The First Department Reiterates the “Strict Nature” of “Notice -to-Cure” Provisions in Construction Contracts
Print Article- Posted on: Oct 13 2021
Many contracts contain provisions requiring that in the event of a default, one party must provide to the other notice of the purported default and an opportunity to cure before the valuable rights under the contract can be terminated. In general “[t]he purpose of a Notice to Cure is to specifically apprise the [other party] of claimed defaults in its obligations under the [contract] and of the forfeiture and termination of the [contract] if the claimed default is not cured within a set period of time.” Filmtrucks, Inc. v. Express Industries and Terminal Corp., 127 A.D.2d 509, 510 (1st Dep’t 1987) (addressing a notice to cure under a lease). “A termination that does not comply with contractual requirements is ineffectual.” Process America, Inc. v. Cynergy Holdings, LLC, 2014 WL 3844626, *11 (E.D.N.Y. April 30, 2014), aff’d, 839 F3d 125 (2nd Cir. 2016).
Default/notice-to-cure provisions are frequently found in construction contracts. Such was the case in East Empire Construction Inc. v. Borough Construction Group LLC, decided by the Appellate Division, First Department, on October 12, 2021. The Court described the import of East Empire as “giv[ing] us the opportunity to address the strict nature of [notice-to-cure] provisions and the very rare instances when they can be ignored.”
By way of brief background, the plaintiff in East Empire was a steel subcontractor that was to, inter alia, “supply and install all steel needed for ‘Support of Excavation’ and for construction of the structural steel frame of the new building, and to secure and pay for the crane permits for installation.” The defendant was the general contractor for the subject residential development project.
The relevant subcontract provisions as articulated by the Court, are as follows:
Section 3.4 of the subcontract provides,
“If the Subcontractor [plaintiff] defaults or neglects to carry out the Work … fails within five working days after receipt of written notice from the Contractor to commence and continue correction of such default or neglect with diligence and promptness, the Contractor may … make good such deficiencies and may deduct the reasonable cost thereof from the payments then or thereafter due the Subcontractor.”
Section 7.2.1 provides,
“If the Subcontractor repeatedly fails or neglects to carry out the Work in accordance with the Subcontract Documents or otherwise fails to perform in accordance with this Subcontract and fails within a ten-day period after receipt of written notice to commence and continue correction of such default or neglect with diligence and promptness, the Contractor [Borough] may by written notice[,] … terminate the Subcontract and finish the Subcontractor’s Work by whatever method the Contractor may deem expedient.”
(Brackets and ellipses in original.) In addition, a rider to the subcontract “provided the owner (as opposed to Borough [the general contractor]) with a shorter notice period.” Thus, the rider provided, in part, that “[i]f for any reason the Subcontractor fails to perform to the degree and standards set forth by the Owner, he will be issued [a 72-hour] Notice to Cure [and s]hould the Subcontractor fail to rectify and remedy the situation within that timeframe, the Owner will remove Subcontractor from the Project….”
In May of 2016, defendant sent plaintiff a “written notice of termination” directing that plaintiff “cease work immediately” and that “the subcontract would be terminated in three days from the date of the letter and that plaintiff was in default” of numerous provisions of the subcontract.” While the notice was cancelled and plaintiff returned to the job, one week later an identical notice of termination was sent to plaintiff in which plaintiff was directed to “cease operations.”
Plaintiff commenced action against, inter alia, defendant general contractor asserting a claim for breaching the subcontract by “improperly terminating plaintiff from the project on May 16, 2016 without good cause and without providing plaintiff with the appropriate notice and opportunity to cure the alleged default….” Plaintiff moved for summary judgment “on the grounds that [defendant] did not give plaintiff the chance to ‘commence and continue correction’ of its alleged breach, as required by the subcontract.” Plaintiff further argued, inter alia, that the record failed to show “that the alleged defects were impossible to cure or amounted to a repudiation of the subcontract so as to render futile a notice-to-cure….” In response, defendant alleged “persistent, incurable acts of negligence and numerous safety violations and delays by plaintiff” caused defendant’s engineer to shut down the job.
The First Department affirmed supreme court’s grant of summary judgment to plaintiff subcontractor. In so doing, the Court noted that termination of the subcontract required compliance with section 7.2.1 of the subcontract and, accordingly, before termination “plaintiff [must] first be given the opportunity to ‘commence and continue correction’ of the defaults within a 10-day period from the termination notice. The Court also noted that the cure provisions in the rider, which permitted the owner (as opposed to defendant) to terminate plaintiff if noticed defaults were not cured within 72 hours, were inapplicable to defendant.
Thus, the Court held that:
Our case law is clear that a party’s termination is ineffective where the relevant contract provides for a notice-to-cure and notice is not provided. This approach gives effect to the principle that, generally, where contracting parties agree on a termination procedure, the procedure will be enforced as written.
(Citations omitted.)
The Court also discussed “limited circumstances” where otherwise required notices to cure may not be necessary and include, among others, situations where “the other party expressly repudiates the contract or abandons performance” (numerous citations omitted) or where “the breach is impossible to cure, or so substantial that it ‘undermines the entire contractual relationship such that it cannot be cured’” (numerous citations omitted).
Jonathan H. Freiberger is a partner and co-founder of Freiberger Haber LLP.
This article is for informational purposes and is not intended to be and should not be taken as legal advice.
