Sherrodd Inc. v. Morrison-Knudsen

No. 90-347
IN THE SUPREME COURT OF THE STATE OF MONTANA
JUL 23 1991
Plaintiff and Appellant, t ' d 3hitL
CLERK OF S U P R E M E COURT
-vs- STATE OF MONTANA
MORRISON-KNUDSEN COMPANY, SCHLEKEWAY CONSTRUCTION INC., COP
CONSTRUCTION INC., and SAFECO INSURANCE COMPANY OF AMERICA,
Defendants and Respondents.
APPEAL FROM: District Court of the Thirteenth Judicial District,
In and for the County of Yellowstone,
The Honorable Russell K. Fillner, Judge presiding.
COUNSEL OF RECORD:
For Appellant:
Loren H. Torkelson and Frank Richter; Richter &
Torkelson, Billings, Montana.
For Respondent:
Urban L. Roth and James A. Poore; Poore, Roth &
Robinson, Butte, Montana. W. Anderson Forsythe;
Moulton, Bellingham, Longo & Mather, Billings,
Montana.
Submitted on briefs: May 16, 1991
Filed:
I
Clerk
Chief Justice J. A. Turnage delivered the Opinion of the Court.
This action arises out of a construction contract on which
plaintiff Sherrodd, Inc., was a subcontractor. Sherrodd, Inc.,
appeals from a summary judgment entered for defendants by the
District Court for the Thirteenth Judicial District, Yellowstone
County. We affirm.
The issue is whether the entry of summary judgment for
defendants was proper.
Sherrodd, Inc. (Sherrodd), is a family-owned Montana construc-
tion corporation. Sherrodd subcontracted with COP Construction
(COP) to do certain earth-moving work involved in the construction
of fifty family housing units in Forsyth, Montana, for the Army
Corps of Engineers. COP itself was a subcontractor to the general
contractors Morrison-Knudsen Company, Inc. (Morrison-Knudsen), and
Schlekeway Construction, Inc. (Schlekeway). Safeco Insurance
Company of America (Safeco) provided COP'S payment bond on the job.
Sherrodd contends that while its officer William Sherrodd was
examining the building site in preparation for submitting a bid on
this project, a representative of Morrison-Knudsen told him that
there were 25,000 cubic yards of excavation to be performed on the
job. It claims that its bid of $97,500 on the subcontract was made
in reliance on that representation, based on $3.90 per cubic yard
for 25,000 cubic yards. Morrison-Knudsen denies that its represen-
tative made any such statement to William Sherrodd.
Sherroddlsbid, and, in turn, COP1sbid including Sherroddls
bid, were submitted and accepted. Sherrodd began work before a
written contract was signed. While performing the earthwork,
Sherrodd discovered that the quantity of work far exceeded 25,000
cubic yards.
The written contract between Sherrodd and COP provided that
Sherrodd would perform earthwork in the quantity l1LSl1 for the
consideration of $97,500. The parties agree that the letters ItLS1'
mean lump sum. Sherrodd contends that its officers signed the
contract, even though by then they knew that the job involved more
than 25,000 cubic yards of earthwork, because a COP officer
threatened to withhold payment for work already done unless the
contract was signed. Sherrodd further contends that the COP
officer verbally represented that a deal would be worked out
wherein Sherrodd would be paid more than the sum provided for in
the contract. COP1s position is that it only agreed to assist
Sherrodd in presenting a claim for additional compensation to the
Army Corps of Engineers, based on differences in the moisture
content of the soil from that stated in the bid proposal. That was
done, but the claim was denied.
In its l1StandardSubcontract provision^," the contract entered
between Sherrodd and COP also provided that
the Subcontractor has, by examination, satis-
fied himself as to the ... character, quan-
tity and kind of materials to be encountered
. . . No verbal agreement with any agent
either before or after the execution of this
Subcontract shall affect or modify any of the
terms or obligations herein contained and this
contract shall be conclusively considered as
containing and expressing all of the terms and
conditions agreed upon by the parties hereto.
No changes ... shall be valid ... unless
reduced to writing and signed by the parties
hereto.
Sherrodd was paid the $97,500 provided for in the contract.
It brought this suit to set aside the price provisions in the
contract and to recover quantum meruit plus tort damages. Its
legal theories were fraud, both actual and constructive, and breach
of the covenant of good faith and fair dealing. Defendants moved
for summary judgment, which was granted based on the parol evidence
rule regarding modification of written contracts.
Summary judgment is proper when the pleadings, depositions,
answers to interrogatories, and admissions on file, together with
the affidavits, if any, show that there are no genuine issues of
material fact and that the moving party is entitled to judgment as
a matter of law. Rule 56(c), M.R.Civ.P. The District Court held
that, under the parol evidence rule, Sherrodd could not introduce
evidence of the alleged oral misrepresentations by either the
Morrison-Knudsen representative or the COP officer. Therefore, it
concluded that even taking the evidence in the light most favorable
to Sherrodd, summary judgment for defendants was proper.
