No




                                                               No. 97-513




                          IN THE SUPREME COURT OF THE STATE OF MONTANA




                                                             1998 MT 213




                                             CARL WEISSMAN & SONS, INC.,

                                                      a Montana Corporation,




                                                     Plaintiff and Respondent,




                                                                      v.




                                   D & L THOMAS EQUIPMENT CORPORATION,

                                                             a Corporation,




                                                     Defendant and Appellant.




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                                                               APPEAL FROM: District Court of the Eighth Judicial
                                                                                 District,

                                                In and for the County of Cascade,

                                The Honorable Thomas M. McKittrick, Judge presiding.




                                                    COUNSEL OF RECORD:




                                                             For Appellant:




                           Robert J. Emmons, Emmons & Sullivan, Great Falls, Montana




                                                            For Respondent:




                         Robert B. Pfennigs; Jardine, Stephenson, Blewett & Weaver, P.C.;

                                                        Great Falls, Montana




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                                                Submitted on Briefs: April 9, 1998




                                                      Decided: August 25, 1998

                                                                    Filed:




                                    __________________________________________

                                                                    Clerk

                            Justice Jim Regnier delivered the opinion of the Court.

¶ On November 29, 1991, Carl Weissman & Sons, Inc. (CWS), filed suit in the Eighth
Judicial District Court, Cascade County, against D&L Thomas Equipment
Corporation (D&L) to collect delinquent lease payments owed to it under an
equipment rental agreement. D&L appeals from the findings of fact, conclusions of
law, and order, and the amended judgment entered by the District Court after a
bench trial. We affirm.

¶ The following issues are on appeal:

¶ 1. Did the District Court err in concluding there was sufficient consideration in the
contract between the parties?

¶ 2. Did the District Court err in concluding that the Agreement was not mutually
canceled and rescinded by the parties?

¶ 3. Did the District Court err in concluding that CWS did not violate § 70-8-101,
MCA (1989)?



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¶ 4. Did the District Court err in concluding that CWS had not misrepresented the
condition of the drill?

¶ 5. Did the District Court abuse its discretion in excluding certain testimony
regarding D&L's failure to make a lease payment to CWS?

¶ 6. Did the District Court err in granting sanctions to the plaintiff?



FACTUAL AND PROCEDURAL BACKGROUND

¶ In February 1990, D&L initiated discussions with CWS over the proposed leasing
of an Atlas-Copco Roc 712 rock drill. At the time, both D&L and CWS were
distributors of Atlas-Copco drilling and mining equipment. The negotiations were
conducted by Robert Cozad, branch manager of D&L in Tucson, Arizona, and
James Richey, the CWS branch manger in Bozeman, Montana.

¶ D&L had three rock drilling machines in Tucson, but all were leased out and it
needed an additional machine to lease to one of its customers, namely the Ashton
Company. A written agreement was entered into between Richey of CWS and Cozad
of D&L to lease the rock drill for three months, beginning March 1, 1990, and ending
May 31, 1990. Payments were $7600 per month. The first payment was to be paid in
advance and payments were to be made thereafter on the second of April and on the
second of May.

¶ Cozad asserts that when he discussed the drill with Richey before it was shipped to
Tucson, Richey represented that the drill was "like new" and had "very few hours
on it." Richey testified that the drill had been purchased new by CWS four months
before March 1, 1990. CWS asserts that it did a service and maintenance check on
the drill prior to shipping.

¶ The drill was shipped from Bozeman on March 1, 1990, and arrived in Tucson on
March 3, 1990. Cozad inspected the drill and sent it on to Mammoth, Arizona, for
the Ashton job. D&L asserts that it began having problems with the drill
immediately upon arrival.

