Terminating a contractor on a construction project is a drastic step. Most construction contracts, particularly public works contracts, will have provisions concerning the steps, notices, and the right to cure under both termination for cause and termination for convenience. Failing to comply with these provisions can lead to some serious consequences under wrongful termination. The City of Puyallup tried to claim set-offs after wrongful termination of a contractor, without giving them the opportunity to fix the issues. A Washington Court of Appeals wasn’t having it.
Failing to provide opportunity to cure resulted in wrongful termination
The case in question is Conway Construction Co. v. City of Puyallup. This case not only discussed right to cure defective work, but also offered some guidance on set-off rights and attorney fees in the public construction sector in the state of Washington.
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- Public Entity: The City of Puyallup (City)
- Contractor: Conway Construction Company (Conway)
The City had contracted with Conway to perform street improvements, including expanding turn lanes and installing traffic signals. During the progress of the construction, the City had concerns about the work being performed. The issues related specifically to the quality of the materials, defects in construction, and unsafe work conditions.
On March 9th, the City sent Conway a notice of suspension and breach of contract, and advised Conway that they had 15 days to remedy the defective work and safety violations, which Conway denied. A second notice was sent 12 days later, and Conway again contended that there were no issues. On the 16th day after the notice, the City issued a notice of termination for default and withheld payments from Conway.
Wrongful termination with no right to cure
Conway brought a lawsuit against the City to have the termination declared one for convenience, and not for default. They also filed a claim for breach of contract, seeking over $1M in damages.
At trial, evidence was introduced that the Washington State Department of Labor and Industries (L&I) had inspected and approved the work during the 15-day time period. Given that evidence, the court agreed with Conway that they were wrongfully terminated and awarded damages, attorney fees, and court costs. The City appealed.
The appeals court agreed with the trial court decision that the termination was improper. However, there were still two other issues raised by the City on appeal.
The first was that the City was entitled to set-off the judgment with the costs to replace the defective work discovered after the termination of Conway. And secondly, that Conway wasn’t entitled to the award of attorney fees because they didn’t make an offer of settlement as required by R.C.W. §39.04.240.
City not entitled to set-offs
In regards to the set-off claims, the City contends that the defective work, which was discovered after the termination of Conway, should set off the damages awarded to Conway.
However, the court relied on prior case law, which held that “a breaching party is not entitled to a set-off for allegedly defective work upon the breaching party’s termination for convenience where the breaching party did not give the other party notice of defects and opportunity to inspect, cure, or complete work.”
The City had wrongfully terminated the contract, and furthermore didn’t provide an opportunity to cure after the defective work was discovered post-termination. Therefore, the City was not entitled to set off the award for defective work.
Attorney fees unavailable for lack of offer settlement
As for the attorney fees awarded but the trial court, the City contended that Conway shouldn’t have been awarded attorney fees because no offer of settlement was made. Conway countered this argument by stating they were entitled to attorney fees under the terminus of the contract. But, under §39.04.240(2) “any provision that provides for the waiver of these rights is void as against public policy.” Thus, the lack of an offer settlement did in fact preclude the award of attorney fees.
Accordingly, the court affirmed the lower court decisions regarding the termination and the inability to set-off the claims. But the award of attorney fees was reversed due to failure of an offer settlement prior to the litigation.
First and foremost, anytime termination is considered, be sure to review the terms of the construction contract carefully. There are typically notice and opportunity to cure provisions that must be followed. This is true even when defective work is discovered post-termination.
In this case, the City had lost their ability to collect set-off costs for correcting the defective work, particularly since the termination for default was deemed to be improper.
Furthermore, when working under a public works contract, be sure to review any applicable law that may supersede any contractual provisions. In this case, Conway did not follow the requirements necessary in order to recover attorney fees. Even if your contract provides for the collection of attorney fees, there may be statutory factors and requirements that are often overlooked.
When dealing with a payment dispute on public projects, in Washington in particular, contractors should get in touch with an attorney immediately. That way they can establish if and how they should propose a settlement offer before the dispute escalates.