This article was originally published in the June 2018 issue of ConsensusDocs Construction Law Newsletter (Vol. 4, Issue 3). It is reprinted here with permission.
Parties negotiating a contract commonly indicate that they reject a proposed provision by striking through it. But merely striking a provision can create a contractual gap, which could alter a party’s expected performance — and enforcement — of the contract.
Most states have enacted a version of the Uniform Commercial Code (UCC), which provides a number of “gap fillers,” including provisions for price, time for payment and place of delivery. Some states have also added gap fillers that provide for prejudgment interest and the recovery of attorney’s fees and court costs in the event of a dispute.
If a party negotiating a contract strikes a term and creates a contractual gap for which the law provides a gap filler, it may find itself bound by a term for which it did not bargain. A general contractor created this exact scenario by striking the prejudgment interest provision from a draft subcontract in G&G Mechanical Constructors, Inc. v. Jeff City Industry, Inc., No. WD80840, 2018 Mo. App. LEXIS 271 (Mo. Ct. App. Mar. 20, 2018).
G&G involved a project in Columbia, Missouri on which Jeff City Industry, Inc. (JCI) was the general contractor and G&G Mechanical Constructors, Inc. was a subcontractor. The draft subcontract stated that overdue payments “shall bear interest at the annual rate of 18% or the highest rate allowed by law, if lower. Retainage shall not be held out of payment.” JCI struck through this provision, wrote “5% Retiange [sic]” in the margin, initialed it, and sent it to G&G. G&G also initialed the revision.
When JCI failed to pay G&G for its work, G&G sued JCI for breach of contract, unjust enrichment and violation of Missouri’s Prompt Pay Act. A jury returned a verdict against JCI, and the trial court entered a judgment against it. The judgment included prejudgment interest at a rate of 9 percent pursuant to Missouri Revised Statute section 408.020.
JCI appealed the prejudgment interest award, contending that G&G failed to satisfy its burden to prove entitlement to interest pursuant to the statute. The Missouri Court of Appeals upheld the award. It found that section 408.020 entitles a creditor to interest at a rate of 9 percent unless otherwise agreed upon by the parties. The burden was on JCI, the party seeking to avoid application of section 408.020, to establish that the parties agreed to an alternative arrangement.
JCI argued that the mutual striking of the interest provision constituted an agreement that no interest would be paid. G&G countered that the striking did nothing more than remove the interest provision from the draft subcontract, leaving the final subcontract silent on the issue.
The court applied general rules of contract construction to resolve the conflict. It explained that the primary rule is to ascertain and give effect to the parties’ intent. If a contract is unambiguous, the parties’ intent is to be discerned from the plain and ordinary meaning of the contract language. If it is ambiguous, extrinsic evidence may be considered.
The court held that it could not consider the stricken interest provision because it was extrinsic evidence. “The rationale,” it explained, “is that the writing excised from the agreement, whether by way of striking, erasing, or simply transferring the agreement to a new piece of paper without the stricken language, is not part of the agreement between the parties.”
Absent the stricken provision, the court held that the subcontract was silent on the interest issue. The subcontract thus unambiguously expressed that the parties had no agreement on the issue. In Missouri, when the parties have not reached an agreement on an interest rate, the creditor is entitled to interest at the rate designated by section 408.020. The appellate court held that because JCI and G&G failed to reach an express agreement in writing regarding a different interest rate, the trial court properly awarded G&G prejudgment interest pursuant to section 408.020.
G&G should serve as a cautionary tale for contracting parties. By striking a provision from a draft contract, a party might find itself bound by a provision for which it did not bargain. Negotiating parties would be well-advised to seek counsel’s advice before simply striking a provision. Experienced construction counsel can identify when a strike would create a gap and recommend an alternative provision that best protects the party’s interests.
The material in this publication was created as of the date set forth above and is based on laws, court decisions, administrative rulings and congressional materials that existed at that time, and should not be construed as legal advice or legal opinions on specific facts. The information in this publication is not intended to create, and the transmission and receipt of it does not constitute, a lawyer-client relationship.