“Contracts for the execution of the works should be drawn with care and precision: Because, when without legal flaws, neither party will be able to take advantage of the other.” —Vitruvius, chief architect to Caesars Julius and Augustus
Contract interpretation is an area marked by shades of grey that are ripe for dispute, especially because language and its use is varied in form, meaning and intent. In drafting a contract, it is difficult (if not impossible) to anticipate most circumstances that might give rise to a dispute. As a result, most contracts contain issues of potential vagueness that can give rise to litigation.
Most courts subscribe to rules of objective contract interpretation, which means that words are given their plain meaning and interpreted so the contract as a whole makes sense. If the contract language is unambiguous, courts are not allowed to look to external (extrinsic) evidence to interpret the contract.
In Appeal of Dragados USA, Inc. (August 29, 2013), the Armed Services Board of Contract Appeals (ASBCA or Board) denied Dragados’ appeal relating to claimed extra costs for a dam project in Puerto Rico based on contract interpretation.
On March 14, 2008, the U.S. Army Corps of Engineers (COE) awarded Dragados a contract to construct the Portugues Dam and Bucana Rivers Project in Ponce, Puerto Rico. The project included construction of a 220-foot-high roller compacted concrete (RCC) thick-arch dam, with a crest length of 1,230 feet and an estimated 367,000 cubic yards of concrete.
The specifications included detailed requirements for the concrete. The provision in dispute provided an approximate design mix for the RCC mixture. Section 03701, paragraph 2.2.2 of the specifications, “Proportions,” provides:
RCC mixtures and all other conventional concrete mixtures including bedding mortar and grout for GERCC will be proportioned by the Contracting Officer. There will be one primary RCC mixture used for the mass of the dam structure. This primary mixture will contain approximately 210 to 250 pounds water, 180 to 215 pounds of Portland cement and 90 to 125 pounds pozzolan per cubic yard. Based on the design mix, 280,000 tons of fine aggregate and 420,000 tons of coarse aggregate will be required.
On February 12, 2010, the COE provided Dragados the approved mix design for RCC. On April 23, 2013, Dragados sent a letter notifying the COE the approved mix design resulted in a change to the contract. The COE’s final mix design required 293,000 tons of fine aggregate and 473,000 tons of coarse aggregate. Dragados believed this was a change because paragraph 2.2.2 of the specifications provided for 700,000 tons of aggregate (“[b]ased on the design mix, 280,000 tons of fine aggregate and 420,000 tons of coarse aggregate will be required”).
On September 17, 2010, Dragados submitted a Request for Equitable Adjustment (REA) and requested $1,925,693 because the approved mix design resulted in an additional 72,817 tons of aggregate. On November 10, 2010, the COE rejected Dragados’ REA. The COE’s rejection letter included a technical evaluation that argued the quantity of aggregate could be determined from quantity “take-offs” from the contract drawings.
On December 14, 2010, Dragados submitted a certified claim for $2,969,504. Dragados argued it performed its own quantity take-offs, and lacking clear information, arrived at a figure close to the 700,000 tons of aggregate indicted in the contract for RCC and conventional concrete. Based on these results, Dragados used this amount for its offer and reached an agreement with its subcontractor, Construcciones Jose Carro, for the same amount of aggregate.
Dragados argued it was entitled to recover additional costs for producing aggregate in excess of a 700,000 ton baseline, pursuant to paragraph 2.2.2. Dragados stated its estimate had been updated to 90,058 tons of additional required aggregate. On April 1, 2011, the COE denied Dragados’ claim. Dragados appealed to the ASBCA.
On appeal, Dragados argued the specifications clearly represented that 700,000 tons of aggregate were required for RCC and conventional concrete. Dragados maintained that itself and its subcontractor understood the 700,000 ton amount of required aggregate applied to both RCC and conventional concrete. In response, the government argued that paragraph 2.2.2 refers to a proposed mix design for RCC only, as opposed to conventional concrete where no mix design or quantities were provided.
The Board reviewed basic rules of contract interpretation. When interpreting a contract, the language of the contract must be given the meaning that would be derived by a reasonably intelligent person acquainted with similar circumstances. When a contract’s language is unambiguous, it must be given its “plain and ordinary” meaning and the court may not look to external evidence to interpret its provisions.
Applying these principles, the Board found the disputed language was clear and unambiguous on its face. The Board noted the second and third sentences of paragraph 2.2.2 deal only with RCC. The Board found the critical fourth sentence of paragraph 2.2.2 — that provides the quantity of 700,000 tons — must also relate to the second and third sentences.
Therefore, the Board concluded the 700,000 tons of aggregate was specified for RCC only (and not for conventional concrete). In addition, the Board found there was more information in the drawings that Dragados could have used to estimate the amount of aggregate, and that Dragados did just that with its quantity take-offs. Based on this plain and ordinary reading of the contract, the Board denied Dragados’ appeal.
The Dragados matter illustrates the approach of most courts in interpreting contracts. If contract language is subject to a reasonable interpretation, courts will typically take that route to interpret the contract. This avoids the need for further discovery, court hearings and a potential trial. Here, the ASBCA took the “plain meaning” approach and denied Dragados’ claim. If the contract was drafted or interpreted slightly differently, Dragados might have prevailed on its claim for $3 million.
Brian Morrow is a partner in Newmeyer & Dillion LLP and a licensed California Civil Engineer and attorney specializing in the field of construction law. [email protected]