Oregon Court of Appeals Holds General Contractor Cannot Offset Costs of Repairing Subcontractor’s Defective Work After Subcontractor Is Terminated “For Convenience” Without an Opportunity to Cure

Shelter Prods. v. Steelwood Constr., Inc.
307 P.3d 449 (Or. Ct. App. 2013)

This action arose from a payment dispute between a general contractor, Catamount Constructors, Inc. (“Catamount”), and one of its subcontractors, Steelwood Construction, Inc. (“Steelwood”). Catamount contracted with Steelwood (the “Subcontract”) to provide materials and perform work for the construction of a Home Depot distribution center in Salem, Oregon (the “Project”). Included in the Subcontract was a provision that allowed Catamount to terminate the Subcontract for convenience and “without cause.” In the event the Subcontract was terminated for convenience, Steelwood would be entitled to the cost of all work performed on the Project as of the date of termination.

After Steelwood delivered all materials required for the Project and commenced performance under the Subcontract, Catamount sent Steelwood a letter outlining concerns it had about the progress and quality of Steelwood’s work. The letter concluded that “[o]n Monday morning we will evaluate where you are and how to best assist you in meeting your contractual obligations.” However, before that meeting occurred, Catamount elected to terminate the Subcontract for convenience, and Steelwood vacated the site.

After it terminated Steelwood for convenience, Catamount refused to pay Steelwood for materials delivered or work performed prior to termination. Thereafter, Steelwood recorded a construction lien on the Project. Catamount, for its part, cleaned up debris left by Steelwood on the Project and engaged another subcontractor to complete Steelwood’s work under the Subcontract. In addition to completing the work that would have been performed by Steelwood, Catamount contended that it incurred $75,440 in conjunction with the cleanup and the repair of Steelwood’s defective work. However, after terminating the Subcontract, Catamount did not provide Steelwood with notice that its work was defective, nor did it give Steelwood an opportunity to enter the work site with respect to any defects in the work it performed.

Steelwood sued Catamount to recover amounts owed and alleged claims for breach of contract and construction lien foreclosure. Catamount counterclaimed for the costs incurred correcting allegedly deficient work. In the ensuing litigation, Steelwood argued that Catamount’s claim for costs incurred correcting allegedly deficient work could not be set off from amounts otherwise due and owing because Catamount terminated the Subcontract for convenience not default, and Steelwood was never given any notice or opportunity to correct the work. The trial court agreed and, on summary judgment, entered a limited judgment in Steelwood’s favor. The trial court reasoned that when the contract was terminated “for convenience,” Steelwood should have been given the opportunity to cure the defect and it was not given such an opportunity. Catamount appealed.

On appeal, Catamount argued that even though it terminated the Subcontract for convenience, it continues to have a “right in breach of contract against Steelwood for its breach of the Subcontract by performing its work in a deficient manner.” Thus, Catamount contended, in part, that it was entitled to offset amounts owed to Steelwood with costs it incurred to repair Steelwood’s defective work. Steelwood, on the other hand, maintained that a party cannot assert an offset after it has terminated for convenience.

In a matter of first impression in Oregon, the Court of Appeals agreed with the trial court and Steelwood and held that “in the absence of an opportunity to correct allegedly defective work… where a party has terminated a contract for convenience, that party may not then counterclaim for the cost of curing any alleged default.” The Court of Appeals looked to the Subcontract and found that, “the text of the termination for convenience clause does not, under the circumstances of this case, permit the prime to both terminate the subcontractor without cause and subsequently proceed against the subcontractor as if it had terminated the agreement for cause.” The Court reasoned that Steelwood would have been given an opportunity to cure had the contract been terminated for cause and, therefore, Catamount could not use an offset to reduce the damages where the Subcontract was terminated for convenience. Accordingly, the Court of Appeals reaffirmed the trial court’s decision to deny Catamount its defective-work damages and upheld the limited judgment in Steelwood’s favor.

Jeffery R. Mullen

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