Sak & Associates, / Cross- Res. v. Ferguson Construction, / Cross-app. , 189 Wash. App. 405 ( 2015 )

-«'" n<,:j J (J i
ML- 135 Wash. 2d 658, 663, 958 P.2d 301 (1998); RAP 9.12;
Wash. Fed'n of State Emps.. Council 28 v. Office of Fin. Mgmt.. 121 Wash. 2d 152, 163,
849P.2d 1201 (1993).
7 Krvoowksi Constr. Co. v. United States, 94 F.3d 1537, 1540 (1996).
8 Id.
No. 72258-1-1/4
for convenience clauses are required by regulations for most government procurement
contracts.9
The use of termination for convenience clauses has migrated to the private
setting, notably in construction and high technology contracts.10 Most standard form
construction contracts include such clauses.11 There is very limited authority
addressing termination for convenience clauses in private contracts.12
Here, the subcontract provides for termination for convenience:
In addition to the rights listed above, Contractor may, after
providing Subcontractor with written notice, terminate (without prejudice to
any right or remedy of Contractor) the Subcontract, or any part of it, for its
own convenience and require Subcontractor to immediately stop work. In
such event, the Contractor shall pay the Subcontractor for the work
actually performed in an amount proportionate to the total Subcontract
price. Contractor shall not be liable to the Subcontractor for any other
9]d at 1541.
10 Ryan P. Adair, Limitations Imposed by the Covenant of Good Faith and Fair
Dealing upon Termination for Convenience Rights in Private Construction Contracts,
7 J. Am. C. Construction Law. 127,127-28 (2013).
11 jd. at 161 ("several standard form construction contracts . . . provide insight
into the customary treatment of [termination for convenience] clauses," referencing the
American Institute of Architects, the Associated General Contractors of America, the
American Subcontractors Association, the Engineers Joint Contract Documents
Committee, and the Design-Build Institute of America).
12 Id. at 128. The extensive jurisprudence governing termination for convenience
provisions in government contracts is grounded in the particular role played by
government agencies. But "the case-law supporting such a broad right in federal
contracts obviously is of limited value when interpreting a contract between private
parties. . . . [T]he federal government stands in a position entirely uncomparable to that
of a private person." Questar Builders. Inc.. v. CB Flooring. LLC, 410 Md. 241, 271, 978
A.2d 651 (2009); see also Vila & Son Landscaping Corp. v. Posen Constr.. Inc., 99 So.
3d 563, 567 (2012) ("[W]e find limited value in these federal procurement cases and
look instead to common law contract principles as articulated by Florida's courts."). We
do not find the federal case law on government contracts helpful in analyzing the private
contract issues presented in this appeal.
No. 72258-1-1/5
costs, including anticipated profits on work not performed or unabsorbed
overhead.[13]
SAK argues that this clause is an invalid illusory promise and that Ferguson
breached the subcontract by invoking the clause.14 In Washington, whether a promise
is illusory generally turns on whether there is adequate consideration.
An enforceable contract requires consideration.15 "If the provisions of an
agreement leave the promisor's performance entirely within his discretion and control,
the 'promise' is illusory. Where there is an absolute right not to perform at all, there is
an absence of consideration."16 Thus, if a promise is illusory, there is no consideration
and no enforceable obligation.17 Washington courts "will not give effect to
interpretations that would render contract obligations illusory."18
In construction contracts, consideration usually consists of reciprocal promises of
the contractor and the owner, or the subcontractor and the general contractor, to
13 CP at 94 (emphasis added).
14 Ferguson contends that SAK's argument that the contract is illusory actually
defeats its breach of contract claim because if the contract is unenforceable, there can
be no breach. But SAK does not appear to argue that the clause renders the entire
contract invalid, just that the termination for convenience clause is illusory and therefore
unenforceable.
15 King v. Riveland, 125 Wash. 2d 500, 505, 886 P.2d 160 (1994).
16 Felice v. Clausen, 22 Wash. App. 608, 611, 590 P.2d 1283 (1979).
17 Omni Group, Inc. v. Seattle-First Nat'l Bank, 32 Wash. App. 22, 24-25, 645 P.2d
727(1982).
