Construction Contracts 102 – Interpreting Contracts

by Ken Robinson

This is the second of a three part series on construction contracts. Please check back next week for Construction Contracts 103 - Breach, and be sure to check out last week’s Construction Contracts 101 - The Basics

The guiding principle of contract law is that a contract will be interpreted to give effect to the intention of the parties.  To discern that intention, a court will look first to the written document, the so-called "four corners rule" of contract interpretation.  If that document is ambiguous -- that is, susceptible to more than one interpretation -- the court can look outside the four corners to "extrinsic evidence."  Extrinsic evidence can include other documents, testimony of the parties as to their intent in entering into the contract, called "parole evidence," or the way the parties actually conduct themselves under the contract, particularly before a dispute arises.

Another principle of contract interpretation, not always applied with consistency, is that an ambiguous contract will be construed against the interests of the party who drafted the contract.  This means that if a party is given a contract on a take it or leave it basis with no opportunity to fairly negotiate the contract language, and the contract is susceptible to more than one interpretation in some respect, an ambiguous provision will be construed in favor of the non-drafting party.  Also, a court will always try to harmonize all parts of the contract so that if a clause is ambiguous and one interpretation of the clause creates a conflict with another non-ambiguous clause, the non-conflicting interpretation will prevail.

It is important to understand that a contract is not necessarily a static document, even where the parties don't sign any addenda or modifications.  This is because the parties can inadvertently choose one interpretation of an ambiguous provision merely by acting consistently with that interpretation, particularly before a dispute arises.  For example, if a notice requirement in a change clause is not clear, but the parties proceed on the project processing changes with no formal notice, the notice requirement will be dispensed with by a court based upon the way the parties acted.  That is, their conduct is regarded as dispositive of the parties' intentions as to the ambiguous notice provision.

It is also important to recognize that the parties can amend their contract by their very conduct even though they had no discussions about the modification and signed no addenda, and even though the contract has a requirement that any modification of the contract be in writing and signed by both parties.  In Hahl v. Langfur Const. Corp., 529 P.2d 1369, (Colo. App. 1974), the operative contract had a written change order requirement.  A dispute arose as to the validity of the subcontractor's claim for additional work,  and the general contractor defended on the grounds that the work had been performed without prior written authorization.  The Colorado Court of Appeals held that the parties had amended their contract and waived the requirement for written authorization by their words and their conduct.  Accord, Hi-Valley Constructors, Inc. v. Heyser, 428 P.2d 354 (Colo. 1967) (by their conduct, parties waived contract requirement for written authorization).

For more information on construction contracts, please contact Ken Robinson or another member of our Construction Contracts, Real Estate Law, or Construction Law & Litigation teams.