In Conway Construction Company v. City of Puyallup, No. 80649-1-1 (May 4, 2020), the Washington Court of Appeals, Division 1, adopted Oregon’s Shelter Products, Inc. v. Steelwood Construction, Inc., precluding certain claims for defects in termination cases and limiting the justification for termination to those listed in the termination notice.  It also held that Washington’s settlement statute protecting public owners, RCW 39.04.240, trumps an attorney fee provision in a contract.

In Conway, the City of Puyallup (“City”) contracted with Conway Construction Company (“Conway”) to construct certain roadway improvements.  During the project, the City became concerned about construction defects.  The City issued notices to Conway expressing its concerns.  The City also observed unsafe work conditions and reported the safety violations to the Washington State Department of Labor & Industries.  After issuing a series of notices, the City terminated Conway because of its defective work and safety violations.

Conway sued the City for wrongful termination, claiming Conway had been denied the right to cure and/or had cured the alleged default.  The trial court found the City breached the contract when it terminated Conway and awarded Conway its damages, attorney fees, and costs.  The City appealed.

Right to Cure – The City argued that it can justify its termination of Conway based on evidence discovered after termination, relying on Mega Construction Company v. United States, 29 Fed. Cl. 396 (1993). The Court of Appeals disagreed, holding that Mega is not analogous and, because Conway had cured those defaults in the termination notice, any post-termination violations were “irrelevant.”

Claims for Defective Construction – The City claimed the trial court should have considered the City’s claims for defective work (first discovered after the termination) to offset against Conway’s damages.  The Court of Appeals found Oregon’s Shelter opinion persuasive, 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.”  Because the City breached the contract by wrongfully terminating Conway and did not provide Conway an opportunity to cure, the City was not entitled to its claimed post-termination damages and costs, according to the Court of Appeals.

Attorney Fees – The City argued Conway was not entitled to attorney fees because it was required to make an offer of settlement under Washington’s public works settlement statute, RCW 39.04.240.  Conway countered, arguing that the statutory offer of settlement was not its sole remedy, and that the contract also provided for attorney fees.  RCW 39.04.240(2) renders “void any contract provision waiving the government entity’s right to receive an early settlement offer before being exposed to an attorney fee claim as part of the consequences of losing a lawsuit involving a public works contract.”  Therefore, according to the Court of Appeals, because Conway failed to make a timely settlement offer, Conway was not the prevailing party and was not entitled to recovery of its attorney fees, despite the attorney fee clause in the contract.