2014BasicSkillsCourse
PresentedbytheIowaBarReviewSchool
andTheIowaStateBarAssociation.
Monday
September22,2014
IowaContractsLaw
4:15 p.m. - 5:15 p.m.
Materials by
Justice Edward Mansfield
Iowa Supreme Court
Judicial Branch Building
1111 East Court Avenue
Des Moines, IA 50319
IOWA BASIC SKILLS
June 2014
CONTRACTS
BACK TO BASICS
RECENT CASE SUMMARY
Justice Michael Streit (with additional updates by
Justice Edward Mansfield)
1
Disclaimer: This material does not reflect the views of
the Iowa Supreme Court and should not be cited in a
court proceeding.
2
BACK TO BASICS
Recent Iowa Supreme Court cases demonstrate the
importance of returning to basic contract principles when
confronted with a contract case. Contract law in Iowa is
pretty similar to what you learned in law school.
I. IS THERE A CONTRACT? You have to have offer and acceptance (what we
now call mutual manifestation of assent) and consideration (a bargainedfor exchange). You also have to have sufficiently definite terms.
a. There must be an offer.
i. Blackford v. Prairie Meadows Racetrack and Casino Inc., 778
N.W.2d 184 (Iowa 2010). Facts: Individual was banned after he
struck a slot machine and broke the machine’s glass belly. He
continued to frequent the casino and later won $9,387. The casino
refused to pay. The gambler argued the ban had been lifted, but a
jury found he was still banned from the casino when he won the
money. The parties focused on whether the casino had the
authority to withhold winnings.
ii. Holding: The IA Supreme Court focused on basic contract
principles. Because Prairie Meadows had banned the gambler
from premises, there was no pending offer for him to gamble, the
gambler’s decision to gamble was not an acceptance because
there was no offer, and the casino was not required to pay any
winnings.
1. Don’t forget to argue in the alternative – gambler had not
raised the issue of restitution for the money he spent at the
casino and was only seeking his winnings.
b. There must be mirror-image acceptance.
3
i. Rick v. Sprague, 706 N.W.2d 717 (Iowa 2005). Facts: couple was
injured when their car was rear-ended. The offending driver offered
to settle their injuries for $5000. The wife accepted the offer and
the husband rejected it. The wife argued she should be able to
recover the $5000 because the offer was of $5000 each to both the
wife and husband.
ii. Holding: There was no settlement contract.
Language of
settlement offer indicated it was meant to settle claims of both wife
and husband. Wife’s acceptance regarding only her claims did not
meet the mirror-image rule.
c. Ratification of acceptance (an acceptance even if not initially valid can be
ratified by subsequent conduct).
i. Life Investors Ins. Co. of America v. Estate of Corrado, 838 N.W.2d
640 (Iowa 2013). Corrado, an insurance agent, allegedly entered
into a settlement with Life Investors, agreeing to pay money to the
company. The agreement purported to be signed by Corrado and
the parties operated as if the settlement agreement existed for a
period of years. Subsequently, a challenge was raised to the
signatures on the settlement agreement.
ii. Held: Even if Corrado did not sign the settlement agreement, and
even if he did not initially know the terms of the agreement, he
could ratify it by subsequent conduct.
d. There must be consideration.
i. Consideration can be either a benefit to the promisor or a detriment
to the promisee. It must be “bargained for” which means one
promise is sought in exchange for the other’s promise.
ii.
1. Meincke v. Northwest Bank & Trust Co., 765 N.W.2d 223
(Iowa 2008). Facts: Mother made a $90,000 loan to her
daughter and nephew for their business, secured by the
mortgage to a building. When the daughter and nephew
wanted an additional loan, the mother signed a
subordination agreement.
The mother argued the
subordination agreement lacked consideration and was not
bargained for.
4
2. Holding: The subordination agreement was valid and did not
lack consideration. The consideration in exchange for the
mother’s agreement to subordinate her loan was the bank’s
detriment of agreeing to loan the daughter and nephew
additional money. The consideration was bargained for
because the mother’s testimony indicates she understood
the bank would lend more money if she signed the
agreement.
II. ENFORCEABILITY. Is there a defense to enforceability of the contract?
a. Incapacity is a common example (such as minors, incompetence, duress).
b. Unconscionability. The “ice chest on wheels” cases. C&J Vantage
Leasing Co. v. Wolfe, 795 N.W.2d 65 (Iowa 2011). Royal Links brought a
transaction to the golf course owner. The owner leased a nonmotorized
beverage cart on extended terms from C&J. Royals Links agreed to pay
theowner more than the amount due C&J in return for the right to display
advertising on the cart. Royal Links stopped paying so the owner stopped
paying C&J. In defense of C&J’s claim for money due, the owner tried to
claim unconscionability.
i. Held: Unconscionability can be either procedural or substantive.
Procedural unconscionability “involves an advantaged party's
exploitation of a disadvantaged party's lack of understanding,
unequal bargaining power between the parties, as well as the use
of
fine
print
and
convoluted
language.
Substantive
unconscionability involves whether or not the substantive terms of
the agreement are so harsh or oppressive that no person in his or
her right senses would make it. Finally, whether an agreement is
unconscionable must be determined at the time it was entered.”
This agreement was not unconscionable. The owner was an
intelligent business entity that had the opportunity to read the
paperwork. The agreement was not so oppressive that no one in
their right senses would sign it. A “bad bargain” is not enough to
establish unconscionability.
c. Public policy is an area where there has been considerable judicial
activity. Recent case law highlights the public policy exception to
enforceability. Galloway v. State, 790 N.W.2d 252 (Iowa 2010).
5
i. Facts: Child injured crossing the street while on a field trip. Parents
had signed a waiver of liability prior to the field trip.
ii. Holding: Public policy prevents parents from preemptively waiving
their children’s causes of action for negligence. This is because (1)
parents cannot waive their children’s causes of action post-injury
without court approval, (2) children should be protected from the
improvident decisions of their parents, and (3) children are ill-suited
to identify and avoid risks while participating in an activity.
d. Consideration must not violate public policy.
i. In re Marriage of Cooper, 769 N.W.2d 582 (Iowa 2009). Facts:
Husband had been unfaithful to wife. They entered a reconciliation
agreement which provided for a large alimony amount should the
husband cheat again. The wife alleged the husband cheated again
and the district court relied on the reconciliation agreement.
ii. Holding: Reconciliation agreement void because it intrudes on the
intimacy of the marital relationship, requires the courts to engage in
a he-said/she-said inquiry, and injects fault back into divorce
proceeding.
iii. Contrast these cases with Staff Management v. Jimenez, 839
N.W.2d 640 (Iowa 2013). An employment contract with an
undocumented worker is not void for violation of public policy
because it does not inherently have an illegal purpose. Here the
consideration did not violate public policy.
e. Robinson v. Allied Property and Cas. Ins. Co., 816 N.W.2d 398 (Iowa
2012). This case raises an important general public-policy issue. The
plaintiff brought a claim for underinsured motorist (UIM benefits) after
more than two years had elapsed from the accident. The policy required
suit to be filed for UIM benefits within two years of the accident. The
plaintiff alleged she had not discovered the significant worsening of her
back condition, and the increase in her potential damages, until more than
two years had passed. Held: The two year limit is reasonable and
enforceable as a matter of law. Plaintiffs generally can sue the UIM
carrier at the same time they sue the tortfeasor. The court declines to
6
endorse a case by case analysis to decide whether the limitations period
is reasonable.
f. Hint: Be careful when writing contract provisions that may be so onerous
they violate public policy. In Robinson, for example, if the two year
limitations period in the contract were found unreasonable and violative of
public policy, the parties would then have defaulted to the statutory
limitations period of ten years from the time of breach. Also, when making
public policy challenges to enforcement of a contract, consider both
across-the-board (the provision always violates public policy) and asapplied (the provision violates public policy under the facts of this case)
arguments.
III. CONTRACT MODIFICATION. Was the contract validly modified?
a. Modifications may be oral, but still must meet contract requirements. The
parol evidence rule does not apply to oral modifications. The parol
evidence rule applies to bar prior or contemporaneous terms, conditions,
or “understandings” that conflict with (or in some instances supplement) a
written contract.
i. Passehl v. Passehl, 712 N.W.2d 408 (Iowa 2006). Facts: Doris
Passehl died while owning 160 acres of farmland. At the time her
son Jerry had lived on a portion of the land and operated an auto
salvage business thereon. They had obtained a zoning adjustment
to operate the business. Jerry settled with Doris’s estate to keep
the land containing his business and a dispute arose regarding the
size of the land and the contours of the agreement. The estate
claimed the contract had been orally modified to require additional
obligations of Jerry.
ii. Holding: Generally, a written contract may be modified by a
subsequent oral contract if it has the essential elements of a
binding contract. Modification may be express or implied, but must
be “more than loose and random conversations.”
1. The court held there was no oral modification because the
estate provided insufficient evidence of a contract. The court
noted the three siblings had been in litigation for 5 years and
7
it seemed “incredible” that they would reach a major
modification and not reduce it to writing.
iii. Seneca Waste Solutions, Inc. v. Sheaffer Mfg. Co., LLC, 791
N.W.2d 407 (Iowa 2010). An environmental services company
agreed to perform decontamination/cleanup/demolition services for
a not to exceed price. Later sought to recover more than the price.
Held: There is an issue of fact whether the contract was orally
modified when the owner required additional services. Even
though the contract required modifications to be in writing, oral
modifications can be binding and consent to modification may be
shown by conduct. (The rule is different under the UCC.)
b. Hint: Think about arguing oral or implied modification when you are
precluded from recovery under the terms of the written contract.
c. Modifications under the common law require consideration.
i. Margeson v. Artis, 776 N.W.2d 652 (Iowa 2009). Facts: Individual
agreed to purchase a business for $125,000.
The parties
subsequently executed an addendum raising the price to $155,000.
The parties disagreed regarding whether the addendum was
enforceable.
ii. Holding: The court applied the common law rule that consideration
is required for modification of a contract. Here, there was no
consideration in exchange for raising the price from 125,000 to
155,000. The sellers agreed to new financing terms, but because
these only applied to the additional $30,000, they did not constitute
consideration because they did not require the sellers to do
something they were already obligated to do or refrain from
something they had a legal right to.
1. Hint: Don’t forget to survey the legal landscape and consider
arguing for a change in the common law – other courts have
abandoned the common-law rule requiring consideration for
valid modification and the court hints in a footnote that it
would at least consider the issue. The court also notes that
the parties could have rescinded the prior agreement and
entered into a new, valid agreement.
8
d. Is it a confirmation or a modification? Remember you can sometimes
characterize contract problems in more than one way.
i. Bartlett Grain Co., LP v. Sheeder, 829 N.W.2d 18 (Iowa 2013). A
farmer entered into oral agreements to sell grain. Subsequently,
the elevator sent the farmer “written confirmations” which he signed
and returned. The confirmations provided for NGFA arbitration.
Held: The parol evidence bars the farmer from relying on the
earlier oral agreements to avoid arbitration. Also, even if the
situation is treated as a modification (i.e., later written agreements
modifying earlier oral ones), the UCC does not require
modifications to be supported by separate consideration.
IV. CONTRACTUAL CONDITIONS. Has the party that is seeking recovery
substantially performed the contract or been excused from doing so?
a. Generally, a party must substantially perform its end of the bargain in
order to demand performance from the other side.
i.
Hint: When pleading a breach of contract claim, be sure to allege
that the plaintiff “substantially performed the contract or performance has
been excused.”
b. Flynn Builders, LC v. Lande, 814 N.W.2d 542 (Iowa 2012). Substantial
performance is equivalent to not materially breaching the contract. A
contractor that had partly built a house (80-85% completed) before
walking off the job had not substantially performed and thus was not
entitled to foreclose a mechanics lien on that basis. Remands for a
determination whether the contractor’s performance might be excused by
the owner’s conduct.
i. Hint: If you want to insure that strict performance of a particular
term in the contract is a prerequisite to receiving benefits under the
contract, say so expressly in the contract. Otherwise, disputes will
arise as to whether the breach was material or the performance
was substantial.
9
c. Even if a party does not substantially perform it may be able to recover in
quantum meruit. In a case involving the wiring and installation of electrical
lighting in a commercial building, where the contractor did considerable
work but did not substantially perform its contract, the contractor could
recover in quantum meruit the difference between (1) the remaining
unpaid contract price and (2) the owner’s cost of completion, including
finishing any unfinished work and remedying any defective work. Lewis
Elec. Co. v. Miller, 791 N.W.2d 691 (Iowa 2010).
i. Hint: Plead in the alternative for (A) breach of contract and (B)
quantum meruit.
d. One party’s repudiation excuses the other party from performing. The
other party may continue to urge the repudiator to perform without waiving
the effects of the repudiation. A recent decision contains a thorough
discussion of what amounts to a repudiation and what the effects of a
repudiation are. Pavone v. Kirke, 807 N.W.2d 828 (Iowa 2011).
V. DAMAGES. “Benefit of the bargain” is a common form of recovery, but a
party cannot recover beyond what the parties contemplated damages could
be at the time of contracting.
a. Must be within contemplation of the parties at the time of contracting.
i. Royal Indemnity Co. v. Factory Mutual Ins. Co., 786 N.W.2d 839
(Iowa 2010). Facts: Factory Mutual (FM) entered into a contract
with John Deere to inspect a warehouse. The warehouse burned
down causing $39 million in damages. John Deere’s insurance
company sued FM claiming a more thorough inspection would have
found problems and caused John Deere not to place its products in
the warehouse.
ii. Holding: The damages here were not contemplated at the time the
contract was formed. John Deere did not pay very much for the
inspection, did not ask FM whether it should use the warehouse,
and there was no proof the fire was caused by a deficiency that
could have been revealed through a more thorough inspection.
10
iii. Hint: If you are providing inspection or loss prevention services,
you probably want to include limits on damages in your contracts.
b. Promissory notes are a special case from a damages standpoint. Under
the common law, when a lender holds a promissory note, a rebuttable
presumption exists that the note has not been paid and that borrower
owes the lender the amount the lender claims is still due. The burden
then shifts to the borrower to show additional payments have been made.
Iowa Mortgage Center, LLC v. Baccam, 841 N.W.2d 107 (Iowa 2013).
i. Hint: This rule may not apply in consumer credit transactions. See
Iowa Code section 537.5114; Capital One Bank (USA) v. Denboer,
791 N.W.2d 264 (Iowa Ct. App. 2010).
VI. CONTRACT INTERPRETATION. “I voted for it before I voted against it.”
a. It is a question of law whether a contract is ambiguous. If a term is
unambiguous, the legal effect of the term is a question of law.
i. Van Sloun v. Agans Bros. Inc., 778 N.W.2d 174 (Iowa 2010).
Facts: A contract prevented the landlord from “unreasonably”
withholding permission to sublease. A commercial tenant vacated
a lease and the landlord rejected a proposed sublessor.
ii. Holding: The court upheld the district court’s determination that the
landlord acted reasonably. The court first held that the term
“unreasonably withheld” was not ambiguous and meant the
contract should be interpreted to apply the standard of a reasonably
prudent person.
b. Courts may rely on extrinsic evidence to determine BOTH whether a
contract term is ambiguous and, if ambiguous, what the term means. See
Fausel v. JRJ Enterprises, Inc., 603 N.W.2d 612 (Iowa 1999). This means
the court first looks at the contract language and the extrinsic evidence,
then decides whether the contract is ambiguous.
c. However, the extrinsic evidence is only relevant when it sheds light on the
situation and circumstances of the parties at the time of the contract. The
parol evidence rule does not apply because the parol evidence rule bars
extrinsic evidence about additional terms not reflected in a written
11
contract, not the meaning of terms expressly contained in a written
contract.
i. Clinton Physical Therapy Services, P.C. v. John Deere Health
Care, Inc., 714 N.W.2d 603 (Iowa 2006). Facts: Clinton Physical
Therapy Services (CPT) entered contract with John Deere Health
Care to be a network provider of therapy services to plan members.
CPT opened a Davenport office in 1997. The parties disputed
whether John Deere Health Care was required to pay for services
at the Davenport office. CPT sought to introduce a 2001 contract
that explicitly addressed the effect of new offices.
ii. Holding: 2001 contract does not shed light on the intent or situation
of the parties at the time of the 1996 contract and is therefore not
relevant and properly excluded.
iii. In a case dealing with a settlement of a U-Haul trailer stuck in the
snow and a broken leg the parties settled and signed an
agreement. The injured man claimed the release did not include
other defendants or his wife. The court summed up this area well:
“The cardinal rule of contract interpretation is to determine the
intent of the parties at the time they entered into the contract. The
most important evidence of the parties' intentions at the time of
contracting is the words of the contract. When the interpretation of
a contract depends on the credibility of extrinsic evidence or on a
choice among reasonable inferences that can be drawn from the
extrinsic evidence, the question of interpretation is determined by
the finder of fact.” Peak v. Adams, 799 N.W.2d 535 (Iowa 2011).
iv. Pillsbury Co. v. Wells Dairy, Inc., 752 N.W.2d 430 (Iowa 2008).
The court demonstrated the clean split from the past cases
requiring an ambiguity be shown before extrinsic evidence is
allowed.
v. This is best summarized in a case involving the intent of the parties
to secure a promissory note that did not exist (replaced by later
notes). The court recognized that long ago we abandoned the rule
that extrinsic evidence cannot change the plain meaning of a
contract. We now recognize the rule in the Restatement (Second)
of Contracts that states the meaning of a contract “can almost
12
never be plain except in a context.” The court clearly declared that
any determination of meaning or ambiguity should only be made in
the light of relevant evidence of the situation and relations of the
parties, the subject matter of the transaction, preliminary
negotiations and statements made therein, usages of trade, and the
course of dealing between the parties. But after the transaction has
been shown in all its length and breadth, the words of an integrated
agreement remain the most important evidence of intention. In
other words, although the law allows extrinsic evidence to aid in the
process of interpretation, the words of the agreement are still the
most important evidence of the party's intentions at the time they
entered into the contract. When the interpretation of a contract
depends on the credibility of extrinsic evidence or on a choice
among reasonable inferences that can be drawn from the extrinsic
evidence, the question of interpretation is determined by the finder
of fact. Soults Farms, Inc. v. Schafer, 797 N.W.2d 92 (Iowa 2011).
d. Hint: The rule that you look at the extrinsic evidence before you decide
whether contract language is unambiguous sounds counterintuitive, so
you may need to explain it to the court and counsel.
VII.
DUTY OF GOOD FAITH AND FAIR DEALING. This is an aspect of
contract interpretation. The good-faith duty is interpreted into every
contract. But how far does it go?
a. Bagelmann v. First Nat. Bank, 823 N.W.2d 18 (Iowa 2012). The
Bagelmanns brought a home that turned out to be in a flood hazard zone,
although this was not known by the Bagelmanns or their lender at the
time. Later, the lender discovered the property was in a flood hazard zone
but failed to promptly inform the Bagelmanns. The Bagelmanns sued the
lender for violating the covenant of good faith and fair dealing, alleging
they would have purchased flood insurance before the 2008 floods
inundated their home if they had known they were in a flood hazard zone.
Affirming summary judgment for the lender on this point, the court said
that the covenant of good faith and fair dealing does not give rise to new
substantive terms that do not otherwise exist in a contract. “There was no
promise to notify (let alone update) the Bagelmanns concerning their flood
zone status, so any allegation of bad faith here lacks a contract term to
which it can be attached.”
13
VIII.
THIRD PARTY BENEFICIARIES. The contract must not just benefit a
third party, but the wording of the contract itself must show that it was
intended to benefit that third party.
a. The contract must manifest that the third party is an intended beneficiary.
i. RPC Liquidation v. Iowa Dept. of Transportation, 717 N.W.2d 317
(Iowa 2006). Facts: IDOT contracted to have company build a
bridge. RPC was to supply beams to the company. IDOT rejected
the beams as contaminated by soybeans and therefore the bridgebuilding company refused to pay RPC for the beams. RPC sued
IDOT claiming it was a third-party beneficiary.
ii. Holding: Beam-supplier was not a party to contract and was not a
third party beneficiary. The contract clearly expressed the intent of
the parties to exclude anyone from third party beneficiary status by
expressly disclaiming any such liability.
iii. Hint: The test for what is a third-party beneficiary is not all that
clear. It is a good drafting technique to expressly disclaim third
party beneficiary rights in your contract if you intend not to have
third party beneficiaries.
b. A third-party beneficiary is subject to defenses that can be raised against
a primary party to the contract. Osmic v. Nationwide Agribusiness Ins.
Co., 841 N.W.2d 853 (Iowa 2014). An injured passenger sought recovery
on the driver’s UIM policy. Held: His claim was barred by the contractual
provision requiring any suit to be initiated within 2 years. Although the
passenger would be deemed a third-party beneficiary, his rights can rise
no higher than those of the policyholder.
IX. STATUTE OF FRAUDS.
a. Certain important contracts need to be in writing. The Iowa statute
of frauds does not render oral promises invalid. Rather, the statute
is a rule of evidence that renders incompetent oral proof of such
promises. In a contract for employment to manage a gambling
casino that possibly could be concluded in less than a year, there is
14
no requirement that the agreement be evidenced in writing.
Pavone v. Kirke, 801 N.W.2d 477 (Iowa 2011).
b. Hint: When confronted with a statute of frauds defense, look for
estoppel or other ways to overcome the defense.
15
IOWA
CONTRACTS

Winter 2012
PREPARED BY JUSTICE MICHAEL STREIT
USED WITH PERMISSION
i
IOWA BASIC SKILLS COURSE
CONTRACTS OUTLINE
I.
Is this a UCC case? ................................................................................................ 1
II.
Is this action barred by the Statute of Limitations? ........................................... 1
A. Common Law Contracts ................................................................................. 1
B. Statutes of Repose........................................................................................... 2
C. UCC Sale of Goods ........................................................................................ 3
D. Revival of Contract Actions ........................................................................... 3
III.
Does the Statute of Frauds apply to this alleged contract? ................................ 3
A. Purpose ........................................................................................................... 3
B. Common Law Contracts ................................................................................. 3
C. UCC Statute of Frauds .................................................................................... 6
IV.
If the contract is within Statute of Frauds, is the Statute satisfied? ................. 6
A. Common Law Contracts ................................................................................. 6
B. UCC Sales of Goods ....................................................................................... 6
C. UCC Personal Property................................................................................... 7
D. Effect of Satisfying the Statute of Frauds ....................................................... 7
V.
Are there facts to avoid the need to satisfy the Statute of Frauds. .................... 7
A. Common Law Contracts ................................................................................. 7
B. UCC contracts ................................................................................................. 9
C. Effect of Failure to Satisfy or Avoid Statute of Frauds .................................. 9
D. Effect of Avoiding the Statute of Frauds ........................................................ 9
VI.
Is there a contract? .............................................................................................. 10
VII.
Is there an offer? .................................................................................................. 10
A. Definition ...................................................................................................... 10
B. Manifestation of Intent to be Bound ............................................................. 10
C. Bargain .......................................................................................................... 11
D. Definiteness .................................................................................................. 11
VIII. Is there an acceptance? ....................................................................................... 12
A. Common Law Contracts ............................................................................... 12
B. UCC Contracts .............................................................................................. 13
C. When Misrepresentation Causes Lack of Assent ......................................... 13
IX.
