Third Circuit Affirms District Court Ruling Poor Performance is Not Severe Enough to Circumvent Right-to-Cure Provision in Employment Contract

In Milton Reg’l Sewer Auth. v. Travelers Cas. & Sur. Co. of Am., 648 Fed.Appx. 215 (3rd Cir. 2016) the Third Circuit Court of Appeals found that Pennsylvania contract law requires a more severe breach before contracting parties may violate a right-to-cure provision in a contract. Appellant Milton Regional Sewer Authority (“Milton”), a municipal authority, entered into a contract with Appellee Travelers Casualty and Surety Company of America (“Travelers”), a construction company, for a public works project. The contract contained a right-to-cure provision that states “[Travelers’] services will not be terminated if [Travelers] begins within seven days of receipt of notice of intent to terminate to correct its failure to perform and proceeds diligently to cure such failure within no more than 30 days of receipt of said notice.” In other words, before Milton could terminate the contract, it was required to give Travelers 30 days to fix whatever problem had arisen.

After the contract was finalized, Travelers began working on the project. Milton quickly became unsatisfied with the work being done and proceeded to send a letter to Travelers ordering it to suspend work. Travelers offered to correct the work in their response but Milton rejected and terminated the contract without giving Travelers an opportunity to fix its allegedly defective work. Following the termination of the contract, Milton hired another construction company to complete the project. Milton filed a complaint for additional costs incurred as a result of the termination.

The Court of Appeals for the Third Circuit began their analysis by stating “Pennsylvania follows the general rule of contract law that ‘a material breach of a contract relieves the non-breaching party from any continuing duty of performance thereunder.’” Such a contract may only be terminated without providing an opportunity to cure when there is a material breach of the contract so serious it goes directly to the heart and essence of the contract, rendering the breach incurable. The breach must be so severe that requiring notice before termination would be a useless gesture. The Court said a “typical example of a breach that goes directly to the essence of a contract is fraud.” Milton in this case alleged various deficiencies in the work performed by Travelers which, taken together, amount to an allegation that Travelers performed poorly. The Court found that “unlike fraud, poor performance is not incurable” and Travelers was eager to cure its deficiencies if given the chance. Lastly, the Court points out that “Pennsylvania contract law, therefore, requires a more severe breach before contracting parties may violate right to cure provisions.” Thus, Milton’s conduct in terminating Travelers amounted to wrongful termination and an ineffective exercise of contract rights.

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