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Vern Edwards

Contract Interpretation: Which is right?

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I would like to solicit some opinions about the interpretation of a paragraph in the clause at FAR 52.215-10, Price Reduction for Defective Cost or Pricing Data (OCT 1997). The paragraph is (d)(2), which reads as follows:

If any reduction in the contract price under this clause

reduces the price of items for which payment was made prior

to the date of the modification reflecting the price reduction,

the Contractor shall be liable to and shall pay the United States

at the time such overpayment is repaid--(2) A penalty equal

to the amount of overpayment, if the Contractor or subcontractor

knowingly submitted cost or pricing data that were incomplete,

inaccurate, or noncurrent.

Two interpretations of that clause are on the table:

1. The contractor must pay the penalty if the contractor knew that the data were defective when it submitted the data.

2. The contractor must pay the penalty if (a) the contractor knew that it was submitting cost or pricing data and (B) the data were defective, whether or not the contractor knew that the data were defective.

Which do you think is correct (or more correct)?

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Guest carl r culham

I conclude that No. 1 is the most correct based on language of the Certificate of Current Cost or Pricing Data (FAR 15.506-2).

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I conclude that No. 1 is the most correct based on language of the Certificate of Current Cost or Pricing Data (FAR 15.506-2).

Carl, Setting other considerations like the certificate aside, do you think that No. 1 is the best interpretation of the sentence?

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This is inartfully drafted, but not in an obvious way. The result is an ambiguous statement. It actually took me a few moments to understand how one could get interpretation number 2 out of that language.

But it is definately there. I would still say the intent is for interpretation 1. Interpretation 2 doesn't really fit with the way we typically do things, or think we're doing things--that is, interpretation 2 holds contractors (or subcontractors) liable for a penalty for any mistake made in the cost or pricing data, even if done unintentionally. The language preceding that already states that the Government gets back any funds paid as a result of the mistake. To impose a penalty equal to the first amount for ANY mistake made in cost or pricing data does not seem to me to be reasonable where it was an honest mistake. And we are told that we are supposed to be reasonable.

Problem is--looking only at the text presented here--there's really nothing else to back that interpretation; excepting perhaps that interpretation 1 is the more likely understanding of that language. But that doesn't hold well in court, generally. The phrasing is ambiguous and can be interpreted in conflicting ways.

I guess the good news is you're sure of the penalty if the contractor did knowingly submit defective data. Of course, they could then argue the whole thing is void because it's ambiguous...

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FAR 15.407-1(B)(7)©(iii) (I think I got that cite right) speaks of applying the penalty "where the submission of defective cost or pricing data was a knowing submission." That's consistent with interpretation 1 -- you have to know the data is defective.

Of course, in that event, the contractor is more likely to be worried about treble damages under the False Claims Act than double damages under the clause.

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This is inartfully drafted, but not in an obvious way. The result is an ambiguous statement. It actually took me a few moments to understand how one could get interpretation number 2 out of that language.

But it is definately there. I would still say the intent is for interpretation 1. Interpretation 2 doesn't really fit with the way we typically do things, or think we're doing things--that is, interpretation 2 holds contractors (or subcontractors) liable for a penalty for any mistake made in the cost or pricing data, even if done unintentionally. The language preceding that already states that the Government gets back any funds paid as a result of the mistake. To impose a penalty equal to the first amount for ANY mistake made in cost or pricing data does not seem to me to be reasonable where it was an honest mistake. And we are told that we are supposed to be reasonable.

Problem is--looking only at the text presented here--there's really nothing else to back that interpretation; excepting perhaps that interpretation 1 is the more likely understanding of that language. But that doesn't hold well in court, generally. The phrasing is ambiguous and can be interpreted in conflicting ways.

I guess the good news is you're sure of the penalty if the contractor did knowingly submit defective data. Of course, they could then argue the whole thing is void because it's ambiguous...

jmj:

Great reply. Thanks.

My post arises from a discussion that I've had with a student about the proper interpretation of the sentence outside the context of the other words in the clause. I have (so far) analyzed the sentence as follows: The subject is: "the Contractor"; the predicate verb is "submitted," which is a transitive verb. But what is the object of the verb? Is it "cost or pricing data" or is it "cost or pricing data that were inaccurate, incomplete, or noncurrent"?

My student and I agree that the contractor's liability arises from knowledge that it is submitting something, a particular thing--the object of the sentence. We agree that no liability arises from the contractor's mere realization that it is engaged in the act of submitting. So far so good.

