or amistake of oneparty while the other at the time knewor suspected,awritten contract does not truly express the intention of the parties, it may be revised on the applicationof a party aggrieved so as to express that intention, so far as it can be done without prejudice to rights acquired by third persons in good faith and for value. The exception to the parol evidence rule for extrinsic evidence of fraud is well-established and long-standing, not just inMontana, but throughout the nation. It is clear that: Itwas never intendedthat theparol evidence rule could be used as a shield to prevent the proof of fraud, or that a person could arrange to have an agreement which was obtained by him through fraud exercised upon the other contracting party reduced to writing and formally executed, and therebydeprive the courts of thepower to prevent him from reaping the benefits of his deception and chicanery. 37Am. 

### Jur. 2d, Fraud and Deceit, § 451. 

### Appellant did not bring

a cause of action specifically alleging fraud. Instead,appellant brought an action forbreach of the implied covenant of good faith and fair dealing resulting from misrepresentations made by respondents. In terms of the rationale underlying the fraud exception to the parol evidence rule, it shouldmake no difference whether a plaintiff in a given case brings an action based on misrepresentations under a theory of fraud or breach of the covenant of good faith and fair dealing. The rationale for the exception to the parol evidence rule applies equally to both situations. In either case, there is an allegation that false

### representations havebeen made which can onlybeprovenby evidence extrinsic to the contract. Sheer necessitydictates such evidence must be allowed. This is the very essence of the exception to the parol evidence rule. On appeal, respondents contend that allowing appellant the opportunitytopresent evidence that oral representations were made which were contrary to thewritten contractwould be nothing short of a "revolution" inMontana contract law. On the contrary, there is nothing revolutionary in allowing one party to a contract to present evidence thatmaterial oralmisrepresentations induced the party to enter into the contract. The majority opinion concludes its discussion of this issue by stating that Ifinsuits of good faith and fairdealing relativeto terminationat theexpirationof the term, the alleged implied covenant cannot be in direct contradiction of the written term contract. This statement is apparentlybased on themajority's holding that the parol evidence rule excludes all evidence that would show that in fact representations were made in contradiction of the written term contract. InNordlund v. School District No. 14 (1987), 

### 227 Mont. 402, 738 

### P.2d 1299, 

### this Court was faced with a 

### similar factual situation. InNordlund, an employeebrought suit forbreach of the covenantof good faithand fairdealing followingthenonrenewal of his specific termwritten contract of employment. We affirmed the DistrictCourt'sdecisionagainstNordlund,partially on thebasis that Nordlund could prove no set of facts from which a breach of

### the implied covenant could be proven. Thepar01 evidence rulewas not mentioned by the Court. In Stark v. Circle K 

### Corporation (1988), 230 Mont. 468, 751 P.2d 162, an employee brought suit for breach of the implied covenant of good faith and fair dealing in the termination of his employment. In Stark, there was a written contractual provision providing that he could be terminated with or without cause. A 

### jury returned a verdict in favor of Stark. In affirming the jury verdict, this Court stated that "[wle find the evidence considerably more than sufficient for the jury to find that Stark had an objectively reasonable belief that he would be fired only for good cause." Stark, 751 P.2d at 166. The employer in Stark argued that oral representations could not overcome the written contractual provision that the employment could be terminatedwith

or without cause. This Court's response to that argument is relevant to the present case. We stated: It is alleged that the written contractual provision allowing termination without cause cannotbe modified by oral representations which would give rise to a reasonable expectation of anything but "at will" employment. Circle K 

### misunderstands the nature of good faith and fair dealing. In Gates

### v. Life 

### ofMontanaZmuranceCo. (1982)

## , 196 Mont. 178, 638 P.2d 1063 (Gates

### I), we recognized that the covenant of good faithand fairdealing is applicable to employment contracts. The covenant is implied as a matter of lawbased on the public policy of this State. It does not depend on contractual terms for its existence, nor is the covenant of good faith and fair dealing subject to contractual waiver, express or implied. See § 

