Contractors should be aware that the failure to define material terms in their construction contracts, such as the term “costs” in a change order provision, can lead to the admission of “parol evidence” (extrinsic evidence outside of the contract) to clarify the ambiguity. For example, in Vivir of L I, Inc. v. Ehrenkranz, 127 A.D.3d 962 (2nd Dept. 2015), the Appellate Division held that the contract at issue there failed to define the term “costs” in the change order provision, which failure rendered that provision ambiguous. The Appellate Division, therefore, affirmed the lower court’s admission of parol evidence (an e-mail from the contractor’s principal) to clarify the meaning of change order costs, which excluded any markup.
In Vivir of L I, Inc. v. Ehrenkranz, the defendants entered into a contract to purchase real property which was improved with a partially constructed residence. At the same time, the defendants entered into a construction contract with the plaintiff, who agreed to complete the construction for $1.4 million. The construction contract provided that “[n]ecessary or desired” changes during the construction process, also referred to as change orders, would be at “the additional cost to Owner,” i.e., the defendants. Approximately 36 change orders were approved during the construction of the residence, which ultimately came to a halt, uncompleted, in December 2008. Shortly thereafter, the plaintiff ceased doing business and advised the defendants it could not complete the construction due to an alleged “cash flow” problem.
The plaintiff commenced an action against the defendants seeking to recover allegedly outstanding monies due under the construction contract and change orders. The defendants counterclaimed, alleging that the plaintiff materially breached the construction contract in a number of ways, and overcharged them with respect to the change orders by adding a markup to the total amount of each change order. The defendants alleged, and argued at trial, that the construction contract did not provide for markups, and that, during the negotiation process, the plaintiff’s principal stated in an email that any changes following execution of the construction contract would be at “cost,” without “mark up.” The plaintiff contended that change order markups were always contemplated by the parties, and that they did not need to be listed as a separate item on the change orders. Following a jury trial limited to the issue of the parties’ respective breach of contract claims—at which parol evidence with respect to the change order markup issue was admitted into evidence—the jury returned a verdict in favor of the defendants awarding them damages in the principal sum of $2,211,000.
The plaintiff contended on appeal that the jury verdict must be set aside because parol evidence with respect to the change order markup issue was incorrectly admitted into evidence. The Appellate Division disagreed. It said that a written agreement that is complete, clear, and unambiguous on its face must be enforced to give effect to the meaning of its terms and the reasonable expectations of the parties, and the court should determine the intent of the parties from within the four corners of the contract without looking to extrinsic evidence to create ambiguities. A contract is considered to be clear and unambiguous where the language used has “a definite and precise meaning, unattended by danger of misconception in the purport of the [agreement] itself, and concerning which there is no reasonable basis for a difference of opinion”. Where a contract is clear and unambiguous, the parol evidence rule operates to preclude evidence of a prior or contemporaneous communication during negotiations of the agreement that contradicts, varies, or explains a written agreement which expresses the parties’ entire agreement and intentions.
In this case, because the contract was found to be ambiguous (because of the undefined term), parol evidence was properly admitted to explain the ambiguous phrase “cost to Owner” in the change order provision of the construction contract. Specifically, as the term “cost” was not defined, it could have had various meanings, including one limited to labor and material costs without an additional markup. Accordingly, parol evidence, such as the email from the plaintiff’s principal, stating that change orders would not include markups, which does not otherwise vary or contradict the construction contract, was properly permitted by the lower court.