Legal and Regulatory

The Cure for the Common Defect: The Contractor’s Right to Cure Defective Performance

The right to cure is found in most contracts and gives a contractor the chance to fix its mistakes. Contractors should insist on right to cure when negotiating contracts with owners.
By Luke J. Farley, Sr.
July 28, 2020
Topics
Legal and Regulatory

Everyone loves second chances—except maybe project owners. If a contractor’s work is defective, incomplete or behind schedule, owners are often quick to supplement the contractor’s forces or bring in a replacement contractor to address the problems or, in the worst of all scenarios, terminate the contract. Of course, the owner then seeks to back charge its costs to correct and complete the contractor’s work. But owners act rashly at their own risk.

Whether by the express terms of the contract or state law, most contractors have a “right to cure,” meaning that the contractor has a legal right to notice and a reasonable opportunity to fix defective work or get the project back on schedule before the owner can take over the work or terminate and hold the contractor responsible for the added costs. This right to cure means the owner itself will be in material breach of the contract if it does not first give the contractor a reasonable opportunity to correct the defective performance, whether that means getting the project back on schedule or tearing out and replacing defective work.

This article gives a brief overview of the right to cure across the country and provides some practical tips for dealing with cure notices. For the sake of simplicity, this article discusses the right to cure in the context of the owner-prime contractor relationship but beware that usually subcontractors also are entitled to an opportunity to cure to the same extent as prime contractors.

Why Have a Right to Cure?

The main rationale for a right to cure is simple: fairness. If the owner thinks a supposed breach is serious enough to supplement the contractor’s forces or, worse yet, terminate the agreement, then it only seems fair that the contractor should have a chance to correct the problem before the owner takes drastic action. Granting the contractor a right to cure also promotes economic efficiency. Because the contractor is already mobilized to the project site, there is usually no one who can correct a contractor’s mistakes more quickly or efficiently than the contractor itself. Giving the contractor an opportunity to cure, therefore, minimizes losses on both sides. Lastly, a right to cure encourages owners and contractors to resolve their disputes informally instead of declaring the contract terminated and rushing off to court. This helps reduce the burden on our court systems.

Cure Starts with the Contract

As with most questions about a contractor’s rights and obligations, the first place to look is the contract itself. These days, most commercial construction contracts include some right to cure before the owner can take action against the contractor. With one exception, each of the major standard form contracts in the industry includes a right to cure.

For instance, under Article 11 of the ConsensusDocs No. 200, the owner must give the contractor seven days written notice before the owner can terminate the contract for default. The notice must set forth “the nature of the default” and request “cure within seven calendar days from the date of the notice.” Section 3.9 of ConsensusDocs No. 200 also requires the owner to give the contractor written notice and a “reasonable time” to correct defective work discovered before substantial completion.

Similarly, Article 14 of American Institute of Architects document A201-2017 provides that, upon an event of default, the owner may terminate the contract after giving seven days’ written notice. While the A201 does not specifically mention the word “cure,” the notice requirement has been interpreted to mean written notice which invites the contractor to cure the defect, instead of merely apprising the contractor of the owner’s intention to terminate. The A201 gives some additional protection to the contractor by requiring the architect to certify that sufficient cause exists to terminate the contract.

The one major exception to receiving notice to cure is under the Federal Acquisition Regulation, the dense set of rules which supply the terms for federal construction contracts. Under FAR § 52.249-10 (Default (Fixed Price Construction)) the government may “by written notice to the Contractor, terminate the right to proceed with the work.” Contractors have argued that the “written notice” must include an opportunity to cure, but the courts have rejected this argument.

As a practical matter, a default termination by a government contracting officer without notice is rare. Since termination is a dramatic step that can also have serious consequences for the government, the FAR expresses a preference for notice of the “possibility of termination” if “practicable.” Instead of issuing a “notice to cure,” contracting officers will often issue a “show cause” notice to contractors as a warning that the government finds the contractor’s performance to be lacking. If a contractor receives a show cause notice on a federal project, it should be taken seriously.

Cure outside the Contract

Not all contracts contain cure provisions, especially smaller, custom-drafted agreements. Does this mean a contractor has no right to cure? Not at all. Under the law in most states, even if a contract does not include a specific provision addressing the right to cure, the law will treat the contract as if it contains a contractor’s right to cure. In states such as California, Indiana, Nebraska, New York and Tennessee, the courts treat all construction contracts as if they require the owner to give the contractor notice and an opportunity to cure, whether or not the contract language mentions curing defects; the right to cure is treated as an implied term.

