The Contract Speaks Again

Legal The Contract Speaks Again July 2020

In my March column, I posed three problems from actual cases. These concerned imperfect contract language that caused financial impacts to the electrical contractors.

When these issues are presented in court, there is little predictability in the outcome, except that a decision will be made. Courts use rules for disputed language, but persuasive arguments can be as useful. There is often a desire by the courts to have their decisions be reasonable and fair. This concept of reasonableness is one you should keep in mind whenever you need to convince another that your understanding is correct.

1. The tank repair shop

Explosion-proof fittings were needed for the repair shop. The U.S. Army also wanted to assure safety in close-by areas where gas could accumulate. The language used for this goal was: “Areas adjacent to hazardous areas shall be deemed hazardous.”

This language has two problems: 1) by logical extension, every “adjacent area” to the prior “deemed hazardous” area would extend by leap-frogging the hazardous label to each next area, and 2) the term “adjacent to” is not very precise—it could mean abutting or merely nearby.

The repair shop offices were on the second floor. That level had a concrete floor, and the Army had not designated the offices as being “adjacent” in its arguments to the court. Also, the exterior walls of the shop were comparable in construction to the interior bathroom walls where the electrical cable entered, and the Army had not argued that the area outside the building was hazardous.

The bathroom block walls were of “like kind” to the concrete floor above and to the exterior walls. By the Army’s own interpretation, these other areas were not “adjacent to.”

2. The basis of a claim

The issue was the meaning of one phrase that was interpreted somewhat reasonably by the general contractor and somewhat reasonably, although very differently, by the electrical subcontractor. When this kind of disagreement occurs, the parties will say the phrase is ambiguous. But that can be a dangerous argument as a judge may find that one view is more reasonable than the other, and that other could be yours.

Payment for extra work was to be “based on” actual costs. “Based on” is not so much ambiguous as it is vague. It could mean “in accordance with,” “in reference to,” “necessary for” or “connected with.” Think about a movie being based on a novel.

Other contract language in the same clause seems to give the general contractor the better argument. Payment for the extra work was to be for “costs to be determined later.” There was no promise that all costs would be paid. The indications were that the actual costs would be reviewed later. Putting “to be determined later” with “based on actual costs,” the interpretation is that payment would not be based on estimates, and there was no promise that all costs would be reimbursed.

3. Lien waiver confusion

The lien waiver is fairly common. With the progress payment, the subcontractor’s notarized signature affirms that it has been paid in full to date. In this case, disputed extras existed before the waiver was signed, yet these extras survived the waiver as negotiations continued. How can we make sense of that if the subcontractor swore that he had been paid in full?

There is no vagueness or ambiguity in the lien release. The phrase “paid in full” could not be clearer. Similarly, it was clear that this payment was intended to pay “for all work” to date. So how can a way be found to get around this problem?

It was shown to the court that the lien waiver did not really mean what it said. Retainage was never intended to be waived, yet retainage represented work performed. It was argued that the purpose of the lien waiver was to confirm the amount of payments that were due. Finally, continued negotiations on extras reflected the general contractor’s own understanding that they were not considered to be affected by the waiver. The court’s ruling was that the lien waiver language became ambiguous in operation.

 

The rules of contract interpretation employed in these cases are for case No. 1, the rule was ejusdem generis, that is, listing items of like kind; for case No. 2, that all the language of a contract shall be read as a whole, if possible, without invalidating any of the provisions; and, for case No. 3, an ambiguity can be created by circumstances as well as the language itself.

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