No. 90-519

IN THE SUPREME COURT OF THE STATE OF MONTANA

MARTEL CONSTRUCTION, INC., Plaintiff and Respondent,

THE STATE OF MONTANA, ACTING BY AND THROUGH THE DEPARTMENT OF HIGHWAYS OF THE STATE OF MONTANA, Defendant and Appellant.

APPEAL FROM: District Court of the First Judicial District, In and for the County of Lewis and Clark, The Honorable Dorothy McCarter, Judgepresiding.

COUNSEL OF RECORD: For Appellant: Hon. Marc Racicot, Attorney General, Helena, Montana; W. D. Hutchinson, Assistant Attorney General, Helena,Montana. For Respondent: Richard J. Andriolo, Attorney at Law; Bozeman, Montana; Patrick A. Sullivan; Winston & Cashett, Spokane,Washington.

Filed: Submitted on Briefs: April 12, 1991 Decided: August 30, 1991

PClerkJustice Karla M. Gray delivered them Opinion of the Court.

The appellant, State of Montana, appeals from a judgment entered on a jury verdict rendered in the District Court of the First Judicial District, Lewis and Clark County, awarding the respondent, Martel Construction, Inc., $549,000 in damages for breach of contract. We affirm inpart, reverse inpart and remand for a new trial. The sole issue for review iswhether the District Court erred in ruling that Martel could recover, as an element of damages against the State, the interest expense paid on funds it was allegedly required toborrow in order to finance extra work caused by the State. In June, 1984,the appellant, State of Montana, actingby and through theMontana Department of Highways,solicitedbids for the reconstruction of the existing Burlington Northern Railroad overpass at Havre, Montana. The project called for the complete refurbishment of the existing railroad overpass and the addition of two more traffic lanes. The end result was to be a four-lane overpass consisting of a newbridge built immediately adjacent and attached to the refurbished old bridge. The Department of Highways did not make a new survey of the existing bridge prior toputting theproject out forbid. Instead, it used the plans prepared for construction in 1936 which the Department believed actually represented the elevation and dimensions of the bridge in 1984. The 1936 data was transposedonto the contract drawings sent olit to contractors for bidding purposes. Martel, relying upon the accuracy of the contract drawings, submitted the lowestbid and was awarded the contract on July 27, 1984. Martel began constructionon September 12, 1984. When Martel started to construct the new bridge to attach to the old bridge, it discovered that the elevation of the old bridge and certain other dimensionswere not as represented on the contractdrawings. Martel was required to perform extra work not contemplated under the contract in order tomake the newbridge fit. Martel completed the contract onAugust 1, 1986. On January 16, 1986,prior to completing the contract,Martel submitted a series of claims associated with extra work in performing the contract to the Department of Highways for administrative resolution. Some of the claims were allowed;most

were denied by the Department on April 17, 1986. Martel appealed the denial of the claims to the Department's Board of Contract Appeals onMay 9,1986. The Board affirmed the original denial on December 31, 1986. On March 26, 1987, Martel filed suit in the District Court against the State of Montana seeking damages for breach of contract. Martel sought to recover its actual construction costs for the extra work it had performed under the contract aswell as the interest ithad paid on fundsallegedly borrowed to financethe extra work. Martel denominated the interest it had paid on theborrowed funds as I1moratoryinterest." Prior to trial, the District Court requested briefs from counsel on the issue of whether nnmoratoryinteresttncould be recovered as an item of damages in a contract action against the State. The District Court ruled, as a matter of law, that the Itmoratoryinterestnn claimedbyMartel ispart of theactual damages claimed to have been incurred by Martel, rather than prejudgment interest; thus, it could be recovered as an item of special or general damages for breach of contract. A jury trialwas held May 28 throughJune 8, 1990. At trial, Martel presented testimony and exhibit evidence that it incurred an actual expense of $170,841.46 through the payment of interest

on fundsborrowed during the period 1985-1990 in order to finance the construction project and that the average interestrateduring this time was 10 3/4%. During closing argumentMartelnscounsel, stated: You will also have with you exhibit number 126 which is the moratory interest calculations. 