¶ Critical to the written agreement between the parties is Paragraph 7. This
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paragraph required D&L to inspect the drill within ten days of receipt and unless
within such time period D&L gave notice to CWS specifying any defects, the drill
would be conclusively presumed to have been accepted by D&L in its then condition.
The agreement further provides, at Paragraph 26, that all notices must be in writing
and served by certified mail. Since the drill was received by D&L on March 3, 1990,
Paragraph 7 would require that written notice of any defects should have been given
to CWS prior to March 14, 1990. There are no allegations that D&L notified CWS in
writing of any defects or problems with the drill prior to March 14, 1990. Paragraph
7 also provides that following the ten-day period, the lessee shall bear the expense of
any necessary repairs, maintenance, and replacements for the drill. By D&L's own
evidence, any repairs made by D&L were made subsequent to the ten-day inspection
period.

¶ Cozad testified that he could not recall the exact dates that he contacted Richey
concerning problems with the drill. However, his telephone records establish several
calls to Richey between March 5, 1990, and March 22, 1990. Richey recalled the
telephone calls, but contends they pertained to matters unrelated to the drill. More
importantly, Richey testified that the first time he was told by Cozad that there were
any problems with the drill was on March 22, 1990. He stated that Cozad telephoned
him and that he then sent a fax to Cozad telling him not to return the drill because it
might be diverted to another location. D&L alleges that Richey could not have sent
the fax in response to the telephone call of March 22, 1990, because D&L's telephone
records establish that the fax was sent before the telephone call. There is nothing in
the record that clearly established that D&L gave notice of any problems with the
drill any earlier than March 22, 1990.

¶ The parties hotly dispute the impact of Richey's March 22, 1990, fax. Cozad
testified that he interpreted the fax as a cancellation of the written agreement. Richey
alleges that he did not regard his fax of March 22, 1990, as canceling the agreement.

¶ In May 1990, while D&L still possessed the drill, CWS and Cozad began
negotiations for a new six-month lease for the drill. Although CWS had not received
any of the payments due under the March 1 agreement, CWS was willing to consider
a new agreement as long as it included a firm commitment by D&L to buy the drill.
However, the negotiations broke down and CWS demanded the return of the drill.
Subsequently, D&L paid for its use of the drill during the month of June, but has
never paid for any rent for the months of March, April, and May.

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¶ During these negotiations, D&L subleased the drill to Spirit Drilling Co. in
California. Spirit reported no problems with the drill and it was returned to CWS at
the end of June.

¶ On November 29, 1991, CWS filed suit in the Eighth Judicial District Court,
Cascade County, against D&L to collect the delinquent lease payments owed under
the March 1, 1990, Agreement. Curiously, on January 21, 1992, D&L filed an answer
denying any knowledge of the Agreement. D&L claimed that the first time it saw the
Agreement was when it was served with the complaint and further maintained that
the purported signature on the document was made by someone without authority to
bind D&L.

¶ Until November 1993, D&L continued to deny, both in its pleadings and in its
responses to written discovery requests, any knowledge of the Agreement. However,
faced with CWS's motion for summary judgment, D&L finally admitted full
knowledge of the Agreement, admitted that its agent had authority to execute the
Agreement on D&L's behalf and moved to amend its answer. On February 24, 1994,
the District Court allowed D&L to file an amended answer. On that day, D&L filed
an amended answer and counterclaim.

¶ On November 19, 1993, CWS moved for sanctions, arguing that D&L had
attempted to mislead, delay, and hinder the prosecution of CWS's complaint. On
December 5, 1994, the District Court awarded CWS $4,904.25 for attorney fees and
$2,500 as sanctions for D&L's initial answer to the complaint and interrogatory
answers that denied the Agreement and Cozad's authority to sign the lease for D&L.

¶ The case proceeded to a bench trial on March 18, 1996. On April 25, 1996, the
District Court filed its findings of fact, conclusions of law, and order, entering
judgment in favor of CWS in the amount of $56,577.54. Thereafter, D&L filed
several post-trial motions concerning the interest rate to be used in calculating the
delinquency charge included in the judgment award. The parties stipulated to the
entry of an amended judgment in the amount of $48,312.54. This amended judgment
was filed on August 13, 1997.

