U.S. Court of Appeals for the Third Circuit

PHILADELPHIA -- The U.S. Court of Appeals for the Third Circuit ruled Thursday that Travelers Casualty & Surety Co. of America overcame an appeal from the Milton Regional Sewer Authority in a breach of contract lawsuit.

Judge Anthony J. Scirica authored an opinion on behalf of himself and fellow judges Joseph A. Greenaway Jr. and Jane R. Roth, explaining the right-to-cure provision of a contract between Milton and Travelers was not followed, and Milton had no right under state law to violate that same right-to-cure provision.

On July 25, 2011, Milton entered into a construction contract with Ankiewicz Enterprises for a public works project, which was secured by a performance bond issued by Travelers.

Milton’s contract with Ankiewicz contains several provisions specifying when and how Milton could terminate the contract. Specifically, the portion relevant to the instant appeal is commonly referred to as a “right-to-cure” provision.

Such a provision states: “[Ankiewicz’s] services will not be terminated if [Ankiewicz] 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.”

The bond also contained a provision stating no obligation could arise for Travelers if Milton failed to comply with the terms of its contract with Ankiewicz, including the right-to-cure provision.

After the paperwork was finalized, Ankiewicz began working on the project to the dissatisfaction of Milton shortly thereafter, according to the lawsuit. On Feb. 20, 2012, Milton sent a letter to Ankiewicz ordering it to suspend work on the project, while Ankiewicz responded four days later, on Feb. 24, offering to correct any failures in the work it had performed.

On Feb. 28, Milton rejected the offer, prohibiting Ankiewicz from performing any more work under the contract. After a subsequent meeting, Milton terminated the contract without affording Ankiewicz an opportunity to fix its allegedly defective work.

Milton then hired another construction firm to complete the project, incurring additional costs as a result. Milton asserted a bond claim against Travelers for these additional costs, and after Travelers refused to reimburse, Milton filed a complaint in state court. Travelers removed the case to federal court, and moved to dismiss the complaint.

Scirica said, “The District Court granted Travelers’ motion to dismiss. Its opinion included two separate holdings. First, the court held Milton did not follow the right-to-cure provision of the contract. That holding is not on appeal. Second, the court held Milton had no valid reason under Pennsylvania law to violate the right-to-cure provision. It acknowledged Pennsylvania allows parties to violate right-to-cure provisions in cases of an extreme breach.”

Scirica added the district court decided Milton “failed to plead that Ankiewicz materially breached the contract such that the material breach would excuse [Milton] from complying with the contractually agreed to termination procedures.”

Since Milton “failed to comply with the terms of the contract, Travelers’ obligation under the bond was not triggered, and the complaint against Travelers was dismissed with prejudice,” the judge said.

“The Supreme Court of Pennsylvania… recognized that, when one contracting party defrauds the other, the breach ‘is so fundamentally destructive, it understandably and inevitably causes the trust which is the bedrock foundation and veritable lifeblood of the parties’ contractual relationship to essentially evaporate.’ Thus, there is no need to allow for a right to cure in such instances,” Scirica wrote.

Scirica pointed out Milton’s complaint does not allege a breach of that severity, merely a poor performance on the part of Ankiewicz.

“Unlike fraud, poor performance is not incurable. In fact, Ankiewicz demonstrated its willingness to cure its deficiencies if given the chance, and Milton admits another party was able to complete the project,” he wrote.

Scirica reiterated the intent of right-to-cure provisions being to give contractors the opportunity to correct unsatisfactory work before their contracts are terminated, and Pennsylvania law requires “a more severe breach” before a contract’s parties could violate right-to-cure provisions.

“Because Milton’s complaint does not allege such a breach, the District Court correctly held it had no valid reason to violate the right-to-cure provision of its contract. Accordingly, Travelers’ obligation under the bond was not triggered, and the complaint against it was properly dismissed,” the judge wrote.

The appellant is represented by Preston L. Davis of Davis Davis & Kaar in Milton.

The appellee is represented by L. John Vassalotti, Patrick R. Kingsley and Benjamin E. Gordon of Stradley Ronon Stevens & Young in Philadelphia.

U.S. Court of Appeals for the Third Circuit case 14-4575

U.S. District Court for the Middle District of Pennsylvania case 4:13-cv-02786

From the Pennsylvania Record: Reach Courts Reporter Nicholas Malfitano at nickpennrecord@gmail.com.

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