In a recent Indiana case, a municipal project owner recovered under a performance bond after a sewer contractor breached a “differing subsurface conditions” provision in a construction contract. 

In Dave’s Excavating, Inc. v. City of New Castle, 959 N.E.2d 369 (Ind. Ct. App. 2012), the City undertook a sewer and water main extension project. Bidders were told that the engineer’s estimated cost was approximately $1.3 million. The low bid was approximately $984,000.  After work on the project began, the contractor requested change orders, and then issued a letter to the engineer invoking the “differing subsurface conditions” provision in the contract, stating that work would stop pending direction from the engineer. The contractor requested a price increase to over $1.8 million. The engineer instructed the contractor to continue working while the claim was reviewed, but the contractor asserted that it was not possible to resume work until the differing condition issue was resolved. The City gave notice to the performance bond surety that the City was considering declaring a default, but the surety did not take action in response to the notice within the time period required by the bond. The City ultimately declared the contractor in default, sending a copy of the termination notice to the surety. 

The City hired a completion contractor at a cost of $1.215 million, and the project was completed more than five months ahead of schedule. The City then sued the contractor and surety for the amount paid in excess of the balance of the original contract, and recovered a summary judgment for over $908,000. Upon appeal by the surety, the judgment was affirmed. The court agreed that the contractor’s refusal to return to work was a breach of contract. The court rejected the surety’s argument that differences in bid documents given to completion contractors as compared to those given to original bidders created an issue of material fact. Under the contract, the contractor agreed that it was fully informed of the conditions that could affect work on the project. The surety did not act promptly, as required, to assert its rights under the bond, and the owner mitigated its damages by hiring a completion contractor. Accordingly, the surety was liable to the owner under the terms of the bond.