Construction Contract Ambiguity: Court Considers Expert Testimony To Clarify Contract Terms

imageA construction site injury provides the setting for the First District’s recent application of Illinois contract interpretation rules to the question of when and how contracting parties’ prior course of dealing can inform the court’s analysis of an ambiguous written agreement.

In Gomez v. Bovis Lend Lease, 2013 IL App (1st) 130568, the plaintiff plumbing subcontractor was injured when he fell through a floor gap known in the trade as an “infill” while working on the construction of the 102-story Trump Tower in Chicago.  He sued the project manager and general contractor who in turn, filed a third-party complaint against the concrete forms subcontractor for breach of a written concrete flooring contract.

The flooring contract required the subcontractor to provide “designs, drawings and technical support” for the concrete forming systems. The parties (the general contractor and the concrete subcontractor) had worked together several times in the past.  In these prior projects, the subcontractor never provided any infill design services or technical support to the general contractor.  The trial court granted the subcontractor’s motion for summary judgment on the basis that the subcontractor wasn’t obligated to provide support for the infill areas.

Held: Affirmed

In siding with the subcontractor, the First District applied several key contract interpretation and enforceability principles:

–  The court must give effect to the parties’ intentions when interpreting a contract;

– The best indication of the parties’ intent is the plain meaning of the contract’s language which must be interpreted in light of the contract as a whole;

 – A contract is ambiguous where it’s subject to more than one reasonable interpretation;

 – If a contract’s ambiguous, extrinsic evidence may be used to interpret it;

 – If the contract is unambiguous, extrinsic evidence may not be used to interpret it;

–  Mere disagreement over contract terms doesn’t equate to ambiguity;

– If a contract contains an integration clause, a court may not use extrinsic evidence to interpret the contract;

– But if the contract’s ambiguous, the integration clause will not preclude consideration of extrinsic evidence;

Gomez, ¶¶ 13-14, 25-26.

The Court found the subject contract ambiguous.  While the contract was detailed in its delineation of the subcontractor’s design, drawing, calculation and technical support requirements, it was silent on what if any obligations the subcontractor had for an infill area, which was the location of the plaintiff’s injury.  The court considered extrinsic evidence including expert affidavit testimony on the parties’ previous projects to determine the scope of the subcontractor’s obligations.

The subcontractor’s summary judgment evidence showed that in the parties’ prior 20 or so projects, neither the general contractor nor the project manager ever asked the subcontractor to provide design or support for infill areas.  Because of this, the Court held that the parties’ past dealings and their course of performance on the Trump Tower project conclusively showed that the concrete subcontractor had no contractual responsibility for the infills.  The Court affirmed summary judgment for the subcontractor on the general contractor’s contribution claim.  Gomez, ¶¶18-19, 30.

Take-away: Gomez presents a good summary of some fundamental and prevalent Illinois contract interpretation principles.  The case specifies that where a contract is ambiguous, a court will consider evidence – namely, expert testimony – of the contracting parties’ prior dealings as well as their course of performance on the same project in order to give content to an unclear contract term.

Integration Clause, Justifiable Reliance and Limited Guaranties: IL Basics

The limited guarantor won big in Ringgold Capital IV, LLC v. Finley, 2013 IL App (1st) 121702, a case that vividly captures how important it is for a lender to correctly document a loan.

After a borrower defaulted on the underlying loan, the plaintiff sued to foreclose its mortgage and on the guaranty.

The trial court dismissed the guaranty claim since it contained the wrong date (it had a superseded payment date) that mistakenly wasn’t changed to reflect the continued loan closing date.  Plaintiff lender appealed. 

Holding: Circuit court affirmed.  All counts pled against the limited guarantor were properly dismissed with prejudice.

Reasoning/Rules:   Siding with the guarantor, the appeals Court espoused the governing guaranty rules:

a guarantor’s liability is determined from the text of the guaranty contract;

– A guarantor is a favorite of the law and when construing his liability, the court gives the guarantor the benefit of any doubts that arise from the contract language;

– A court will not increase a guarantor’s liability beyond the precise words of the contract;

– where a guaranty is clearly worded, it must be construed according to its plan language;

– an integration clause or merger clause in an unambiguous guaranty will preclude the introduction of parol evidence to alter or interpret the contract.

