                IN THE COURT OF APPEALS OF TENNESSEE
                           AT KNOXVILLE
                                 August 31, 2010 Session

    RAY BELL CONSTRUCTION CO., INC. v. STATE OF TENNESSEE,
         TENNESSEE DEPARTMENT OF TRANSPORTATION

                        Appeal from the Claims Commission
                No. T20071215-1   William O. Shults, Commissioner 1


               No. E2009-01803-COA-R3-CV - Filed November 24, 2010


This case concerns an alleged breach of contract involving the incentive clause of a
Tennessee Department of Transportation (“TDOT”) road construction contract. Before the
Claims Commission, TDOT argued that the contract language was clear in prohibiting an
extension, alteration, or amendment of the incentive clause. The Claims Commission agreed
with the position of Ray Bell Construction Company (“RBCC”) that it was entitled to a
modification of the incentive provision. To so find, the Commission held that “a definite
latent ambiguity exists for which parol evidence not only is admissible, but frankly,
absolutely necessary in both understanding and deciding the issues in this case.” TDOT has
appealed. We affirm the decision of the Claims Commission.


     Tenn. R. App. P. 3 Appeal as of Right; Judgment of the Claims Commission
                            Affirmed; Case Remanded

J OHN W. M CC LARTY, J., delivered the opinion of the Court, in which H ERSCHEL P. F RANKS,
P.J., joined, and D. M ICHAEL S WINEY, J., filed separate dissenting opinion.

Robert Cooper, Jr., Attorney General & Reporter; Michael E. Moore, Solicitor General; and
Melissa Moreau, Assistant Attorney General, Nashville, Tennessee, for the appellant, State
of Tennessee.

Gregory L. Cashion, Matthew J. DeVries, and Craig N. Mangum, Nashville, Tennessee, for
the appellee, Ray Bell Construction Company, Inc.



       1
       Sitting by interchange for Commissioner Nancy Miller-Herron, Commissioner for the Western
Grand Division.
                                               OPINION

                                        I. BACKGROUND

       The project at issue was located at the I-40/I-240 Midtown Interchange beginning at
Ayers Street and extending to Vollintine Avenue in Memphis, Shelby County, Tennessee (the
“Midtown Interchange Project”).2 RBCC’s scope of work included grading, drainage and
paving work, as well as the construction of seven bridges, 22 retaining walls and 12 noise
barriers. Funding for the $52.8 million contract was split between TDOT at 10 percent
participation and the Federal Highway Administration (“FHWA”) at 90 percent
participation.

       When TDOT refused to agree that RBCC was entitled to recover an incentive payment
upon completion of its work, RBCC filed a claim in the Claims Commission on May 4, 2007.
The trial was conducted in this matter October 27-30, 2008.


                     PROVISIONS REGARDING CONTRACT TIME

       The contract between RBCC and TDOT contained two distinct sections that address
time extensions – the Standard Specifications and the Special Provisions. Standard
Specification 108.06 allowed RBCC to receive a time extension where the work quantities
have been increased and the work has been delayed due to reasons beyond RBCC’s control:

        The number of days for performance allowed in the Contract as awarded is
        based on the original quantities as defined in Subsection 102.03. If
        satisfactory fulfillment of the Contract requires performance of work in
        greater quantities than those set forth in the proposal, the contract time
        allowed for performance shall be increased on the basis commensurate with
        the amount and difficulty of the added work. If the Engineer determines that
        an increase in the contract working time proportionate to the value of the
        increase in quantities is commensurate with the amount and difficulty of the
        added work and a written request to extend the time as provided below has not

        2
          As noted by the Commission, “[t]he planning stages for this project began in the late 1960’s and
at one point involved a case which resulted in an important United States Supreme Court decision.” See
Citizens to Preserve Overton Park, Inc. v. Volpe, 401 U.S. 402, 91 S.Ct. 814, 28 L.Ed. 136 (1971). When
the interchange at issue was originally designed, the plans had it extending through the center of Memphis
and through Overton Park. The revisions to the plans resulted in an interchange with I-40 traffic making an
awkward turn onto a one-lane, 25-mile-per-hour ramp. The project at issue was designed to correct the
perceived deficiencies.

                                                   -2-
        been made, he may proportionately increase the contract working time.

        If the Contractor finds it impossible for reasons beyond his control to complete
        the Work within the contract time as specified or as extended in accordance
        with the provisions of this Subsection, he may, at any time prior to the
        expiration of the contract time specified or as extended, make a written request
        to the Engineer for an extension of time setting forth therein the reasons which
        he believes will justify the granting of his request. The Contractor’s plea that
        insufficient time was specified is not a valid reason for extension of time. If
        the Engineer finds that the Work was delayed because of conditions beyond
        the control and without the fault of the Contractor, he may extend the time for
        completion by a properly executed Supplemental Agreement in such amount
        as the conditions justify. The extended time for completion shall then be in
        full force and effect the same as though it were the original time for
        completion.

(Emphasis added). Fred Clayton, formerly employed by TDOT for 17 years and RBCC’s
Project Manager3 on the Midtown Interchange Project, testified at trial that the first
paragraph above invokes the use of the “pro-rata method” for determining a time extension
when there are quantity overruns – i.e., a time extension will be granted on a pro-rata basis
for the increased quantities of work above and beyond the original bid. According to Mr.
Clayton, the second paragraph deals with those delays beyond a contractor’s control, such
as a change in design or TDOT’s inability to secure an easement to property.

     Special Provision 108(B) (“SP108B”) addressed liquidated damages, incentive
payments and disincentive payments as follows:

        The project shall be completed in its entirety on or before December 15, 2006.

        For each calendar day prior to December 15, 2006, that all work in the original
        contract has been completed and all lanes are opened to the free, safe and
        unrestricted passage of traffic, an incentive payment of ten thousand dollars
        ($10,000) per day shall be made to the contractor as an incentive. However,
        the maximum amount of incentive payments shall not exceed two million five
        hundred thousand dollars ($2,500,000).

