Opinion ID: 886354
Heading Depth: 3
Heading Rank: 3

Heading: Montana Case Law on Liquidated Damages

Text: ¶ 32 While our first case addressing liquidated damages dates back to 1868, see Bautz v. Kuhworth (1868), 1 Mont. 133, the first modern case thoroughly discussing and analyzing liquidated damages at length is Morgen & Oswood Constr. Co. v. Big Sky of Montana, Inc. (1976), 171 Mont. 268, 557 P.2d 1017. [8] Morgen involved a contract for the construction of condominiums near a ski resort. Upon Morgen's completion of construction, Big Sky held back from the final payment liquidated damages of $500 per day of delay after the agreed completion date as per contract terms. Morgen refused this final payment and sued for the full contract price. Morgen, 171 Mont. at 277, 557 P.2d at 1022. ¶ 33 In holding the liquidated damages clause was enforceable by Big Sky, we set out a rule that essentially embodies all the tests discussed above. We stated: Whether the forfeiture provision imposed a penalty, or provided for liquidated damages, is to be determined from the language and subject matter of the contract, the evident intent of the parties and all the facts and circumstances under which the contract was made. The most important facts to be considered are whether the damages were difficult to ascertain, and whether the stipulated amount is a reasonable estimate of probable damages or is reasonably proportionate to the actual damage sustained at the time of the breach. Morgen, 171 Mont. at 273, 557 P.2d at 1020 (citation omitted). ¶ 34 After noting the evidence demonstrated damages from delay were impractical or difficult to fix because Big Sky lost months of sales opportunities right before the ski season, we held that Big Sky showed the $500 per day damages were reasonable because $500 was less than the anticipated daily costs of loan interest, utility costs, and lost rent. We also noted that the clause was reasonable because Big Sky introduced evidence showing its actual damages were greater than the liquidated damages. Morgen, 171 Mont. at 271, 557 P.2d at 1019-20. ¶ 35 In addition to comparing the liquidated damages to anticipated and actual damages, we also noted that the liquidated damages were reasonable in light of the intent of parties as shown by their precontract negotiations. Specifically, when given a later completion date during negotiation, Morgen lowered its bid by an amount less than the liquidated damages provided for in the contract with the earlier completion date and Big Sky refused this bid. Morgen, 171 Mont. at 274, 557 P.2d at 1021. Further, we noted the bargaining process itself was proper because most construction contractors are not so unsophisticated as to merit special protection by the courts and because while the liquidation amounts may not actually be bargained, the contractor can take this into account when he makes his bid. Morgen, 171 Mont. at 272, 557 P.2d at 1020 (citation omitted). Lastly, we noted that the language of the contract was only one consideration and not in any way controlling. Morgen, 171 Mont. at 272-73, 557 P.2d at 1020. Therefore, under any of the tests used to measure the reasonableness of liquidated damages, the clause in Morgen was enforceable. ¶ 36 Indeed, because Morgen addresses all the facts and circumstances under which the contract was made, including the difficulty of proof, the amount of anticipated and actual damages as compared to liquidated damages, the evidence of actual negotiation and intent of the parties, and the nature of the bargaining process between the two parties, the facts and holding of Morgen represent the ideal of liquidated damages under the principle of freedom of contract. The parties to Morgen negotiated with full information and predetermined a damage amount which was upheld by the courts. ¶ 37 The next two cases addressing liquidated damages, while brief, are consistent with Morgen even though Morgen is not cited. Erickson v. First Nat'l Bank (1985), 215 Mont. 350, 359, 697 P.2d 1332, 1338, addressed a contract for deed which provided that upon default, any payments already made under the contract would be considered liquidated damages for reasonable rental value. In upholding the clause, we stated, If, in fact, liquidated damages approximate those actually suffered, the amount is reasonable. Erickson, 215 Mont. at 359, 697 P.2d at 1338. Because evidence showed that the reasonable rental value of the property for the time the defaulting party was in possession approximated the liquidated damages clause, we upheld the clause under this actual damages rule. However, we noted that testimony by a representative of First National Bank was the only evidence submitted on the issue. See also Lilienthal v. District Court of Sixteenth Judicial Dist. (1982), 200 Mont. 236, 242, 650 P.2d 779, 782 (citing Morgen in support of remanding a damage award to the trial court because no evidence was taken to demonstrate $500 per day delay charges were reasonably related to the actual damages sustained by the Bank). ¶ 38 In Ruegsegger v. Welborn (1989), 237 Mont. 317, 321, 773 P.2d 305, 308, we considered a $75 per day holdover rent clause meant to apply if the tenants did not vacate agricultural property upon a date agreed upon by the parties. Again, we held the clause was reasonable and enforceable because it amounted to less than actual damages as shown by the market value of the annual lease as agreed to between the parties, because the agreement detailed what use of the property the holdover rent was intended to pay for, and because the terms reflected the parties' intent as demonstrated by actual bargaining. ¶ 39 Following Morgen, Erickson, and Ruegsegger, our precedent took two dramatic turns, first away from Morgen in Daugherty Cattle Co. v. General Constr. Co. (1992), 254 Mont. 479, 839 P.2d 562, then back again in Weber v. Rivera (1992), 255 Mont. 195, 841 P.2d 