A majority of states, including Arizona, California, Florida, Idaho, Texas and Washington, have also enacted “right to repair” laws that give a contractor a right to notice of defective work and/or an opportunity to repair the defective work before the owner can file a lawsuit.

Significantly, most of the statutes are limited to residential construction. Even so, the reach of these statutes is broader than it may seem at first: “Residential” construction can include condominiums and subdivisions, not just single-family homes, so tract builders and multi-family contractors may have an opportunity to take advantage of these laws. Additionally, the “right to repair” laws can apply not just to individual homeowners but homeowners’ associations too. HOAs drive a lot of construction defect litigation, so obligating an HOA to give notice and/or an opportunity to repair can be of significant benefit to a contractor.

While most states have some type of “right to repair” law on the books, beware that a significant minority do not, including, Massachusetts, New York, New Jersey, North Carolina and Pennsylvania. In these states, a contractor’s notice and opportunity to cure will depend on the terms of the parties’ contract and how the courts interpret those contracts.

Responding to a Notice to Cure

When an owner meets its obligation to give notice and an opportunity to cure, the burden then shifts to the contractor to respond appropriately. Failure to address a notice to cure has serious consequences as it will entitle the owner to either supplement the contractor’s forces, correct defective work or terminate the agreement. The contractor’s obligation to respond may be set forth in the contract itself. For instance, Article 11 of the ConsensusDocs No. 200 requires the contractor to respond to a notice to cure with “either (a) written evidence that the default has been cured or (b) a written plan demonstrating steps to be taken … to cure the default and accomplish completion of the work in accordance with the requirements of the Contract Documents and within established cost and schedule requirements.”

In other words, the contractor must demonstrate that the defect has been cured or provide a plan for how that will be achieved. Sometimes a contractor may dispute that a defect exists and that there is any need to cure. Alternatively, the contractor may take the position that the demand made by the owner is not a demand to cure but a request to perform extra work outside the scope of the original contract. In those instances, the contractor should respond in writing, carefully explaining why the contractor has satisfied the requirements of the contract documents and documenting the file in the event of wrongful supplementation or termination.

Limits on the Right to Cure

While the law generally protects a contractor’s right to notice and an opportunity to cure, the right is not absolute. Contractors should be aware that there are limited situations where a contractor is not entitled to notice to cure before the owner supplements or terminates.

First, an owner has no obligation to give a notice to cure where the right to cure has been waived by the contractor. Whether a contractor has waived the right to cure will depend on the specific facts of each case, but the clearest form of waiver occurs when the contractor enters into a contract with an owner that expressly allows the owner to supplement or terminate without notice. Courts will enforce these provisions. For instance, a Florida court interpreted the following language in a subcontract to mean that the subcontractor had waived the right to receive notice to cure before the contractor took over the work:

Contractor has the option, but not the obligation, to notify the Subcontractor that upon its failure to satisfactorily improve the rate of progress after forty-eight (48) hours’ notice, Contractor shall have the right to declare the Subcontract breached and take charge of and complete the performance of the WORK.

Similarly, a court in Indiana determined that a contractor waived the right to cure when the contractor’s proposal expressly reserved the right to cure, but the contractor then later accepted the owner’s purchase order that lacked a right to cure. In a federal case, the court concluded that a provision in the contract that allowed the owner to immediately terminate for fraudulent billings superseded the general provisions in the contract that required seven days written notice before termination.

Another important limitation on the right to cure is when the breach is not curable, or it would be futile for the owner to provide notice. Courts have routinely held that a notice to cure was not required where the contractor failed to meet the contract completion date and the time for completion had expired. Courts have also determined that where a contractor abandons the job, notice to cure is not required.

The right to cure, found in most contracts and recognized under the law of most states, prevents owners from acting rashly. Everyone is better served when a contractor is given the chance to fix its mistakes. Contractors should insist on the opportunity to cure their supposed defects when negotiating contracts with owners.

by Luke J. Farley, Sr.
The majority of Luke Farley’s practice is devoted to contract disputes, state and federal Miller Act claims, mechanics’ liens and OSHA citations. He also assists clients with contract negotiation and project-level advice. He is in the Raleigh, N.C. office of Ellis & Winters.

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