        For each day after December 15, 2006, that all work in the original contract is


        3
        As Project Manager, Mr. Clayton was generally involved in the day-to-day operations of the project.
He was also the primary point of contact for TDOT and its engineer of record, Allen & Hoshall.

                                                    -3-
       not completed, the sum of ten thousand dollars ($10,000) per day shall be
       deducted from monies due the Contractor as a disincentive. The amount of
       monies that may be deducted as a disincentive shall be unlimited except that
       the disincentive may be waived if the working time is extended in accordance
       with the Standard Specifications.

       . . . The December 15, 2006, completion date may be extended in accordance
       with the Standard Specifications, however, no incentive payment will be made
       if work is not completed in its entirety by December 15, 2006.

Pursuant to Paragraph 4 of the contract, TDOT agreed to pay RBCC in accordance with “the
1995 Standard Specifications, Supplemental Specifications and applicable Special
Provisions.” The contract contained a precedence clause providing that the Supplemental
Specifications control over the Standard Specifications, the contract plans govern over both
the Supplemental and Standard Specifications, and the Special Provisions control over the
contract plans and the Supplemental and Standard Specifications.

       The contract between RBCC and TDOT was signed by both parties in May 2003. The
work commenced on June 18, 2003, and was to be completed on or before December 15,
2006. The projected duration of the Midtown Interchange Project was originally scheduled
to be 1,277 days.

       The record reveals that RBCC’s work suffered several setbacks. According to Mr.
Clayton, RBCC experienced a number of delays beyond its control. The primary delays
included: (a) redesign of certain abutments due to concerns that the pile driving activities
were damaging an adjacent historical church property (the “Redesign delays”); and (b) a
delayed right-of-way on Tract 163 of the project where TDOT was unable to timely secure
the easement (the “Easement delays”). Although other delays existed, the Redesign and
Easement delays were the only ones for which RBCC sought additional time. Specifically,
RBCC sought 180 days in contract time for the Easement delays and 154 days for the
Redesign delays. In response, TDOT issued Supplemental Agreement/Request for
Construction Change Number 24, Category 1 (“SA-24”), which authorized an extension of
time of 137 calendar days (30 days for the Easement delay and 107 days for the Redesign
delay). Accordingly, SA-24 extended the completion date from December 15, 2006, to May
1, 2007. However, the proposed SA-24 expressly stated that the time extension would not
apply to the incentive payment. RBCC made numerous requests that TDOT apply the
contract extension of 137 days to the incentive date, but TDOT refused to do so.
Consequently, RBCC did not execute the SA-24.




                                            -4-
                             TWENTY PERCENT MORE WORK

       It is RBCC’s position that because it was required to complete 20 percent more work
based on unanticipated overruns in the total quantities of components used to complete the
work, additional days should be tacked onto the originally anticipated completion date as
authorized by Standard Specification 108.06 for incentive earning purposes.4 According to
RBCC, the Standard Specifications recognized that the number of days for performance of
the work is based upon the “original quantities” in the bid. Per Standard Specification
108.06, “[i]f satisfactory fulfillment of the Contract requires performance of work in greater
quantities than those set forth in the proposal, the contract time allowed for performance shall
be increased on a basis commensurate with the amount and difficulty of the added work.”
RBCC contends that Standard Specification 108.06 made extension of the completion date
mandatory if “greater quantities than those set forth in the proposal” and the time requested
are “commensurate with the amount and difficulty of the added work.” RBCC argues that
the pro-rata method applied to its contract with TDOT, meaning that if 20 percent more
quantity was added to a project, it is entitled to 20 percent more time to complete such a
project.

       David Donoho, Director of Construction for TDOT, testified that pro-rata adjustments
under Standard Specification 108.06 had been used in the past and allowed TDOT to make
adjustments “based on over-runs and contract quantities.” According to Mr. Donoho,
computing pro-rata adjustments was a simple process and saved time and expense.

       Based upon the original quantities in the original bid documents, RBCC earned the
original contract revenue of $52,882,351.76 as of March 15, 2006. According to Monthly
Construction Reports prepared by TDOT, 97.67% of the work was complete as of February
15, 2006, and 102.15% of the work was complete as of March 15, 2006. The Commission
recognized that judging simply the original contract work, RBCC would have completed the
contract by March 2006. Based on the estimated quantities prepared by TDOT’s own
engineers, RBCC experienced quantity overruns of 20 percent of the total contract price.
According to RBCC, the estimated contract quantities overran or exceeded the actual
quantities by approximately $10.8 million dollars.

        4
         According to Mr. Clayton, the installed quantities are tracked by TDOT’s engineer based upon
progress payments. An “overrun” occurred when RBCC installed more of a particular quantity of material
than was projected on TDOT’s estimated quantities provided at the time of bidding. A contractor like RBCC
bids a quantity estimated or established by TDOT with a unit price for each item of work. On the Midtown
Interchange Project, there were more than 565 items of work. The contract sum was established by
multiplying the estimated quantities by the unit prices. TDOT pays the contractor for the actual quantities
multiplied by its unit pricing, as evidenced on its Engineer’s Estimate Reports.