534. ¶ 40 In Daugherty, we addressed another contract for deed which required payments already made under the contract to be considered liquidated damages for reasonable rental value upon default. Citing Erickson, the buyer argued that actual damages in the form of reasonable rental value had to be considered in order to determine whether the $857,000.00 in principal payments and $385,447.50 in interest already paid during the approximately ten years the buyer was in possession should be considered a penalty relative to the contract price of $1,195,000.00. However, in contrast to Morgen's reliance on evidence of difficulty of proof, actual and anticipated damages, and intent, Daugherty affirmed the district court's grant of summary judgment. Specifically, Daugherty held that it was not necessary to hear evidence on the reasonable rental value in order to determine whether the liquidated damages clause was reasonable. Regarding Erickson's reliance on a comparison to actual damages, Daugherty stated the rule was not mandatory because Erickson does not require a judicial determination that the amount forfeited was a reasonable rental [value]. Daugherty, 254 Mont. at 484, 839 P.2d at 564. Further, Daugherty did not cite or discuss Morgen. However, the facts set forth in Daugherty recognize both that there was actual negotiation between the parties and that the parties' had relatively equal bargaining power. ¶ 41 Daugherty also upheld the district court's statements that to inquire into the actual damages would defeat the language of the contract. More to the point, because Daugherty upheld a summary judgment ruling, the opinion in effect held that there are no genuine issues of material fact involved in the determination of whether a liquidated damages clause should be declared a penalty. ¶ 42 Only three months later in Weber, we sharply departed from Daugherty without citing or discussing it. In Weber, we considered a form contract used to memorialize a land purchase which provided for 10% of the purchase price as liquidated damages. Citing the all the facts and circumstances under which the contract was made rule from Morgen, we held the provision was a penalty because there was no attempt by the parties to reasonably estimate anticipated damages. Specifically, we noted that because a form contract was used and both parties testified that no one knew how 10% of the purchase price was chosen, there was no evidence of actual negotiation between the parties so there was no attempt to reasonably estimate damages. We also held the provision a penalty because it entitled the sellers to the same amount whether they attempted to mitigate or not. Weber, 255 Mont. at 200-01, 841 P.2d at 537-38. Cf. Wendy's of Montana v. Larsen (1982), 196 Mont. 525, 529, 640 P.2d 464, 466 (bargained earnest money upheld as liquidated damages because buyer received benefit of the bargain when land was taken off the market for months). ¶ 43 While Weber questioned the language of the contract and required introduction of specific evidence unlike Daugherty, in one way Weber is similar to Daugherty because the opinion also rejected the actual damages test. The court stated: [A]ny relationship between the amount of actual damages suffered and the amount specified in the provision is merely a fortuitous coincidence and not the result of a reasonable estimate in advance to determine what the damages might be. The fact that the liquidated damage provision in this case may approximate the actual damages suffered, is insufficient by itself to create a valid liquidated damages provision. Our decision in Morgen ... makes it clear that other factors must also be considered. Weber, 255 Mont. at 201, 841 P.2d at 538. Therefore, by rejecting the actual damages test, Weber stands for the proposition that evidence of actual bargaining between the parties is required for form contracts. ¶ 44 After Weber, the next liquidated damages holding occurred in Story v. City of Bozeman (1993), 259 Mont. 207, 227-28, 856 P.2d 202, 214-15, another case involving a delay in construction liquidated damages provision. Rather than substantively consider the clause at issue, this Court disallowed the provision as a penalty purely as a matter of burden of proof. Because the party seeking to enforce the clause failed to present any proof that damages were extremely difficult or impracticable to ascertain or that the damages in the provision were reasonable in light of either anticipated or actual damages, we held the clause was a penalty. Story, 259 Mont. at 228, 856 P.2d at 215. Therefore, Story also contrasts with Daugherty and Morgen because rather than simply relying on the contract language like Daugherty or considering the nature of the bargaining process between the parties like Morgen, Story holds that any inquiry into a liquidated damages clause requires evidence beyond the language of the contract. Further, this requirement virtually guarantees that genuine issues of material fact would preclude summary judgment contrary to the holding in Daugherty. [9] ¶ 45 As this discussion demonstrates, our precedent has both required and completely ignored proof that damages be of a type difficult to ascertain; it has relied on proof of actual damages to show reasonableness and it has rejected proof of actual damages to show reasonableness; it has considered actual bargaining as only one factor to be considered and it has held actual bargaining is required; finally, it has considered the penalty/liquidated damages issue as one that requires evidence and also one that is based on contract interpretation. ¶ 46 In sum, our precedent on liquidated damages has numerous inconsistencies that make application of a uniform rule elusive at best. Yet, in order to resolve the issue presented and provide direction to contracting parties, we must resolve the disparities in our case law. To that task we now turn.