Is the acceptance effective? ................................................................................. 14
A. Lapse or Expiration....................................................................................... 14
B. Previous Rejection ........................................................................................ 14
C. Revocation .................................................................................................... 14
ii
X.
Is there consideration? ........................................................................................ 16
A. What Qualifies as Consideration .................................................................. 16
B. Bargained-for-Exchange ............................................................................... 18
C. Consideration for Modifications ................................................................... 19
D. Miscellaneous Consideration Issues ............................................................. 19
XI.
Has the contract been modified .......................................................................... 21
A. Oral modification ............................................................................................. 21
B. Reminder – consideration required .................................................................. 21
XII.
If there is no contract (no offer or acceptance) will restitution help?............. 21
A. Background .................................................................................................. 21
B. Elements ....................................................................................................... 22
C. Injustice......................................................................................................... 22
XIII. If there is no contract (no consideration), but merely past services,
will promissory restitution help?........................................................................ 23
A. Elements ....................................................................................................... 23
B. Injustice......................................................................................................... 23
XIV. If no contract because no consideration, will promissory estoppel help? ...... 23
A. Background .................................................................................................. 23
B. Elements ....................................................................................................... 23
C. Charitable Subscriptions ............................................................................... 24
XV.
If there is a contract, what are the terms of the agreement? ........................... 24
A. General .......................................................................................................... 24
B. Integrated and Non-integrated Contracts ...................................................... 24
C. Determining Terms of a Non-integrated Agreement under the Common
Law ............................................................................................................... 25
D. Determining Terms of a Non-integrated Agreement under the UCC........... 25
E. Determining Terms of an Integrated Contract under the Common Law ...... 26
F. Determining Terms of an Integrated Contract under the UCC .................... 27
G. Implied Terms ............................................................................................... 28
H. Reformation .................................................................................................. 31
I.
Reasonable Expectations .............................................................................. 32
J.
Indemnification from Party’s Own Negligence ............................................ 32
XVI. What do the terms of the agreement mean? ..................................................... 33
A. Interpretation................................................................................................. 33
B. Construction .................................................................................................. 37
XVII. Does a third party have rights under the contract? ......................................... 38
A. General .......................................................................................................... 38
B. Requirements ................................................................................................ 38
C. Intended v. Incidental Beneficiaries ............................................................. 39
iii
D.
E.
F.
G.
Creditor Beneficiaries ................................................................................... 40
Non-Creditor Beneficiaries ........................................................................... 40
Modification of Third Party Benefits ........................................................... 40
Rights under Third Party Contracts .............................................................. 41
XVIII. Have contract rights or duties been transferred or assigned? ........................ 41
A. Assignment ................................................................................................... 41
B. Delegation ..................................................................................................... 43
C. Assumption ................................................................................................... 44
D. Novation ....................................................................................................... 44
XIX. Is there an excuse for nonperformance of a contract obligation? .................. 45
A. Incapacity...................................................................................................... 45
B. Incompetence ................................................................................................ 45
C. Duress ........................................................................................................... 46
D. Undue Influence............................................................................................ 47
E. Material or Fraudulent Misrepresentation .................................................... 48
F. Fraud ............................................................................................................. 51
G. Mistake ......................................................................................................... 52
H. Impossibility/Impracticability....................................................................... 54
I.
Frustration of purpose ................................................................................... 56
J.
Unconscionability ......................................................................................... 56
K. Public Policy ................................................................................................. 57
L. Procedural Fairness ....................................................................................... 60
XX.
Can non-performance be justified? ................................................................... 60
A. Failure of an Express Condition Precedent .................................................. 60
B. Occurrence of a Condition Subsequent ........................................................ 64
C. Total breach .................................................................................................. 65
D. Failure of performance ................................................................................. 70
E. Breach under the UCC for Sale of Goods .................................................... 70
XXI. What remedies are available for breach of a common law contract? ............ 72
A. Monetary Damages ....................................................................................... 72
B. Specific Performance .................................................................................... 79
C. Remedies for Breach of Employment Contracts .......................................... 80
XXII. What remedies are available for breach in UCC sale of goods cases? ........... 81
A. Seller’s Remedies Prior to Acceptance......................................................... 81
B. Seller’s Remedies After Acceptance ............................................................ 82
C. Buyer’s Remedies Prior to Acceptance ........................................................ 83
D. Buyer’s Remedies After Acceptance ............................................................ 84
E. Miscellaneous Damage Issues ...................................................................... 85
XXIII. Enforcement of real estate contracts.................................................................. 86
A. Statute of Frauds ........................................................................................... 86
iv
B.
C.
D.
E.
Caveat Emptor .............................................................................................. 86
Equitable Conversion.................................................................................... 88
Forfeitures ..................................................................................................... 89
Miscellaneous ............................................................................................... 93
XXIV. Parol Evidence .................................................................................................... 94
I.
IS THIS A UCC CASE?
A.
The UCC incorporates much of common-law contract and equity law, except where it
explicitly departs from these rules. See ICA § 554.1103.
B.
Article 2 governs all sales transactions in "goods." ICA § 554.2102. "Goods" are all
things which are moveable at the time of identification to the contract for sale,
including the unborn young of animals and growing crops. ICA § 554.2105(1). Other
v
identified things that are attached to realty are goods if such things are to be severed
from the realty for the sale, i.e., mining products, mobile homes, or even homes to be
moved. Severable improvements to real estate are also goods. ICA § 554.2107(1). The
following are not goods: money (unless its value is not its face value, but as a
collector’s item such as a buffalo nickel), collections, investment securities and things
in action.
1.
II.
Article 2A governs finance leases. Article 9 governs sales with a security
interest. Someone entering into a contract intended to fall within one of these
areas—or litigating the effects of a such a contract—should carefully consider
whether the terms of the agreement cause it to be considered a lease, a finance
lease, or a sale with a security interest. This distinction will determine which
portion of the UCC (or the Iowa codification of the UCC) applies. The Iowa
Supreme Court recently explained how to differentiate a sale with a security
interest from a finance lease in C & J Vantage Leasing Co. v. Outlook Farm
Golf Club, LLC, 784 N.W.2d 753 (Iowa 2010).
C.
The Iowa common-law of contract covers contracts for employment, service, real estate,
construction, sale of business, leasing, etc. (case law, Restatement of Contracts).
D.
If there is a mixed goods and services contract, look to see whether the predominant
factor, the thrust, the purpose reasonably stated, is the rendition of service with goods
incidentally involved (e.g., contract with artist for painting) or is a transaction of sale,
with labor incidentally involved (e.g., installation of a water heater in a bathroom).
Bonebrake v. Cox, 499 F.2d 951 (8th Cir. 1974) (contract for sale and installation of
bowling alley equipment considered transaction in goods).
IS THIS ACTION BARRED BY THE STATUTE OF LIMITATIONS?
A.
Common law contracts: calculate time until bar from accrual of cause of action,
which is when the breach produces loss or damage to the claimant, Scott v. City of Sioux
City, 432 N.W.2d 144, 147 (Iowa 1988), or when plaintiff reasonably discovers or
should have discovered the injury. Brown v. Ellison, 304 N.W.2d 197, 201 (Iowa 1981)
(discovery rule applies to contract actions arising from breach or express or implied
warranty).
1.
oral = 5 years from breach, ICA § 614.1(4).
2.
written = 10 years from breach, ICA § 614.1(5).
3. claims for wages = 2 years from failure to pay, ICA § 614.1(8).
But, a cause of action for wages where there is a "continuous, open, current
account" accrues on the date of the last item in the account. ICA § 614.5; Audas v.
Sabra Communications Corp., 554 N.W. 2d 868 (Iowa 1996) (commissions accrued
and not fully paid over course of employment establish a continuous account and
cause of action accrued either when last sale made or last payment demanded);
Patterson v. Patterson's Estate, 189 N.W.2d 601 (Iowa 1971) (nursing services over
three years part of continuous account for unpaid wages); Banker’s Trust Co. v.
2
Economy Coal Co., 276 N.W. 16 (1937) (deferred salaries part of continuous
accounts); Wertz v. Ryan, 184 N.W. 517 (Iowa 1921) (suit for materials and labor
based on continuous open account); Soderland v. Graeber, 180 N.W. 745(1921)
(operating farm for five years established continuous account).
4.
personal injury from breach of contract = 2 years, ICA § 614.1(2).
Note: Hamm v. Allied Mut. Ins. Co., 612 N.W.2d 775 (Iowa 2000) (Limitations period
governing claim against insurer for underinsured motorist coverage was ten years because it
involved an action founded upon a written contract). But see Nicodemus v. Milwaukee Mut.
Ins. Co., 612 N.W.2d 785 (Iowa 2000) (contractual provisions altering the statute of limitations
period are enforceable so long as not unreasonable; contractual limitations provision in
insurance contract which commenced limitations period before the insured’s claim accrued was
unenforceable).
B. Statutes of Repose: terminate rights of action after specified period of time, regardless
of when and if an injury has occurred or when it was discovered.
1.
breach of implied warranty suits for damages from personal or property injury
arising out of defective improvements to real property = 15 yr. statute of repose,
running from date of act or omission alleged as cause of injury. Bob McKiness
Excavating & Grading, lnc. v. Morton Buildings, Inc., 507 N.W.2d 405 (Iowa
1993) (suit barred because 15 years ran from completion of buildings and collapse
did not occur until 20 years after completion).
This statute of repose does not apply to claims based on express warranty. It also does
not apply to actions against a person solely in their capacity as owner, occupant, or
operator of such an improvement to real property. ICA § 614.1.
Improvements must be attached to the real estate and cause the injury in question as
attached. Construction workers brought products liability actions against manufacturers
of asbestos. Buttz v. Owens-Corning Fiberglas Corp., 557 N.W.2d 90 (Iowa 1996)
(asbestos-related disease due to installation of asbestos insulation around ducts, boilers
and pipes not covered by this statute of repose because injury was caused by asbestos
prior to its attachment to the real estate). The improvement must either be permanent or
one that enhances the capital value. Jarnigan v. Fisher Controls Int., 573 N.W.2d 34
(Iowa 1997) (LP gas regulators, not attached to the structure, but to the LP gas tank on
the property, was an improvement within the statute because they increased the value of
the property).
C. The limitation period for sale of goods under the UCC is 5 years, under the catch-all
provision of ICA § 614.1(4). City of Carlisle v. Fetzer, 381 N.W.2d 627 (Iowa 1986) (
five year limitation period for breach of implied warranty under the UCC).
In a failure of bricks used in a house, nine years after the house was built, the five-year
STATUTE OF LIMITATIONS governs actions for breach of implied warranty. Such
3
actions must be filed within five years after they accrue. Actions for breach of implied
warranty accrue when delivery is made, regardless of the lack of knowledge of the breach.
The discovery rule applies only when an express warranty of future performance has been
made, so that discovery of a breach must await performance. Richards v. Midland Brick Sales
Co., Inc., 551 N.W.2d 649 (Iowa App. 1996); ICA § 554.2725(2).
D.
Revival of Contract actions:
1.
Actions barred by the Statute of Limitations can be revived by:
a.
an admission in writing, signed by the party to be charged, that the debt is
unpaid or, by a like new promise. ICA § 614.11. This new writing starts the
statute of limitations running again. In re Sleezer’s Estate, 209 Iowa 56, 227
N.W. 644 (1929) (reviving admission can occur before or after barred by
limitation period).
b.
Part payment. Rest. 2d § 82(2)(b).
c.
Statement waiving the statute of limitations defense. Rest. 2d § 82(2)(c).
d. Claims discharged in bankruptcy can be revived by express promise. Rest. 2d §
83.
III.
DOES THE STATUTE OF FRAUDS APPLY TO THIS ALLEGED CONTRACT?
A.
In an effort to prevent fraudulent claims and perjurious testimony in the proof of
agreements, contract law requires that certain agreements be evidenced by a writing
signed by the party to be charged or her agent. The Statute of Frauds does not void
the underlying contract, rather it is a rule of evidence preventing the party from proving
the contract. M&W Farm Service Company v. Callison, 285 N.W.2d 271 (Iowa 1979).
The Statute of Frauds will always be satisfied by a written contract. If there is no
written contract, we must first determine if the requirements of the Statute of Frauds
apply to this kind of agreement.
B.
Common law cases are governed by ICA § 622.32. UCC statute of Frauds applies to
sales of goods. ICA § 554.2201(1). A helpful mnemonic for the categories of cases
listed there is "MY LEGS at Home."
1.
2.
M = a promise for which the consideration is a promise to marry,
Y = contracts incapable of being performed within a year from the date made,
as determinable at the time contract was made. The contract must negate the
right to perform it within a year. If the right to perform the contract within a
year remains and it is possible to do so, even if difficult or improbable, the
contract is not within the Statute of Frauds. Blair Town Lot & Land Co. v.
Walker, 39 Iowa 406 (1874) (only contracts that clearly fall under this category
are: a contract which expressly requires more than one year of performance; a
4
contract which expressly requires that performance not commence within a year;
a contract that is impossible to perform within a year; and a contract whose
terms make it clear, although not expressly, that there is no right to perform
within a year); Garland v. Branstad, 648 N.W.2d 65 (Iowa 2002) (statute of
frauds did not apply to oral contract modifying interest rate on promissory note
because agreement was terminable at will by either party).
In a case where the trial court admitted parol evidence of the alleged three-year
employment contract the court held the statute of frauds does not void such oral
contracts; it simply makes oral proof of them incompetent. While a three-year contract
would come within the statute of frauds, part performance will remove it from the
statute, to the extent of such performance. Pollmann v. Belle Plaine Livestock Auction,
Inc., 567 N.W.2d 405 (Iowa 1997).
a.
Never unilateral contracts, as they are not made until
performance is complete.
b.
Not lifetime contracts, as death could occur within a year. See
Stauter v. Walnut Grove Products, 188 N.W.2d 305 (Iowa 1971)
(lifetime employment contract not within statute of frauds because could
be performed within one year if the employee dies or the employer goes
out of business within one year).
c.
A two-year contract will be taken out of the statute if it contains
an option to terminate for a nonbreach reason which could result in full
performance within a year, i.e., option to terminate for any reason.
Johnson v. Ward, 265 N.W.2d 746 (Iowa 1978) (right to terminate
contract upon withdrawal after notice, shutdown of branch offices or
death of defendant removed contract from category of contracts
incapable of performance within a year).
3.
L = promises creating or transferring interest in LAND, including lease,
easements or covenants, but not leases of less than one year. Promises to
convey interests in real estate fall within the statute of frauds. Sun Valley Iowa
Lake Association v. Anderson, 551 N.W.2d 62 (Iowa 1996). One year leases are
within statute. Shell Oil Co. v. Kelinson, 158 N.W.2d 724 (Iowa 1968) (not
deciding whether oral rescissions of contracts conveying an interest in real estate
fall within the statute of frauds, but holding at the very least that person trying to
prove such parol rescission has burden of showing intention to rescind by clear
and convincing evidence).
4.
E = promise by EXECUTOR to be personally responsible for, i.e., pay
themselves, debts of the estate.
5.
G = Sale of GOODS where the price is $500 or more. Signed agreements
which require all modifications or rescissions to be in writing will be enforced,
5
but such a provision on a form between merchants must be separately signed by
the other merchant before it will be enforced. UCC has special statute of frauds
for sales of personal property (not goods), such as royalty rights, contract rights
over $5000. ICA § 554.1206.
6.
S = SURETY contract, promise to creditor to answer for debt, default or
miscarriage of another. This application of the Statute of Frauds has been
carefully limited by courts to true "surety" contracts. The surety must have no
personal concern in a debtor's obligation but nonetheless promises to pay a
creditor if the debtor does not. The "main purpose" of the promise must not be
the benefit of the surety. Rest. 2d § 184. Thus, no writing is required where
second mortgagee promises to pay first mortgage to avoid foreclosure, or where
commission seller guarantees payment on customer accounts to owner of goods,
because these promises benefit the surety. Miller v. Pound, 284 N.W. 449 (Iowa
1939) (no writing required to enforce seller's guarantee of payment on sold
account because main purpose is to conclude sale for seller). The principal
obligation must be that of the debtor and the creditor must be aware that the
promisor is acting as a surety. See Rest. 2d § 180. The promise must be made
to the creditor, not the debtor, otherwise the promisor will not be viewed as a
true surety and the Statute of Frauds will not apply.
7.
C.
IV.
AT HOME = conveyances or encumbrances on HOMESTEAD by owner must
be by written instrument signed by owner and spouse and setting out legal
description of the homestead. ICA § 561.13. Estate of Gustafson v. Fogleman,
551 N.W.2d 312 (Iowa 1996) (voiding agreement between child and siblings
converting child's inherited ownership of residence to equal ownership because
residence was homestead of child and child's then spouse, and spouse did not
sign the agreement). Oral contracts to convey homestead are only enforceable
where possession of homestead has been abandoned, Shaffer v. Miller, 192 N.W.
868 (Iowa 1923) (actual possession and occupation of homestead is necessary to
assert homestead, although temporary absence is okay), or is abandoned by
means of the oral contract, Recker v. Gustafson, 279 N.W. 2d 744 (1979) (oral
contract enforceable when possession and control of homestead is given in
consummation of contract). While this is similar to the Statute of Fraud
requirement, it is not actually a Statute of Frauds rule, but a separate law, so it is
not subject to most of the avoidance doctrines set out below, with the exception
of estoppel. Id. (bar on enforcing oral contract as to homestead limited to five
acres of total contract property previously designated as homestead).
Contracts not within the Statute of Frauds: If no Statute of Frauds applies to the
contract in question, proceed to determine if a contract is present. See VI infra.
IF THE CONTRACT IS WITHIN STATUTE OF FRAUDS, IS THE STATUTE
SATISFIED?
A. Common law requires:
6
1.
2.
3.
a memorandum signed by party to be charged or their agent. ICA § 622.32.
which provides the essential terms of the unperformed promises.
Signed and unsigned writings can be combined to satisfy the statute of frauds as long
as there is reference on the signed document to the unsigned document, if by their
terms the memoranda clearly rate to the same transaction, or there is parol evidence
which indicates assent to the unsigned document. Nebraska Bridge Supply &
Lumber Co. v. Owen Conway & Sons, 103 N.W. 122 (Iowa 1905) (memorandum
consisted of different writings whose terms made clear their connection to the same
transaction); Lee v. Mahoney, 9 Iowa 344 (1859) (multiple documents may be
connected by parol evidence).
B. UCC/Goods sold for $500 or over: two ways to satisfy
1.
traditional way: ICA § 554.2201(1).
a.
writing sufficient to indicate a contract (afford a basis for believing real
transaction),
b.
signed by party to be charged,
c.
stating some quantity (enforced only as to quantity stated),
d. no other terms necessary, including price, which can be implied.
554.2305.
2.
ICA §
merchants exception: ICA § 554.2201(2).
a.
between merchants. ICA § 554.2104 defines merchants as dealers in these goods
or one whose occupation suggests special knowledge of these goods or one who
employs someone whose occupation suggests special knowledge of these goods.
Sand Seed Service v. Poeckes, 249 N.W.2d 663 (Iowa 1977) (farmer who sells
own crops annually not a merchant); Bauer v. Curran, 360 N.W.2d 88 (Iowa
1984) (a farmer may be a merchant depending on nature and extent of sales,
issue of fact for jury),
b.
a confirmation of a pre-existing contract,
c.
sufficient against the sender = writing signed by charging party, indicating a
contract, stating quantity;
d.
received by defendant within a reasonable time; St. Ansgar Mills, Inc. v. Streit,
613 N.W.2d 289 (Iowa 2000) (whether a written confirmation has been received
“within a reasonable time” depends on all relevant circumstances, including
custom and practice of the parties)
7
e.
defendant has reason to know of contents; and
f.
no written notice of objection within 10 days of receipt, where objection means
saying "what agreement?," not "I said green, not yellow."
C. UCC personal property: ICA § 554.1206.
1.
2.
3.
4.
D.
Effect of satisfying the Statute of Frauds: If the Statute of Frauds can be satisfied, you
may proceed to determine if a contract is present. See VI infra.
1.
V.
writing signed by party to be charged;
indicates a contract for sale between parties;
defined or stated price;
identifies subject matter of sale.
DePaepe v. Malito, 578 N.W.2d 229 (Iowa 1998) (The statute of frauds governs
the way certain oral agreements may be proved; it does not furnish conclusive
proof of the existence of the oral contract, let alone of its terms. The statute of
frauds is a rule of evidence, not of substantive law)
ARE THERE FACTS TO AVOID THE NEED TO SATISFY THE STATUTE OF
FRAUDS?
A. Common law: there will be no need to satisfy statute with a writing if:
1.
there is part performance which refers exclusively and unequivocally to the
contract by the party seeking to enforce the contract. Gardner v. Gardner, 454
N.W.2d 361 (Iowa 1990) (conveyance of remainder interest in land was sufficient
performance to make oral agreement enforceable); Netteland v. Farm Bureau Life
Ins. Co., 510 N.W.2d 162 (Iowa App. 1993) (hiring employees and presenting
director for corporate approval as part performance of a contract to set up and run an
in-house corporate day care center).
2.
the contract is not denied in the pleadings. ICA § 622.34. The statute of frauds
cannot be raised by a motion to dismiss, avoiding the need to answer and deny
allegations that a contract exists. The existence of the contract must be denied and
the statute of frauds defense pled in the answer or raised by objection to evidence at
trial. Johnson v. Ward, 265 N.W.2d 746 (Iowa 1978).
3.
oral admission of contract in court testimony. ICA § 622.35.
4.
reliance on a contract promise will be taken as evidence of the contract sufficient to
allay the fears addressed by the Statute of Frauds, Warder & Lee Elevator, 274
N.W.2d 339 (Iowa 1979) (recognizing promissory estoppel as a means of defeating
the general statute of frauds in ICA § 622.32), where there is:
8
a.
a clear and definite oral agreement:
(1)
reliance or other evidence must corroborate both the existence
and terms of contract clearly;
b.
detrimental reliance:
(1) definite and substantial reliance;
(2) justifiable/reasonable reliance;
(3) foreseeable reliance;
c.
unjust not to enforce:
(1)
possibly because no other remedies, like restitution.
5.
equitable estoppel, or reliance on a misrepresentation that a writing was not
necessary, that a writing had been or would be executed, or that the statute of frauds
would not be pled as a defense.
6.
real estate contracts where
a.
there is payment of all or part of purchase money to seller. ICA § 622.33; see
Recker v. Gustafson, 279 N.W.2d 744 (Iowa 1979) (purchase money means any
consideration, including money). A tender and acceptance of check is enough, it
does not need to be cashed. Rohrbach v. Hammill, 143 N.W. 872 (Iowa 1913);
or
b.
buyer takes possession of realty with express or implied consent of seller. ICA §
622.33 [Note: The Majority Rule is to require Payment and Possession, or
possession and improvements to take a real estate contract out of the statute];
c.
reliance on a real estate contract as above. Miller v. Lawlor, 66 N.W.2d 267
(Iowa 1954) (holding that reliance on a claimed contract for a negative easement
preventing building on adjoining property which would block the view would
allow evidence of contract otherwise barred by lack of writing); Johnson v.
Pattison, 185 N.W.2d 790 (Iowa 1971) (holding that reliance on an oral promise
that land would only be used for residential purposes would make the promise
enforceable).