                                                   -5-
       TDOT argues that the construction problems did not slow down completion of the
project in its entirety since RBCC was freed up to utilize its resources on other aspects of the
work while the problems were being resolved. Brian Egan, TDOT’s Region 4 Assistant
Director of Construction at the time of this contract, opined that RBCC was not delayed on
overall completion of the project. However, Stan Klenk, Chief Engineer for Allen &
Hoshall5 (“A & H”), TDOT’s Engineer of record, acknowledged that simply because a
contractor was able to work on one part of an improvement which was not critical did not
necessarily mean it was advancing the work, and that potentially if the contractor identified
work in a critical area it could not perform at a scheduled time, then this could delay the
project as a whole. Furthermore, as Mr. Clayton testified, under this contract there was no
requirement that the work be evaluated pursuant to the Critical Path Method (“CPM”).6


                                         COMPLETION DATE

        RBCC’s witnesses and TDOT’s representatives testified that all lanes and ramps were
open to traffic on December 12, 2006. In accordance with the Standard Specifications, by
letter dated December 12, 2006, RBCC notified TDOT that the Midtown Interchange Project
was presumptively complete. Eric Criswell, a TDOT engineer representative who worked
for A& H, alerted TDOT officials by email that all lanes and ramps were open to traffic as
of December 12, 2006. In his testimony, Mr. Egan confirmed that all lanes were open to
traffic as of December 12, 2006. On December 20, 2006, Mr. Klenk wrote Mr. Clayton that
contract time charges were stopped effective December 17, 2006, since at that time, “the
project was determined to be substantially complete” and all lanes were open to traffic and
the work remaining to complete on the project was relatively insignificant.7 Without an
extension of the incentive deadline, the finding by TDOT that the Midtown Interchange
Project was completed after December 15, 2006, precluded RBCC from receiving any bonus.




        5
       A & H was a private consulting firm hired by TDOT to design and oversee the construction of the
Midtown Interchange Project.
        6
          On projects begun after February 2005, some TDOT contracts demand a CPM analysis requiring
the detailed diagramming of project tasks that must be completed in order to finish a job on schedule. In
current contracts, Mr. Donoho noted that CPM is required if there is an incentive clause. If there is a CPM
requirement in a current contract, there will be no extensions of the completion dates utilizing the pro-rata
method set out in Standard Specification 108.06.


        7
            It appears that the work “in its entirety” was not completed until November 8, 2007.

                                                      -6-
                                  DONOHO MEETING

        After TDOT first denied RBCC’s claim for additional time and compensation, Bruce
Nicely, Senior Vice President and head of RBCC’s Transportation Department, met with Mr.
Donoho to discuss the merits of the dispute. Mr. Donoho in essence informed Mr. Nicely
that the claim had been denied because it was not on “the list” of approved contracts allowing
for an extension to the incentive payment date. Upon further inquiry about this purported
“list,” Mr. Donoho gave Mr. Nicely copies of a February 24, 2005 letter from TDOT to
FHWA, and the response letter from FHWA to TDOT dated March 2, 2005. The substance
of the exchange of letters involved a change in policy by FHWA to eliminate the use of the
pro-rata method for calculating time extensions when there are quantity overruns on projects
with incentive clauses. Mr. Nicely testified that prior to the meeting with Mr. Donoho, he
had never heard about the list of approved contracts. However, according to Mr. Donoho’s
testimony, the matters discussed in the letters provided the basis for TDOT’s denial of
RBCC’s claim.


                                  THE TDOT LETTER

       TDOT’s letter was signed by Paul Degges, Chief Engineer for TDOT. It was sent to
Bobby Blackmon, Division Administrator for FHWA. The letter sought approval of the pro-
rata method for “existing contracts” with TDOT:

       . . . [Pro-rata adjustments have] eliminated the need for processing
       supplemental agreements for these mostly routine transactions and [have] over
       the years saved the department and FHWA immeasurable time and expense.

       Recently, however, the applicability of the pro rata cost estimation method for
       establishing contract time has been decided to conflict with FHWA
       procedures. According to the FHWA guideline, this method “is not
       recommended for use on projects where completion time is a major factor.”
       It follows that if the method is not appropriate for establishing working time
       initially, then it should not be used for calculating additional time.

       The department is in full agreement with the FHWA guideline looking
       forward. However, since this provision is included in practically all of the
       department’s current contracts, we feel that in fairness to both the
       department and its agents, that the provision should continue [to] be applied
       in accordance with current practice to existing contracts. Since this has been
       the practice for many years now, we do not believe that continuing to do so

                                             -7-
        will in any way diminish the integrity of the department’s contract
        administration process. Therefore, FHWA’s concurrence and participation is
        requested on existing contracts as new policy and guidelines are being
        developed. A list of these projects is attached.

        . . . We have recently, and will continue to use contracting methods such as
        “A + B Bidding” and “No Excuses Bonuses” when appropriate.8 Guidelines
        will be developed to help in determining applicable projects for these and other
        type contracting methods.

        To further facilitate these goals, contract specifications and guidelines for
        setting contract working time are being reviewed. . . . Specifically, on future
        contracts that contain an incentive/disincentive clause for acceleration of the
        work, a . . . CPM schedule will be required. In fact, beginning with the
        February 2005 letting, the department will no longer consider paying
        incentives on any projects that are not complete by the original contract
        completion date. In addition, new guidelines for the use of incentives are
        being discussed.

                                                      ***

(Emphasis added). The list attached to the letter contained ten different projects, including
another RBCC project known as “CNA428-Briley [Parkway] Robertson Rd.” 9 However, the
attached list did not include CNB004 Midtown Interchange Project. At the time the letter
was created, the Midtown Interchange Project was an “existing” project.


                                          THE FHWA LETTER

      In the FHWA letter, Mr. Blackmon responded to Mr. Degges’ prior letter and
approved TDOT’s request for use of the pro-rata method on existing contracts:


        8
         Following the change in policy by FHWA, TDOT began using more restrictive language in its
special provisions. For example, TDOT used what is known as a “No Excuse Bonus” provision in Contract
No. CND123 in Knox County, which stated that “the NO EXCUSE BONUS Completion date will not be
adjusted for any reason, cause or circumstance whatsoever, regardless of fault, save and except in the
instance of a catastrophic event (e.g., tornado, earthquake or declared state of emergency).” On another
project, Contract No. CNG251 in Jefferson County, the Special Provision expressly stated that “[u]nder no
circumstances” would the completion date be extended for consideration of the incentive payment.
        9
            In that contract, a pro-rata extension of the incentive data was granted.

                                                       -8-
      On several projects, we have raised concerns about the appropriateness of
      using Section 108.06 of the Standard Specifications to proportionately increase
      contract time for quantity overruns on projects with incentive/disincentive
      provisions for completion. With the changes listed in your letter, future
      contracts will not allow this approach.

