SAK & Associates, Inc. v. Ferguson Construction, Inc., Div. I, Washington State Court of Appeals, Filed August 10, 2015
The Washington State Court of Appeals held on August 10, 2015, that a termination for convenience provision in a private construction contract is enforceable where there is adequate consideration in the form of partial performance of the contract and payment for such work.
FACTS OF THE CASE
General contractor Ferguson Construction entered into a subcontract with SAK & Associates to provide concrete materials and paving services for a fixed sum. SAK was at work for just over three months when Ferguson terminated its contract pursuant to a termination for convenience provision providing that “[Ferguson] may, after providing [SAK] with written notice, terminate (without prejudice to any right or remedy of [Ferguson]) the Subcontract, or any part of it, for its own convenience and require [SAK] to immediately stop work. In such event, [Ferguson] shall pay [SAK] for the work actually performed in an amount proportionate to the total Subcontract price.”
Ferguson provided adequate written notice of termination to SAK and paid SAK for the work performed—just over $181,000 for SAK’s performance of approximately 24 percent of the total work contemplated by the subcontract—both as required under the subcontract.
In a case of first impression, the court held that a termination for convenience clause in a private construction contract is not an illusory promise where there is consideration in the form of partial performance. Here, that partial performance was SAK’s completion of 24 percent of the work and Ferguson’s payment for such work.
The court also explained that a termination for convenience provision is not illusory where there are restrictions, even if only slight, on the power to terminate, such as a requirement for written notice of termination.
Finally, the court said that the implied covenants of good faith and fair dealing in a contract are not breached where a party merely exercises an express provision of the contract, such as a termination for convenience clause.
WHY THIS CASE IS IMPORTANT
This case illustrates how upstream contracting parties, such as owners and general contractors, can terminate for convenience without good cause where there is partial performance. Downstream contractors should beware and attempt to negotiate procedural safeguards related to termination into construction contracts.