B. UCC: there is no need to satisfy the statute with a writing if:
1.
the goods in question are
a.
b
specially manufactured for this buyer,
not suitable for sale to others, and
9
c. manufacture has substantially begun or commitment to purchase has been made.
ICA § 554.2201(2)(a).
2.
there is an admission of the contract by the party to be charged in the pleadings,
testimony, or in court. ICA § 554.2201(3)(b). Levien Leasing v. Dickey Co., 380
N.W.2d 748 (Iowa App.1985) (introduction into evidence of offer by party asserting
statute of frauds defense waives the defense). The statute of frauds cannot be raised
by a motion to dismiss, avoiding the need to answer and deny allegation that a
contract exist, or a motion for summary judgment, which would deny plaintiff the
opportunity to elicit oral admission of the contract on cross examination or
otherwise. M&W Farm Service Co. v. Callison, 285 N.W.2d 271 (Iowa 1979).
Failure to object to evidence attempting to establish the contract will act as a waiver
of the defense. Bahnsen v. Rabe, 276 N.W.2d 413 (Iowa 1979).
3.
goods for which payment or delivery has been accepted. ICA § 554.2201(3).
4. reliance on a contract promise will be taken as evidence of the contract sufficient to
allay the fears addressed by the statute of frauds, as above VII(A)(4). Warder & Lee
Elevator, Inc. v. Britten, 274 N.W.2d 339 (Iowa 1979) (holding that the use of promissory
estoppel as defined by Restatement 2d § 139 is available to avoid failure to satisfy the
UCC statute of frauds).
VI.
C.
If the statute of frauds applies and cannot be satisfied or avoided (although failure to
avoid ultimately depends upon the defendant denying the contract in the answer, not
admitting the contract at trial, and objecting to oral evidence of the contract at trial),
consider seeking noncontractual remedial relief, i.e., restitution, in addition to contract
claims. See Xl-XIII infra.
D.
If the statute of frauds does not apply or does apply and is satisfied or avoided, proceed to
determine whether there is a contract.
IS THERE A CONTRACT?
A contract will be present where there is offer, acceptance, and consideration. Kristerin
Development Co. v. Granson Investment, 394 N.W.2d 325 (Iowa 1986) (mutual assent to the
terms or contract usually shown by offer and acceptance).
VII.
IS THERE AN OFFER?
A. An offer is the manifestation of a willingness to enter into a bargain, so made as to justify
another person in understanding that his assent to that bargain is invited and will conclude
it. Rest. 2d § 24. This is an objective standard, focusing on what the offeree reasonably
understands the alleged offer to mean, rather on the subjective intent of the offeror.
10
Fairway Center Corp. v. U.l.P. Corp., 502 F.2d 1135 (8th Cir. 1974) (Iowa has adopted
objective test focusing on expression of intent rather than subjective intent). An offer
must not be made conditional on further assent by the offeror, but must create a power of
acceptance in the offeree and not reserve any right to further assent by the offeror. Rest.
2d § 26.
B. An offer must include a promise or manifestation of willingness to be bound.
1.
This requires that the offeror communicate a promise to the promisee. This excludes
requests for information, price quotations, preliminary negotiations, informational
statements, statements of present or future intent, form letters, advertisements,
negotiations preliminary to written agreement. Knight v. Cooley, 34 Iowa 218 (1872)
(mere statement of price not an offer to sell); Pappas v. Bever, 219 N.W.2d 720
(Iowa 1974) (language of pledge: "I intend to subscribe" mere statement of intent
and not a promise).
2.
Factors to be considered in deciding if oral discussions resulted in agreement or
were negotiations preliminary to a written agreement are: is the contract of a type
usually put in writing, does it need a formal writing for its full expression, number of
details, dollar amount, common or unusual subject matter, whether all details are
resolved, and whether a writing was discussed. Recker v. Gustafson, 279 N.W.2d
744 (Iowa 1979) (found oral contract to buy physical assets of grain elevator);
Emmons v. Ingebretson, 279 F. Supp. 558 (N.D. Iowa 1968) (no oral agreement
found for stock option agreement which was condition for employment agreement
because it had numerous details, was of type normally written, was unique, and
involved over $100).
3.
a request for commercial services/goods is an implied in fact contract offer,
unless made within a setting in which a gift is expected, such as a family or charity.
The request is treated as containing implied promise to pay if service/goods are
provided, i.e., a unilateral contract offer. Quantum meruit describes the situation in
which an employee seeks compensation where there is an express contract as to the
employment, but no express agreement as to compensation, in which case the law
implies a promise to pay a reasonable compensation.
4.
Gambling: Casinos are the offeror. They make an offer to patrons that, if accepted
by wagering an amount and the patron wins, the casino will pay off the wager. In
Blackford v. Prairie Meadows Racetrack and Casino, Inc., 778 N.W.2d 184 (2010),
the Iowa Supreme Court held that there is no pending offer for someone who was
banned from the casino and therefore the casino did not have to pay the plaintiff his
“winnings.”
5.
Offers at auctions: unless a contrary intention is manifested, an auctioneer invites
offers from bidders "with reserve," which means the auctioneer may accept or reject
as too low. If goods are put up for auction "without reserve," the auctioneer makes
an offer to sell at any price bid by the highest bidder; once without reserve bids are
11
called for and a bid is received, the auctioneer cannot withdraw the goods because of
a low bid. Rest. 2d § 28; ICA § 554.2328.
C. An offer must seek a bargain, rather than offer a gift. Thus the promise must be
conditioned upon the receipt of a return promise (bilateral contract offer) or conditioned
upon the receipt of a performance (unilateral contract offer).
D. Definiteness.
1.
A common-law offer is sufficiently definite if it includes all terms essential to
determine duties and conditions of performance and provides a reasonably certain
basis for a remedy. Netteland v. Farm Bureau, 510 N.W.2d 162 (Iowa App. 1993)
(agreement of 10% discount on competitive rates sufficiently definite); there are
practical considerations and the courts are still reluctant to impose reasonable
terms on contracting parties. Bowser v. PMX Industries, Inc., 545 N.W.2d 898, 900
(Iowa App. 1996); Recker v. Gustafson, 279 N.W.2d 744 (Iowa 1979) (while
agreement on additional and more precise terms might be prudent, not necessary);
Hsu v. Vet-A-Mix, 479 N.W.2d 336 (Iowa App. 1991) (lack of precise royalty terms
fatal to claimed agreement); Contrast: Audas v. Sabra Communications Corp., 554
N.W. 2d 868 (Iowa 1996) (where a contract appears to exist, courts are reluctant
to find it too uncertain to be enforceable); Whalen v. Connelly, 545 N.W.2d 284
(Iowa 1996) (an agreement to a future contract without definitive terms is merely an
agreement to agree and not a contract). In Magnusson Agency v. Public Entity
Company-Midwest, 560 N.W.2d 20, (Iowa 1997), an insurance agent submitted a bid
to PENCO to sell insurance to Webster County. The specific amount of his
commission was not discussed but terms (length of service and they would pay him a
commission) were sufficient to determine with certainty the promises and
performances to be rendered by each party.
2.
A UCC offer can contain numerous open terms, especially as to those terms for
which the UCC acts as a gap filler, such as price, delivery, remedies and others. See
ICA § 554.2301 -- 2338. The sole requirement is that it was intended as an offer and
there is a reasonably certain basis for giving an appropriate remedy. ICA § 554.22
The time for performance on a land contract is not usually of the essence unless the
contract expressly states otherwise. Beckman v. Kitchen, 599 N.W.2d 69 (Iowa 1999)
12
VIII.
IS THERE AN ACCEPTANCE?
A. Common law:
1.
Acceptance must have the following features:
a.
definite manifestation of assent. Rest. 2d § 50. Apply an objective test to
interpret whether a reasonable person would understand as a manifestation of
assent. This is normally an affirmative act, although silence may be acceptance
where the offeree takes the benefit of services with a reasonable opportunity to
reject them and reason to know that compensation is expected, where the offeror
indicates that silence can be assent and the offeree intends silence to be assent,
or previous dealings indicate that silence is to be understood as assent. Rest.2d §
69; Olson v. Employment Appeal Bd., 460 N.W.2d 865 (Iowa App. 1990)
(working under changed contract for seven months is evidence of acceptance of
new contract).
b.
unequivocal acceptance of the terms offered: the mirror image rule. Shell Oil
Co. v. Kelinson, 158 N.W.2d 724 (Iowa 1968) (acceptance must conform strictly
to the offer in all its conditions, without any deviations, conditions or
qualifications); O'Brien v. Fitzhugh, 215 N.W. 944 (Iowa 1927) (non-mirror
image acceptance is a rejection and counter-offer).
(1) Rick v. Sprague, 706 N.W.2d 717 (Iowa 2005), recently held an
acceptance did not conform to the offer and therefore no contract existed.
The driver of a car who rear-ended a couple offered to settle their claims for
$5000. The wife accepted the offer and the husband rejected it. The court
held the offer could be construed as an offer to settle both claims together for
$5000 and therefore the acceptance by one of the two was not valid.
c.
in the manner requested. An acceptance must accord to the method, place, and
time prescribed in the offer, without variation. Rest. 2d § 60.
(1)
A unilateral contract offer seeks acceptance in the form of a
performance. The performance must conform precisely to the demands
of the offer.
(2)
A bilateral contract offer seeks acceptance in the form of a
promise. If the offer requires a particular mode of acceptance, attempts
to accept in a different manner from that specified will not suffice as an
acceptance but will constitute a counter-offer. An offer which specifies
no manner of acceptance will impliedly authorize its acceptance through
the same agency. Lucas v. Western Union Telegraph, 109 N.W. 191
(Iowa 1906) (mailed offer authorized mailed acceptance when
circumstances suggest parties contemplated use of the mail for
acceptance).
13
(3)
except conduct such as delivery or acceptance of goods may be
viewed as acceptance of last bilateral contact offer where no express
acceptance is present and parties act as if contract is present (last shot
rule).
d.
communicated to offer acceptance of a bilateral contract offer requires that the
manifestation of assent be communicated to the offeror. Kristerin Development
Co. v. Granson Investment, 394 N.W.2d 325 (Iowa 1986) (communication of
acceptance need not take the form of delivery, but may occur through words,
acts or both which manifest intend to be bound). Lack of notice of acceptance
of a unilateral contract offer by performance will not discharge the offeror
unless notice was requested or offeree has reason to know offeror will not
promptly learn of the performance, although no discharge if notification was
expressly waived in the offer, notice is attempted or notice is actually received
within a reasonable time. Rest. 2d § 54.
B. UCC Acceptance:
C.
1.
follows common law as to what is a manifestation of assent.
2.
mirror image acceptances count, but are not necessary. ICA § 554.2207. An
acceptance with different or additional terms is an acceptance and not a counter-offer
as long as it is a definite and seasonable expression of acceptance (manifestation of
assent) and is not expressly conditioned on offeror’s assent to different or additional
terms, i.e., expressly states it is a counter-offer.
3.
modifies common law as to conformity of manner of acceptance to offer. ICA §
554.2206 provides that an offer to buy or sell goods invites acceptance in any manner
and by any medium reasonable in the circumstances. If an offer seeks shipment of
goods, either shipment or a prompt promise to ship is a proper and effective means of
acceptance. ICA § 554.2206(1)(b).
4.
communication: Where the beginning of a requested performance is a reasonable
mode of acceptance, the offeree in a sale of goods contract must, within a reasonable
time, notify the offeror of the fact of the offeree’s beginning performance. If an
offeree fails to notify the offeror, the offeror may treat the offer as having lapsed.
ICA § 554.2206(2).
An otherwise objective manifestation of assent induced by misrepresentations as to the
character or essential terms of a proposed contract will not be considered a manifestation
of assent to the actual terms of the contract. Rest. 2d § 163.
14
IX.
IS THE ACCEPTANCE EFFECTIVE?
A. Has the offer lapsed or expired before acceptance?
1.
Generally, offers expire after a reasonable period of time, Rest. 2d § 49, but
a.
oral offers lapse when conversation ends unless otherwise stated.
b.
offers with a specified expiration date expire on that date, although if the
communication of the offer is delayed and the offeree has reason to know of the
delay, the time for acceptance begins from when the offer should have arrived
unless circumstances suggest otherwise. Rest. 2d § 49.
c.
offers (but not options) automatically lapse at offeror’s death or incapacity,
regardless of lack of notice to offeree. Rest. 2d § 48.
d.
power to accept an offer may also terminate where intervening events have
made the subject matter of the contract illegal or the subject matter is destroyed.
Rest. 2d § 36.
B. Has offer been previously rejected?
1.
The offeree’s power of acceptance ends upon the offeree’s express rejection.
2.
Counter-offers which do not specifically indicate nonrejection terminate the power to
accept the original offer. A counter-offer is an offer made by the offeree which
proposes a substitute bargain or, for common law cases, a nonmirror image
acceptance.
3.
Inquiries about the possibility of other terms is not a rejection.
C. Has offer been effectively revoked prior to acceptance?
1.
An offeree’s power of acceptance terminates when the offeree receives notice of
revocation from the offeror. Emmons v. Ingebretson, 279 F. Supp. 558 (N.D. Iowa
1968) (offer revoked when offeree told to “hold up the contract” because offeror
learned he could not perform).
2.
Notice of revocation may occur if the offeree learns of conduct which is inconsistent
with the offer, for example, sale to another. Rest. 2d § 43.
3.
Notice of revocation is ineffective if the offer is irrevocable.
a.
Is offer revocable at time of acceptance? An irrevocable offer cannot be
terminated by an attempted rejection, counter-offer or revocation, nor by the
death or incapacity of the offeror. Rest. 2d § 37.
15
(1)
unilateral offers are not revocable after performance starts, even
if notice has not been provided yet. Rest. 2d § 45. Van Hosen v. Bankers
Trust Co., 200 N.W.2d 504 (Iowa 1972) (unilateral offer to provide
pension if employee works for stated period irrevocable once employee
starts working).
(2)
bilateral offers are freely revocable even if there is an express
promise to keep it open unless
(a)
there is an option contract = promise to keep offer
open supported by consideration. A right of first refusal or right
of preemption is not an option until the owner decides to sell.
Knepper v. Monticello State Bank, 450 N.W.2d 833 (Iowa 1990).
(b)
offer reasonably and foreseeably had to be relied
upon prior to acceptance. Rest. 2d § 82(2). The use of reliance
to hold an offer open is rarely considered foreseeable or
reasonable outside of the context in which a contractor submits
an overall bid which relies upon subcontractor bids which the
contractor has not yet accepted. Drennan v. Star Paving, 333
P.2d 757 (Cal. 1958).
SDG Macerich Props., L.P. v. Stanek, Inc., 648 N.W2d 581 (Iowa 2002)
Macerich leased property to Stanek under a twenty-year lease agreement. The
agreement gave Stanek, who operated a Hardee’s restaurant on the property, an option to
renew the lease. Stanek forgot to exercise the option within the timeframe required by the
agreement, and Macerich declined to renew the lease. Stanek asked for equitable relief,
because he had substantially performed under the contract. The Court held an option is
merely an offer than cannot be revoked until a certain date. The holder of the option has the
power of acceptance throughout the option period. After the time period passes, an option
holder may not accept the offer. Substantial performance and equity will not excuse the
nonoccurrence of an express condition precedent to a contract.
Stanek failed to exercise the option provision due to honest mistake or oversight.
Forgetfulness is not the equivalent of a legal mistake. Equitable relief is afforded only where
there is evidence of excusable fault, fraud, mistake, estoppel, accident, overreaching, or
unconscionable results. Because none of these conditions were present in this case, it was
proper to enforce the option provision as written.
(c)
Restatement 2d of Contracts § 87(1) makes a
written offer signed by offeror, which recites a purported
consideration and states a fair exchange within a reasonable time
act as an option contract, even if no actual consideration
16
bargained for or no reasonable reliance. There is no case law yet
in Iowa accepting or rejecting this.
(d)
UCC cases: firm offers under ICA § 554.2205 are
irrevocable for time stated or a reasonable time, but no more
than 3 months if the offer is by merchant, in a signed writing and
the terms give assurance it will be held open.
b.
If the offer is revocable, is the revocation effective before acceptance is?
(1) Mail Box Rule regarding acceptances: acceptance is effective on posting, if
mail is a proper mode of acceptance. Lucas v. Western Union Telegraph Co.,
109 N.W. 191 (Iowa 1906) (telegrammed acceptance of mailed offer not
effective until received, but telegrammed acceptance of telegraphed offer is
effective when sent).
(a)
Exception: acceptance of an option contract is not effective until
it is received. Rest. 2d § 63(b).
(2) mail box rule regarding revocations:
received. Rest. 2d § 42.
X.
revocations are not effective until
IS THERE CONSIDERATION?
A contract will exist only if the agreement established by the acceptance of the offer is
supported by consideration. Dullard v. Schafer, 100 N.W.2d 422 (Iowa 1960). Promises to
make gifts are not contracts although such promises may be both offered and accepted, as there
is no consideration. To determine if consideration is present, determine if these two features are
present:
A. Does what is being exchanged qualify as consideration?
1.
Consideration can only be a legal benefit to promisor OR a legal detriment to
promisee. The majority rule requires both. Iowa recognizes a legal benefit alone as
sufficient. A legal detriment exists where the promisee gives up a legal right.
a.
2.
In Meinke v. Northwest Bank & Trust Co., 765 N.W.2d 223 (Iowa 2008), a
mother loaned money to a family business secured by a mortgage. The bank
agreed to loan additional money to the business if the mother would subordinate
her loan. The bank’s consideration was the legal detriment of agreeing to loan
additional money, something it was not required to do. The consideration as
bargained for because the mother understood the bank would lend more money
if she would sign the agreement.
A legal detriment will be present even when a promisee releases or compromises:
17
a
a disputed right, Laicized Boating & Bathing, Inc. v. Iowa, 402 N.W.2d 419
(1987) (lessee’s possession of property under low cost lease a benefit where
lessee’s claim of ownership of property was vigorously disputed and would have
been expensive to litigate),
b.
a doubtful legal right asserted in good faith. White v. Flood, 138 N.W.2d 863
(1965) (release of right to probate a will revoking an earlier will is consideration
even if validity of later will was doubtful), OR
c.
an unfounded claim of right asserted in good faith. Dyer v. Nat’l Bank
Products, 380 N.W.2d 732 (Iowa 1986) (policy which favors compromises of
disputed claims in order to reduce the volume of litigation justifies finding that
release of right to sue employer by employee where workers’ compensation
statute deprives employees of right to sue employers in tort was consideration
for promise of lifetime employment if claim of right made by employee in good
faith).
3.
An illusory promise, where the promisee reserves the right to perform or not
perform, is not consideration. Rest. 2d § 77. For example a promise to perform
subject to a right to cancel at any time is illusory. Such a promise will not be viewed
a illusory, however, if actual performance has occurred, or if the right to cancel is
subject to a notice provision or other limits. Exclusive sales contracts are viewed as
supported by an implied promise to use reasonable effort to sell the product, thus
avoiding a lack of consideration as a result of illusory promise to compensate owner
for sale. See ICA § 554.2306.
4.
Promises voidable because of infancy, incompetency or other defense are not illusory
and do serve as consideration. Promises conditioned upon the occurrence of a future
event, such as an insurer's promise to pay if there is a fire, are good consideration.
5.
No legal detriment is present when the promisor has a pre-existing legal duty to
perform what has been promised. Rest. 2d § 73.
6.
A promise not to engage in illegal acts is not a legal detriment since there is no legal
right to perform such act which can be given up.
7.
An agreement to accept part payment in satisfaction of an undisputed, liquidated debt
is generally invalid for lack of consideration, although part payment will be
consideration if the debtor is insolvent. Engbretson v. Seiberling, 98 N.W. 319 (Iowa
1904) (partial payment of Iiquidated debt by an insolvent debtor was valid settlement
of claim).
8.
The Iowa Supreme Court has suggested, in dictum, that a promise of reconciliation
may consist merely of a promise of love and affection and may not, therefore, qualify
as consideration. Marriage of Farr, 542 N.W.2d 828 (Iowa 1996) (fraudulent nature
of promise to reconcile (promisor lying) made it unnecessary to consider whether
18
such a promise could be consideration for a release and satisfaction of permanent
alimony obligation).
a.
In re Marriage of Cooper, 769 N.W.2d 582 (Iowa 2009), held a reconciliation
agreement which provided for a large amount of alimony should the husband
cheat again was void. The consideration of refraining from cheating would
require the court to engage in a he-said/she-said inquiry about the marital
relationship and injects fault into the divorce proceeding.
B. Has what is being exchanged been bargained-for? Each party’s promise or
performance must have been the price or condition for the other party’s promise or
performance.
1.
Past services, rendered prior to the making of the contract, cannot have been
bargained-for by the contract and cannot serve as consideration. Dullard v. Shaefer,
251 Iowa 274, 100 N.W.2d 422 (1960) (past assistance of son to father’s acquisition
and maintenance of property cannot be consideration for later promise to leave
property to son in will). However, past acts performed under a contract, the
enforcement of which was technically barred by bankruptcy or the statute of
limitations, will be viewed as consideration for a revived promise to pay the debt.
Furthermore, a mortgage which secures an antecedent or preexisting debt is viewed
as supported by consideration. See also Padzensky v. Kinsenbaw, 343 N.W.2d 467
(Iowa 1984) (pre-existing debt to lawyer was consideration for assignment of bail
bond to lawyer).
2.
Consideration can be found where there is a "bad bargain" or where the consideration
exchanged appears inadequate relative to the value of what was received, as long as
what was exchanged was actually bargained-for. Rest. 2d § 79; Kristerin
Development v. Granson Investment, 394 N.W.2d 325 Iowa (1986).
3.
A gift transaction "masquerading" as a bargain by the insertion of a sham recital of
consideration will not be viewed as supported by consideration. Dullard v. Schaefer,
251 Iowa 274, 100 N.W.2d 422 (1960) (recitation of payment in contract between
father and son where no payment made does not suffice to show consideration).
Nominal consideration (a peppercorn), a great disparity in the values of what is
exchanged, or a relationship between the parties in which gifts are often made may
be evidence that the purported consideration was not actually bargained-for.
4.
In order to distinguish between a unilateral contract offer, which seeks performance,
and a conditional gratuitous promise, which requires the donee to do something to
"pick-up" the gift, ask whether the performance was the price of the promise and
whether the performance benefits the promisee or the promisor.
C. Consideration for Modifications.
19
1.
Common law: consideration is required (pre-existing duty rule) unless there are
changed circumstances and fair change in the terms, but no consideration required if
previous contract is rescinded. Rest. 2d § 89; Recker v. Gustafson, 279 N.W.2d 744
(Iowa 1979) (modification adding $10,000 to purchase price is without consideration
and unenforceable since no evidence of changed circumstances or rescission);
Cannon v. Nat. By-Products Inc., 422 N.W.2d 638 (Iowa 1988) (new consideration
unnecessary because modification of an employment at-will contract should be
viewed as rescission of old contract and formation of new contract); Wiysel v.
William Penn College, 448 N.W.2d 712 (Iowa App. 1989) (presentation of new
employment contract covering term of existing contract constitutes an offer to
rescind the existing contract).
a.
The common law requirement of consideration for modifications was recently
reinforced in Margeson v. Artis, 776 N.W.2d 652 (Iowa 2009). The court found
that a modification raising the purchase price of a business was not supported by
consideration.
