If You Want to Avoid Prejudgment Interest You Have to Expressly Say So in the Contract, Merely Striking the Interest Provision From the Contract May Not Work

G&G Mech. Constructors, Inc. v. Jeff City Indus., Inc., No. WD80840, 2018 Mo. App. LEXIS 271 (Mar. 20, 2018).

This case arose out of a project in Columbia, Missouri on which Jeff City Industry, Inc. (“JCI”) was the general contractor and G&G Mechanical Constructors, Inc. (“G&G”) was a subcontractor.

The draft subcontract contained an interest provision which provided 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 which included prejudgment interest at the rate of 9% pursuant to Missouri Revised Statute § 408.020.

JCI appealed the award of prejudgment interest.  It contended that G&G failed to satisfy its burden to prove entitlement to interest pursuant to the statute.  The appellate court found that § 408.020 entitles a creditor to interest at a rate of 9% unless otherwise agreed upon by the parties.  The burden was thus on JCI, the party seeking to avoid application of § 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 issue of interest.  Thus, the subcontract was unambiguous that the parties had no agreement on the issue.  In Missouri, where no agreement is reached by the parties regarding interest rate, the creditor is entitled to interest at the rate designated by § 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 § 408.020.

To view the full text of the court’s decision, courtesy of Lexis®, click here.

Jane Fox Lehman

 

 

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