Notice of Default and Opportunity to Cure: Considerations and Limitations to Examine When a Contracting Party Fails to Uphold Its Part of the Contract
March 22, 2021
The opportunity to cure is probably the most important consideration to make when faced with a contracting party whose performance has been unsatisfactory.
The legal right to cure is a principle founded in contract law that allows one party in a contract, who has defaulted under a contract provision, to remedy their default by taking steps to ensure compliance or otherwise, cure the default. The default can occur in a variety of commercial settings, from repayment of loans to performing under a construction contract. The loan repayment scenario provides a good illustration. X borrows money from Y and agrees to repay Y in monthly payments until the loan is repaid. X fails to make a monthly payment. In this instance Y must provide X with notice of the nonpayment and time to cure the default before holding X liable for damages.
In the construction context, owners (or upstream contractors) are often quick to supplement a contractor’s forces or bring in a replacement contractor when they feel a contractor’s work is defective, incomplete or behind schedule. The owner or contractor will then seek to back charge its costs to correct and complete the contractor’s work. Oftentimes the relationship has deteriorated to the point where an exasperated owner or contractor will terminate or supplement immediately. However, a rash decision is almost certain to backfire, because the failure to comply with applicable notice and cure provisions in a contract bars recovery on a claim based upon allegations of another’s nonperformance, Northeast Constr. Group, Inc. v Deconstruction, Inc., 16 AD3d 357, 793 NYS2d 17 (2005).
Most any construction contract will include an express obligation for the non-defaulting party to provide the defaulting party with notice of the default and opportunity to cure. The principle is so ingrained in New York law that even in the absence of an express provision a contractor has an implied right to cure its own default. This means the non-defaulting party will ultimately be found in material breach, if it does not first give the contractor a reasonable opportunity to correct the defective performance.
The rationale behind the right to cure is a mix of fairness and the courts collective frowning on termination of contracts in general. Most “defaults” in the construction context are curable, and damages are available to make a party whole. What’s more only a material breach allows the non-defaulting party to supplement or terminate a contract. If a party thinks an alleged breach is serious enough to supplement the contractor’s forces or, worse yet, terminate the agreement, then in fairness the contractor should have a chance to correct the problem before the owner takes drastic action. This also encourages parties to resolve their disputes informally instead of declaring the contract terminated and rushing off to court, which in turn reduces the burden on the court systems.
At its most basic, a notice to cure must be specific enough to give the other party a reasonable opportunity to cure the alleged breach, Ulla-Maija, Inc. v. Kivimaki, 2005 WL 2429490, at *4 (S.D.N.Y. 2005). It’s not enough to recite conclusory allegations of nonperformance by simply regurgitating language contained in the general conditions. For example, an owner’s termination letter merely stating: “pursuant to Section 14.2 of the contract…we hereby give notice of termination of your services effective (7) seven days from receipt of this letter” will not suffice, and the owner will be barred from recovering its damages in completing the contract, Mike Building and Contracting, Inc. v. Just Homes, LLC, 27 Misc.3d 833 (NY Sup., 2010).
Once the proper notice is given the defaulting party must act to effect the cure within the time provided. Where a default is not capable of cure within the time provided (i.e. a three day notice) the defaulting party must begin and continue reasonable efforts to cure within the time allotted. Keep in mind, a notice to cure does not survive the other party’s performance, that is once the cure is “accepted” either expressly or impliedly, a new material breach requires a new notice of default and opportunity to cure.
There are limits to the right to cure. For instance, the right can be waived by contract. In addition there can be instances where a default may not be curable, or the notice would be futile. These situations typically involve fraud or deceit on the part of the defaulting party, or where a party abandons the project altogether. However it is always better to err on the side of caution and provide a notice of default and opportunity to cure before supplementing or terminating any contract.
Daniel P. Adams, a founding partner of Adams Leclair LLP, practices in construction law, contracts and commercial litigation.