Afterthoughts: Contract Interpretation

If you are performing a contract and the terms of the contract become an issue, what are the key things that you should be concerned about? Is it different if you are a government procurement official or private contractor?

Well I think the concerns are basically the same whichever party you are a part of. If you are having a disagreement, the parties need to step back and look at the positions they are each taking and ask themselves, if a judge read these words – without any help about how we performed this contract before or after we signed it – what would he or she objectively think the words meant. What is the plain meaning of these words?

To do this sort of objective analysis you will probably need to bring in counsel and perhaps, more importantly, experts that know what the words are about.

It’s the words that control and so you need to do an objective analysis of how the words would be interpreted by a disinterested third party.

 

In a couple of steps, what is the process used by the courts to interpret a contract?

My understanding of the Federal Circuit’s general process of interpretation is

Step 1: Read the words. In reading the words, you can use dictionaries or any kind of interpretation tools available, including trade dictionaries. You might be able to use trade usage, though we are somewhat up in the air about this. However, if you are a party that is arguing before a court, you would be better off finding a definition written down somewhere. We even suggested, during the webinar, that something like our Government Contracts Reference Book might be useful because it has a number of definitions written down. But then a number of those definitions are pulled from the FAR.

Step 2: If that analysis indicates that there are two reasonable interpretations of the words, you can go to the conduct of the parties. How did you get in to the contract? This would consider the negotiation history of the contract. The courts will also look to how the parties interpreted that contract after they signed and began performance.

Step 3: If there is still ambiguity, you go to risk allocation rules, and there are three of them.

(a) Interpret the words against the drafter, usually the government.

(b) Interpret the words against the contractor if the contractor should have known of the ambiguity and did not ask for the clarification during the solicitation and award process.

(c) Rule against contractor if the contractor cannot demonstrate reliance on its interpretation of the ambiguous clause when it competed for the contract.

 

Can anything be done during contract formation that will minimize the likelihood contract interpretation issues arising during performance?

I think the problem is whether people are actually reading the contract carefully before they sign it. Time and resources are the critical problem here.

The government drafts the contract. Now if you have an adequate acquisition planning process, starting months before you put a solicitation out on the street, you have time to pay careful attention to the terms of the solicitation. Ultimately, the solicitation needs to be fully read by someone in the contracting office and someone in the legal office to make sure that all the terms are consistent. But often not enough time is given to the planning process.

Once the solicitation is on the street, now the contractor has a problem. The contractor has anywhere from 30-90 days to respond to the solicitation. Now that time is probably commensurate with the complexity of the contract. But still this puts a lot of pressure on the contractor to prepare a full response and fully analyze the contract terms.

One of the major problems for both sides is that they tend to parcel out pieces of the contract to different people. Nobody has the job of reading the entire contract to see if the pieces fit together. You should certainly involve the legal office in the process to ensure that words are reasonably clear. But, normally, there is simply not enough time in the process for someone to do the full read through.

 

What, if any, solicitation documents can be considered part of the contract? Should you negotiate to incorporate more these documents into the contract?

Normally, Parts A through J are considered to be part of the contract, which includes basic legal conditions, works statements and any appendices that may be included.

I don’t think the issue of what is part of the contract is a significant issue because it is spelled out pretty directly in the FAR. Most people understand that anything labeled a solicitations provision is not a part of the contract, including the solicitation provisions in Section L. Certificates and Representations in Section K are not part of the contract and neither is Section M. This is pretty clearly stated.

But the problem is if you have a particularly complicated solicitation you have a Spec but it cites a lot of other specs and those specs cite other specs. So what looks like an 80 page specification, if you traced it through down all those referenced documents could be more like 1,000 pages. Somebody on each side needs to check these documents and trace them down to make sure there are not conflicts. What is in the contract is everything incorporated by reference and down through those parts of the contract.

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