Trustees of Indiana University v. Aetna Cas. & Sur. Co.

• Decision Date: 11 December 1990
• Docket Number: No. 89-2914,89-2914
• Citation: 920 F.2d 429
• Parties: 64 Ed. Law Rep. 680 The TRUSTEES OF INDIANA UNIVERSITY, Plaintiff-Appellant, v. The AETNA CASUALTY & SURETY COMPANY, Defendant-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 429

920 F.2d 429

64 Ed. Law Rep. 680

The TRUSTEES OF INDIANA UNIVERSITY, Plaintiff-Appellant, v. The AETNA CASUALTY & SURETY COMPANY, Defendant-Appellee.

No. 89-2914.

United States Court of Appeals Seventh Circuit.

Argued Feb. 22, 1990.

Decided Dec. 11, 1990.

Brent D. Taylor, Terrill D. Albright, David K. Herzog, Baker & Daniels, Indianapolis, Ind., for plaintiff-appellant.

Julia M. Blackwell, Hugh E. Reynolds, Jr., Richard A. Huser, Locke, Reynolds, Boyd & Weisell, Robert A. Kelso, New Albany, Ind., for defendant-appellee.

Before BAUER, Chief Judge, CUMMINGS, Circuit Judge, and PELL, Senior Circuit Judge.

BAUER, Chief Judge.

Before us is the appeal of the Trustees of the Indiana University ("I.U.") from a jury verdict and judgment in a diversity suit for breach of contract. I.U. sued The Aetna Casualty & Surety Company ("Aetna") over the deterioration of exterior facing bricks in four buildings at I.U.'s Southeast Regional Campus. Aetna was the surety for Mid Republic Construction Company ("Mid Republic"), the contractor that began the construction of the buildings in question. Aetna also became the assignee of Mid Republic's contract and completed performance of the contracts through another construction company.

I.U. charges error in the district court's denial of its motion for partial summary judgment as to Aetna's warranty liability. I.U. also charges error in several of the court's jury instructions. We affirm the district court in all respects.

I

In March, 1971, and April, 1972, I.U. contracted with Mid Republic for the construction of four buildings for I.U.'s Southeast Regional Campus in New Albany, Indiana. (The 1971 contract encompassed three of the buildings, and the 1972 contract the fourth.) Years earlier, I.U. had entered into a relationship with the firm of Applegate, Oakes, Ritz, Eby, Walker, Galbreath & Leach ("Walker Applegate") to provide architectural, engineering and landscaping services regarding the regional campus construction. Walker Applegate worked with I.U.'s in-house staff architects in the preparation and review of construction contracts and bids. As we shall see, Walker Applegate and I.U. also hashed-out between them the specifications for construction methods and materials, and selected some of these materials.

The 1971 and 1972 construction contracts between I.U. and Mid Republic contained essentially the same terms. Three provisions are important for our purposes here. First, p 4.5 of the contracts' "General Conditions" (a standardized form developed by the American Institute of Architects) is headed "Warranty," and p 4.5.1 states as follows:

The Contractor warrants to the Owner and the Architect that all materials and equipment furnished under this Contract will be new unless otherwise specified, and that all Work ¹ will be of good quality, free from faults and defects and in conformance with the Contract Documents. All Work not so conforming to these standards may be considered defective. If required by the Architect, the Contractor shall furnish satisfactory evidence as to the kind and quality of the materials and equipment.

Second, "Division 4" of the lengthy contract specifications contains instructions to Mid Republic concerning the masonry work on the buildings. Paragraph 3.1 of the masonry specifications lists four types of brick by manufacturer, tradename and size (e.g., "Adams Clay Products 'Dark Eyes' standard size ..."). Paragraph 10 instructs Mid Republic to build sample panels using these bricks, from which I.U. would choose the brick Mid Republic would be required to use on the four buildings. The four brick types listed in the masonry specifications were selected as follows: I.U. gave Walker Applegate a general list of Indiana brick manufacturers, Walker Applegate narrowed it down and presented several samples to I.U.'s in-house architects, who in turn chose the four brick types listed in the specifications.

Third, the contracts contain a section of provisions entitled "Supplementary General Conditions," which are modifications to the standard-form "General Conditions." Paragraph 15.20 of these provisions substitutes a new p 9.7 regarding substantial completion and final payment. The new p 9.7 provides that, upon receipt from the contractor of an application for final payment, the owner and architect will make a final inspection, p 9.7.2, after which the parties will execute a "final certificate," which "shall constitute the acceptance of the work by the Owner, except as to work thereafter found to be defective. The date of such certificate shall be regarded as the date of acceptance of the work...." p 9.7.5.

