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    October 23, 2015 Practice Points

    Washington Court Rules a Termination for Convenience Provision Is Not Illusory

    The decision in SAK & Associates, Inc. v. Ferguson Construction, Inc. distinguishes Washington law from some jurisdictions that interpret the implied covenant of good faith and fair dealing to impose a limitation on termination for convenience provisions

    by Paul R. Cressman Jr.

    The decision in SAK & Associates, Inc. v. Ferguson Construction, Inc., No. 72258-1-I, 2015 WL 4726912 (Div. 1, August 10, 2015) distinguishes Washington law from some jurisdictions that interpret the implied covenant of good faith and fair dealing to impose a limitation on termination for convenience provisions. The court ruled that a termination for convenience provision is not illusory, and the covenant of good faith and fair dealing will not trump express and unambiguous terms, as there cannot be a breach of good faith when a party simply stands on its rights according to a contract’s terms.

    SAK entered into a subcontract agreement with Ferguson for the furnishing of concrete materials and paving services for the construction of hangars at an airport. SAK partially performed the contract between April 18, 2012 and July 27, 2012, and Ferguson terminated SAK from the project on July 27, 2012. The notice of termination referred to “phasing restrictions, site logistics, and basic convenience,” citing to the termination for convenience provision in the subcontract. Upon termination, Ferguson paid SAK its proportionate share of the contract for actual work performed.

    On May 10, 2013, SAK sued Ferguson alleging breach of contract for wrongful termination without cause. Ferguson moved for summary judgment based on SAK’s failure to observe the procedural claim requirements set forth in the subcontract. SAK also filed a motion for summary judgment asserting the termination for convenience provision was unenforceable as a matter of law. The court denied both motions. Ferguson filed a second motion for summary judgment asserting it properly exercised the termination for convenience provision in the subcontract, and that it was enforceable as a matter of law. The court granted Ferguson’s second motion and dismissed SAK’s claims with prejudice.

    On appeal, SAK argued the termination for convenience provision was an illusory promise and therefore unenforceable. SAK also raised issues with Ferguson’s notice of termination. The court, noting that in Washington the measure of an illusory promise is whether there is adequate consideration, stated that, “it is well recognized that partial performance provides adequate consideration for enforcement of what otherwise might be an illusory provision granting unilateral control to one party.” Because SAK had performed 24 percent of the contract and Ferguson paid the proportionate share of the contract price for the work performed, SAK failed to establish that the termination for convenience provision was illusory for lack of consideration.

    Although SAK did not argue breach of good faith, the court opined Washington is not among the jurisdictions that read the implied covenant of good faith to limit the exercise of a termination for convenience provision. The court held that “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 contract according to its terms.” Covenants of good faith and fair dealing do not trump provisions in a contract that are express and unambiguous. Thus, Ferguson properly exercised its right to terminate for convenience, as it was a clause in the contract to which both parties agreed.

    SAK also argued that Ferguson’s notice of termination was improper. SAK contended Ferguson’s references in the notice were mere pretextual excuses for increasing its own profits. The court disagreed holding the termination for convenience clause did not specify the content of the required notice, and that Ferguson’s notice stating “for convenience” was sufficient pursuant to the provision in the contract.

    Keywords: termination for convenience, wrongful termination, good faith and fair dealing

    Paul R. Cressman Jr. is with Ahlers & Cressman PLLC, Seattle.

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