Unraveling Contract Disputes – The Principles of Contract Interpretation
Breakout Session #: B01
Kenneth Allen, J.D., Author and Instructor, Self-Employed
Date: Monday, July 25
Time: 2:30pm – 3:45pm
The Challenge of Interpretation
“There is no lawyers’ paradise, where words have a fixed, precisely ascertained meaning … and where, if the writer has been careful, a lawyer, having a document referred to him, may sit in his chair, inspect the text, and answer all questions without raising his eyes.” - J.B. Thayer, A Preliminary Treatise on Evidence
3
The Importance of Interpretation
“Many contract disputes arise because different people attach different meanings to the same words and conduct.” Restatement (Second) Contracts, §2 (1981), comment b, Manifestation of Intention
4
Most government contract disputes that go all the way to a Board of Contract Appeals or to the Court of Federal Claims, are about contract interpretation.
Interpretation is a Fundamental Skill Set for All Acquisition Professionals
Contracting without being familiar with the principles of interpretation, is like driving a car without understanding road signs or rules of the road – it’s only a matter of time before an accident.
5
Interpretation is a Fundamental Skill Set
● Familiarity with the principles of interpretation is not just for lawyers,
who maybe had an hour on the topic in first year law school
● Lawyers are often the last to get involved in an interpretation dispute,
and by then the parties have often locked themselves into a position by
their actions/inactions and comments.
● All acquisition professionals have to be at least familiar with the principles!
6
The Value of Interpretation Skills
Knowledge of the principles will help spot issues; raise questions; and
clarify things before contract award, and intelligently resolve
disputes that arise during contract administration.
7
Ambiguity of Syntax “The ladies of the parish have discarded
clothing, and can be seen in the church basement.” – Lynne Truss
“Flying airplanes can be dangerous.” –
Noam Chomsky
We always know what we mean. – K. Allen
“The difference between the “right” word and the “almost right” word is the
difference between “lightening bug” and “lightening.” – Mark Twain
8
The Poster Child Contract Dispute
“Part way through performance of the contract, the parties fell into disagreement over the work, a dispute based on a difference in interpretation of the contract terms. …
The dispute was resolved by the Government ordering Fruin to do it the Government's way, and Fruin doing it. This involved redoing work in a manner more costly to the contractor. Fruin now wants compensation for the extra cost.” Fruin-Colnon Corp. v. U.S., 912 F.2d 1426, 1427 (Fed. Cir. 1990)
9
The Principles of Contact Interpretation
● The principles are ancient, and unlike every other topic in contracting,
they will not change in your lifetime.
● The principles are few, and are based on assumptions about how people
communicate
● The principles – with a few government contract exceptions we will
point out – apply to ALL contracts.
10
The Principles Around the World
Every principle we will discuss has an almost exact counterpart in civil law and
international legal systems ● International Institute for the Unification of Private Law (UNIDROIT) Principles of
Contract Interpretation
● United Nations Convention on Contracts for the International Sale of
Goods
● The European Union Principles of Contract Interpretation
11
The Principles of Contact Interpretation
The principles of interpretation are not in the FAR, and not in any statutes or regulations – they are only in the decisions of the judges and in a few non-official legal publications.
12
When Interpretation Occurs: During - • Acquisition planning
• Contractor bid/proposal
preparation
• Government evaluation and selection for award
• Contract performance
13
Interpretation is constant! The parties interpret their contracts every day
when they carry them out.
The Interpretation Dispute Process
1). Determine Contract Formation
2). Determine Contract Content
3). Apply the Principles of Contract Interpretation
● Overarching ● Preferences
● Intrinsic Evidence ● Extrinsic Evidence
4). Apply Contra Proferentem
14
Interpretation Dispute Issues
● The Meaning of Individual Words and Phrases
● The Resolution of Conflicting Parts of the Contract
● Tie-Breaking Ambiguous Contracts
15
Contract Formation Issues
Questions of contract interpretation arise in determining whether there is a contract, as well as in determining rights and duties under a contract. – Restatement (Second) of Contracts, §200 (1981).
16
Contract Formation
There is a problem of interpretation in determining whether a contract has been made, as well as determining what obligations it imposes. - Restatement (Second) of Contracts, §20 cmt. c (1981).
Contract Formation Issues
● ID/IQs (“Min – Max”) ● Requirement Contracts ● Agreements (Basic, BPAs, Basic Ordering) ● Multiple Award Contracts ● Purchase Orders in “Simplified Acquisition” ● Requirements in Cost Reimbursement Contracts (completion & term)
17
Government Contract Formation Issues
Contact Content Issues
• Pre-Award Q&As • Incorporated by reference and
without reference • Oral Presentations (FAR 15.102(f)) • Pre-Contract Representations,
Assurances, Communications, Clarifications, & Understandings, etc.
• The “Christian Doctrine”
18
The Parol Evidence Rule
When the parties have agreed that a document is their complete
agreement, pre-contract agreements that are not in the final contract, cannot add to, detract from, or
change the contract. BUT the PER does not prohibit pre-
award matters to explain an ambiguous contract.