¶ On September 2, 1997, D&L filed its notice of appeal from the amended judgment.

                                                                 ISSUE 1

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¶ Did the District Court err in concluding there was sufficient consideration in the
contract between the parties?

¶ D&L argues failure of consideration results in an invalid contract. D&L asserts
that CWS's consideration amounted to a drill that was operative only five hours after
it was placed in operation on the Ashton job. D&L alleges that there was failure of
consideration on CWS's part because the drill malfunctioned and overheated.
Therefore, D&L argues that CWS's failure of consideration renders the contract
unenforceable.

¶ The standard of review of a district court's conclusions of law is whether the
court's interpretation of the law is correct. Carbon County v. Union Reserve Coal Co.
(1995), 271 Mont. 459, 469, 898 P.2d 680, 686.

¶ A basic principle of contract law, of course, is that there must be consideration in
order to have a valid contract. Section 28-2-102(4), MCA; Boise Cascade Corp. v.
First Security Bank of Anaconda (1979), 183 Mont. 378, 391, 600 P.2d 173, 181. The
equipment rental agreement of March 1, 1990, creates a presumption of
consideration between D&L and CWS. See § 28-2-804, MCA. Under § 28-2-805,
MCA, D&L bears the burden of proof in seeking to invalidate the agreement for
failure of consideration.

¶ The District Court concluded that D&L did not meet its burden at trial. We agree.
Under the agreement, D&L agreed to lease a rock drill from CWS for three months
beginning March 1, 1990, and ending May 31, 1990. Moreover, under Paragraph 7 of
the Agreement, D&L is conclusively presumed to have accepted the drill in its
condition upon receipt if D&L did not give CWS notice of any defects within ten days
of receipt. Paragraph 7 states:

                  Repairs. Lessor shall not be obligated to make any repairs or replacements
                  and Lessee shall not incur for Lessor's account or liability any expense
                  therefor without Lessor's prior written consent. Lessee shall inspect the
                  equipment within ten (10) days after its receipt: unless within said time Lessee
                  notified Lessor, stating the details of any defects. Lessee shall be conclusively
                  presumed to have accepted the equipment in its then condition. Thereafter
                  Lessee shall effect and bear the expense of all necessary repairs, maintenance
                  and replacements, using only genuine parts of the manufacturer of the leased

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                  equipment, and Lessee assumes all risk of injury or loss to the equipment
                  during the term of this lease or any extension thereof, however caused. Lessee
                  agrees to service equipment in accordance with good operating practice and to
                  protect the same from the weather.



¶ On appeal, D&L does not argue that it gave CWS proper notice of any problems
with the drill in the time period provided under Paragraph 7. In fact, in its brief,
D&L states "D&L never gave CWS written notice of any defects in the drill within
ten days from March 3, 1990, when the drill was delivered." Instead, D&L contends
that it verbally notified CWS of problems with the drill. CWS disputes these
contentions.

¶ Under Paragraph 7 of the Agreement, D&L is presumed to have accepted the drill
in its condition upon receipt if D&L did not give CWS notice within ten days of
receipt. The District Court found that D&L did not notify CWS about any problem
with the drill within ten days of receipt. Therefore, this Court cannot conclude that
the contract fails for lack of consideration.

                                                                 ISSUE 2

¶ Did the District Court err in concluding that the Agreement was not mutually
canceled and rescinded by the parties?

¶ D&L argues that the parties canceled and rescinded the Agreement because the
drill was inoperative due to overheating. D&L's argument for rescission is based on a
fax sent by Richey to Cozad dated March 22, 1990. The fax states in relevant part:

                  Bob, Please do not send our ROC 712 back until we advise. We are now in
                  discussions with Atlas Copco. The machine may be diverted to another
                  location. Sorry the machine didn't work out.



¶ The District Court concluded that this fax could not be interpreted as indicating
that the Agreement between the parties was indeed canceled. We review a district
court's conclusions of law to determine whether the court's interpretation of the law
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is correct. Carbon County, 271 Mont. at 469, 898 P.2d at 686.