In 1971, Mid Republic began the construction of the buildings. As instructed, Mid Republic "laid up" sample panels of each of the four types of brick listed in p 3.1 of the masonry specifications. Representatives of I.U. and Walker Applegate viewed the panels, and didn't like any of them. After consulting with the brick supplier as to their options, I.U. and Walker Applegate ordered a fifth panel of "courthouse blend" bricks to be laid up. (Courthouse blend appears to be either a mixture of two of the types of Adams Clay brick named in the masonry specifications, or a separate kind of Adams Clay brick.) Happy with the courthouse blend, I.U. and Walker Applegate instructed Mid Republic to use it on the facings of the buildings.

Mid Republic put up the exterior brick walls of the first building from July to November, 1971. The brickwork on the second two buildings was completed by May, 1972, and on the fourth by early April, 1973. Throughout, Mid Republic used the bricks and other facing materials specified by I.U. and Walker Applegate.

The first signs of trouble with the brickwork appeared even before the completion of the facing on the fourth building. As early as November, 1972, some of the bricks on the first three buildings started to display "efflorescence." This malady occurs when salts in the brick, mortar or some other material bleeds from the brick, leaving white deposits. Although some (but not all) of I.U.'s architects testified that efflorescence is "normal," the efflorescence on these buildings was clearly a matter of some concern to all parties at the time. The condition was discussed at several progress meetings in late 1972 and early 1973, after which it was decided that cleaning and waterproofing of the bricks would be postponed until fall of 1973 to allow the bricks to dry.

No sooner had the brickwork on the fourth building been completed when a second, more serious problem cropped up. In May, 1973, I.U. officials began discovering cracks in some of the exterior walls. Walker Applegate and Mid Republic looked into the problem, and it was determined that the cracks were the result of Walker Applegate's failure to require the use of control joints to accommodate for the natural expansion and contraction of the masonry walls. A lengthy dispute ensued over who was to blame for the cracks and who was to pay for the repair of the affected walls. A settlement ultimately was reached between Aetna and Walker Applegate in 1976, and the walls were repaired. This specific cracking problem was not the issue that resulted in the instant lawsuit.

What did give rise to the instant suit was a third set of problems with the brickwork. Beginning in late 1973, I.U. personnel noticed that the facing bricks had begun to "spall" (chip or flake) and deteriorate. Concerned about these developments, I.U.'s in-house architects made inquiry with the brick manufacturer. The brick manufacturer inspected the buildings and represented to all parties that it found no spalled bricks and that all of the bricks were "structurally sound." Evidence of major problems with the bricks kept coming in, however. I.U. had contracted with another construction company, Glenroy, to build two additional buildings at the regional campus using the same Adams Clay brick. Glenroy, too, noticed the efflorescence, spalling and other problems with the bricks on Mid Republic's buildings, and therefore decided to have samples of the brick tested before it used the same bricks on its buildings. In September, 1973, Walker Applegate and I.U.'s in-house architects (but not Mid Republic or Aetna) received the test results, which showed that the bricks did not meet quality standards with respect to initial rate of absorption, that the brick was excessively porous, and that the possibility of spalling in winter months was very great. (Nonetheless, because Walker Applegate did not show any great concern about these results, I.U. instructed Glenroy to use the same facing brick as had Mid Republic.) As one further sign of impending trouble, the spalling on some of Mid Republic's buildings was already bad enough by the spring of 1975 that I.U. ordered repair work at that time.

Despite the onset of these brick-related problems, I.U. deemed Mid Republic's buildings to be "substantially complete" in April, 1973. Later that year, I.U. learned that Mid Republic, due to financial difficulties, would be unable to complete the buildings. With I.U.'s consent, Mid Republic assigned all of its rights and obligations under the contracts to Aetna, which in turn contracted with another construction company, Geupal DeMars, to complete the buildings. In June, 1975, Aetna submitted documents stating that all work was complete, and requested final payment. Walker Applegate certified that the four buildings were complete and final payment could be made, and, in September, 1975, I.U. executed the certificate for final payment.

The spalling and deterioration, particularly of several freestanding "garden walls," soon got much worse. ² (Proving that "when it rains, it pours," a design problem unrelated to the brick deterioration also forced I.U. to undertake the emergency replacement of a brick wall on one of Mid Republic's buildings in 1981.) Fearing that it would be left with the bill for...