My student (a very bright law school graduate) and I part company over the something. She says it's "cost or pricing data." Period. So, she argues, the contractor's liability arises from (1) knowledge of the fact that what it was submitting were cost or pricing data and (2) the fact that the data were defective, whether that fact was known or not.

My position is that you cannot separate "cost or pricing data" from the restrictive clause "that were incomplete, inaccurate, or noncurrent." Thus, I argue, the contractor is liable only if it knew (1) that it was submitting cost or pricing data and (2) that the data were defective. I say that her interpretation is inconsistent, because while she says that liability arises from the contractor's knowledge of the nature of what it was submitting, she does not require knowledge of as specified attribute of its nature--"that were incomplete... ."

My student argues that to extend "knowingly" to the restrictive clause would be to extend it "too far." She bases her assertion on her claim of the existence of a grammatical rule or legal rule of interpretation that she can't identify. We had a great discussion and it was really fun. (Oh, if only we had more like her!)

We agree on what the sentence means in the larger context of the clause. Our disagreement is based entirely on our different understandings of the syntactically correct interpretation of the sentence. However, as you say, perhaps there are two correct interpretations, which would make the sentence ambiguous outside of the context of the clause.

Do you have any more thoughts on this?

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FAR 15.407-1© describes a situation lending itself to the 2 interpretation - "© If, after award, the contracting officer learns or suspects that the data furnished were not accurate, complete, and current, or were not adequately verified by the contractor as of the time of negotiation, the contracting officer shall request an audit to evaluate the accuracy, completeness, and currency of the data."

The contractor submits data which wasn't adequately verified. The contractor doesn't know it was defective when it was submitted but an audit later discloses it is.

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FAR 15.407-1? describes a situation lending itself to the 2 interpretation - "? If, after award, the contracting officer learns or suspects that the data furnished were not accurate, complete, and current, or were not adequately verified by the contractor as of the time of negotiation, the contracting officer shall request an audit to evaluate the accuracy, completeness, and currency of the data."

The contractor submits data which wasn't adequately verified. The contractor doesn't know it was defective when it was submitted but an audit later discloses it is.

Hi formerfed:

I'm not sure what you're saying in your post. Defective pricing, in and of itself, does not depend on the contractor's knowledge that the data were defective. In most cases the contractor did not know. Nevertheless, the government is entitled to a price reduction. Knowledge is an issue only with respect to liability to pay a penalty over and above the price reduction. I don't see how the language at FAR 15.407-1( c) pertains to the interpretation of the sentence in question. Please explain.

Vern

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"She bases her assertion on her claim of the existence of a grammatical rule or legal rule of interpretation that she can't identify."

I'm surprised that Vern accepted, even for the sake of argument, this obvious blowing of smoke.

I would submit the supposedly ambiguous language to the linguists at Language Log (or similar specialists) for their take.

http://languagelog.ldc.upenn.edu/nll/

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"She bases her assertion on her claim of the existence of a grammatical rule or legal rule of interpretation that she can't identify."

I'm surprised that Vern accepted, even for the sake of argument, this obvious blowing of smoke.

I would submit the supposedly ambiguous language to the linguists at Language Log (or similar specialists) for their take.

http://languagelog.ldc.upenn.edu/nll/

PWAC:

That's a good idea. But I didn't see where I could submit something for comment. I only saw where I could comment on what the bloggers had to say. Did I miss it?

By the way--my student is very sincere and reasonable. She wasn't blowing smoke. It was an intelligent discussion, which I enjoyed very much.

Vern

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In my youth, perhaps I had too many Sisters Mary Knuckles drilling grammar and sentence structure into me. It is very clear to me that the words ?that were incomplete, inaccurate, or noncurrent? represent a relative clause modifying the word ?data?.

If the clause does not modify the word "data", what does it modify?

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"I didn't see where I could submit something for comment."

Good point. I would try this:

Professor Geoffrey K. Pullum

PPLS, Dugald Stewart Building

3 Charles Street

Edinburgh EH8 9AD

United Kingdom

Tel: +44(0)131 650 3603

Fax: +44(0)131 650 6883

Departmental web page: http://www.lel.ed.ac.uk

Email: <pullum @ gmail?com> for Language Log correspondence

"By the way--my student she was very sincere and reasonable. She wasn't blowing smoke. It was an intelligent discussion, which I enjoyed very much."

I should have added a winking smilie--knew that. My "blowing smoke" comment was random provocation, a weakness of mine. Good, lively classroom discussion is something all good teachers live for....

