Caseflicks

Montana Supreme Court • 1991

Sherrodd, Inc. v. Morrison-Knudsen Co.

815 P.2d 1135 | 249 Mont. 282

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Takeaway

In short, this case enforces a written construction subcontract's lump-sum, integration, and no-oral-modification clauses, holding that alleged contradictory oral promises cannot defeat the contract under Montana's parol-evidence rule.

Background

Sherrodd, Inc., an earth-moving subcontractor, bid $97,500 to perform work on an Army Corps of Engineers housing project in Forsyth, Montana. Sherrodd alleged that a Morrison-Knudsen representative told its officer that the project involved 25,000 cubic yards of excavation, and that Sherrodd calculated its bid at $3.90 per cubic yard on that basis. COP Construction, Sherrodd's immediate contractor, accepted the bid, and Sherrodd began work before signing a written subcontract.

Sherrodd later discovered that the project required substantially more than 25,000 cubic yards of excavation. It nevertheless signed a written subcontract stating that the work was to be performed for a $97,500 "LS," or lump-sum, price. The subcontract also stated that Sherrodd had examined and satisfied itself as to the quantity and character of the work, merged all prior negotiations into the writing, and required signed written changes. Sherrodd alleged that COP threatened to withhold a progress payment unless it signed and orally promised that it would later receive additional compensation.

After receiving the contract amount, less a deduction for unfinished work, Sherrodd sued the general contractors, COP, and COP's surety. It sought to avoid the contract's price term and recover in quantum meruit and tort, alleging actual and constructive fraud and breach of the covenant of good faith and fair dealing. The District Court granted summary judgment for the defendants, holding that the parol-evidence rule barred proof of the alleged oral representations. Sherrodd appealed.

Issues

Issue #1

Whether the parol-evidence rule barred Sherrodd from relying on the alleged pre-contract representation that the job involved only 25,000 cubic yards of excavation.

Holding

Yes. The written lump-sum subcontract superseded the alleged prior oral representation, so that evidence could not support Sherrodd's fraud or compensation claims.

Reasoning

Montana's parol-evidence statutes provide that a written contract supersedes oral negotiations or stipulations concerning the same subject that preceded or accompanied its execution. Once parties reduce their agreement to writing, the writing ordinarily supplies the exclusive evidence of its terms.

Although fraud may sometimes permit evidence outside a written agreement, the Court applied its precedent limiting that exception when the alleged oral promise directly contradicts an express contractual term. Sherrodd's asserted reliance on a 25,000-cubic-yard estimate conflicted with its written acknowledgment that, through examination, it had satisfied itself about the quantity and character of the work.

The claimed $3.90-per-cubic-yard understanding also conflicted with the written agreement's express lump-sum price, its integration clause merging prior negotiations and agreements, and its provision governing the work as a whole. Because the alleged representation directly concerned and contradicted the written contract's subject matter, the parol-evidence rule excluded it.

Sherrodd briefly invoked mutual mistake on appeal, but it had not advanced that theory in the trial court. The Court therefore declined to consider it under the rule that an appellate court will not review a theory raised for the first time on appeal.

Issue #2

Whether Sherrodd could rely on COP's alleged later oral promise to pay more than the written lump-sum price.

Holding

No. The alleged promise did not establish a valid modification of the subcontract.

Reasoning

Under Montana law, a written contract may be altered only by a later written contract or by an executed oral agreement. The subcontract independently reinforced that rule by declaring that changes were invalid unless reduced to writing and signed by the parties.

Sherrodd alleged neither a subsequent written modification nor an executed oral agreement. If COP had actually executed an agreement to pay the additional sums Sherrodd sought, the Court reasoned, Sherrodd would not need this lawsuit to recover them. The alleged unperformed oral promise therefore could not alter the written price term.

Issue #3

Whether Sherrodd's claim for breach of the implied covenant of good faith and fair dealing survived summary judgment.

Holding

No. Without admissible evidence of the alleged oral misrepresentations and without an alleged breach of an express contract term, the claim failed.

Reasoning

Sherrodd's good-faith claim depended on the same alleged oral representations that the parol-evidence rule excluded. Once those statements were unavailable, the claim had no evidentiary foundation.

In an arm's-length commercial contract, the covenant of good faith and fair dealing does not create liability merely because one party enforces a lawful written bargain. Sherrodd did not allege that the defendants violated any express term of the subcontract, as required by the Court's decision in Story v. City of Bozeman.

The Court emphasized that commercial stability depends on parties being able to rely on clear written terms. Enforcing the integration, lump-sum, and written-modification provisions protected that reliance interest and supported summary judgment for the defendants.

Dissents

Justice Trieweiler

Reasoning

Justice Trieweiler would have reversed and remanded for a jury trial. Accepting Sherrodd's allegations as true, as required at the summary-judgment stage, he concluded that COP's conduct could satisfy the elements of fraud: COP allegedly promised payment based on the actual amount of work, intended Sherrodd to rely on that promise when signing, and then refused the promised additional payment after Sherrodd had relied and suffered severe business losses.

He read Montana's statutory fraud exception to the parol-evidence rule more broadly than the majority. In his view, the statutes allow evidence explaining fraud and permit reformation when fraud causes a writing not to express the parties' real intention; they do not exclude fraud evidence merely because the oral representation contradicts the writing.

Justice Trieweiler rejected the majority's reliance on Continental Oil as an unjustified judicial limitation on the statutory fraud exception. A rule that excludes evidence whenever a fraudulent oral promise conflicts with a signed contract, he argued, enables a party with superior bargaining power to procure a protective writing through deception and then invoke that writing to avoid accountability.

The alleged circumstances made that concern especially acute: Sherrodd had already begun work, had substantial payroll and operating obligations, and was allegedly told it would not receive a needed progress payment unless it signed. General contractors need not be insulated from trial where a subcontractor plausibly alleges that its signature was procured by fraudulent assurances.

Justice Hunt

Reasoning

Justice Hunt joined Justice Trieweiler's dissent without adding separate reasoning. He therefore shared the view that the statutory fraud exception should permit Sherrodd to present its fraud claim to a jury despite the subcontract's conflicting written terms.