It is well known that in business, including the construction business, the applicable contract governs the relationship between the parties. As the subject of negotiation, its specific terms should be familiar to all parties. Unfortunately, during the bustle of the project, some contractual provisions, including notice provisions and right to cure provisions, fall by the wayside. While, the majority of the time, these missed provisions end up being inconsequential (because the parties make their way past the issues and deal with them at the end of the job), an appellate court, in East Empire Construction, Inc. v Borough Construction Group LLC, reminds us of the importance of complying with these provisions so that any subsequent actions, such as a termination, will be valid.
In 2015, Borough Construction Group, a general contractor, entered into a subcontract with East Empire Construction whereby East Empire was to perform the steel scope of work for the construction of a building in Columbus Circle in Manhattan. The relevant contract, which was an AIA A401/201 form of contract, contained a provision permitting Borough to undertake to correct East Empire’s defective work if East Empire failed to do so itself within five days of receiving notice of such defective work. Another provision of the contract required Borough to provide East Empire with a 10 day period within which to cure any defect as a condition precedent to termination.
In May of 2016, Borough sent East Empire a notice of termination, stating that the subcontract would be terminated three days from the date of the letter, claiming that East Empire was in default by “failing to provide sufficient manpower  [and] failing to meet the schedule, safety regulations and qualified workmanship” for the project. The parties discussed these issues and, after negotiations, Borough withdrew its termination letter. One week later, Borough sent East Empire an identical notice of termination, and subsequently retained a new steel contractor to complete East Empire’s scope of work.
In November of 2016, East Empire sued Borough for breach of contract, alleging that Borough breached the contract by improperly terminating East Empire’s subcontract, and seeking the monies for which it had invoiced up until the termination. Borough denied the allegations in the complaint, and asserted East Empire’s claimed breaches of the subcontract as a defense to payment. East Empire moved for summary judgment in its favor on its breach of contract claim, and dismissing Borough’s affirmative defense, on the grounds that Borough denied it of its contractual opportunity to cure the claimed defects. In opposition, Borough argued that East Empire’s acts of default were persistent and incurable.
The motion court granted East Empire’s motion, and found that by failing to give East Empire the opportunity to cure provided for in the subcontract, Borough’s second attempt at termination was improper and, itself, constituted a breach of that contract. The appellate court affirmed, addressing not only the clear lack of the contractually required cure period, but also the limited exceptions to this requirement. The appellate court discussed that while such a notice to cure need not be given where: the terminated party repudiates its performance; the terminated party abandons the project; the breach is impossible to cure; or the breach is so substantial that it undermines the entire contractual relationship such that it cannot be cured, the exceptions are of very limited scope, and none applied here. In doing so, the appellate court cited well settled law in holding that the defaults complained of, mere faulty steelwork and failing to meet the schedule, was “the very situation to which the cure provision was intended to apply”.
Notice and opportunity to cure provisions, like other contractual provisions, must—absent extraordinary circumstances—be strictly complied with. Typically, arguments that extraordinary circumstances apply are made not when there are such extraordinary circumstances, but when the notice and cure provisions are overlooked (or, in a haste to remove a contractor from a project, simply not complied with). East Empire highlights how a subcontractor in default was able to completely turn the tables on the general contractor and not only avoid the consequences of its own default (being backcharged for the excess cost incurred by the general contractor to complete its work), but also have an affirmative recovery and get paid for its (claimed defective) work. While the reflexive statement to a contractor in default is to “get off of my jobsite”, contractors would be well advised to review their contracts to see if there are notice and cure provisions, and strictly comply with them. Surely, the offense at having the contractor around for an extra few days while he tries to remedy a default is not as grievous as having to not only forego a backcharge for excess completion costs, but also actually writing that contractor a check for work you believe is defective. If you have any questions as to whether such an exception applies, experienced construction counsel can help.
About the author: Thomas H. Welby, an attorney and licensed professional engineer, is General Counsel to the Construction Industry Council of Westchester and the Hudson Valley, and is the Founder of, and Senior Counsel to the law firm of Welby, Brady & Greenblatt, LLP, with offices located throughout the Tri-State/Greater Metropolitan Region. Gregory J. Spaun, General Counsel to the Queens and Bronx Building Association, and an attorney and a partner with the firm, co-authors this series with Mr. Welby.