### 28-2-701(2), MCA. "The duty arises out of the employment relationshipyet theduty exists apart from, and in addition to, any terms agreed to by the

### parties.l1 Gates v. 

### Lqe ofMontana Imurance Co. (1983)

### , 205 

### Mont. 304, 668 P.2d 

### 213, 214, 40 

### St.Rep. 1287, 

### 1289 (Gates

### II)

# . Despite the express 

### contract,the question of 

### whether the "covenant of good faith and fair dealing 

### is implied in a particular case depends upon the objective manifestations by the employer giving rise to the employee's reasonable 

### belief that 

### he or 

### she 

### has job 

### security and 

### will be 

### treated fairly. Dare 

### v. Montana PetroEeumMarkztingCo. 

### (Mont. 1984), 687 

### P.2d 1015, 1020, 41 St.Rep. 1735, 1739. Therecord demonstrates Starkexperiencedobjective manifestations reasonably giving rise 

### to 

### abelief of job security. Stark, 751 

### P.2d at 166. The parol evidence rule

### was not mentioned in Stark. 

### This same analysiswas later applied in Prout

### v. Sears, Roebuck and Co. 

### (1989), 236 Mont. 152, 772 

### P.2d 288. 7: 

### believe this Court should follow the

### precedent set in these and other past Montana cases, as well 

### as 

### the statutory exception to the pard 

### evidence rule and 

### allow appellant the opportunity to present her

case.The 

### application of the parol evidence rule in this case 

### to exclude the extrinsic oral representations is 

### unduly harsh, formalistic, and 

### contrary to the 

### very spirit and rationale upon which the rule 

### is grounded. Appellant should be able to 

### present her evidence concerning the alleged breach of the implied covenant 

### of good faith and fair 

### dealing. If 

### appellant prevails, she is entitled to recover her contract damages as provided in Storv. Appellant also contends that according to Storv the employer/employee relationship 

### is a "special relationship," for which the breach of 

### the covenant may allow tort damages. While this Court, in Gatesv. 

### Life of Montana

### InsuranceCo. (1983), 205Mont. 304, 668 

### P.2d 213, stated that the employer/employee relationship is similar to the duty to act in good faith in discharging insurance contractual obligations, we have not explicitly held that it is a special relationship under the criteria set out in

# w. In order to recover damages in tort, appellant must satisfy the five criteria set out in Story. The question of whether a special relationship exists should be presented at trial in accordance with the guidelines set out by this Court in Storv wherein we stated that: If the facts of the special relationship are undisputedastowhether there isa specialrelationship, it is a question of law for the court to decide. If substantial evidence is presented supporting eachand all of the above essential elements and such evidence is controverted in whole or in part, there arises appropriate questionsofmaterial facttobe submittedto the jury. If substantial evidence is not presented in support of each and all of the essential elements, the court shall direct there is no special relationship.

The decision to exclude all extrinsic oral representations in these situations on the grounds that allowing such evidencewould undermine the sanctity and security of written contracts, is both draconian in nature and altogether unnecessary. A 

### decisionwhich protects both employers and the sanctity of written contracts, while still allowing employees some opportunity to seek redress, could have been fashioned in this case and shouldhave been sought after by the majority. Employers who have acted honestly and in good faith with their employees will be protected by our jury system of trials. Rule 11 sanctions are a mechanism already in

### place to protect against suits which are frivolous and without merit. Contract provisions can assure adequate compensation for attorney fees and costs to employers prevailing in these actions. On the other hand, employers who do not conform their conduct to comply with the covenant of good faith and fair dealing do not deserve the protection of the law. However, for some unknown reason, the majority decision extends an absolute protection to employers who violate the covenant of good faithand fair dealing, insulating them from all liability for their wrongful conduct. This result isboth unnecessary and unacceptable. I

### would reverse and remand for a trial of this matter.

Justice

Justice Terry

### N. Trieweiler joins in the foregoingdissent of Justice Hunt.