SAK & Assocs. v. Ferguson Constr., Inc., 189 Wn. App. 405 (Wash. Ct. App. 2015)

Ferguson Construction, Inc. (“General Contractor”) entered into a fixed sum contract (the “Subcontract”) with SAK & Associates (“Subcontractor”) to provide concrete materials and paving services (the “Work”).  The Subcontract included a termination for convenience clause providing that General Contractor could terminate Subcontractor for convenience upon written notice.  After Subcontractor completed 24 percent of the Work, General Contractor terminated Subcontractor.  General Contractor paid Subcontractor 24 percent of the fixed contract price for the work Subcontractor actually completed.

Subcontractor sued General Contractor, alleging that General Contractor breached the Subcontract by unilaterally terminating without cause.  General Contractor filed a motion for summary judgment, invoking the termination for convenience clause.  Subcontractor filed a cross motion for summary judgment, contending the clause was an illusory promise and thus unenforceable as a matter of law.  The trial court granted General Contractor’s motion, and Subcontractor appealed.

The appeals court noted that while termination for convenience clauses are ubiquitous in government procurement contracts, case law governing termination for convenience clauses in such contracts is grounded in the particular role played by government agencies, and thus is of limited value when interpreting contracts between private parties.

Instead, the court applied common law contract principles, explaining that whether a promise is illusory generally turns on whether there is adequate consideration.  Where there is an absolute right not to perform at all, there is an absence of consideration.  But where there is some restriction or condition upon the right not to perform, there is adequate consideration.  Courts are split on whether a written notice condition, such as the one in the Subcontract, constitutes adequate consideration.

The appeals court found it unnecessary to determine whether the written notice condition constituted adequate consideration because partial performance also provides adequate consideration for enforcement of a promise.  Where Subcontractor completed 24 percent of the Work, and General Contractor paid a proportionate amount of the fixed contract price, General Contractor’s partial performance provided adequate consideration for enforcement of the termination for convenience clause.

The court rejected the idea that exercise of a termination for convenience clause could be limited by an implied covenant of good faith and fair dealing, explaining that such a covenant does not trump express, freely-bargained for contract terms.  The Subcontract objectively manifested the parties’ intent that  General Contractor could terminate Subcontractor for convenience.  The parties could have negotiated different terms, but did not do so.  There was no assertion that the Subcontract was procedurally or substantively unconscionable.  The duty of good faith and fair dealing did not allow Subcontractor to evade a contract term to which it had agreed.

To view the full text of the court’s decision, courtesy of Lexis ®, click here.