The Acquisition Profession’s Essential Tools: The Principles of Contract Interpretation

2. The Acquisition Profession’s Essential Tools: The Principles of Contract Interpretation Kenneth J. Allen Author: The Contract Interpretation Handbook, 2016-2017 ed. (Thomson Reuters) KAllen9436@aol.com

3. 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

4. Comprehension and Communication Requires familiarity with the principles of interpretation (others’ communications), and a constant and conscious realization that even the simplest formulation of language can be reasonably understood to mean more than one thing (our own communications) “In reading each other’s words, men certainly see through a glass darkly” – US v. Lennox Metal (2nd Cir Court of Appeals, 1955)

5. Comprehension and Communication “This is the kind of case that is without a governing issue of law, only the meaning of carelessly written and slovenly documents.” Robinshorne v. Synder(Ill. 1970) “Unfortunately, neither party paid sufficient attention to detail before entering into the contract.” Gemini Elec. V. U.S. (Ct. Federal Claims, 2005)

6. 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.

7. Interpretation is a Fundamental Skill 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.

8. Interpretation is Fundamental ● 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!

9. The Value of Interpretation Skills Knowledge of the principles will help spot issues; raise and ask questions; and clarify things before contract award, and intelligently resolve disputes that arise during contract administration.

10. The Classic Interpretation Dispute Fruin-Colnon entered into a contract with the Corps of Engineers…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-ColnonCorp. v. United States, 912 F.2d 1426, 1427 (Fed. Cir. 1990)

11. OUR BASIC FACTS Widgets: Spec #1 says 5” and Spec#2 says “comply with the Code.” The Code says widgets must be at least 4”, and no more than 6” Ice: The contract incorporates the National Restaurant Standards, which require the salad dressing containers to be surrounded with “ice” Donuts: The Contracting Officer orders “a dozen donuts” and complains when the Contractor delivers only 12

12. 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

13. 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 and grant exceptions we will point out – apply to ALL contracts.

14. The Principles Around the World Every principle we will discuss has a close counterpart in civil law systems and international legal codes ● 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

15. The Principles of 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.

16. When Interpretation Occurs • 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.

17. The Interpretation Process 1). Determine Contract Formation 2). Determine Contract Content 3). Apply the Principles of Contract Interpretation ●Overarching Rules ●Preferences ●Intrinsic Evidence ●Extrinsic Evidence 4). Apply Contra Proferentem

18. Classic Interpretation Issues ● The Meaning of Individual Words and Phrases ● The Resolution of Conflicting Parts of the Contract ● Supplying Omitted Terms ● Tie-Breaking Ambiguous Contracts

19. Contract Formation –The Basic Issue 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).

20. 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)

21. Contact Content Issues Pre-Award Q&As Incorporated by reference and without reference Oral Presentations (FAR 15.102(f)) Pre-Contract Representations, Assurances, Communications, Understandings, etc. The “Christian Doctrine” Contractor’s Proposals

22. 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 a contract. The Parole Evidence Rule not about contract interpretation or ambiguity; it’s about contract content

23. 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)

24. 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 Other Important Factors ●The Plain Meaning Rule (and dictionaries and trade usage) ● The Parole Evidence Rule ● Contra Proferentem and its Federal Exception

25. 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 to the other party, or known to the other party, can be binding on the other party.

26. Dictionary 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

27. 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.”Hol-Gar Mfg. Corp. v. U.S. (Ct. Cl. 1965)

28. 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. “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

29. Principles of Contact Interpretation The Court is also mindful of the principle that to the extent that contract provisions appear to conflict, “those which relate to a particular matter control over the more general language.”Weston/Bean v. United States (Court of Federal Claims, 2015) A general statement or rule is always of less authority than a specific statement or rule, and yields to it. – Robert’s Rules of Order

30. 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.

31. 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.

32. 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)

33. Principles of Contact Interpretation “The Court finds the maxim expressiouniusestexclusioalteriushighly instructive to the interpretation of the Character of Materials To Be Dredged clause. It dictates no exceptions to the materials “to be dredged” other than those specifically enumerated in the clause. In designating only monolithic in situ rock as “not required to be dredged,” the clause clearly signals that all the other materials are required to be dredged.” – Weston/Bean v. United States (Court of Federal Claims, 2015) If the bylaws authorize things specifically, other things of the same class are thereby prohibited - Robert’s Rules of Order

34. 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)

35. Principles of Contact Interpretation “The canon of ejusdem generis teaches that “where general words follow a specific enumeration of persons or things, the general words should be limited to persons or things similar to those specially enumerated.”Hymas v. United States (Court of Appeals for the Federal Circuit, 2016) In ejusdem, the general, or “catchall” term, is being interpreted by reference to the specifically enumerated terms. Most writers today agree that it does not matter if the general term is at the beginning or end of the enumerated items.

