Eighth Circuit Concludes No Liability Against Surety When Claim Against Principal Fails

04.30.2019

CASE SUMMARY:
The United States Court of Appeals for the Eighth Circuit recently held that in cases involving “complicated technical and scientific issues ... expert testimony is required to submit the issue of a product defect under Iowa law.” Iowa Great Lakes Sanitary Dist. v. Travelers Cas. & Sur. Co. of Am., 913 F.3d 760 (8th Cir. 2019). Moreover, the case is significant because the Plaintiff’s failure to prove up its case against the contractor resulted in judgment for the surety. The case arose from a summary judgment ruling from the United States District Court for the Northern District of Iowa. Iowa law applied to the dispute.

FACTS:
Iowa Great Lakes Sanitary District (“IGLSD”) entered a contract with a construction company in 2007 for a wastewater treatment facility. The project including the installation of a UV System to kill bacteria in the wastewater.

To guarantee performance under the contract, the company obtained a Performance and Maintenance Bond (“Bond”) from Travelers. The company then purchased the UV System from Evoqua. The purchase agreement for the UV System was accompanied by a two-year limited warranty, guaranteeing the system was free of “defects in workmanship and material.” This two-year warranty was to begin once the system successfully passed a sixty-day performance test. Due to a default by the company, Travelers agreed to take over and complete the project under the terms of the contract and the Performance Bond. Although there were additional delays in the completion of the project by Travelers, IGLSD’s project engineer deemed the installation of the system to be “substantially completed” on November 8, 2011, after successfully passing the performance test. The warranty period was to begin November 1, 2011.

Despite its finding of “substantial completion”, IGLSD claimed the system was defective and “often nonoperational.” IGLSD based such warranty claims on several incidents, such as an electrical fire damaging one of the modules in June of 2012, and the system malfunctioning in May of 2013. In July of 2013, IGLSD’s engineer informed Travelers of numerous issues with the system needing repair. The engineer further expressed concerns that Evoqua had not supported the system. Consequently, the engineer noted the two-year warranty’s expiration date and asked Travelers to “develop a plan to repair/replace the equipment by the end of the Warranty date.”

In response, Evoqua assessed the equipment in September of 2013 and in April of 2014 proposed the UV systems “undergo a substantial rehab” with costs being split by both Evoqua and IGLSD. In May of 2014, IGLSD responded they did not wish to “go any further to repair the failed equipment” and asked that the system be removed and the initial cost of the system refunded.

PROCEDURAL HISTORY AND COURT RULINGS:

IGLSD brought a breach of warranty claim against Evoqua and a claim against Travelers under the Bond. The district court granted summary judgment against IGLSD. The judgment was based on an earlier order which prohibited IGLSD from an offer of expert testimony, to prove the defects in the UV System, due to IGLSD’s failure to comply with court deadlines. The court also ruled that IGLSD failed to respond to “Statements of Undisputed Facts” by Evoqua and Travelers, in violation of a local court rule. Thus, these statements were deemed to be admitted by IGLSD. These rulings were not challenged by IGLSD on appeal.

Rather, IGLSD claimed on appeal that the court should have allowed them to prove defects in the system and show that Evoqua breached their two-year express warranty for the UV System by lay testimony that “the UV equipment failed to function frequently and in so many ways that it clearly was defective.” IGLSD further argued that their claim against Travelers should not depend on their claim against Evoqua. Finally, IGLSD argued their demand for a refund was, nonetheless, justified under the contract.

ANALYSIS:
To determine whether IGLSD could use lay witnesses, the court noted a breach of warranty claim “requires proof of a product defect” and that summary judgment is mandated “against a party who fails to make a showing sufficient to establish the existence of an element essential to that party’s case.” The lower court held that in cases involving “complicated technical and scientific issues ... expert testimony is required to submit the issue of a product defect under Iowa law.” When there is a “fact issue upon which the jury needs assistance to reach an intelligent or correct decision”, such as in this case, expert testimony is required. Accordingly, due to the earlier rulings prohibiting expert testimony on behalf of IGLSD, the district court held IGLSD could not prove the indispensable element of its breach of warranty claim that the system was defective, because the issue involved “sophisticated technology” that is “far beyond the common knowledge and experience of the average layperson”. Thus, a lay person could not testify as to the defects in the system.

In affirming the district court’s dismissal of IGLSD’s claim against Evoqua, the appellate court held that, when viewed in a light most favorable to IGLSD, the record did in fact show the system often malfunctioned. However, without expert testimony, IGLSD could not establish that such malfunctions were “caused by equipment defects that breached the express warranty.” The court further reasoned that “buyer’s remorse” was not proof the equipment had defects in workmanship and materials. Further, IGLSD did not allow Evoqua to repair such equipment. Again, the lower court held that IGLSD’s refusal could only be justified by expert testimony.

The appellate court also affirmed the district court’s decision to dismiss IGLSD’s claim against Travelers under the Performance Bond. The lower court held that, had IGLSD been successful in their claim against Evoqua, Travelers would have been required to correct, repair, or replace the defective work. Yet, because IGLSD’s claim against Evoqua failed, so did their claim against Travelers.

Finally, the appellate court reasoned that the general rule as to known defects is that “acceptance of the work in the absence of fraud or mistake is a complete bar to recovery on the construction bond.”

Contact John F. Fatino for more information about construction and surety matters at 515-288-6041. Jennifer Chavez-Rivera, J.D. candidate, Drake University Law School assisted in the preparation of these materials.

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