State Supreme Court says dissatisfaction is not enough to terminate

This column published as "The Contractor's Friend" in September 2021 issue

Jon Straw / September 08, 2021 / 3 minute read
Jon Straw

Recently, the Washington State Supreme Court held a public owner’s mere dissatisfaction was insufficient for a default termination when the contractor acted diligently.

Also, in addressing a question of first impression, the court held a failure to notify and afford an opportunity to cure alleged defects prevented offsets and recovery for corrective efforts.

In the case of Conway Construction Co. v. City of Puyallup, Washington, Case No. 98753-0, July 8, 2021, the city engaged the contractor to build the nation’s first arterial roadway with pervious concrete. In early 2016, the city notified the contractor of defective work and unsafe working conditions. The contractor disputed the allegations, but also tried to remedy the alleged breaches. Several times the contractor asked to meet and discuss the city’s concerns, but the city’s engineer refused to meet. In March 2016, the city terminated the contractor for default. After termination, the city alleged more defective concrete panels needed to be replaced.

The contractor sued the city seeking conversion of the termination for default (T4D) into a termination for convenience (T4C) and attorney’s fees. The city counterclaimed for the defective work discovered after termination.

Generally, a contractor in a T4D must pay for the completion of its scope of work by its surety or a replacement contractor. Under a T4C, the contractor is entitled payment for actual work performed, including profit, until the date of termination. A T4D must be based on good cause, such as the contractor’s failure to meet the contract requirements. Under a T4C clause, a contractor can be terminated for nearly any reason, assuming no bad faith or abuse of discretion. The Washington State DOT’s standard specifications incorporated by reference into the contract convert an improper T4D into a T4C.

To succeed, the claimant must carry the legal burden of proof. The plaintiff is not always the claimant nor the only claimant. The claimant is the party with affirmative claims. For example, here, the contractor’s affirmative claim was for attorney’s fees and the city’s affirmative claim was for offsets for defective work. In the case of a T4D, the burden is still on the claimant, but the claimant is the terminating party. So, here, it was the city’s burden to prove the T4D was proper.

At trial, the city argued the standard for termination was whether the city was satisfied with the contractor’s performance. The contractor argued the standard for termination was whether the contractor neglected or refused to correct defective work. The trial court held both parties were correct. However, the T4D was improper because, although the city was dissatisfied with the contractor’s performance, the contractor also took reasonable steps to remedy the defaulting conditions and to dialogue with the city regarding its satisfaction, which the city rebuffed.

The trial court converted the T4D into a T4C and denied the city any offset for the defective work, but also denied the contractor’s claim for attorney’s fees. The intermediate appellate court agreed with the trial court, but awarded the contractor its attorneys fees. The Washington State Supreme Court agreed with the two lower courts on the issues of termination and denial of offsets. The Supreme Court also agreed the contractor was entitled to recover attorneys fees under the contract terms.

The Washington State Supreme Court aptly stated, “[w]hile the city had the right to be satisfied with the proposed remedy, it did not have the right to unreasonably withhold satisfaction.” The contractor “made significant efforts to address the nine issues in the notice of suspension, and repeatedly asked for a meeting to discuss these efforts.”

Regarding the offsets, the court answered a question of first impression in Washington State and held the post-termination discovery itself did not prevent the offset for defective work, but the city’s failure to notify the contractor and afford an opportunity to cure prevented the contractor from mitigating the alleged damages and, therefore, prejudiced the contractor. “[N]either the [contractor] nor its surety were permitted to even timely investigate the potential cause or causes of the city’s defective work claims.”

Regarding the attorney’s fees, the court noted with approval the legislative history of the Washington State legislature that the attorneys fees statute was passed to “‘encourage settlement’ ... because in public works cases, the public entity often ‘react[s] to litigation as if their attorneys are free.’” Although the contractor did not recover under the statute, it did recover under the prevailing party provision in the contract.

Dissatisfaction alone was not enough to terminate for default. Diligent mitigation efforts and communication were the contractor’s friends.

About the Author

Straw is a partner with Kraftson Caudle, PLC, a law firm in McLean, Va., specializing in heavy-highway and transportation construction. Straw can be contacted via e-mail at [email protected]

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