unraveling contract disputes-the principles of contract interpretation

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

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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

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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.

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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!

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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.

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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

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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)

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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.

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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

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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.

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When Interpretation Occurs: During - • Acquisition planning

• Contractor bid/proposal

preparation

• Government evaluation and selection for award

• Contract performance

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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

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Interpretation Dispute Issues

● The Meaning of Individual Words and Phrases

● The Resolution of Conflicting Parts of the Contract

● Tie-Breaking Ambiguous Contracts

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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).

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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)

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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”

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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.

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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

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“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

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Modern Lexical Approaches: Proscriptive or Descriptive


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

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“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)


Principle: Specific Over General Terms

RS (2d) §203 (c). specific terms and exact terms are given greater weight than general language.

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“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


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.

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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.

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Exclusive Lists Admit no Outsiders: Expressio Unius est Exclusio Alterius

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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

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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)


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.”

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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 -

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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

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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)

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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.

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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)

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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)

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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)

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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)

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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.

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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

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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.

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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 -

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● 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

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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.

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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)

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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)

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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.

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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

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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.

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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)

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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.

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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.

unraveling contract disputes-the principles of contract interpretation

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