Many legal battles in the construction industry revolve around contract interpretation disputes. Care in contract drafting is a valuable way to avoid disputes.
A fundamental principle of contract interpretation is to ascertain and give effect to the parties’ objectively expressed intent. What a party was trying to say, without accurately expressing it, does not count. Contract terms are usually given their ordinary (i.e., dictionary) meaning unless the contract specially defines them or the industry has adopted a special meaning known to both parties.
Identifying and interpreting ambiguity
Ambiguity exists in a contract when the pertinent terms are subject to two or more reasonable constructions. When an ambiguity exists, a court (and presumably an arbitrator) will give great weight to how the parties contemporaneously construed the terms by conduct or otherwise. Other interpretive guides when an ambiguity exists include:
- The specific controls over the general; and
- The more recently drafted of two provisions controls.
The interpretative rule of last resort is to construe the ambiguity against the party that provided the language.
In federal government contracts, a patent or apparent ambiguity is construed against the contractor. To avoid this result, a contractor for a federal project is obligated, before bidding, to seek clarification.
Examples from case law of ambiguities include:
- Subcontract: “any other ancillary items required to provide a complete bridge structure.”
- Contract: Owner “shall not hold [contractor] liable for any alleged incorrect location of the pool.” (Query: Was the intent to cover owner misdirection or contractor mis-location?)
- Prime contract was silent on which party bore responsibility for the builder’s risk deductible amount.
- Contract: “Owner shall pay Builder … on a Cost/Plus basis to a Guaranteed Maximum Price of … The Contract Price shall include, without limitation, …” (The term “Cost,” without any definition, was ambiguous; the expression “without limitation” also created an ambiguity.)
Tools to improve a contract
Here are some simple tools to improve a contract:
- Use plain and straightforward terms and clauses. Avoid terms or clauses that are confusing or lend themselves to varying interpretations. The mantra should be precision and accuracy. Brevity without sufficient clarity is a problem. If doubt exists as to what is intended, add or modify terms to eliminate the doubt. A good illustration is: Add to a general scope of work description a listing of significant items included in, and major items excluded from, the scope of work.
- For a technical term, consider adding a definition since the technical understanding may vary from the common usage of the term. A party not familiar with technical usage may prevail on its interpretation based on common dictionary usage.
- Include contract language covering all points specifically negotiated. A written contract silent on what was orally agreed upon is ripe for a dispute. Worse yet, clearly written boilerplate or standard contract terms that are inconsistent with a point negotiated but not drafted into the contract will likely govern, unless a mutual mistake can be proven — which is an extremely difficult burden of proof.
- Add a reference, when applicable, to published standards or other available documents governing that particular subject. Incorporation by reference is a valid technique as long as the referenced document exists and is described, as one court put it, “in such terms that its identity may be ascertained beyond doubt.” In one case, the subcontract referenced a prime contract document that was prepared after the subcontract, and thus the attempted incorporation was ruled invalid. Beware of incorporated by reference terms that conflict with other terms. Language to reconcile the conflicts is needed.
- When two or more different contract documents address the same subject, make sure the contract language harmonizes those provisions or, alternatively, explains the priority among the clauses or documents. Construction contracts frequently consist of multiple contract documents such as the agreement, general conditions, plans, specifications, and special conditions. One good solution is to consolidate the key terms of two or more contract documents into one harmonized contract document, and in the process delete the unnecessary or conflicting terms. Another good tool to avoid conflict is to include an order of precedence clause identifying the priority among the contract documents.
- Carefully consider punctuation. Occasionally, a missing or misplaced punctuation mark alters the meaning.
- Do not leave fill-in-the-blank provisions blank.
- Mistakes happen.