Practice Note: Consider arguing the common law rule should be abandoned when
presented with an appropriate case. Margeson notes the parties did not question the
common law rule that modifications require consideration and simply argued about
whether consideration existed. In a footnote, Margeson acknowledges declining
acceptance of the common law rule amongst commentators and a “growing number of
courts.” This footnote is a good reminder to conduct quick research outside of Iowa
law to identify trends or arguments to push the development of the law.
2.
UCC: no consideration is needed for modification of sale of goods contracts, but
modifications must be made in good faith. Extortionate modifications are not
permitted and party may need to show there was an objective commercial reason,
such as a market shift, for the modification. ICA § 554.2209(1).
D. Miscellaneous Consideration Issues.
1.
A promise to perform an antecedent contract which was previously voidable by the
promisor due to minority or other defense but which was not avoided, also known as
ratification, is binding without consideration. Rest. 2d § 85.
2.
No consideration is required to waive rights or claims arising out of an alleged
breach of a commercial contract within the scope of any of the UCC Articles, if the
renunciation is in writing and signed and delivered by the aggrieved party. ICA §
554.1107.
20
XI.
3.
Waivers require neither consideration nor a writing, but can be based on conduct
alone, although they are limited to nonmaterial terms. See XIX A.6, infra.
Consequently, arguing waiver is a good alternative if a modification argument is
blocked by either lack of consideration or the statute of frauds.
4.
Lack of consideration means the contract as formed is missing an essential element
and there is no contract. Iowa courts have at times used the antiquated term “failure
of consideration” when a valid contract was formed but the contract was breached
because the promised performance had not occurred. Federal Land Bank of Omaha
v. Woods, 480 N.W.2d 61 (Iowa 1992); Kristerin Development Co. v. Granson
Investment, 394 N.W.2d 325 (Iowa 1986) (failure to pay $100 earnest money in
$600,000 land-purchase contract is partial failure of consideration, not lack of
consideration, and insufficient to show total breach).
5.
Lack of mutuality of obligation is only a problem if it amounts to a lack of
consideration altogether. Exclusive distributorships are supported by consideration
both by implication of a promise to use best effort, as well as by actual performance
of the distributorship. Shearon v. Boise Lunger Co., 478 F.2d 1111 (8th Cir. 1973)
(actual purchase of lumber by exclusive distributor provided consideration adequate
to overcome mutuality arguments); Economy Roof & Insulating Co. v. Zumaris, 538
N.W.2d 641 (Iowa 1995) (roofing contract which failed to obligate the owner to
accept or request services exclusively from roofer lacked mutuality of obligation and
was unenforceable).
6.
The presence of a seal will not make up for the absence of consideration in Iowa.
ICA § 537A.1, ICA § 554.2203. If the contract is written and signed by party to be
charged, a plaintiff need not plead or prove consideration, as the law presumes
consideration for written instrument. ICA § 537A.2. If consideration is stated in a
written contract, no additional or different consideration may be used to support the
agreement. Lane v. Richards, 91 N.W. 786 (Iowa 1902). Whether consideration is
stated or not in a written contract, defendant may raise lack of consideration as a
defense, but the burden of proof regarding lack of consideration remains with the
defendant. ICA § 537A.3; Hubbard Milling Co. v. Citizens State Bank, 385 N.W.2d
255 (Iowa 1986) (defense of lack of consideration also available when the parties
recited some consideration in the agreement).
7.
When a contract contemplates subsequent execution of a subsidiary agreement,
promises in that agreement are supported by the consideration provided for the
original contract. If, however, a subsidiary agreement is not contemplated in the
original contract, and performance of the original agreement is completed, a
subsidiary agreement requires independent consideration. Iowa Realty of Pella v.
Boomsmas, Inc., 553 N.W.2d 549 (Iowa 1995).
HAS THE CONTRACT BEEN MODIFIED?
A.
A written contract can be modified orally. However, the modification must meet the
21
essential elements of a contract. Modification may be express or implied, but must be
“more than loose and random conversations.” Passehl v. Passehl, 712 N.W.2d 408 (Iowa
2006).
1.
B.
XII.
Doris Passehl died owning 160 acres of farmland. They had obtained a zoning
adjustment so that her son Jerry could live on a portion of the land and operated an
auto salvage business. Jerry settled with Doris’s estate to keep the land containing
his business and a dispute arose regarding the size of the land and the contours of
the agreement. The estate claimed the contract had been modified to require
additional obligations of Jerry. Generally, a written contract may be modified by
a subsequent oral contract if it has the essential elements of a binding contract. It
may be express or implied, but must be “more than loose and random
conversations.” The court held there was no oral modification because the estate
provided insufficient evidence of a contract. The court noted that the three
siblings had been in litigation for 5 years and it seemed “incredible” that they
would reach a major modification and not reduce it to writing.
Reminder – consideration required for modification under common law (but not under
the UCC). See discussion above.
IF THERE IS NO CONTRACT (NO OFFER OR ACCEPTANCE) WILL
RESTITUTION HELP?
A.
Restitution is the same as unjust enrichment, quasi contract or implied-in-law
contract. Although names such as implied-in-law contract suggest that restitution rests
on contract theory and the presence of a bargain, its application to cases in which no
bargain is or could be present reveals that it is essentially a noncontractual theory of
recovery. It may be available, therefore, where no assent is present and no contract can
be found. Irons v. Community Star Bank, 461 N.W.2d 849 (Iowa 1983) ("contracts
implied in law are imposed by the court to prevent unjust enrichment and require no
expression of assent”). Unjust enrichment is a doctrine of restitution. Slade v.
M.L.E. Inv. Co., 566 N.W.2d 503 (Iowa 1997).
Practice Note: Remember to raise the argument of restitution in the alternative. In
Blackford v. Paririe Meadows Racetrack and Casino, Inc., 778 N.W.2d 184 (Iowa
2010), the Iowa Supreme Court held there was no contract because the casino had not
extended an offer to gamble. It noted in a footnote that the gambler had not sought
return of the gambled money under any theory.
Frank Millard & Contract., Inc. v. Housewright Lumber Contract., 588 N.W.2d 440 (Iowa 1999)
Housewright was the general contractor and Millard was a mechanical and electrical
subcontractor on a project for the Iowa Army Ammunition Plant in Middletown, Iowa. Millard
bid on a project. The original bid did not include the insulation. Housewright mailed Millard a
contract including the insulation work and adding
22 an additional $2000 to the contract price.
Millard refused to sign that contract because either Housewright or Millard could not ascertain
the extent of the insulation work until another subcontractor completed some asbestos
abatement work.
A second contract was signed. That contract was identical to earlier contract, with one
exception. The second contract had a handwritten addendum that said: "At end of project we
will review the cost of duct insulation and responsibility."
B. The essential elements of restitution are:
1.
an enrichment to one which is an impoverishment to another, and
2.
injustice if retention of the benefit is allowed without compensation. Pella v.
Fowler, 215 Iowa 90, 244 N.W. 734 (1932) (telephone company’s use of streets and
alleys was not a benefit to it provided by the city where city had no power to lease
streets and alleys); Irons v. Community Star Bank, 461 N.W.2d 849 (Iowa 1983)
(lack of benefit to defendant or impoverishment to plaintiff defeats an implied-in-law
contract claim).
C. Injustice will not be present where there is an alternative justification for not
compensating the beneficiary, such as that the benefit was provided as a gift or there was
no intent to charge, it was unnecessary, or the donor’s improper conduct created the need
for the benefit, or there is another remedy. Hsu v. Vet-A-Mix, Inc., 479 N.W.2d 336
(Iowa App. 1991) (no restitution for research by professor when already paid for by
university).
XIII. IF THERE IS NO CONTRACT (NO CONSIDERATION), BUT MERELY PAST
SERVICES, WILL PROMISSORY RESTITUTION HELP?
A. Promissory restitution may be available where there is
23
1.
a subsequent promise to compensate for past benefit,
2.
provided under circumstances where it is unjust not to enforce the promise. Rest. 2d
§ 8C.
B. It will not be unjust if the benefit was provided as a gift, but defendant has the burden of
showing it was intended as a gift. Dullard v. Schaefer, 100 N.W.2d 422 (Iowa 1960)
(dictum suggesting that Iowa would enforce a subsequent promise to compensate for a
non-gratuitous past service which provided a material benefit to promisor). The promise
will not be enforced to the extent it is disproportionate to the benefit.
XIV. IF NO CONTRACT (NO CONSIDERATION), WILL PROMISSORY ESTOPPEL
HELP?
A. Although promissory estoppel is sometimes described as substituting reliance for
consideration, it is essentially a noncontractual theory of recovery in which reliance
provides the justification for liability which a bargained-for exchange provides in contract
theory. Promissory estoppel is particularly useful to enforce gift promises which are
unenforceable under contract theory because they are unsupported by consideration.
B. Promissory estoppel requires:
1.
a clear and definite oral agreement, promise, or assurance without which promisee
would not have acted. In Re Scheib Trust, 457 N.W.2d 4 (Iowa 1990) (tentative
agreement insufficient as a basis for reliance).
2.
foreseeable and justifiable detrimental reliance. National Bank of Waterloo v.
Mueller, 434 N.W.2d 887 (Iowa 1989) (reliance on promise conditioned on "no
unexpected problems arising” was neither reasonably foreseeable or justified); Miller
v. Lawlor, 66 N.W.2d 267 (1954) (purchase and construction on land in reliance on
assurance that view would not be blocked justified specific enforcement of
assurance); Hsu v. Vet-A-Mix, Inc., 479 N.W.2d 336 (Iowa App. 1991) (agreement to
agree on royalty terms too indefinite to justify reliance).
3.
under circumstances which make it unjust not to enforce. Warder & Lee Elevator,
Inc. v. Britten, 274 N.W.2d 339 (Iowa 1979) (unjust not to enforce sale of grain to
grain elevator when elevator immediately contracted to sell grain).
4.
The remedy granted for breach may be limited as justice requires. Hardin v. Eska
Co., 127 N.W.2d 595 (1964) (promissory estoppel justified compensation for
expenses incurred in reliance on promise of exclusive sales contract); Johnson v.
Pattison, 185 N.W.2d 790 (Iowa 1971) (enforcing an assurance that adjoining land
would always be used for residential purposes by enjoining operation of grain
elevator built on the land in knowing violation of the assurance).
24
C. Iowa does not require reliance in order to make charitable subscriptions enforceable.
P.H.C.C. v. Johnston, 340 N.W.2d 774 (Iowa 1983) (as long as the language of the
charitable pledge is obligatory, rather than expressing present intent, no proof of action or
forbearance by the charity is necessary); Rest. 2d § 90(2).
XV.
IF THERE IS A CONTRACT, WHAT ARE THE TERMS OF THE AGREEMENT?
A. Where one may look to determine the terms of an agreement will depend upon whether
the agreement in question is integrated, i.e., whether the agreement consists of a writing
or writings intended to constitute the final expression of one or more terms in the
agreement. Rest. 2d § 209(1). The primary example of integrated agreements are written
contracts signed by both parties. There are three kinds of agreements:
1.
nonintegrated agreements will be found where no single document is the complete
or final expression of agreement. Oral agreement or agreements which arise out of
an exchange of letters or call are nonintegrated agreements.
2.
partially integrated agreements are meant to be final only as to what is included,
but not intended to be complete. Rest 2d. § 210(2).
3.
fully integrated agreements are meant to be the complete and exclusive expression
of parties’ agreement. Rest. 2d 210(1).
B. Determining integration:
1.
Parol evidence, i.e., evidence of prior or contemporaneous agreements, is
admissible to show whether a writing was intended to be the final expression of any
part of their agreement (partially integrated), or the complete and final expression of
their agreement (fully integrated). In Re Eickman Estate, 291 N.W.2d 308 (Iowa
1980) (summary judgment inappropriate where record revealed evidence that one
party did not understand that the signed document was to constitute the full and final
agreement of the parties); Commercial Trust and Savings Bank of Storm Lake v. Toy
National Bank of Sioux City, 373 N.W.2d 521 (Iowa App. 1985) (the key question in
determining whether an agreement is integrated is “the intent of the parties”);
Cannon v. National By-Products, Inc., 422 N.W.2d 638 (Iowa 1988) (whether an
employment contract includes personnel handbook policies will depend upon the
reasonable expectations of the employee).
2.
The presence of a merger clause in a contract, such as "This writing contains the
entire agreement of the patties; there are no promises, understandings or agreements
of any kind which relate to this contract other than those stated below," is only
conclusive in Iowa where hand-crafted (not preprinted), between those who are
sophisticated business persons represented by counsel and of equal bargaining
strength, and where the terms of the alleged oral agreement would normally be
expected to be found in the written agreement. Montgomery Properties Corp. v.
25
Economy Forms Corporation, 305 N.W.2d 470 (Iowa 1981) (presence of merger
clause here justified exclusion of parol evidence to vary term).
C. Determining the terms of a nonintegrated agreement under the common-law.
1.
Because under the common-law, only a mirror-image acceptance is an acceptance,
the terms of a common-law contract must be the terms of the offer which was
accepted.
2.
Where both parties act as if there is a contract despite no explicit acceptance, the last
shot rule states that the last outstanding offer is accepted by the contract performance
of the offeree, and the terms of the contract are as found in that offer.
D. Determining the terms of a nonintegrated agreement under the UCC:
1.
Regardless of the form of offer and acceptance, as to open terms not expressly
resolved by the parties, the UCC provides supplementary gap-fillers, such as price,
delivery provisions, warranties, etc., which become terms of the contract. ICA §
554.2305 et seq. Inclusion of most of these gap-fillers can be avoided by agreement.
ICA § 554.2316.
2.
In UCC cases, express warranties, or promises as to the quality of performance, will
be found to have been made by any affirmation of fact, description of the goods, or
promise which relates to the goods and becomes part of the basis of the bargain, even
without the use of the words "warrant" or "guarantee" or a specific intent to made a
warranty. ICA § 554.2313.
3.
If acceptance is mirror-image and no confirmation with additional terms is reached,
terms are as found in the offer and as supplemented by the UCC gap-fillers.
4.
Under section 2-207(2):
a.
additional terms in a nonmirror acceptance will only be in contract involving a
nonmerchant when expressly accepted by the original offeror. ICA §
554.22071. Between merchants, express agreement to an additional term can
also bring it into the contract, even if it is a material alteration. N & D Fashion,
Inc. v. DHJ, Industries, Inc., 548 F.2d 722 (8th Cir. 1976)(also holding that
signing of confirmation stating materially alerting additional term was express
agreement to such term).
b.
Additional terms in such an acceptance will automatically become part of a
contract between merchants as long as
(1)
(2)
the offer did not limit acceptance to the terms of the offer,
the terms are nonmaterial (resulting in neither surprise nor hardship).
While determination of materiality is a question of fact, terms which the
26
(3)
c.
comments to the UCC suggest are likely to be material are clauses
negating standard warranties, permitting seller's cancellation upon late
payment, requiring complaint to be made in an unusually short time.
UCC 2-207 comment 4. The 8th circuit has affirmed a district court
holding that an arbitration clause was material, despite the widespread
existence of arbitration clauses in written acknowledgments in the
garment industry. N & D Fashions, Inc. v. DHJ, Industries, Inc., 548
F.2d 722 (8th Cir. 1976).
the terms are not subsequently objected to within a reasonable time. ICA
§ 554.2207(2).
Different terms in an acceptance between merchants are not in the contract.
5. Additional and different terms in a confirmation to an existing mirror-image
agreement.
6.
a.
Additional terms may become part of the contract under the same conditions
additional terms in a nonmirror-image acceptance may become part of the
contract.
b.
Different terms in reciprocal confirmations by offeror and offeree "knock" each
other out and the contract is governed by what the original agreement says on
that issue and supplementary terms supplied by the UCC gap-filling provisions.
ICA 554.2207(2).
In addition to these expressly agreed upon and implied terms, evidence of additional
terms may be provided by trade usage (regularly observed practices, ICA §
554.1205(2)), course of dealing (conduct under previous contracts, ICA §
554.1205(l)), and course of performance (conduct under contract at issue, ICA §
554.2208; ICA § 554.2202(1)). Course of dealing will be more probative of such
other agreed-upon terms than trade usage, and course of performance will be more
probative than either of the other two. ICA § 554.1205(4) & 2208(2).
E. Determining the terms of an integrated contract under the common law.
1.
The terms contained within the four corners of the writing are terms in the contract.
The question is what terms outside the written document can become part of the
contract. The parol evidence rule was designed to prevent fraudulent claims that the
actual agreement of the parties differed in some way from the written contract. The
rule assumes a written contract intended to be the complete or final agreement
between the parties intended to exclude additional or contradictory terms. Thus, the
parol evidence rule states that parol evidence, which is evidence of additional terms
arising from prior or contemporaneous oral agreements, is admissible only to
a.
add terms to partially integrated agreements, Rest. 2d § 216(1); and
27
F.
b.
never to add terms to completely integrated agreements, Associated Grocers of
Iowa Cooperative, Inc. v. West, 297 N.W.2d 103 (Iowa 1980); and
c.
never to vary or contradict terms in any integrated agreement. Commercial
Trust and Savings Bank v. Toy National Bank, 373 N.W.2d 521 (Iowa App.
1985).
2.
However, parol evidence is admissible to show whether an agreement is integrated at
all First Interstate Equipment Leasing of Iowa, Inc. v. Fielder, 449 N.W.2d 100
(Iowa App. 1989).
3.
It is also admissible to reform a writing which does not express the true agreement of
the parties, if shown by clear and convincing evidence, or to show that an agreement
was improperly induced by fraud, duress, mistake, etc. Id. (parol evidence admissible
to reform written contract where induced by prior oral agreement).
4.
Parol evidence is also permissible to prove the term of a collateral agreement for both
partially and completely integrated agreements, where a collateral agreement is an
agreement for separate consideration and relating to a distinctly different subject
matter. Seastrom v. Farm Bureau Life Ins., 601 N.W.2d 339 (Iowa 1999) (Parol
evidence is admissible to prove the existence of an independent oral contract).
5.
In a case where a lawyer bought a home-built house from a physician, written
statements by the seller about the walls and heating system constituted express
warranties. They constituted a “distinct assertion of quality” about the house, as
opposed to being “a mere statement of opinion or praise.” Seller intended the
statements to be believed and relied upon, and buyer did so. Flom v. Stahly, 569
N.W.2d 135 (Iowa 1997).
Determining the terms of an integrated contract under the UCC.
1.
As under the common-law, in addition to the terms expressly contained in the four
corners of a contract:
a.
consistent (noncontradictory) additional terms may be added by parol evidence
to partially integrated agreements, but not to completely integrated agreements,
and
b.
contradiction by parol evidence is forbidden for both partially and completely
integrated agreements. Cargill, Inc. v Fickbohm, 252 N.W.2d 739 (Iowa 1977)
(parol evidence of oral agreement on delivery date admissible to supplement
standard form agreement which left out delivery date and was intended to be
partially integrated).
28
2.
UCC express warranties will be found to have been made by any affirmation of fact,
description of the goods, sample, model or promise which relates to the goods and
becomes part of the basis of the bargain, even without the use of the words
"warranty" or "guarantee" or a specific intent to make a warranty. ICA § 554.2313;
Limited Flying Club, Inc. v. Wood, 632 F.2d 51 (8th Cir 1980) (airplane logbook and
certificate of air worthiness created an express warranty of air worthiness). Be
certain to distinguish this type of warranty from puffing or opinion.
3.
Following the premise of the UCC that business agreements are usually made against
a backdrop of commercial practice, both partially and completely integrated
agreements may be supplemented by terms which are evidenced by usage of trade,
course of dealing, or course of performance, in order of ascending relevance and
evidentiary weight. ICA § 554.2202; C-Thru Container Corp. v. Midland
Manufacturing Co., 533 N.W.2d 542 (Iowa 1995) (trade practice of providing
sample bottles admissible to add term despite generally unambiguous contract
language in a 20+ page contract).
4.
In a dispute arising out of a 1918 commercial lease’s provisions requiring a tenant to
remove buildings on the leased property when the lease expires. If the language is
found to be ambiguous, extraneous evidence is admissible as an aid to
interpretation of the contract. When there are ambiguities in the contract, they are
strictly construed against the drafter. In ascertaining the meaning of contractual
terms "extrinsic evidence is admissible as an aid to interpretation when it sheds light
on the situation of the parties, antecedent negotiations, the attendant circumstances,
and the objects they were striving to attain." Dickson v. Hubbell Realty Co., 1997
WL 424451 (Iowa 1997).
G. Implied Terms.
1.
In the absence of specific contractual language, terms may be viewed as implied in a
contract where necessary to give the agreement greater clarity or where
indispensable to effectuate the intent of the parties. Taylor Enterprises, Inc. v.
Clarinda Production Credit Ass’n, 447 N.W.2d 113 (Iowa 1989) (matter of fact
whether there was an implied contract excusing bank from advancing repayment
money where borrower appeared to be diverting assets away from repayment of
connected loans). However, this may only be done where the agreement is not fully
integrated. Fashion Fabrics of Iowa, Inc., v. Retail Investors, Corp. 266 N.W.2d 22
(Iowa 1978) (sublessor of part of retain space impliedly covenanted to continue
operating its own surrounding retail establishment).
2.
UCC and common-law: a promise to perform the contract in good faith (honesty in
fact) will be implied into all contracts and cannot be avoided by agreement of the
parties. ICA § 554.1203; Fashion Fabrics of Iowa, Inc. v. Retail Investors, Corp.,
266 N.W.2d 22 (Iowa 1978) (citing approvingly cases finding implied obligation by
lessee to continue operating in good faith where rent is determined primarily or
exclusively as a percentage of sales). Parties to a sales contract may agree to
29
establish standard to measure good faith. ICA § 544.1102(3) Good faith for
merchants includes both honesty in fact and adherence to reasonable commercial
standards of fair dealing in the trade. ICA § 554.2103(b).
3.
The Supreme Court of Iowa recognized an implied duty of loyalty in an employment
contract in Condon Auto Sales & Serv., Inc. v. Crick, 604 N.W.2d 587 (Iowa 1999).
The court did not determine whether the duty applies only in a principal-agent
relationship or if it applied to a mere employer-employee relationship. The court
observed the scope of the duty of loyalty will vary with the nature of the relationship.
A higher duty of loyalty exists for employees who occupy a position of trust and
confidence than those who occupy a low level position. Moreover, the duty of
loyalty is generally confined to instances of direct competition, misappropriation of
profits, property, or business opportunities, trade secrets and other confidences.
4.
In an exclusive dealing contract, a promise to use one’s best efforts to perform will
be implied. ICA § 554.2306(2).
5.
A promise not to hinder or make the other party’s performance impossible will be
implied. Hardin v. Eska Company, 127 N.W.2d 595 (Iowa 1964) (breach of contract
to provide air conditioners exclusively to plaintiff for door-to-door sales when
distributor then provided same product for sale at local retail stores at one-third the
door-to-door price).
6.
A promise to conform to local building ordinances will be implied in construction
contracts. C & F Maintenance and Property Management v. Eliason and Knuth
Drywall Co., Inc., 418 N.W.2d 44 (Iowa 1988) (local building ordinances will be
viewed as implied terms unless the contract language removes the contractual
performance from the effect of the ordinances).
7.
