Terminology of Contract Considered Ambiguous

When the Pepcol Manufacturing Company connected to a cooperative water service operated by the Denver Union Corporation, it was billed for the amount of water used at “seller's cost”, ie, the per‐gallon rate charged by the Denver Water Board. The corporation discovered it was paying the board 20‐25 percent more than it received from its water service system and assessed a surcharge to make up for the discrepancy. Pepcol refused to pay and sued the corporation for amounts it had advanced for construction of the water line. In turn, the corporation sued Pepcol for the balance due, including the unpaid surcharge. Although the trial court ruled against Denver Union, the court of appeals found in its favor. In an appeal, the supreme court agreed with Pepcol that the term “seller's cost” was ambiguous because it could be interpreted as the per‐gallon rate charged by the board or the cost actually expended by the corporation in furnishing the water, even though the cost was in excess of the rate charged by the board. The court considered the corporation's manner of charging prior to the water loss discovery , i.e., the per‐gallon rate charged by the board, as extrinsic evidence, and ruled that Pepcol was not liable for the surcharge.