20. Common Rules of Contract Interpretation

Key Words and Concepts

  • Contract must not be redrafted
  • Determination of the intent of the parties
  • Manifestations of intent
  • Express contract terms
  • Course of performance
  • Course of dealing
  • Separately negotiated terms
  • Customs and trade practices
  • Contract must be read as a whole
  • Interpretation giving lawful and reasonable meaning to all other provisions preferred
  • Express terms govern over all else
  • Relative importance of the various manifestations of intent
  • Parole evidence rule
  • Doctrine of contra proferentem

Previous chapters dealt with various important provisions of construction-related contracts and how courts interpreted and applied these provisions. The interpretation of a contract is a legal matter that lies in the province of judges and arbitrators, not the parties to the contracts themselves. However, it is important that these parties possess at least a rudimentary understanding of the rules of contract interpretation. This chapter explains and discusses some of the more common rules.

The resolution of many construction contract disputes turns on what the terms and provisions of the contract really mean. When disputes arise, courts, arbitrators, or other dispute resolution bodies determine the correct meaning of the contract and apply it to the situation of each particular case. They approach their task with the following mindset:

  1. The contract must be interpreted as it is. The contract must not be redrafted to reflect what the reviewing body believes “it should have said.”
  2. The reviewing body tries to determine the intent of the parties when they entered into the contract. In other words, they try to find what the parties were trying to accomplish when they wrote the language of the contract.
  3. In the search for that intent, the reviewers look for “tracks,” or manifestations of intent, that may lead them to an understanding of what the parties were thinking when they entered into the contract.

Manifestations of Intent

Some common manifestations of intent include the following:

Express Contract Terms

Perhaps nothing can express the intent of a party to be bound by a contract provision more clearly than signing a contract prominently containing that express provision. By signing a contract, the parties indicate their intention to be bound by each provision in the contract. If the provision is express and clear, there is no need to look further. However, if the contract is silent or the expressly stated provisions are badly drafted and unclear, it is necessary to search for other manifestations of intent.

Course of Performance

Course of performance means the sequence of events during the contract from its beginning up to some particular point in time. The actions and attitudes of the parties during the period prior to the occurrence of a dispute reveal how each party to the contract understood the contract’s meaning and how each responded to the causal events leading to the dispute. For example, an owner’s practice of previously paying for changes in the work based on oral direction indicates that the owner intended the contract to operate that way as opposed to a situation in which the owner paid for changed work only if a signed change order had been issued. Similarly, a contractor who does not put the owner on notice at the time of a breach of contract by the owner is sending a clear message that the contractor did not think a breach had occurred or, if it had, that it was not an important breach.

Course of Dealing

A third manifestation of intent is course of dealing. This means how the parties have previously dealt with each other, prior to entering into the current contract. Past actions and attitudes indicate what the parties are likely to have intended in a new contract that on its face is unclear.

Separately Negotiated Terms

If a contract contains separately negotiated terms or provisions as opposed to standard “boilerplate” language, those terms are taken as a very strong manifestation of intent. Separately negotiated terms mean those that were obviously drafted for that particular contract. The inclusion of such provisions clearly shows that the parties intended them to apply. Otherwise, why would they have taken the trouble to draft the special language? On the other hand, boilerplate language could be present and frequently is—simply because it was lifted or carried over from other contracts used in the past. One or both of the parties may not have realized that the language was there and thus failed to insist that it be altered or deleted. This can happen when preprinted contract forms are used or when a previously used specification or other provision is carelessly included in the new contract documents without careful scrutiny.

Customs and Trade Practices

A fifth manifestation of intent is an express or implied reference to the customs and trade practices of the industry. Customs and trade practices are sometimes determinate in resolving unclear contract meaning, particularly when the contract expressly provides that normal trade practices are intended to apply. Even when normal trade practices are not specifically mentioned, there is an implied presumption that they were meant to apply. Parties to the contract are generally expected to interact according to the customs and trade practices of the industry in the absence of express indications to the contrary.

Generalized Rules of Contract Interpretation

The preceding manifestations of intent are involved in the following generalized rules of contract interpretation.

The Contract Must Be Read As a Whole

First, and most important, the contract must be read as a whole, not as a series of isolated parts. It must also be read with an attempt to give reasonable meaning to each provision. No provision in the contract can be arbitrarily regarded as meaningless. Otherwise, why would the parties have included that provision in the contract?

