J. Kent Holland, J.D.

Where a subcontractor sued the prime contractor for wrongfully issuing a termination for convenience, the trial court found in favor of the prime contractor, concluding that as a convenience termination a prime is not required to have a reason for termination, and holding that enforcing the clause in the contract would not render the subcontractor’s rights under the contract illusory. The appeals court affirmed the ruling, holding that payment by the prime for the sub’s partial performance was adequate consideration for the subcontract’s “termination for convenience” clause. The court also held that the prime was permitted to terminate at will, and that it did not need a specific reason for doing so. Sak & Associates, Inc. v. Ferguson Construction, Inc., 357 P.3d 671 (Wash. Ct. App. Div. 1 2015).

In this case, the subcontractor entered into a fixed sum contract with a prime contractor to provide concrete materials and paving services at an airport hangar. Part way through the work, the prime terminated its sub for convenience, paying the sub only for the work actually performed. The sub sued the prime for damages, alleging both that the prime contractor breached the subcontract by unilaterally terminating without cause, and that the reasons given for the termination were a mere pretext.

The trial court found that the prime had properly exercised the termination for convenience provision in the subcontract, and granted the prime’s motion for summary judgment. The appeals court affirmed the ruling, holding that payment by the prime for the sub’s partial performance was adequate consideration for the subcontract’s “termination for convenience” clause. The court also held that the prime was permitted to terminate at will and did not need a specific reason for doing so.

The Subcontractor’s argument was that the termination clause was an invalid illusory promise and since the clause was invalid, the Contractor breached the subcontract by invoking it. The clause, Section 7 of the subcontract, stated:

7. .. Contractor may, after providing Subcontractor with written notice, terminate .. the Subcontract, or any part of it, for its own convenience .. Contractor shall pay the Subcontractor for the work actually performed in an amount proportionate to the total Subcontract price. Contractor shall not be liable to the Subcontractor for any other costs, including anticipated profits on work not performed or unabsorbed overhead.

Under contracts law, a contract is not valid and enforceable unless both parties have provided “consideration.” Consideration means something of legal value; it can be money or goods, but is often the promise to do something. If the provisions of an agreement leave the promisor’s performance entirely within its discretion and control, the promise is illusory. In other words, if there is an absolute right not to perform at all, there is no consideration.

In construction contracts, consideration usually consists of the reciprocal promises of the contractor and the owner, or the subcontractor and the general contractor, to perform work and to pay for that work. In this case, the Subcontractor contended that because the termination for convenience clause allowed the Contractor to terminate the contract at its discretion, the clause lacked consideration and was therefore illusory and unenforceable. However as the appeals court pointed out, it is well-settled law that partial performance provides consideration for what might otherwise be an illusory provision that appears to grant unilateral control to one party. The court found that since the prime had paid the sub for the 24 percent of the project it had completed by paying a proportionate amount of the fixed contract price, there was adequate consideration for enforcement of the clause.

The Notice of Termination

The Subcontractor also alleged that it had not been given proper notice for the termination and that the content of the notice was critical to submitting timely notice of a claim or dispute. The Contractor’s notice of termination stated the following:

Ferguson Construction has determined that SAK’s services for this project are no longer required. Due to overall phasing restrictions, site logistics, and basic convenience, it has become apparent that it is in the best interest of the project to complete the site concrete paving with Ferguson’s own forces. This decision is not based on SAK’s work performed to date. Pursuant to Section 7 of the Subcontract General Conditions, the subcontract is terminated, effective immediately.

The sub complained that the prime contractor’s references to phasing, site logistics, and convenience were merely false and pretextual excuses for the prime’s goal of increasing its profits from the project. However, the termination for convenience clause, which the parties had agreed to by executing the contract, simply required that the Subcontractor be given written notice and receive payment for the work it had performed. Nothing in the termination for convenience clause required that the notice state any reason beyond “convenience.” Thus, the appeals court found that the Subcontractor had no basis for a claim.

Comment on Termination for Convenience

Like much of the law relevant to construction contracts, the concept of “termination for convenience” developed in federal government contracts. The federal government began including termination for convenience clauses in its contracts during the Civil War to avoid costly purchases that were no longer needed because of changes in war-time technology or cessation of conflict. Over time, the concept migrated to private contracts.

Courts in some states hold that exercise of a termination for convenience provision is limited by an implied duty of good faith and fair dealing. However, in Washington State, implied covenants of good faith and fair dealing do not trump express terms or unambiguous rights in a contract. The Appeals court noted that as a matter of law, there cannot be a breach of the duty of good faith when a party simply exercises its rights to require performance of a contract according to its terms. The court found that the termination for convenience clause unambiguously allowed the Contractor to terminate the subcontract for convenience; the only requirements were that the Contractor give notice and pay a proportionate payment of contract price. In the court’s words, “The implied duty of good faith and fair dealing does not allow one party to reshape or evade the bargain that was mutually agreed.”