18 Taylor v. Shigaki, 84 Wash. App. 723, 730, 930 P.2d 340 (1997); see also
Kennewick Irrigation Distr. v. United States. 880 F.2d 1018, 1032 (9th Cir. 1989)
("'Preference must be given to reasonable interpretations as opposed to those that are
unreasonable, or that would make the contract illusory.'" (quoting Shakev's Inc. v.
Covalt, 704 F.2d 426, 434 (9th Cir. 1983))).
No. 72258-1-1/6
perform work and to pay for that work.19 The form construction contract provisions
governing compensation upon a termination for convenience are particularly varied. For
example, American Institute of Architects (AIA) form A201 (2007) generously includes
compensation for overhead and profit on work not completed.20 Because it is so
favorable to the terminated contractor, this AIA compensation provision "is frequently
revised or negotiated out of the final contract documents."2122 Other form contracts,
such as the Design-Build Institute of America document 530 (2d ed. 2010), contemplate
one fee to be paid for termination before commencement of work and a different fee
after commencement of work "endors[ing] the principle that partial performance may
provide consideration in support of broader termination for convenience rights."23 It is
also clear that some termination for convenience clauses provide only for proportionate
payment for the work performed through the date of termination.24
SAK specifically contends that because the termination for convenience clause
allows Ferguson to terminate the contract at its discretion, it lacks consideration and is
19 Adair, supra, at 130.
20 Id. at 161.
21 Stephen M. Seeger & Ben Patrick, Terminations for Convenience—"You Want
Me to Pay You What?", Address at the American Bar Association Forum on the
Construction Industry 2013 Midwinter Meeting 24 (Jan. 31 & Feb. 1, 2013),
http://www.imageserve.com/naples2013/papers/WorkshopB.pdf.
22 Notably here, the owner and Ferguson modified their AIA A-201 termination for
convenience clause to delete any overhead or profit for work not completed. See CP at
83.
23 Adair, supra, at 163.
24 See id. at 141-42 ("Monetary consideration may be furnished by either
payment of damages or partial performance.").
No. 72258-1-1/7
therefore illusory and unenforceable. Because partial performance provides adequate
consideration, we disagree.
Agreements that permit one party to cancel or terminate the undertaking are not
illusory if there is some restriction upon the power to terminate.25 Generally, the right to
cancel or terminate is not illusory where it can be exercised only upon the occurrence of
specified conditions, such as providing notice.26 Williston on Contracts observes that
"the tendency is to interpret even a slight restriction on the exercise of the right of
cancellation as constituting a legal detriment sufficient to satisfy the requirement of
consideration!,] for example,. .. upon written notice."27 While some courts have upheld
termination for convenience clauses based upon written notice requirements,28 others
cast doubt upon the adequacy of consideration resulting from a notice provision.29
Here, the contract provides for termination for convenience immediately upon written
notice of termination. We need not determine whether the written notice requirement
provides adequate consideration for the termination for convenience clause.
It is well recognized that partial performance provides adequate consideration for
enforcement of what otherwise might be an illusory provision granting unilateral control
25 Omni Group, 32 Wash. App. at 28.
26 jd\
27 3 Samuel Williston & Richard A. Lord, A Treatise on the Law of Contracts
§ 7.13, at 316-19 (4th ed. 2008).
28 See Vila & Son, 99 So. 3d at 568 (provision requiring written notice in a
termination for convenience clause provided sufficient consideration to prevent the
promise from being illusory under Florida law) (cited here by trial court).
29 See Questar Builders, 410 Md. at 279 n.24 ("We decline to speculate whether
a contract reserving the right to terminate for any reason, upon two days' notice, would
be enforceable.").
No. 72258-1-1/8
to one party.30 We are not faced with an attempt to invoke a termination for
convenience clause before the commencement of any work or only after a nominal
amount of work. Here, SAK completed 24 percent of the project, and Ferguson paid a
proportionate amount of the fixed contract price. This level of partial performance
provides adequate consideration. Accordingly, SAK fails to establish the termination for
convenience provision is illusory for lack of consideration.