# . . 

# . That is the actual money that Bill Martel paid out of his pocket to a bank to finance this job. And whatever money you determine thathe is entitled toyou shouldadd a factor of interest and 

### Iwould suggest that once you have come up with a lump sum for delays and the 

# . . 

# . [extra construction] costs, that you can apply the 10 point three quarter percent interest. Later, in discussing theverdict form, counsel stated: 

### I have not filled in any amounts for moratory interest because 

### I trust that on any amounts that you find that Martel is entitled to you can apply the 10 point three quarter interest factorand comeup withyour ownamount. In addition, Jury InstructionNo. 23 instructed the jury that:Martel Construction.isseeking ttmoratory interest" damages from the State ofMontana. Moratory interest is interest allowed in actions for breach of contract as damages for unlawful detention of money found due. As a jury, youmay award moratory interest damages to Martel Construction if you find that the State of Montana causedMartel Constructiontoborrowmoney topay for extra work or delays ordered by or caused by the State of Montana. At the conclusion of the trial the jury found the State had breached the contract between the parties and awarded Martel damages in the amount of $384,000 for extra work and $165,000 for I1moratoryinterest,lVfor a total award of $549,000. The State appeals the portion of the judgment relating to the vlmoratory interest. Contract actions against the State of Montana aregoverned by Title 18, Chapter 1, part 4, MCA. The extent of the State's liability in contract actions is setout in 5 18-1-404,MCA,which provides, in pertinent part: Liability of state--limitations--costs. (1) The state of Montana shall be liable in respect to any contract entered into in the same manner and to the same extent as aprivate individual under like circumstances, except the state of Montana shall not be liable for interest prior to or after judgment or for punitive damages. As quoted above, except for the prohibition against interest prior to or after judgment and punitive damages, 5 18-1-404(1)

## , MCA, renders the State liable for damages in contract cases to the same extent as a similarly situated private litigant. The general measure of damages for breach of contract, including a breach of contract by the State, is set out in 5 27-1-311,MCA.

### Breach of 

### contract. For the breach of an obligation arising from contract, the measure of damages, except when otherwise expressly provided by this code, is the amount which will compensatetheparty aggrieved for all thedetriment whichwasproximately caused thereby or in the ordinary course of things would be likely to result therefrom. Damageswhich are not clearly ascertainable in both their nature and origin cannot be recovered for a breach of contract. In Ehly v. Cady (1984), 212 Mont. 82, 97, 687 P.2d 687, 695,

we made the following observation regarding the types of damages recoverable for breach of contract: An examinationof Section 27-1-311,MCA, 

# . . .will reveal two kinds of damages recoverable from breach of contract. Damages Itfor allthedetrimentcaused thereby" include all damages which in the ordinary and natural course of things are proximately caused by the breach itself. These damages are the natural result of the breach. Damages under the statutemay alsobe recovered Ifwhichin the ordinary course of thingswould be likely to result therefrom. Our court,and courts everywhere, recognize this provision as permitting recovery for consequential damages within the contemplation of the parties when they entered into the contract,and such as might naturally be expectedtoresult from its violation. Myers v. Bender (1913), 46 Mont. 497, 508, 129 P. 330, 333. These damages are the contemplated result of the breach. We note, in addition, that all damages for breach of contract, whether natural or contemplated, require proof of causation, certainty and foreseeability. Ehly, 212 Mont. at 97, 687 P.2d at 695. Furthermore, damages must be reasonable. Section 27-1-302, MCA. We have held previously that interest paid by a plaintiff to

a third party as a result of a defendant's breach of contract is

a proper element of damages. In Popp v. Gountanis (1986), 221 Mont. 267, 718 P.2d 340, Popp leased land from the defendant andplanted and harvested crops 

