It’s All A Matter Of Context

Today’s installment comes courtesy of the Massachusetts Appeals Court with its decision in Merrimack College v. KPMG LLP, No. 15-P-122.

For several years, KPMG performed annual audits for Merrimack College. At some point, serious financial irregularities in the College’s financial aid office were discovered relating to the 1998-2004 fiscal years that KPMG had failed to detect during its audits. The College then sued KPMG for malpractice.

KPMG moved to compel arbitration based upon an arbitration provision in the parties’ engagement letter for the 2005 fiscal year, which applied to disputes “arising out of or relating to” the engagement letter, the services provided thereunder, or to “any other services provided” by KPMG. Notwithstanding the fact that none of the parties’ engagement letters for the earlier fiscal years contained a similar provision, KPMG argued that its pre-2005 services fell within the scope of “any other services provided” within the meaning of the 2005 engagement letter, and, therefore, were subject to compulsory arbitration. The trial court denied KPMG’s motion.

KPMG fared no better in the Appeals Court. The Appeals Court conceded that KPMG’s interpretation was linguistically possible – if the phrase “any other services provided” was read in isolation – but noted that the meaning of contractual language is dependent upon context. When placed in the context of what it described as a wholly “forward-looking agreement,” the Court held that the “any other services provided” language applied only to services provided by KPMG after the 2005 engagement letter was executed. In so holding, the Court noted that, “The fact that KPMG’s preferred reading is linguistically possible does not make it a reasonable interpretation of the parties’ agreement.”

What struck me about the Court’s decision is how nicely the conclusion that a linguistically possible interpretation is not necessarily a reasonable one illuminates questions of contractual ambiguity. In Massachusetts (as well as in Maine and New Hampshire), the standard for determining whether contractual language is ambiguous is if it is reasonably susceptible of more than one interpretation. Although producing an alternative interpretation that is linguistically possible is a prerequisite to establishing ambiguity, it is not enough to meet the reasonable susceptibility threshold – that linguistically possible interpretation must also be plausible in light of the language of the rest of the contract. In other words, it is the context in which the language is used that ultimately determines whether a linguistically possible interpretation is a reasonable one.

Chutzpah Fails To Persuade Massachusetts Appeals Court

It’s been about two months since I last posted. Just when I was beginning to think that the courts were never going to offer up anything of interest (at least of interest to me), along came the Massachusetts Appeals Court this week with its decision in Celco Construction Corp. v. Town of Avon, No. 13-P-1880, to remind us that parties who create their own messes usually don’t get relief from the courts.

In 2008, the Town of Avon solicited bids to perform work on a water main extension project. Celco Construction’s bid assigned a unit price of $0.01 as its charge to remove each cubic yard of rock from the site despite the fact that its actual cost to remove the rock was much higher. Celco based its bid on its belief that the amount of rock on site would be far less than the expressly unverified estimate contained in the bid documents and that its low unit price would give it a competitive advantage versus bidders assigning unit prices approximating their actual costs.

Initially, the gamble appeared to pay off – Celco was the successful bidder. Unfortunately, for Celco, the amount of rock on site ended up exceeding the estimate by over 1,500 cubic yards. When the Town rejected its request that the unit price for rock removal be increased from $0.01 to $220 per cubic yard, Celco sued.

Celco’s claim was for “equitable adjustment.” Under Mass. Gen. Laws ch. 30, § 39N, every public construction contract must include a provision allowing either party to request an adjustment in the contract price if, during the course of the work, it is discovered that “the actual subsurface or latent physical conditions encountered at the site differ substantially or materially from those shown on the plans or indicated in the contract documents.” Such a provision allows the contracting authority to obtain bids stripped of risk premiums used as hedges, while assuring bidders that they will be compensated in the event that subsurface or latent conditions impose greater costs than reflected in the bid documents.

Like the Superior Court, the Appeals Court had little difficulty sending Celco packing. The bid documents specifically stated that the amount of rock on site was “indeterminate,” and that the unverified estimate contained therein was solely for the purpose of allowing comparison of the submitted bids. Nor did Celco even suggest that the nature of the rock or the means and cost to remove it differed in any way from what as anticipated in the contract documents.

