Beware of Jargon In Contract Documents

Contract documents are complicated in the construction industry. Everyone has them and they tend to be quite long, but the strict adherence of both parties to the language of the contract often takes a back seat to practical considerations when a project is going well. In those situations there are really only three issues that matter: (1) getting the job done right, (2) getting the job done on time, and (3) getting the job done at a reasonable cost. On many projects where things are going well you could probably delete ninety-five percent of the contract documents and it would not affect the project at all. However, when things go wrong and someone is going to lose money those written words and the interpretation given to them by the law becomes vastly more important.

A recent case sheds light on the importance of knowing what the words in your contract and change orders actually mean. Durham Stabilization v. SBBI, Inc. comes from the United States District Court for the District of Arizona and shows the importance of explicitly defining the meaning of terms in contract documents including change orders. This case involved a paving contract for the Federal Highway Administration. The plaintiff was supplying materials to the defendant who was actually performing the paving work. The subcontract between the parties was a unit price contract with an estimated quantity in tons used to calculate an estimated total contract value. However, because of rainy conditions and their possible effect on the paving work, the defendant wanted to change the type of materials that were being used for the project. Fortunately this change was identified prior to the materials being supplied. The parties then entered into a “no-cost change order” modifying the type of paving materials that were to be supplied.

Unfortunately, the parties did not define what “no-cost change order” meant in the context of this unit price contract and the change order was not totally clear on how it affected the unit prices. This change was also made verbally rather than with a formal written change order.

The change affected the tonnage of the materials that were necessary for the work because the new product was lighter than the original product. The defendant argued that the “no-cost change order” meant that the unit price stayed the same. The plaintiff argued that it believed that the “no-cost change order” did not affect the estimated total cost of the work, but that the unit prices and quantities that made up that estimated total cost were modified due the change to reach the same total cost. This meant a higher unit price. This difference had a considerable impact on the total amount of the contract when the resulting unit prices were applied to the quantities of materials that were actually supplied as opposed to the estimated quantities. The plaintiff’s interpretation resulted in a significantly higher actual contract value.

The primary question addressed by the court is an explosive one: whether the dispute between the parties over the meaning of “no-cost change order” meant that there in fact was no legally binding “no-cost change order.” Applying Arizona law, the court noted that even a written contract may not be legally enforceable if the parties gave “materially different meanings” to the contractual language. This examination included a two step process of first determining whether each side’s interpretation was reasonable and then, if both interpretations were reasonable, determining whether either party was aware of the other party’s interpretation. Because the Court determined that there were legitimate factual disputes about this two step process that should be decided by a jury, it declined to decide the case at summary judgment and the parties were going to have to try the case if they wanted a ruling on the merits. However, we will never know the ultimate legal outcome because the case was thereafter dismissed by the parties. While settlement is generally a good thing, at least one—or both—of the parties likely went home unhappy thanks to the uncertainty in the change order language. While “no cost change order” might seem completely clear to anyone in the industry, it took on two meanings in this situation and a price was paid for the uncertainty.

The lesson to be taken from this case is that relying on undefined language can be a risky proposition. In dealing with either contract language or change orders, any terms arguably subject to multiple interpretations need to be clearly defined or you may end up having to let a court determine what you really meant. You might even end up not having an enforceable contract.