Good News for Contractors: Right to Cure Performance Upheld in Milton Regional Sewer Authority v. Travelers Casualty & Surety Co. of America
In April of this year, the United States Court of Appeals for the Third Circuit addressed the question of when, under Pennsylvania law, an owner may ignore a right-to-cure provision in terminating a construction contract and assert a claim against the contractor’s performance bond. In the case of Milton Regional Sewer Authority v. Travelers Casualty & Surety Co. of America, the Court held that an owner may only ignore this contractual right to cure when the contractor has committed an incurable breach, such as in instances of fraud.
In Milton, a municipal authority entered into a contract for a public works project, with the contractor’s performance secured by a performance bond. The contract provided that, before the owner could terminate the contractor for any problems, the owner needed to provide the contractor with thirty days’ notice to cure. Significantly, the performance bond did not allow the owner to recover from the surety if it failed to comply with the terms of the contract.
As the project progressed, the owner became dissatisfied with the contractor and sent a letter ordering it to suspend its work. The contractor offered to correct any failures in its work, which the owner rejected. The owner then terminated the contract. After termination, the owner incurred additional costs to complete the project and asserted a bond claim against the surety to recover these costs. The surety refused to pay the owner, citing to the improper termination. The owner then filed suit against the surety, which ultimately went to the Third Circuit on appeal.
The Third Circuit ruled that, by terminating the contract without giving the contractor its contractual right to cure, the owner had breached the contract and was therefore not entitled to recover from the surety. It found that when a contract provides a contractor with a right to cure, the owner must allow the contractor to do so unless the contractor’s breach is “so serious [that] it goes directly to the heart and essence of the contract, rendering the breach incurable.” The court noted instances of fraud as one such example, but found that, in this case, “poor performance is not incurable.” It also recognized that the contractor was willing to fix its deficiencies if given the opportunity.
Milton reaffirms several points of law in Pennsylvania. For one, it recognizes that a contractor generally has a right to cure its defects when the contract allows it. Additionally, the Milton case recognizes that, when provided for in the contract, owners have an obligation to provide contractors with a reasonable opportunity to cure, notwithstanding a serious, material breach. Moreover, common breaches by contractors and subcontractors, such as costly defects in workmanship, delays, and non-payment to suppliers or subcontractors, will likely not be sufficient to justify a termination without first providing an opportunity to cure. Indeed, all of these breaches could possibly be remedied with repaired work, an increased labor force, or payment. Both owners and contractors alike should follow right-to-cure provisions in their contracts, as a failure to do so may limit recovery for legitimate damages incurred as a result of a deficient contractor or subcontractor.
