Earlier this year, the Indiana Court of Appeals issued an important opinion that impacts contractors and sureties alike. The decision should give contractors in Indiana pause before ceasing work while a dispute with the owner is pending. Sureties also have been placed on notice that strict compliance with the terms of their bonds is amongst their best defenses to claims made by owners and bond claimants.

In Dave's Excavating, Inc. and Liberty Mutual Insurance Co. v. City of New Castle, Indiana, 959 N.E.2d 369 (Ind. Ct. App. 2012), the contractor (“Dave’s”) was the successful bidder on a public sanitary sewer and water main extension project. Dave's procured a performance bond from Liberty Mutual to guarantee its performance obligations to the owner (the "City"). After encountering what it deemed different subsurface conditions—and indeed after having been previously granted a change order to use excavated materials as backfill in light of the subsurface conditions on site—Dave’s placed the project engineer on notice of a differing site conditions claim. The total claim amounted to an 84% increase in the total contract price. With the claim, Dave's advised the project engineer it was ceasing further work until the project engineer provided direction.

While the project engineer reviewed the claim, it reminded Dave's of its contractual obligation to "carry on the work and adhere to the progress schedule during all disputes or disagreements with the OWNER." A dispute immediately occurred regarding whether Dave's was required to continue to work while the project engineer resolved the differing site condition claim. After Dave's maintained its position that it was not required to continue to work, the project engineer placed it on notice of default and copied the letter to Liberty Mutual. The City then solicited bids from completion contractors and included in the bid documents the following: "[S]and and gravel is anticipated in the project." Interestingly, this same disclosure was not included in the original bid documents. And the engineer’s estimate for the completion work also included pricing for the unexpected conditions Dave's had previously encountered.

In response to the notice of termination, Liberty Mutual advised the City in writing on August 10th that it was investigating the claim against the performance bond under a reservation of rights. On August 31st, the City wrote to Liberty Mutual advising the surety that it was required to act with reasonable promptness pursuant to the bond. After the City engaged a completion contractor, and after the work was finished, it provided written demand to Liberty Mutual for payment under the performance bond. After cross motions for summary judgment were filed, the trial court granted the City's motion, denied Dave's and Liberty Mutual's motions, and entered judgment in the City's favor in the amount of $908,541.77.

On appeal, Dave's and Liberty Mutual argued that genuine issues of material fact existed regarding the scope of work as a result of the differing site conditions encountered. They relied primarily on the fact that the City disclosed the sand and gravel to the completion contractors but not in the original bid documents. The Court of Appeals was not persuaded, relying upon the fact that the original contract documents required Dave's as the earthwork contractor to acknowledge that it was familiar with the conditions on site that would affect its work. The Court of Appeals also held that Dave's had breached the contract by not continuing to perform pending the project engineer's review of its claim. In so ruling, the Court relied upon the fact that the project engineer ultimately ruled that the subsurface conditions actually encountered did not differ materially from the conditions ordinarily encountered, and which could have been discovered with reasonable inspection by Dave's.

Finally, the Court held that summary judgment in the City's favor against Liberty Mutual was proper. Liberty Mutual argued that it could not be liable under the performance bond because the City "usurped its right to mitigate" by soliciting completion contractors on its own. In ruling against the surety, the Court determined that Liberty Mutual failed to act promptly under the bond and could not be heard to argue about the City's efforts to complete. Notably, Liberty Mutual never provided the City with the results of its investigation, nor did it deny liability before suit was filed.

The Dave's Excavating decision sounds as a warning to contractors and sureties alike. The contract documents included the age-old requirement that Dave's as the contractor become generally familiar with the site conditions affecting its work. And this requirement served at least in part to bar Dave's assertion of a differing site condition claim. A contractor should proceed with caution in choosing to not continue with the work in the face of a dispute with the owner, particularly where the contract requires continued performance. Sureties also should carefully document their reservation of rights throughout the claims process and be prepared to act promptly in investigating and resolving claims.

Source: Oncite Newsletter