{"id":899099,"date":"2021-09-02T14:16:06","date_gmt":"2021-09-02T20:16:06","guid":{"rendered":"https:\/\/www.myconstructionexpert.com\/blog\/?p=899099"},"modified":"2021-09-02T14:16:14","modified_gmt":"2021-09-02T20:16:14","slug":"termination-provision-construction-contract","status":"publish","type":"post","link":"https:\/\/www.myconstructionexpert.com\/blog\/termination-provision-construction-contract\/","title":{"rendered":"Tips on Termination: Recent Washington Case Examines Parties\u2019 Rights"},"content":{"rendered":"\n

Danika L. Duffy and Bart W. Reed | Stoel Rives<\/a><\/p>\n\n\n\n

Owners and contractors should consider the recent Washington Supreme Court decision\u00a0Conway Construction Co. v. City of Puyallup<\/em>, which emphasizes the importance of carefully drafting, and following, a Termination of Construction Contracts<\/a>.<\/p>\n\n\n\n

An overview of termination provisions<\/strong><\/p>\n\n\n\n

Termination provisions dictate the terminating party\u2019s rights, remedies and liabilities. Most standard construction contracts allow a party to terminate for cause (default) or convenience. Parties may elect to add a clause converting an otherwise improper termination for cause into one of convenience.<\/p>\n\n\n\n

An owner may terminate for cause when a contractor fails to perform its contractual obligations. These provisions generally require the owner to provide formal written notice to the defaulting party and a reasonable opportunity to cure the defective performance. Additionally, these provisions often entitle the owner to recover damages incurred to correct the defective work.<\/p>\n\n\n\n

In contrast, termination for convenience is generally permissible without providing an opportunity to cure. However, standard termination for convenience generally requires the owner to pay the contractor for all work performed up to the termination date. Further, owners are not entitled to damages \u2013 even if it is later determined that the contractor\u2019s work was defective.<\/p>\n\n\n\n

Conversion provisions may mitigate the risks of defective termination. These clauses characterize an improper termination for cause as one for convenience.<\/p>\n\n\n\n

The basis for termination matters<\/strong><\/p>\n\n\n\n

In Conway<\/em>, the city contracted with Conway Construction Co. to build the nation\u2019s first major roadway with pervious concrete. The parties\u2019 construction contract contained the three aforementioned termination provisions: (i) termination for cause; (ii) termination for convenience; and (iii) conversion.<\/p>\n\n\n\n

The city subsequently lost confidence in Conway\u2019s work, and, without providing an opportunity to cure, issued Conway a notice of termination for default and withheld payments. Post-termination, the city found significant defects in Conway\u2019s work, and sought an \u201coffset\u201d for the money expended to issue corrections.<\/p>\n\n\n\n

Conway sued the city, asserting improper termination for default. The Washington Supreme Court agreed the termination was improper, noting the parties\u2019 contract specified that (a) Conway needed to show that it was not neglecting or refusing to cure defective work, and (b) the city needed to be reasonably satisfied with those efforts.<\/p>\n\n\n\n

The evidence demonstrated Conway did not neglect or refuse to correct the defects (e.g., it took steps to remedy the conditions, reached out to the city to determine whether those efforts were sufficient, and repeatedly requested a meeting). The evidence also demonstrated that the city did not act reasonably in deciding whether it was unsatisfied with Conway\u2019s curative efforts. The court noted \u201c\u2018the right to terminate exists only when the latter party\u2019s dissatisfaction is based upon reasonable grounds.\u2019\u201d In this case, the court held that \u201closs of confidence \u2026 is not grounds for default termination.\u201d Accordingly, the city\u2019s termination was converted to one of convenience.<\/p>\n\n\n\n

Next, the court examined whether the city was entitled to an offset for defective work discovered after termination. Considering this issue (one of first impression in Washington), the court found persuasive Shelter Products, Inc. v. Steelwood Construction, Inc.<\/em>, in which \u201cthe Oregon Court of Appeals held that the terminating party was not entitled to offset allegedly defective work after it terminated the contract for convenience without giving the other party the contractually required notice of the defects and an opportunity to fix them.\u201d In Shelter<\/em>, the terminating party could not pursue \u201c\u2018two inconsistent paths simultaneously: both terminating the agreement for convenience and seeking damages \u2026 as if it had terminated for cause and given (the non-terminating party) an opportunity to cure.\u2019\u201d<\/p>\n\n\n\n

Informed by Shelter<\/em> and the parties\u2019 contract, the Conway<\/em> court affirmed that the city could not claim an offset for the subsequently discovered defective work.<\/p>\n\n\n\n

Drafting agreements post-Conway<\/em><\/strong><\/p>\n\n\n\n

Conway<\/em> emphasizes that termination provisions are subject to strict construction and therefore strict adherence. Failure to abide by their terms will severely restrict the terminating party\u2019s ability to seek damages for defective work. The following tips may reduce the risk of claims and preserve the right to damages, in light of the Conway<\/em> decision:<\/p>\n\n\n\n

  1. Know the contract terms.<\/strong> It is critically important to remain mindful of the contract\u2019s termination provisions. For instance, most standard form construction agreements contain both termination for cause and termination for convenience clauses, but not conversion clauses. The owner or contractor should carefully consider whether a conversion clause will mitigate its liability should it fail to properly terminate for cause \u2013 understanding that, once converted, recovery of damages under the termination for cause clause is less certain, if not foreclosed.<\/li>
  2. Consider adding specific language to preserve termination for cause remedies.<\/strong> Post-Conway<\/em>, owners and contractors may wish to consider adding specific contractual language to preserve the right of offset even when the contract is terminated for convenience. In doing so, parties should consider the Shelter<\/em> reference in Conway<\/em>, in which the court held that a contractual provision entitling a party to terminate \u201cwithout cause and without prejudice to any other right or remedy\u201d was not specific enough to preserve the right to setoff.<\/li>
  3. Always follow the contract.<\/strong> Careful, clear language delineating the precise steps needed to terminate a contract for cause will help prevent disputes regarding the basis of termination. The terminating party should verify the steps needed to properly terminate the contract prior to taking any action.<\/li><\/ol>\n","protected":false},"excerpt":{"rendered":"

    Danika L. Duffy and Bart W. Reed | Stoel Rives Owners and contractors should consider the recent Washington Supreme Court decision\u00a0Conway Construction Co. v. City of Puyallup, which emphasizes the importance of carefully drafting, and following, a Termination of Construction Contracts. An overview of termination provisions Termination provisions dictate the terminating party\u2019s rights, remedies and… Continue reading Tips on Termination: Recent Washington Case Examines Parties\u2019 Rights<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":"","jetpack_publicize_message":"","jetpack_publicize_feature_enabled":true,"jetpack_social_post_already_shared":true,"jetpack_social_options":{"image_generator_settings":{"template":"highway","enabled":false},"version":2}},"categories":[9],"tags":[9895,224,11529],"class_list":["post-899099","post","type-post","status-publish","format-standard","hentry","category-construction-contracts","tag-advise-consult","tag-construction-contract","tag-termination-provision","entry"],"jetpack_publicize_connections":[],"yoast_head":"\nTips on Termination: Recent Washington Case Examines Parties\u2019 Rights - 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