In a unanimous decision, the Washington Supreme Court has held that a city's termination of a public works contractor partway through construction was a termination for convenience, entitling the contractor to be paid for actual work up to termination, and not for cause, which would have required the contractor to pay the city's extra costs to complete the project. In holding the contractor was not in default, the Court in Conway Construction Co. v. City of Puyallup also said that the city failed to provide contractually-required notice and opportunity to cure defective work discovered after termination and that the contractor was entitled to attorney fees under the contract's dispute clause, even though the statute applicable to public works contracts would have precluded such an award.
Conway had contracted with the city of Puyallup to build the nation's first arterial roadway project with pervious concrete. The contract incorporated the Washington State Department of Transportation (WSDOT) Standard Specifications along with a project-specific Public Works Contract. Numerous problems arose. The city issued a notice of default, rejected Conway's attempts to cure, and terminated Conway from the project. Conway sued the city and, following a lengthy trial, the superior court ruled the termination was for convenience, denied the city an offset for defective work, and awarded Conway damages and attorney fees. The Court of Appeals affirmed, except for the attorney fee award. The Supreme Court's July 8, 2021 decision has at least three major implications for parties to construction contracts in Washington, particularly public works project utilizing the WSDOT Standard Specifications.
Termination for Default and Opportunity to Cure
Interpreting the Standard Specifications, the court found that, while the city had the right to reject Conway's attempts to cure the defaults at issue, it could only terminate Conway for default if the city's dissatisfaction with the attempted cure(s) was based on reasonable grounds. This obligation is based upon the duty of good faith and fair dealing imported into every contract. Finding the city refused to engage with Conway (including rejecting meetings requested by Conway) regarding the inadequacy of its attempts to cure, the court held that the city's termination for default converted to a termination for convenience as set forth in the contract.
No Offset for Post-Termination Discovery of Defective Work
Although the contract stated that the city would not pay for defective work, the court as matter of first impression in this state and relying on Oregon law and the plain language of the contract, held that the city was not entitled to offset because the city failed to give Conway notice of and an opportunity to cure the later-discovered defective work. The court ruled that the termination provisions of the Public Works Contract did not supersede the WSDOT Standard Specifications and, in fact, the two contractual provisions were complementary. Failure to provide the notice as required by the contracts precluded the city from offsetting the costs incurred to repair the work in this lawsuit.
Attorney Fee Awards
The court also addressed the question of whether RCW 39.04.240 — which awards fees to prevailing parties in public works contracts disputes — is an exclusive fee provision. That statute requires an offer of settlement to be made within a certain time period for a contractor to recover prevailing party attorneys' fees. Conway had not made an offer, but the Public Works Contract had a provision allowing the prevailing party to recover attorneys' fees. The Court of Appeals had found that the legislature intended RCW 39.04.240 to be the only available method for parties to a public works construction contract to recover attorneys' fees. The Supreme Court disagreed, holding that the absence of an offer of settlement, while preclusive of an award of fees under RCW 39.04.240, did not prevent Conway from recovering its fees under its contract's disputes clause.
Conclusion
Each of the court's determinations was highly dependent on the specific contract language. Therefore, it is important to carefully review contract language regarding termination, notice and ability to cure, and the requirements around offsetting for defective work found after termination or completion of a project. For public works contracts, particular attention should be paid to language that modifies the WSDOT Standard Specifications on these issues, including whether to include a prevailing party attorney fee provision in addition to the statutorily provided attorneys' fees under RCW 39.04.240.
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