A contract includes not only what is expressly stated but also what is necessarily to
be implied from the language used; and terms which may clearly be implied from a
consideration of the entire contract are as much a part thereof as though plainly
written on its face. Courts are reluctant to find IMPLIED COVENANTS. The
obligation must arise from the language used or it must be indispensable to give
effect to the intent of the parties; it must have been so clearly within their
contemplation that they deemed it unnecessary to express it. It can be justified only
on the ground of legal necessity and can arise only when it can be assumed it would
have been made part of the agreement if attention had been called to it. Moreover, an
implied covenant cannot be found when the contract is fully integrated. See East
Broadway Corp. v. Taco Bell Corp., 542 N.W.2d 816 (Iowa 1996) (When rent is
fixed exclusively or primarily on the basis of a percentage of the lessee’s gross
revenues or profit, an obligation on the part of the lessee to continue operating in
good faith has been implied. Generally, a covenant of continuous use and operation
will be implied in cases involving commercial leases when the tenant is obligated to
pay a significant part of the rental as a percentage of the tenant’s gross receipts.).
30
8.
Common law implied warranties:
a.
Sale of homes by the builder contain an implied warranty of good workmanship.
Kirk v. Ridgway, 373 N.W.2d 491 (Iowa 1985) (implied warranty that building
material used would be compatible with paint).
b.
Construction contracts in general contain implied warranties of construction in a
workmanlike manner and fitness for a particular purpose. Busker v. Sokolowski,
203 N.W.2d 301 (Iowa 1972).
c.
Insurance contracts contain implied warranties that they will be fit for their
particular purpose where the insurer has reason to know of the particular
purpose and the insured relied upon the company’s skill or judgment in
furnishing such coverage. Farm Bureau Mutual Ins. Co. v. Sandbulte, 302
N.W.2d 104 (Iowa 1981) (no implied warranty because insurer had no reason to
know of insured’s desire for off-premise coverage of motor vehicle).
d. Leases of dwellings contain an implied warranty of habitability. Mease v. Fox,
200 N.W.2d 791 (Iowa 1972).
e.
9.
An implied warranty that the performance required by the contract is not
impossible as specified may be found to run from the buyer of services to the
seller of services where the buyer provides the plans and specifications.
Midwest Dredging Company v. McAninch Corp., 424 N.W.2d 216 (Iowa 1988)
(Iowa Department of Transportation warrantied the accuracy of its plans and
specifications for hydraulic dredging and the feasibility of hydraulic dredging to
bidder where the state drew up the plans for such dredging and required that a
specific dredging technique be used and the site conditions in fact made the use
of this technique impossible and it would have been tremendously expensive for
the bidder to check the site conditions itself).
UCC implied warranties:
a.
Warranty of clear title. ICA § 554.2312.
b.
From merchant vendors, a warranty of merchantability, which is an assurance
that the goods are as named, of fair average quality and fit for ordinary purposes
of such goods. ICA § 554.2314. The implied warranty of merchantability also
applies to any sale of food or drink; the warranty provides that the goods, food
or drink must at least pass without objection to similar quality products in the
trade. In other words, the products must be of a quality comparable to that
generally accepted in that line of trade, under the description used in the
contract.
c.
A warranty of fitness for a particular purpose, from merchants and
nonmerchants, where
31
(1)
the seller has reason to know the particular purpose the goods are wanted
for (if goods are used for an ordinary purpose, the warranty of
merchantability, not fitness, arises),
(2)
the seller has reason to know that the buyer is relying on the seller to
choose appropriate goods; and,
(3)
buyer in fact relied on seller's skill or judgment. ICA § 554.2315; Renze
Hybrids, Inc. v. Shell Oil Co., 418 N.W.2d 634 (Iowa 1988) (request for
insecticide effective against European corn borers conveyed through
middleman to seller created a warranty that supplied insecticide was fit for
that particular purpose). Reliance on a seller’s trade name is not decisive
on the issue of warranty but is a factor to be considered.
H. Reformation.
I.
1.
Reformation is the judicial rewriting of the terms of an integrated contract.
Ordinarily, parol evidence may not be used to vary or contradict the terms of an
integrated agreement and that is precisely what reformation seeks to do. However,
parol evidence may be admissible to reform an integrated agreement where it is
essential to the end of justice and it can be shown by clear and convincing evidence
that the written expression of the agreement does not accurately reflect the actual
agreement between the parties because of mutual mistakes of expression, ranging
from scrivener’s errors to mistakes as to the legal effect of language, unilateral
mistakes about the contents or effects of a written agreement if the mistake was
induced by a fraudulent misrepresentation or nondisclosure of material facts, fraud,
duress, or other inequitable conduct. First Interstate Equipment Leasing, Inc. of
Iowa, Inc. v. Fielder, 449 N.W.2d 100 (Iowa App. 1989) (allowing reformation
where underlying agreement was clear and written agreement was either a mere
confirmation or improperly induced by expectation that written agreement accurately
reflected oral agreement).
2.
Courts of equity have jurisdiction to relieve parties against the consequences of
mutual mistake of fact, and to grant reformation in case of such a mistake. It is
necessary the mistake be mutual, and both parties understood the contract
mistakenly. A unilateral mistake is not ordinarily ground for reformation.
However, the requirement of mutuality of mistake does not apply to a mistake of a
scrivener in reducing an agreement to writing.
3.
In order to get reformation, it is necessary to show the existence of a preliminary
or prior agreement, written or oral, which can form the basis for rectification.
Sun Valley Iowa Lake Association v. Anderson, 551 N.W. 2d 621 (Iowa 1996).
Reasonable Expectations in Insurance Contracts.
32
1.
Under the doctrine of reasonable expectations, Iowa courts can ignore an insurance
policy exclusion if it is bizarre or oppressive, eviscerates terms explicitly agreed to,
or eliminates the dominant purpose of the transaction. C & J Fertilizer, Inc. v. Allied
Mutual Insurance Co., 227 N.W.2d 169 (Iowa 1975) (exclusion of burglary arising
out of any forced entry which was accomplished without visible marks or damage
did not comport with ordinary understanding of burglary and could not reasonably be
excluded from general burglary coverage); Rodman v. State Farm Mutual
Automobile Insurance Co., 208 N.W.2d 903 (Iowa 1973)(exclusion of coverage for
injury to insured upheld because reasonable person would not have believed this was
covered after reading the exclusion); Cairns v. Grinnell Mutual Reinsurance Co., 398
N.W.2d 821 (Iowa 1987)(exclusion from farm liability policy of auto accidents not
involving farm employees doing farm work is reasonable).
In looking at negotiations between the insurer and insured, the court will focus on the
particular liabilities for which coverage was sought to evaluate coverage expectations.
Ide v. Farm Bureau Mut. Ins. Co., 545 N.W.2d 853 (Iowa 1996) (farmer seeking
insurance coverage for breach of contract liability due to death of custom feeder lambs in
ice storm had no reasonable expectation of coverage for this when negotiations for
coverage had focused on property loss to farmer for death of own lambs). The doctrine of
reasonable expectations has no' application to statements regarding coverage after the
time of policy negotiation and issuance. Zaragoza v. West Bend Mutual Insurance Co,
549 N.W.2d 510 (Iowa 1996).
If an insurance policy is ambiguous, requires interpretation, or is susceptible of two
equally plausible constructions, we adopt the construction that is most favorable to the
insured. This principle of construction is necessary because insurance policies are in the
nature of adhesion contracts. Iowa Comprehensive Petroleum Underground Storage
Tank Fund Bd. v. Farmland Mut. Ins. Co., 1997 WL 576028, (Iowa 1997)(Sept. 17,
1997).
J.
Indemnification for a Party’s Own Negligence.
1.
XVI.
In Maxim Techs., Inc. v. City of Dubuque, 690 N.W.2d 896 (Iowa 2005), the court
recognized a special rule of construction applies when a party asserts indemnification
from its own negligence. This rule provides that indemnification contracts will not
be construed to permit an indemnitee to recover for its own negligence unless the
intention of the parties is clearly and unambiguously expressed.
WHAT DO THE TERMS OF THE AGREEMENT MEAN?
Iowa courts distinguish between interpretation and construction. Interpretation is simply
concerned with the intended meaning of the parties. Interpretation is a matter of law for the
court to decide unless it depends upon the credibility of extrinsic evidence or a choice among
reasonable inferences to be drawn from extrinsic evidence, in which case interpretation is a
matter for the fact-finder to determine. C & F Maintenance and Property Management, Inc. v.
33
Eliason and Knuth Drywall Co., 418 N.W.2d 44 (Iowa 1988). Construction, which is a
determination of the legal effect of a contract, is always a matter of law to be decided by the
court. Evans v. Green, 231 N.W.2d 907 (Iowa 1975).
A.
Interpretation: When the parties dispute the meaning of contract terms, the court will
seek to determine the intent of the parties in making the agreement.
1.
Where the language has a plain meaning, the intention of the parties is clear and the
contract will be enforced as written.
a.
Magina v. Bartlett, 582 N.W.2d 159 (Iowa 1998). Magina and Bartlett
entered an agreement to acquire and develop air rights in Cedar Rapids.
After their relationship deteriorated, they entered a settlement agreement
giving the air rights to Bartlett, but stating that when Bartlett transfers his
rights to a third party for cash payments, Magina would receive half.
Bartlett transferred the rights to a third party in exchange for a floor of a
building (worth $725,000). The agreement required payments to Magina
if Bartlett received cash payments. Property is not cash. Instead, the
provision of the contract providing Magina would get 10% upon resale
of property transferred to Bartlett applied.
2.
Language is ambiguous where a genuine uncertainty exists as to which one of two or
more meanings is the proper one. Gendler Stone Products Co. v. Laub, 179 N.W.2d
628 (Iowa 1970).
3.
Ambiguity or idiosyncratic use of language may be revealed by extrinsic evidence
of the subjective understanding of the parties, even where the agreement appears
clear on its face. Peoples Bank & Trust Co. of Cedar Rapids v. Lala, 392 N.W.2d
179 (lowa App. 1986) (terms which unambiguously release all underlying debt are
nonetheless shown to have latent ambiguity in light of extrinsic facts); Hamilton v.
Wosepka, 154 N.W.2d 164 (Iowa 1967) (holding that extrinsic evidence, when
offered, is always permissible to interpret or explain what the parties meant, and that
the determination that language has a clear meaning can only be the product of the
interpretative process, which must include the evaluation of extrinsic evidence when
offered).
a. Extrinsic evidence may be used to demonstrate EITHER whether there is
ambiguity and, if there is ambiguity, the parties’ intent for the meaning of
the ambiguous term. This is because “the rule that words and other conduct
are interpreted in light of all the circumstances is not limited to cases when
ambiguity in the agreement exists.” Fausel v. JRJ Enters., Inc., 603 N.W.2d
612 (Iowa 1999). Any determination of ambiguity or meaning should be
made in light of the relevant evidence of the situation and relations of the
parties, subject matter, negotiations, usages of trade, and course of dealing.
34
b. In Fausel, Fausel agreed to purchases JRJ’s interest in a Colorado casino.
JRJ cancelled after Fausel experienced delay in obtaining approval from the
Colorado Division of Gaming. The court held that where, as here, the
contract fails to specify a time for performance, the parties must perform
within a reasonable time and remanded for determination of reasonable time
in these circumstances.
c. Extrinsic evidence is relevant when it sheds light on the situation and
circumstances of the parties at the time of the contract. In Clinton Physical
Therapy Services, P.C. v. John Deere Health Care, Inc., 714 N.W.2d 603
(Iowa 2006), the court held the district court properly excluded a 2001
contract because it did not shed light on the parties’ intentions with regard to
a 1996 contract.
d. Extrinsic evidence includes
(1) parol evidence of prior or contemporaneous discussions,
(2) course of performance, ICA § 554.2208; Gendler Stone Products Co. v.
Laub, 179 N.W.2d 628 (lowa 1970) (course of performance evidence
determinative where parties have dealt with each other before),
(3) course of dealing,
(4) usage of trade evidence, ICA § 554.1-205(4), or
(5) any other evidence which is outside the four corners of the contract.
e. Express terms and any course of performance, course of dealing, and wage
of trade should be construed as consistent with each other whenever it is
reasonable to do so. However, where course of performance, course of
dealing, or usage in the trade cannot be construed as reasonably consistent
with the express terms, the express terms must prevail, ICA § 554.1205(4) &
2208(2), Rest. 2d § 202(5), particularly where such terms appear to have
been chosen to specifically negate the commercial context of the agreement.
ICA § 554.2202, comment 2.
f. In a case where an insured lessor of airplane brought action against insurer
to recover for physical damage to plane that crashed while deputy sheriff
was piloting it to transport prisoner, the Supreme Court of Iowa held it was
appropriate to consider EXTRINSIC EVIDENCE to become familiar with
the commercial aviation industry's specialized vocabulary. TECHNICAL
TERMS AND WORDS OF ART are given their technical meaning when
used in a transaction within their technical field. When the meaning
attached by one party accorded with a relevant usage and the other knew or
had reason to know of the usage, the other is treated as having known or had
35
reason to know the meaning attached by the first party. Unless the
interpretation issue depends on the credibility of extrinsic evidence or on a
choice of reasonable inferences to be drawn therefrom, the issue is to be
determined by the court as a matter of law. Schneider Leasing, Inc. v. U.S.
Aviation Underwriters, Inc., 555 N.W.2d 838 (Iowa 1996).
g. Alternatively, course of performance may show mere waiver of rights or a
modification of rights. ICA § 554.2208(3).
4.
Where no extrinsic evidence is offered to show ambiguity, ambiguity may also be
revealed by the objective meanings of the word itself, by the dictionary, or by the
application of various rule of interpretation to the face of the written instrument.
Berryhill v. Hatt, 428 N.W.2d 647 (Iowa 1988) (applying rule that an agreement is to
be interpreted as a whole to find no ambiguity). The rules of interpretation which
might help either reveal ambiguity or a clear meaning include:
a. specific list without general inclusive term intends to exclude unlisted items;
b. a general term combined with specific terms is intended to include only
things that are similar to the specific terms;
c. an interpretation which gives a reasonable, lawful, and effective meaning to
all terms is preferred to an interpretation which leaves a part unreasonable,
unlawful, or of no effect;
d. Specific provisions reflect intent more than general provisions;
e. Contract should be read and interpreted as a whole, clauses should not be
interpreted in isolation;
f. Interpret based upon commonly accepted and ordinary meaning of the
language used;
g. Handwritten terms reflect intent more than typewritten terms, and
typewritten terms reflect intent more than boilerplate;
h. Specially negotiated terms reflect intent more than standard terms;
i. Give weight to the purpose of the parties in entering into the contract.
5.
Where possible ambiguity is found, it is necessary to determine whether, at the time
of contracting, the parties actually agreed upon one of the possible meanings, in
which case that is the meaning which will control. Rest. 2d § 201(1); Home Federal
Savings and Loan Ass’n of Algona v. Campney, 357 N.W.2d 613 (Iowa 1984) (the
proper interpretation of contract term cannot include a meaning which neither party
actually intended at time of contracting).
36
6.
If the parties actually disagreed about the meaning, the plaintiff’s meaning can only
prevail if the plaintiff can show that the defendant either knew or should have known
of the plaintiff's meaning, while the plaintiff neither knew nor should have known of
the defendant’s meaning. ICA § 622.22; Fashion Fabrics of Iowa, Inc. v. Retail
Investors Corp., 266 N.W.2d 22 (Iowa 1978); Baron v. Crossroads Center of Iowa,
Inc., 165 N.W.2d 745 (Iowa 1969). For example, in the absence of an express
reservation of rights, reasonable parties will expect that settlement agreements
dispose of all the claims between the parties arising out of the settled transaction.
Waechter v. Aluminum Co. of America, 454 N.W.2d 565 (Iowa 1990) (employer had
no reason to know of intent to reserve drug testing claim against employer where
employee said nothing about reservation).
7.
In rare cases, particularly where the contract is entirely executory, if neither party can
be shown to have known of the other's meaning, nor should either party have known
of the other's meaning, the court can find that there was a failure of mutual assent and
that there is no contract between the parties. Rest. 2d § 201(3).
8.
Where a lack of extrinsic evidence makes it difficult to determine the actual
agreement or disagreement of parties in relation to ambiguous terms in the contract,
the following rules are often used to determine which meaning will prevail:
a.
Interpret against the drafter, especially where it is an adhesion contract.
b.
Favor an interpretation which is more in the public interest.
c.
Favor an interpretation which treats similarly situated individuals in a
standardized agreement alike, without regard to their knowledge or
understanding of the standard terms. Rest. 2d § 211(2).
d.
Interpret conditions of satisfaction as demanding only objective satisfaction,
especially where the contract involves commercial quality, operative fitness or
mechanical utility. A requirement of subjective satisfaction should only be
found where the contract involves personal taste, aesthetics, or fancy, or
expressly indicates that personal satisfaction is required.
e.
Assuming that bargaining produces a fair agreement, a reasonable interpretation
should be favored.
B. Construction is the determination by the court of the legal effect of unclear or
ambiguous
language, independent of any meaning the parties may have attached to such language.
1.
Exculpatory agreements which exempt another from liability arising out of certain
conduct will be strictly construed and will not be found to cover negligent conduct, or
willful breaches of duty without an express intention to do so. Baker v. Stewarts’ Inc.,
37
433 N.W.2d 706 (Iowa 1988) (agreement waiving right to damages for services
performed by student hairdresser trainees held not to cover negligent supervision of
trainees by the professional staff).
2.
Promises to indemnify will not be construed to cover liability for indemnitee’s own
negligence without express language. Evans v. Howard Green Co., 231 N.W.2d 907
(Iowa 1975).
3.
Construe settlements as disposal of all claims absent express reservations of rights.
Waechter v. Aluminum Co. of America, 454 N.W.2d 565 (Iowa 1990).
4.
Contracts for permanent or lifetime employment will be construed as contracts for
employment for an indefinite time, terminable at the will of either party, unless there is
consideration from the employee additional to the employee’s services. Stauter v. Walnut
Grove Products, 188 N.W.2d 305 (Iowa 1971) (lifetime employment contract where
employment was incident of sale of business by employee to now employer).
5.
Construe as a promise rather than a condition, unless occurrence of condition under
control of obligee. Rest. 2d § 227.
6.
In UCC cases, limitations or negations are inoperative to the extent such constructions are
unreasonable or where circumstances suggest that such limitation or negation was
unreasonable. ICA § 554.2316; Vorthman v. Kenneth Myers Enterprises, 296 N.W.2d
772 (Iowa 1980) (delivery instrument disclaiming warranties failed to waive express and
implied warranties or "good health feeder pigs where impossible to check pigs’ condition
at time of delivery); Select Pork, Inc. v. Babcock Swine, Inc., 640 F.2d 147 (8th Cir.
1981) (general disclaimer of all non-contract warranties failed to disclaim the warranty
arising out of the description of contract good as specific breed of pigs, which description
implied by incorporated brochure representations about these specific breed of pig).
7.
UCC implied warranties of merchantability can be excluded only by specific mention
of merchantability and, if in writing, the language must be conspicuous. An implied
warranty of fitness for a particular purpose can be excluded only by a conspicuous
wiring. ICA § 554.231C(2). This section of the Code seeks to protect buyers from
unexpected and unbargained language of disclaimer.
8.
Some UCC implied warranties may be excluded by terms which, in the ordinary
commercial usage, are understood to mean that the buyer takes the risk concerning
quality of the goods. The language such as "as is" or "with all faults," will exclude
implied warranties as to defects which in the circumstances ought to be revealed by
an examination, where the buyer has examined the goods as fully as desired or
refused to examine the goods. ICA § 554.2316(3); Limited Flying Club, Inc. v.
Wood, 632 F.2d 51 (8th Cir. 1980) ("as is” disclaimer negated implied warranties,
but failed to disclaim express warranties).
38
9.
Implied warranties under ICA § 554.2314 and .2315 are statutorily excluded from
a sale of cattle, sheep, hogs, and horses if the seller discloses certain specified
information to the prospective buyer. ICA § 554A.1.
10. Iowa courts do not strictly construe restrictive covenants so long as they are fair and
reasonable. Baron v. Crossroads Center of Iowa, lnc., 165 N.W.2d. 745 (Iowa
1969).
11. Perpetual contracts (renewable in perpetuity) are enforceable where the intent to
create a perpetual contract is clear by use of words such as “perpetual,” “in
perpetuity,” or “forever.” City of Des Moines v. West Des Moines, 30 N.W.2d 500
(Iowa 1948) (language providing for “perpetual use” of sewer facilities created
perpetual contract).
12. Because the law favors arbitration, an agreement to arbitrate will be construed
broadly. Postville Community School Dist. v. Billmeyer, 548 N.W.2d 558 (Iowa
1996) (doubts about whether an arbitration clause covers a particular grievance
should be resolved in favor of coverage).
XVII. DOES A THIRD PARTY HAVE RIGHTS UNDER THE CONTRACT?
A. Assuming the requirements for formation of a contract have been met, the parties to a
contract have the power to create an enforceable right in a third person not in privity to
the contract, i.e., one who provides no consideration to the contract. In re Walker’s
Estate, 15 N.W.2d 260 (1944) (stating that where husband enters into prenuptial
agreement with wife to pay wife’s children a specific sum in exchange for wife’s waiver
of all rights to husband’s estate, children are intended beneficiaries with right to sue to
enforce the prenuptial agreement even though children have not given any consideration
to husband or wife).
B. In order for third party rights to be created:
1.
the promisor must make a promise to the promisee for benefit of the third-party
beneficiary,
2.
the promisee must provide consideration for promisor’s promise, and
3.
the third party must be the intended recipient of these benefits.
C. Such a third party will have rights to a beneficial performance under a contract and may
sue under the contract only if they are the intended recipient of such benefits. An
incidental beneficiary, on the other hand, has no rights under the contract.
1.
Iowa has adopted Restatement 2d § 302, which defines an intended, as opposed to an
incidental, beneficiary as follows:
39
2.
a.
recognition of the beneficiary's right to performance is appropriate to effectuate
the intention of the parties and either
b.
the performance of the promise will satisfy an obligation of the promisee to pay
money to the beneficiary (also known as a creditor beneficiary) or
c.
the circumstances indicate that the promisee intends to give the beneficiary the
benefit of the promised performance (also known as a donee beneficiary).
Whether a contract creates an intended beneficiary or not is a matter of interpretation
of the contract in light of the circumstances surrounding it. Generally it is the intent
of the promisee which is considered controlling, although Iowa courts have not ruled
out the possibility that both parties must be found to have intended a third-party
beneficiary. Midwest Dredging Co. v. McAninch Corp, 424 N.W.2d 216 (Iowa 1988)
(finding a dredging subcontractor an intended third-party beneficiary to warranties as
to the suitability of the soil for dredging made to the State to the general contractor
because the warranties covered work both the State and the general intended to be
subcontracted out and both intended that the subcontractor rely upon them);
Gremillion v. Erenberg, 402 N.W.2d 410 (Iowa 1987) (biological father not an
intended beneficiary of an agreement between divorcing husband and wife as to
support of child); Galloway v. Bankers Trust Co., 420 N.W.2d 437 (Iowa
1988)(contract language made mall customer an intended beneficiary of security
company’s contract with mall); Hibbs v. K-Mart Corp., 870 F.2d 435 (Iowa 1989)(KMart’s sublease with development company for proposed shopping center did not
make owner of land for proposed shopping center an intended third-party
beneficiary); Smith v. Air Feeds, Inc., 556 N.W.2d 160 (Iowa App. 1996) (employee
injured using metal press not 3rd-party beneficiary of agreement between employer
and manufacturer, which provided for installation and training assistance).
