In Dave’s Excavating, Inc. and Liberty Mutual Insurance Co. v. City of New Castle, Indiana, the Indiana Court of Appeals affirmed a $900,000 judgment against a contractor and surety arising out of the contractor’s differing site conditions claim. The decision is a cautionary tale warning that a contractor’s refusal to perform disputed work may have catastrophic consequences.
Facts: Dave’s Excavating (“Contractor”) contracted to perform work on a sanitation project for New Castle (“City”). Liberty Mutual (“Surety”) posted the statutorily-required payment and performance bonds. During work on the project, Contractor submitted a differing site conditions claim and stopped work: The contract stipulated that “Contractor shall not further disturb such condition or perform any Work in connection therewith . . . until receipt of written order to do so.”
The contract also contained a clause obligating Contractor to continue performance during a dispute:
4.03.A. Contractor shall carry on the Work and adhere to the progress schedule during all disputes or disagreements with Owner. No Work shall be delayed or postponed pending resolution of any disputes or disagreements except as permitted by [the contract] or as Owner and Contractor may otherwise agree in writing.
Relying on that clause, City directed Contractor to resume its work. When Contractor refused, City terminated it, made a demand upon Surety under Contractor’s performance bond, and hired a replacement contractor.
The trial court awarded City $900,000 in damages and attorneys’ fees, and Contractor and Surety appealed. The Court of Appeals affirmed the award.
First, the Court of Appeals agreed that Contractor had breached the contract. It noted: “In sum, [Contractor’s] refusal to return to work when directed to do so constituted a breach of 4.03.A of the construction contract.”
Second, the Court of Appeals rejected Surety’s argument that City had “usurped [Surety’s] right to mitigate its damages” by hiring a replacement contractor. Because of statutory requirements for installing utilities after an annexation, City had declared the project an emergency and notified Surety of its intent to promptly hire a replacement contractor. Surety’s letter acknowledging City’s bond claim instructed City of its obligation to mitigate its damages–standard language in a surety’s acknowledgment. The Court sanctioned City’s hiring of a replacement contractor for that reason: “By hiring a replacement contractor, [City] worked to mitigate its damages–as instructed in [Surety’s letter]–and in fact hired a contractor that worked faster than [Contractor] had and completed the Project ahead of schedule.”