An excellent example of the application of this rule is afforded by the action of the Supreme Court of Montana in reversing a trial court decision arising from the construction of a housing project for the Montana Housing Authority. A conflict developed between the utility subcontractor and the mechanical subcontractor over who was responsible for installation and hookup work within five feet of the building lines. A lower court had ruled that the utility subcontractor must perform this work based on the court’s interpretation of the technical specifications that required the utility contractor to complete its work “in every respect complete and ready for immediate and continued use.”

The Supreme Court of Montana reversed the lower court, based on their review of all of the contract documents. Another clause stated that the work of the utility subcontractor terminated at a point five feet from building foundations where the utility lines were required to be plugged or capped. A further clause indicated that the plumbing subcontractor’s duties continued to a point five feet outside the building foundation. Reading the contract as a whole, the court concluded that it was not the utility contractor’s obligation to bring the lines within the five-foot limit of the buildings. The court said:

When read together, these contractual provisions indicate Palm Tree (utility subcontractor) was not required to make the water and sewer service lines connections. The whole of the contract is to be taken together so as to give effect to every part if reasonably practicable, each clause helping to interpret the other.[1]

This case illustrates the principle that an interpretation that gives lawful and reasonable meaning to all the other provisions of the contract will prevail over an interpretation that does not. In other words, each provision will be read so that it will not conflict or be inconsistent with other provisions when this is reasonably possible.

Similarly, the Supreme Court of Arkansas settled an argument whether undercutting was required in certain work areas of a shopping center project but not required in other areas of the same project by considering all of the contract documents including an engineer’s soil report deemed to be incorporated into the contract by reference. The court concluded that undercutting was required in all areas of the project. That interpretation was the only one that permitted harmonizing the various parts of the contract documents. In the court’s words:

In seeking to harmonize different clauses of a contract, we should not give effect to one to the exclusion of another, even though they seem conflicting or contradictory, nor adopt an interpretation which neutralizes a provision if the various clauses can be reconciled. The object is to ascertain the intention of the parties, not from particular words or phrases, but from the entire context of the agreement.[2]

Determine the Relative Importance of the Manifestations of Intent

If irreconcilable conflicts or ambiguities remain after reading the contract as a whole, the various manifestations of intent should then be examined to see if they shed light on what the parties intended. In doing that, the relative importance of the various manifestations are usually weighted as follows:

  • Express contract terms are more important than course of performance, course of dealing, or the customs and trade practices of the industry.
  • Course of performance is more important than course of dealing or the customs and trade practices of the industry.
  • Course of dealing will take precedence over the customs and trade practices of the industry.
  • Separately negotiated or added terms will take precedence over boilerplate language.

Although applicable primarily to purchase order agreements, clear articulation of the preceding principles is set forth in Article 2-208 of the Uniform Commercial Code, subparagraph (2) which states:

The expressed terms of the agreement and any such course of performance, as well as any course of dealing and usage of trade, shall be construed whenever reasonable as consistent with each other; but when such construction is unreasonable, expressed terms shall control course of performance and course of performance shall control both course of dealing and usage of trade.

Even though customs and trade practices of the industry are at the bottom in the previous list of precedences, they are not unimportant. They cannot be used to override clear express language in the contract, but when a contract is ambiguous, consideration of customs and trade practices often removes the ambiguity. Words and terms will be given their ordinary and customary meaning. In particular, technical terms and usages will be given meaning according to the customs and trade practices of the industry.

For instance, a New York general contractor was held to have breached the contract when they withheld money retained from a subcontractor until final approval and acceptance of the prime contract, when the subcontract contained express language stating, “Any balance due the subcontractor shall be paid within 30 days … after his work is finally approved and accepted by the Architect and/or Engineer.” The general contractor argued, “By trade custom and usage, the general contractor always withholds money retained from the subcontractor pending final approval and acceptance of the total job.”

Unimpressed by this argument, a New York court concluded, “There is no reason to resort to trade practices or evidence of custom for an interpretation when the contract is unambiguous” and that under such certain circumstances, the subcontract clause “may not be changed by an attempt to invoke trade custom.”[3]

However, in a case in which a contract, on its face, was clearly ambiguous, another court relied on customs and trade practices of the industry to help determine the probable meaning of the ambiguous provision.[4]

Parole Evidence Rule

Construction practitioners should be familiar with the parole evidence rule. Parole or extrinsic evidence is evidence of the intent of the parties other than the express provisions of the contract itself. Specific examples include the following:

  • Previous oral or written understandings or agreements between the parties, such as records of the negotiations leading to contract formation. This category also includes letters and other written forms of communications.
  • Course of performance and course of dealing.
  • Customs and trade practices of the industry.

