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, Judge presiding. 

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 

P 

Clerk 
Justice 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 in part, reverse in part and remand 

for a new trial. 

The sole issue for review is whether 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 to borrow in order to finance extra work caused 

by the State. 

In June, 1984, the appellant, State of Montana, acting by and 

through the Montana Department of Highways, solicited bids 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 new bridge 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 to putting the project out for bid. 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 transposed 
onto the contract drawings sent olit to contractors for bidding 

purposes. Martel, relying upon the accuracy of the contract 

drawings, submitted the lowest bid and was awarded the contract on 

July 27, 1984. 

Martel began construction on 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 dimensions were not as represented on the contract drawings. 

Martel was required to perform extra work not contemplated under 

the contract in order to make the new bridge fit. Martel completed 

the contract on August 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 on May 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 as well as 

the interest it had paid on funds allegedly borrowed to finance the 

extra work. Martel denominated the interest it had paid on the 
borrowed funds as I1moratory interest." 

Prior to trial, the District Court requested briefs from 

counsel on the issue of whether nnmoratory interesttn could 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 

Itmoratory interestnn claimed by Martel is part of the actual 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 trial was held May 28 through June 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 funds borrowed during the period 1985-1990 in order to finance 

the construction project and that the average interest rate during 

this time was 10 3/4%. During closing argument Martelns counsel, 

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 that he is entitled to you should add a factor 

of interest and I would 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 the verdict 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 factor and come up with your own amount. 

In addition, Jury Instruction No. 23 instructed the jury that: 
Martel Construction.is seeking ttmoratory interest" 

damages from the State of Montana. Moratory interest is 

interest allowed in actions for breach of contract as 

damages for unlawful detention of money found due. 

As a jury, you may award moratory interest damages 

to Martel Construction if you find that the State of 

Montana caused Martel Construction to borrow money to pay 

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 

I1moratory interest,lV for 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 are governed by 

Title 18, Chapter 1, part 4, MCA. The extent of the State's 

liability in contract actions is set out 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 a private 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 compensate the party aggrieved for all 

the detriment which was proximately caused thereby or in 

the ordinary course of things would be likely to result 

therefrom. Damages which 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 examination of Section 27-1-311, MCA, . . . will 

reveal two kinds of damages recoverable from breach of 

contract. Damages Itfor all the detriment caused 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 statute may also be recovered 

Ifwhich in the ordinary course of things would 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 expected to result 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 and 
planted 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, which he intended to pay with the PIK payments. 

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 

have been able to pay the loan entirely and 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 legislature was to prohibit State 

1 iability for prejudgment or post- judgment interest in contract 
cases where a similarly situated private litigant would be liable 

for such interest. This Court upheld the constitutionality of 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 Ifdamage for 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 Itthe compensation allowed by 

law or fixed by the parties for the use or forbearance or detention 

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 is money which the injured party hypothetically 

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), 214 Mont. 456, 468-69, 693 

P.2d 553, 559-60, in which we stated: 

The prejudgment interest statute, in existence since 

1895, merely sets forth a broad area in which the 

legislature has determined prejudgment interest should 

be allowed as a matter of right . . . . It is merely 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 the 
framework 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 

overridins purDose 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. [Emphasis added.] 

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 to delay damages or compensation for 

the loss of use or detention of money. Therefore, whether referred 

to as prejudgment interest, moratory interest or otherwise, amounts 

claimed against the State for the loss of use or detention of money 

are "interesttt within the meaning of 5 18-1-404(1), MCA, and thus, 

not recoverable under the statute. 

Examining that portion of Martel's overall claim against the 

State which is referred to as "moratory interest,It it appears from 

the record that some part of this claim against the State may 

constitute actual damages, that is, out-of-pocket expenses incurred 

as a result of the State's breach 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 order to finance this extra work it was required to borrow money 

from its bank, for which the bank charged interest. Interest paid 

by Martel to its bank on funds necessarily 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 nature 
and origin and can be causally and foreseeably related to the 

State's breach 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 defendantsv breach 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 actually paid by the plaintiff as a result of 

the defendants1 breach, was an item of actual damages which could 

be recovered. However, the plaintiff also sought, and was 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 the prospect 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 than he or she could have gained by the 

full performance thereof on both sides. Again, the 

increased interest already 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 Billinss Clinic, "moratory interestg1 is not actual expense 

incurred, but rather is the additional compensation allowed for the 

loss of use of money. It necessarily follows that what this Court 

accepted as I1moratory interestw in Billinss Clinic, if claimed in 

a contract action against the State, would not be recoverable under 

§ 18-1-404 (I), MCA, since it falls squarely within 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 appropriately proved, an item of actual damages 

recoverable under 5 27-1-311, MCA, and under 5 18-1-404 (1) , MCA, 

in an action for breach of contract by the State. 

We note that both the District Court's ruling on the "moratory 

interest" issue and the trial in this case predated our holding in 

Billings Clinic. Nonetheless, the pleadings, proof, argument and 

instruction in this case are not altogether consistent with 

Martells assertion that it sought to recover as Ifmoratory interestt1 

its out-of-pocket expenses resulting from the Statels breach. 

Martells claim for "moratory interestw and the manner 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 that Martel utilizes the 

term I1moratory interest" to represent compensation for the loss of 
use 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 I1moratory interest" can be proved to be an item of 

actual damages resulting from the Statevs breach 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: /