Opinion ID: 2573445
Heading Depth: 3
Heading Rank: 2

Heading: The Pro Rata Cap in Article 17.3 of the Subcontract Applies Only to the Second Category of Recoverable Costs: Overhead and Profit

Text: ¶ 30 The FAK parties next argue that the trial court erred in applying the pro rata, dollar value cap (pro rata cap) established in article 17.3 of the subcontract and thus awarded Encon $1,083,335 in excess of the value of the work it actually performed. The FAK parties contend that this result violated article 17.3 and seek to have the judgment reduced to reflect their interpretation of the proper amount due Encon. Because the court applied the pro rata cap correctly, no reduction in the award is warranted. ¶ 31 In calculating Encon's compensation, the court reviewed the terms of article 17.3, which provide that in the event of Encon's termination for convenience, it may recover the actual costs of all such Work satisfactorily executed to the date of termination, plus an allowance for reasonable overhead and profit on such costs incurred prior to termination (but not to exceed a pro rata portion of such Contract Price for such Work based on the percentage of Work properly completed to the date of termination), together with reasonable costs occasioned by such termination and not previously paid for, less such sums as [Encon] has already received on account of the Work performed. In no event shall total payment to [Encon] exceed the Contract Price [of $6,842,342]. ¶ 32 There are three categories of recovery established in article 17.3:(1) actual costs of work performed pre-termination, (2) reasonable overhead and profit on those costs, and (3) reasonable costs occasioned by the termination. ¶ 33 There are also two caps on recovery: (1) pursuant to the last sentence of section 17.3, Encon's total recovery could not exceed the contract price and (2) pursuant to the pro rata cap in the parenthetical, Encon's overhead and profit component was limited. ¶ 34 The trial court determined, as to each category, what Encon was entitled to recover, applied the pro rata cap to the second category  overhead and profit  and awarded Encon the following: (1) $1,815,945 in actual costs, (2) $2,134,331 in overhead and profit, and (3) $197,877 in termination costs. The court then subtracted the total payments Encon received from FAK under the subcontract ($2,887,375) and awarded Encon $1,260,778 in termination compensation. ¶ 35 The FAK parties claim that the pro rata cap applies not only to the second category of costs  overhead and profit  but to the first category as well  actual costs. Under this approach, the FAK parties contend that the trial court should have limited, or capped, Encon's entire recovery at $2,866,941. They claim that $2,866,941 represents the total value of the work Encon actually performed and that under article 17.3, Encon was entitled to recover no more. ¶ 36 The FAK parties' argument rests not on the language, grammar, or punctuation of article 17.3, but on their claim that section 15 of the prime contract governs this issue. They point to subsection 15.5.3 of the prime contract, which explicitly provides that in no instance shall compensation [exceed] ... the value of the Work performed. Though article 17.3 contains no similar limitation, the FAK parties claim that [a]t its essence, the pro rata [cap, when applied to the first and second category of costs,] is the contract value of the work performed prior to termination. Thus, they argue, [article] 17.3 imposes the same ceiling that is imposed by [s]ection 15. ¶ 37 The FAK parties' argument fails for two reasons. First, section 15, though incorporated, does not govern Encon's compensation for early termination. Therefore, the limitation on recovering only the value of the work performed as established in section 15 of the prime contract has no bearing on the interpretation of article 17.3 of the subcontract. Second, the language, grammatical structure, and punctuation of article 17.3 demonstrate that the pro rata cap applies only to the second category of costs  overhead and profit. ¶ 38 Proper contract interpretation includes application of ordinary rules of grammar. [9] Here, the pro rata cap appears in a sentence that contains three phrases. Each phrase is set off by commas. The second phrase contains a parenthetical, and that parenthetical contains the pro rata cap. Encon argues that, based on the grammatical structure of article 17.3, the pro rata cap should be applied only to the phrase in which the language appears. They cite Goetz v. American Reliable Insurance Co. [10] as support for their claim that rules of grammar and punctuation can inform and dictate contract interpretation. ¶ 39 In Goetz, the court of appeals interpreted an insurance policy that contained three clauses set off by commas. In relevant part, the policy provided that maximum recovery was fixed [i]f an eligible injured person who is a named insured, a relative, or person who is injured in an accident involving the use of an insured motor vehicle, has other similar insurance applicable to the accident... [11] ¶ 40 The court of appeals found that the provision unambiguously fixed the maximum insurance recovery in three situations: when the injured person (1) is a named insured, (2) is a relative, and (3) is injured in an accident involving an insured motor vehicle. [12] The appellant argued that the emphasized language applied to all three categories, but the court found such an interpretation flawed because of grammatical oversight. [13] The court noted that clearly, given normal rules of punctuation, the clause is only part of (3). [14] ¶ 41 Similarly, in article 17.3, there are three categories of costs, each set off by commas. The pro rata language appears solely within a parenthetical phrase, which in turn, is included solely within the second category of costs. Normal rules of punctuation dictate that the parenthetical applies only to the phrase to which it is attached. [15] The trial court correctly found the same: [B]ased on the plain meaning and punctuation of [article] 17.3 ... the pro rata limitation in the parenthetical clause modifies only the preceding term, `an allowance for reasonable overhead and profit on such costs incurred prior to termination' and therefore applies only to the calculation of overhead and profit. ¶ 42 The FAK parties next assert that this interpretation is incorrect because the pro rata cap could never be triggered and therefore is not meaningful. That is not the case. Any finding of less than 31% completion by Encon, in fact, would have triggered the pro rata cap. [16] ¶ 43 Based on the foregoing discussion, we affirm the trial court's decisions that article 17.3 governs Encon's compensation for early termination, the pro rata cap applies only to the second category of recoverable costs, and the prime contract's limitation on recovering only the value of the work performed does not apply to Encon. Therefore, no reduction in Encon's award is warranted.