If an express contract provision is clear and prominent, it matters not how it got that way—courts will give it full force and effect and will not consider parole evidence.

Only when the contract is not clear does parole evidence become important. Then, courts will apply the tests just discussed to attempt to resolve the ambiguity by determining the intent of the parties.

The following cases illustrate these points. In the first, the Supreme Court of South Carolina would not permit the introduction of parole evidence consisting of an oral agreement that contradicted the terms of an unambiguous written contract. A general contractor on a HUD housing project had issued subcontracts for interior plumbing to a plumbing subcontractor and for utility work to a second subcontractor. The utility subcontract clearly stated that the subcontractor was to perform its work in conformity with the plans and specifications. The court found that the plans and specifications clearly placed the obligation to pay water and sewer tap fees on the utility subcontractor. The general contractor paid these fees and withheld that amount from monies otherwise due the utility subcontractor. A trial court permitted the introduction of parole evidence to the effect that an independent oral agreement between the general contractor and the utility subcontractor provided that the subcontractor would not be required to pay the fees. When the trial court found in favor of the subcontractor, the general contractor appealed, asserting that the lower court had violated the parole evidence rule in allowing the introduction of evidence relating to the independent agreement.

Agreeing with the general contractor, the Supreme Court reversed the trial court, stating:

Where the terms of a written agreement are unambiguous, extrinsic evidence of statements made contemporaneously with or prior to its execution are inadmissible to contradict or vary the terms….

Under the written subcontractor agreement, Ward (utility subcontractor) was responsible for the tap fees. We hold the terms of the written contract were contradicted in direct violation of the parole evidence rule.[5]

On the other hand, the Supreme Court of Nevada permitted the introduction of parole evidence to determine the true intent of the parties when they found that the contract was ambiguous. The subcontract for the installation of a roof on a new warehouse resulted in a dispute when the owner withheld payment from the general contractor, alleging that the installed roof did not comply with the contract specifications. A trial court ruled for the general contractor, who had sued to recover the withheld payments. The owner appealed, claiming that Johns-Manville roofing specifications were required by the contract, but that the contractor had installed the roofing in accordance with Bird specifications, in violation of the contract. The owner conceded that both specifications were considered prior to execution of the contract but that only the Johns-Manville specifications were integrated into the final agreement and that evidence submitted by the contractor relating to the Bird specifications violated the parole evidence rule.

After review of the trial record, the Supreme Court found that, although the contract referenced the roofing specifications, nowhere in the document was it stated which set of specifications were intended. The contract was, therefore, ambiguous. For this reason, the court held that the lower court properly admitted parole evidence to determine the intent of the parties. The lower court decision in favor of the general contractor was affirmed.[6]

Doctrine of Contra Proferentem

When a contract provision is ambiguous and all of the preceding steps, including consideration of parole evidence, fail to resolve the ambiguity, the doctrine of contra proferentem will control. This rule requires that the meaning of an ambiguous contract provision be construed against the drafter. The drafter is the party that had the opportunity to make the provision clear, and the drafter bears the burden of failure to do so.

The rule cannot be successfully invoked simply because one party does not agree with the other party’s interpretation of a particular contract provision. The provision in question must be determined to be ambiguous—that is, the provision must be susceptible to more than one reasonable meaning before it can be construed against the party that drafted it.

As long as the claimant’s interpretation is reasonable and does not conflict with other provisions of the contract, it does not matter that the drafter also has a reasonable interpretation of the provision. After all, the word ambiguous means “subject to more than one reasonable meaning.” Therefore, the meaning of the provision will be construed against the drafter by acceptance of the claimant’s interpretation, even though the drafter’s interpretation is also reasonable.

