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By Elizabeth Walsh
Howrey LLP
Contractor agreed to build an addition onto the U.S. Department of Veterans Affairs' Medical Center in Boston. During construction, a dispute arose with the VA as to whether the $24 million general contract required the contractor to install special electrical features, particularly fire-rated electrical feeders and panelboards, in a third-floor operating room area. The VA insisted on a fire-rated installation. The contractor complied but submitted a $321,000 pass-through claim on behalf of its electrical subcontractor for the resulting extra costs.
At trial, the U.S. Court of Federal Claims denied contractor's claim for extra costs. Turner Construction Co. v. United States, 54 Fed.Cl. 388 (Fed.Cl. 2002). The contractor appealed. The U.S. Court of Appeals for the Federal Circuit reversed, finding that the terms of the general contract were ambiguous, that the contractor's interpretation of those terms had been reasonable and that the contractor was, therefore, entitled to additional payment for the VA's imposition of a “material change.” Turner Construction Co. v. United States, 367 F.3d 1319 (Fed. Cir. 2004).
In reaching this conclusion, the Federal Circuit applied the rule of contra proferentum, “which requires that ambiguous or unclear terms that are subject to more than one reasonable interpretation be construed against the party who drafted the document,” in this case, the VA.
The court noted, however, that if any ambiguity or lack of clarity were sufficiently apparent in the contract terms proposed by VA, the contractor would have become obligated to inquire as to that apparent ambiguity before entering into the contract. This is because any party entering into a contract is presumed to possess “knowledge of law and fact appropriate to the subject matter, and reasonable professional competence in reading and writing contracts.”
The Federal Circuit rejected the VA's argument, however, that any such patent ambiguity had existed in the contract at issue. Rather, by express terms of the general contract, the contractor had agreed to “furnish and install electrical wiring, systems, equipment and accessories in accordance with the specifications and drawings” and to comply with all applicable electrical codes (in this case, the Massachusetts and National Electric codes).
By code, any part of the hospital's designated “emergency system” required fire-rated installations. The contract's specifications and drawings - though detailing the electrical systems for the operating rooms, among other areas of construction, and the hospital's “emergency system” - did not require fire-rated installations in the operating room area, nor did they show the operating room area as part of the hospital's “emergency system.”
The Federal Circuit concluded that the contractor's reading of the general contract in conjunction with the governing electrical codes - so as not to include fire-rated electrical installations in the operating room area - was “reasonable and prudent.”
Particularly rejected was the VA's contention that the contractor's general requirement to comply with electrical codes should have overridden any inadequacies or errors in the specifications and electrical drawings provided by the VA. Although numerous VA drawings otherwise explicitly designated certain construction areas fire-rated, none directed any such installations in the operating room area. Nor could the Federal Circuit find any direction in the federal and state electrical codes as to which areas of a building should be included in an “emergency system” requiring fire-rated electrical installations.
The Chief Judge of the Federal Circuit dissented. Noting that the operating room panelboards had two potential sources of energy - normal commercial electricity and an emergency generator - the chief judge concluded that the operating room area was part of the hospital's “emergency system” and so was subject to the fire-rated installation requirements of the codes and the contract.
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For more information about the issues covered in this report, please contact Elizabeth Walsh in our Washington, D.C. office at 202-383-7392 or at walshe@howrey.com or contact your Howrey attorney. For more information about Howrey's Construction Practice Group, click here.
©2006 Howrey LLP
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