Although not argued by SAK, some courts read an implied covenant of good faith
and fair dealing into a contract that grants one party the discretionary authority to
determine a contract term.31 And some jurisdictions read a duty of good faith and fair
dealing as a limit upon the exercise of a termination for convenience provision.32 "But
covenants of good faith and fair dealing do not trump express terms or unambiguous
rights in a contract."33 Rather, "as a matter of law, there cannot be a breach of the duty
of good faith when a party simply stands on its rights to require performance of a
3013 Sarah Howard Jenkins, Corbin on Contracts § 68.9, at 247-48 (rev. ed.
2003) ("The reservation of such a power neither invalidates the contract nor renders a
promise given as consideration illusory. As long as the party with the reserved power to
terminate is irrevocably bound for any period of time or has materially changed any of
its legal relations or otherwise rendered some performance capable of operating as a
consideration, consideration has been given and the other's promise is enforceable.");
Adair, supra, at 142 ("Partial performance accomplishes the same as payment of
damages.").
31 Myers v. State. 152 Wash. App. 823, 828, 218 P.3d 241 (2009).
32 Although not cited by the parties, in Questar Builders. 410 Md. at 279, the
Maryland Court of Appeals held that a termination for convenience provision in a private
subcontract is limited by the duty of good faith and fair dealing. But the clause was
exercised when no work had been performed by the subcontractor, and it appears that
Maryland law on illusory promises is not consistent with Washington law. See also Vila
& Son, 99 So. 3d at 568-69 (rejecting theory that duty of good faith restricts exercise of
termination for convenience clause).
33 Myers, 152 Wash. App. at 828.
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contract according to its terms."34 In Washington, the only case touching on the subject
held that the implied duty of good faith and fair dealing does not restrict the use of an
express and unambiguous termination for convenience clause.
In Myers v. State, the court held that the Department of Social & Health Services
(DSHS) properly terminated a contract with a caregiver based on a termination for
convenience provision, recognizing that the covenants of good faith and fair dealing do
not trump express contract terms.35 The contract allowed DSHS to terminate for default
upon a finding of neglect. It further provided that "[i]f it is later determined that the
[contractor was not in default, the termination shall be considered a termination for
convenience."36 DSHS terminated the caregiver's contract after an investigation
resulted in a finding that she neglected a vulnerable adult. The neglect finding was
ultimately reversed and the caregiver sued DSHS for breach of contract, but the trial
court dismissed the claim.37
This court affirmed, upholding the termination for convenience provision and
concluding that "the plain language ofthat provision authorizes termination even when a
finding of neglect is later determined to be unfounded."38 The court recognized that
"[t]he contract grants DSHS broad authority to terminate the contract, regardless of the
outcome of the administrative process," explaining:
34 Badoet v. Security State Bank, 116 Wash. 2d 563, 570, 807 P.2d 356 (1991).
35 152 Wash. App. 823, 828, 218 P.3d 241 (2009).
36 Id,
37 id, at 827.
38 Id. at 829.
No. 72258-1-1/10
Ms. Myers makes a persuasive case that she, essentially, did
nothing wrong here. Indeed, the administrative process vindicated her.
She, however, ignores the termination for convenience provision of her
contract and offers no statute or administrative rule with which it might
conflict. She raises questions of fact. But they are not material questions
of fact. DSHS had authority under this contract to terminate the contract
on a finding of neglect by Adult Protective Services and, failing that, it
could do so for convenience. The trial court properly dismissed her suit on
summary judgment.'39!
Similarly here, Ferguson properly invoked the termination for convenience clause
to which both parties agreed. SAK argues that Myers should be distinguished because
it involved services for an indefinite period of time and because Myers did not expressly
contest the validity of the termination for convenience clause. But Myers expressly
holds that an unambiguous termination for convenience clause is not limited by the
implied duty of good faith and fair dealing.
Enforcing the termination for convenience provision here is also consistent with
our focus upon "the objective manifestations" of intent of the parties.40 Ferguson and
SAK objectively manifested their intent that the contract may be terminated for
convenience by Ferguson upon written notice, requiring only a proportionate payment of
the contract price. A proportionate payment based upon the amount of work completed
in a fixed price contract necessarily includes a proportionate share of any overhead and
profit that SAK built into the negotiated fixed price. The parties could have negotiated
other limitations or terms of payment upon a termination for convenience, but they did
not do so. There is no assertion that the contract is procedurally or substantively
39 \± at 829-30 (citations omitted).
40 State v. R.J. Reynolds Tobacco Co., 151 Wash. App. 775, 783, 211 P.3d 448
(2009).
