City Of Puyallup v. Conway Construction Company ( 2020 )

IN THE COURT OF APPEALS FOR THE STATE OF WASHINGTON
CONWAY CONSTRUCTION No. 80649-1-I
COMPANY,
DIVISION ONE
Respondent,
PUBLISHED OPINION
v.
CITY OF PUYALLUP,
Appellant.
LEACH, J. — In this public works contract case, the City of Puyallup (the City)
appeals a trial court decision finding that it improperly terminated Conway Construction
Company’s (Conway) contract for road improvements and awarding Conway damages
plus attorney fees and costs. Substantial evidence supports the trial court’s findings of
fact and they support its legal conclusions. But, Conway was not entitled to recover
attorney fees because it did not submit an offer of settlement as required by statute. So,
we affirm the trial court’s judgment for damages but reverse its award of attorney fees to
Conway.
FACTS
The City and Conway contracted for road improvements (the project). The public
works contract included a “Public Works Contract” form and incorporated by reference
several voluminous documents, including the Washington State Department of
Transportation Standard Specifications for Road, Bridge, and Municipal Construction.
Citations and pincites are based on the Westlaw online version of the cited material.
No. 80649-1-I / 2
During construction, the City became concerned about the quality of pavement
concrete, defects in utilities, and other construction defects, and issued notices to Conway
describing these concerns. The City also observed unsafe work conditions, such as lack
of trench shoring, and reported those concerns to the Washington State Department of
Labor & Industries (L&I).
On March 9, 2016, the City gave Conway a notice of suspension and breach of
contract.1 This notice identified nine items that it deemed contract breaches. These
included defective and uncorrected work and safety concerns. It advised Conway that it
had 15 days to remedy the listed issues. Conway denied any wrongdoing.
On March 21, 2016, the City informed Conway that it still needed to remedy the
same nine items and that it had received further reports of safety violations. Conway
again denied the safety violation allegations.
On March 25, 2016, the City issued a notice of termination for default to Conway.
The City also withheld payments due to Conway.
On April 23, 2016, L&I issued a citation to Conway for a “serious” safety violation
endangering Conway workers.
Conway sued the City asking the court to declare termination for default improper
and deemed it to be for public convenience. Conway later amended its request to include
breach of contract and unjust enrichment claims. After a bench trial, the court found the
City breached the contract when it terminated Conway. It awarded Conway damages,
1
This exhibit is dated March 9, 2015. This is an obvious scrivener’s error because it
references a Non-Conformance Report dated March 3,2016 and the parties had not yet
entered their contract on March 9, 2015. Exhibits 53, 58, and 59 contain similar dating
errors.
2
No. 80649-1-I / 3
attorney fees, and costs. The City appeals.
STANDARD OF REVIEW
We review a party’s challenge to a trial court’s decision when the trial court has
evaluated the evidence to determine whether substantial evidence supports the trial
court’s findings of fact and whether those findings support the court’s conclusions of law. 2
Substantial evidence is evidence sufficient to persuade a fair-minded person of its truth. 3
Evidence may be substantial even if there are other reasonable interpretations of the
evidence.4
We defer to the trial court’s determinations about persuasiveness of the evidence,
witness credibility, and conflicting testimony. 5 We will not disturb a trial court’s ruling if
substantial, though conflicting, evidence supports its findings of fact.6
ANALYSIS
The City raises three issues on appeal. First, it claims the trial court used the
wrong test to determine if the City properly terminated the project contract for default.
Next, it claims the contract entitles it to an offset for Conway’s defective work. Finally, it
contends Conway is not entitled to recover attorney fees because it did not make a
statutorily required offer of settlement. We agree that Conway is not entitled to recover
attorney fees, but we reject the City’s other claims.
2
Standing Rock Homeowners Ass’n v. Misich, 106 Wash. App. 231, 242-43, 23 P.3d 520
(2001).
3
Hegwine v. Longview Fibre Co., Inc., 132 Wash. App. 546, 555-56, 132 P.3d 789 (2006).
4
Sherrell v. Selfors, 73 Wash. App. 596, 600-01, 871 P.2d 168 (1994).
5
Snyder v. Haynes, 152 Wash. App. 774, 779, 217 P.3d 787 (2009).
6
Merriman v. Cokeley, 168 Wash. 2d 627, 631, 230 P.3d 162 (2010).
3
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Contract Termination – Breach of Contract
Standard for Termination
We first address the City’s claim that the trial court did not use the correct test to
decide whether the City properly terminated Conway for default. The City contends the
trial court should have used the following two part test (1) was Conway in default, and
(2) was the City satisfied with Conway’s efforts to remedy the breach. Conway claims the
City had to satisfy a different two part test (1) was Conway in default, and (2) did Conway
neglect or refuse to correct rejected work. Conway also asserts that any error the trial
court made in applying the correct test was harmless.
