Story v. City of Bozeman
791 P.2d 767, 242 Mont. 436 (1990)
Rule of Law:
A breach of the implied covenant of good faith and fair dealing is a breach of the contract itself, giving rise only to contract damages. Tort damages for such a breach are only available when the parties have a special relationship characterized by factors such as unequal bargaining power, a non-profit motivation for the contract, and special vulnerability.
Facts:
- In November 1985, Mark Story successfully bid on a contract to construct two water mains for the City of Bozeman.
- The City's bid schedule contained a typographical error, listing an estimate for 120 'C.F.' (cubic feet) of pipe bedding material instead of 'C.Y.' (cubic yards), a 27-fold difference.
- Story claimed he bid in good faith based on the 'C.F.' figure, contributing to his low bid, while the City claimed he knew it was an error; the parties never resolved this dispute.
- Beginning in March 1986, Story requested several time extensions due to bad weather, which the City's engineer, Neil Mann, did not promptly approve or disapprove.
- Story alleged Mann withheld approval of the time extensions to pressure him into accepting the City's position on the pipe bedding material dispute.
- The City alleged Story's company performed shoddy work, trespassed on and damaged adjacent property, and moved its crew to another project during a critical period.
- In May 1986, Mann wrote a letter to Story's performance bond surety expressing concern about project delays, which resulted in Story's bonding being cut off.
- In June 1986, Story terminated the construction contract with the City.
Procedural Posture:
- Mark Story sued the City of Bozeman and its engineer, Neil Mann, in District Court, alleging breach of contract, bad faith, and defamation.
- The City filed an answer and counterclaimed against Story for reformation of the contract and breach of contract.
- Following a trial, a jury returned a special verdict finding the City breached the covenant of good faith and fair dealing and awarded Story $360,000 in tort damages and $13,236 in contract damages.
- The jury also found there was a mutual mistake in the contract, that the contract should be reformed, and that there was no defamation.
- The District Court denied the City's post-trial motion for a new trial.
- The City of Bozeman appealed the judgment to the Supreme Court of Montana, and Story cross-appealed.
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Issue:
Does the breach of the implied covenant of good faith and fair dealing in an ordinary commercial contract give rise to an independent tort action with tort damages?
Opinions:
Majority - Chief Justice Turnage
No. In an ordinary contract, breach of the implied covenant of good faith and fair dealing is a breach of the contract itself, and damages are limited to those available in contract law. The court held that allowing tort damages in common contract litigation upsets the concept of efficient breach and introduces speculative and inflammatory evidence. To correct the 'tort tail wagging the contract dog,' the court established that every contract contains an implied covenant of good faith and fair dealing, defined as honesty in fact and the observance of reasonable commercial standards. A breach of this covenant is a contract breach, not a separate tort, unless the parties have a 'special relationship' involving inherently unequal bargaining power, vulnerability, and trust, for which a separate five-part test was established.
Dissenting - Justice Sheehy
Yes. The breach of the implied covenant of good faith and fair dealing should give rise to tort damages. The dissent argued that the majority used the flawed special verdict form as a flimsy pretext to reverse the jury's verdict and fundamentally change Montana law by overturning the precedent set in Nicholson. The dissent contended that the covenant is imposed by law out of fairness, so its breach is inherently a tort, not a breach of contract. Limiting damages to contract remedies for egregious, bad-faith conduct is a 'perversion' of legal history and abrogates a remedy for parties who are victims of arbitrary, capricious, or unreasonable actions by a contracting party.
Dissenting - Justice Hunt
Yes. This opinion concurs entirely with Justice Sheehy's dissent.
Analysis:
This landmark decision significantly curtailed the availability of the bad faith tort in Montana, bringing the state's contract law more in line with the majority of other jurisdictions and the Uniform Commercial Code. By holding that a breach of the implied covenant is a contract breach in most commercial settings, the court made it much more difficult for plaintiffs to recover extra-contractual damages like punitive and emotional distress damages. The decision prioritizes the predictability of contract law and the principle of efficient breach over providing tort remedies for bad-faith conduct, except in narrowly defined 'special relationships,' thereby raising the bar for such claims in future litigation.
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