      We understand there are active projects with incentive/disincentive clauses
      whose contracts include Section 108.06 of the Standard Specifications. In
      addition, we understand that it has been the TDOT’s practice on Federal-aid
      projects to proportionally increase contract time for quantity overruns.
      Therefore, we agree that it is appropriate to honor the use [of] this approach
      on the projects listed in your letter. On the listed projects, we will approve
      your requests for a proportionate increase in contract time for quantity
      overruns and the approved additional time can be used to adjust the
      incentive/disincentive dates.

(Emphasis added). According to Mr. Donoho, the Midtown Interchange Project was one of
the larger incentive provisions in existence at the time of the policy change.




                     BRILEY PARKWAY ROBERTSON ROAD

       On RBCC’s Briley Parkway Robertson Road Project, included on the list of existing
contracts, RBCC had a completion date of November 1, 2005, with incentive/disincentive
payments in the amount of $7,500 per day. That contract provided in part:

      The project shall be completed in its entirety on or before November 1, 2005.

                                          ***

      . . . The November 1, 2005 completion date may be extended in accordance
      with the Standard Specifications, however, no incentive payment will be made
      if work is not completed in its entirety by November 1, 2005.


As to contract time extensions, the above language was exactly the same language as SP108B
in the present case, with the exception of the actual completion date.

      On the Briley Parkway Robertson Road project however, TDOT executed Change


                                            -9-
Order No. 31, which extended the completion date from November 1, 2005, to April 26,
2006. Of the 177 days added to the contract time, 129 days were for quantity overruns
calculated by the pro-rata method. The change order expressly stated that “the original
completion date of November 1, 2005 listed in the Special Provision 108(B) will be adjusted
to reflect the new completion date of April 26, 2006.” TDOT later revised the SP108B to
reflect the new completion date. Mr. Donoho testified that all dates in the SP108B, including
the incentive payment date, were changed to April 26, 2006, because the Briley Parkway
Robertson Road project was included on the list of “existing contracts” approved by FHWA.


                        THE “EXISTING CONTRACTS” LIST

        Mr. Donoho testified that he assisted Mr. Degges in drafting the February 2005 letter
to FHWA, and that his office prepared the list of “existing contracts” attached to TDOT’s
letter. In their testimony, both Mr. Donoho and Mr. Degges could identify no objective
reason for the Midtown Interchange Project not being included on the list. Indeed, Mr.
Donoho conceded at trial that it was simply due to “an oversight.” However, even after
learning about the “oversight,” Mr. Degges admitted that he never asked FHWA about
moving the incentive date for the Midtown Interchange Project.

       Based upon FHWA’s March 2005 response to TDOT’s February 2005 letter, Mr.
Donoho testified that RBCC’s claim would have been treated differently by both TDOT and
FHWA – a pro-rata extension would have been granted – had the Midtown Interchange
Project been included on the attached list of “existing contracts.” He acknowledged that
prior to the change in policy, the incentive dates could be extended and that TDOT had
previously done so in other contracts.

       However, as the Commission noted in the decision,

       Mr. Donoho admitted that when FHWA advised him that it did not want the
       incentive date extended on this contract, TDOT looked at the project
       differently. . . . Specifically, Mr. Egan testified FHWA told him that if the
       Shelby County project [(Midtown Interchange Project)] was not on the list,
       they were not going to pay it and if the RBCC Davidson County project
       [(Briley Parkway Robertson Road)] had the same language, they should not
       have paid that one. Mr. Egan was afraid that FHWA would re-visit the
       payment made on the Davidson County project and dropped the issue.

The Commission discussed the integral involvement of FHWA with the administration of the
contract:

                                            -10-
       Mr. Egan testified that when Scottie Plunk with TDOT forwarded proposed
       Supplemental Agreement 24 to RBCC on March 1, 2006, he and possibly
       Plunk already had held discussions with FHWA. Mr. Egan went on to testify
       that when RBCC’s claim was presented to FHWA, it responded that it did not
       know if it would participate or not. According to Mr. Donoho, in 2005,
       FHWA took the position that the pro-rata method of adding additional days to
       the completion date was not consistent with its policies. Mr. Donoho testified
       that this project’s incentive was looked at differently because FHWA made
       TDOT look at it differently although Mr. Egan testified the Federal
       government “ha[d] approved moving the completion date for incentive and
       disincentive purposes” on other occasions. Implicitly acknowledging the pro-
       rata method of extending time, Mr. Donoho wrote to Mr. Clayton at RBCC on
       January 30, 2007, that use of the method was not automatic “regardless of how
       this method may have been implemented in the past.”

The decision of the Commission continues as follows:

       Mr. Donoho testified that on other projects he had been involved with at
       TDOT on which RBCC was the contractor,7 RBCC attempted to earn
       incentives. Mr. Donoho also acknowledged that prior to February of 2005,
       incentive dates could and had been extended. He acknowledged the similarity
       between SP108(B) in this Shelby County contract and the same provision in
       RBCC’s Robertson Road/Briley Parkway Project in Davidson County. It will
       be recalled that the Davidson County contract was entered into on October 1,
       2002, with an anticipated completion date of November 1, 2005 – some nine
       (9) to ten (10) months after the Degges/Blackmon letter exchange of
       February/March 2005, and that the completion date was later extended to April
       of 2006, with the consequence that RBCC earned a bonus of two million five
       hundred thousand dollars ($2,500,000.00).

       According to Mr. Degges’ testimony, both he and FHWA were concerned
       about extending a contract time every time there was an over-run on quantities.
       FHWA was pushing TDOT to establish more concrete completion dates. In
       fact, Mr. Degges testified that he was being “pushed” by FHWA to “kind of
       take a stand” and that because of the flexibility TDOT’s Specifications gave
       it, it wanted to start moving forward in its management of contracts.
       Additionally, Mr. Degges testified that both TDOT and FHWA were trying to


       7
         As noted by the Commission, RBCC was carrying out some ten to 20 projects for TDOT at the same
time as this one.