The City correctly notes the parties’ contract form contains two termination
provisions. First, paragraph 22 of the contract provides that violation of a statute or
regulation is “good cause” for terminating the contract:
22. Termination. The City shall be entitled to terminate this Contract for
good cause. “Good cause” shall include, but shall not be limited to, any one
or more of the following events:
d. Contractor’s failure to comply with Federal, state or local laws, rules or
regulations
Second, the contract incorporates the Washington State Department of Transportation
(“WSDOT”) Standard Specifications for Road, Bridge, and Municipal Construction (2014),
which provided the general terms of the contract. Section 1-08.10(1) of these
specifications contains terms relating to termination of the contract and allows the
contracting agency to terminate the contract upon the occurrence of any one or more of
the following events:
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No. 80649-1-I / 5
1. If the Contractor fails to supply sufficient skilled workers or suitable
materials or equipment;
2. [Inapplicable]
3. [Inapplicable]
4. If the Contractor disregards laws, ordinances, rules, codes, regulations,
orders or similar requirements of any public entity having jurisdiction;
5. If the Contractor disregards the authority of the Contracting Agency;
6. If the Contractor performs Work which deviates from the Contract, and
neglects or refuses to correct the rejected Work; or
7. If the Contractor otherwise violates in any material way any provisions
or requirements of the Contract.
Once the Contracting Agency determines that sufficient cause exists to
terminate the Contract, written notice shall be given to the Contractor and
its Surety indicating that the Contractor is in breach of the Contract and that
the Contractor is to remedy the breach within 15 calendar days after the
notice is sent.... If the remedy does not take place to the satisfaction of the
Contracting Agency, the Engineer may, by serving written notice to the
Contractor and Surety either:
1. Transfer the performance of the Work from the Contractor to the Surety;
or
2. Terminate the Contract …
The contract form contains the following provision addressing conflicts between
the form and the attached specifications, “This Contract and any attachments contain the
entire Contract between the parties. Should any language in any attachment conflict with
any language contained in this Contract, the terms of this Contract shall prevail.” So, if
any provision of the specifications conflicts with paragraph 22, then paragraph 22
controls. The City relies on this conflict coordination provision to assert that once Conway
violated a state safety regulation, paragraph 22 gave it the right to terminate the contract
without providing the cure opportunity found in Section 1-08.10(1). We disagree.
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No. 80649-1-I / 6
Washington courts “‘follow the objective manifestation theory of contracts.’”7 So,
we “focus on the agreement’s objective manifestations to ascertain the parties’ intent.” 8
We look to the face of the agreement, but when the language is ambiguous, we may also
look to extrinsic evidence of intent.9
Paragraph 22 and section 1-08.10(1) do not conflict in the way asserted by the
City. Paragraph 22 defines one act of default, and section 1-08.10(1) identifies additional
acts of default. Paragraph 22 is silent about termination procedure and opportunity for
cure. This silence does not place paragraph 22 in conflict with section 1-08.10(1)’s
procedural and cure provisions. Instead, section 1-08.10(1) supplements paragraph 22
by providing specific procedures and timelines for action. The City’s own conduct before
termination shows that it understood this to be the relationship between these provisions.
Its notices and correspondence with Conway repeatedly referenced section 1-08.10(1)
and never relied on paragraph 22. These notices also identified a cure period. Only in
litigation did the City discover a conflict.
The City also claims Conway had to remedy all asserted breaches within 15 days
to satisfaction. The contract allows the City to terminate “if the [c]ontractor performs
[w]ork which deviates from the [c]ontract, and neglects or refuses to correct rejected
[w]ork.” It also states that once the City gives notice, Conway “is to remedy the breach
within 15 calendar days after the notice is sent . . . [and] [i]f the remedy does not take
place to the satisfaction of the [c]ontracting agency, the [e]ngineer may . . . [t]erminate
7
Kelley v. Tonda, 198 Wash. App. 303, 311, 393 P.3d 824 (2017) (quoting Hearst
Commc’ns, Inc. v. Seattle Times Co., 154 Wash. 2d 493, 503, 115 P.3d 262 (2005).
8
Mart. v. Smith, 192 Wash. App. 527, 532, 368 P.3d 227 (2016).
9
Kelley, 198 Wash. App. at 312.
6
No. 80649-1-I / 7
the [c]ontract.” So, the City was only justified in terminating the contract for rejected work
if Conway neglected or refused to correct the rejected work. The trial court used the
appropriate test in determining whether the City was justified in terminating Conway for
rejected work.
As the City notes, the “neglect or refuses to correct” provision applies only to
rejected work breaches and not violation of law breaches. So, Conway had 15 days to
cure the safety breach. But, to the extent the trial court used the wrong test for the safety
violation, that error was harmless because Conway cured the only safety breach within
15 days.
