An unpublished decision from the North Carolina Court of Appeals yesterday demonstrates how important it is to not only read, but also to fully understand, legally binding documents before signing them.
In Pattison Outdoor Advertising, LP v. Elevator Channel, Inc., Defendant agreed to build and manage a network of digital advertising and other content for Plaintiff billboard company. Under the parties’ Services Agreement, Plaintiff would provide all content for the network, while Defendant would install and manage the network and provide customer service. The alternative dispute resolution (“ADR”) clause of the Services Agreement called for direct negotiations, then mediation, then arbitration in the event of a dispute.
The parties entered into Amendment 1 to the Services Agreement, by which Defendant agreed to deliver various intellectual property and software to Plaintiff in exchange for an advance payment of $154,500. Plaintiff made the advance payment of $154,500. However, for reasons not set forth in the decision, the parties subsequently decided to abandon the entire deal, executing a memorandum of understanding (“MOU”) which provided that the entire Services Agreement would be terminated and “both parties will be released of any and all responsibilities/obligations (financial, operational, or other),” with one exception: Defendant would reimburse the advance payment of $154,500 to Plaintiff by a certain date, at which point Plaintiff would return to Defendant the intellectual property and software discussed in Amendment 1.
Plaintiff demanded return of the advance payment in accordance with the MOU, but for reasons not apparent in the decision, Defendant did not comply. When Plaintiff sued for return of the advance payment, Defendant moved to dismiss, contending that Plaintiff could not sue until it had participated in the ADR activities recited in the Services Agreement. Its motion was denied, however, with the trial court finding that the MOU constituted a release of the ADR obligations set forth in the Services Agreement. The Court of Appeals agreed, finding that “there is no enforceable agreement between the [p]arties with respect to alternative dispute resolution.”
I have no reason to doubt that Defendant in Pattison honestly believed, and argued in good faith, that the ADR provision of the Services Agreement survived the MOU. Unfortunately for Defendant, that’s not what the MOU said. Instead, the MOU clearly indicated that all obligations, except for one, were released; its plain language evidenced an intention by both parties to release the contractual obligation to engage in ADR in the event of a dispute.
That’s the key lesson here. Courts will look to the plain language of parties’ agreements in divining their intentions and construing their rights and responsibilities in the event of conflict. That obviously places a premium on making sure that the plain language of whatever contract or other instrument you might be asked to sign is consistent with your intentions.
While Pattison is not a construction case, its lesson is certainly applicable to the commercial construction industry. There are dozens of situations where your reading must be mindful in order to mitigate risk on a construction project. Here are just a few examples:
- If you sign that subcontract as-is, are you going to have difficulty recovering damages for delay? Are you agreeing to indemnify the prime contractor against non-insurable risks? And are you consenting to bear the risk of owner non-payment?
- If you sign that change order calling for additional compensation but no additional time, will you have the ability to later obtain additional time to perform the changed work?
- If you sign that lien waiver, are you relinquishing your right to seek additional compensation and/or additional time for changed or delayed work encountered during this or prior pay periods?
Contracts and other construction documents can be tricky. If you have any questions about the potential legal consequences of signing a construction document, an experienced construction attorney undoubtedly would be willing to guide you through the minefield.
N.C. Construction Law, Policy & News 
Another five-star issue and article! Thanks, Matt!
Matt, as I was reading I could not help but reflect on the traditional four corners rule, and specifically your statement: “Courts will look to the plain language of parties’ agreements…”.
The unfortunate reality is that players in the design/construction arena are regularly faced with contracts that defy a “plain language” reading. I could cite all manner of non-standard format contracts that, once subjected to scrutiny, simply cannot meet that standard. Smaller parties in particular are hard pressed to diligently review and renegotiate complex contracts prepared by their opposites, who have extensive resources and protective counsel. Such contracts frequently contain one-sided provisions cloaked in obtuse provisions which are themselves, at times, in conflict, and defy any “plain reading” effort.
The most obvious example is ANY construction-related insurance policy. This problem is pervasive – in fact it is actually the insurance industry standard. Even state and federal courts across the country are unable to reach any semblance of consensus as to the meaning of boiler-plate insurance contracts (including the many Endorsements and Exclusion provisions). They are the polar opposite of Sesame Street language, and border on bait and switch.
Each year (and especially this past year or two) we have seen one landmark case after another, out of various courts, that disagree on the most fundamental coverage aspects of insurance contract language. The case law on this topic is in turmoil. In simple terms, from the consumer standpoint… “how do I know what coverage I am actually buying… how do I make an informed decision… how can I make intelligent business risk decisions if even the courts can’t figure out what the coverage is?”
This begs the question of when the design/construction industry as a whole will demand a sea change in standard form insurance contracts – so that they are written in transparent “plain language”? Given the history of this issue, likely not in my lifetime. Insurers continue to deny or delay coverage/payments, and the insurance bar is guaranteed a continuing stream of ‘interpretative’ cases (with their resultant work stream). If insurers have no incentive to change their traditional obfuscatory contract approach, how can the individual businessman/consumer see any light at the end of the tunnel?