Unpublished Disposition, 902 F.2d 1579 (9th Cir. 1989)

MEMORANDUM^* 

Plaza West Dental Group ("Plaza West") appeals the district court's grant of summary judgment in favor of Mountain States Telephone & Telegraph d/b/a Mountain Bell ("Mountain Bell") in Plaza West's action alleging breach of contract and breach of the implied covenant of good faith and fair dealing. The claim arises from Mountain Bell's omission of Plaza West's business advertisement from its yellow pages directory and its subsequent refusal to allow Plaza West to remedy the omission by applying stickers to undistributed phone books. We have jurisdiction pursuant to 28 U.S.C. § 1291. We affirm in part and reverse and remand in part.

* On or about April 25, 1982, Plaza West, a dental corporation consisting of 8 dentists, contracted with Mountain Bell for a yellow page display advertisement in Mountain Bell's Billings & Eastern Montana directory. On October 26, 1982, the first day of distribution of the telephone books, Plaza West learned that its advertisement had been omitted from the directory. Plaza West's office manager immediately went to the distribution center, confirmed the omission, and contacted Mountain Bell to request permission to place stickers in all of the undistributed directories. The proposed stickers would be printed and pasted at Plaza West's expense. Mountain Bell refused the request.

On April 17, 1985 Plaza West filed an action against Mountain Bell for (1) breach of contract, (2) negligence, (3) breach of the implied covenant of good faith and fair dealing, and (4) intentional, willful and wanton conduct. Mountain Bell admitted that it breached the advertising contract and offered payment to Plaza West in the damage amount specified by the limitation of liability clause in the Plaza West/Mountain Bell contract.

All four counts of the complaint were dismissed by the district court in a grant of summary judgment dated April 6, 1988, based upon the limitation of liability clause. On October 6, 1988, upon reconsideration, the district court vacated the portion of its original judgment relative to the intentional, willful and wanton conduct charge and the breach of the implied covenant of good faith and fair dealing charge. On May 22, 1989 the district court issued a Memorandum reinstating its original order of April 6, 1988 granting summary judgment on all four counts in favor of defendants. The first two issues of the complaint are not raised in this appeal. The issues remaining are: (1) willful and wanton conduct, and (2) breach of the implied covenant of good faith and fair dealing.

II

Plaza West contends that Mountain Bell's actions fall within the exception to the enforcement of a limitation of liability clause, first described in State ex rel. Mountain States Tel. & Tel. v. District Court, 503 P.2d 526 (Mont.1972), namely, that enforcement of the limitation of liability clause is against public policy when a breach is willful, wanton, and in bad faith. Id. at 531. In this case there is nothing in the record to indicate that the breach (omission of the Plaza West advertisement) was willful, wanton or in bad faith. Thus, summary judgment on this issue is affirmed.

III

Having determined that the limitation clause is effective, we next consider its scope. The scope is very broad and seems to purport to cover not only money damages for the breach, but also all liability flowing from the breach, including liability sounding in tort. The clause states that in "no event shall [Mountain Bell's] ... liability exceed the amount payable to the telephone company for said advertisement...." On its face, the clause would seem to preclude a tort action alleging breach of the covenant of good faith and fair dealing. However, it is unlikely that one can contract out of the implied covenant. Mont.Code Ann. Sec. 28-2-702 states that " [a]ll contracts which have for their object, directly or indirectly, to exempt anyone from responsibility for his own fraud, for willful injury to the person or property of another, or for violation of law, whether willful or negligent, are against the policy of the law." See also Miller v. Fallon County, 722 Mont. 214, 721 P.2d 342, 347 (1986) (negligence action; waiver signed by wife of truck driver, waiving any rights against the trucking company by virtue of her being a passenger in a company vehicle, is void and in violation of section 28-2-702). Thus we must address Plaza West's contention that Mountain Bell breached the implied covenant of good faith and fair dealing when it refused Plaza West's stickering request.

The district court dismissed this claim because it found that under the contractual limitation of liability clause Mountain Bell had no duty to allow Plaza West to mitigate. In the absence of a duty, the court reasoned, there could be no breach. See Memorandum and Order dated April 5, 1988 at 7-8. The error in this reasoning is the assumption that the implied covenant of good faith and fair dealing is a duty that must be expressed in the contract. The implied covenant is in actuality a duty imposed by operation of law quite apart from the language of the contract. Love v. United States, 871 F.2d 1488, 1494 (9th Cir. 1989) (quoting Gates v. Life of Montana Ins. Co., 205 Mont. 304, 668 P.2d 213, 214-15 (1983)). Since the district court did not reach this issue, we remand for determination on the claim of breach of the implied covenant of good faith and fair dealing.

The threshold question the district court must decide is whether Montana law extends the implied covenant of good faith and fair dealing to ordinary commercial contracts such as the contract between Plaza West and Mountain Bell. In a diversity case, we must "predict how the state high court" would resolve a question. Air-Sea Forwarders, Inc. v. Air Asia Co., Ltd., 880 F.2d 176, 186 (9th Cir. 1989). However, it is not clear to what extent Montana applies the covenant in commercial contracts.¹  The district court may therefore wish to certify this question to the Montana Supreme Court. See Mont.R.App.P. 44, in Mont.Code Ann., tit. 25, ch. 21 (1987).

If the district court determines that under Montana law the implied covenant attaches in this case, it must then determine if the covenant was breached. The Montana Code sets the standard of conduct required by the implied covenant of good faith and fair dealing as "honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade." Mont.Code Ann. Sec. 28-1-211 (1987). The Montana Supreme Court defined the standard of conduct as being "measured in a particular contract by the justifiable expectations of the parties. Where one party acts arbitrarily, capriciously or unreasonably, that conduct exceeds the justifiable expectation of the second party." Nicholson v. United Pac. Ins. Co., 219 Mont. 32, 710 P.2d 1342, 1348 (1985). However, the breach conduct must be "sufficiently culpable" if punitive damages are to be awarded. Gates, 668 P.2d at 215. We AFFIRM in part and REVERSE AND REMAND in part.