Termination Justification
The City claims that once it demonstrated that Conway defaulted due to the safety
violation, the liability phase of the case should have ended.
In contract disputes like this one, where the Government is a party, the
Government has the burden of proving whether termination of a contract for default was
justified. 10
The trial court found the City was unjustified in terminating Conway because
Conway addressed the safety issues when it worked directly with L&I:
Finding of Fact No. 59: While the City complains of ongoing safety concerns
existing on the site, at the time of termination the unsafe trench detailed
in these findings was being addressed during the suspension period
between Conway and the Department of Labor and Industries. In Remedy
Item No. 9 of Exhibit 44, the City essentially deferred the safety issue to
the Department of Labor and Industries, stating, “If the contractor does
not correct the deficiency to L&l’s satisfaction, the City will suspend
operation until the work site is deemed safe again by L&I.” After at least two
inspections of the Project site and meetings with Conway’s principals, the
Department of Labor and Industries perceived no ongoing safety issues. In
10
Lisbon Contractors, Inc. v. U.S., 828 F.2d 759, 765 (Fed. Cir. 1987).
7
No. 80649-1-I / 8
Exhibit 119, the City admitted there were no further safety issues on site
after March 9, 2016. This item consequently is found to have been
cured by the end of the suspension period.
After the City provided notice to Conway, that it had breached the contract,
Conway had 15 days to cure the identified safety breach. It did so by working with L&I to
address the safety concerns and then by notifying the City about its actions.
Because L&I detected no ongoing safety issues after the original safety issue,
which Conway addressed, the court found any breach by Conway was resolved.
Substantial evidence established that Conway resolved the safety regulation breach,
which the City asserts justified termination.
Subsequently Discovered Evidence
The City next claims it can justify termination with subsequently discovered
evidence. It relies on Mega Construction Company, Inc. v. United States 11 as support for
the claim that L&I’s citation for the safety violation after the City terminated the contract
justified the decision to terminate. But, Mega Construction explains how the termination
was justified because of not only discovered violations after the termination, but because
of the violations discovered before the termination. 12
In this case, the trial court held that Conway cured the pre-termination breach
within 15 days of notice. So, any post-termination violations are irrelevant and Mega
Construction is not analogous.
11
29 Fed. Cl. 396 (Fed. Cl. 1993).
12
29 Fed. Cl. at 421-22.
8
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Good Faith
The City also asserts that because Conway breached a specific condition of
default, the only remaining questions were whether the City was satisfied with Conway’s
performance and whether the City exercised good faith in its exercise of discretion. It
claims the trial court made no finding that the City acted in bad faith. But, the trial court
found that Conway was not in breach at the time of termination, so the trial court did not
err in failing to make a good faith effort analysis.
Set-Off for Defective Work
The City next claims the trial court should have considered claims for replacing the
defective work it discovered after it terminated Conway. The City asserts the contract
“specifically allows a set-off for defective work, even where the termination is one for
convenience.”
The relevant contract provision states:
The total payment for any one item in the case of a deletion or partial
termination shall not exceed the Bid price as modified by approved change
orders less the estimated cost (including overhead and profit) to complete
the Work and less any amount paid to the Contractor for the item.
This contract provision applies only to cases involving deletion, such as when the
“[e]ngineer may delete [w]ork by change order,” or partial termination. Here, the City
completely terminated the entire contract, so no “deletion” or “partial termination”
occurred. This provision does not apply.
The City also claims the trial court refused to consider claims for replacing
defective work first discovered after the City terminated Conway. The City frames this
defect issue as a timing issue. But, the trial court did not rely on timing of discovery to
reject this claim. It rejected it because the City did not provide Conway an opportunity to
9
No. 80649-1-I / 10
cure, or timely investigate, the alleged defects as required by the contract. 13 No
Washington case law addresses whether a breaching party is entitled to a set-off when it
did not give the other non-breaching party an opportunity to cure alleged defects. But,
Shelter Products, Inc. v. Steelwood Construction, Inc.14 addressed this issue. We find
this case persuasive and follow it here. There, the court 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. 15
The City acknowledges that it did not give Conway an opportunity to cure or
investigate these defects. And, the City provides no persuasive reason why we should
not follow Shelter Products.16 The City’s assertion that Ducolon Mech. Inc., v.
Shinstine/Forness, Inc. entitles it to set-off its costs for Conway’s defective work lacks
merit because both parties breached the contract.17 Here, only the City failed to cure a
breach, so Ducolon is not analogous or helpful.
Because the City breached by terminating the contract, and did not provide
Conway an opportunity to cure alleged defects, the City was not entitled to its claimed
post-termination damages and costs.