Recently re-affirmed in RPC Liquidation v. Iowa Dept. of Transportation, 717 N.W.2d
317 (Iowa 2006). RPC supplied beams to a separate company. The separate company
had contracted with IDOT to build the bridge. The beams were rejected. RPC sued
IDOT claiming to be a third party beneficiary. The court rejected RPC’s claim because
the contract did not manifest an intent to benefit RPC and instead contained an express
disclaimer of third-party beneficiary liability.
3.
Both donee and creditor beneficiaries can maintain actions. Neither consideration
from the beneficiary, nor knowledge of the contract by the beneficiary, is required.
Giarratano v. Weitz Co., 147 N.W.2d 824, 259 Iowa 1292, (Iowa 1967). At the same
time, the beneficiary may decline the benefit, in which case, the promisor is released
from any duty to provide the benefit. Rest. 2d § 306.
D. A contract which creates a third-party creditor beneficiary arises when a debtor contracts
with another, who promises to pay the debtor's debt to the creditor.
40
1.
The creditor beneficiary can choose to sue the promisor to enforce the contract
promise to pay the debt, or sue the promisee, who is the original debtor.
2.
However, if the creditor has signed a contract releasing the debtor and substituting
the promisor, called a novation, the creditor can only sue the promisor.
E. Non-creditor (donee) third-party beneficiaries have no underlying right against the
promisee. Consequently, they may only sue the promisor under the contract and have no
rights against the promisee.
F.
Modification of third-party benefits.
1.
2.
The promisor and promisee can modify the contract and the duty owed to the thirdparty beneficiary without the consent of the third party unless the third party has
already acquired rights under the contract. This can occur when the third party has
a.
justifiably and materially relied on the contract promise, or
b.
has brought suit on the contract, or
c.
has manifested assent to the contract at the request of the promisor or promisee.
Bridgman v. Curry, 398 N.W.2d 167 (Iowa 1986) (acceptance of joint check
from promisor was manifestation of assent to third-party beneficiary contract
sufficient to vest rights against promisor despite promisor and promisee’s
subsequent rescission of the contract).
The third party can immediately acquire rights under the contract if the contract itself
provides that it cannot be modified without the third party’s consent. For example,
an insurance policy might expressly require consent of a named beneficiary before
the beneficiary can be changed. Rest. 2d § 311(1).
G. Rights under third-party contracts.
1.
The rights of an intended beneficiary against the promisor are subject to any defenses
promisor has against contract with promisee (undue influence, fraud, etc.).
2.
Similarly, the rights of third-party beneficiaries can "rise no higher" than the rights of
the original promisee. C & F Maintenance and Property Management, Inc. v.
Eliason and Knuth Drywall Co., Inc., 418 N.W.2d 44 (Iowa 1988) (intention of
contracting parties binding on third-party beneficiary).
3.
Should the promisor fail to provide the beneficiary with the promised performance,
the promisee can sue promisor for breach, however, the only appropriate remedy for
the promisee is specific performance, since the promisee receives no direct benefit
from the performance.
41
4.
Under the UCC, reasonably expected users of goods or those expected to be affected
by the goods are third-party beneficiaries to all express and implied warranties
between seller and buyer, which means that no privity is required for breach of
warranty actions. ICA § 554.2318.
XVIII. HAVE CONTRACT RIGHTS OR DUTIES BEEN TRANSFERRED OR ASSIGNED?
Today, most contract rights are freely transferable. Both the rights of the person owed
performance (the obligee) and the duties of the person owing performance (obligor) under a
contract may be transferred. There are four levels at which such rights and duties may be
transferred.
A. The act of assignment transfers assignor/obligee’s contract right to performance from the
assignor to assignee. Rest. 2d § 317(1).
1.
Assignment is like passing a football. The obligee loses right to performance by the
obligor and the assignee now has it. For example, a business can assign its accounts
receivable to a collection agency, in which case the collection agency obtains the
exclusive right to collect on money owed by the customer (obligor) to the business
(obligee). Assignment can be of accounts receivable, choses in action (except tort
causes of action), contract rights, negotiable instruments, security interests, stocks
and bonds and wages.
2.
An assignment can be accomplished by the manifestation of a present intent to make
the transfer without an exchange of consideration, Rest. 2d § 324, however,
gratuitous assignments are revocable, unless they are in writing. Assignments for
value, on the other hand, are not revocable.
3.
Assignment of rights can be as security for the payment of a debt, see ICA §
554.1201(37) and 554.9102(1)(a), or outright. Article 9 of the UCC covers
assignments of accounts, chattel paper, and security interest. Courts will presume
that an assignment is outright unless only a security assignment is manifest or
inferable from the circumstances.
4.
Procedural defenses, such as misrepresentation, duress, etc., can be raised by the
obligor against the assignee.
5.
Rights are freely assignable unless
a.
the assignment materially changes the obligor’s duty. This is particularly true
in contracts for personal service where the obligor’s ability to fulfill their
performance obligation may be dependent upon the obligee’s cooperation.
Thus, for example, assignment of a right to have a portrait painted by Picasso
from one person to another would change Picasso’s duty and would not be
allowed without either the general consent in the contract of the obligor to
42
assignment or subsequent consent to a particular assignment.
Orkin
Exterminating Co. v. Burnett, 259 Iowa 1218, 146 N.W.2d 320 (1967) (right to
no competition by former employee assignable to company acquiring employer
where contract gave this right to successors and assigns).
b.
the assignment materially effects obligor’s risk. Thus, for example, your right
to automobile insurance under a contract with your insurer cannot be assigned to
another driver without the insurer’s consent because the other driver constitutes
an unknown and unaccepted risk for the insurer.
c.
assignment impairs the chance of obtaining obligee’s return performance
because obligee no longer has an incentive to perform. This may occur where
assignor has assigned their salary rights prior to earning that salary.
d.
assignment is precluded by statute or public policy. Thus, for example, ICA §
554.2210(2) prohibits the assignment of government officials salary as that
might impair their motivation to perform. The Iowa Consumer Credit Code
537.3305 works similarly to protect against consumer improvidence by making
unenforceable an irrevocable assignment of earnings by a consumer as security
for payment of a debt. Similarly, a purported assignment of the right to sue a
corporation to a former shareholder who no longer has an interest in a
corporation is offensive to public policy.
6.
Prohibitions against assignment in sales of good contracts are to be construed as
barring only the delegation of duties, unless the circumstances indicate otherwise.
ICA § 555.2210(3).
7.
Furthermore, in Iowa, certain debt instruments (accounts receivable and
nonnegotiable instruments) are assignable even though the instrument has a clause
precluding assignment.
8.
Otherwise, anti-assignment clauses are generally enforceable. However, once
performance is completed by one party, she may assign the "right" which is
generated by her performance (accounts receivable) or the right to damages (chose in
action), even where there is an anti-assignment clause. See, e.g., ICA § 554.20(2).
For example, A contracts to paint B's portrait for $500. The contract expressly
provides that the terms and conditions of the contract are nonassignable. A cannot
delegate A’s duty to paint; however, once A completed the portrait, A can assign A’s
right to receive payment. If B refuses to pay, A may also assign the cause of action for
nonpayment, notwithstanding the anti-assignment clause.
B. Delegation is the transfer of the obligor's duty of performance to a delegated performer.
1.
Delegation is a bit like giving someone a cold; even if you infect someone else, you
still have it. Thus the obligee can still look to the obligor for performance of duty
43
despite the delegation and the obligor will be liable for breach if the duty is not
performed. Rest. 2d § 318(3).
2.
At the same time, the delegatee has no liability to obligee to perform. A delegatee is
under no duty to perform unless she has expressly undertaken to assume
responsibility for performance (assumption). See C Infra.
3.
However, if delegatee does perform and delegation of the duty was permissible, the
obligee must accept the delegatee’s performance as discharging the obligor’s durty to
perform.
4.
Contract duties are generally delegable under the common law and UCC unless
5.
a.
the contract prohibits delegation, Rest. 2d § 318(1); ICA § 554.2210(1),
however, antidelegation clauses are narrowly construed;
b.
the obligee has substantial interest in having duty performed by obligor or
having the obligor control the acts required by the contract. Rest. 2d § 318(2);
ICA § 554.2210(1). This will primarily be the case in executory personal
service contracts involving personal relationship of confidence, such as a
cosmetic surgeon, or where an obligor relied on particular characteristics
(character, credit ability, experience) of obligee in making the contract, such a
band for a wedding. This will not be the case in ordinary sales contracts where
the goods to be delivered are stock items or in construction contracts, since it is
the custom in the trade to have subcontractors perform for the general
contractor;
c.
the delegation is contrary to public policy. Rest. 2d § 318(1).
One assignee/delegatee can be both assigned rights and delegated duties under a
contract where permissible. An assignment of “the contract” or “all my rights” or in
similar general terms will be viewed as both an assignment of rights and a delegation
of duties, unless the language or circumstances suggest otherwise. ICA §
554.2210(4); Rest. 2d § 328(1).
C. Assumption of delegation of performance requires a promise by the delegate to
delegator/obligor to perform obligor’s duty to obligee. It is an acceptance of the
obligation for the benefit of obligee. Thus, suppose the Iowa bottler of Coke has a
contract to supply Coke to Iowa McDonalds, but due to flood conditions loses access to
their supply of fresh water. Iowa Coke can delegate their duty to supply the Coke to
Nebraska Coke. If Nebraska Coke promises Iowa Coke that they will deliver Coke to
Iowa McDonalds, they have assumed Iowa Coke’s obligation.
1.
Assumption makes the obligee a third-party beneficiary of the delegatee’s promise to
assume the performance obligation of the obligor to the obligee. Thus, Iowa
McDonalds is the third-party beneficiary of Nebraska Coke’s promise to Iowa Coke
44
to supply Iowa McDonald’s with Coke. This means that Iowa MacDonalds can sue
Nebraska Coke for any failure to deliver the Coke.
2.
However, assumption does not relieve the original obligor from their duty to
perform, Rest. 2d § 318(3), but transforms the obligor into a guarantor or surety for
the performance of the delegate, who is now primarily responsible for performing.
Thus, if Nebraska Coke fails to perform, McDonalds can still sue Iowa Coke.
Assumption puts both the delegatee and the delegator “on the hook” for the
performance.
3.
Assumption is normally made by an express promise, however, acceptance of
delegation will be inferred from conduct of accepting benefits/rights of assignment of
a whole contract. Rest. 2d § 328(2); ICA § 554.2210(4).
D. A novation occurs when the obligee consents to performance by delegatee or releases the
delegator/obligor from their duty to perform.
XIX.
1.
Neither an effective delegation by a party delegating nor an assumption by the
delegatee will discharge the duty of the party delegating unless they are also
accompanied by a novation.
2.
Novation is "a substituted contract that includes as a party one who was neither the
obligor nor the obligee of the original duty." Novation is never presumed; rather,
the party asserting it must establish (1) a previous valid obligation, (2) agreement of
all parties to the new contract, (3) extinguishment of the old contract, and (4) validity
of the new contract. A novation takes the delegator “off the hook” and leaves the
delegatee “on the hook.” The mere fact that a new contract obligates a third party to
assume the financial obligation of the debtor will not alone support a presumption
that the creditor accepts the new debtor and releases the old one. Parties who
delegate duties under a contract may not avoid their contractual obligation without a
contract to the contrary, i.e., a novation. Matter of Integrated Resources Life Ins.
Co., 562 N.W.2d 179
(Iowa 1997). The original seller will not be deemed to
have agreed to an novation of a contract, relieving the buyer of real estate contract
obligations, even if the sellers knows of substantial breaches by the assignee —
gutting the building and defaulting in the payments. B & H Apartments Partnership
v. Tharp, 466 N.W.2d 694 (Iowa App. 1990).
IS THERE AN EXCUSE FOR NONPERFORMANCE OF A CONTRACT
OBLIGATION?
Excuses generally arise out of defects in the bargaining process which either make
the bargain insufficiently voluntary to be enforced or out of substantive problems with the
bargain itself. The presence of such a defect or problem can allow the contract to be voided
by the party who would be harmed by the defect or problem, thus allowing them to escape
liability for nonperformance under the contract.
45
A.
B.
Incapacity: contracts made with minors (under the age of 18, ICA § 599.1) can be
voided at the option of the minor, unless:
1.
the contract was for necessities at fair price,
2.
the contract was affirmed after the minor attained majority, or
3.
the contract was not disaffirmed within a reasonable time of reaching 18,
4.
If the minor disaffirms, s/he must return any property held under the disaffirmed
contract, ICA § 599.2,
5.
Minors may not disaffirm or void contracts induced by the minor’s own
misrepresentation of majority, unless they obviously appear to be a minor.
ICA § 599.3; Martin v. Stewart Motor Sales, 247 Iowa 204, 73 N.W.2d 1 (1955)
(minor who signed certification that he was of majority age held to have
misrepresented age and not permitted to disaffirm contract).
Incompetence: Adults who do not have the capacity to enter into a contractual
relationship.
1.
Previously adjudicated incompetents, usually persons placed under
guardianship, ICA § 222.31, are deemed incapable of making any contracts.
2.
Nonadjudicated incompetents are presumed to have full contractual capacity
and incompetency must be proved by the party asserting the defense. It must
be shown that, as to a particular transaction, there is a mental illness, defect, or
condition which causes incapacity as to that transaction. Such incapacity may
arise out of
a.
cognitive incompetence, which is a lack of ability to understand the nature
or consequences of a particular transaction, i.e., advanced Alzheimer’s.
Rest. 2d § 15(1)(a).
b.
volitional incompetence, which is a lack of ability on the part of the
contracting party to control his/her actions in relation to this transaction,
that is known to other party, i.e., manic depression or obsessive
compulsive disorder. Rest. 2d § 15(1)(b).
c.
intoxication, if it results in cognitive or volitional competence and is
known to other party. Peoples Bank & Trust Co. of Cedar Rapids v. Lala,
392 N.W.2d 179 (Iowa App. 1986) (hospitalized patient on Valium who
signed mortgage on homestead not shown to have failed to understand the
nature of the instrument).
46
3.
Where the contract is made on fair terms and the other party does not have
reason to know of the mental illness or defect, the contract is voidable only to
the extent of the executory (unperformed) portion of the contract. Rest. 2d §
15(2). For example, if A, an incompetent not under guardianship, mortgages
land on fair terms to a bank which has no knowledge or reason to know of A’s
incompetency and A requests that the loan proceeds be paid to A’s spouse, who
absconds with the money, the contract is not voidable.
C. Duress is present where coercive threats or acts overcome the free will of a person of
reasonable firmness in the bargaining process. Thus, if you sign a contract only because
someone has a gun to your head, you may avoid the contract under the excuse of duress.
D.
1.
Duress arises when there is either violence to person or property or an improper
threat which leaves one party with no reasonable alternative but to agree to the
contract bargain sought by the threatening party. Rest. 2d § 174-75. Iowa
follows the Restatement 2nd of Contracts duress rule. Turner v. Low Rent
Housing Agency, 387 N.W. 2d 596 (Iowa 1986).
2.
An improper threat includes threat of a criminal or tortious act, bad faith suit,
bad faith breach of contract, criminal prosecution, or other extortionate threats.
Rest. 2d § 176.
3.
Litigation can be a reasonable alternative, but will not be under circumstances
where damages will be insufficient to remedy the consequences of the
threatened conduct. In Re Marriage of Spiegal, 553 N.W. 2d 309 (Iowa 1996)
(cancellation of wedding is a reasonable alternative when future spouse insists
on signature of a prenuptial agreement 5 days before wedding).
Undue Influence is present where persuasion, rather than threats or violence,
overcome the will of a person and destroys their free agency.
1.
It requires advice which resulted in a contract which is unfairly beneficial to the
advisor and
a.
a vulnerable person susceptible to undue influence because of age, stress,
illness, intellectual capacity, etc. Curran, 206 N.W.2d at 322; Peoples
Bank & Trust Co. of Cedar Rapids v. Lala, 392 N.W.2d 179 (Iowa App.
1986) (wife under severe emotional and mental stress when husband
hospitalized for apparent heart attack),
b.
and over persuasion, which may be shown when there is a lack of an
independent advisor, a rush for agreement, the persuasion and agreement
occurs at an unusual place or time, or two advisors ganging up against the
party to be persuaded.
47
E.
2.
Where, however, there is a relationship of blood, business or friendship with
the advisor, such as agent, partner, tenant in common, family members, longtime friends, or a special relationship based on confidence and trust in the
skill and integrity of the advisor, such as attorney or guardian, the advisor must
show by clear and convincing evidence that they were acting in good faith, and
the transaction was free, voluntary and intelligent on the part of the advisee.
Peoples Bank & Trust Co. of Cedar Rapids v. Lala, 392 N.W.2d 179 (Iowa App.
1986) (although bankers are not viewed as being in a confidential relationship
with customer, a 20-year exclusive banking relationship and close personal
friendship did create a confidential relationship, but fairness and voluntariness
of transaction and presence of independent advise of attorney negated any
presumption of undue influence).
3.
The ultimate question is whether the result was produced by means that
seriously impaired the free and competent exercise of judgment. Welch v.
Welch, 534 N.W.2d 109 (Iowa 1995) (wife of eight months exerted undue
influence over 69-year-old husband in ill health, isolated from family, friends,
and medical care, and totally dependent on wife, where she rushed transfer of
substantial assets to her before his death).
4.
Undue influence will be found where:
a.
the harmed party was susceptible to undue influence
b.
the person who allegedly exercised the undue influence had the
opportunity to exercise it;
c.
the person had the disposition to influence the person unduly for the
purpose of procuring an improper favor; and
d.
the result clearly appears to have been the effect of undue influence.
Pence v. Rawlings, 453 N.W.2d 249 (Iowa App. 1990) (tenant of confused
and forgetful 93-year-old woman was in a relationship of confidence to her
when he established a close, almost parent-child relationship with her and
became integrally involved in all facets of her life and finances, and his
daily contact with her and his drafting of documents conveying all her
property to him and his son was found to have created undue influence on
her).
A material or fraudulent misrepresentation, i.e., a false statement of fact, which
reasonably or justifiably induces a manifestation of assent to a contract can allow the
harmed party to void or rescind the contract. Rest. 2d § 164. Parties seeking
rescission are entitled to restitution for expenses incurred under the contract, but,
because of the election to rescind, cannot also recover contract damages. Hyler v.
Garner, 548 N.W. 2d 864 (Iowa 1996) ("The elements of an equitable claim for
rescission based on misrepresentation are (1) a representation, (2) falsity, (3)
48
materiality, (4) and intent to induce the other to act or refrain from action, and (5)
justifiable reliance").
1.
A misrepresentation is material if a reasonable person would be likely to be
induced to asset by it, or if the maker knows that this individual would be likely
to be induced to assent by it. It may be made innocently or negligently. Rest.
2d § 162(2); Kanzmeir v. McCoppin, 398 N.W.2d 826 (Iowa 1987) (higher price
of some cattle at sale barn not material because higher priced cattle not
comparable to seller’s cattle). The failure to disclose a material fact known to
the person who has a legal duty to inform the other contracting person of the
matter can constitute fraud. A misrepresentation may occur when one with
superior knowledge, dealing with inexperienced persons who rely on him or her,
purposely suppresses the truth respecting a material fact involved in the
transaction.
2.
A misrepresentation is fraudulent if it is intended by the maker to induce assent
and
3.
a.
the maker knows or believes it is not in accord with the facts, or
b.
the maker does not have the confidence in the truth of the assertion
which is stated or implied, or
c.
the maker knows that s/he does not have the basis for the assertion which
s/he has stated or implied. Rest. 2d § 162(1).
In an equity action seeking rescission of a contract (as opposed to a tort action
seeking damages for misrepresentation leading to a contract), it is not necessary
to show scienter/intent to deceive/fraud, but merely to show an intent to induce
the plaintiff to act or refrain from acting. Hyler v. Garner, 548 N.W. 2d 864
(Iowa 1996).
However, knowledge of a defect in the property sold must be shown to recover
in tort. In a case the court denied a buyer’s rescission and restitution from a seller of
a property who failed to disclose an illegal sewer hookup the seller did not know of.
Arthur v. Brick, 565 N.W.2d 623 (Iowa App. 1997)
In one case, purchasers of a motor home, brought suit against defendant dealer
for rescission of a sale contract based on misrepresentation when manufacturer ceased
operations. Where seller had knowledge of buyer’s desire of an adequate warranty
and where seller had knowledge of manufacturer’s bankruptcy and failed to disclose
such information, the failure to inform buyer constitutes misrepresentation and is
grounds for rescission of the sale contract after buyer experienced many problems
with the mobile home. The elements of an equitable claim for RESCISSION
BASED ON MISREPRESENTATION are: (1) a representation; (2) falsity; (3)
materiality; (4) an intent to induce the other to act or refrain from acting; and (5)
49
justifiable reliance. Importantly, there is no requirement that plaintiffs prove an
intent to deceive on the part of the dealer. The restitution remedy is return of the
purchase price less a deduction based on the buyer’s use of the vehicle. Hyler v.
Garner, 548 N.W.2d 864 (Iowa 1996). The buyer is not entitled to RESCISSION
since an adequate remedy is available at law. Buyer of automobile that was later
discovered to have been “clipped” (i.e., front and rear of car were from different cars
originally) brought suit against seller for rescission. Clark v. McDaniel, 546 N.W.2d
590 (Iowa 1996). Rescission is only granted where: (1) the injured party is not in
default; (2) the breach must be substantial and go to the heart of the contract; and (3)
remedies at law must be inadequate.
4.
There must be justifiable reliance on the representations, determined on a
subjective standard. In Re Marriage of Spiegal, 553 N.W.2d 309 (Iowa 1996)
("whether the complaining party, in view of his own information and
intelligence, had a right to rely on the representations").
5.
Statements of opinion are not misrepresentations and cannot be reasonably
relied upon unless
6.
a.
the statement is not in fact the true opinion of the speaker, and the opinion
can be justifiably relied upon because speaker is in a confidential
relationship with the hearer, or is an expert, or hearer is particularly
susceptible to such misrepresentations, Rest. 2d § 169, or
b.
the circumstances justify interpreting speaker as also asserting
(1)
no knowledge of inconsistent facts, and the speaker in fact has such
knowledge, or
(2)
knowledge of supporting facts, and the speaker in fact has no such
knowledge. Rest. 2d § 168.
Nondisclosure can amount to misrepresentation in the following situations
(see generally Rest. 2d § 161).
a.
disclosure is needed to prevent a previous representation from becoming
a misrepresentation.
b.
disclosure is needed to correct mistake as to a basic assumption of the
contract and would be breach of good faith and fair dealing not to
disclose. Roberts v. Moore, 445 N.W.2d 384 (Iowa App. 1989) (plaintiff’s
failure to inform defendant that car was a gray market vehicle made for
sale in Europe rather than the U.S. and lacking certain emission control
devices required by U.S. law amounted to a material misrepresentation);
Smith v. Peterson, 282 N.W.2d 761 (Iowa App. 1979) (seller of business
had superior knowledge that road widening would affect access to business
50
from road and failure to disclose this information to buyer was a material
misrepresentation); Hyler v. Garner, 548 N.W. 2d 864 (Iowa 1996)(when
big selling point of motor home was the manufacturer’s warranty, failure
to disclose the bankruptcy of the manufacturer was a nondisclosure which
amounted to a misrepresentation).
