Surety Case Law Note: Waving Bye-Bye to a Jury Trial
August 13, 2024
In this Surety Today: The Blog post we consider a Case Law Note addressing the issue of a surety’s motion to strike a demand for a jury trial in a performance bond case under New Mexico law. The case is:
Repsol Renewables Dev. Co., LLC v. Trisura Ins. Co., No. CV 1:24-296 KRS/JMR,
2024 WL 3535387, at *1–4 (D.N.M. July 25, 2024)
There are probably few things more certain than the general concept that sureties hate jury trials. This is especially visceral in bad faith cases! So, when the surety has a chance to strike a demand for a jury trial in a case against it, the surety will likely take it. And so it was in the Repsol Renewables case. The case arose from the construction of a $24 million photovoltaic solar power facility in New Mexico. The surety bonded the general contractor (the “Principal”) who was responsible for the design, engineering, procurement, and construction of the project. Eventually, the Owner terminated the Principal and made demand upon the surety under the performance bond (the “Bond”).
The Owner undertook the completion of the remaining work under the Contract and contended that its costs to complete will exceed $51 million. After a year of providing documentation to the surety, the parties agreed on a partial settlement in which the surety paid $11,539,213.79 without prejudice to Owner’s right to seek the remaining balance of the Bond, i.e., $12,926,190.21. Unable to settle the remaining payment, the Owner filed suit against the surety alleging breach of contract, violation of the New Mexico Insurance Code, and common law insurance bad faith. The Owner demanded a jury trial in its complaint. The surety moved to strike the jury demand on the basis that the Contract between Owner and the Principal contained a jury trial waiver and the Contract was incorporated by reference into the Bond
The court began its analysis by noting that “[t]he right of trial by jury as declared by the Seventh Amendment to the Constitution—or as provided by a federal statute—is preserved to the parties inviolate.” Fed. R. Civ. P. 38. The right to a jury trial in the federal courts is governed by federal law. Telum, Inc. v. E.F. Hutton Credit Corp., 859 F.2d 835, 837 (10th Cir. 1988) (citing Simler v. Conner, 372 U.S. 221, 221-22 (1963) (per curiam)). Parties may contract to waive their right to a jury trial, and such waivers are neither illegal nor contrary to public policy if they are knowing and voluntary. Id.; see also Hulsey v. West, 966 F.2d 579, 581 (10th Cir. 1992); McCarthy v. Wynne, 126 F.2d 620, 623 (10th Cir. 1942), cert. denied, 317 U.S. 640 (1942). To determine if a jury waiver was knowing and voluntary, courts consider: “(1) whether there was a gross disparity in bargaining power between the parties; (2) the business or professional experience of the party opposing the waiver; (3) whether the opposing party had an opportunity to negotiate contract terms; and (4) whether the clause containing the waiver was inconspicuous.” Romero v. TitleMax of New Mexico, Inc., 2020 WL 5076081, at *1 (D.N.M.).
The Contract in this case contained a jury trial waiver clause stating: “EACH PARTY WAIVES ITS RESPECTIVE RIGHT TO ANY JURY TRIAL WITH RESPECT TO ANY LITIGATION ARISING UNDER OR IN CONNECTION WITH THIS AGREEMENT.” (emphasis original). The court noted that the jury waiver was prominent, and the parties did not assert any disparity in bargaining power or lack of business or professional experience. Accordingly, the court concluded that the Owner agreed to the waiver knowingly and voluntarily.
Thus, the remaining question was whether the jury waiver between the Owner and Principal was incorporated into the Bond such that the surety could rely upon it. The Bond’s incorporation by reference clause stated: “[t]he Contractor and Surety, jointly and severally, bind themselves, their heirs, executors, administrators, successors and assigns to the Owner for the performance of the Construction Contract, which is incorporated herein by reference.” Id. The Owner raised three arguments as to why the surety should not be permitted to enforce the jury waiver.
