Download Contract Ambiguities: When the Plain Language of a Contract is Not

LEGAL FORUM
Contract Ambiguities: When the Plain
Language of a Contract is Not so Plain
BY JACK HORAN AND SANDEEP NANDIVADA
On May 1, 2007, the U.S.
Agency for International
Development (USAID)
entered into a contract
with Jacintoport
International LLC. The
contract was for food
storage, cargo handling,
and custodial and
logistics services for
the USAID Title II Food
Program.
The contract contained a provision titled
“Responsibility for Condition of Warehouse
and Protection of Commodities,” which
provided, in pertinent part:
The contractor must maintain the
warehouse in a sound, clean condition
and in accordance with the standards
in this contract, take all commercially
reasonable steps to keep it free of
insects, rodents, birds, and other conditions which may adversely affect the
condition of the commodities or their
containers, including but not limited to
fumigation which shall be reimbursed
by USAID…. [The] contractor shall fumigate the commodities as necessary
or as determined to be necessary by
inspection. All fumigations costs shall
be reimbursed by USAID and shall be
billed at cost.
Additionally, the solicitation, which was
appended to the contract, provided the
following:
72
Contract Management | August 2015
Fumigation: If condition inspectors find
infested commodities, the contractor
shall arrange and pay for fumigation of
any lots found to be infested…. Fumigation is to be done in accordance with
the [Federal Grain Inspection Service
(FGIS)] fumigation handbook. The
contractor shall pay all cost associated
with fumigation. The contractor shall
be reimbursed by the government for
these costs on a cost reimbursables
basis in accordance with the contract
rates, terms, and conditions. Copies of
all fumigation reports shall be sent to
the USAID [cognizant technical officer].
Contract Disputes Act (41 U.S.C. 7104(b)(1)).
Thereafter, Jacintoport moved for judgment
on the pleadings, arguing that the plain
language of the contract required USAID to
reimburse Jacintoport for warehouse fumigation, and that the rate for reimbursement
was $3.00 per metric ton. The government
cross-moved for partial summary judgment, contending that the plain language
of the contract, and Jacintoport’s conduct
throughout contract performance, contradicted Jacintoport’s claim. The case is noted
as Jacintoport International LLC v. United
States, No. 14-541C (Fed. Cl., May 20, 2015).
The COFC considered two issues:
Per the contract’s “Schedule of Rates,” fumigation services were to be provided at a rate
of $3.00 per metric ton.
Pursuant to these provisions, Jacintoport
submitted two invoices, for a total amount
of $10,918.65, to USAID for reimbursement
for the fumigation of cargo. These invoices
were paid in full. Three years after the
completion of the contract, however, Jacintoport submitted a claim for an additional
$552,658.35 for expenses incurred for the
fumigation of the warehouse at a rate of
$3.00 per metric ton. The contracting officer
denied the claim on July 18, 2013, stating
that the contract did not require the fumigation of the warehouse, but rather only the
fumigation of the commodities within the
warehouse. Further, the contracting officer
stated that the $3.00 per metric ton rate applied only to the fumigation of commodities
and, in any event, was only an estimated
rate. In practice, fumigation costs were to
be reimbursed by the government at cost.
Jacintoport appealed the contracting
officer’s final decision to the U.S. Court
of Federal Claims (COFC) pursuant to the
§§
Whether the contract obligated USAID
to reimburse Jacintoport for costs
incurred to fumigate the warehouse
where commodities were stored; and
§§
Whether fumigation services were to
be charged “at cost” or at the $3.00
per metric ton rate indicated in the
contract’s “Schedule of Rates.”
On the first issue, Jacintoport relied on its
contractual obligation to “maintain the
warehouse in a sound, clean condition…
take all commercially reasonable steps to
keep it free of insects, rodents, birds, and
other conditions…including but not limited
to fumigation which shall be reimbursed
by USAID.” Jacintoport contended that
this requirement established its right to
reimbursement for the fumigation of the
warehouse, and not just the commodities
within the warehouse. Jacintoport further
argued that the contractual requirement
to “fumigate the commodities as necessary or as determined to be necessary by
inspection” was separate and distinct from
the requirement to fumigate the warehouse.
LEGAL FORUM
Whereas fumigation of the warehouse was
to be completed as a prophylactic measure
to prevent infestation of commodities, fumigation of the commodities was necessary
once infestation already had occurred.
In contrast, the government argued that the
contract’s fumigation requirement applied
only to the fumigation of commodities. The
government asserted that its interpretation
of the contract was supported not only by
the contract’s plain language, but also the
FGIS Handbook, which provides internal
policies and procedures applicable to the
fumigation of grain and certain other commodities. The government also contended
that the contract’s prescribed fumigation
rate—which was based on the quantity of
commodities to be fumigated rather than
square footage—clearly indicated that warehouse fumigation was not contemplated.