### on the land for several years. The defendant enrolled the land in a federal "payment in kind" (PIK) program and, without Popp's knowledge or permission, received the entire PIK payment. Popp sued for breach of the lease seeking, among other damages, the increased interest incurred as a result of his inability to pay off the balance of his loan covering his farming operations, whichhe intendedtopaywith the PIKpayments. The District Court awarded such damages and this Court affirmed, stating: The District Court found that Popp's inability to satisfy the loan balance of $32,694.92 was directly related to Frank and Gountanis' refusal to pay Popp his two-thirds share of the PIK benefits. Frank and Gountanis received payment for their PIK bushels in December, 1983, at which time Popp's share became certain. Had Popp received his proper share, he would havebeen abletopay the loan entirelyand avoid further interest charges. The accrued interest on PODPIS loan balance from that date was clearly part of his damases and we uphold the District Court award. Popp, 221 Mont. at 271, 718 P.2d at 343 (emphasis added). See also, Bolz v. Meyers (1982), 200 Mont. 286, 651 P.2d 606; Lee v. Andrews (1983), 204 Mont. 527, 667 P.2d 919. It is clear, therefore, that in a suit between private litigants or, indeed, against the State absent the exception in 18-1-404, MCA, increased interest payments by a plaintiff which result from a defendant's breach of contract,are 

### a recoverable item of damages. The plain language of 5 18-1-404(1), MCA, makes it clear, however, that the intent of the legislaturewas to prohibit State 1iability for prejudgment or post-judgment interest in contractcaseswhere a similarly situated private litigantwould be liable for such interest. This Court upheld the constitutionalityof the statutory prohibition against State liability for prejudgment and post-judgment interest in Leaseamerica Corp. v. State (1981), 191 Mont. 462, 468-69, 625 P.2d 68, 71. This Court has referred to interest as Ifdamagefor delay in payment of the principal obligation. Jacques v. Montana Nat 1 Guard (1982), 199 Mont. 493, 507, 649 P.2d 1319, 1327. The statutory definition of interest is Itthecompensation allowed by lawor fixedby theparties for theuse or forbearanceordetention of money." Section 31-1-104, MCA. Most cases dealing with the recoverability of interest involve claims for interest allegedly due as compensation for the detention of money. In other words, the interest sought ismoney which the injuredpartyhypothetically could have earned, through investment or otherwise, if the injurycausing party timely had paid compensation for the harm. This usual approach to interest is reflected in our discussion of the general prejudgment interest statute, 5 27-1-211, MCA, in Price Building Service, Inc. v. Holms (1985), 214Mont. 456, 468-69, 693 P.2d 553, 559-60, in which we stated: Theprejudgment intereststatute, in existencesince 1895, merely sets forth a broad area in which the legislature has determined prejudgment interest should be allowedas amatter of right

# .. . . It ismerely part of the law of damages that has, as its objective, that of making the injured person whole.

Determining whether a cause of action fits within theframework of the statute; particularly the question of whether the claim is determined or can be determined by calculation, is not always an easy one. However, the overridinspurDose of the statute can be best preserved if it is remembered that its purpose is to fully compensate the injured partv for the loss of use of his money durins the period in which a valid claim was not paid. [Emphasisadded.] Bearing in mind this usual approach to interest, the prohibition against the State's liability for interest contained in § 18-1-404(1), MCA, refers todelay damages or compensation for the lossofuse ordetention ofmoney. Therefore,whether referred to asprejudgment interest,moratory interestorotherwise,amounts claimed against the State for the loss of use or detention ofmoney

are "interesttt within themeaning of 5 18-1-404(1), MCA, and thus, not recoverable under the statute. Examining that portion of Martel's overall claim against the Statewhich is referred to as "moratory interest,Itit appears from the record that some part of this claim against the State may constitute actualdamages,that is,out-of-pocket expenses incurred

as a resultof the State'sbreach of contract. Martel alleged that

as a result of errors in the contract drawings prepared by the State and justifiably relied upon by Martel, it had to perform extra work to complete the project. Martel further alleged that 