F.
c.
Disclosure is needed to correct a mistake as to the contents or the effect
of a written contract.
d.
Where there is a relation of trust and confidence, all material facts must
be disclosed. Peoples Bank & Trust Co. v. Lala, 392 N.W.2d 179 (Iowa
1986)(confidential relationship with banker required bank to disclose that
mortgage on homestead waived judgment-proof nature of homestead).
7.
Misrepresentation leading to the creation of a contract gives rise to a right of
rescission and restitution for expenses incurred under the contract. Robinson v.
Perpetual Partners Corp., 412 N.W.2d 562 (Iowa 1987) (recision for fraudulent
misrepresentation).
8.
Where the contract is with a fiduciary on matters within the scope of the
fiduciary duty, the contract can be voided if it is either not on fair terms or the
fiduciary has failed to both ensure that the beneficiary has full understanding of
their legal rights and disclose all relevant facts. Rest. 2d § 173.
9.
Where an arbitration clause in a contract is claimed unenforceable because
induced by misrepresentations, the claim of misrepresentation will be subject to
arbitration if the inducing misrepresentations relate to the entire contract, but
may be litigated if the misrepresentations were directed at the arbitration clause
itself. Dacres v. John Deere Insurance Co., 548 N.W.2d 576 (Iowa 1996).
Fraud is really a tort remedy allowing both compensatory "benefit of the bargain"
damages and punitive damages, rather than rescission or reformation, which are the
contract remedies for misrepresentation. Freeman v. Bonnes Trucking, Inc., 337
N.W.2d 879 (Iowa 1983)(fraudulent representation to employee before surgery that
insurance was in effect when in fact company failed to make premium payments,
including amounts withheld from employee’s check, was sufficient to impose punitive
damages).
1.
Fraud requires establishing by a preponderance of clear, satisfactory, and
convincing evidence that:
a.
a material representation, or failure to disclose a material fact where
there is a duty to reveal. Such a duty can arise from a “relation of trust,
from confidence, from inequality of condition and knowledge, or other
attendant circumstances." Clark v. McDaniel, 546 N.W.2d 590 (Iowa
51
1996) (failure to reveal that car was composed of 1989 front end and 1986
rear end amounted to a misrepresentation).
G.
b.
which was either known to be false or made in reckless disregard for its
truth or falsity and
c.
was intended to deceive,
d.
was in fact relied upon and reliance was justified. Clark v. McDaniel,
546 N.W.2d 590 (Iowa 1996) (misrepresentations by original seller of
motor vehicle can be expected to be relied upon by subsequent purchasers
of vehicle).
e.
with resulting injury and damage. Robinson v. Iowa-Nebraska Partners
Real Estate, 412 N.W.2d 562 (Iowa 1987) (a statement of intent to perform
a future act (a promise) is a false statement of fact only where the speaker
actually had an intent not to perform); Limited Flying Club, Inc. v. Wood,
632 F.2d 51 (8th Cir. 1980) (lack or knowledge of falsity of statements and
no reckless disregard for truth defeats fraud claim).
Mistake.
1.
A mistake is an incorrect belief at the time the contract was made, which goes to
a basic assumption upon which the contract was based. See Rest. 2d §
151-153.
2.
A mistake may be as to facts or law.
3.
A mistake may be mutual, in which both parties to the contract have the
incorrect beliefs about the subject of the contract, or unilateral, in which only
one party has the incorrect beliefs about the subject of the contract.
4.
Be careful not to confuse mutual or unilateral mistake with the minimum
requirement of a meeting of the minds for formation of a contract.
a.
For there to be a meeting of the minds, there need only be an objective
manifestation of assent to the terms of the contract.
b.
This objective manifestation of assent can nonetheless be accompanied by
subjective beliefs on the part of one or both parties about the matters
involved in the contract which are not in accord with reality.
(1)
In unilateral mistake cases, this lack of agreement in the subjective
beliefs of the parties is irrelevant to the presence of objective
manifestations of assent to the same terms.
52
(2) In mutual mistake cases, there is even agreement of the subjective
beliefs of both parties, the problem is that these beliefs do not match
reality.
c.
5.
Thus the defense of mistake should be raised where the technical
requirements for the formation of a contract, mutual assent, and
consideration, have already been shown to be present. It is not that there is
no contract, but rather that it is unfair to enforce the contract given the
mistaken beliefs of one or both of the parties. But see Harding v. Willie,
458 N.W.2d 612 (Iowa 1990) (suggesting that rescission due to material
mutual mistake is based on a finding of no contract because no meeting of
the minds).
Mutual mistakes require:
a.
a mistake as to a basic assumption of the contract (material), Harding v.
Willie, 458 N.W.2d 612 (Iowa 1990) (belief that leaky roof was fully fixed
was material).
b.
made at the time of the contract,
c.
shared by both parties. Kreiger v. Iowa Dept. of Human Services, 439
N.W.2d 200 (Iowa 1989).
6.
Contracts made as a result of mutual mistake are generally voidable unless the
risk of mistake allocated to one party. Rest. 2d § 152.
7.
Unilateral mistake requires:
8.
a.
a mistake as to basic assumption of contract,
b.
made at the time of the contract,
c.
held by only one party.
Unilateral mistakes are generally not voidable unless:
a.
risk of mistake is not allocated to the mistaken party and either,
b.
enforcement would be unconscionable or,
c.
the other party had reason to know of mistake or caused it. Rest. 2d 153;
Schlosser v. Van Dusseldorp, 101 N.W.2d 715 (1960) (mistake re contents
of contract due to not reading it cannot be basis for rescission unless the
other party tricked them into not reading it).
53
9.
Generally risk of mistake will be viewed as allocated to a party:
a.
if agreement says so,
b.
or the mistaken party acted knowing they had only limited knowledge of
facts but viewed it as sufficient, or
c.
it is otherwise reasonable to allocate the risk to that party. Rest. 2d § 154
For example, a contract to purchase stock which is made on the belief that the
stock price will rise is still a valid contract if the stock does not rise in price because
the risk is assumed by the purchaser.
10.
H.
A mutual mistake may be the basis of contract reformation where it is shown
by clear and convincing evidence that the contract instrument fails to accurately
express the real agreement between the parties. Kufer v. Carson, 230 N.W.2d
500 (Iowa 1975); Contract reformation is also available when this kind of
mistake results unilaterally because of fraud, duress, or other inequitable
conduct by one party.
Impossibility/Impracticability.
1.
Impossibility is a defense to nonperformance when events occurring after the
making of the contract make performance technically not doable due to no fault
of the nonperforming party. For example if an opera singer had laryngitis and
could not sing, that would make the performance impossible.
2.
In contrast, the defense of impracticability is available when events occurring
after the making of the contract due to no fault of the nonperforming party do
not make it impossible to perform, but rather make it too expensive, too
dangerous, or too wasteful to perform. If the opera singer could sing, but was
the subject of a credible death threat, this might make the performance
impracticable, rather than impossible.
3.
It is important to distinguish these two defenses from mistake.
a.
In impossibility/impracticability, things are different than they were at the
time the contract was made.
b.
In mistake, reality doesn't change, but rather there is a failure of agreement
between reality and our subjective perception of it.
c.
Thus, if an opera house contracted with an opera singer for a part which
each mistakenly thought was an alto part, but which in fact was a soprano
part out of the range of an alto, this would involve the defense of mistake
54
rather than impossibility because no supervening event occurred to make
the performance impossible, it was impossible to begin with.
d.
4.
5.
One could understand impossibility/impracticability as involving mistakes
about what the future will be like, whereas mistake involves mistakes
about what the present is like.
Performance can become impossible because of:
a.
death or incapacity of a designated performer,
b.
destruction or nonexistence of the subject or object of performance (a
house repair contract when the house is subsequently destroyed by fire), or
c.
prevention of law, where performance is made illegal (an agreement not to
build on property where the land is taken by eminent domain and a
building is erected). Rest. 2d § 2624.
If impossibility occurs because of a contingency which reasonably may have
been anticipated and the occurrence of this contingency is not specifically
excused by the term of the contract, the resulting impossibility will not operate
as an excuse because the risk of this contingency has been assumed by the
performing party. Salinger v. General Exchange Insurance Co., 250 N.W. 13
(Iowa 1933) (finding no impossibility where insurer knew that repossession of
car by finance company could prevent it from fulfilling its obligation to repair
car and return it to owner).
a.
Where an assumed method of performance is not specified in the contract,
inability to use this method does not amount to impossibility of
performance. Nora Springs Cooperative Co. v. Brandau, 247 N.W.2d 744
(Iowa 1976) (boxcar shortage did not relieve grain elevator from its duty to
accept farmer’s grain & arrange alternative mode of reshipment, where
elevator’s ability to subsequently transport grain by boxcar was not a
conditions of contract with farmer).
6.
Temporary impossibility operates as only a temporary excuse.
7.
When ground of impossibility prevent full performance, but partial performance
is possible, capable of a ratable apportionment, and worthwhile or of value to
the other party, neither party may be excused for performance of the remaining
portion of the contract. Yost v. Council Bluffs, 471 N.W.2d 836 (Iowa 1991)
(the destruction of flammable debris caused only partial impossibility where
contract also called for building trenches for disposal of burned debris and burial
of all burned debris in addition to the burning of the flammable debris).
8.
Performance can become impracticable because of:
55
a.
extraordinary changed circumstances not assumed possible by the parties
b.
the risk of which is not allocated to one or other, such as war, changes in
the law, or Acts of God (major earthquakes). ICA § 554.2615, Rest. 2d §
261; Nora Springs Cooperative Co. v. Brandau, 247 N.W.2d 744 (Iowa
1976) (UCC impracticability applies to both sellers and buyers).
c.
Market shifts do not count as unexpected extraordinary changed
circumstances.
d.
Mere increased expense of performance does not create impracticability
unless the increased cost is due to some unforeseen contingency which
alters the essential nature of the performance. Id.
and
I.
Frustration of purpose.
1.
Frustration of purpose occurs when performance is both possible and as easily
done, but no longer has any value due to changed circumstances not
anticipated by either party. Rest. 2d § 265. For example, where a rental to use
building for particular use was frustrated when ordinance made this use of this
building illegal. McCollough Realty Co. v. Laemmle Film Service, 165 N.W. 33
(Iowa 1917) (finding frustration of purpose where lessee lost all beneficial use
of property when the specific purpose for leasing the property was “film
exchange and film and theater supply purposes” and the city subsequently
passed an ordinance prohibiting this particular use of the building).
2.
However, the primary purpose of the contract must be frustrated and courts are
generally reluctant to find primary purpose frustration. Courts will not find that
making a profit is the primary purpose of any contract.
3.
Furthermore, the frustration must not be due to any fault of the frustrated party
4.
The risk of such changed circumstances cannot have been allocated to the party
claiming frustration.
and
J.
Unconscionability.
1.
Iowa courts have described an unconscionable bargain as one "no man in his
senses and not under delusion would make . . . and no honest and fair man
would accept." Casey v. Lupkes, 286 N.W.2d 204 (Iowa 1979).
2.
Unconscionability can excuse a party from a contract altogether, or only form an
unconscionable clause in a contract. Rest. 2d § 208; ICA § 554.2302; ICA §
56
537.5108(1) (Iowa Consumer Credit Code); ICA § 554.2719(3), 544.2302. See
also, ICA § 562A.7, 562A.11 of the Uniform Residential Landlord and Tenant
Act.
3.
K.
Two elements must be present:
a.
an absence of meaningful choice or procedural unfairness, in which there
is some compulsion to agree, but not amounting to duress, a lack of
bargaining power, surprise or lack of notice; Besta v. Beneficial Loan Co.,
855 F.2d 532 (8th Cir. 1988) (a six-year credit term designed solely to
increase the total cost enough to permit a home mortgage as security was
unconscionable where borrower not told that she could have repaid the
same loan with lower monthly payments in three years, thus depriving her
of fair notice and creating unfair surprise); C & J Fertilizer v. Allied
Mutual Insurance Co., 227 N.W.2d 169 (Iowa 1975) (provision in a theft
insurance policy that required visible exterior damage was unconscionable
when the liability-avoiding provision was in small print and not located in
a section of the contract where it is normally expected); and
b.
terms which are unreasonably favorable to one party, i.e., substantive
unfairness, such as price or credit terms. Gentile v. Allied Energy
Products, Inc., 479 N.W.2d 607 (Iowa App. 1991) (no unconscionability
where parties of equal bargaining power, there was no pressure to agree or
lack of familiarity with transaction, and the language was clear and easily
read); Lakeside Boating and Bathing v. Iowa, 402 N.W.2d 419 (Iowa
1987)(not a one-sided agreement for lessee where lease provided a definite
benefit and lessee under no apparent compulsion to sign).
4.
This excuse is used mostly for the benefit of consumers, and is rarely applied
for the benefit of a commercial party.
5.
Under Iowa Rules of Civil Procedure Nos. 101 and 103, unconscionability must
be specially pleaded at an affirmative defense. Federal Land Bank v. Steinlage,
409 N.W.2d 173 (Iowa 1987).
Public Policy.
1.
The defense that enforcement of a contract would violate public policy is the
only defense which is based entirely on substance or terms of the contract
without any requirement that there be a defect in the bargaining process. Where
the subject matter is illegal or it would be against public policy to enforce the
contract, the contract will not be enforced. However, an innocent party to an
illegal agreement may be awarded damages where both parties were not in pari
delicto (equally at fault). In Rogers v. Webb, 558 N.W.2d 155 (Iowa 1997), the
Supreme Court found a contingent fee consulting contract between a wife and
her friend/consultant in a dissolution proceeding to be in violation of PUBLIC
57
POLICY. The plaintiff was not an attorney but was hired to help the wife in the
divorce. The contract would be not be allowed if he was an attorney. Applying
the same concepts as with an attorney the contract was void. Court also
commented on the scoundrel’s having already received $195,000 for other
services. See also Bergantzel v. Mlynarik, 619 N.W.2d 309 (Iowa 2000)
(holding contingency fee agreement between Mlynarik and layperson hired to
represent Mlynarik in a tort claim not enforceable because it was against public
policy. Layperson’s actions amounted to unauthorized practice of law.).
a. The Iowa Supreme Court recently held in Galloway v. State, ___ N.W.2d ___
(Iowa 2010), that pre-injury waivers by parents of their children’s negligence
causes action unenforceable under public policy. The public policy was based
on the need to protect children from improvident decisions of their parents, the
fact that parents cannot waive their child’s cause of action post-injury without
court approval, and childrens’ inability to avoid or understand the risks of
danger while participating in an activity. [NOTE: procedendo has not yet
issued]
2.
Agreements can be found unenforceable on the basis of:
a.
statutes which prohibit enforcement of specific contracts, such as statutes
which prohibit the enforcement of surrogate mother contracts and usurious
loans. For example, ICA § 596.5(2) makes provisions waiving alimony in
prenuptial agreements void. In re Marriage of Spiegal, 553 N.W.2d 309
(Iowa 1996);
b.
statutes which make the contracted performance illegal, such as criminal
statutes prohibiting murder, drug sales or obstruction of justice, or a civil
statute prohibiting pollution;
c.
statute which regulate the contracted performance, such as insurance
industry statutes or professional licensing statutes; or
d.
or by judicially noticed public policy, such as a public policy against even
voluntary bodily mutilation which would make unenforceable contracts to
sell body parts, even in the absence of specific legislation concerning this
subject.
e.
Although the courts do not discuss public policy in this area, there is a
public policy at work that no other contract dispute is similarly analyzed.
The person challenging a prenuptual agreement must prove its terms are
unfair or the person’s waiver of rights was not knowing and voluntary.
Court of Appeals threw out a prenuptial agreement where the court
concluded the signing spouse did not understand the import of what she
was signing. She was unaware of her rights and what she was giving up
by signing. Prenuptial agreements that are substantively unfair are still
58
binding if they were executed in a procedurally fair manner. In assessing
the fairness and validity of such agreements, we apply a substantive
fairness test combined with the requirement of a knowing and voluntary
waiver of a spouse’s entitlement to marital property. In re Marriage of
Gonzalez, 561 N.W.2d 94, 97 (Iowa App. 1997).
3.
In determining whether a regulatory statute or judicially noticed public policy
should prohibit the contracted performance, one must balance:
a.
the strength of public policy against
b.
the harm or forfeiture to result and
c.
the equitable status (clean hands) of the party seeking enforcement. Rest.
2d § 178 & 181; Baker v. Stewarts’, Inc., 433 N.W.2d 706 (Iowa 1988)
(dictum re the unenforcability of exculpatory agreements where a
professional such as a doctor is involved or a party assumes great
responsibility, such as hospital/patient contract); Norwest Bank Des
Moines, N.A. v. Bruett, 432 N.W.2d 711 (Iowa App. 1988)(mortgage
provision waiving the statutory right of possession and redemption
following foreclosure is not a violation of public policy); Van Hosen v.
Bankers Trust Co., 200 N.W.2d 504 (Iowa 1972) (holding unenforceable
the total forfeiture of bank pension for a 33-year employee triggered by a
later employment with a competing bank); Walker v. Gribble, 689 N.W.2d
104 (Iowa 2004) (stating the court will invalidate a contract where the
preservation of the public welfare outweighs the societal interest in
freedom of contract).
4.
A basic rule of construction is to presume that the contract is binding on the
parties. Courts will refuse to enforce only where it is clear that the parties
intended the performance which violate public policy. Baker v. Stewarts’, Inc.,
433 N.W.2d 706 (Iowa 1988) (avoid construing customer waiver at cosmetology
school to include problematic waiver of claims arising out of supervisor’s
negligence).
5.
Courts will refuse to void a contract prior to the time for performance where the
contract was not violative of public policy at its making and may not violate
public policy at the time of performance. S & S, Inc. v. Meyer, 478 N.W.2d 857
(lowa App. 1991) (refusing to view as void and unassignable contracts to sell
grain to grain elevator at the point in time where the elevator lost its license to
deal in grain when the license might have been reinstated by the time for
delivery on the contracts).
6.
Restrictive covenants which prohibit an employee from working a similar job
after employment is terminated are frequently challenged as unenforceable
because they violate a long-standing public policy against depriving a person of
59
their livelihood. Iowa courts do not view restrictive covenants as per se
violations of this public policy and will enforce such covenants when they are
reasonable and involve a limited area of restriction for a limited time. Orkin
Exterminating Co. v. Burnett, 146 N.W.2d 320 (Iowa 1967) (holding reasonable
a three-year restriction within ten miles of any city or town previously serviced
as an employee of an extermination business); Casey’s General Stores, Inc. v.
Campbell Oil Co., 441 N.W.2d 758 (Iowa 1989)(holding reasonable a restriction
on operating competing convenience store within three-mile radius of existing
franchises); Rasmussen Heating & Cooling, Inc. v. Idso, 463 N.W.2d 703 (Iowa
App. 1990)(ten-year covenant not to compete in manufacturing and selling boat
hoists was “neither tightly time limited nor reasonably necessary for the
protection of the business”; suggesting five years was outside limit). Restrictive
covenants found to be over broad will be reformed to set reasonable limits. The
court will balance:
7.
a.
the interest and behavior of employer,
b.
the interest and behavior of the employee and
c.
any interest the public may have in the employer or employees. Curtis
1000, Inc. v. Youngblade, 878 F. Supp. 1224 (N.D. Iowa 1995) (two-year
restriction on competition in salesperson’s former sales area reasonable
where salesperson received special training from employer and salesperson
had chance to take customers away from employer).
Choice of forum provisions that would deprive Iowa courts of jurisdiction they
would otherwise have are not legally binding in Iowa, but Iowa courts will
consider the provision as one factor in determining whether to exercise
jurisdiction. Holiday Inns Franchising, Inc. v. Branstad, 537 N.W.2d 724
(Iowa 1995).
L. Prenuptial agreements must, at minimum, meet a test of procedural fairness. In Re
Marriage of Spiegal, 553 N.W.2d 309 (Iowa 1996)(waiver of marital rights must be
knowing and voluntary). At the same time, Iowa courts will also be concemed about
the substantive fairness of the agreement, however, substantive fairness will be found
where "the provisions of the contract or mutual, or the division of property is consistent
with the financial condition of the parties at the time of execution.") Id.
XX.
CAN NONPERFORMANCE BE JUSTIFIED?
A.
Failure of an express condition precedent to performance can justify
nonperformance.
1.
A condition precedent is an event, not certain to occur, which must occur before
the other party’s performance is due. Rest. 2d § 224. For such a condition
precedent to be express, it must be created by the terms of the contract.
60
2.
If the condition precedent does not occur, or is repudiated, the other party has no
obligation to perform. Berryhill v. Hatt, 428 N.W.2d 647 (Iowa 1988) (buyers’
duty to purchase property never arose because condition precedent of splitting
property into lots was never fulfilled and was further repudiated by the seller
when he served a notice of forfeiture on the buyers). This will result in a total
forfeiture of the benefits of the contract for that party because the nonoccurrence
of the condition shield the other party from suit for failure to perform. Rest. 2d
§ 225. As a result, there are several mechanisms which the courts have
developed to avoid this harsh result even where the condition has not occurred.
3.
Prefer a construction of the possible condition as a promise to perform
rather than a condition of performance where forfeiture will result unless the
condition event is within the control of the party whose contract rights are
dependent upon the condition, or that party has assumed the risk of forfeiture.
Rest. 2d § 227.
4.
a.
This is done by requiring special words to make it a condition, such as
provided that, on condition, when, so that, while, as soon as, only after.
National Bank of Waterloo v. Moeller, 434 N.W.2d 887 (Iowa 1989)
(words "provided that no problems arise" created condition to promise),
b.
The advantage of this is that the failure to perform as promised results in a
breach, which may be only partial, and thus allows the nonperforming
party to avoid total forfeiture. For example, A contracts to make repairs on
B’s house by July 1, in return for which B agrees to pay $5,000. A
completes the repairs on July 2. If completion of repairs by July 1 is
viewed as a condition, B will not have to pay under the contract for the
repairs, although A will have a restitution claim. If completion of repairs
by July 1 is viewed as part of the promise to perform, then the delay is a
breach which may be insubstantial enough that B will be required to pay
all or most of the $5,000.
Excuse the nonoccurrence of the condition, thus reimposing the other party's
obligation to perform, if the condition is not material, disproportionate forfeiture
would occur and the forfeiting party has clean hands. Rest. 2d § 229.
a.
The materiality of a condition may be determined by asking whether the
failure of the condition to occur substantially effects the conditioned
performance, making it more burdensome, or changes the value of the
performance received in exchange for the conditioned performance.
b.
Courts are required to balance between the forfeiture that one party would
suffer and the interests that the other seeks to protect.
61
c.
For example, A contracts to make repairs on B’s house in return for which
B agrees to pay $5,000 "on condition that the repairs are completed by July
1." A completes the repairs on July 2. The language of the contract
clearly establishes the date of completion as a condition, so it cannot be
interpreted as a promise. However, the nonoccurrence of the second
condition can be excused to the extent of the one-day delay if the delay
neither makes it more difficult to pay the $5,000 nor reduces the value of
repairs by causing significant additional expense and A reasonably
attempted to perform by July 1.
