An Obligation to Provide Notice and an Opportunity to Cure May Not End After Termination, and Why an Early Offer of Settlement Should Be Considered on Public Works Contracts

In 2015, the City of Puyallup (“City”) and Conway Construction Company (“Conway”) executed a public works contract for road improvements (“Project”).  On March 9, 2016, approximately four months after work started on the Project, the City issued Conway a notice of suspension and breach of contract and identified nine defective and uncorrected work and safety concerns.  Conway denied any wrongdoing, and on March 25, 2016, the City issued a notice of termination for default and withheld payments due to Conway. 

Conway subsequently filed suit in Pierce County Superior Court and alleged the City’s termination for default breached the contract and sought a determination that the City’s termination for default was improper and should be deemed a termination for convenience. Conway sought approximately $1.25 million in damages and recovery of its attorney fees and costs.  Following a bench trial, the Trial Court found the City breached the contract and awarded Conway damages, attorney fees, and costs.  The City appealed.[1] 

On appeal, after affirming the trial court’s determination that the City improperly terminated Conway, the Court of Appeals considered two other issues raised by the City.  First, whether the City was entitled to a set-off for replacing defective work discovered after Conway was terminated. Second, whether Conway is entitled to attorney fees if it did not make the statutorily required offer of settlement per RCW 39.04.240. 

  1. No Set Off Without Opportunity to Cure & Investigate.

The City argued the Trial Court erred by rejecting the its set-off claims based on when they were discovered, i.e. after Conway’s termination.  However, the Trial Court did not reject the City’s set-off claims based on the timing of their discovery.  Rather, citing Shelter Products, Inc. v. Steelwood Construction, Inc.,[2] – an Oregon appellate court opinion – the Trial Court rejected these claims because the City “did not provide Conway an opportunity to cure, or timely investigate, the alleged defects as required by the contract.”[3]  Finding no applicable Washington authority, the Court of Appeals found the Shelter Products decision persuasive, at least where only one party is in breach of contract, and affirmed the Trial Court’s decision.[4]

2. No Fees Without Providing Offer of Settlement.

The City argued the trial court erred by awarding attorney fees to Conway because Conway failed to make an offer of settlement pursuant to RCW 39.04.240.  In response, Conway argued it was not required to make an offer of settlement because the contract’s fee provision provided an alternative remedy and did not incorporate RCW 39.04.240 or require an offer of settlement as a condition for obtaining a fee award.[5]  The Court of Appeals reversed the trial court’s award of attorney fees citing the anti-waiver provisions of RCW 39.04.020(2).  A governmental entity is entitled to receive an early settlement offer in an action arising from a public works contact, and any contractual fee provision is void to the extent is waives this right.[6]   Thus, despite the contract’s fee provision, the City was entitled to receive, and Conway was obligated to provide, a timely offer of settlement, the failure of which prevents Conway from receiving attorney fees.   

Editor’s Note: We anticipate both parties will appeal the Conway decision.  In the interim, a terminating party should seriously consider giving the other party, at a minimum, notice and an opportunity to investigate any defective work discovered post-termination.  Otherwise, the terminating party risks foregoing recovery of correction costs, especially where, as in Conway, the termination for default was later deemed improper and converted to one for convenience. 

Similarly, in the public works context, contractors and owners alike should review their contractual fee provisions to determine whether it waives a governmental entity’s right to an early settlement offer pursuant to RCW 39.04.020. If so, a thorough evaluation and assessment of the case will be necessary very early on so as to make an offer the contractor believes it can ultimately beat all the while knowing that the offer operates as a ceiling in any subsequent settlement discussions. 

[1] Conway Construction Company v. City of Puyallup, 2020 WL 2112362, 462 P.3d 885 (2020)

[2] 257 Or. App. 382, 307 P.3d 449 (2013) (holding where a party has terminated a contract for convenience, that party may not counterclaim for the cost of curing any alleged defect in the absence of notice and opportunity to inspect or cure the allegedly defective work). ACS reviewed this decision in a previous blog.

[3] Conway, at *5. 

[4] In Duculon Mech. Inc. v. Shinstine/Forness, Inc., 77 Wn. App. 707, 893 P.2d 1127 (1995) a set-off was permissible because both parties breached the contact.  Duculon is not applicable where only one party is in breach. 

[5] The contract’s fee provision provided “… [t]hat 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 costs of defense.”

[6] Conway, at *6. 

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