The COFC concluded that neither party
had established that its reading of the
contract was the only reasonable interpretation. The COFC found that Jacintoport’s
interpretation was inconsistent with the
contract’s actual language, which appeared
to contemplate that fumigation of the
commodities could occur for both prophylactic purposes as well as to address actual
infestation. As such, any contractual provision requiring fumigation of the warehouse
for solely prophylactic purposes would
arguably be redundant. Moreover, the COFC
found that Jacintoport’s interpretation
Contract Management | August 2015
73
LEGAL FORUM
Effective pre-contractual
communications
with the government
eliminates the certainty
of a bad result to
contractors for patent
ambiguities, and
mitigates the risk of
a bad result for latent
ambiguities.
of the contract could not be reconciled
with either the FGIS Handbook’s express
language regarding the fumigation of commodities or the fumigation rate established
in the contract. Similarly, the COFC found
that the government’s interpretation of
the contract was unconvincing, noting that
the government did not have an adequate
explanation for the separate contract
requirement to keep the warehouse “free of
insects, rodents, birds, and other conditions which may adversely affect the condition of the commodities or their containers,
including but not limited to fumigation
which shall be reimbursed by USAID.”
Concluding, however, that neither party’s
interpretation was outside the zone of
reasonableness, and that the ambiguity in
the contract’s terms was not so “obvious,
gross, or glaring” as to be patent, the COFC
found that the contract contained a latent
ambiguity in stating the fumigation requirement. Because the parties had not yet
obtained discovery on or presented to the
COFC all relevant evidence on the issue, the
COFC could not consult extrinsic evidence
to resolve the ambiguity. As such, the COFC
denied Jacintoport’s motion for partial
judgment on the pleadings, and denied the
portion of the government’s motion for
summary judgment pertaining to the scope
of the fumigation requirement without
prejudice. The COFC would determine, after
the completion of discovery, which of the
74
Contract Management | August 2015
two reasonable interpretations of the
ambiguities was intended by the parties
based on the extrinsic evidence presented
by the parties.
As to the second issue—whether fumigation
was to be charged at cost or at the $3.00
per metric ton rate—the COFC again found
that the contract was ambiguous. The COFC
explained that the contract’s language, on
its face, was internally inconsistent—providing, at once, that the fumigation was to be
billed “at cost” and at “$3.00 per metric
ton.” The COFC also found that neither
party met its burden to show that its reading of the contract was the only reasonable
interpretation. In arguing that fumigation
was to be billed at the $3.00 per metric
ton rate, Jacintoport failed to reconcile the
contract’s reference to “at cost” billing. The
government could not explain why the contract would have incorporated a “Schedule
of Rates” specifying a $3.00 per metric ton
rate for fumigation services if that rate was
to be used solely as an estimate.
Because this ambiguity was apparent on the
face of the contract, the COFC determined
that the ambiguity was patent and should be
construed against Jacintoport. According to
the COFC (and a long line of cases), the contractor has a duty to confirm its understanding of the fumigation rate and ensure that the
contract’s language reflected this understanding. As such, the COFC accepted the government’s interpretation of the ambiguity and
held that the contract provided for fumigation
to be billed at actual cost, rather than at the
$3.00 per metric ton rate. The COFC therefore
granted the government’s motion for summary judgment on the proper measure of the
fumigation rate, deciding this issue squarely in
favor of the government.
Jacintoport’s experience navigating contractual ambiguities demonstrates the risk to contractors of ambiguities in contract language.
If the ambiguity is obvious or patent, the
contractor has an obligation to resolve the ambiguity prior to performance. If the contractor
does not resolve the ambiguity, the court will
do so—in the favor of the government. On the
other hand, if the ambiguity is not obvious on
the face of the contract (or latent), the court
will look to extrinsic evidence—such as the
communication of the parties, performance
history, prior conduct, etc.—to determine
which interpretation is correct. The contractor
has a fighting chance at a resolution of the
ambiguity in its favor, but only a chance.
Effective pre-contractual communications with
the government eliminates the certainty of a
bad result to contractors for patent ambiguities, and mitigates the risk of a bad result for
latent ambiguities. If Jacintoport clarified
the ambiguities, it could have performed the
contract according to the explicit requirements
of the contract. Instead, Jacintoport’s failure to
clarify its fumigation responsibilities prevented
Jacintoport from reimbursement according to
its interpretation of the patently ambiguous
language, and put Jacintoport at risk that it will
not be reimbursed according to its interpretation of the latently ambiguous language.
Ultimately, contractors are wise to clarify any
potentially inconsistent contract language with
the government rather than assume that their
understanding of a contract is correct. CM
ABOUT THE AUTHORS
JACK HORAN, JD, is the general counsel for
NCMA. He also practices in the Government
Contracts and White Collar Crime practice
groups at McKenna Long & Aldridge, LLP.
SANDEEP NANDIVADA is a member of McKenna Long and Aldridge’s Government Contracts practice group.
Send comments about this article to
[email protected].