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The Importance of Following Termination Provisions of Construction Contracts

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  • Posted on: Nov 8 2019

This Blog, in “Contract Must be Enforced According to Its Clear and Concise Terms Says Second Department,” analyzed Gristede’s Operating Corp. v. Scarsdale Shopping Ctr. Assoc., LLC, 2019 N.Y. Slip Op. 07771 (2nd Dep’t October 30, 2019), in which the Second Department found that, inter alia, clear and unambiguous contracts will be interpreted according their terms.

The same analysis applies with respect to notice/termination provisions of construction contracts.  Thus, “[w]here a contract provides that a party must fulfill specific conditions precedent before it can terminate the agreement, those conditions are enforced as written and the party must comply with them.”  Summit Development Corp. v. Fownes, 74 A.D.3d 563 (1st Dep’t 2010) (citations and quotation marks omitted).  The Summit Court, in reaching its decision, indirectly relied upon the Court of Appeals’ decision in A. S. Rampell, Inc. v. Hyster Co., 3 N.Y.2d 369 (1957).  The Court in A. S. Rampell, adhering to the same principle, stated that “… where as here the parties have agreed to a termination clause, the clause has been enforced as written.  The parties assented to the terms of the contract when they entered into it, and no reason is now presented which justifies altering the clear provisions of the agreement.”  A. S. Rampell, 3 N.Y.2d at 382 (citations omitted).

“Furthermore, this general rule fully applies to construction agreements, whose parties cannot terminate contractors unless they follow the contractual procedures to the letter.”  Mike Building & Contracting, Inc. v. Just Homes, LLC, 27 Misc.3d 833, 843 (Sup. Ct. Kings Co. 2010) (citations and internal quotation marks omitted).  Similarly, the Court in MCK Building Assoc., Inc. v. St. Lawrence University, 301 A.D.2d 726 (3rd Dep’t 2003), in affirming the motion court’s grant of summary judgment in favor of the plaintiff, stated:

Initially, we agree with Supreme Court that the contract was wrongfully terminated for default. Notably, defendant’s contract termination letter not only cited defendant’s “lack of job performance” and “disregard of contractual obligations,” but specifically stated that it was terminating the contract pursuant to provisions of one of the contract documents that governs termination for default. Under these provisions, plaintiff was required to provide 10 days’ prior written notice of termination to defendant, its surety and the University. However, defendant’s termination letter indicated that the contract was terminated “as of this date” and defendant’s surety and the University were not given written notice of termination until several days later. Under these circumstances, it is clear that defendant’s termination of the contract was wrongful.

MCK Builders, 301 A.D.2d at 727 -28.

The Supreme Court of the State of New York, New York County, in East Empire Construction Inc. v. Borough Construction Group LLC, 2019 NY Slip Op 33284(U) (Sup. Ct. New York Co. November 1, 2019), recently revisited these issues.  A defendant in Borough, Borough Construction Group LLC (“Group”), retained plaintiff subcontractor (“East”) to perform work on a project.  A relevant provision of the subcontract provides:

if the Subcontractor defaults or neglects to carry out the Work in accordance with this Agreement and 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, by appropriate Modification, and without prejudice to any other remedy the Contractor may have, make good such deficiencies and may deduct the reasonable cost thereof from the payments then or thereafter due the Subcontractor.

The subcontract also provides that Group “may terminate it if plaintiff repeatedly fails or neglects to carry out its work 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….’”  Similarly, the “scope of work sheet, annexed to the subcontract, provides that if plaintiff fails to perform, plaintiff will be issued a seventy-two hour notice to cure, and if it fails to rectify and remedy the situation within that timeframe, the project’s owner will remove it from the project, and any costs and fees associated with its failure to perform will be back-charged and deducted from any monies owed to plaintiff.”

After some disputes about East’s work, Group sent a letter to East giving East “notice of termination and that the subcontract ‘will be terminated in three business days from the date of this letter ….”  While the parties attempted to resolve their differences and the termination notice was cancelled, an “identical notice of termination letter as before, and again directed plaintiff to cease all work at the site immediately.”

East sued Group alleging, among other things, that Group breached the subcontract by wrongfully terminating East, “failing to give [East] the opportunity to cure any alleged defects, and failing to pay [East].]  The East Court granted East’s motion for partial summary judgment as to liability and, in so doing, stated:

If a contract provides that a party must fulfill conditions precedent before it can terminate it, those conditions are enforceable and binding, and a party that fails to follow them may be held liable for breach of contract. (Black Riv. Plumbing, Heating & A. C., Inc. v Bd. of Educ. Thousand Is. Cent. Sch. Dist., 175 AD3d 1051 [4th Dept 2019]). Thus, in Black Riv. Plumbing, where the parties’ contract required defendants to give plaintiff seven days to cure any deficiencies before terminating the contract, and defendants failed to do so, the Court granted the plaintiffs motion for liability on its breach of contract claim.

*   *   *

Here, the parties’ subcontract and scope of work sheet require both written notice to plaintiff and an opportunity for it to cure any alleged defaults before the subcontract may be terminated. Even assuming that Borough’s 72-hour notice of termination was sufficient rather than the 10-day notice provided in the subcontract, the notice directed plaintiff to cease immediately all of its work on the project, thus failing to give it an opportunity to cure before the subcontract was terminated. Plaintiff thereby establishes, prima facie, that defendants breached their agreement by failing to comply with its proper termination provisions.

The East Court also found that because of Group’s breach of the subcontract by “fail[ing] to terminate the subcontract properly, [it is] barred from seeking an offset based on plaintiff’s alleged defaults, specifically, any expenses incurred by [Group] for finishing plaintiff’s work and other damages and costs and fees associated with plaintiff’s failure to perform, all of which depends on [Group’s] adherence to the notice, opportunity to cure and, termination procedures in the subcontract and scope of work sheet.”

The East Court also found that “[Group] failed to comply with section 3.4 of the subcontract, which requires five-days notice and an opportunity to cure before [Group] may correct plaintiff’s alleged deficiencies and ‘deduct the reasonable cost thereof’ from payments due plaintiff.”

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