The parol evidence rule is codified in Montana statutes.
Section 28-2-904, MCA, provides that:
The execution of a contract in writing, whe-
ther the law requires it to be written or not,
supersedes all the oral negotiations or stipu-
lations concerning its matter which preceded
or accompanied the execution of the instru-
ment.
Section 28-2-905, MCA, provides that when an agreement has been
reduced to writing by the parties, there can be no evidence of the
terms of the agreement other than the contents of the writing
except when a mistake or imperfection of the writing is claimed or
when the validity of the agreement is the fact in dispute.
Although it mentions mutual mistake in its brief to this
Court, Sherrodd did not rely on that theory in the proceedings
below, as evidenced in the pretrial order and in the District
Court's memorandum on the summary judgment. We will not consider
on appeal a theory not raised at the trial court level. Morse v.
Cremer (1982), 200 Mont. 71, 81, 647 P.2d 358, 363.
A further exception is made to the parol evidence rule when
fraud is alleged. Section 28-2-905 (2), MCA. However, that
exception only applies when the alleged fraud does not relate
directly to the subject of the contract. Where an alleged oral
promise directly contradicts the terms of an express written
contract, the parol evidence rule applies. Continental Oil Co. v.
Bell (1933), 94 Mont. 123, 133, 21 P.2d 65, 67. Accord, Superior
Oil Company v. Vanderhoof (D. Mont. 1969), 297 F. Supp. 1086.
Here, any reliance on the alleged fraudulent statement of the
Morrison-Knudsen representative is contradicted by the terms of the
written contract that Sherrodd has, examination, satisfied
himself as to the . . . character, quantity and kind of materials
to be enc~untered.`` contention that the $97,500 covered only
The
25,000 cubic yards of earthwork contradicts the terms of the
written agreement that all "negotiations and agreementsttprior to
the date of the contract are merged in the writing and that the
work to be done is "lump sum." We conclude that the par01 evidence
rule applies. Because the written agreement supersedes all
previous oral agreements, the rule prohibits admission of any
evidence of the representation by the Morrison-Knudsen represen-
tative.
Next we consider Sherroddtsclaim that COP officers induced
Sherrodd officers to sign the contract with the promise that more
money would be paid than the contract provided. Section 28-2-
1602, MCA, provides that a written contract may be altered only by
a subsequent contract in writing or by an executed oral agreement.
Also, Sherroddtssubcontract provided that ItNochanges . . . shall
be valid . . . unless reduced to writing and signed by the parties
hereto." As the District Court noted, there is no allegation of
a subsequent contract in writing, and if there had been an executed
oral agreement to pay additional sums for the work, there would
have been no reason for this lawsuit.
Because of the inadmissibility of Sherroddts evidence as to
alleged misrepresentations, the claim of breach of the covenant of
good faith and fair dealing also fails. There is no allegation of
any violation of the express terms of the written contract, as
6
would be required in this arms-length contract under our opinion
in Story v. City of Bozeman (1990), 242 Mont. 436, 791 P.2d 767.
As we have stated,
Commercial stability requires that parties to
a contract may rely upon its express terms
without worrying that the law will allow the
other party to change the terms of the agree-
ment at a later date.
Baker v. Bailey (1989), 240 Mont. 139, 143, 782 P.2d 1286, 1288.
The parol evidence rule is the public policy of Montana and
it is clearly established by statute and the decisions of this
Court. If this public policy and rule is not upheld, contracting
parties that include lawful provisions in written contracts would
be under a cloud of uncertainty as to whether or not their written
contracts may be relied upon. The public policy and law does not
permit such uncertainty to occur.
We conclude that the compensation of Sherrodd is governed
exclusively by the written contract and that Sherrodd's claims are
barred under the parol evidence rule. We hold that the District
Court did not err in granting summary judgment for defendants.
Affirmed.
We concur:
Justices
Justice Terry N. Trieweiler dissenting.
I dissent from the opinion of the majority.
If the facts are as alleged by the plaintiff (and for purposes
of this proceeding we must assume that they are), then the result
of this case is that no party can be held accountable for its
fraudulent conduct so long as it is in a sufficiently superior
bargaining position to compel its victim to sign a document
relieving it of liability.
The facts, as alleged by the plaintiff, offend any reasonable
sense of fairness. No court should be so bound by a 58-year-old
precedent that it cannot adapt to circumstances such as those
presented in this case.
The plaintiff was informed by Lou Castino, the construction
manager for Schlekeway and Associates, that the project he was
being asked to bid on involved moving 25,000 cubic yards of dirt.
It was based on that information that he submitted his bid. It was
based on his bid that he was given an oral request to proceed with
the work.
After commencing work on the project, plaintiff realized that
the amount of earth that had to be moved greatly exceeded 25,000
cubic yards, and was actually more than twice that amount. He had
conversations with representatives of both COP Construction and
Schlekeway and Associates, during which it was agreed that the
amount of work to be performed would be recalculated, and during
which the defendants agreed to compensate plaintiff on the basis
9
of the actual amount of work done, rather than the price which was
originally agreed upon.
