In recent posts, we discussed termination-for-convenience provisions in construction contracts, noting that such provisions appear in both governmental and non-governmental contracts. Construction Contracts Termination Basics – Part I; Part II. This post provides more detail on the state of the law on such clauses in Washington.
In Torncello v. United States, the U.S. Court of Claims first discussed the obligations of good faith and lack of arbitrariness in termination-for-convenience clauses. 681 F.2d 756 (Ct. Cl. 1982). In that case, the government was found to have breached its contract with a pest control contractor when it terminated a contract for such services so that it could take advantage of a lower price from another contractor.
Although Washington courts often find federal decisions persuasive on questions involving government contracts, there are no cases in Washington following Torncello. The only two reported Washington cases involving termination-for-convenience clauses simply enforced them as written without discussing their enforceability.[1] Although some Washington practitioners assume that Washington would follow federal law if the question were squarely put, there are reasons to doubt that assumption.
First, Washington courts are extremely deferential to the intentions of contracting parties as expressed by the words of their contracts. In the words of the Washington Supreme Court in Berschauer/Phillips Const. Co. v. Seattle School Dist. No. 1, 124 Wn. 2d 816, 881 P.2d 986 (1994), “We hold parties to their contracts.” If both parties agree on the terms under which an owner or upstream contractor can terminate the contract, a Washington court seems unlikely to disturb that agreement.
Second, Washington courts have pointedly refused to follow federal law on other contractual questions. The most glaring example is Mike M. Johnson, Inc. v. County of Spokane; 150 Wn.2d 375, 28 P.3d 161 (2003), in which the Associated General Contractors argued that the Court should follow federal law and not enforce notice provisions in the absence of a showing of prejudice to the owner resulting from lack of notice. The Washington Supreme Court declined to import that rule and held that failure to follow detailed contractual notice and claim procedures resulted in a waiver of the contractor’s claim, whether the owner was prejudiced by the lack of such notice or not.
Where private contracts are concerned, there is an additional reason to doubt that Washington courts would follow Torncello. That is because governmental entities are deemed to have special, extra-contractual obligations to the public that private parties do not have to each other. In the absence of such special obligations, Washington courts are likely to “hold [the] parties to their contracts.”
In summary, limitations on termination-for-convenience are well-developed in federal contracting law, but those limitations have not been applied by Washington courts. There are several reasons to believe that rather than do so, Washington courts might respect the objectively manifest intend of the parties and enforce the terms as written. Of course, there is no way to know for sure until someone incurs the expense and time to take the issue up on appeal.
[1] Myers v State, 152 Wn. App. 823, 218 P.3d 241 (2009); Lampson Universal Rigging, Inc. v. Washington Public Power Supply System, 44 Wn. App. 237, 721 P.2d 996 (1986).