¶ Rescission of a contract can be undertaken only under certain circumstances.
Section 28-2-1711, MCA, states that "[a] party to a contract may rescind the same in
the following cases only: . . . (5) if all the other parties consent." Moreover, mutual
cancellation "must be clearly expressed and shown, and acts and conduct of the
parties to be sufficient must be clear, convincing and inconsistent with the existence
of the contract." West River Equipment Co. v. Holzworth Construction Co. (1959), 134
Mont. 582, 587, 335 P.2d 298, 301-02.

¶ We agree with the District Court that the fax and the actions of both D&L and
CWS do not amount to a clear expression of the intent necessary to establish
rescission. In fact, a seven page fax sent by Abe Moreno (Cozad's replacement in
Arizona) indicated that he "will make every effort to get Carl Weissman & Sons
their entitled monies." We conclude that the District Court did not err in
determining that the March 1, 1990, Agreement was mutually rescinded.

                                                                 ISSUE 3

¶ Did the District Court err by concluding that CWS did not violate § 70-8-101,
MCA (1989)?

¶ D&L argues that the District Court erred by failing to conclude that CWS violated
§ 70-8-101, MCA (1989), because the drill was delivered in a condition not fit for the
purpose for which it was intended. Section 70-8-101, MCA (1989), provided:

                  One who lets personal property must deliver it to the hirer, secure his quiet
                  enjoyment thereof against all lawful claimants, put it into a condition fit for
                  the purpose for which he lets it, and repair all deteriorations thereof not
                  occasioned by the fault of the hirer and not the natural result of its use.



¶ CWS counters by arguing that in order for it to have violated the statute, the
District Court first had to find that the drill was not in a condition fit for the purpose
for which it was intended. CWS contends that the drill left Bozeman in a like-new
condition. Moreover, CWS argues that under Paragraph 7 of the Agreement, D&L

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was required to inspect the drill and provide written notice of any defects within ten
days of delivery.

¶ The District Court concluded that since D&L did not object to the condition of the
drill pursuant to the terms of Paragraph 7 of the Agreement, D&L is presumed to
have accepted the drill in its condition upon receipt. As noted above, this Court
reviews a district court's conclusions of law to determine whether the court's
interpretation of the law is correct. Carbon County, 271 Mont. at 469, 898 P.2d at 686.

¶ We conclude that the District Court was correct in holding that D&L's § 70-8-101,
MCA (1989), claim was without merit. As discussed above, the Agreement between
the parties is a valid contract. Under Paragraph 16 of the Agreement, the parties
waived all warranties. Therefore, D&L waived any benefits provided by § 70-8-101,
MCA (1989). Furthermore, by not objecting to the drill's condition pursuant to
Paragraph 7 of the Agreement, D&L is presumed to have accepted the drill in a
condition fit for the purpose which D&L intended.



                                                                 ISSUE 4

¶ Did the District Court err in concluding that CWS had not misrepresented the
condition of the drill?

¶ D&L argues that CWS negligently misrepresented the condition of the drill which
was a breach of the agreement. D&L alleges that Richey told Cozad that the drill was
in like-new condition before delivering it. However, because the drill became
inoperative due to overheating soon after delivery, D&L argues that there was a
negligent misrepresentation about the condition of the drill which was breach of the
agreement.

¶ As discussed above, Paragraph 7 of the Agreement required D&L to give notice of
any defects with the drill within ten days of receipt. If D&L did not give CWS notice,
D&L is presumed to have accepted the drill in its condition.

¶ The District Court found there was no evidence that D&L gave any notice to CWS
about any defects with the drill within ten days of receipt. Furthermore, the court


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stated that even if CWS had misrepresented the condition of the drill, pursuant to
Paragraph 7 of the Agreement, D&L was required to assess the condition of the drill
upon receipt and not rely upon previous representations by CWS. We review a
district court's conclusions of law to determine whether the court's interpretation of
the law is correct. Carbon County, 271 Mont. at 469, 898 P.2d at 686.

