Washington Supreme Court Says Termination of a Contract, Not for Default, Equals a Termination for Convenience

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From the desk of Ashley Nagrodski:

These two forms of termination commonly result in different financial consequences for the contractor. This case addresses such an occurrence and illustrates how an entity can avoid paying extra costs and fees.

Claims Pointer:

Here, the Washington Supreme Court illustrates how the standard specifications incorporated into the subject contract – between a contractor and the City of Puyallup – automatically converts an improper termination for default into a termination for convenience and the financial impact of the same.  

Conway Constr. Co. v. City of Puyallup, No. 98753-0 Wn.2d (July 8, 2021).

Facts:

The City of Puyallup contracted with Conway Construction Company to build the nation’s first arterial roadway with pervious concrete. As is customary with public works projects, the City drafted the contract, setting the terms of the project. The subject contract included several documents which, together, governed the project. 

The City found several problems with this project and issued a number of nonconformance reports to Conway in early 2016.  The nonconformance reports notified Conway that some of its work did not meet contract specifications.  The City also saw unsafe work conditions, which it reported to the Washington State Department of Labor & Industries (L&I).  Citing the notice requirements within the contract, the City gave Conway notice of suspension and breach of contract, identifying a total of nine contract violations.  Conway subsequently disputed the violations but also took steps to remedy the alleged breaches.  On several occasions, Conway asked to meet and discuss the City’s concerns, but the City’s engineer refused.  The City ultimately issued a final notice of termination for default to Conway and withheld further payments. Conway sued the City, arguing that the termination for default was improper and should be converted to a termination for convenience under the contract.  The City sought costs incurred to complete the project.  Conway sought attorney’s fees pursuant to the contractual language regarding a termination for convenience.

Law:

Under the subject contract, once the Contracting Agency determines that sufficient cause exists to terminate the contract, written notice must be given to the Contractor and its Surety indicating that the Contractor is in breach of the contract and that the Contractor must remedy this breach within 15 days after notice is sent.  The Contract allowed the City to continue termination if it was not satisfied with the remedy, but it could not terminate if the City’s lack of approval was unreasonable or not in good faith. Although the City did not properly terminate for default, the termination was converted into a termination for convenience.  

A termination for default must be based on good cause, such as the contractor’s failure to meet the requirements of the contract. By contrast, a termination for convenience clause in a contract generally gives a public entity “the right to terminate ‘at will,’” assuming no bad faith or abuse of discretion. These two forms of termination result in different financial consequences for the parties. 

Analysis:

The subject contract specifies that under a termination for default, Conway must pay any extra costs the City incurs to complete the project, including a new contractor’s higher prices, and states that payments are withheld until the project is finished. However, the City shall only be entitled to terminate the contract for good cause, the City may also terminate the Contract upon the occurrence of Conway disregarding the law; authority of the City; or performance of work which deviates from the contract and, after notice, Conway neglects or refuses to correct the rejected work. Here, the City argued that the “good cause” clause superseded the secondary clause, and that because Conway failed to comply with the law, the City was justified in termination of the Contract, regardless of any attempts at remedy. 

The Washington Supreme Court disagreed. Stating that the two provisions are instead complimentary. Accordingly, both clauses governed the termination here. The subject contract allowed termination based on defective work only if Conway neglected or refused to correct the rejected work, Conway attempted to make good faith repairs and cure the defective work, but the City failed to act in good faith when determining whether it approved the corrections. Because the City did not act in good faith, the termination of the contract was for convenience, not default.

Because this was a termination for convenience, the City was unable to recover any offset for defective conditions discovered after termination because Conway was not provided notice or an opportunity to cure.

The termination for convenience allowed Conway to seek contractual attorney fees. The Court had to decide if Conway was entitled to contractual attorney fees given the free provision in RCW 39.04.240, which did not apply this in this case. In sum, RCW 39.04.240 requires a settlement offer to be made in order to recover fees. Conway did not make a settlement offer and thus, was not entitled to fees under the statute.

However, the contractual language, as drafted by the City, allowed for attorney fees. RCW 39.04.240 is not an exclusive fee provision so contractual attorney fees are allowed.  Conway is entitled to recover the same.

The Big Picture:

Failing to understand contractual language can result in financial consequences for a party. Parties should be diligent in drafting and negotiating contractual language, be aware of the requirements needed for terminating a contract for default versus terminating a contract for convenience, and be sure to comply with the contractual language regarding the same. Parties should be careful in drafting, negotiating, and reviewing contractual language setting forth the financial consequences under each type of termination. Finally, if a contract provision provides for attorney fees, a party may recover such fees even if that party does not qualify for fees under RCW 39.04.240.