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BAKER V. BAILEY
Montana Supreme Court, 1989.
782 P.2d 1286 (1989)

Procedural History
The District Court of the Fourth Judicial District in Minnesota County found the Bakers
breached the implied covenant of good faith and fair dealing. The Bakers appealed.

Key Facts
Beginning June 1976, Arthur and Emma Bailey (defendants) lived in a mobile home on their
daughter’s property and drew water from the same pipeline that serviced their daughter’s home.
In 1982, the Baileys’ daughter sold her residence to Grant and Norma Baker (plaintiffs), but
reserved one acre of land surrounding the mobile home for the Baileys. The Bakers and the
Baileys entered into a Water Well Use Agreement (Agreement) to ensure the Baileys had access
to water. The Agreement was made solely for the Baileys’ benefit and was to terminate once the
Baileys ceased to occupy the land. This was done because the Bakers wanted some control over
future occupants of the Baileys’ land. The Agreement did not reflect this reasoning.

However, the Baileys understood that the Bakers would supply water to successive owners if the
Bakers deemed them acceptable. The Agreement also gave the Bakers the right of first refusal. In
1984 the Baileys sought to sell their property. The Bakers informed the Baileys that they would
not be transferring water rights to any subsequent owners. The Baileys were therefore forced to
sell their property for $8,000.00, although the land with water would have been worth about
$47,500.00. The Bakers then exercised their right of first refusal and purchased the property from
the Baileys for $8,000.00.

The Bakers subsequently brought suit against the Baileys for unpaid expenses. The Baileys
countersued for breach of the Agreement.

Rule
- Parole Evidence Rule: States that extrinsic evidence is inadmissible where parties to a
contract have reduced their agreement to an integrated writing and that writing is
unambiguous
- Note: The implied covenant of good faith and fair dealing is not violated unless an express
term of the Agreement has been breached.

Legal Issue
- Is extrinsic evidence admissible where the language of a written and integrated contract is
unambiguous?

Application
- Here, the Agreement purports to fully set forth the understanding of the parties.
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• Even if the Baileys correctly believed the Bakers intended to share their well water with
subsequent purchasers they deemed acceptable, nothing in the contract requires the Bakers
to provide water to acceptable subsequent purchasers.
• The Agreement instead clearly states that only the Baileys were to benefit from the
Agreement. Thus, no express provision of the Agreement was breached.
- The implied covenant of good faith and fair dealing is not violated unless an express
term of the Agreement has been breached.
• Since there is no breach of the Agreement, the implied covenant was not violated.

Conclusion
- Extrinsic evidence is inadmissible where parties to a contract have reduced their agreement to
an integrated writing and that writing is unambiguous.
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Case Name

Notes/Questions