19
The Parol Evidence Rule not about contract interpretation; It’s about contract content
Principles of Contact Interpretation
• Overarching Considerations • Preferences in Competing
Interpretations • Principles Applicable to
Intrinsic Evidence • Principles Applicable to
Extrinsic Evidence • Contra Proferentem (applies to
ambiguous contracts) 20
Overarching Principles
• Find the “Intent of the Parties” • Interpret Objectively • Interpret in Light of all the
Circumstances • The Primacy of the Words Over
Extrinsic Evidence
21
“Secondary” Overarching Principles: ● The Plain Meaning Rule (and dictionaries and trade usage) ● The Parol Evidence Rule ● Contra Proferentem and its Federal Exception
Overarching Principles
Objective and Subjective Interpretation. Objective focuses
on the words of the contract; subjective takes into account the
parties’ personal intentions – Contracts are interpreted
objectively. BUT - Interpretations expressed before
the contract, or known to the other party, can be binding on
the other party. 22
Definitions FAR 1.108(a); 2.101(a); 2.202; 52.202-1 • Definitions written specifically
for the contract • FAR definitions in the body of
the FAR • FAR definitions in FAR Part 2 • Ordinary dictionary definitions
23
Modern Lexical Approaches: Proscriptive or Descriptive
Principles of Contact Interpretation
Principle: Interpret contracts as a whole. (RS §202(2) (1981) A writing is interpreted as a whole, and all writings that are part of the same transaction are interpreted together
24
“In construing Item 10 in conjunction with Item 22, the intention of the parties must be gathered from the whole instrument.” Hol-Gar Mfg. Corp. v. U.S. (Ct. Cl. 1965)
Principles of Contact Interpretation
Principle: Specific Over General Terms
RS (2d) §203 (c). specific terms and exact terms are given greater weight than general language.
25
“Therefore, the court interprets the specific reference to ... take preference over the general reference in the contract,” TLC Construction Corp. v. U.S. (Ct. Fed Claims 2004) “Specific terms and exact terms are given greater weight than general language.” Farnsworth on Contracts, §7:11
Principles of Contact Interpretation
RS (2d) §202(3). Unless a different intention is manifested, (a) where language has a generally prevailing meaning, it is interpreted in accordance with that meaning. RS (2d) §202(3). Unless a different intention is manifested, (b). technical terms and words of art are given their technical meaning when used in a transaction within their technical field.
26
Principles of Contact Interpretation
Principle: Specially- Negotiated Terms Prevail Over Boilerplates
RS(2d) §203 In the interpretation of a promise or agreement or a term thereof, … (d). separately negotiated or added terms are given greater weight than standardized terms, or other terms not separately negotiated.
27
Principles of Contact Interpretation
Exclusive Lists Admit no Outsiders: Expressio Unius est Exclusio Alterius
28
Where “certain things are specified in a contract, other things of the same general character are generally held to be excluded by implication.” As the maxim “Expressio Unius Est Exclusio Alterius” states, “the expression of one thing is the exclusion of another.” Capital Properties v U.S. (Ct. Fed. Cl. 2003)
Principles of Contact Interpretation Specific Words Help Define General
Terms – Ejusdem Generis
29
The meaning of a term that appears ambiguous in isolation may become clear when analyzed in light of the terms that surround it. A word in a list is given more precise content by the neighboring words. Courts turn to the principle of ejusdem generis, which states that that general words in a list should be construed as similar to more specific words in the list. GAO (2010)
Principles of Contact Interpretation
Noscitur a Sociis
Specific words on a list are interpreted by reference to the
neighboring words
“Words, like men, are known by the company they keep.”
30
The Plain Meaning Rule or “Four Corners Rule”
● Extrinsic evidence is not admissible to interpret the contract unless the words of the contract are unclear.
● The Rule is contrary to the Restatement, and most legal systems in the world, BUT -
31
The Rule is alive and well in U.S. government procurement contracting!
The Plain Meaning Rule
“Further, where there is an ambiguity, we may consider extrinsic evidence to determine the parties’ intent.” Altanmia Commercial Marketing Company, ASBCA 2009
32
Four Species of Extrinsic Evidence
• Pre-Award Communications and Events
• Course of Performance, or Contemporaneous Interpretation
• Course of Dealing
• Trade Usage (does not require ambiguity)
33
Pre-Award Evidence
Pre-Award Conduct and Communications Can Affect Contract Content and Meaning
Conduct and communications that
occur before the contract can affect the content of the contract, or the explanation of the contract.
The Parol Evidence Rule is a major
factor in contract content.