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I think the recent case posted on WIFCON validates Vern's position (at least for statutory construction):

http://www.wifcon.com/cofc/09-432c.pdf

on page 6

As explained by the Federal Circuit, that rule provides that ?[r]eferential and qualifying words and phrases, where no contrary intention appears, refer solely to the last antecedent, which consists of ?the last word, phrase, or clause that can be made an antecedent without impairing the meaning of the sentence for purposes of statutory construction.?? Anhydrides & Chems., Inc. v. United States, 130 F.3d 1481, 1483 (Fed. Cir. 1997) (quoting 2A C. Dallas Sands, Sutherland Statutory Construction ? 47.33 (4th ed. 1984)). ?In contrast, ?[w]hen a modifier is set off from a series of antecedents by a comma, the modifier should be read to apply to each of those antecedents.?? Finisar Corp. v. DirecTV Group, Inc., 523 F.3d 1323, 1336 (Fed. Cir. 2008) (quoting Kahn Lucas Lancaster, Inc. v. Lark Int?l Ltd., 186 F.3d 210, 215 (2d Cir. 1999)).

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Points of clarification:

In response to Napolik: "That" is a relative pronoun and introduces a restrictive clause: "that were incomplete, inaccurate, or noncurrent."

My student and I agree about how the sentence should be interpreted in the context of the rest of the clause and FAR 15.407-1. We also agree that the restrictive clause ("that were incomplete, inaccurate, or noncomplete") applies to "data" or "cost or pricing data."

The issue is how the sentence should be interpreted standing alone based solely on its own syntax, i.e., the arrangement of its words.

Here, again, is the issue: Assume that the cost or pricing data submitted by the contractor were defective. In order to be liable to pay a penalty, did the contractor have to know only that the data were cost or pricing data or did it have to know both that the data were cost or pricing data and that they were defective?

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What are the rules of syntax when using pre-defined terminology? "Cost or pricing data" is a defined term that incorporates the certification in 15.406-2 in its definition - "best of my knowledge and belief".

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It took me a while to understand the student's interpretation. I don't think it's a good interpretation because of the existence of "knowingly" in the sentence. It's within the realm of possibility that a contractor can knowingly or unknowingly submit defective data. However, a contractor can only knowingly submit cost or pricing data because they sign a certificate. The student's interpretation suggests that a contractor can knowingly or unknowingly submit cost or pricing data, which is nonsense.

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Guest carl r culham

Vern - No intent to ignore your question I was just busy all day. As the clause has only force and effect when a part of a contract I say that the interpretation must be made with the whole of the contract in mind. In my simple way the object of the verb is not cost or price data,....etc but the Certificate and other considerations or in other words - The Contract.

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Vern - No intent to ignore your question I was just busy all day. As the clause has only force and effect when a part of a contract I say that the interpretation must be made with the whole of the contract in mind. In my simple way the object of the verb is not cost or price data,....etc but the Certificate and other considerations or in other words - The Contract.

Thanks, Carl. When I mentioned the object of the verb, I was referring to syntax. "Submit" is the transitive verb and "cost or pricing data" is its object.

I don't see the certificate of current cost or pricing data coming into this, because the contractor need not have signed a certificate at the time of submission of the data in order to be liable for the submission.

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It took me a while to understand the student's interpretation. I don't think it's a good interpretation because of the existence of "knowingly" in the sentence. It's within the realm of possibility that a contractor can knowingly or unknowingly submit defective data. However, a contractor can only knowingly submit cost or pricing data because they sign a certificate. The student's interpretation suggests that a contractor can knowingly or unknowingly submit cost or pricing data, which is nonsense.

There has been an awful lot of litigation in which contractors argued that data they had submitted were not cost or pricing data. Either they were lying or they didn't know that the data were cost or pricing data when they submitted it. The boards and the courts have found that data that contractors did not think was cost or pricing data was, in fact, cost or pricing data. Moreover, data can be defective due to something as simple as a math error.

These facts certainly indicate that a contractor can submit data without knowing that it's cost or pricing data. It is not always easy to know what is and is not cost or pricing data. Not all data in a proposal is cost or pricing data. See United Technologies Corp., ASBCA No. 51410, 04 BCA ? 32556:

[W]e believe that a BAFO [best and final offer] does not fall under the definition of cost or pricing data as prescribed by the regulations. Under DAR 3-807. l(a)(1), cost or pricing data “consist of all facts which reasonably can be expected to contribute to sound estimates of future costs as well as to the validity of costs already incurred” (finding 74). A contractor's offer or BAFO is not a set of facts consistent with this definition. Rather, a contractor's offer is a mix of judgments as to how best to accomplish contract work at a price that is developed to cover anticipated cost and a satisfactory profit. That a verifiable “fact” may be included in such a document does not detract from its overall judgmental nature.