                                                 -11-
get to the point where they would use a CPM on projects in order to make a
determination whether contract change impacted the completion date. Mr.
Donoho testified that the change in Standard Specification 108.06 requiring
use of a CPM in order to earn incentives took effect on March 1, 2006.

The pro-rata adjustment method for extending completion dates was discussed
in Chief Engineer Degges’ letter to Mr. Blackmon of FHWA. According to
that letter, use of pro-rata adjustments allowed TDOT to modify its contracts
“based on over-runs and contract quantities.” Mr. Donoho testified that this
method had been used in the past by TDOT. However, according to Mr.
Degges, the pro-rata approach probably ended around the time frame of his
correspondence with Mr. Blackmon in February and March of 2005. Mr.
Degges testified that the list attached to his letter to Mr. Blackmon was part of
an effort to streamline the process and “basically move forward with projects
that were either newly let to contract or had not been let to contract yet.”
According to Mr. Donoho and the language of Mr. Degges’ letter, under
existing contracts TDOT wanted to continue using the pro-rata method and
requested that FHWA concur with that position. Attached to the Degges’ letter
is a list of “existing contracts” which “in fairness” should continue using the
pro-rata or cost estimation method for establishing contract time and then
“beginning with the February 2005 letting, the department [would] no longer
consider paying incentives on any projects that [were] not complete by the
original contract completion dates.”

. . . Mr. Egan and Mr. Donoho agreed that if the Shelby County Mid-Town
project had been included on th[e] list the incentive would have been paid, and
that Mr. Blackmon and Mr. Degges agreed that contracts in existence prior to
2005 would be paid consistent with past practice. There is no evidence in this
record explaining why the contract here, containing language identical to five
of the contracts listed on Mr. Degges’ list, and in place since 2003 was not
included on that list.

Mr. Donoho . . . testified that Mr. Blackmon had responded to Mr. Degges that
“. . . it is appropriate to honor the use of this approach on the projects listed
in your letter.” In fact, he testified that there was no objective reason why the
Shelby County project had been left off the attached list, and that if it had been
there, he would have looked at RBCC’s claim differently. In fact, he also
stated that the incentive date was changed (extended) on the Davidson County
Robertson Road/Briley Parkway project because it was on the list.



                                      -12-
                                    ***

. . . [T]he Commission FINDS that the proof developed over four days of trial
establishes clearly that up until February or March of 2005, TDOT and FHWA
permitted extensions of completion dates for purposes of earning incentives,
even in the face of the language contained in SP108(B).

This case is a strong example of why parol evidence is sometimes admitted in
establishing the full intent of parties to a contract.

                                    ***

Based upon the extensive evidence introduced at the trial of this matter, the
Commission FINDS that there was an ambiguity in this contract, based upon
both the language and the circumstances surrounding the entering into and
performance of the same, created by Standard Specification 108.06 and
SP108(B), both of which, according to the terms of the contract, are a part of
it and are “complementary.”

It is clear that for a number of years, as shown by the Degges/Blackmon
correspondence of early 2005, exceptions to the no extension language for
incentives found in SP108(B) had been regularly made. Apparently, a
watershed change in the way of awarding incentives took place in early 2005
unbeknownst to RBCC, and for that matter, perhaps other contractors, when
FHWA decided unanticipated delays and pro-rata quantity increases could not,
under its regulations, provide a basis for extending completion dates for
purposes of earning an incentive. As a primary provider of funds for large
highway construction projects in Tennessee, here, ninety percent (90%), the
FHWA obviously was integrally involved with projects such as this one.

According to the testimony, one of the methods involved here to extend the
completion dates for purposes of earning an incentive was involved in a small
subset of the total set of construction projects overseen by TDOT. RBCC had
been the beneficiary of such an extension with regard to the Davidson County,
Robertson Road/Briley Parkway project which was entered into on October 1,
2002, with an effective date of November 25, 2002. The originally bargained
for completion date was November 1, 2005. However, pursuant to a
Supplemental Agreement signed by TDOT’s Director of Construction on
March 13, 2006, the completion date, for purposes of earning an incentive, was
extended to April 26, 2006. As a result of that one hundred seventy-seven

                                     -13-
      (177) day extension, RBCC received an incentive bonus of two million five
      hundred thousand dollars ($2,500,000.00). Mr. Nicely testified that in fact it
      was TDOT which had taught him how to apply for an extension of the
      incentive date during the course of the Robertson Road/Briley Parkway
      project.

      The timing of the approval of the extension of the Davidson County project is
      particularly intriguing since the proposed Supplemental Agreement in this
      case, SA 24, providing for an extension of the date to avoid a disincentive (but
      not to earn an incentive), was sent by Mr. Plunk of TDOT to RBCC on March
      1, 2006, twelve days before TDOT’s Director of Construction signed a
      Supplemental Agreement extending the completion date for purposes of
      earning a bonus on the Robertson Road/Briley Parkway project even though
      the language of SP108(B) in both contracts was virtually the same. This
      discrepancy in the State’s position vis-a-vis these two contracts is difficult and
      perhaps impossible to logically reconcile.

      Therefore, it is clear to the undersigned that based upon TDOT’s past practice
      of extending incentive dates as well as RBCC’s recent experience in Davidson
      County, a fair interpretation of the contract here . . . is that the completion date
      could be extended not only for avoiding disincentives and liquidated damages
      but also for purposes of earning the ten thousand dollar ($10,000.00) a day
      incentive.

The Commission went on to state:

      [D]enying RBCC an early completion bonus on this project, delayed as it was
      by problems at two bridge sites and involving performance of millions of
      dollars in additional work is both unreasonable and out of sync with the
      parties’ agreement. The proof shows that even as early as March of 2005,
      RBCC had completed one hundred and two percent (102%) of the original
      projected work. Further, although the State’s position was that throughout the
      project when RBCC was stymied at one work location it could merely move
      to another area and complete other aspects of the job, [this] is simply not borne
      out by the proof. . . .

