Show Cause Notices and Cure Notices

One of the problems with contracting is the same terminology can be used in different settings and have a different meaning. For example a court issued show cause notice requires the recipient to appear before the court and explain why a certain action should not be taken. In business companies may use a form of show cause notice to place employees or other parties on notice that there has been a performance problem or misconduct that needs to be corrected. In government contracting a show cause notice may be a precursor to terminating the agreement where they want the supplier to explain why they should not be terminated.

In most commercial contracts companies seldom use the concept of show cause notices. Instead if a party is in breach of the obligations under the agreement they will issue what’s called a cure notice. Most commercial contract termination for cause provisions requires several things prior to being able to terminate. First there must be a material breach of the agreement. In drafting this clause to avoid any misunderstanding, the parties may agree what specific terms, which breached, would constitute a material breach of the agreement. Second, the non-breaching party needs to provide notice to the breaching of the circumstances of the breach. That notice is called a “cure notice”, Third, the breaching party will have the right to remedy or “cure” the breach within the period of time specified in the termination for cause
section. If the breaching party cures the breach, the non-breaching party cannot terminate the agreement as the breach has been cured. If the breaching party fails to cure the breach, the non-breaching party has the right, but not the obligation, to terminate the agreement for cause.

That doesn’t mean that a show cause notice cannot be used in commercial contracting. In fact is could be a preliminary notice that could be used to notify the other party that is something isn’t corrected within a specific period, that you would take a certain action or exercise a specific right. An example of that will be in my next post called “Stopping Work for Non-Payment”.