Where a city default terminated its construction contractor that was building the nation’s first arterial roadway with pervious concrete, the contractor filed suit against the city challenging the default, and asking the court to turn it into a convenience termination.  The trial court found in favor of the contractor and this was affirmed on appeal, with the court also holding that the City was not entitled to an offset for any defective work discovered after termination because it failed to provide the contractor with the contractually required notice and opportunity to cure.  Prevailing party attorneys fees were also awarded to the contractor.

A key finding by the court was that the city failed to act in good faith because, after giving contractor 15 day notice of nine contract violations, the contractor took steps to remedy the breaches and, on several occasions, asked to meet and discuss the City’s concerns.  The City’s engineer refused – and instead responded, “the required actions seem to be clear, therefore I don’t see the need for a meeting.” This refusal to meet and discuss the details with the contractor “implicated the concerns of bad faith on the City’s part.”   The appellate court held that the “City’s withholding of ‘satisfaction’ with the [contractor’s] proposed remedy was unreasonable.”  This, therefore, became a termination for convenience.  In addition to recovering costs, the contractor was also entitled to recover its attorneys fees from the city.  Conway Construction Company v. City of Puyallup, 197 Wash. 2d 825 (2021).

The court began its analysis by stating that pursuant to the Standard Specifications that are incorporated into the contract terms, if a default termination is determined to have been improper, the termination automatically becomes a termination for convenience.

Because this was a transportation project, the city’s Public Works Contract here incorporated the Washington State Department of Transportation’s Standard Specifications for Road, Bridge and Municipal Construction (Standard Specifications).  The Standard Specifications set forth several bases upon which the city could default terminate its contractor, and provided:

 “Once the Contracting Agency determines that sufficient cause exists to terminate the contract, written notice shall be given to the Contractor and its Surety indicating that the Contractor is in breach of the Contract and that the Contractor is to remedy the breach with 15 calendar drays after he notice is sent…. If the remedy does not take place to the satisfaction of the Contracting Agency, the Engineer may, be serving written notice to the Contractor and Surety … Terminate the Contract.”

The City argued that the trial court should have asked whether the City “was satisfied” with the Contractor’s remedial efforts.  Instead, the court agreed with the contractor’s argument that the proper test was whether the contractor neglected or refused to correct defective work.  If the contractor made an attempt to remedy the defaults, then termination was improper.  The appellate court concluded that both of the above are required.

Based on the contractor’s steps to remedy the defaulting conditions, and the fact that it reached out to the city to determine whether its efforts were sufficient (repeatedly requesting a meeting which was denied by city), the court found “substantial evidence to support the trial court’s conclusion” that the contractor was not neglecting or refusing to correct the defects.

Although the appellate court found that the city was correct that the contract allowed it to terminate if the contractor’s remedy didn’t satisfy the city, “the City must act reasonably and in good faith in deciding it is satisfied.”   Here, “the trial court’s findings of fact establish that the City’s actions leading up to termination were unreasonable or made in bad faith.”  “The City engineer testified that he had lost confidence in [contractor’s] ability to perform the Contract to his satisfaction… Loss of confidence, however, is to grounds for default termination.”  For these reasons, the appellate court found that withholding of “satisfaction” with the proposed remedy was unreasonable.”

The burden of proof fell on the city to show not only that the contractor initially defaulted, but under the federal case law, the court also held that the city the burden of proving that the termination of the contract for default was justified.  Here, the city “failed to meet its burden to show that termination was justified by a continuing default at the time of termination.”

City was not permitted to recover an offset for alleged defective contractor work.  The city argued it should be able to claim an offset for defective work it discovered after terminating the contract. The appellate court here cited Oregon case law for the proposition that a party that terminates a contract for convenience is not entitled to offset for defective work without giving the other party the contractually required notice of the defects and an opportunity to fix them.    It would be inconsistent for the city to both terminate the contract for convenience and then seek damages against the contractor as if it had been terminated for default.    The court concluded that although this Oregon case law is instructive, the court here need only decide this issue based on the plain language of the contract that required the city to provide notice of defective work and an opportunity to fix it.  Since the city failed to do that, it cannot seek to recover the offset damages.

Attorney fees can be recovered by the contractor.  Contract language here stated: “The Owner and Contractor each agree that in the event either of said parties brings an action in any court arising out of this Contract, the prevailing party in any such lawsuit shall be entitled to an award of its cost of defense.”


About the author: Article written by J. Kent Holland, Jr., a construction lawyer located in Tysons Corner, Virginia, with a national practice (formerly with Wickwire Gavin, P.C. and now with ConstructionRisk Counsel, PLLC) representing design professionals, contractors and project owners.  He is founder and president of a consulting firm, ConstructionRisk, LLC, providing consulting services to owners, design professionals, contractors and attorneys on construction projects.  He is publisher of ConstructionRisk Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932.  This article is published in ConstructionRisk Report, Vol. 23, No. 6 (October 2021).

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