Washington Court of Appeals Addresses when a Construction Contract Can and Cannot be Terminated Without a Remedy Period

From the desk of Mike J. Staskiews: It is no secret that major public works projects come with major potential for safety risks and hazards. Contractors strive to protect the health and wellbeing of their workers and the general public alike. Unfortunately, things can slip through the cracks which, if not remedied within a certain period of time, can result in the termination of high-value contracts. However, a terminating party (like the City of Puyallup in the following case) must be careful to follow the termination procedures found in the contractual agreement between the parties. Additionally, if a party terminating a construction agreement for defective work wants to recover post-termination damages and costs for repair, it must also allow the terminated party an opportunity to cure the alleged defects.

Case Pointer: In this case from the Washington Court of Appeals, the Court addresses the propriety of the City of Puyallup’s decision to terminate a public works contract with Conway Construction Company after discovering a number of safety issues. The dispute came down to whether the City had breached its contract with Conway in relying on a certain clause contained in the Washington State Department of Transportation’s (WDOT) Specifications for Road, Bridge, and Municipal Construction. Was the city correct in terminating Conway’s contract?  Did Conway comply with Washington Offer of Settlement rules for public works contracts to recover its attorney fees?  Read on to find out.

Conway Constr. Co. v. City of Puyallup, 2020 Wash. App. LEXIS 1250 (May 4, 2020).

Plaintiff, a Washington-based construction contractor, had secured a job to perform a variety of roadway improvements for Defendant, the City of Puyallup, Washington. The contract was voluminous, as it contained references to a number of WDOT construction specifications relating to roadways – documents that would become important later in the litigation. Construction began and the City eventually became concerned about a number of potential defects (e.g. the quality of pavement being used and other utility defects), and unsafe working conditions, which it reported to the Washington State Department of Labor and Industries (L&I).

The timeline of events is important to the case. On March 9, 2016, the City gave Conway a notice of suspension and breach of contract, which included a list of nine items that the City deemed to be contract breaches. The notice gave Conway 15 days to remedy the issues. Conway denied any wrongdoing. Then, on March 21, 2016, the City told Conway it still needed to remedy the original nine issues and that it had received even more reports of safety violations, but Conway again denied any wrongdoing. On March 25, 2016, the City issued a notice of termination for default to Conway and started withholding payments. Following a bench trial, the court found that the City had breached its contract when it terminated Conway, awarding damages, attorney fees, and costs. The City appealed.

On appeal, the real question came down to the language of the contract between Conway and the City, which contained two termination provisions. The first, “Paragraph 22” of the contract form, allowed the City to terminate for “good cause,” which was defined to include “[Conway’s] failure to comply with … local laws, rules or regulations,” and did not include a cure opportunity timeline. However, the contract also incorporated WDOT Specifications for Road, Bridge, and Municipal Construction. Section 1-08.10(1) of those specifications allowed termination of the contract upon the occurrence of any one (or more) of a variety of events. Among them, “if [Conway] disregards laws, ordinances, rules, codes, regulations, orders, or similar requirements of any public entity having jurisdiction.” Unlike the termination provision of the contract form, Section 1-08.10(1) did contain a 15-day cure opportunity period before the contracting agency (the City, in this case) could terminate the contract.

The Court of Appeals then considered the effect of a conflict provision in the contract form which addressed conflicts between it and the attached specifications. The City argued that the terms of the contract form and the terms of specification Section 1-08.10(1) conflicted, meaning that Paragraph 22 (which did not include a cure opportunity period) would govern. The Court of Appeals disagreed, instead finding that the terms of Section 1-08.10(1) supplemented rather than conflicted with the terms of Paragraph 22. Regarding the cure opportunity period, Paragraph 22 was silent, but Section 1-08.10(1) required a 15-day cure opportunity period. The Court interpreted this as a supplement, not a conflict, and therefore gave effect to both pieces of language. Thus, in the context of safety violations, Conway had 15 days to cure before the City could rightfully terminate the contract. As it turned out, Conway had cured the safety issues while working directly with L&I following the City’s complaint. In a finding of fact, L&I stated “there were no further safety issues on site after March 9, 2016” and that the safety issues were “found to have been cured by the end of the suspension period.”

The Court then considered a matter of first impression in Washington. The City argued that it was entitled to a setoff for defective work it discovered after terminating Conway. Finding no Washington law addressing the issue of whether a breaching party was entitled to a setoff when it did not give the nonbreaching party an opportunity to cure alleged defects, the Court looked to the Oregon case of Shelter Products, Inc. v. Steelwood Construction, Inc., 257 Or App 382, 402, 307 P.3d 449 (2013), which held that a breaching party is not entitled to a setoff for allegedly defective work where the breaching party terminated the contract for convenience, but did not give the other party notice of the defects and opportunity to inspect, cure or complete the work.  Concluding that the City of Puyallup had terminated the agreement with Conway, but did not provide Conway an opportunity to cure alleged defects, the Court found that the City was not entitled to its claimed post-termination damages and costs.

Not everything went Conway’s way, however.  With respect to the trial court’s award of attorney fees for Conway, the Court of Appeals reversed.  The public works contracts statutory section relating to the award of attorney fees under an offer of settlement (RCW 39.04.240) requires that the offer of settlement be served no less than 30 days and no more than 120 days after completion of service and filing of the summons and complaint. According to the Court, the Washington legislature had enacted this statutory provision to allow government entities an early opportunity to settle public works litigation by requiring an early settlement offer from a claimant who wishes to preserve a claim for attorney fees. Conway had not made such a settlement offer and was therefore precluded from obtaining attorney fees. Ultimately, the trial court was reversed only on its award of Conway’s attorney fees. The City had failed to justify its contract termination, and was therefore not entitled to post termination damages.