      The State’s insistence that RBCC could merely shift its resources to other
      aspects of the job when problems were encountered is also curious in light of
      its emphasis – in its own proof – on the schedules developed by RBCC for
      completing the work, as well as the State’s misplaced reliance on a critical

                                             -14-
       path method, which was not required under this contract. Obviously, the State
       acknowledges the importance of completing work in a sequential fashion and
       cannot be heard now to criticize RBCC for seeking more days, pursuant to an
       established practice for bonus purposes, when it was thrown off schedule by
       circumstances it did not create.

                                           ***

       . . . [I]n this case, the Commission FINDS that RBCC, TDOT, and FHWA
       were working under a system that clearly involved payment of bonuses even
       though the initial completion/incentive date was not met when unanticipated
       delays and quantity over-runs were encountered.

       There may well have been a change in FHWA policy in perhaps late 2004 and
       early 2005 but this contract was entered into well before that, there is no
       evidence that the ground rules for interpreting the terms of this contract had
       changed prior to its effective date.


        Accordingly, the Claims Commission concluded that RBCC was entitled to the full
relief sought, including an award for the maximum incentive payment ($2,500,000), return
of disincentive ($170,000) and liquidated damages ($23,800), compensation for previously
unpaid items ($67,819.36), and prejudgment interest. Due to a calculation error, the Claims
Commission amended the final judgment on August 7, 2009. TDOT filed a timely notice of
appeal, limited solely to the award of the incentive payment of $2,500,000, plus the award
of prejudgment interest of $173,618.50 on the incentive payment. TDOT did not appeal any
of the other monetary awards in favor of RBCC.


                                        II. ISSUE

      The issue before us is whether the Claims Commission erred in allowing extrinsic
evidence to explain what it found to be an “egregious” latent ambiguity in the contract?


                            III. STANDARD OF REVIEW

      On appeal, the appellate court reviews the Claims Commission’s conclusions of law
under a de novo standard upon the record with no presumption of correctness. Union
Carbide Corp. v. Huddleston, 854 S.W.2d 87, 91 (Tenn. 1993). The factual findings of the

                                            -15-
Commission are presumed to be correct; the appellate courts will not overturn those factual
findings unless the evidence preponderates against them. Skipper v. State, No. M2009-
00022-COA-R3-CV, 2009 WL 2365580, at *2 (Tenn. Ct. App. W.S., July 31, 2009). For the
evidence to preponderate against such a finding of fact, it must support another finding of
fact with greater convincing effect. Id. We accord great deference to the Claims
Commission’s determinations on matters of witness credibility and will not re-evaluate that
assessment in the absence of clear and convincing evidence to the contrary. Wells v. Tenn.
Bd. of Regents, 9 S.W.3d 779, 783 (Tenn. 1999) (citations omitted).


                                         IV. DISCUSSION

       The Commission concluded that the terms of the contract, as well as extraneous facts,
presented an “egregious” latent ambiguity in the parties’ contract that allowed it to rely on
extrinsic evidence to supplement the contract terms. Specifically, the Commission found
contract provision SP108B ambiguous for three reasons: (1) the term “original” in SP108B
creates an ambiguous circumstance; (2) SP108B cannot be reconciled with Standard
Specification 108.06 when applied; and (3) TDOT’s past practices make SP108B ambiguous.

       TDOT objected to the consideration of extrinsic evidence, arguing that review of the
evidence by the Commission violated the parol evidence rule, constituted hearsay, and was
not relevant to the proceedings.8

        The parol evidence rule is a matter of substantive law in contract cases that prevents
a party to a written contract from contradicting the terms of the contract by seeking the
admission of “extrinsic” evidence. See, e.g., Maddox v. Webb Constr. Co., 562 S.W.2d 198,
201 (Tenn. 1978); Airline Constr., Inc. v. Barr, 807 S.W.2d 247, 259 (Tenn. Ct. App. 1990).
Ordinarily, parol evidence is inadmissible to add to, vary, or contradict contract language.
Stickley v. Carmichael, 850 S.W.2d 127, 132 (Tenn. 1992). There are a number of
exceptions to the parol evidence rule. In this state, extrinsic evidence can be admitted for the
following purposes: (a) to aid in the interpretation of existing terms or to explain, rather
than contradict, the terms of a document, see Burlison v. United States, 533 F.3d 419, 429-
430 (6th Cir. 2008); Richland Country Club, Inc. v. CRC Equities, Inc., 832 S.W.2d 554,
558 (Tenn. Ct. App. 1991); (b) to resolve a latent ambiguity in the contract, Coble Systems,
Inc. v. Gifford Co., 627 S.W.2d 359 (Tenn. Ct. App. 1981); or (c) to establish allegations of


        8
         The Claims Commission found that the TDOT and FHWA letters and the contracts involving other
TDOT projects were relevant to the issues in dispute and were not inadmissible hearsay under the party-
opponent admission, statement against interest, and public record exceptions to the hearsay rule. See Tenn.
R. Evid. 803(1.2), 803(8), and 804(b)(3).

                                                   -16-
fraud or fraudulent misrepresentation in the inducement of a contract. See Brungard v.
Caprice Records, Inc., 608 S.W.2d 585, 588 (Tenn. Ct. App. 1980); see also Hines v. Wilcox,
33 S.W. 914, 915-16 (Tenn. 1896) (listing several other exceptions to the parol evidence
rule).

