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Contracting Party Can’t Have It Both Ways

Just a few days ago, the Colorado Court of Appeals issued a decision confirming that a party to a contract can’t play both sides of an ambiguous contract provision.  More specifically, the court concluded that one party to a contract can’t obtain the other party’s contract performance by staying silent regarding its real view of the meaning of a contract, and then refuse to pay the other party based on the interpretation of the contract it was silent about.

The case, Extreme Construction Company v. RCG Glenwood, LLC (www.courts.state.co.us/Courts/Court_of_Appeals/Opinion/2012/12CA0084-PD.pdf), concerned RCG’s refusal to pay its remodeling contractor, Extreme, for the full amount Extreme said was due.  RCG claimed in the breach-of-contract lawsuit Extreme filed that a “cost-plus” provision in the remodeling contract prevented Extreme from billing for superintendence or related labor on the project.  RCG, however, had not objected to the proposed superintendence charges in pre-contract negotiations, and had paid a number of Extreme’s bills without objection.

Based on these facts, the Colorado Court of Appeals concluded that RCG was precluded (“equitably estopped” in the court’s words) from asserting that Extreme’s charges for superintendence or related labor were contractually prohibited by the ambiguous “cost-plus” provision in the contract.  As the court put it: “it is unreasonable for a contracting party who knows of, but secretly disagrees with, the other side’s contract interpretation to delay challenging that interpretation until the other side has completed its performance.”

The case affirms what most of us instinctively know – that it not only is right, but also generally makes good business sense, to be honest and to act with integrity in all business dealings.  When contracts are ambiguous, as so many turn out to be, being candid with the other party to the contract and resolving the issue early often will avoid costly later disputes.

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