By May 22, 1985, plaintiff had already been working on the
project and had incurred substantial expenses and obligations to
his own employees. He had not been paid for his work, and was
still operating without a written agreement. It was on that date
that he was requested by COP Construction's superintendent to sign
the written contract which the defendants now assert as a bar to
his cause of action. He was advised that if he did not sign the
agreement he would not receive the progress payment in the amount
of $70,372.80 which was due. Without the progress payment he would
not have been able to pay his current expenses and payroll.
He was further advised that he would not be bound by the terms
of the written agreement, but that he would be paid for the actual
work done at the rate of $3.90 per cubic yard.
Thereafter, the amount of earth work to be done was
recalculated at approximately 50,000 cubic yards. On that basis,
plaintiff tried to recover the full amount due, but payment was
refused. Instead, the defendants raised the written agreement as
a bar to any further payment to the plaintiff.
Because of the defendantst failure to pay the plaintiff the
additional $100,000 to $120,000 which they owed him, plaintiff's
business lost its ability to borrow money, lost its bonding, and
was unable to complete additional contracts because of a lack of
operating capital. Plaintiff was unable to bid on contracts that
10
required bonding, and completely lost its ability to carry on
business as it had in the past. As a direct result of the
defendants1 failure to pay the amounts due, plaintiff was unable
to continue in business as a construction company, which it had
done for the previous 30 years.
If the plaintiff's allegations are true, then defendant COP
Construction Company's conduct, at least, satisfies the elements
of fraud. See Poulsen, et al. v. Treasure State Industries,
192 Mont. 69, 626 P.2d 822 (1981). COP'S employees represented to
the plaintiff that he would be paid for the full amount of work
done, regardless of the written terms of the contract. That
representation was untrue and material, and COP'S superintendent
either knew it was untrue or had no reason to believe that it was
true. COP Construction intended that the plaintiff act in reliance
upon that representation. Plaintiff did rely on it, and had no
reason to believe that COP'S superintendent would mislead him. As
a result, plaintiff has sustained the total loss of his business
and substantial damages.
The majority has affirmed the dismissal of plaintiff's claim
based solely on the par01 evidence rule found at 5 28-2-904, MCA.
That rule provides that a written agreement supersedes all oral
negotiations which preceded or accompanied the execution of the
instrument. Furthermore, 5 28-2-905, MCA, provides that the terms
of a written agreement cannot be proven by evidence other than what
is contained in the written document.
11
However, an important exception is found at § 28-2-905 (2) ,
MCA, which provides, in relevant part, as follows:
This section does not exclude other evidence of the
circumstances under which the agreement was made or to
which it relates . . . or other evidence to explain . ..
fraud.
In addition, 5 28-2-1611, MCA, provides as follows:
When, through fraud or a mutual mistake of the parties
or a mistake of one party while the other at the time
knew or suspected, a written contract does not truly
express the intention of the parties, it may be revised
on the application of 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.
(Emphasis added.)
In this case, in spite of the exceptions to the parol evidence
rule set forth by statute above, the majority has chosen to rely
on this Court's 58-year-old decision in Continental Oil v. Bell,
94 Mont. 123, 133, 21 P.2d 65, 68 (1933). In that case, this Court
held that parol evidence of fraud was not admissible when the oral
promise directly contradicts a provision of the written contract.
I would not follow this Court's previous decision in
Continental Oil for two reasons:
1. That decision made no specific reference to the statute
which is controlling, and yet adds qualifications to the statute
which were not included by the legislature. The legislature
provided that parol evidence could be offered to establish that a
contract was induced by fraud. It made no exception where evidence
of the fraudulent oral agreement contradicted a term in the written
agreement.
2. To follow the decision in Continental Oil creates a
terrible injustice, rewards fraudulent parties who are in a
superior bargaining position, and totally defeats the purpose for
which the fraud exception was provided to the par01 evidence rule.
Based on this decision, and our previous decision in
Continental oil, all that a fraudulent party needs to do in order
to avoid accountability for fraudulent conduct is to obtain the
signature of his defrauded victim on a written agreement.
The majority expresses concern that but for this decision
general contractors would not be able to rely on written agreements
with their subcontractors. However, general contractors who induce
subcontractors to enter into a written agreement by fraudulent
representations should find no security in the piece of paper which
resulted from their culpable conduct. Furthermore, a justice
system worth its salt should have equal compassion for Montana's
many subcontractors who, while operating without the benefit of
legal advice, sign whatever is necessary in order to keep their
operations afloat and their crews at work. When what they have
signed results from an obvious misrepresentation and causes them
the kind of substantial damages and hardship that have resulted in
this case, those subcontractors are entitled to the protection of
Montana's laws and its courts.
For these reasons, I dissent from the majority opinion. I
would reverse the judgment of the District Court and remand for a
jury trial to determine the merits of the plaintiff's claim. That
is really all the protection that Montana's general contractors
need.
I concur with the foregoing dissent of Justice Trieweiler.