CONSTRUCTION CONTRACTS AND APPLICATION OF PAROL EVIDENCE RULE TO CLARIFY LATENT AMBIGUITY

Construction ContractsThe parol evidence rule is a need-to-know rule of law when it comes to cases that involve the rights, liabilities, and remedies of parties under a written agreement.  As explained in this article, the parol evidence rule is designed to exclude the admissibility of extrinsic / parol evidence (agreements and discussions) made before or at the time a contract is executed that are used to modify or alter the actual written agreement.  This is because what the parties agreed to should be embodied in the written agreement and there should be no need for parol evidence to guide the court in its interpretation of contractual provisions.  Now, as explained in this article, there are exceptions to this rule.  One such exception is when there is a latent ambiguity in the contract which is an ambiguity that is not clear from the face of the contract, but concerns language reasonably interpreted in more than one way, particularly when the contract fails to specify rights of parties in certain situations.

 

An example of the application of the ambiguity exception to the parol evidence rule in a construction contract can be found in the decision in Science Applications Intern. Corp. v. Environmental Risk Solutions, LLC, 132 A.D.3d 1161 (N.Y. 2015).   While this case did not concern Florida law, the application is still germane. 

 

In this case, a subcontractor sued a contractor and the owner of gas station sites concerning remediation of a spill / contamination it performed at the sites.  The subcontractor had an existing relationship with the contractor where they previously entered into a Professional Services Master Agreement governing general rights and obligations.  The subcontractor and contractor then entered into three Project Specific Scopes of Work that formed three separate subcontracts relating to the sites and contained the same remediation work for each site for a lump sum.   Noteworthy here, the Scopes of Work lump sum were fixed regardless of the actual cleanup costs required for each site to achieve the designated remediation standard.  At some point, the contractor terminated the subcontractor for convenience pursuant to the Professional Services Master Agreement.  The subcontractor submitted its final invoicing for remediation work but was not paid leading to this action.

 

On appeal, the court noted various ambiguities with the Professional Services Master Agreement and Scopes of Work relative to the subcontractor’s scope of work relating to the cleanup of the spill / contamination:

 

Here, we agree with Supreme Court that most of the disputed terms regarding SAIC’s [subcontractor] remediation obligations under the PSSWs [Scopes of Work] are ‘a compromised hodgepodge of conflicting proposals’ susceptible to several reasonable interpretations. As an example, Lehigh’s [owner] argument that section 5(a)(1) of the PSSWs [Scopes of Work] unambiguously required SAIC to, among other things, meet a stringent, contractually defined ‘Cleanup Standard’ is belied by section 5(a)(3) of the PSSWs, which—also unambiguously—permits SAIC to remediate the sites by, among other things, achieving regulatory closure of the spill numbers from DEC [Department of Environmental Conservation], as indicated by receipt of ‘no further action’ (hereinafter NFA) letters from DEC.

 

 

As an additional example, SAIC [subcontractor] argues that Lehigh’s [owner] consent to seek spill number closures pursuant to section 5(a)(3) of the PSSWs [Scopes of Work] could be obtained passively via the review and comment procedure set forth in section 5(p) of the PSSWs. Nowhere in the PSSWs, however, does it indicate that SAIC could rely on this subsection to obtain Lehigh’s consent—passively or otherwise—to proceed with regulatory closure pursuant to section 5(a)(3). Likewise, the PSSWs fail to provide any alternative mechanism or procedure for Lehigh to review and comment on SAIC’s submissions to DEC. This failure on the part of Lehigh and SAIC to articulate an adequately defined procedure for how SAIC was to obtain Lehigh’s consent to proceed with an alternate cleanup standard left the ultimate formation of such a procedure susceptible to the varied and subjective constructions of the parties, thus creating additional [latent] ambiguity.

 

 

Further ambiguity arose with regard to section 5(g) of the PSSWs [Scopes of Work], an inherently contradictory provision governing when SAIC’s remediation work at a given site could be considered complete. In its first clause, section 5(g) references SAIC’s [subcontractor] obligations pursuant to section 5(a)(1) of the PSSWs, stating that ‘SAIC’s remediation and monitoring obligations under this PSSW shall cease upon attainment of the Cleanup Standard and receipt of NFA Status from DEC for each site as defined in section 5(a)’ . However, the very next clause contradicts the prior one, stating that, ‘upon receipt of NFA Status confirmation from DEC, SAIC’s remediation and monitoring obligations shall cease, except for re-openers to the extent found to be due to SAIC’s negligence.’  In light of these ambiguities, we find that Supreme Court [of New York] appropriately considered parol evidence to determine both the intent of the parties and whether SAIC breached the PSSWs.

 

Science Applications Intern, supra, at 756-757.

 

 

The last sentence quoted above—that the trial court appropriately considered parol evidence to determine the parties’ intent and whether the subcontractor breached the Scopes of Work—is telling.  This was based on the court finding there the scope of work was susceptible to more than one reasonable interpretation by, in part, omitting adequately defined procedures applicable to the remediation work.  The point of a written contract is to prevent parol evidence from being considered to determine the parties’ intent.  This is why it is important for the contract and the scope of work, in particular, to be clear and unambiguous!

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.