A recent Nebraska Supreme Court decision reminds parties that careful contract drafting is essential to protect their interests in the event that a dispute arises. It doesn’t take much– even a subtle oversight can create ambiguity in a contract and thereby permit a court to look outside the language of the contract documents when determining what the parties intended.
In Facilities Cost Mgmt. Group v. Otoe Cty. Sch. Dist., Otoe County School District (the District) and Facilities Cost Management Group, LLC (FCMG), entered into a contract where FCMG agreed to provide architectural, representative, and managerial services in connection with the construction and renovation of three schools within the District. 291 Neb. 642 (2015). At some point, the District learned that the project was nearly $2 million over budget and stopped paying FCMG’s invoices. FCMG filed suit, alleging the District breached the contract by failing to pay the full amount due, seeking $2,016,747.52 in damages, plus interest, attorney fees, and costs.
The contract between the District and FCMG was based on a 1987 version of the American Institute of Architects’ “Standard Form of Agreement Between Owner and Architect.” However, the parties opted to customize certain sections of the contract, including section 11.2.
The District argued that the customized contract incorporated certain documents which included “guaranteed maximum price” language; or in the alternative, that the contract was unclear as to the method for how to calculate fees for increases to the scope of the project. In contrast, FCMG argued that the contract was not ambiguous, and that the parties’ conduct during performance of the contract clearly indicated the intent of the parties as to the payment of costs and fees. Under Nebraska law, a contract is ambiguous when a word, phrase, or provision in the contract has, or is susceptible of, at least two reasonable but conflicting interpretations or meanings.
After a hearing on the issue, the district court concluded that the contract was not ambiguous and the jury returned a verdict in favor of FCMG in the amount of $1,972,993.
On appeal, the Supreme Court found that the language of section 11.2 was ambiguous because “scope of work” was not a defined term in the contract and it was unclear exactly what the parties intended “scope of work” to encompass. Importantly, this finding required the Court to remand the case for a new trial because in a jury case, when the terms of an ambiguous contract are in dispute and the intent of the parties cannot be determined from the words used, the jury, not the court, determines the meaning of the contract based on the all the facts and circumstances.
Many standardized contracts produced by the AIA and other institutions are carefully drafted after a thorough review of industry norms and general expectations of experienced parties. This doesn’t mean that standardized forms are immune from ambiguity, however, and there is the added risk that a standardized document will not address the specific concerns and risks associated with any given construction project. After all, standardized, one-fits-all contracts are just that: standard.
On the flip side, parties should realize that even small modifications to an agreement can leave an otherwise well-drafted contract susceptible to multiple interpretations. In such an event, the consequences can be serious.
This issue is not unique to Nebraska. In several states, including Colorado, Indiana, Iowa, Minnesota, North Dakota, and South Dakota, once a court finds a contract is ambiguous, the fate of the parties is left to the jury’s determination of “what the parties intended.” Unfortunately, as many parties often learn the hard way, a contract interpreted retroactively by a group of 12 individuals with no construction experience can be vastly different from what the contracting parties originally intended at the project’s commencement.
Ultimately, parties are cautioned to consult with an experienced attorney prior to entering into any contract. With the right legal guidance, the treacherous maze of contract drafting is much more navigable.
If you have any questions, please contact one of Woods Aitken’s Construction Attorneys. For additional construction news, tips, and updates, we encourage you to view our Construction E-Brief archives.