10
No. 72258-1-1/11
unconscionable. The parties partially performed their contract. The implied duty of
good faith and fair dealing does not allow one party to reshape or evade the bargain
that was mutually agreed. On these facts and this briefing, the termination for
convenience clause is not illusory or otherwise unenforceable.
Notice of Termination
SAK also contends that Ferguson did not give SAK proper notice of the
termination. We disagree.
"Whether particular notice was reasonable is ordinarily a question of fact for the
jury. But when reasonable minds could reach only one conclusion, the court can
determine reasonableness as a matter of law."41 "Reasonable notice" is "'notice or
information of a fact as may fairly and properly be expected or required in the particular
circumstances."'42
Section 7 of the subcontract provides for notice of termination for convenience on
written notice:
In addition to the rights listed above, Contractor may, after
providing Subcontractor with written notice, terminate (without prejudice to
any right or remedy of Contractor) the Subcontract, or any part of it, for its
own convenience and require Contractor to immediately stop work.[43]
Ferguson sent the following notice of termination:
Ferguson Construction has determined that SAK's services for this
project are no longer required. Due to overall phasing restrictions, site
logistics, and basic convenience, it has become apparent that it is in the
41 Cascade Auto Glass. Inc. v. Progressive Cas. Ins. Co., 135 Wash. App. 760,
767, 145 P.3d 1253 (2006) (citations omitted).
42 Lanov.Osberg Const. Co., 67 Wash. 2d 659, 663, 409 P.2d 466 (1966) (quoting
Black's Law Dictionary 1211 (4th ed. 1951)).
43 CP at 94.
11
No. 72258-1-1/12
best interest of the project to complete the site concrete paving with
Ferguson's own forces. This decision is not based on SAK's work
performed to date.
Pursuant to Section 7 of the Subcontract General Conditions, the
subcontract is terminated, effective immediately. SAK will be
compensated for work performed based on the agreed upon unit price as
stated in the Subcontract Agreement.1441
The termination for convenience clause requires written notice to the
subcontractor, but does not specify the content of the notice. The undisputed facts are
that Ferguson gave such notice. SAK complains that Ferguson's references to phasing,
site logistics, and convenience were merely false and pretextual excuses for Ferguson's
goal of increasing its profits from the project. But as noted above, the termination for
convenience clause is valid so long as a written notice is given and payment for work
performed is made proportionate to the total fixed price of the subcontract. Nothing in
the termination for convenience clause required that the notice state any reason beyond
"convenience."
SAK's reliance on Lano v. Osbero Construction is misplaced.45 There, the
subcontractor was given notice that it had one business day and a weekend to meet a
list of demands or its contract would be terminated. The court concluded that under the
circumstances, such notice was "patently not enough time to permit a reasonable
attempt to meet the demands."46 But here, the termination was not contingent upon
meeting a list of demands; itwas simply a termination for convenience, which was
contemplated by the parties in the clear language of the contract.
44 CP at 104.
45 67 Wash. 2d 659, 409 P.2d 466 (1966).
46 Id. at 664.
12
No. 72258-1-1/13
SAK also contends that Ferguson's notice was not reasonable because it did not
allow SAK to take action to protect its rights under the contract. SAK argues that the
content of the notice is critical to submitting a timely notice of a claim or dispute.47 But
SAK also acknowledges that there were no defects in performance that gave rise to the
termination. Rather, the termination was simply based on convenience, against which
SAK had no claim. Thus, this argument is without basis. Indeed, the trial court rejected
Ferguson's argument that SAK was required to comply with the contract's claim
requirements.48 At most, SAK had a claim for the proportionate amount it was owed for
the work performed to date, but the notice of termination was sufficient to allow SAK to
make that claim.
Attorney Fees
SAK argues that the attorney fees award should be vacated because the
summary judgment was improper, but we affirm the summary judgment. Ferguson
cross appeals the attorney fees award, contending that the trial court abused its
discretion by reducing Ferguson's requested fees when it was the substantially
prevailing party. We disagree.
47 SAK refers to section 20 of the subcontract, which requires that the
subcontractor give notice of a claim or dispute within 14 days of the occurrence of a
problem, dispute, claim or delay event, or the claim will not be reimbursed.
