Court Relies on Evidence Outside Contract to Determine Parties' Intent as to Calculation of Pricing

A consistent theme of this column has been that at the end of the day, what is expressed in the parties’ contract will control their relationship—and ultimately control what a court does when something goes awry with that relationship. However, what happens when the parties’ intent, as expressed in their contract, is not clear? The recent case of Top Grade Excavating New York, Inc. v HDMI Holdings LLC shows us that under such circumstances, a court can rely on outside evidence to determine what the parties intended back when they entered into the contract.

Background

In October of 2014, Top Grade Excavating New York entered into a subcontract with Airitan Management Corp. by which Top Grade was subcontracted to perform certain excavation, foundation, and concrete slab work at the construction site owned by HDMI Holdings. The form of contract was Top Grade’s (bare bones) proposal form, which stated that it was based on certain specified drawings and a geotechnical investigation report. The scope of work (which was scattered between various sections of the proposal) described various charges for excavation, and included two lines labeled “Total Rock Breaking Price” and “Total Price for Excavation”. However, below the line labeled “Total Price for Excavation” was a disclaimer stating “no rock breaking, no contaminated dirt, no dewatering, no existing concrete footing and wall demolition, no metal tank or other things”. Later on the proposal form, there were prices (on a per cubic yard basis) for “Rock 1a breaking”, “Rock breaking for elevator pit”, and “Hauling”. Unfortunately, there was nothing in the proposal form defining how the removed rock was to be quantified, or how Top Grade would be paid if it had to break and haul both 1a rock and rock for the elevator pit (which Top Grade ultimately did).

A dispute arose as to how Top Grade was to be paid for the work it performed on the job, and Top Grade eventually filed (and sued to foreclose) a mechanic’s lien it filed against HDMI’s property.  The case ultimately went to a non-jury trial. At trial, Airitan’s principal testified that the contract was a fixed price contract, as was evidenced by the lines “Total Rock Breaking Price” and “Total Price for Excavation”. However, when confronted with change orders that Airitan had previously approved for additional rock breaking, Airitan’s witness then testified that the quantity of rock should be measured by the drawings which showed the rock in place, and not by truckload quantity (which is certainly greater). Top Grade’s principal testified that Airitan’s approval of the earlier change orders stood as an acknowledgement that Top Grade was entitled to compensation for the extra rock removal. As to the calculation of the quantity, Top Grade’s witness testified that measurement by the truckload was the industry standard, even if such number deviated from the Department of Building’s measurements—as was evidenced by Airitan passing along these charges upstream, unmodified, to HDMI for payment.

Decision

The trial court credited the testimony of Top Grade’s witness that the contract was not a lump sum contract, and that truckload measurement was the correct measurement for the quantity of removed rock—even if it was a larger measurement than what the drawings showed. Airitan appealed (and abandoned its lump-sum argument), focusing on the argument that the trial court erred in accepting outside testimony that the truckload measure was the proper measure for billing for rock removal. The appellate court rejected that argument, finding that the contract was silent as to how the quantity of broken rock was to be measured. In light of this silence, and guided by long standing case law, the appellate court held that the trial court “properly considered extrinsic evidence in determining whether the quantity of excavated broken rock was to be based on the dimensions of the excavation, i.e., the volume of the rock in its compacted, unbroken, undisturbed state or the size of the containers it filled after being excavated and broken”.

Comment

While the law is well settled that a court cannot accept outside evidence where a contract is clear on a subject, Top Grade stands for the principle that where a contract is either silent or ambiguous on such a subject, then a court can rely on outside evidence (either documents or testimony, or both) to fill in the blank. Clearly, in such a situation, someone’s understanding of what the contract provided for is not going to prevail. That understanding may affect either a minor, or major, term of the contract—and, as we saw in Top Grade, it can even affect a monetary term of the contract, turning what a contractor believed was a profitable contract into an unprofitable one.

In order to prevent a court from telling a contractor what they meant at the time they signed the contract, such contractor should make sure that all reasonably foreseeable eventualities (such as what, and how, an excavator would be entitled to compensation in the likely event that they hit extra rock) are addressed in the contract to each party’s satisfaction. Consulting with experienced construction counsel to be sure that there is clarity and specificity in a contract would limit a court’s role to enforcing what is already written, while depriving it of any blanks to fill in.

If you would like more information regarding this topic please contact Thomas H. Welby at twelby@wbgllp.com or call (914) 428-2100