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‘Incompetence’ Is Not Material: Contractor’s Defective Performance Doesn’t Excuse Owner’s Noncompliance With Pre-Termination Notice to Cure

In a recent Pennsylvania federal court decision, a surety in a construction dispute was found to be protected by a 30-day notice-to-cure provision in its principal’s construction contract, resulting in the dismissal of the owner’s claim against the surety. 

The underlying construction project in Milton Regional Sewer Authority v. Travelers Cas. & Sur. Co. of Am. involved the demolition of a wastewater treatment pump station and the construction and rehabilitation of associated sewer pipe. The owner, the Milton Regional Sewer Authority (MRSA), engaged Ankiewicz Enterprises, Inc. to serve as the contractor. Travelers provided a performance bond on the project. The underlying construction contract provided that, prior to a declaration of default and termination, MRSA had to provide the contractor with 30 days notice and an opportunity to cure.

Several months into the project, MRSA’s engineer sent a letter notifying Ankiewicz of numerous deficiencies in its performance and of MRSA’s intent to declare Ankiewicz in default. Four days later, Ankiewicz responded in writing to the engineer, assuring the Authority of its willingness to cure—which, per the contract, it had 30 days to attempt to do. However, before the 30-day cure period had elapsed, the engineer sent a letter to Ankiewicz, copying Travelers, advising that the Authority had elected to exercise its rights under the contract and the bond and that it was declaring Ankiewicz in default and was terminating the contract for cause.

When Travelers refused to assume liability for Ankiewicz’s defective performance, MRSA filed suit. Travelers filed a motion to dismiss, arguing that because MRSA had not complied with the notice and cure provision in the contract, Travelers’ obligations under the bond were not triggered. In response, MRSA argued that Ankiewicz’s breaches of the contract were so material that MRSA’s failure to comply with the cure provision was justified. To support its argument of materiality, MRSA delineated 27 ways in which Ankiewicz was purportedly in material breach—including by failing to supply sufficient skilled workers, adhere to progress schedule, meet various project milestone, and coordinate road closures and provide traffic maintenance, among other things.

The court disagreed that these defects in performance—even if true—were material. Instead, it appeared to the court that MRSA was merely “exasperated” with Ankiewicz’s “perceived incompetence.” To the court, Ankiewicz’s failings, as alleged by MRSA, were best characterized as simply the poor performance of the contract, and “precisely within the contemplation of the cure provision in the contract.”

Thus, the allegations did not describe an egregious or “incurable” breach (such as a quasi-criminal fraud outside the contemplation of the contract) necessary to excuse an owner from allowing a contractor the contractually mandated opportunity to cure.

This decision has been appealed, but for now, the case underscores the basic and fundamental principle that courts will hold parties to the terms of the bargains they negotiated. It pays to know, understand and adhere closely to those terms—especially where payment and performance obligations may hang in the balance.

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