36. Principles of Contact Interpretation “To understand ‘fishing rods, hooks, bobbers, sinkers, and other equipment,’ it would be useful to apply ejusdem generis. ‘Other equipment’ should be interpreted with reference to the previous words – it refers to other fishing equipment, and reading it broadly to include all types of fishing equipment, such as large commercial crab traps, would render the preceding list meaningless.”Bay County v. United States (Court of Appeals for the Federal Circuit, 2015

37. Principles of Contact Interpretation Ejusdem Generis “The Homeowners’ Association is responsible for the utilities, including water, electric, and gas.” Is the Association responsible for trash collection? Is trash collection a “utility” within the meaning of this language?

38. Principles of Contact Interpretation Noscitur a Sociis “Known by its associates” Specific words on a list are interpreted by reference to the neighboring specific words Noscitur a sociis says that words or terms in a contract should be understood with reference to those that accompany them. - Professor Steven J. Burton, Elements of Contract Interpretation “Words, like men, are known by the company they keep.”

39. Principles of Contact Interpretation Forest Service Timber-Harvesting Lease: “The lumber company bears the risk of loss from things such as, but not limited to, wind, ice, fire, floods, insects and animals, tornadoes, hurricanes, tsunami, and earthquakes.” The Forest Service starts a “controlled burn” on the next-door government-owned land, and that fire gets out of control and burns down the leased timber. Tough luck for the lumber company?

40. Extrinsic Evidence Looking and Going Outside the Contract

41. The Plain Meaning 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!

42. The Plain Meaning Rule – A Step Back in Legal History An approach soundly rejected in modern times by the Restatement (Second) of Contracts, the UCC, civil law system nations, and international legal systems

43. The Plain Meaning Rule Courts which subscribe to the Plain Meaning Rule, hold that if an unambiguous meaning is discernable in the language of the contract, no extrinsic evidence of surrounding circumstances may be admitted to challenge this interpretation. The decision as to whether ambiguity exists must be made without reference to any source other than the contract itself. – Professor M. N. Kniffin (1995)

44. Application of the Plain Meaning Rule Extrinsic evidence can only be considered if a document is ambiguous, i.e. subject to two reasonable meanings… this contract is not ambiguous, and extrinsic evidence cannot be considered to interpret its terms. – Armed Services Board of Contract Appeals, 2011, in Sundt Construction

45. Application of 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

46. Criticism of the Plain Meaning Rule It has been said that a person who relies only on intrinsic evidence retires into that lawyers paradise where all words have a fixed, precisely ascertained meaning … looking outside the text … [looking beyond the contract terms] tends to steadily destroy such illusions, and to reveal the essential imperfection of language. – Thayer on Evidence

47. Criticism of the Plain Meaning Rule Although favored a century ago, the Plain Meaning Rule has been rejected by the UCC and the Restatement (Second) of Contracts, and condemned by treatise writers and rejected by an increasing number of courts. … One court has described it as a process by which the words of the parties [are run] through a judicial sieve, whose meshes are incapable of retaining anything but the common meaning of words, and the meaning which the parties placed on them to run way as waste material. - Professor Carlton J. Snow (1987) cont.

48. Criticism of the Plain Meaning Rule The Plain Meaning Rule has been rejected principally because the basic premise of the rule, that words are capable of unambiguous meaning, is a proposition unsupported in the disciplines of semantics, philosophy, and common law. … Application of the rule invariably has led to the substitution of a judge’s perception of the parties’ intent, in place of the parties’ actual intent. - Professor Snow (1987)

49. Criticism of the Plain Meaning Rule So much so for ascertaining the parties’ intent - the current goal seems to be ascertaining the intent of the judge – Professor Ralph Nash (2010) But it is the law in government contracting – Travelers Casualty v. United States, Court of Federal Claims 2007

50. Species of Extrinsic Evidence Pre-Award Communications and Events Course of Performance, or Contemporaneous Interpretation Course of Dealing Trade Usage (does not require ambiguity to explain trade language)