48 Ferguson asserts that the trial court's ruling on this issue (raised in Ferguson's
first summary judgment motion) was error and offers this as another basis upon which
to affirm the trial court. But Ferguson neither cross appealed nor assigned error to this
ruling, which rejected Ferguson's argument that SAK's failure to comply with the notice
and claim requirements barred SAK's lawsuit. Thus, this argument is not within the
scope of our review. But see Realm v. City of Olvmpia, 168 Wash. App. 1, 8, 277 P.3d
679 (2012) (holding that contractor waived right to sue city by failing to comply with
notice provisions in the contract that were precondition to litigation against the city).
13
No. 72258-1-1/14
We review the reasonableness of an award for attorney fees for an abuse of
discretion.49 The party seeking fees bears the burden of proving the reasonableness of
the fees.50 Using the lodestar method, the trial court "must first determine that counsel
expended a reasonable number of hours in securing a successful recovery for the
client."51 This necessarily "requires the court to exclude from the requested hours any
wasteful or duplicative hours and any hours pertaining to unsuccessful theories or
claims."52
Here, the contract's fee provision states, "Ifeither party becomes involved in
litigation or arbitration arising out of this Subcontract or the performance thereof, the
court or arbitration panel in such litigation or arbitration or in a separate suit, shall award
attorney fees to the substantially prevailing party."53 Ferguson requested $58,819.72,
the total amount of attorney fees billed. The trial court found that "Ferguson is the
substantially prevailing party pursuant to the subcontract sec[tion] 40 and that most of
Ferguson's fees are reasonable under the lodestar methodology."54 The court ordered
SAK to pay Ferguson attorney fees in the amount of $44,114.25.
SAK argued that the fee should be reduced to account for Ferguson's
unsuccessful motion for summary judgment and motion to reconsider, but it is not clear
49 Cook v. Brateng, 180 Wash. App. 368, 375, 321 P.3d 1255 (2014) (quoting
Gander v. Yager, 167 Wash. App. 638, 647, 282 P.3d 1100 (2012)).
50 Mahler v. Szucs. 135 Wash. 2d 398, 434, 957 P.2d 632 (1998).
51 Id,
52 jd
53 CP at 102.
54 CP at 442 (citing Berrvman v. Metcalf, 177 Wash. App. 644, 312 P.3d 745
(2014)).
14
No. 72258-1-1/15
from the record that this is the basis upon which the trial court reduced the requested
fees. The trial court's order simply states that SAK is ordered to pay attorney fees "in
the amount of $44,114.25, given the proportional factor(s) as noted in Berrvman v.
Metcalf."55
The trial court's offered reason of "proportionality" under Berrvman— the
relationship between the amount at stake and the amount of fees—is not compelling
here. But Ferguson fails to show that the trial court's fee award was an abuse of
discretion. The amount the court ordered here was approximately $14,000 less than
the amount requested, a discount of one-fourth of the total fees. Given that Ferguson
did incur fees on unsuccessful motions for summary judgment and reconsideration,
Ferguson fails to show that this discount was unreasonable and amounted to an abuse
of discretion.
Ferguson contends that because there was only one claim, the breach of
contract claim upon which it ultimately prevailed, it was entitled to all fees incurred in
defending against that claim. But, as noted above, Washington case law recognizes
that a reasonableness determination requires the court to exclude "any hours pertaining
to unsuccessful theories or claims."56 The summary judgment motions were based on
two different theories, the first of which was unsuccessful. Accordingly, the court in its
discretion could properly exclude the fees incurred on that unsuccessful theory.
Ferguson fails to establish that the fee award was an abuse of discretion.
55 CP at 442.
56 Mahler. 135 Wash. 2d at 434 (emphasis added).
15
No. 72258-1-1/16
Ferguson also requests fees on appeal under RAP 18.1, as provided by the
contract. When a contract provides for an attorney fee award in the trial court, the party
prevailing before this court may seek reasonable attorney fees incurred on appeal.57
Because Ferguson is the prevailing party, we award its reasonable fees on appeal upon
compliance with RAP 18.1.
We affirm.
WE CONCUR:
1"gZL,
57 First-Citizens Bank & Trust Co. v. Reikow, 177 Wash. App. 787, 800, 313 P.3d
1208(2013); RAP 18.1.
16