So I don't think it's nonsense to assert that contractors can unknowingly submit cost or pricing data.

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Guest carl r culham

Vern - I am probably looking at this too simply. I do understand the matter of syntax, I just can not argue how the particular part of the clause should be interpreted absent the connection to a contract. Moving away from syntax the comments of you and jmj in earlier posts is most likely the conclusion.

You also stated in a later post the following - "I don't see the certificate of current cost or pricing data coming into this, because the contractor need not have signed a certificate at the time of submission of the data in order to be liable for the submission." I agree and would offer that FAR Clause 52.215-10 reinforces your statement as it specifically provides that a contractor can not use as a defense the absence of a signed Certificate.

So again outside the issue of syntax I withdraw my comment regard the Certificate and my vote for No. 1 and instead agree that interpretation Nos. 1 or 2 could occur.

At the expense of prolonging the discussion I would like to offer that the end of your sentence in your Post #7 might be better stated this way - However, as you say, perhaps there are two correct interpretations, which would make the sentence ambiguous outside of the context of the contract ( where the word "clause" is replaced with the word "contract".) No contract, no clause, therefore no interpretation necessary.

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The Supreme Court addressed the construction: "knowingly [verb] [object]" in IGNACIO CARLOS FLORES-FIGUEROA,PETITIONER v. UNITED STATES, 556 U..S. _____ (2009) http://www.law.cornell.edu/supct/html/08-108.ZO.html. Here is an excerpt from Justice Breyer's 9-0 majority opinion:

A federal criminal statute forbidding ?[a]ggravated identity theft? imposes a mandatory consecutive 2-year prison term upon individuals convicted of certain other crimes if, during (or in relation to) the commission of those other crimes, the offender ?knowingly transfers, possesses, or uses, without lawful authority, a means of identification of another person.? 18 U. S. C. ?1028A(a)(1) (emphasis added). The question is whether the statute requires the Government to show that the defendant knew that the ?means of identification? he or she unlawfully transferred, possessed, or used, in fact, belonged to ?another person.? We conclude that it does.

The statutory provision in question references a set of predicate crimes, including, for example, theft of government property, fraud, or engaging in various unlawful activities related to passports, visas, and immigration. ?1028A?. It then provides that if any person who commits any of those other crimes (in doing so) ?knowingly transfers, possesses, or uses, without lawful authority, a means of identification of another person,? the judge must add two years? imprisonment to the offender?s underlying sentence. ?1028A(a)(1). All parties agree that the provision applies only where the offender knows that he is transferring, possessing, or using something. And the Government reluctantly concedes that the offender likely must know that he is transferring, possessing, or using that something without lawful authority. But they do not agree whether the provision requires that a defendant also know that the something he has unlawfully transferred is, for example, a real ID belonging to another person rather than, say, a fake ID (i.e., a group of numbers that does not correspond to any real Social Security number).

Petitioner Ignacio Flores-Figueroa argues that the statute requires that the Government prove that he knew that the ?means of identification? belonged to someone else, i.e., was ?a means of identification of another person.? The Government argues that the statute does not impose this particular knowledge requirement. The Government concedes that the statute uses the word ?knowingly,? but that word, the Government claims, does not modify the statute?s last phrase (?a means of identification of another person?) or, at the least, it does not modify the last three words of that phrase (?of another person?).

* * *

There are strong textual reasons for rejecting the Government?s position. As a matter of ordinary English grammar, it seems natural to read the statute?s word ?knowingly? as applying to all the subsequently listed elements of the crime. The Government cannot easily claim that the word ?knowingly? applies only to the statutes first four words, or even its first seven. It makes little sense to read the provision?s language as heavily penalizing a person who ?transfers, possesses, or uses, without lawful authority? a something, but does not know, at the very least, that the ?something? (perhaps inside a box) is a ?means of identification.? Would we apply a statute that makes it unlawful ?knowingly to possess drugs? to a person who steals a passenger?s bag without knowing that the bag has drugs inside?

The Government claims more forcefully that the word ?knowingly? applies to all but the statute?s last three words, i.e., ?of another person.? The statute, the Government says, does not require a prosecutor to show that the defendant knows that the means of identification the defendant has unlawfully used in fact belongs to another person. But how are we to square this reading with the statute?s language?

