Ambiguities, vagueness in contracts can be disastrous

Drafting construction contracts takes skill. Interpreting someone else’s contract can be equally challenging, and more so if clauses can be read to have multiple, possibly contradictory meanings. The English language can be precise, but used carelessly or deliberately, it can also be vague or ambiguous. Vagueness means that no reasonable person can figure out what the clause means. An ambiguity occurs when a contract provision has more than one meaning.

In a recent road contract, for example, there was a provision that “all potholes shall be paved.” Besides the fact that this language is foolish, it is ambiguous. One meaning is that all potholes should be filled; the opposite is that the contractor should just pave them over.

An example of vagueness is in the standard AIA A201 standard form contract. There it says that for delays, the contractor must give the owner a written notice within 21 days of the “occurrence of the event” giving rise to the delay. The phrase is almost meaningless. What is an occurrence of the event that gives rise to delay?

To avoid ambiguity and vagueness, you need to read your contract and get clarifications of fuzzy language and muddled phrases. The simpler the language, the clearer will be the understanding of the agreement.

The following examples all come from real contracts that caused actual lawsuits. Do you know what these contract provisions are saying?

1. “Paint: prime plus two finish coats on all exposed surfaces.”

The Corps of Engineers signed a contract to upgrade an enlisted men’s barracks with structural, electrical, mechanical and painting work. Each of the two-story structures had an unfinished attic used only for storage.

The Corps took the position that as the interior of the attics had exposed surfaces, they should be primed and painted with two finish coats. The painting contractor had not included attic painting in its bid, reasoning that no work was being done in the attics, and the space was essentially unused, so it was not exposed and no painting need be done there.

If you had been the judge, how would you have ruled? Was there an ambiguity? What should the Corps do to improve its clause?

2. “The contractor shall indemnify the owner for all liens and claims.”

Indemnity clauses have been the subject of vast amounts of litigation. Can the owner use a clause like this one to defend against the contractor’s claims for delay and disruption? The owner’s argument would be that “all” means every type of claim and therefore the contractor can’t make any claims of its own. The contractor, however, would argue that it was only agreeing to protect the owner against the claims of others and that is the purpose of an indemnity. Is there an ambiguity?

3. “Areas adjacent to hazardous areas shall be deemed hazardous.”

This language was in an electrical subcontract. As you know, “hazardous” areas require different fittings and conduit, which, in turn, increase expense. How many areas, then, should the electrical subcontractor consider hazardous? Applying pure logic, if the adjacent area is hazardous, the next adjacent area is hazardous. Where does it stop? We can guess that’s not really what was intended, but the provision is both vague and ambiguous.

4. “The contractor’s installation shall comply with all applicable codes.”

Where is the ambiguity here? In a May 3, 2004 article in ENR magazine, it was reported that “the National Fire Protection Association’s Life Safety Code ... (NAPA 101) is a state-adopted standard in Illinois, [but] it is not a part of Chicago’s municipal code.” Which codes apply? If there are inconsistencies, which code takes precedence?

5. “Neither party shall be liable to the other for incidental or consequential damages.”

It is almost impossible to define consequential damages. In a prior article, I addressed this issue, using the Uniform Commercial Code as a guide.

Most contractors want a “no consequential damages” provision so their liability in case of defects or omissions does not extend too far. Although the line between direct damages and consequential damages may be obscure, it is helpful have some form of limitation on damages.

The problem with the clause quoted above is that it sounds good, and especially because it is mutual, it seems fair. But it is directly opposite to the meaning of the contract taken as a whole.

Standard form contracts have certain insurance clauses that include protection for personal injury. The major claims in personal injury are not for direct damages (like the medical and hospital costs), but for consequential damages (for example, the patient’s lost-earning capacity). If the owner has waived consequential damages, that would mean the contractor doesn’t have to pay a good portion of the damages when the owner gets sued by the injured person and, in turn, demands payment from the contractor. However, the whole reason for the insurance clauses in the contract, and the requirement that the contractor obtain coverage, was to provide a source for recovery of these types of damages.

So now you can see the dilemma. What takes precedence in this ambiguous circumstance? The “no consequential damages” provision or the insurance clauses?

6. “The contract terms and specifications shall apply to the subcontractor as the general contractor, in its sole discretion, shall determine.”

Some time ago, the Construction Specifications Institute (CSI) decided to break down the specifications by trade—HVAC, electrical, mechanical, etc. This logical division makes some sense, but each trade would be ill-advised to pay attention only to its own specifications as the work itself often involves more than one trade. Fans (mechanical) need electrical connections (electrical) and possibly devices (low-voltage), and paint, insulation, etc.

When the general contractor gives the electrical subcontractor just the electrical specifications, gaps can exist where there should be interaction with other trades. To bridge these gaps, some contract drafters insert additional terms to put the burden on the subcontractor to “provide a complete system.” With that provision on top of the one giving the contractor sole discretion to apply the contract terms and specifications, the contract is assuredly vague as to the real scope of work.

7. “The design/build contractor shall be liable to the owner for all rework at no cost to the owner.”

This clause is vagueness defined. What is the contractor’s extent of liability? Is he promising to fix any problems with his work without charging the owner, or is he subjecting himself to having to pay for any rework that the owner engages another contractor to do?

To combat vagueness and ambiguity, you need to look at the contract from different perspectives. If you were the owner, or the architect, or another trade subcontractor, how would you interpret a particular provision? Is that the meaning that you intended?

Precision in contract language will save you from confusion, delays, mistakes, omissions, extra and unnecessary work and, of course, money. It’s worth it to say what you mean, just as much as it is to mean what you say. EC

ITTIG, of Ittig & Ittig, P.C., in Washington, D.C., specializes in construction law. He can be contacted at 202.387.5508, USBuildlaw@aol.com or www.ittig-ittig.com.