When you strike the clause in a contract providing for interest, you may think the question of entitlement to interest has been resolved—no clause means no interest. Right?
The Missouri Court of Appeals addressed the implications when parties strike the clause in the construction contract providing for interest, and the result may not be what you expect, in G&G Mech. Constructors, Inc. v. Jeff City Indus., No. WD80840, 2018 Mo. App. LEXIS 271 (Ct. App. Mar. 20, 2018). The Missouri Court of Appeals held that, even with the clause stricken, the trial court properly awarded interest.
Facts of the Case
The general contractor on a sewer project in mid-Missouri negotiated with a subcontractor, G&G Mechanical, to perform boring work on the project. Prior to signing the subcontract agreement with G&G, a representative of the general contractor struck out a provision setting the interest rate at 18 percent per annum "or the highest rate allowed by law, whichever is lower" by drawing a line through it. Then, in lieu of the interest rate, the general contractor's representative handwrote in the contract's margin, next to the stricken interest language, a clause calling for 5 percent retainage. The agreement was sent to the subcontractor, and the subcontractor's authorized representative initialed and dated the stricken language on interest as well as the added language on retention.
As the project progressed, a payment dispute arose between the general contractor and the subcontractor over payment for the boring work. The dispute went to trial, and the jury returned a verdict against the general contractor and its surety and for the subcontractor. The trial court entered judgment on the verdict and included an award of pre-judgment interest at the legal rate set by statute.
The general contractor and surety objected to the assessment of interest because the parties had clearly stricken through the contract clause allowing for interest on money owed. They argued the intent to not award interest was clear because the parties struck the language calling for interest on unpaid amounts.
The Court of Appeals looked at the agreement as revised by the parties. The court concluded that the contract should be enforced as written, including the parties' agreement indicating there would be no interest paid or a certain rate paid. However, the Court of Appeals noted that, when the parties reach no agreement on interest, the parties are entitled to apply applicable statutes setting the rate of interest. In Missouri, creditors, which G&G was found to be, receive interest at 9 percent when no other rate is agreed upon.
In the situation at hand, the general contractor and surety argued that striking the interest clause equated to the parties agreeing no interest would be paid.
Looking at the fundamental rules of contract construction, the court held that the intent of the parties should control and that intent here is expressed in an unambiguous agreement with all clauses given the plain and ordinary meaning. Here, the general contractor and its surety were asking the court to look at the language that had been stricken from the contract. The court concluded the stricken language on interest was extrinsic and must not be considered in construing the parties' agreement.
The court reasoned that, when contract language is stricken, erased, or otherwise removed, it is no longer part of the agreement. Courts should not rely on stricken language because then the court is mistakenly looking beyond the four corners of the document for the terms of the agreement. Such reliance would be improper unless there are ambiguities.
Once the stricken language on interest is set aside, the contract is silent on the question. Because there is no clause addressing interest, there is no ambiguity in the agreement. The result is that the parties are left with an unambiguous contract, but one that does not address interest. The court held that, absent a contract provision on interest, the trial court correctly referenced the statute. The award of pre-judgment interest at 9 percent per the statute was appropriate.
There are ways to avoid this problem. Do not strike the clause. Instead, edit the language to clarify the parties are agreeing to a certain rate or are agreeing there will be no interest awarded. Including an express term that clarifies the agreement that no interest is to be awarded will generally be enforced as written.
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