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July 29, 2021
On July 8, the Washington Supreme Court issued a decision in Conway Construction Co. v. City of Puyallup, handing down an important win to public works contractors in a climate that has tended to recognize interests of owners over contractors.
The court's decision held that:
A public owner has the burden of proving a termination for default is justified, and the city failed to meet that burden.
The city could not offset the cost of defective work when it terminated Conway for its convenience and did not provide notice and an opportunity to cure the defect.
The public works attorney fee statute is intended to protect the rights of contractors and is not an exclusive avenue to the recovery of attorney fees.
In this decision, the court further ruled on other legal issues in favor of the contractor, which should subsequently impact public works construction in Washington in the future.
Conway Construction contracted with the city of Puyallup to build the nation's first pervious concrete arterial roadway. By early 2016, the project was running into problems and the city issued nonconformance reports for portions of the project that it claimed did not meet contract specifications. The city ultimately gave a notice of suspension and breach of contract and identified nine nonconforming portions of the contract.
Conway disputed the alleged breach but still attempted to meet with the city and resolve the dispute. The subcontractor that had installed some of the concrete roadway work that the city claimed was defective had offered in writing to remove and replace the panels in question at no cost to the city.
The city rejected Conway's attempts to meet to discuss Conway's nonconformance and potential repair work, and it then terminated the contract for default. Following the termination for default, the city discovered additional alleged nonconformances. However, the city did not offer Conway the opportunity to replace or repair this work. Conway sued Puyallup, claiming the termination for default was improper.
At the trial court level, Conway prevailed in full and was awarded both its contract damages and its attorney fees, including the attorney fees of its passthrough subcontractor (who was represented by our office). Further, the trial court denied the city an offset for Conway's allegedly defective work. On appeal, the Court of Appeals largely affirmed but reversed and denied the award of attorney fees. Both parties appealed.
The Washington Supreme Court's decision addressed three main issues: (1) was the city's termination for default proper; (2) was the city entitled to an offset for defective work discovered after a termination for convenience; and (3) was Conway entitled to attorney fees under the contractual attorney fees provision when it did not make a settlement offer under RCW 39.04.240 (incorporating RCW 4.84.250-280), the public works prevailing party attorney fee statute.
TERMINATION FOR DEFAULT
The court affirmed the lower courts and held that the city's termination for default was improper and should be converted to a termination for convenience. While a public entity may generally contract to allow it to terminate a contract for convenience (no fault), terminating for default has significantly more stringent criteria (outlined in the contract and the WSDOT Standard Specifications).
The court read the contract provision and standard specifications together to determine that the city may terminate Conway for default if Conway (1) refuses or neglects to correct defective work; or (2) the city was not reasonably satisfied with those efforts. Conway had the burden of proving that it did not neglect or refuse to correct the defective work, and the court found it met that burden by taking specific steps to remedy the default, conveying the offers from the subcontractor to repair and replace work at no cost to the city and repeatedly requesting a meeting with the city to discuss those steps.
Significantly, the court found that the city breached the implied duty of good faith and fair dealing that exists in all contracts in Washington. Specifically, the court found that the city's actions leading up to the termination were unreasonable or made in bad faith based on its refusal to cooperate, i.e., to discuss potential repairs and evidence showing that the city simply lost faith in Conway and wanted to terminate it. Finally, relying on federal law as persuasive, the court found that a public owner has the burden of proving whether a termination for default is justified and that the contractor was in default at the time of termination. The city failed to meet that burden here.
OFFSET FOR DEFECTIVE WORK
In a matter of first impression in Washington, the court determined that the city should not receive an offset for the alleged defective work. The city claimed it found defective roadway panels four months after the contract was terminated. The court ruled that following a cure notice, the contract entitled Conway to correct contractual deficiencies within a specified time. Here, the city did not provide Conway that opportunity, despite Conway offering to cure the alleged defect at no cost to the city. Instead, the city terminated Conway and paid its follow-on contractor to remove and replace the allegedly defective panels — despite Conway's previous offer.
The court found that because the city chose to terminate Conway and never gave it an opportunity to investigate and repair the allegedly defective panels, the city could not prove the defects were actually a result of defective work by Conway. Therefore, due to the city's decision not to follow the terms of its own contract, it was not entitled to an offset for the defective panels.
The court ruled that contractors can recover fees in public works contract cases pursuant to a contractual prevailing party provision when no statutory offer of settlement is made. The statute at issue, RCW 39.04.240, provides that a contractor can recover attorney fees by making an offer of settlement after commencing litigation. Because Conway did not make any such offer, the city argued Conway should be precluded from recovering its attorney fees. However, the city's contract included its own prevailing party attorney provision.
The court noted that it had previously impliedly held that RCW 39.04.240 is not an exclusive fee provision, but now rules explicitly that RCW 39.04.240 is not an exclusive fee provision. Specifically, the court noted that in crafting the attorney fee statute, the Legislature found that the public entity often “react(s) to litigation as if their attorneys are free” and frequently public owners do not include attorney fee provisions in their contracts — contracts of which they are typically the sole drafter. As a result, RCW 39.04.240 was crafted to level the playing field and provide contractors with a pathway to attorney fees when no such pathway is otherwise available.
The court then found that considering RCW 39.04.240 to be an exclusive remedy would be contrary to the intent of the statute, as it is to act as a form of protection for contractors, not a bar to other forms of recovery.
LEVELING THE PLAYING FIELD
This decision is a welcome departure for contractors and subcontractors in the state of Washington after years of decisions at all levels of the Washington legal system putting the rights of public owners above those of contractors. The court here took steps toward leveling the playing field that has continually drifted in favor of public owners, despite legislative intent to the contrary.
While this ruling will certainly not solve all of the difficulties contractors face in Washington state, the court's dicta and use of legislative intent may show that the court's sentiment is beginning to shift. As the court noted, public owners too often act as if litigation is free to the detriment of contractors and subcontractors. That behavior has not only been tolerated by the courts, but encouraged through increasingly troublesome decisions favoring public owners. This decision signals a shift to a more equitable legal environment for contractors in Washington state.
Ryan Gilchrist of Oles Morrison supports clients in the construction and real estate industries. Joseph Haughney, a summer intern at OMRB, contributed to this article.