Contractor’s right to cure before being terminated for cause. Milton Regional Sewer Authority v. Travelers Casualty and Surety Co. United States Court of Appeals for the Third Circuit (2016), by Hugh Anderson

Summary: The contractor on a public works project in Milton, Pennsylvania, struggled to perform adequately in the early stages of the work. The frustrated owner suspended the work, and in response the contractor offered in writing to correct any failures in the work. The owner declined that offer and instead terminated the contract for cause, without giving the contractor an opportunity to fix the defective work.

The owner retained a replacement contractor and made a claim for additional costs against the original contractor’s performance bond. The surety, Travelers, refused to pay, asserting  that the termination was invalid because the contractor was not allowed to cure under the following clause:

Contractor’s services will not be terminated if Contractor begins, within seven days of receipt of notice of intent to terminate, to correct its failure to perform and proceeds diligently to cure such failure within no more than 30 days….

In an action on the bond in federal court, Traveler’s brought a motion to dismiss. The district court granted the motion, and the owner appealed the result. The issue on appeal was whether the owner was entitled to ignore the right-to-cure clause “in cases of extreme breach [by contractor].”

Decision: The Court of Appeals reviewed Pennsylvania case law that held that when there is a material breach of contract (by contractor) that is so serious that it goes to “the heart and essence of the contract, rendering the breach incurable” then allowing time to cure would be a useless gesture. The court concluded that the cases that featured this rule involved fraud or deceit by the contractor. Fraud and deceit are incurable because they destroy the “trust which is the bedrock foundation and veritable lifeblood” of the contractual relationship.

In the Milton case, there were no allegations of fraud, deceit, or other extreme contractor misconduct. Rather, the allegations were that the contractor “performed [the work] poorly, even quite poorly.” The court of appeals held that poor performance is curable, and that the purpose of the right-to-cure clause would be severely undercut if poor performance were a reason for negating the clause. The court affirmed the dismissal of the bond claim against Travelers.

Comment: EJCDC’s Standard General Conditions for the Construction Contract (C- 700) contain a right-to-cure clause that is part of the termination procedures. Under the EJCDC clause, the contractor must begin to correct its failure to perform within seven days, and then proceed diligently with the cure. Termination for cause is an extreme measure that often has adverse consequences for both owner and contractor, and therefore the contract intentionally steers the parties away from such terminations. Termination for convenience is a less onerous and more accessible option, especially under the EJCDC clause, which does not allow the terminated (for convenience) contractor to recover anticipated future profits on the job.

Another factor to consider is whether a contractor that performs very poorly should have been selected in the first instance. What qualifications requirements were established in the bidding process? Was the contractor clearly a responsible bidder?