### in orderto financethis extra work itwas required toborrowmoney from itsbank, forwhich thebank charged interest. Interestpaid by Martel to its bank on fundsnecessarily borrowed to finance the extra work is an item of actual damages recoverable under 5 27-1- 311, MCA, to the extent that it is ascertainable in both natureand origin and can be causally and foreseeably related to the State'sbreach of contract. Although such payments made by Martel to its bank were in the form of interest, they are part of its actual damages, subject to the appropriate proof, and not vvinterestw chargeable against the State as prohibited by 5 18-1- 404(1), MCA. This Court has recently affirmed an award of Ivmoratory interest" between private litigants in Billings Clinic v. Peat Marwick Main & Co. (Mont. 1990), 797 P.2d 899, 47 St.Rep. 1464. In that case, due to the defendantsvbreach of an obligation owed to the plaintiff, the plaintiff incurred an increased interest expense of $834,533. It was conceded that this amount, the increase in interest actuallypaid by theplaintiff as a result of the defendants1breach, was an item of actual damages which could be recovered. However, theplaintiff also sought,andwas awarded,

an additional $142,076 in "moratory interest" as compensation for the loss of use of the money it actually spent in increased interest expense. In affirming the award of "moratory interestfvv this Court stated: When viewed from theprospect of the loss of use of the increased interest expense which the Clinic had to pay, the amount claimed as moratory interest does not exceed the limitation of damages for the breach of an obligation set forth in 

### 5 27-1-303, MCA, that no person can recover a greater amount of damages for the breach of an obligation thanhe or she couldhave gained by the full performance thereof on both sides. Again, the increased interestalready incurred at the time of trial appears to be reasonably certain, and is capable of reasonable calculation. Accordingly, we find no error on this item.Billinss Clinic, 797 P.2d at '915, 47 St.Rep. at 1482. Thus, in light of BillinssClinic, "moratoryinterestg1 isnot actual expense incurred, but rather istheadditional compensationallowed for the loss of use ofmoney. Itnecessarily follows thatwhat this Court accepted as I1moratoryinterestwin Billinss Clinic, if claimed in

a contract action against the State,would notbe recoverableunder § 18-1-404(I), MCA, since it falls squarelywithin the statutory prohibition against State liability for interest. Billinss Clinic further helps clarify, consistent with our holding in PODP, that the increased interest expense incurred as a result of a breach of contract is,where appropriatelyproved,an itemof actual damages recoverable under 5 27-1-311, MCA, and under 

### 5 18-1-404(1)

### , MCA, in an action for breach of contractby the State. We note thatboth theDistrictCourt's ruling on the "moratory interest" issue and the trial in this casepredated ourholding in Billings Clinic. Nonetheless, the pleadings, proof, argument and instruction in this case are not altogether consistent with Martells assertionthat it soughtto recoveras Ifmoratoryinterestt1 its out-of-pocket expenses resulting from the Statelsbreach. Martells claim for "moratory interestwand themanner in which it

was presented in the District Court appear to reflect an intermingling of both a recoverable actual damage component and a prohibited llinterestll component. In light of the above, to the extent thatMartel utilizes the term I1moratoryinterest" to represent compensation for the loss ofuse or detention of money,' the I1moratory interest" is not recoverable against the State. To that extent, it is interest prior to judgment and prohibited by 

### 5 18-1-404(1), MCA, no matter what it is called. On the other hand, to the extent that what was claimed as I1moratoryinterest" can be proved to be an item of actual damages resulting from the Statevsbreach of contract, it is recoverable as such, but not as Ivmoratory interest." Accordingly, we conclude that it is necessary to remand for a new trial on this item of damages consistent with this opinion. Affirmed in part, reversed in part and remanded for a new trial.

We concur: 

# /