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
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.
4
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
Interpretation is constant!
The parties interpret their contracts every day
when they carry them out.
13
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
Contract Formation
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).
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).
16
Contract Formation
Issues
Government
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
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 preaward matters to explain an
ambiguous contract.
The Parol Evidence Rule not about contract
interpretation; It’s about contract content
19
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
“Secondary” Overarching Principles:
● The Plain Meaning Rule (and dictionaries and
trade usage)
● The Parol Evidence Rule
● Contra Proferentem and its Federal Exception
21
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
Modern Lexical Approaches:
Proscriptive or Descriptive
23
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
“In construing Item 10 in conjunction with
Item 22, the intention of the parties must be
gathered from the whole instrument.” HolGar Mfg. Corp. v. U.S. (Ct. Cl. 1965)
24
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.
“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
25
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
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)
28
Principles of Contact Interpretation
Specific Words Help Define General
Terms – Ejusdem Generis
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)
29
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 -
The Rule is alive and well in
U.S. government procurement
contracting!
31
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 -
● That are consistent with the principal
purpose of the contract
● That find harmony, reasonable results,
meaning, and legality
42
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