In ordinary English, where a transitive verb has an object, listeners in most contexts assume that an adverb (such as knowingly) that modifies the transitive verb tells the listener how the subject performed the entire action, including the object as set forth in the sentence. Thus, if a bank official says, ?Smith knowingly transferred the funds to his brother?s account,? we would normally understand the bank official?s statement as telling us that Smith knew the account was his brother?s. Nor would it matter if the bank official said ?Smith knowingly transferred the funds to the account of his brother.? In either instance, if the bank official later told us that Smith did not know the account belonged to Smith?s brother, we should besurprised.

Of course, a statement that does not use the word ?knowingly? may be unclear about just what Smith knows. Suppose Smith mails his bank draft to Tegucigalpa, which (perhaps unbeknownst to Smith) is the capital of Honduras. If the bank official says, ?Smith sent a bank draft to the capital of Honduras,? he has expressed next to nothing about Smith?s knowledge of that geographic identity. But if the official were to say, ?Smith knowingly sent a bank draft to the capital of Honduras,? then the official has suggested that Smith knows his geography.

Similar examples abound. If a child knowingly takes a toy that belongs to his sibling, we assume that the child not only knows that he is taking something, but that he also knows that what he is taking is a toy and that the toy belongs to his sibling. If we say that someone knowingly ate a sandwich with cheese, we normally assume that the person knew both that he was eating a sandwich and that it contained cheese. Or consider the Government?s own example, ? ?John knowingly discarded the homework of his sister.? ? Brief for United States 9. The Government rightly points out that this sentence ?does not necessarily?imply that John knew whom the homework belonged to. Ibid. (emphasis added). But that is what the sentence, as ordinarily used, does imply.

At the same time, dissimilar examples are not easy to find. The Government says that ?knowingly? modifies only the verbs in the statute, while remaining indifferent to the subject?s knowledge of at least part of the transitive verb?s object. In certain contexts, a listener might understand the word ?knowingly? to be used in that way. But the Government has not provided us with a single example of a sentence that, when used in typical fashion, would lead the hearer to believe that the word ?knowingly? modifies only a transitive verb without the full object, i.e., that it leaves the hearer gravely uncertain about the subject?s state of mind in respect to the full object of the transitive verb in the sentence. The likely reason is that such sentences typically involve special contexts or themselves provide a more detailed explanation of background circumstances that call for such a reading. As Justice Alito notes, the inquiry into a sentence?s meaning is a contextual one. See post, at 3 (opinion concurring in part and concurring in judgment). No special context is present here. See infra, at 8?10.

The manner in which the courts ordinarily interpret criminal statutes is fully consistent with this ordinary English usage. That is to say courts ordinarily read a phrase in a criminal statute that introduces the elements of a crime with the word ?knowingly? as applying that word to each element. United States v. X-Citement Video, Inc., 513 U. S. 64, 79 (1994) (Stevens, J., concurring).

***

We conclude that ?1028A(a)(1) requires the Government to show that the defendant knew that the means of identification at issue belonged to another person. The judgment of the Court of Appeals is reversed, and the case is remanded for further proceedings consistent with this opinion.

It is so ordered.

Be sure to read the concurring opinions by Scalia and Alito.

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Vern--

Sorry about the delay in response here. I typically only check this site once per (weekday) morning--if I have time.

Looking at it further, and looking at the other comments, there are two other things I would add.

First, law school deliberately teaches (or tries to teach, not all students learn) finding alternate interpretations of presumably clear language. This is done, in part, due to the assumption that the other guy's lawyers will do this and you need to learn it to avoid the problems that this can cause. You learn to find ambiguous language and fix it before it becomes an issue. You also learn case law about interpretations and the various rules and sources a court will use in interpreting seemingly clear statements.

This gets to be a habit--you're always looking for the other way anything can be interpreted.

But, and this leads to the second point, sometimes you forget a rule in the fun of the reinterpretation. Part of the language posted, and of the sentence in question, states, "if the Contractor or subcontractor knowingly submitted cost or pricing data that were incomplete, inaccurate, or noncurrent." Interpretation 2 basically requires that we pretend the words "that were incomplete, inaccurate, or noncurrent" were never there. If we go with interpretation 2 then those words no longer have meaning. They apply to nothing.

That cannot be, and that is a rule the courts will follow. If an interpretation requires ignoring part of the language set forth then that interpretation cannot be correct. Or so the courts hold. Put another way; if a word or phrase is put into place it must be assumed it was put there for some purpose. It cannot be interpreted out of existence.

NOTE--this is a separate situation from where there is conflicting language that requires some word, phrase, sentence, paragraph (and so on), be treated as if were not in the document.

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