Offer and acceptance. Two words seared in the brains of lawyers and businesspeople as necessary actions to enter into a contract.  

But getting out of contracts? That can be important, too, especially where there has been no breach but where one wants out of a contract for his or her convenience.  

The concept of “termination for convenience” in contracts dates back to the American Civil War. To avoid costly military procurements when changes in war-time technology or cessation of conflict rendered them unnecessary, the federal government included termination for convenience clauses in its contracts.

Under certain circumstances, the government terminated wartime contracts that were no longer necessary and settled with the contractor for partial performance. Today, termination-for-convenience clauses are required by regulations for most government procurement contracts, and there is well settled law in that situation.  

Termination-for-convenience clauses have made their way into private contracts as well.  However, there is little case law nationwide addressing the effectiveness of such clauses where the government isn’t involved.  On Aug. 10, a Division I panel of the Washington State Court of Appeals addressed for the first time in this state the effectiveness of termination-for-convenience clauses in private contracts. 

The decision has considerable significance for the construction industry, among others, and is likely to attract attention around the country because of the dearth of prior case law.

The decision in SAK & Associates, Inc. v. Ferguson Construction, Inc. involved a subcontractor, SAK, that agreed to provide concrete materials and paving services for the construction of hangars at an airport for the general contractor, Ferguson.

The termination-for-convenience provision in the contract provided that the contractor may, after providing subcontractor with written notice, terminate the subcontract, or any part of it, for its own convenience and require the subcontractor to immediately stop work. In such an event, the provision said, the contractor would pay the subcontractor for the work actually performed in an amount proportionate to the total subcontract price. The contractor isn’t liable to the subcontractor for any other costs, including anticipated profits on work not performed or unabsorbed overhead.

SAK started work on April 18, 2012, and had completed 24 percent of the work when it was terminated for convenience by Ferguson on July 27, 2012. SAK sued Ferguson on May 10, 2013, seeking damages of about $227,000 and, alleging that Ferguson breached the subcontract by unilaterally terminating the subcontractor “without cause.” 

Ferguson prevailed at the trial level, and SAK appealed, arguing that because the termination-for-convenience clause allowed Ferguson to terminate the contract at its discretion, it was unenforceable. It also contended that Ferguson’s notice was “false and pretextual”—in other words, that Ferguson terminated the contract in bad faith. The appellate court found no merit in either of the arguments and affirmed the trial court ruling.

In addressing SAK’s first argument, citing Washington case law, the court held that if the provisions of an agreement leave the “promisor’s” performance entirely within its discretion and control, the “promise” is unenforceable.

Here, the court stated the provision was enforceable because SAK had partially performed the contract and was paid for the work it performed, including profit and overhead on that work. The court also reasoned that agreements that permit one party to cancel an undertaking are enforceable if there is even a slight restriction. The court found there was such a restriction on Ferguson’s power to terminate, because it had to give written notice to SAK before exercising that option.  

The court dismissed SAK’s second argument by holding that the implied covenant of good faith and fair dealing has no place in the analysis of whether or not a termination for convenience was proper. The court stated that as a matter of law, there cannot be a breach of the duty of good faith when a party simply stands on its right to require performance of a contract according to its terms.

Therefore, whether a party to a contract believes its termination was “wrongful” or as SAK put it, false and pretextual, is not relevant. A termination for convenience is valid, according to the court, so long as a written notice is given and payment for the work performed is made proportionate to the total fixed price of the subcontract.

There are a couple of important takeaways from this case.

First, the court was careful to note that it wasn’t faced with a situation where the termination for convenience was invoked before work had started or after only a nominal amount of work had been performed. Therefore, all we really know is that the operative question now is, “Has there been at least 24 percent of the work performed?” We know from this case that 24 percent or better is valid. We don’t know whether a court will find a convenience termination valid if performance is less than that. 

Second—and this can be good or bad depending on whether you are the terminator or the terminated—the reason for termination doesn’t matter at all. That isn’t always the case in other states that have addressed the issue. It also isn’t the case in federal construction.

However, the current state of the law in Washington is as long as written notice was given and proportionate payment was made, the termination is valid and can be for any reason whatsoever—and as long as 24 percent of the work has been performed.

Richard D. Campbell is an attorney at Spokane-based Campbell & Bissell PLLC, practicing construction law and commercial litigation in Washington, Idaho and Montana.