13
The contract provides that upon Conway performing work that deviates from the
contract that it neglects or refuses to correct, it has 15 days to cure. So, this contract
provision requires the City to inform Conway of defects and give them an opportunity to
cure.
14
257 Or. App. 382, 402, 307 P.3d 449 (2013).
15
Shelter Products, 257 Or. App. at 398-99.
16
The trial court cited to Shelter Products in its conclusion of law that the City’s claim for
post-termination damages and costs are denied.
17
77 Wash. App. 707, 713, 893 P.2d 1127 (1995).
10
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Attorneys’ Fees
The City asserts the trial court should not have awarded Conway attorney fees
because Conway was required to make an offer of settlement. As a result, Conway is not
the prevailing party for purposes of awarding fees. We agree.
An appellate court reviews de novo whether the prevailing party was entitled to
attorney fees.18 RCW 39.04.240(1) states, “[t]he provisions of RCW 4.84.250 through
4.84.280 shall apply to an action arising out of a public works contract in which the state
or a municipality, or other public body that contracts for public works, is a party.” This
statute also creates two exceptions (1) the maximum dollar limitation in RCW 4.84.250
does not apply, and (2) the time period for serving offers of settlement on the adverse
party is not less than 30 days and not more than one 120 days after completion of the
service and filing of the summons and complaint.
RCW 4.84.260 states, “The plaintiff . . . shall be deemed the prevailing party . . .
when the recovery, exclusive of costs, is as much as or more than the amount offered in
settlement by the plaintiff . . . as set forth in RCW 4.84.280.”19 When a party does not
make an offer of settlement in a lawsuit involving a public works contract, it cannot recover
attorney fees.20
18
Ethridge v. Hwang, 105 Wash. App. 447, 459-60, 20 P.3d 958 (2001).
19
RCW 4.84.260.
20
Hertz v. Riebe, 86 Wash. App. 102, 107, 936 P.2d 24 (1997); Filipino American League
v. Carino, 183 Wash. App. 122, 130, 332 P.3d 1150 (2014) (“the unambiguous language of
RCW 4.84.290 authorizes an award of fees on appeal only where the party is eligible for
an award under RCW 4.84.250. RCW 4.84.250 and RCW 4.84.260 required the League
to make an offer of settlement to become a prevailing party. The League made no such
offer. Therefore, it is not the prevailing party within the meaning of RCW 4.84.250 and
RCW 4.84.290.”).
11
No. 80649-1-I / 12
Conway claims that “[i]t was not necessary for Conway to make an offer of
settlement under RCW 39.04.240 in order to obtain a fee award” because “RCW
39.04.240 is not an exclusive remedy.” Conway asserts the contract’s fee provision
provides a different remedy than RCW 39.04.240. Conway relies on King County v. Vinci
Construction Grands Projects/Parsons RCI/Frontier-Kemper, JV. 21
The City asserts this response is precluded by RCW 39.04.240(2), which states:
The rights provided for under this section may not be waived by the parties
to a public works contract that is entered into on or after June 11, 1992, and
a provision in such a contract that provides for waiver of these rights is void
as against public policy. However, this subsection shall not be construed
as prohibiting the parties from mutually agreeing to a clause in a public
works contract that requires submission of a dispute arising under the
contract to arbitration.
The City claims this statute voids the parties’ contract to the extent it waives the
City’s statutory right, under RCW 4.84.260, to receive an offer of settlement before being
exposed to an attorney fee claim. Conway does not respond directly to this argument.
King County v. Vinci does not support Conway’s position. There, our Supreme
Court considered whether RCW 39.04.240(1) abrogated a common law right of attorney
recovery available in certain types of insurance litigation. The court did not address any
argument involving the anti-waiver provisions of RCW 39.04.240(2).
Our legislature has determined that government entities should receive an early
opportunity to settle public works contract litigation by requiring an early settlement offer
from a claimant who wishes to preserve a claim for attorney fees. And, the legislature
has declared 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
21
188 Wash. 2d 627, 398 P.3d 1093 (2017).
12
No. 80649-1-I / 13
consequences of losing a lawsuit involving a public works contract. The statute is
unambiguous. So, because Conway did not make a timely settlement offer, it was not a
prevailing party for purposes of awarding attorney fees. We reverse the trial court’s fee
award to Conway.
The City Attorney’s Fees
The City requests attorney fees if it prevails on the contract termination issue.
Because it does not, we deny the City’s request for attorney fees.
CONCLUSION
We affirm in part and reverse in part. Substantial evidence supports the trial court
decision that the City failed to justify its contract termination. Also, the City was not
entitled to post-termination damages, because it did not give Conway an opportunity to
cure alleged defects.
We reverse on the trial court’s award of attorney fees to Conway and otherwise
affirm the trial court. We deny attorney fees for both parties on appeal.
WE CONCUR:
13