Most importantly, the court took Celco to task for the chutzpah of its argument, noting that it “defie[d] logic” for Celco to invoke equity as the basis for an adjustment to the contract price when its purported need for an adjustment was the product of its own conscious decision to bid a unit price having no basis in reality in its (ultimately successful) effort to be the low bidder. Celco’s argument was akin to the Melendez brothers seeking leniency for the murders of their parents because they were orphans. Thankfully, common sense prevailed and the court held Celco to the consequences of its own decisions.

Sometimes Trial Courts Really Get It Wrong; Or, That’s Why We Have Appellate Courts

I am now comfortably settled into my new professional home and, with the onset of fall, the appellate courts are back in the business of providing me with blog fodder – also known, more formally, as issuing written decisions in furtherance of their constitutional and statutory obligations to decide cases.  So, let’s get to it with a decision that has me wondering how the trial court could have possibly reached the decision it did.

The subject of today’s post comes to us courtesy of the Massachusetts Appeals Court in the form of Rodman v. Commonwealth, No. 12-P-223, an eminent domain case decided last week.  In Rodman, the Commonwealth’s Department of Highways took by eminent domain a portion of the plaintiffs’ land in 2001 in order to complete an elevated vehicle/pedestrian ramp extending from the large complex then being constructed across U.S. Route 1.  At the time of the taking, a portion of the property had been used for many years as a temporary parking lot, but the remainder was undeveloped.  Dissatisfied with the amount of the Commonwealth’s pro tanto award, the plaintiffs filed suit seeking more, but were ultimately awarded less.

The appeal centered on the Superior Court’s exclusion of evidence offered by the plaintiffs on the issue of fair market value, which consisted of plans for the potential development of the property for hotel, manufacturing, and warehouse uses.  Two of the Commonwealth’s arguments, accepted by the Superior Court, were that:  (1) since the property was essentially vacant and there were no pre-taking plans to develop it, the property had to be valued consistently with comparable sales of similar, large undeveloped parcels; and (2) the potential hotel, manufacturing, and warehouse uses were not permitted as of right in the applicable zoning district. 

In its decision, the Appeals Court provided a nice synopsis of Massachusetts law regarding the determination of fair market value in eminent domain cases.  The court noted that fair market value is based on “the highest price that a hypothetical arm’s-length willing buyer would pay to a hypothetical willing seller in a free and open market, based on the highest and best use of the property.”  It then followed up by pointing out that the concept of “highest and best use” is not limited to consideration of the then-current use, but also takes into account “potential uses [] that a reasonable buyer would consider significant in deciding how much to pay.”1

Having established that the concept of fair market valuation is based on a hypothetical transaction giving due regard to potential uses that could reasonably be made of the property, it should come as no surprise that the Appeal Court rejected the Superior Court’s analysis – or what I will call the “of course you should ignore the construction of the gigantic, half-billion dollar stadium across the street” method of valuation. Indeed, the court had little trouble concluding that a reasonable buyer interested in purchasing property across the street from Gillette Stadium would have explored the property’s development potential in determining how much to pay for it, particularly where that the zoning district’s stated goal was to “allow[] flexibility in facilitating economic development of the ‘Route One corridor.’”

The court had only slightly more difficulty dispatching the notion that only uses allowed as of right in the zone could be considered. The court stated that the hotel, manufacturing, and warehouse uses contemplated the by the plaintiffs were allowed in the zone by special permit and that there was testimony in the record to the effect that a request for such a permit would likely be granted since no waivers or other zoning relief would be necessary. The court further noted that a reasonable buyer would account for the uncertainty of obtaining such a permit by discounting for what it called “futurity and likelihood” in determining the amount it is willing to pay and that the jury could account for this in arriving at a valuation.

Frankly, given the state of Massachusetts law regarding “fair market value” and “highest and best use,” I don’t see how the Appeals Court could have done anything other than vacate the Superior Court’s decision, which effectively prevented any consideration of the property’s development potential on the question of its value. So, my friends, Rodman is as good an example as any why we have (and need) appellate courts; it will be interesting to see how it all plays out on remand.

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1 Maine law appears to be in accord.  See Curtis v. Maine State Highway Comm’n, 160 Me. 262, 266-68, 203 A.2d 451, 453-54 (1964).