J. Kent Holland, J.D.
A trial court erred when it considered the course of dealings of the parties to determine the meaning of a design professional contract, and then issued a jury instruction advising the jury that the contract was not ambiguous. As a result, a $2 million judgment for an architect was reversed and remanded for the jury to determine the meaning of the contract and determine what, if any, relief the Architect was entitled to. Facilities Cost Management Group, LLC, v. Otoe County School District 66–0111, 291 Neb. 642 (2015).
Comment: The rules of contract interpretation are well established and vary only slightly from state to state. One such rule is that a court cannot speculate as to the meaning of the terms of a contract. If the terms are susceptible to different interpretations or the wording is vague, the parties must be allowed to present additional evidence (referred to as parol evidence) to prove the parties’ intent. In a jury trial, it is the jury rather than the judge that interprets ambiguous language, based on all the facts and circumstances. Had the trial court not erroneously determined that a key section of the contract was unambiguous, the parties could have presented evidence with respect to the meaning of “scope of work” at trial. Based on such potential evidence, the jury’s award to the Architect could have been very different.
In this case, a dispute arose over whether the architect’s scope of services had increased such that it was entitled to an additional $2 million in fees, or whether the agreement constituted a guaranteed maximum price contract that capped the architect’s fee. During construction, the project owner made changes to the project, and the Architect presented the Owner with updated information regarding the project’s budget and regularly submitted invoices for the work performed by the contractors as well as for the services of the Architect.
The owner paid the invoices for Architect’s fees until it learned that the project was almost $2 million over budget. Architect filed suit. A point of contention was whether the contract included a guaranteed maximum price that could not be exceeded for the scope of services that were performed. Based on the contract language, and the parties’ course of dealings, the district court instructed the jury that the contract was not ambiguous. This resulted in the jury awarding the Architect damages of $1,972,993 for the additional services that the Owner argued were barred because they were subject to a GMP cap.
On appeal, the Supreme Court of Nebraska held that district court committed prejudicial error when it gave a jury instruction that stated, “the contract in this case is not ambiguous.” The Supreme Court thus reversed and remanded for a new trial.
In its appeal, the Owner argued that the contract provided for a guaranteed maximum price; but failing that interpretation, the Owner argued that the contract was ambiguous both as to whether the parties intended to fix a guaranteed maximum price, and how to calculate Architect’s fees for increases to the scope of the project. Architect argued that the contract was not ambiguous and that the parties’ conduct during performance of the contract indicated their intent concerning the payment of costs and fees beyond any type of a cap.
The contract was the 1987 version of the American Institute of Architects’ “Standard Form of Agreement Between Owner and Architect,” but the parties had added certain sections, including sections 11.2 and 12.7.
Section 11.2, “BASIC COMPENSATION” provided:
Fees shall be as outlined in the attached Recommended Compensation schedule … These fees and costs are intended to be converted to Lump Sum amounts … Lump Sum amounts and inclusions shall remain effective for the duration of the Project(s), except in the event of approved changes in the scope of work or alternatives to be bid adding two percent or more to the scope. In such event the Lump Sum fees and costs shall be increased proportionately to reflect the full percentage of changes.
Section 12.7, “RESPONSE TO DISTRICT’S REQUEST FOR PROPOSAL” provided:
The Architect’s Response to the District’s Request for Proposal is attached to this Agreement for general reference purposes including overviews of projects and services. The District’s approvals following execution of this Agreement and related to the scope of work on the individual projects and corresponding portions of Project Budgets during the various Phases shall incorporate applicable adjustments through the project’s development.
After receiving Architect’s proposal, the District sent Architect a series of written questions concerning its proposal. With respect to the question “Do you have a guaranteed maximum price for the project?”, Architect responded “Yes” and “Guaranteed maximum price options are clearly available to the District in our planning approach.”
Section 12.7 Was Not Ambiguous
On appeal, the Owner argued that section 12.7 of the contract was ambiguous, that Architect’s proposal and its responses to the Owner’s questions were incorporated into the contract via section 12.7, and that by incorporating these documents, the contract provides a guaranteed maximum price.
The district court had rejected the Owner’s argument, stating that while the words ‘for general reference purposes’ were possibly ambiguous, they did not serve to incorporate the Architect’s responses into the terms of the contract and, therefore, could not be a basis to determine fees and costs. The Supreme Court affirmed that part of the trial court’s decision, agreeing that section 12.7 did not incorporate Architect’s responses into the contract, and found that there was no language in the contract to indicate that the parties intended the budget to be fixed with respect to construction costs. In fact, section 5.2.2 of the contract provided: “No fixed limit of Construction Cost shall be established as a condition of this Agreement by the furnishing, proposal or establishment of a Project budget, unless such fixed limit has been agreed upon in writing and signed by the parties hereto.”
Section 11.2 Was Ambiguous
The Supreme Court found, however, that section 11.2 was ambiguous and that the trial court erred in deciding otherwise on the basis of the parties’ course of dealing. The trial court noted that the Architect met with the Owner in March 2008 to review the billing process and that the Owner continued to pay Architect’s invoices through May 2009. The court also pointed to the parties’ discussion with respect to various invoices as evidence of how fees on increases in the scope of the project were to be calculated. These actions by the parties were used by the court to conclude that the contract was not ambiguous.
Under section 11.2, increases in the scope of work were to serve as the basis for Architect’s increased fees and costs. The Supreme Court found this section was ambiguous because it was not clear how the scope of work was to be determined. The Court noted that while square footage is one way to determine the scope of work, there are other ways. Indeed, the Architect asserted that “increases in the scope of work” included not only square footage increases, but also increases in items such as equipment and Owner’s Representative fees.
The Supreme Court held that the jury, and not the judge, must decide the intent of the parties under an ambiguous contract, and thus remanded the case accordingly.
Comment
The rules of contract interpretation are well established and vary only slightly from state to state. One such rule is that a court cannot speculate as to the meaning of the terms of a contract. If the terms are susceptible to different interpretations or the wording is vague, the parties must be allowed to present additional evidence (referred to as parol evidence) to prove the parties’ intent. In a jury trial, it is the jury rather than the judge that interprets ambiguous language, based on all the facts and circumstances. Had the trial court not erroneously determined that section 11.2 was unambiguous, the parties could have presented evidence with respect to the meaning of “scope of work” at trial. Based on this evidence, the jury’s award to the Architect could have been very different.
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