Opinion ID: 356198
Heading Depth: 2
Heading Rank: 2

Heading: Interpreting an Ambiguous Contract.

Text: 14 The interpretation of an ambiguous contract is a mixed question of fact and law. United States v. Lewiston Lime Co., 466 F.2d 1358, 1359, fn. 1 (9th Cir. 1972). The factual findings by the lower court as to what the parties said and did must be accepted unless clearly erroneous. Saturn Oil and Gas Co. v. Northern Natural Gas Co., 359 F.2d 297, 302 (8th Cir. 1966). The principles of contract interpretation to be applied to those facts, however, are legal issues which this court can review. Cf. Restatement (Second) of Contracts, § 228; McClung v. Thompson, 401 F.2d 253, 257-58 (8th Cir. 1968) (interpretation of ambiguity is a question for the jury, under proper instructions, to resolve). 15 A threshold question where the parties attached different meanings to an ambiguous clause is whether the parties have made a binding contract on this issue at all. 4 If neither party knows or has reason to know the meaning attached by the other, or if both parties know or have reason to know the meaning attached by the other, then there is no contract. Restatement (Second) of Contracts, § 21A(1). However, if only one party knows or has reason to know of the conflict in meaning, the contract will be interpreted in favor of the party who does not know of the conflict. Restatement (Second) of Contracts, §§ 21A(2), 227(2) and 238. Therefore the crucial factual issue in this case is whether either party knew or had reason to know of the meaning given to the contract by the other. Emor, Inc. v. Cyprus Mines Corp., 467 F.2d 770, 775 (3rd Cir. 1972). 16
17 The district court found that neither side had actual knowledge of the expectation of the other at the time the contract was entered into; but the lower court made no explicit findings with respect to whether either had reason to know of the other's understanding. Nevertheless, we hold that H & H had reason to know that UBM expected recovery of some profit and overhead at the time of delivery of the material. UBM indicated during pre-contract negotiations that it was important that it receive an early cash flow on this project because it could not carry the expense by itself. The court specifically found that H & H had been informed both of the proposed cost breakdown on the project and that Mr. Kranz expected progress payments. Finding of Fact # 7. This finding appears inconsistent with Finding of Fact # 9, in which the court said that H & H did not know of UBM's expectation of progress payments. These two findings can be reconciled by concluding that Finding of Fact # 9 is referring to actual knowledge, while Finding of Fact # 7 is concerned with reason to know. Thus, under this interpretation of the factual findings, we regard the district court as having found that H & H had reason to know the meaning attached by UBM. 18
19 Appellant argues, however, that since the trade custom was not to allow for recovery of profit and overhead on delivery of materials, UBM should be found to have reason to know that such was the meaning attached by H & H. We agree that trade practices are a legitimate way of supplying the inference that one had reason to know of a given meaning. Restatement (Second) of Contracts, § 246(2). The district court specifically found that H & H's interpretation did reflect the trade custom. Since this finding is not clearly erroneous, we accept the existence of such a trade custom. U.C.C. § 1-205(2); Haw.Rev.Stat. § 490:1-205(2). 20 However, trade usages are not automatically binding on all persons. The party sought to be bound by the trade usage must be in a position to know of that usage. Restatement (Second) of Contracts, § 246(2) (must have reason to know of the usage); U.C.C. § 1-205(3); Haw.Rev.Stat. § 490:1-205(3) (should be aware of the usage). It is well settled that in order to be bound by trade custom, it must be shown that the custom is so generally known that the parties may be presumed to have known of it. PSG Co. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 417 F.2d 659, 662 fn. 7 (9th Cir. 1969), cert. denied, 397 U.S. 918, 90 S.Ct. 924, 25 L.Ed.2d 99 (1970); United States ex rel. Shields, Inc. v. Citizens and Southern National Bank, 367 F.2d 473, 477 (4th Cir. 1966) (universal and all-pervading); Heggblade-Marguleis-Tenneco, Inc. v. Sunshine Biscuit, Inc., 59 Cal.App.3d 948, 131 Cal.Rptr. 183 (1976) (general and universal application). 21 The district court found that UBM was a brand-new comer (sic) into the field of carpent (sic) subcontracting and was unfamiliar with government contracts and the interpretation thereof. Finding of Fact # 6. The district court also found, however, that UBM was not in the trade. Finding of Fact # 10. While apparently contradictory, we think these findings can be viewed as a statement by the court that because UBM was a newcomer to the field, it had no reason to know of the trade custom and so should not be bound by it. Viewed in this manner, the findings are not clearly erroneous. 22 These not altogether harmonious findings amount to this. Neither party knew of the meaning attached by the other. UBM did not have reason to know of the trade custom, but H & H did have some reason to know of UBM's meaning. Therefore, we hold that a contract was formed according to the meaning given by UBM. 23
24 Our holding is strengthened by examining the conduct of the parties during performance. The practical construction given an agreement by the parties is relevant to fixing the meaning of an ambiguous provision. The principle is clearly operative where there are repeated occasions for performance. Restatement (Second) of Contracts, § 228(4); U.C.C. § 2-208(2); Haw.Rev.Stat. § 490:2-208(2). Although only one payment was ever demanded under this contract, case law has recognized that subsequent action of the parties in construing the contract cannot be ignored as evidencing the intent of the parties. In Re Taxes of Aiea Dairy, Ltd., 46 Haw. 292, 380 P.2d 156, 163 (1963). See also Riess v. Murchison, 329 F.2d 635, 642 (9th Cir. 1964), cert. denied, 383 U.S. 946, 86 S.Ct. 1196, 16 L.Ed.2d 209 (1966); Hutchins v. Bethel Methodist Home, 370 F.Supp. 954, 962 (S.D.N.Y.1974); Corbin on Contracts, § 558. 25 In this case H & H accepted the $125,000 invoice from UBM and forwarded it to the government for payment. H & H then received full payment from the GSA. This suggests initial acquiescence in UBM's interpretation of the contract. Furthermore, the district court also found that H & H never informed either the GSA or UBM of the alleged error, a failure that also indicates that H & H had agreed to this interpretation. While this evidence is not conclusive, it supports our conclusion that the contract should be given the meaning ascribed to it by UBM. 26
27 Our conclusion is also supported by the general rule that an ambiguity will be resolved against the one who prepared the document. We recognize that this rule should be applied only where, after examining the entire contract, the relation of the parties, their intentions, and the circumstances under which they executed the contract, the ambiguity remains unresolved. United States ex rel. Yardley Drilling Co. v. Erickson Paving Co., 465 F.2d 396, 400 (9th Cir. 1972); see also Saturn Oil and Gas Co. v. Northern Natural Gas Co., supra at 302. These conditions are met in this case. Thus, since this was a standard form contract presented by H & H to UBM with little opportunity for negotiation, any remaining ambiguity should be resolved against H & H, the draftsman. We therefore affirm the district court's action in interpreting the ambiguous contract to mean that profit and overhead could be recovered in a payment for materials delivered but not yet installed. 28 AFFIRMED.