Judicial conversion of a termination for cause to a termination for convenience. Conway Construction Co. v. City of Puyallup. Supreme Court of Washington (2021), by Hugh Anderson

Summary: The City of Puyallup contracted with Conway Construction Company to build a road—reportedly America’s first arterial roadway built with pervious concrete. There were problems with the project, including contentions by the City that Conway’s work did not meet the requirements of the specifications, and site safety issues. The City eventually issued a notice of suspension and breach of contract, citing nine contract violations.

Under the contract, Conway had 15 days to remedy the contract breaches. Conway took steps to do so, and at the same time asked to meet with the City to discuss the City’s concerns. The City engineer refused to meet, stating that “the required actions seem to be clear, therefore I don’t see the need for a meeting.” Ultimately the City issued a termination for default (more commonly known as a termination for cause).

Conway Construction sued the City, arguing that the termination for cause was unjustified and should have been a termination for owner’s convenience. A lengthy trial ensued, resulting in the judge finding that Conway had not been in default when it was terminated, and the termination should have been for convenience, not for cause.

The differences between a termination for cause and a termination for convenience can be significant:

  • Under a termination for convenience, typically the contractor is entitled to be paid for the work that it has performed to date, usually including related overhead and profit, and for termination-related transaction costs.
  • Under a termination for cause, all payments stop until the project (including remedial work) has been completed by replacement contractors, at which time all additional costs of completion are levied against the contractor.
  • Replacement contractors often charge a high, non-competitive price for their services.

A termination for cause will usually require the involvement of the contractor’s performance bond surety (and indeed a surety was apparently indirectly involved in the Conway v. Puyallup case).
A termination for cause can harm the terminated contractor’s reputation.

The dispute regarding the termination of the Puyallup-Conway road construction contract eventually reached the State of Washington’s Supreme Court.

Decision: The Supreme Court of Washington upheld the trial court’s decision in favor of the contractor, ruling that the termination should have been for the owner’s convenience, not for cause.
The core of the decision is an analysis of the process that should have been followed for a termination for cause, under the governing contract provisions and principles of contract law:

  • A termination for cause must be based on good cause, such as the contractor’s failure to meet the requirements of the contract.
  • The owner’s notice of termination for cause must be accompanied by an opportunity for the contractor to cure the cited defects in its work.
  • The contractor must establish that it did not neglect or refuse to cure the cited defects.
  • The efforts to cure the defects must be satisfactory to the owner, but the owner must act reasonably and in good faith in deciding whether the corrective work is satisfactory.

The Supreme Court concluded that the trial court was justified in finding that the contractor, Conway, did take appropriate “steps to remedy the defaulting conditions,” reached out to the City to determine if its efforts were sufficient, and repeatedly requested a meeting. Thus, “Conway was not neglecting or refusing to correct the defects.”

The high court held that under established law there is an “implied duty of good faith and fair dealing” in Washington contracts that “obligates the parties to cooperate with each other so that each may obtain the full benefit of performance.” The findings of fact from the trial established that the City had been unreasonable or acted in bad faith in handling the termination—in particular, the refusal to meet with the contractor. Also troubling to the Supreme Court was the City engineer’s testimony that he had “lost confidence” in the contractor’s ability to perform satisfactorily: “Loss of confidence, however, is not grounds for default termination.”

Comment: The published decision mentions repeatedly that there was a lengthy trial that examined the facts concerning the defects, the termination, the contractor’s efforts to cure, and the City’s lack of satisfaction with those efforts, resulting in extensive findings of fact that were largely adverse to the City. The underlying facts that are specifically mentioned in the decision (declining to meet with the contractor, for example) do not seem especially compelling, but it is noteworthy that the trial judge’s findings of fact, viewed in their entirety, were persuasive to both the intermediate court of appeals and the state Supreme Court.
Though having a meeting (or not) may not seem especially significant, in actual practice the value of meetings in avoiding or resolving construction problems or disputes is well recognized. At the project level, regular meetings are a project staple. Of more direct relevance to a potential termination, the industry’s standard performance bond encourages a conference (Owner, Contractor, Surety) in response to a notice that the Owner is considering declaring a contractor default. EJCDC® C-610, Performance Bond, Paragraph 3.1. Many construction contracts, including those published by EJCDC, call for direct negotiations between the parties with the intent to reach an early resolution of claims (EJCDC® C-700 (2018), Standard General Conditions of the Construction Contract, Paragraph 12.01.C), or have similar variations of “meet, confer, negotiate.” From this broader perspective, the city engineer’s refusal to meet with the struggling contractor takes on more weight.

The published decision refers to both “the city engineer” and “the city’s engineer.” It is not clear whether these are references to a third-party engineering firm under contract to the City, or to a city official—more likely the latter. There is no indication of any City claim against a third-party.

Under an express provision of the Puyallup-Conway construction contract, an improper termination for default is automatically converted into a termination for convenience. The industry’s standard contracts do not contain such a provision (see C-700 2018, Article 16; AIA A201™, General Conditions of the Construction Contract, Article 14), but the merits of adding such a provision are worthy of discussion.

Another issue that is discussed in the Puyallup case is whether an owner may pursue a claim against the contractor if defective work is discovered after a termination for convenience. The apparent answer is that such a claim is possible, but only if the terminated contractor is given notice and an opportunity to cure the defect. If such is the answer (the wording of the decision is somewhat unclear), it would be consistent with the standard principle that certain obligations survive the termination of the contract, regardless of whether the termination was for convenience or cause. See C-700 2018, Paragraph 18.06.