Facts
- Beginning in 1976, Arthur and Edna Bailey lived in a mobile home placed on their daughter’s property and obtained water through the same pipeline that served the daughter’s home.
- In 1982, the Baileys’ daughter sold the residence and most of the surrounding land to Grant and (as referenced in the opinion) Norma/Elma Baker, but reserved and conveyed a one-acre parcel surrounding the Baileys’ mobile home to the Baileys.
- To ensure the Baileys had water while living on that one-acre parcel, the parties executed a written Water Well Use Agreement.
- The agreement stated the water-use right was solely for the Baileys’ benefit and would terminate when the Baileys stopped occupying the parcel; it also stated the water-use right extended only to the Baileys.
- The agreement further provided that if the Baileys conveyed the one-acre parcel, the Bakers had no obligation to provide water to any new owners; it also granted the Bakers a right of first refusal if the Baileys received an offer to purchase the parcel.
- The Bakers’ motivation for limiting the water right to the Baileys (desiring control over future neighbors) was not stated in the agreement, and the Baileys believed the Bakers would provide water to a later “reasonable” purchaser if the Bakers found the buyer acceptable.
- In 1984, the Baileys attempted to sell their property, which was listed as having “shared well water” at a substantially higher price than it would command without transferable water access.
- The Bakers informed the Baileys they would not provide water to any purchaser of the Baileys’ parcel, which reduced the parcel’s marketability and sale price.
- The Baileys ultimately agreed to sell for $8,000, and the Bakers exercised their right of first refusal and purchased the parcel at that price.
- The Bakers sued in the District Court for the Fourth Judicial District, Missoula County, seeking unpaid expenses claimed under the agreement (and related items); the Baileys counterclaimed for breach of the agreement and breach of the implied covenant of good faith and fair dealing.
- After a bench trial, the district court found the Bakers liable for breach of the implied covenant of good faith and fair dealing, limited the Bakers’ recovery on their claimed expenses, and required each side to bear its own attorney’s fees.
- The Bakers appealed.
Issues
- Whether the district court erred when it found the Bakers in breach of contract and the implied covenant of good faith and fair dealing.
- Whether the district court erred when it limited the Bakers to recovery of less than one-half the sums they claimed under the contract.
- Whether the district court abused its discretion when it required both parties to be responsible for their own attorney’s fees.
Decision
- Reversed the district court’s determination that the Bakers breached the Water Well Use Agreement and the implied covenant of good faith and fair dealing based on refusing to extend water rights beyond the agreement’s express terms.
- Affirmed the district court’s limitation on the Bakers’ recovery of claimed contract expenses.
- Affirmed the denial of attorney’s fees to either party.
Legal Principles
- When a written agreement is clear and unambiguous, it is enforced according to its terms; extrinsic evidence may not be used to add to, vary, or contradict the agreement.
- The implied covenant of good faith and fair dealing applies to contracts, but it does not create obligations inconsistent with the contract’s express provisions.
- A party generally does not breach the implied covenant by exercising a right the contract expressly grants, even if doing so causes economic harm to the other party.
- Appellate courts defer to trial-court factfinding and damage allocations unless clearly erroneous.
- Attorney’s fees are not recoverable unless authorized by contract or statute; in the absence of a mandatory basis, a trial court has discretion to require each party to bear its own fees.
Conclusion
The Montana Supreme Court enforced the Water Well Use Agreement as written, holding that the Bakers had no contractual duty to provide water to any successor owner of the Baileys’ parcel and that the Baileys’ contrary expectations could not be used to rewrite the agreement through a good-faith theory; the Court nonetheless left intact the trial court’s partial limitation of the Bakers’ claimed expense recovery and its decision to deny attorney’s fees to both sides.