( ¶¶ 16, 19, 25)

Applying these rules, the First District rejected lender’s argument that the guaranty was ambiguous since it referred to “related loan documents.”

The court found the guaranty unambiguous based on its plain text. (¶¶ 20-24). 

The Court found the integration clause preventef plaintiff’s attempt to introduce outside evidence to change or explain the guaranty’s text. (¶¶ 27-28).

Next, the Court rejected plaintiff’s fraud in the inducement counts.  That claim fell short because defendant’s alleged representations about guaranteeing the borrower’s obligations spoke to future events and future intentions aren’t actionable fraud. (¶ 38). 

Plaintiff also failed to allege justifiable reliance (another fraud in the inducement element) on any words or acts of the limited guarantor since the lender drafted the limited guaranty and its terms were freely negotiated by both parties’ counsel. (¶ 39). 

Take-away

Ringgold shows that if a document is unambiguous and specific – in terms of date and amount – and contains an integration clause, the court will enforce it to the letter and disallow any attempts to change or explain its terms. 

The case also embodies a cautionary tale for lenders involved in a loan that doesn’t close as originally planned.  In such a case, it is paramount for a lender to ensure that all guaranties reflect any new loan dates.

Illinois Contract Law: Parol Evidence Rule, ‘No Damages for Delay’ Clauses

In Asset Recovery vs. Walsh Construction, 2012 IL App (1st) 101226, the First District affirmed  a bench trial judgment for a general contractor sued by a demolition subcontractor for breach of contract and quantum meruit.  The lawsuit stemmed from numerous delays over the course of a multi-million dollar demolition subcontract in connection with the redevelopment of the Palmolive Building, a high profile building on Michigan Avenue, Chicago.

In affirming the trial court, the First District held that all the delays sued upon by the plaintiff were within the contemplation of the parties and also enforced a “no damages for delay” clause contained in both the subcontract (between plaintiff and defendant) and the prime contract (between defendant and building owner).  In the lengthy opinion, the Asset Recovery Court – citing Illinois precedent – provides a good synopsis of several legal principles which commonly crop up in breach of contract litigation.

The key contract formation, interpretation and damages propositions cited in Asset Recovery include:

– Illinois applies the “four corners rule” and looks to the language of the contract to determine its meaning;

– Contractual ambiguity exists if the contract language is susceptible to more than one meaning; 

– If an ambiguity is present, parol evidence may be admitted to aid the court in resolving the ambiguity;

– If the contract is unambiguous, extrinsic evidence isn’t provisionally admitted to show an external ambiguity;

– Where a contract is signed after its effective date, it relates back to the effective date;

– A party can accept a contract by course of conduct, but it must be clear that the conduct relates to the specific contract in question;

– the parol evidence rule precludes (a) the admissibility of evidence to alter, vary or contradict a written agreement and (b) bars evidence of understandings not reflected in the contract reached before or at the time of execution that vary or modify the contract terms;

– the parol evidence rule does not preclude a contracting party from offering proof of terms (such as an oral agreement to change in schedule) that supplement rather than contradict the contract; 

– Contracting parties may waive delays in performance by words or conduct;

– In such a case, the court may extend the term of a contract for a “reasonable time”;

– “No damages for delay” clauses are enforceable but are construed strictly against the party seeking the provision’s benefit;

– Exceptions to “no damages for delay” clauses include (1) bad faith delay; (2) delay “not within the contemplation of the parties”; (3) delay of unreasonable duration; and (4) delay attributable to inexcusable ignorance or incompetence;

– Under waiver and estoppel rules, a party to a contract may not lull another party into false belief that strict compliance isn’t required and then sue for noncompliance. 

The Asset Recovery case contains detailed facts and an exhaustive chronology. The case illustrates the interplay between prime contracts and subcontracts – the latter of which often mirror the prime contract terms.  The opinion serves as an excellent resource for quick bullet-point research on contract formation, construction and enforceability issues; particularly in the construction law context.

PBP