34
Pre-Award Evidence
Principles Involving Communication and Knowledge, Silence, and Secret Desires
“If one party to a contract knows the meaning that the other intended to convey by his words, then he is bound by that meaning. The same is true if he had reason to know what the other party intended.” Cresswell v. U.S., 146 Ct. Cl. 119, 173 F. Supp. 805, 811 (1959)
35
Course of Performance
Principle: “Course of Performance”- How People Carry Out Their Contract Reflects Their Interpretation of the Contract
“In cases where the language of the contract is indefinite or ambiguous, the practical interpretation by the parties themselves, is entitled to great, if not controlling, influence.” City of Chicago v. Sheldon, 76 U.S. (9 Wall.) 50, 54 (1869)
36
Course of Performance
“The contractor, when ordered, proceeded to clean and disinfect its entire premises without protest. A principle of contract interpretation is that the contract must be interpreted in accordance with the parties' understanding as shown by their conduct before the controversy.” Julius Goldman’s Egg City v. U.S., 697 F.2d 1051 (Fed. Cir. 1983), cert. denied 464 U.S. 814 (1983)
37
Course of Performance “We reject the VA’s interpretation.
The VA never contemporaneously argued that the generators were non-conforming … Generally, evidence of contemporaneous beliefs about the contract is particularly probative of the meaning of a contract.” Reliable Contracting Group, LLC v. United States, 779 F.3d 1329, 1332 (Fed. Cir. 2015)
38
Course of Dealing
Restatement (Second) of Contracts, §223 (1981) Course of Dealing
(1). A course of dealing is a sequence of previous
conduct between the parties to an agreement which is fairly to be regarded as establishing a common basis of understanding for interpreting their expressions and conduct.
(2). Unless otherwise agreed, a course of dealing between the parties gives meaning to or
supplements or qualifies their agreement.
39
Trade Usage
What the trades do, and how they use language, is taken into account in interpreting technical contracts.
Evidence of trade usage can serve a definitive purpose and translate plain language into trade terms.
Trade usage gets a pass from the Plain Meaning Rule
40
Trade Usage
Restatement (Second) of Contracts, §222 (1981) Usage of Trade
(3). Unless otherwise agreed, a usage of trade in the vocation or trade in which the parties are engaged, or a usage of trade of which they know or have reason to know, gives meaning to, or supplements, or qualifies their agreement.
41
Preferences in Interpretation
If after all the evidence is in – both intrinsic and extrinsic evidence - the judges review the competing interpretations. The law prefers interpretations -
42
● That are consistent with the principal purpose of the contract
● That find harmony, reasonable results, meaning, and legality
The Doctrine of Contra Proferentem
Verba chartarum fortius accipiunter
contra proferentem
43
Ambiguous Contracts
If, after considering all the evidence, intrinsic and extrinsic, and applying all the principles and preferences of interpretation, the court determines that both parties hold different but reasonable interpretations - the contract is ambiguous. It does not matter if one party’s interpretation is more reasonable than the other’s. Now Contra Proferentem can be applied.
44
Contra Proferentem
“Where one of the parties to a contract draws the document and the language is susceptible of more than one reasonable interpretation, that meaning will be given the document which is more favorable to the party that did not draw it. This rule is particularly applicable to government contracts, where the contractor had nothing to say as to its provisions.” Peter Kiewit Sons' Co. v. U.S. (Ct. Claims, 1947)
45
Contra Proferentem Contra preferentem is a schoolmaster of
wisdom and diligence in making men watchful in their own business.— Sir Francis Bacon, A Collection of Principal Rules and Maximes of the Common Law (1597)
As between two reasonable and practical constructions of an ambiguous provision ... the provision should be construed less favorably to that party which selected the contractual language. U.S. v. Seckinger (U.S. Supreme Ct, 1970)
46
Contra Proferentem
Restatement (Second) of Contracts, §206 (1981). Interpretation Against the Draftsman. In choosing among the reasonable meanings of a promise or agreement, or a term thereof, that meaning is generally preferred which operates against the party who supplies the words, or from whom a writing otherwise proceeds.
47
Contra Proferentem
The Government Contract Elements of Contra Proferentem:
1) An Ambiguous Contract
2) Drafted by Just One Party
3) The Non-Drafter Contractor Can Prove that It Relied on its Reasonable Interpretation When Preparing Its Proposal
48
The Patent Ambiguity Exception
The “Patent Ambiguity Exception to Contra Profertentem.” If the problem with the contract was obvious, the non – drafter contractor must ask about it before it bids.
49
Contra Proferentem’s Duty of Inquiry
“A companion rule to the rule of ambiguities is that, where a bidder faced with a ‘patent and glaring discrepancy’ fails to seek clarification from the Contracting Officer, the discrepancy should be construed against him.” Brezina Construction Company, Inc. v. U.S., Court of Federal Claims (1972)
50
The Patent Ambiguity Exception
The “Patent Ambiguity Exception to Contra Profertentem.” If not obvious, the non drafter must prove that it relied on its reasonable interpretation when it bid.
51
The District of Columbia has a “no cost” contract with Soprano’s Towing to tow cars designated by the District to the city’s impound lot, where they would be offered for sale at auction. The contract provides that Soprano has the option of purchasing any such vehicle for $25 - “if it does not sell at public auction.” The District attempts to sell the vehicles at
successive auctions, claiming that it can determine how many attempts at auction can be made to sell the cars before they are offered to Soprano. Soprano says the cars are theirs for $25 after the first auction.