DEFAULT TERMINATION IS RISKY BUSINESS: WASHINGTON COURTS SAY “WATCH OUT!”

Date: July 30th, 2014
Categories: Contracts

Washington courts have repeatedly ruled that termination, where one contracting party unilaterally declares the other in default, is an extreme remedy. Accordingly, a general rule has developed demanding strict compliance with any and all contractual notice-and-cure procedures. Recently, the Washington Court of Appeals issued the DC Farms, LLC. v. ConAgra Foods Lamb Weston decision, illustrating the exacting standard imposed on parties asserting default termination.

DC Farms arose from an agreement between a farming company, DC Farms, LLC, and a food processor, ConAgra Foods Lamb Weston, Inc. The Agreement designated 1,300 acres of DC Farms’ land to be farmed for the parties in a joint venture. Under the Agreement, DC Farms was to grow and store potatoes until Lamb Weston was ready to transport and process them. After DC Farms completed farming, Lamb Weston employees began removing the potatoes from DC Farms’ cellars. Two days into the removal process, Lamb Weston found broken glass among the crop. Unable to decontaminate the potatoes, Lamb Weston unilaterally terminated the Agreement without complying with a contractual provision requiring written notice of default and a seven-day opportunity to cure. DC Farms subsequently sued for, among other claims, breach of the termination clause.

At trial, Lamb Weston argued it was not required to comply with the termination clause because providing notice to cure would have been an “idle and useless act.” In effect, Lamb Weston claimed a “cure” was not possible because the contamination was irreversible. The Court expressly rejected the “useless act” theory as applied to default termination clauses. In doing so, the Court stated that providing notice and opportunity to cure encourages parties to “resolve their differences by negotiation, including clarification of expectations, cure of past defaults, and assurance as to future performance” instead of filing a lawsuit. Accordingly, the Court ruled that “requiring compliance with the notice-and-cure provision is the better rule [because] it reduces the prospect of litigation.”

In addition to reducing litigation, the Court observed:

“[I]f the party who seeks to terminate the contract truly believes that the default cannot be cured, then giving notice–with the result that any steps actually taken and proposals actually made will be in evidence–will produce a more reliable and thereby fairer basis for deciding whether the breach was curable.”

In other words, a party attempting termination must give notice and opportunity to cure in the form and time required by its contract, even if the chances of the other party curing are very unlikely.

While DC Farms did not involve a construction contract, Washington courts deciding termination issues in construction cases have long embraced DC Farms’ general proposition. For example, in Lano v. Osberg, a contractor’s termination was held invalid for failure to comply with a reasonable notice requirement in the contract. The contractor Osberg’s subcontract with Lano gave it “the right, after reasonable notice, to take over said work to complete the same at the cost and expense of [Lano]” if Lano did not proceed diligently. After Lano failed to adequately perform, Osberg gave repeated notice to Lano. When Lano failed to speed its progress, Osberg gave a formal notice to cure, allowing Lano only one business day and a weekend to meet its demands. At the expiration of that period, during which time Lano made no effort to cure, Osberg terminated the subcontract. Lano sued for breach of the termination provision. Siding with Lano, the Supreme Court ruled that the one business day and one weekend notice-to-cure provided by Osberg was “patently not enough time to permit a reasonable attempt to meet [Osberg’s] demands,” and that the notice was therefore unenforceable.

In part because of the massive financial impact on defaulting parties, courts treat default termination as a very serious matter. Termination clauses are not favored in the law, and parties who claim there has been default are usually held to their contract’s exact termination requirements.

Takeaway:
In DC Farms, the Washington Court of Appeals confirmed that seeking default termination is risky business. Parties who terminate will be held to the precise letter of their contracts. If you seek default termination, you must strictly follow any and all contractually-specified procedures.

Jocelyn Whiteley is a third year law student at the University of Washington School of Law and is a summer associate at Ashbaugh Beal. If you have any questions about DC Farms or any other construction law matter, please contact any of the construction lawyers at Ashbaugh Beal by calling 206.386.5900.