       The interpretation of written agreements is a matter of law to be reviewed de novo on
the record according no presumption of correctness to the trial court’s conclusions of law.
See Guiliano v. Cleo, Inc., 995 S.W.2d 88, 95 (Tenn. 1999). The cardinal rule of contract
interpretation is that the court must attempt to ascertain and give effect to the intention of the
parties. Christenberry v. Tipton, 160 S.W.3d 487, 494 (Tenn. 2005). In attempting to
ascertain the intent of the parties, the court must examine the language of the contract, giving
each word its usual, natural, and ordinary meaning. See Wilson v. Moore, 929 S.W.2d 367,
373 (Tenn. Ct. App. 1996). Additionally, the court may consider the situation of the parties,
the business to which the contract relates, the subject matter of the contract, the
circumstances surrounding the transaction, and the construction placed on the contract by the
parties in carrying out its terms. See Penske Truck Leasing Co., L.P. v. Huddleston, 795
S.W.2d 669, 671 (Tenn. 1990); Minor v. Minor, 863 S.W.2d 51, 54 (Tenn. Ct. App. 1993).

       The court’s initial task in construing the contract is to determine whether the language
is ambiguous. Planters Gin Co. v. Fed. Compress & Warehouse Co., 78 S.W.3d 885, 889-90
(Tenn. 2002). A contract is ambiguous if its meaning is uncertain and is susceptible to more
than one reasonable interpretation. See Bonastia v. Berman Bros., 914 F.Supp. 1533, 1537
(W.D. Tenn. 1995); Frank Rudy Heirs Assocs. v. Moore & Assocs., Inc., 919 S.W.2d 609,
613 (Tenn. Ct. App. 1995); Gredig v. Tennessee Farmers Mut. Ins. Co., 891 S.W.2d 909, 912
(Tenn. Ct. App. 1994).

       A latent ambiguity is found to exist where the words of a written instrument are plain
and intelligible, yet have capability of multiple meanings given extraneous facts. See 96
C.J.S. Wills § 893 (2001). The courts in Tennessee have provided that a latent ambiguity
exists when “the equivocality of expression or obscurity of intention does not arise from the
words themselves, but from the ambiguous state of extrinsic circumstances to which the
words of the instrument refer[.]” Burchfiel v. First United Methodist Church of Sevierville,
933 S.W.2d 481, 482 (Tenn. Ct. App. 1996) (quoting Weatherhead v. Sewell, 28 Tenn. 272,
295 (1848)). Moreover, a latent ambiguity is “susceptible of explanation by the mere
development of extraneous facts, without altering or adding to the written language, or
requiring more to be understood thereby than will fairly comport with the ordinary or legal
sense of the words and phrases made use of.” Id.

     The Commission focused on three separate provisions in the parties’ contract: (1)
SP108B; (2) Standard Specification 108.06; and (3) the order of precedence clause in the

                                              -17-
standard contract. The Commission noted in the decision as follows:

      The Commission FINDS that there is an egregious ambiguity in these
      contractual provisions.

      SP 108(B) in this contract requires completion of “all work in the original
      contract” before RBCC could earn an incentive bonus. In fact, there is
      arguably proof in this record that the originally contemplated work was
      complete months before December 15, 2006 . . . .

      The ambiguity here develops since the order of precedence clause . . . provides
      clearly that theoretically SP 108(B) would trump Standard Specification
      108.06, which provides for extension of the completion date where there are
      overruns and unanticipated delays in completing that same original work . . .
      . In other words, Special Provision 108(B) seemingly requires completion of
      the original work in its entirety but fails to take into account circumstances
      dealt with in Standard Specification 108.06 which may change the nature and
      content of that original work for reasons completely out of the control and
      unanticipated by either the State or the contractor.

The Commission further noted:

      This ambiguity becomes even more confounding in light of the proof here that
      apparently both TDOT and FHWA had for a number of years extended both
      incentive and disincentive dates, and agreed to do so again in February of
      2005, on a list of “existing” and “active” contracts – a list from which the
      contract at issue here was inexplicably omitted. . . .

      This constellation of ambiguities is further accentuated by the fact that around
      the time of the completion of this project, RBCC had completed for TDOT
      another project involving in excess of forty-three million dollars
      ($43,000,000.00) in Davidson County, containing the exact same language as
      SP 108(B) here and was granted an extension of the completion date which
      qualified it for an incentive bonus in excess of two million dollars
      ($2,000,000.00).

      In light of this complex set of circumstances, created not only by the terms of
      the contract itself but by the circumstances surrounding the implementation of
      its terms, a definite latent ambiguity exists for which parol evidence not only
      is admissible, but frankly, absolutely necessary in both understanding and

                                            -18-
       deciding the issues in this case.


       When contractual language is found to be ambiguous, the court must apply established
rules of construction to determine the intent of the parties. Planters Gin Co., 78 S.W.3d at
890. Generally, an ambiguous provision in a contract will be construed against the party
drafting it. Hanover Ins. Co. v. Haney, 425 S.W.2d 590, 592 (Tenn. 1968). When a
provision is ambiguous, a court is permitted to use parol evidence, including the contracting
parties’ conduct and statements regarding the disputed provisions, to guide the court in
construing the contract. See Allstate Ins. Co. v. Watson, 195 S.W.3d 609, 611-12 (Tenn.
2006).

        There was a sufficient legal basis for the Commission to rely on the two letters, as
well as evidence of other TDOT contracts, in order to (1) explain the basis for denial of
RBCC’s claims; (2) clarify the latent ambiguity; and (3) aid in the interpretation of the
contract. The Claims Commission correctly determined that the parol evidence rule did not
bar the admissibility or consideration of the TDOT letter, the FHWA letter, or the evidence
of the other TDOT projects in this case. The evidence viewed as a whole fully supports the
Commission’s determination that the extrinsic evidence was “absolutely necessary in both
understanding and deciding the issues in this case.”

       Furthermore, we agree with the Commission’s findings that a change in the contract
completion date could be applied to the incentive date, as evidenced by the admissions in the
TDOT letter, the change of the incentive date on another RBCC project with the exact same
language, and examples of both exemplary and prohibitory language in numerous other
contracts. As found by the Commission, “the painstaking proof put on by [RBCC] easily
establishes that a combination of delay days and quantity over-run days results in an
extension of at least two hundred fifty (250) days to be added to the original contract
completion date of December 15, 2006 . . . .”


