Settlement Offers Do Not Waive Contractual Conditions Precedent
Commentary on Kratzer Construction v. Hardy Construction Co., Inc., 2025 MT 140

Introduction

In Kratzer Construction v. Hardy Construction, the Montana Supreme Court handed down a significant pronouncement on two recurring questions in construction and commercial contract disputes:

1. When may a contractor lawfully withhold final payment from a subcontractor?
2. Does a party’s offer to compromise or modify a disputed obligation constitute a waiver of the original contractual condition precedent?

The litigation emerged from a public-school construction project in Ekalaka, Montana, where Hardy, the general contractor, subcontracted portions of the earthwork and concrete to Buck Kratzer (d/b/a Kratzer Construction). Defective concrete work, contested change orders, and withheld releases triggered a textbook breach-of-contract fight: Kratzer sued to collect the final balance, plus 18 % statutory interest and attorney fees; Hardy countered that the subcontract’s condition precedent—submission of releases and waivers from Kratzer’s own lower-tier subcontractors and suppliers—was never satisfied.

The District Court sided with Kratzer and awarded the money, interest, and fees. On appeal, the Supreme Court reversed, holding that (1) the releases were a clear condition precedent to Hardy’s duty to pay; (2) Hardy’s post-dispute settlement overtures did not constitute either a waiver, novation, or modification of that condition; and therefore (3) Kratzer, not Hardy, was in breach.

Summary of the Judgment

The Court (Justice Rice, unanimous) affirmed the contractual condition-precedent doctrine and clarified that:

• “Final payment shall become payable” means the amount may be processed, but payment is not due until the subcontractor performs the requisite condition—in this case, furnishing written releases from its own subs and suppliers.
• The provision is unambiguous when the two related sentences are read together under § 28-3-202, MCA (whole-contract rule).
• A mere offer to settle or relax that requirement does not
  • (a) waive the right,
  • (b) create a novation, or
  • (c) estop the offeror from re-asserting the original provision if the offer is rejected.
• Because the condition precedent remained unsatisfied, Hardy’s withholding of $81,153 was contractually lawful; therefore no statutory 18 % interest (§ 28-2-2104(2), MCA) accrued, and Kratzer was not a “prevailing party” for purposes of fee-shifting.
• The amount ultimately owed to Kratzer (once the condition is met) is undisputed: $81,153, but Hardy may seek its own reasonable attorney fees on remand.

Analysis

Precedents Cited & Their Influence

The Court’s reasoning weaves together several strands of Montana contract jurisprudence:

• Bender v. Rosman, 2023 MT 140 – Reaffirmed that fulfilment of a condition precedent is a prerequisite to the other party’s performance (§ 28-1-403, § 28-1-406, MCA).
• Dodds v. Tierney, 2024 MT 48 – Defined waiver as “voluntary and intentional relinquishment of a known right.” Used to show why Hardy’s conduct did not meet the waiver standard.
• Peeler v. Rocky Mountain Log Homes (Can.), 2018 MT 297 – Set the three-part test for proving waiver (knowledge, inconsistent conduct, prejudice). The Court found Kratzer could not satisfy element (2) or (3).
• Waite v. Andreassi, 249 Mont. 149 (1991) – “Novation is never presumed.” Guided the Court in rejecting Kratzer’s argument that Hardy’s email offers created a novation/modification.
• Rubin v. Hughes, 2022 MT 74 – Courts must avoid interpretations that lead to absurd results; used to reject Kratzer’s reading that would allow him to nullify the condition simply by delay.

Legal Reasoning

1. Plain-Language & Whole-Contract Canon. Applying § 28-3-401 and § 28-3-202, MCA, the Court held that the two sentences are complementary, not conflicting: money “shall become payable” (i.e., may be paid) after owner acceptance, but “prior to final payment” the subcontractor must produce releases. Both clauses can operate simultaneously without absurdity.
2. Condition Precedent. Under § 28-1-403, MCA, subcontractor releases are a classic condition precedent; non-satisfaction suspends the contractor’s duty to pay. Kratzer never produced them.
3. Waiver Analysis. Hardy’s emailed overtures (December 2021 and May 2022) were offers to modify payment conditions for the sake of expediency. But an offer alone, rejected by the other party, cannot satisfy Peeler’s “deliberately inconsistent conduct” prong nor cause prejudice to the subcontractor. Accordingly, no waiver.
4. Novation / Modification. Because agreement on the new terms never occurred, Waite foreclosed finding a novation; and without acceptance, there was no executed modification under § 28-2-1602, MCA.
5. Interest & Attorney Fees. Interest under the Montana Prompt Pay statute triggers only when payment is “wrongfully withheld.” Since Hardy’s withholding was contract-authorized, no statutory interest accrued. And because Hardy prevailed on the central breach issue, fee-shifting under § 31 of the subcontract flips in Hardy’s favor.

Potential Impact of the Decision

• Contract Drafting. The case underscores the importance of precisely drafting and strictly observing condition-precedent language, especially the mechanics of final payment and lien waivers on construction projects.
• Negotiation Dynamics. By holding that rejected settlement proposals do not waive contractual rights, the Court preserves a safe space for parties to negotiate without fear of undermining their positions—likely encouraging candid dispute-resolution efforts.
• Prompt Payment Act Litigation. Contractors who withhold money pending required documentation now have clearer protection against statutory interest claims, provided the contract language is explicit and the withholding is tied to a bona fide condition precedent.
• Fee-Shifting Strategy. The “prevailing party” analysis clarifies that winning the main liability question trumps the fact that the defendant still owes some money. This will guide litigants’ risk assessments in fee provisions.
• Broader Commercial Contracts. Though rooted in construction, the logic applies to any Montana contract containing explicit “pay-when-condition satisfied” clauses—insurance, lending, supply agreements, etc.

Complex Concepts Simplified

• Condition Precedent: A built-in checkpoint—one party has to do X (e.g., provide releases) before the other party must do Y (pay).
• Waiver: Intentionally giving up a right. You can’t accidentally waive; courts require clear, inconsistent action + resulting harm.
• Novation: Replacing an old contract with a new one. Everyone must agree, and courts won’t assume it happened without evidence of that intent.
• Payable vs. Due: “Payable” means the money can be paid; “due” means it must be paid now. A sum can be payable yet not legally due.
• Prevailing Party: The side that wins the principal disputed issue, not necessarily the party who recovers (or pays) money in the end.
• Rule 408 (Mont. R. Evid.): Statements made during settlement negotiations generally cannot be used to prove liability—but once liability is + already conceded, they may still inform undisputed sums (as here, $81,153).

Conclusion

Kratzer Construction v. Hardy Construction cements a straightforward yet vital principle in Montana law: a party does not surrender a contractual condition precedent merely by offering to compromise it. The ruling vindicates strict contractual compliance, safeguards candid settlement dialogue, and recalibrates how interest and attorney-fee claims are evaluated in construction payment disputes. Going forward, subcontractors must deliver the contractually required paperwork before invoking prompt-pay statutes, and contractors can negotiate without fearing inadvertent waiver—so long as their offers remain unaccepted. The decision thus provides a balanced blueprint for both enforcing and resolving construction-payment obligations across Montana.