In arguments concerning contract ambiguity, owners frequently take the position that they wrote the specifications, know what they meant to say, and therefore their interpretation of the specifications controls. Courts have little sympathy for this argument. In one case, the U.S. Court of Claims (now the United States Court of Federal Claims) said:

A government contractor cannot properly be required to exercise clairvoyance in determining its contractual responsibilities. The crucial question is “What plaintiff (non-drafting party) would have understood as a reasonable construction contractor,” not what the drafter of the contract terms subjectively intended.[7]

Similarly, the U.S. Court of Appeals said that when dealing with the question of contract ambiguity, a court should

… place itself into the shoes of a reasonable and prudent contractor and decide how a contractor would act in claimant’s situation.[8]

When the court finds that the contract is ambiguous, the following cases illustrate the usual outcome.

In resolving an argument over payment for reinforcing steel accessories, the Engineer Board of Contract Appeals found the contract drafted by a mass transit district to be ambiguous in a way that was too subtle to create a duty for bidders to inquire. The transit district contended that payment should be made only for the weight of reinforcing steel detailed on the drawings, whereas the contractor argued that the specifications required that payment be made for accessories and welding rods as well. In finding for the contractor, the board concluded that the contract was ambiguous, but not so obvious that it imposed a duty on the contractor to inquire into its intended meaning at the time of bid. The contractor was paid for the weight of the accessories and welding rods.[9]

Similarly, the Court of Appeal of Louisiana found that a payment provision drafted by the State of Louisiana Department of Transportation and Development for the laying of drain conduit was ambiguous on whether the unit bid price for drain conduit included the work of placing and compacting backfill around the conduit. The contractor contended that backfill was to be separately paid, whereas the state’s chief engineer contended that backfilling the conduit was included in the unit price for laying the conduit. The court found that the contract was ambiguous and that the ambiguity was latent, thus excusing the contractor from inquiring at the time of bid. The contractor received separate payment for the backfill.[10]

The controlling principle is well defined by the words of the U.S. Court of Claims (now the United States Court of Federal Claims) in one of the leading cases on this point:

When the Government draws specifications which are fairly susceptible of a certain construction and a contractor actually and reasonably so constitutes them, justice and equity require that construction be adopted. Where one of the parties to a contract draws a document and uses therein language which is susceptible to more than one meaning, and the intention of the parties does not otherwise appear, that meaning will be given to the document which is more favorable to the party who did not draw it. This rule is specially applicable to Government contracts when the contractor has nothing to say as to its provisions.[11]

In each of these cases, it is important to note that the court found the contract to be ambiguous and that the ambiguity was latent, excusing the contractor from the duty to inquire about the intended meaning at the time of bid. If the court found that the contract was not ambiguous or that, even though ambiguous, the ambiguity could be cleared up by consideration of parole evidence, the disputed language would be given the meaning that the court determined to have been intended. If the court found that the disputed language was ambiguous but that the ambiguity was so obvious that the contractor should have inquired as to the intended meaning at the time of bid, the contractor’s claim that the disputed language be construed in its favor would fail.

Conclusion

The interpretation of a contract is a legal matter that in cases of dispute is not decided by laypersons. This chapter gave a brief overview of how judges and arbitrators approach the difficult problem of interpreting the meaning of a contract. Understanding these highlights makes the conduct of proper contractual relations easier for all participants in the construction process.

