Milton Reg’l Sewer Auth. v. Travelers Casualty & Surety Co., 2014 U.S. Dist. LEXIS 155419 (M.D. Pa. Nov. 3, 2014)

The United States District Court for the Middle District of Pennsylvania ruled that multiple instances of incomplete and/or defective performance by a contractor did not amount to a material breach so as to excuse the owner from providing notice and an opportunity to cure prior to termination.

This dispute arose after an owner, the Milton Regional Sewer Authority (“MRSA”), terminated its contract with Ankiewicz Enterprises, Inc. (“Ankiewicz”) for the construction and renovation of the Brown Avenue Pump Station.  Following the termination, MRSA filed a complaint against Ankiewicz’s surety, Travelers Casualty & Surety Co. (“Travelers”), alleging that Travelers was liable for Ankiewicz’s failure to properly perform its work under the terminated contract.  Shortly thereafter, Travelers filed a motion to dismiss asserting that MRSA, contrary to the requirements of the contract and the bond, failed to provide Ankiewicz with an opportunity to cure its deficiencies prior to terminating the contract, and therefore MRSA failed satisfy the conditions precedent to proper termination and a claim upon the bond.

In response to Travelers’ motion to dismiss, citing the Pennsylvania Supreme Court’s decision in LJL Transportation Inc. v. Pilot Air Freight Corp., 599 Pa. 546 (2009), MRSA argued that it was excused from following the cure provision because Ankiewicz materially breached the contract.  Indeed, under the holding of LJL Transportation, it is the law in Pennsylvania that “when there is a breach of contract going directly to the essence of the contract, which is so exceedingly grave as to irreparably damage the trust between the contracting parties, the non-breaching party may terminate the contract without notice, absent explicit contractual provisions to the contrary.”  However, because MRSA’s original complaint only vaguely alleged “numerous deficiencies” in Ankiewicz’s work, the Court ordered MRSA to file an amended complaint setting forth facts to substantiate its claim that Ankiewicz materially breached the contract.

In accordance with the Court’s order, MRSA filed an amended complaint, which contained twenty-seven (27) separate factual allegations in support of MRSA’s assertion that  Ankiewicz materially breached the contract.  MRSA pled, among other things, that Ankiewicz failed to supply a sufficient number of skilled workers, failed to adhere to the project schedule, failed to comply with applicable laws and regulations, failed to properly perform its work, and damaged existing work.  The Court, however, concluded that these acts and omissions did not amount to a material breach.  The Court noted that in LJL Transportation, the defendant, a franchisee, intentionally diverted business away from the plaintiff, the franchisor, and steered it to the franchisor’s competitor, which was also owned by the defendant.  The Court found that the LJL Transportation defendant’s conduct was egregious and “quite distinct” from the types of breaches alleged by MRSA.  The Court found that the breaches alleged by MRSA, on the other hand, amounted to “poor performance of the contract, which is precisely within the contemplation of the cure provision in the contract.”

Therefore, the Court concluded that while Ankiewicz “probably breached the contract”, it did not materially breach the contract.  Thus, MRSA was not excused from providing Ankiewicz  with the contractually required opportunity to cure.  And since MRSA had already been given two opportunities to demonstrate a material breach, but it failed both times, the Court found that it would be futile to give MRSA another opportunity to amend its complaint.  As a consequence, the Court dismissed MRSA’s complaint against Travelers.

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