Owner Did Not Waive Right to Damages by Terminating Design Contract for Convenience

Chinese Hosp. Ass’n v. Jacobs Eng’g Grp., Inc., 2019 BL 330340, 2 (N.D. Cal. Sept. 03, 2019)

fanc_thumb
Christine Z. Fan

This case arises out of the alleged breach of contract and defective design for the construction of a new hospital in San Francisco.  During construction, property owner and plaintiff Chinese Hospital Association (“Chinese Hospital”) became aware of alleged defects involving the designs provided by its subcontractor, architect-defendant Jacobs Engineering Group, Inc. (“Jacobs”).  Chinese Hospital terminated its contract with Jacobs for convenience mid-construction.

To complete the project, Chinese Hospital and Jacobs entered into a Termination and License Agreement that allowed for Chinese Hospital to hire a replacement architect.  Chinese Hospital ultimately completed the project with significantly increased costs and filed suit against Jacobs.

Jacobs moved for summary judgment and argued that Chinese Hospital waived its rights to recover damages under the contract.  The Northern District of California disagreed.

First, the court rejected Jacobs’ argument that, under the contract, Chinese Hospital waives its rights to recover damages if it terminates the contract for convenience and not for cause.  The contract contains separate provisions detailing early termination both for cause and for convenience.  The for-cause provision provides that should Jacobs fail to cure its performance defaults within seven days of written notice from Chinese Hospital, then Chinese Hospital “may without prejudice to any other remedy terminate the employment of [Jacobs].”

In contrast, the court stated that there is nothing in the for-convenience provision or anywhere else in the contract that provides a similar waiver should Chinese Hospital terminate the contract without cause (i.e. for convenience).  Based on the contract terms and the lack of clear indication that the parties intended otherwise, the for-cause provision does not apply to bar Chinese Hospital’s remedies following a termination for convenience.

The court found that it is unclear the for-cause termination provision is either the exclusive remedy or a remedy at all in cases of early terminations.  Indeed, specifying that a termination is without prejudice to a remedy is not the same as actually providing a remedy, let alone an exclusive one.  Under these circumstances, the court could not find as a matter of law that Chinese Hospital waived its rights to claim damages.

Further, the parties’ later Termination and License Agreement contained indemnity and no-waiver provisions that expressly reserved Chinese Hospital’s rights to claim damages against Jacobs.  These later provisions effectively modified any waiver that might have occurred under the original contract.  Ultimately, there is sufficient ambiguity in the contract to at least create a material issue of fact as to whether Chinese Hospital indeed waived its rights to claim damages.

Finally, Jacobs also failed to meet its burden in proving its other affirmative defenses.  As to the doctrine of prevention, Jacobs failed to address the parties’ express reservation of rights or prove that it could have performed the contract had Chinese Hospital terminated the contract with cause.  As to implied waiver, the court noted that not every trier of fact would find that Chinese Hospital intended to waive its damages claims.

To view the full text of the court’s decision, courtesy of Bloomberg Law, click here.