Questions and Problems

  1. What are the three things explained in the introduction to this chapter that courts and others do to determine the meaning of disputed contract provisions?
  2. What are five manifestations of intent discussed in this chapter? What do the terms “course of performance” and “course of dealing” mean?
  3. What is meant by “reading the contract as a whole”? Can some provisions of the contract be regarded as meaningless?
  4. Explain the order of importance of the following four manifestations of intent:
    1. Course of dealing
    2. Customs and trade practices
    3. Express terms
    4. Course of performance
  5. What is the relative importance of separately negotiated terms and boilerplate language?
  6. What is parole evidence? What is the parole evidence rule?
  7. What is the doctrine of contra proferentem? Under what narrow circumstances will it be applied by a court? Is it negated when the drafter’s interpretation of a disputed contract provision is just as reasonable as the claimant’s? Why not?
  8. The preprinted standard terms and conditions on the back of a purchase order for the supply of transit mix concrete to a project provided that payment for materials delivered would be made within ten days of the buyer’s receipt of payment from the project owner and that there would be no pay until the buyer had received payment from the owner. The face of the purchase order in one of the blank spaces under the section entitled “Additional Provisions” contained a typed-in statement that read: “Payment for all concrete delivered in the month will be made to Seller by the end of the following month.” Work started, and the contractor-buyer refused to pay the supplier-seller until the tenth day after receiving payment from the owner, which usually occurred 30 to 45 days later than the end of the month following delivery. The supplier protested each payment and, on completion of the work, sued the contractor for interest on the late payments, alleging breach of contract and citing the typed-in payment statement. The contractor contended that the typed-in statement was never intended to supersede the standard terms and conditions and the contractor only agreed to it because it was expected that the owner would pay early enough to permit payment to the supplier by the end of the following month.
    What would the court’s likely decision be? Explain your answer in terms of the rules for contract interpretation discussed in this chapter.
  9. A certain contract contained the following clause: Contractor shall execute and return the contract along with all required insurance policies and contract bonds within 10 calendar days of its delivery to contractor by owner. Notice to proceed shall be issued by owner within 15 calendar days of receipt of the executed contract, insurance policies, and bonds from the contractor. The work of the contract including punch list work and final cleanup of the site shall be completed within 210 calendar days from the date of notice to proceed. A separate clause provided for the assessment of $1,000 per calendar day in liquidated damages for each day that the contract work remained uncompleted beyond 210 calendar days from the notice to proceed (NTP). The contractor completed the contract 295 calendar days after NTP, and $85,000in liquidated damages was withheld from the final contract payment. The contractor sued for the $85,000 alleged to have been wrongfully withheld. The contractor claimed that they had been advised by an owner’s representative prior to the bid opening that the schedule was flexible and that “it would be all right” if the contractor did not make the required completion date and that there would be no liquidated damages assessed.
    1. Would the contractor’s suit be successful? Why or why not?
    2. If the court conducted a trial, would it be likely that the contractor would be allowed to testify about the claimed pre-bid understanding? Why or why not?
    3. With respect to question b., if the contractor had a written note from the owner’s representative confirming what the contractor was told pre-bid, would the chances of success be enhanced? Would the contractor be allowed to introduce the note as evidence at the trial? Why or why not?
  10. A clause in the technical specifications of a contract for the construction of a 3,500,000 CY embankment reads as follows: Fill material shall be spread in six-inch lifts and compacted by a maximum of four passes of a Caterpillar 825C compactor. The minimum compacted density shall be 95% modified Proctor density. When compaction tests were taken during contract performance, it was found that six to nine passes of the 825C compactor were required to obtain 95% modified Proctor density. The engineer directed the contractor to compact the embankment to 95% modified Proctor density. After filing a letter of protest and notice of claim for the additional compaction costs, the contractor complied and made the additional passes. Following project completion, the contractor sued for the extra costs, alleging a constructive change. The contractor testified in court that they thought the specification provision meant that no more than four passes would be required and that the sentence about the required density being 95% modified Proctor was included because it was thought that this density would be achieved with less than four passes. An engineer, testifying on behalf of the owner, said that he had written the specification and knew what it meant, which was that the 95% modified Proctor density must be met and that the sentence about the four passes was included because it was expected that the 95% density would be achieved with no more than four passes. What would the court’s likely decision be? Explain your answer in terms of the rules for contract interpretation discussed in this chapter.

  1. Bender v. Rookhuizen, 685 P.2d 343 (Mont. 1984).
  2. Rad-Razorback Limited Partnership v. Coney, 713 S.W.2d 462 (Ark. 1986).
  3. Cable-Wiedemer, Inc. v. A. Friederich & Sons Co., 336 N.Y.S.2d 139 (Cnty. Ct. 1972).
  4. Hardware Specialties, Inc. v. Mishara Constr. Co., Inc., 311 N.E.2d 564 (Mass. App. 1974).
  5. Southern States Supply Co., Inc. v. Commercial Industrial Contractors, Inc., 329 S.E.2d 738 (S.C. 1985).
  6. Trans Western Leasing Corp. v. Corrao Constr. Co., Inc., 652 P.2d 1181 (Nev. 1982).
  7. Corvetta Constr. Co. v. United States, 461 F.2d 1330 (Ct. Cl. 1972).
  8. P. J. Maffei Bldg. Wrecking Corp. v. United States, 732 F.2d 913 (Fed. Cir. 1984).
  9. Appeal of George Hyman Construction Co., ENGBCA No. 4506 (Sept. 29, 1981).
  10. Johnson Brothers Corp. v. State of Louisiana, 556 So.2d 154 (La. App. 1990).
  11. Peter Kiewit Sons, et al. v. United States, 109 Ct. Cl. 390 (1947).

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