                                           INTEREST

       On June 2, 2009, the Commission concluded that RBCC was entitled to the relief
requested. Thereafter, RBCC was granted prejudgment interest on its award. TDOT argues
that RBCC never made a claim for prejudgment interest. Thus, TDOT asserts that RBCC’s
claim for prejudgment interest is untimely and waived.

       However, an award of prejudgment interest is within the sound discretion of the trial
court and will not be disturbed absent manifest and palpable abuse of discretion. See Myint

                                             -19-
v. Allstate Ins. Co., 970 S.W.2d 920, 927 (Tenn. 1998). As noted by the Commission

      Prejudgment interest need not have been prayed for in the original complaint
      in order to be recoverable. Story v. Lanier, 166 S.W.3d 167, 181 (Tenn. Ct.
      App. 2004).

The Tennessee Claims Commission Act also provides in Tenn. Code Ann. § 9-8-307(d) that
a successful claimant “shall” receive “such interest as the commissioner may determine to
be proper, not exceeding the legal rate as provided for in section 47-14-121.”

      In the final judgment, the Commission noted:

      According to the clear proof in this matter, the omission of the Memphis
      Midtown project from this list was a mere oversight within the TDOT
      bureaucracy. It is clear that had this project been included on the attachment
      to Mr. Degges’ February 24, 2005, letter, this lawsuit in all probability would
      not have occurred.

                                          ***

      The interpretation of the contract insisted upon by the Claimant, justifiably
      held in the view of the Commission, is consistent with FHWA administrator
      Blackmon’s letter to Mr. Degges of March 2, 2005, acknowledging that the
      existing way of doing business should be “honor[ed]” on those projects
      identified in the attachment to the Degges’ letter from which, the Commission
      has found, the Memphis Midtown project was unfortunately omitted by error.

      However, FHWA’s agreement “to honor” the previous way of doing business
      apparently abated since eventually Mr. Egan was told by FHWA that if
      [RBCC’s] Davidson County project contract contained the same language as
      the Midtown Memphis project and the bonus had been paid there, perhaps it
      should not have been and that conceivably that multi-million dollar payment
      should be reconsidered. Mr. Egan testified forthrightly that he dropped the
      entire subject since he was fearful that discussions of the same with FHWA
      could create problems for both [RBCC] and TDOT on the Davidson County
      project.

      FHWA’s views and input on this issue continued after the Blackmon letter of
      March of 2005, when the proposed Supplemental Agreement 24 between
      [RBCC] and TDOT was discussed with FHWA and that agency signaled that

                                           -20-
it did not know whether or not it would participate in any incentive payments
earned which involved an extension of completion dates.

Mr. Degges testified forthrightly, candidly, and credibly that he believed he
was being pushed “by FHWA to take a stand on extension of completion dates
as TDOT and FHWA moved toward adoption of a critical path method (CPM)
for determining whether contract changes impacted a completion date.” In
fact, the critical path method became a part of TDOT contracts on March 1,
2006.

This, as well as other proof in the record, leaves the Commission with the very
strongly held conviction that the progenitor of this entire dispute was the
“silent hand” of FHWA as it pushed, because of its ninety percent (90%)
financial leverage on this project, TDOT to change the way it had been doing
business with contractors such as [RBCC] since the late 1980's.

To this extent, perhaps it is not TDOT which is the real “proximate cause” of
[RBCC’s] loss of use of the monies owed as a result of the payment of an
incentive bonus but rather FHWA’s heavy handed push to change the rules at
the end of the game without telling [RBCC] the rules had changed with regard
to the contract it had entered into in 2003.

Regardless of where this change in the way of doing business came from
[RBCC] did lose for a period of time the use of incentive bonus monies which
the Commission has found it was entitled to . . . .

                                    ***

Here, the Commission is absolutely convinced the driving force in this dispute
was the FHWA with its ninety percent (90%) contribution on the project
providing a huge amount of leverage over both TDOT and [RBCC]. Some of
the indicia of FHWA’s heavy hand have been discussed above. It is also worth
noting that around the time the dispute in this case was brewing, Mr. Degges
had been told by FHWA to try and keep any incentive bonuses at less than ten
percent (10%) of the bid proposal. Additionally, Mr. Egan testified that in
March of 2006, when S.A. 24 was being prepared, FHWA informed TDOT
that it did not know whether or not it would be participating in any payments
based on that S.A., implicitly acknowledging, in my opinion, that an incentive
bonus was justified in this case. Additionally, Mr. Donoho testified that
TDOT began looking at S.A. 24 differently because FHWA made it look at

                                     -21-
       that document differently.

       This change in policy, clearly dictated by FHWA, had never been revealed to
       [RBCC] and came to light only when Mr. Donoho honestly and candidly
       provided Mr. Nicely with RBCC a copy of the February and March 2005,
       correspondence between Mr. Degges and Mr. Blackmon of FHWA.

       It is unfortunate that FHWA imposed on TDOT and its contractor here a
       change in the manner in which a bonus could be earned. This contract was
       entered into nearly three years before FHWA, in 2005, proposed changing the
       fashion in which it had administered contracts with TDOT since the late
       1980’s and early 1990’s.

We find that the Commission properly awarded prejudgment interest to RBCC.

        RBCC requested post-judgment interest in the amount of ten percent from the date of
June 2, 2009. Tennessee’s post-judgment interest statute provides that post-judgment interest
“shall be computed at the effective rate of ten percent (10%) per annum” unless otherwise
provided. Tenn. Code Ann. § 47-14-121 (Supp. 2010). As the contract at issue is silent on
the rate of post-judgment interest, we find RBCC’s request to be proper.


                                    V. CONCLUSION

       The judgment is affirmed and the case is remanded to the Commission. Costs of the
appeal are taxed to the appellant, State of Tennessee.




                                                   _________________________________
                                                   JOHN W. McCLARTY, JUDGE




                                            -22-