¶ We conclude that the District Court did not err in concluding that CWS breached
the Agreement by misrepresenting the condition of the drill. Under Paragraph 7 of
the Agreement, D&L should have given notice to CWS within ten days if there were
any problems with the drill, including if the drill was not in the condition D&L
expected during negotiations.

                                                                 ISSUE 5

¶ Did the District Court abuse its discretion in excluding certain testimony regarding
D&L's failure to make a lease payment to CWS?

¶ We review evidentiary rulings by the district court to determine whether the
district court abused its discretion. State v. Passama (1993), 261 Mont. 338, 341, 863
P.2d 378, 380. The district court has broad discretion to determine whether evidence
is relevant and admissible, and absent a showing of abuse of discretion, the trial
court's determination will not be overturned. Passama, 261 Mont. at 341, 863 P.2d at
380.

¶ At trial, D&L offered testimony by David Thomas to establish the reason why
D&L did not pay CWS. Thomas testified that he did not pay because Bob Cozad told
him that the drill did not work. CWS objected to this testimony as hearsay because it
believed D&L offered the statement as proof the drill failed to operate properly. The
District Court sustained CWS's objections and ordered the testimony to be stricken
from the record.

¶ On appeal, D&L argues, as it did at trial, that the testimony was offered to show
"the frame of mind of the witness as to why payment wasn't paid." D&L contends
that the testimony was not offered as evidence to establish the drill did not work.
Instead, D&L asserts the testimony was submitted to show why Thomas did not
make any of the lease payments.



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¶ CWS responds that Thomas's testimony was hearsay and should have been
excluded. However, CWS states that if the District Court erred in striking this
testimony, the error was not prejudicial but was harmless.

¶ We agree with D&L that the testimony of Thomas was not hearsay under Rule 801
(c), M.R.Evid., and "offered in evidence to prove the truth of the matter asserted."
However, we determine that the error was harmless. In its brief, D&L states that this
"error is not critical to overturn the judgment." D&L further states that the
excluded evidence was not important because "[e]vidence that the drill did not work
was established by Cozad's own testimony."

¶ We have previously held that when a party offers evidence that is improperly
excluded by a district court in one circumstance and then offered by the same party
and properly admitted by the court in another circumstance, no prejudice would
result from the exclusion of the evidence that was ultimately admitted. See Niemen v.
Howell (1988), 234 Mont. 471, 764 P.2d 854. In this case, D&L was able to submit
evidence regarding the problems with the drill through Cozad. Therefore, we
conclude that the substantial rights of D&L were not adversely affected by the
District Court striking Thomas's testimony from the record.

                                                                 ISSUE 6

¶ Did the District Court err in granting sanctions to the plaintiff?

¶ We review a district court's conclusions regarding Rule 11, M.R.Civ.P., sanctions
for abuse of discretion. Wise v. Sebena (1991), 248 Mont. 32, 38, 808 P.2d 494, 498.
Our standard of review of sanctions imposed under Rule 37, M.R.Civ.P., is whether
the district court abused its discretion. First Bank (N.A.)--Billings v. Heidema (1986),
219 Mont. 373, 375, 711 P.2d 1384, 1386.

¶ D&L asks this Court to vacate the award of $7,404.25 in sanctions and attorney
fees to CWS by the District Court if we conclude that there was a failure of
consideration and the parties mutually canceled and rescinded the March 1, 1990,
lease. As discussed above, the lease is a valid enforceable agreement between CWS
and D&L and does not fail for a lack of consideration. Under the circumstances, the
award of sanctions was not an abuse of discretion.



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¶ Affirmed.



/S/ JIM REGNIER




We Concur:



/S/ J. A. TURNAGE

/S/ KARLA M. GRAY

/S/ WILLIAM E. HUNT, SR.

/S/ W. WILLIAM LEAPHART




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