First, the Owner contended that the Bond only incorporated the Contract “for the performance of” the Contract and did not incorporate the Contract in full. However, the court noted that the incorporation provision of the Bond was not limited to purposes of performance of the Contract. The court cited to other cases construing identical incorporation clauses and rejecting similar limited incorporation arguments. See, e.g., Iron Branch Assoc., LP v. Hartford Fire Ins., Co., 559 F. Supp. 3d 368, 379-80 (D. Del. 2021) (finding the construction Contract was incorporated into the performance bond “without qualification” where performance bond stated: “[Contractor] and [Surety], jointly and severally, bind themselves, their heirs, executors, administrators, successors, and assigns to [Owner] for the performance of the Construction Contract, which is incorporated herein by reference.”); Granite Re, Inc. v. N. Lines Contracting, Inc., 478 F. Supp. 3d 772, 778 (D. Minn. 2020) (same, further stating: “The Court emphasizes that the performance bond incorporates the construction Contract without limitation. The performance bond does not provide that only some of the terms of the construction Contract are incorporated. Nor does the performance bond provide that the construction Contract is incorporated by reference ‘except as otherwise provided’ or ‘except insofar as it is inconsistent with this performance bond.’”). Thus, the court held that the Bond’s incorporation clause was not a “limited incorporation” of the underlying Contract and that the matters incorporated by reference to the Bond must be construed as a part of the Bond as if they had been set out in the Bond verbatim.
The Owner’s second argument was that even if the jury waiver was incorporated by reference into the Bond, the waiver by its terms did not apply to this dispute. In other cases where a surety sought to apply a jury waiver from a Contract, courts looked to whether the waiver contained language limiting it to disputes between the original Contracting parties. For example, in Engineering & Construction Innovations, Inc. v. Bradshaw Constr. Corp. and Travelers Casualty & Surety Co., 2022 WL 3585153, at *5 (D. Minn. 2022) the jury waiver provision of the underlying contract was found not to apply to the suit between the Owner and surety because the waiver explicitly stated it applied only to disputes between the Owner and the Contractor. In contrast, in U.S. ex rel. Anderson Excavating Co. v. KiewitPhelps, 2020 WL 2395220, at *2 (D. Neb. 2020), the court held the Contract’s jury waiver was enforceable in the suit brought by the Owner against the surety because the performance bond incorporated the contract. See also Painting Co. v. Walsh/DeMaria Joint Venture III, 2010 WL 1027424, at *2 (S.D. Ohio 2010) (“Plaintiffs’ argument fails to acknowledge the breadth of the waiver provision, which provides that plaintiffs have waived their ‘right to a trial by jury in any or all disputes or claims arising out of or in relation to’ the contracts.”). In this case, the court found that the jury waiver was broad and not limited because it provided that the Owner waived its right to “any jury trial with respect to any litigation arising under or in connection with this agreement.” The court held that the Owner’s claims against the Bond arose from and were connected to the Contract because they were “inherently dependent on the Principal’s nonperformance of the Project Contract, and Plaintiffs seek to enforce and defend their rights under the underlying Contract.” Moreover, the court observed that the Bond was executed as a condition of, and at the same time as, the Contract. Therefore, the court held that the jury waiver in the Contract encompassed the Owner’s claims.
The Owner’s third argument was that the surety could not rely on the waiver because the waiver was not a defense to liability. The court acknowledged that a jury waiver is not a liability defense, and that courts have held that sureties do not have the right to enforce a jury waiver provision in a contract that has not been incorporated into the surety bond. See, e.g., Eng’g & Constr. Innovations, Inc., 2022 WL 3585153, at *5 (“[A] surety does not ‘stand in the shoes’ of its Principal with respect to the jury waiver because a jury waiver is not a defense to liability.”); Attard Indus., Inc. v. U.S. Fire Ins., Co., 2010 WL 3069799, at *4 (E.D. Va.) (holding a surety did not have the right to enforce a jury waiver in a subcontract because a jury waiver does not constitute a substantive defense to liability, “but merely restricts the fact finding function to the Court”). However, the court hastened to note that those cases did not apply because the surety in this case did not seek to “stand in the shoes” of its Principal to enforce the waiver as a defense to liability. Instead, the surety argued that it “is entitled to stand upon the jury waiver incorporated into its Bond.” Ultimately, the court held that the Owner agreed to the jury waiver knowingly and voluntarily, the Bond incorporated the Contract in full including the jury waiver, and the jury waiver encompassed the Owner’s claims brought in the lawsuit. Therefore, the court granted the surety’s motion to strike the jury demand.
This case provides a good road map to addressing the issue of whether a jury trial waiver can be enforced by the surety – The language of the waiver must be examined, the language of the incorporation clause must be examined, and the traditional knowing and voluntary waiver requirements must be met.
If you have questions regarding the issues discussed in this post, please do not hesitate to contact Michael A. Stover, Esq. (410-659-1321/mstover@wcslaw.com) or any member of the Surety and Fidelity Practice Group.