5.
Excuse the nonoccurrence of the condition if it is impossible or
impracticable for the condition to occur. Excusing the nonoccurrence of a
condition precedent because of impossibility or impracticability occurs mainly
in insurance situations to avoid forfeiture of the insured’s coverage under a
policy. McCoy v. New York Life Insurance Co., 258 N.W. 320 (Iowa 1935)
(condition of disability policy that notice of disability be given was excused on
grounds of impossibility when the insured became insane and could not report
the disability).
6.
Excuse the nonoccurrence of the condition when the occurrence of the condition
has been waived by the party whose performance is conditioned.
a.
Waiver is the intentional giving up of a known right by an express
statement of waiver or by conduct inconsistent with assertion of the
waived right.
b.
Waiver of a condition will be found to have occurred where the other party
makes it clear, by statement or conduct, that they will not require the
condition to occur before performing. Gottschalk v. Simpson 422 N.W.2d
181 (Iowa 1988) (where installment contract for land gave seller option of
forfeiture or foreclosure, and seller accepted quitclaim deed rather than
pursue forfeiture to its conclusion seller waived forfeiture); Employee
Benefits Plus, Inc. v. Des Moines General Hospital, 535 N.W.2d 149
(Iowa 1995) (implied waiver of conditions where performance continued
without informing other party whether conditions for such performance
had been met).
c.
Thus where a home buyer’s duty to purchase the house is made conditional
upon the buyer obtaining a mortgage at a particular interest rate, the buyer
can waive the condition by going ahead with preparations for the purchase
of the house after obtaining a mortgage with a higher interest rate.
d.
However a party may waive a condition only if it is for that party’s own
benefit. Berryhill v. Hatt, 428 N.W.2d 647 (Iowa 1988); FS Credit Corp.
v. Troy Elevator, Inc. 397 N.W.2d 735 (Iowa 1986) (even anti-waiver
provision in a contract may be waived expressly or by conduct by
62
beneficiary of the provisions). Thus, only the buyer can waive the interest
rate condition not the seller.
7.
e.
Furthermore where a condition exists solely for the benefit of one party the
other party cannot refuse to perform if the beneficiary of the condition
waives it. Rodgers v. Baughman, 342 N.W.2d 801 (Iowa 1983) (seller
could not refuse to sell when buyer waived condition the buyer’s own
property be sold before buyer had obligation to buy seller’s property). In a
case where buyer sought specific performance from a seller, the appellate
court found parties to a contract may waive a condition precedent to their
performance of an obligation under the contract when the condition exists
for their sole benefit and protection. The waiving party may then compel
performance by the other party to the contract who has no interest in the
performance or nonperformance of the condition. Here the contract
provided that the buyer did not have to perform unless a rezoning (the
condition was for the benefit of the buyer) was obtained. Dergo v. Kollias,
1997 WL 432518 (Iowa App. 1997).
f.
Waivers may be withdrawn or retracted as long as the other party is
given notice and a reasonable opportunity to perform the condition which
had previously been waived. FS Credit Corp. v. Troy Elevator, Inc., 397
N.W.2d 735 (Iowa 1986) (language in new agreement disclaiming prior
conduct waiving prior written consent provided notice and a reasonable
opportunity to perform reinstated conditions); Perkins v. Farmers Trust &
Savings Bank, 421 N.W.2d 533 (Iowa 1988) (Lender's prior conduct of
failing to enforce subordination of landlord’s lien to lender’s security
interest in tenant’s crops amounted to a waiver which precluded lender
from reclaiming priority over landlord’s lien without notice to landlord).
g.
A waiver made after the condition has already not occurred is irrevocable
under the doctrine of election.
h.
By characterizing conduct as a waiver, courts can avoid the three
requirements for a modification (the requirement of assent, satisfaction of
the statute of frauds, and consideration). However this is why waiver can
only be nonmaterial. A material waiver would modify the contract and
require new consideration.
A waiver which has lead the other party to materially change its position in
reliance on the waiver is called an estoppel and may not be withdrawn or
retracted. Nora Springs Cooperative Co. v. Brandau, 247 N.W.2d 744 (Iowa
1976) (waiver could be retracted since grain elevator had not relied on farmer's
acquiescence to delay).
63
a.
Unlike a waiver, an estoppel can be of a material condition, since the
presence of reliance on the waiver justifies enforcement of a material
waiver even in the absence of consideration.
8.
The nonoccurrence of a condition can also be excused where the beneficiary of
the condition has failed to use their best efforts and make a good faith effort to
make sure the condition occurs. Rest. 2d § 245, 255. Thus, if it is a condition of
a buyer’s obligation to purchase a house that they receive a mortgage
commitment from a bank, and they do not receive a commitment because they
never applied for a mortgage, the nonoccurrence of the condition will be
excused, and the buyer will be obligated to purchase the house.
9.
Similarly, the nonoccurrence of a condition can be excused where the other
party prevents the condition from occurring. Thus, if A agreed to sell B a car
on the condition that A obtains title to it at a foreclosure sale the following day,
and B then outbids A for the car at the foreclosure sale, B’s actions would be
viewed as prevention and A's failure to get the title would be excused and B
would be required to pay A for the car or be in breach. Rest. 2d § 205, 245;
Employee Benefits Plus, Inc. v. Des Moines General Hospital, 535 N.W.2d 149
(Iowa 1995) (hospital’s refusal to fully furnish employee benefit information
prevented preparer of benefit statements from fulfilling condition precedent of
satisfactory employee benefits statements).
10.
Finally, the nonoccurrence of a condition will be excused if it has been caused
by the other party’s anticipatory repudiation of their performance. Thus, if an
owner's duty to pay is conditioned upon the builder providing a certificate of
occupancy and the owner repudiates the contract by stating they will not pay no
matter what, the builder may rely on the repudiation and not seek a certificate,
and the nonoccurrence of this condition will be excused, so that the owner can
be found in breach.
11.
Conditions of satisfaction are present when one party’s duty, usually a duty to
pay, is conditioned upon the satisfaction of that party with the proffered
performance.
a.
Such conditions can demand either subjective satisfaction, in which
idiosyncratic standards of aesthetics or taste must be met, usually personal
service contracts like portrait painting, or objective satisfaction, in which
the performance must be acceptable to a reasonable person, usually
commercial contracts in which the primary concerns are utility,
merchantability, and fitness.
b.
Where it is unclear which kind of satisfaction is demanded by contract,
courts will presume only objective satisfaction was required to avoid the
greater likelihood of forfeiture where subjective satisfaction is a condition
of performance.
64
12.
B.
Conditions may also be implied-in-fact from the circumstance of the contract, by
the party’s conduct, a by trade wage. One regularly implied condition of an
obligation to pay upon completion of a task is notice of the completion.
Has occurrence of a condition subsequent excused performance?
1.
A condition subsequent relieves one party of their duty to perform should a
specified event occur. For example, remarriage of an ex-spouse is often a
condition subsequent to an agreement to pay alimony, where the obligation to
pay remains only a long as remarriage does not occur.
2.
The burden of proving a condition subsequent is upon the party who is trying to
avoid performance and is claiming that their duty to perform has been
extinguished.
3.
In contrast, the burden of proving a condition precedent is upon the party who is
seeking to obtain performance and is claiming that performance is due.
C. Total breach or lack of substantial performance as an excuse for nonperformance under
the common law.
1.
One party’s failure to perform as promised under the contract may justify the
other party from refusing to perform their end of the bargain. Such a
justification will only be present
a.
if the first party's performance is due, i.e., they have breached, and
b.
the breach is significant enough to justify the second party’s
nonperformance, i.e., total breach or lack of substantial performance.
2.
In order to determine if a nonperformance constitutes a breach, which is simply
a failure to perform when performance is due, Rest. 2d § 235, it is necessary to
first determine if performance is due.
3.
The doctrine of constructive conditions works to determine which of the
promised performances is due before the other, by treating one promised
performance as if it were a condition of the other performance and therefore
must occur first.
a.
If the contract expressly sets out the order of performance, such as
payment in full is due before goods will be delivered, the payment will be
viewed as a constructive condition of delivery, such that complete failure
to pay will justify a refusal to deliver without risking a breach of contract.
65
4.
5.
b.
A contract may also be silent as to the order of performance. In that case,
if one performance takes longer than the other, the longer performance is
viewed as the constructive condition of the other. Thus, in the absence of
an express order of performance in a contract to build a house in exchange
for payment of money, the building performance will be viewed as a
constructive condition of the promise to pay money. Consequently, the
house must be completed before payment is due.
c.
If both performances can be rendered simultaneously and the contract is
silent about order, they are due simultaneously. Rest. 2d § 234. However,
each is viewed as a constructive condition of the other. This means that
each party must be ready, willing and able to perform before the other is
required to perform. Thus, if the contract proposes payment of money for
the deed to real estate and the contract is silent about the order, the deed
must be delivered as long as the buyer is ready, willing and able to pay,
and payment must be made as long as the seller is ready, willing, and able
to deliver. If the buyer does not have the money, however, the seller’s
obligation to turn over the deed is viewed as not yet due. Berryhill v. Hatt,
428 N.W.2d 647 (Iowa 1988) (where seller stated he would not tender the
title and close, buyer need not tender the down payment).
The nonoccurrence of a constructive condition of performance will not justify a
refusal to perform, however, unless the nonoccurrence reaches a certain level.
a.
Unlike express and implied conditions, where any deviation from the event
set out in the condition is justification for nonperformance, nonoccurrence
of constructive conditions only justifies a refusal to perform when the
nonperformance amounts to a total breach or lack of substantial
performance.
b.
In this way, the doctrine of constructive conditions avoids the possibility
of total forfeiture of the return promise and unjust enrichment when the
first performance due is minimally or trivially incomplete or defective.
Thus, where completion of a house is due before payment is made to the
builder, a failure to complete every bit of the promised landscaping, while
a breach, probably would not be substantial enough to justify a refusal to
pay anything.
The Restatement describes three levels of breach:
breach and total breach.
a.
partial breach, material
A breach is either partial or material, depending upon an evaluation of
the following factors:
(1)
the amount of benefit received by nonbreaching party by whatever
performance has occurred,
66
b.
c.
d.
(2)
the possibility of adequate compensation of the nonbreaching party
by damages;
(3)
whether the breach was willful or innocent;
(4)
how much of a forfeiture would result for breaching party; and
(5)
the likelihood that the breaching party will cure the breach. Rest. 2d
§ 242.
A total breach is a material breach, which has remained uncured beyond
a reasonable time.
(1)
Fairness requires that the breaching party be given some reasonable
period of time to cure the breach.
(2)
a cure is either unlikely or does not occur within a reasonable time
period, the injured party may treat the breach as total and terminate
the contract.
(3)
What is a reasonable time will depend on the circumstances of the
contract, the consequences of the breach to both parties as
determined by the material breach factors, and the possible loss of
substitute arrangements by the nonbreaching party if they continue to
wait. Rest. 2d § 242.
An anticipatory repudiation of contract obligations before due can also
be a total breach if the obligations repudiated are material. Rest. 2d § 253.
Anticipatory repudiation is a repudiation of contract obligations before
performance is due by either.
(1)
an express unequivocal statement that performance will not or cannot
be done, which has not been retracted can only be retracted before
the nonbreaching party has relied upon it or has indicated repudiation
is taken as final.
(2)
or a voluntary act which makes performance impossible. Rest. 2d §
250; or
(3)
a failure to provide reasonable assurance after a demand for such
when reasonable grounds for insecurity have arisen. Rest. 2d § 251.
What each level of breach justifies:
67
6.
(1)
If the breach is merely partial, the nonbreaching party is not
justified in refusing to perform, but must perform. However every
breach does gives rise to a claim for damages. Rest. 2d § 236. As
a result of a partial breach, therefore, the nonbreaching party has the
right to sue for damage.
(2)
If the breach is material, the nonbreaching party may suspend
performance for a period of time to see if cure will occur, but is not
justified in repudiating the contract.
(3)
If the breach is total, the nonbreaching party can repudiate the
contract or refuse to perform when due, and in addition, sue for
damages arising out of the breach. Rest. 2d § 237. If the total
breach is anticipatory, the nonbreaching party can sue immediately or
await the time of performance and then sue. Berryhill v. Hatt, 428
N.W.2d 647 (lowa 1988). However, the nonbreaching party must be
able to establish that they would have been ready, willing and able to
perform had the total breach not occurred. See Rest. 2d § 243, 252
and 253. Baysden v. Hitchcock, 553 N.W.2d 901 (Iowa App. 1996)
(failure to transfer consideration at closing and subsequent attempts
to renegotiate contract justified other party’s sale of business to
another).
(4)
If the breach is merely partial or material, but not total, and the
nonbreaching party overreacts by repudiating the contract or
absolutely refusing to perform, the non-breaching party will have
herself totally breached and the original breacher will no longer have
any further obligation to perform and can further sue for damages
arising out of the total breach. Walker & Co. v. Harrison, 347 Mich.
630, 81 N.W.2d 352 (1957) (a material breach in response to a partial
breach allowed the partial breacher to sue for damages).
The associated doctrine of failure of consideration simply refers to a failure of
one party to receive the consideration bargained for. This can result from
mistake, fraud, or breach.
a.
Prospective failure of consideration arises when it appears to one party that
the other party is not going to be in a position to perform when due or has
no intention to do so.
b.
A prospective failure of consideration can provide the affirmative defense
of discharge to a defendant who has themselves totally breached by
refusing to perform, however, the failure of consideration must ordinarily
be total in order to justify the breach. Taylor Enterprise, Inc. v. Clarinda
Production Credit Ass’n, 447 N.W.2d 113 (Iowa 1989) (holding apparent
borrower’s lack of ability to pay future loan installments because of willful
68
dissipation of assets discharged bank’s obligation to continue to loan
money even though bank stopped performing before actual breach or
repudiation).
7.
In construction contracts where the problem is defective or incomplete
performance and the nonbreaching party refuses to pay because of the defect of
incompleteness, courts tend to use the language of substantial performance or
lack of substantial performance.
a.
Substantial performance is the same as partial breach; less than
substantial performance is the equivalent of total breach.
b.
The presence of substantial performance means there is no justification
for the non-breaching party's nonperformance. Moore’s Builder and
Contractor v. Hoffman, 409 N.W.2d 191 (Iowa App. 1987) (as substantial
performance always means less than full and complete performance,
substantial performance is no defense to a suit against the builder for
damages).
c.
In order to have substantial performance the defects must not:
(1)
impair the structure as a whole,
(2)
they must be remediable without material damage to other portions
of the structure,
(3)
they must be compensable by set off from the contract price, and
(4)
they must be inadvertent, unintentional, and not the result of bad
faith. Id. (minor omissions do not mount to lack of substantial
performance, contractor had right to contract price after deductions
for defects and incompletions); Jacob and Youngs, Inc. v. Kent, 230
N.Y. 239, reh. den. 230 N.Y. 656 (1921) (court found substantial
performance where building contractor built house but failed to use
brand of copper plumbing specified in the contract and required the
buyer-owner to pay the contract price but sue the contractor for the
difference (minimal) in value of house with requested and actual
plumbing),
(5)
To successfully enforce a mechanic’s lien, SUBSTANTIAL
PERFORMANCE of the contract is required. Omissions or
deviations from the contract must be inadvertent or unintentional and
must not impair the structure as a whole. Any omissions or
deviations must be remediable without doing material damage to
other portions of the construction, and may be compensated for by
69
deductions in the contract price. Bidwell v. Midwest Solariums, Inc.,
543 N.W.2d 293 (Iowa App. 1995).
8.
9.
Certain contracts involve divisible performances, i.e., where the intent of the
parties is to provide for separate and divisible performances for which as a
separate price or return performance can be computed.
a.
For example: A hires B to build 35 identical houses. B builds only 11.
Strictly construing this contract, a court could find that B had totally
breached and therefore forfeited any right to payment. On the other hand,
the court could find this agreement was a divisible contract and award B
10/35’s of the contract price.
b.
The divisible contract doctrine avoids forfeiture for breaching party and
unjust enrichment to the nonbreaching party. When a contract is found
divisible, a breach of defective performance on one part (an installment)
does not necessarily breach the entire contract (unless the part breached
impairs the whole contract). See ICA § 554.2612 (installment contract is
one which requires delivery of goods in separate lots to be accepted
separately).
Breach of warranty claim will be lost unless the buyer gives notice of the breach
within as a reasonable time of discovery. Kirk v. Ridgway, 373 N.W.2d 497
(Iowa 1985)(notice of alleged breach of warranty must be given within as a
reasonable time of actual or reasonable discovery).
D.
Total or partial failure of performance, i.e., nonperformance by other party which is
not breach because the performance was excused by impossibility, impracticability, or
another. Such nonperformance justifies the other party in also not performing. Thus if
an opera singer is excused from performing because of laryngitis, the opera house
may be justified in failing to pay her.
E.
Breach under the UCC for sale of goods.
1.
The primary change the UCC has made in justification doctrine is to provide
buyers with an opportunity to view anything less than perfect performance as
total breach. This is accomplished by means of the perfect tender rule. ICA §
554.2601(1). Under this rule, buyer can treat nondelivery, late delivery, or any
defect in goods as a total breach and cancel the contract, so long as:
a.
they reject delivered goods within as a reasonable time and with
seasonable notification of rejection to the seller, ICA § 554.2602,
specifying the reason rejected if curable, ICA § 554.2605; or
b.
they revoke acceptance of goods, which is only permitted if
70
2.
(1)
it occurs within as a reasonable time after the ground for revocation
is discovered and before substantial change in the condition of the
goods not caused by their own defects,
(2)
the seller is notified of the revocation,
(3)
the value of goods is substantially impaired, and
(4)
they were either originally accepted only on assumption the defect
would be cured, or the defect was latent. ICA § 554.2608.
Defects in goods can arise out of:
a.
as a breach of express warranty, i.e., nonconformity to express description,
sample, or promise regarding the goods,
b.
as a breach of implied warranty of merchantability, i.e., goods cannot be
used for their ordinary use, such as as a nail to blunt too be hammered,
c.
as a breach of implied warranty of fitness for as a particular purpose, i.e.,
goods not fit for specific purpose when seller selected goods knowing of
buyer’s particular purpose and knowing of buyer’s reliance on seller’s
judgment.
3.
If an imperfect tender is rejected before the time for performance has expired,
the seller has the right, upon notifying the buyer and until the contract date of
performance, to cure the defective goods or tender. ICA § 554.2508.
4.
However, since under the UCC, unless otherwise agreed, tender of payment is as
a condition to the seller’s duty to tender and complete delivery, ICA § 554.2511,
an imperfect tender will only work to justify failure to pay where the seller has
waived their right to tender of payment before delivery or the contract permits
payment after delivery.
5.
The seller may be justified in refusing to deliver where payment due on or
before delivery is not made by the buyer. ICA § 554.2704. Seller may also be
justified in canceling contract where buyer unreasonably delays acceptance of
delivery. Nora Springs Cooperative Co. v. Brandau, 247 N.W.2d 744 (Iowa
1976) (questioning whether material breach is necessary for cancellation due to
failure to accept scheduled delivery, but finding material breach where corn was
deteriorating while elevator refused to accept delivery because of boxcar
shortage).
6.
Both the seller and buyer can also be justified in not performing when due if the
other party has anticipatorily repudiated their obligation to deliver or pay by
overt communication or an action which renders performance impossible or
71
repudiated, and the loss of the repudiated performance will substantially impair
the value of the contract. Under these circumstances the aggrieved party can
choose to await performance for as a reasonable time and suspend their own
performance, or repudiate their own performance obligations by canceling the
contract. ICA § 554.2610; S & S, Inc. v. Meyer, 479 N.W.2d 857 (Iowa App.
1991)(treating as a change in delivery terms caused by buyer's fraudulent
behavior as an anticipatory breach by buyer); Bonebrake v. Cox, 499 F.2d 951
(8th Cir. 1974)(death of bowling alley equipment seller and installer was
anticipatory repudiation where seller had no business associates or partners to
complete the transaction, subsequent offer by administrators of the estate to
proceed could not operate as retraction where buyers had materially relied upon
repudiation by obtaining equipment elsewhere);
7.
Both seller and buyer can also be justified in not performing when due if they
have
8.
XXI.
a.
reasonable grounds for insecurity about the other's performance,
b.
have in writing demanded adequate reassurances of performance,
c.
and do not receive such assurances within as a reasonable time not to
exceed thirty days. ICA § 554.2609; S & S, Inc. v. Meyer, 478 N.W.2d 857
(Iowa App. 1991)(where buyer filed for bankruptcy, was actually insolvent
for as a short time, and had lost its license to buy grain, sellers had
reasonable grounds for insecurity, but, barring egregious conduct by the
other party, the insecure party may not refuse to perform without writing to
demand and failing to receive adequate assurances in writing—not reached
here, the bankruptcy having prevented a demand for performance being
made).
d.
There is also as a right to suspend performance while awaiting the
assurances, if it is commercially reasonable to do so. Id.
Breach of warranty claim will be lost unless the buyer gives notice of the breach
within as a reasonable time of discovery. ICA § 554.2607(3); Renze Hybrids,
Inc. v. Shell Oil Co., 418 N.W.2d 634 (Iowa 1988).
WHAT REMEDIES ARE AVAILABLE FOR BREACH OF A NON-UCC
CONTRACT?
Judicial remedies available to address the harm to the injured party as a result of
breach include monetary damage or equitable remedies such as specific performance. Rest.
2d § 345.
A.
Common-Law Monetary Damages
72
1.
In general, monetary damages can be compensatory or punitive.
a.
Contract damages are designed to be compensatory, and may address the
injured party’s restitutionary interest, reliance interest or expectation
interest.
b.
As a party injured by the other’s breach is entitled to choose which interest
they would like to be compensated for. Rest. 2d § 347, 349, 370.
c.
As a general matter, restitutionary and reliance damages seek to restore
the parties to the status quo, i.e., the position they were in before they
entered into the contract, by requiring reimbursement either for benefits
provided by the injured party or losses to the injured patty caused by
detrimental reliance.
d.
Expectation damages, on the other hand, seek to give the injured party
the benefit of the bargain, i.e., put the injured party in the improved
position that would have resulted from performance of the contract. Rest.
2d § 344.
In Royal Indemnity Co. v. Factory Mutual Ins. Co., 786 N.W.2d 839 (Iowa
2010), the Iowa Supreme Court overturned a damages verdict, holding the
damages were not contemplated by the parties when they entered into the
contract. Factory Mutual had performed an inspection of a warehouse which
eventually burned down. The court noted the fire was not linked to any
alleged deficiency in the inspection, the cost of the inspection was very low,
and the inspecting company was never asked for its opinion on whether to
use the warehouse.
e.
Punitive damages are not available for breach of contract alone, but may
be awarded when the breach constitutes an intentional tort or other
wrongful act, committed with legal malice, that is with willful or reckless
disregard for another’s rights. Berryhill v. Hatt, 428 N.W.2d 647 (Iowa
1988); Seastrom v. Farm Bureau Life Ins., 601 N.W.2d 339 (Iowa 1999).
.
Determan v. Johnson, 613 N.W.2d 259 (Iowa 2000)
Determan bought a house from the Johnsons. Determan discovered the house had significant
structural and moisture problems, and filed a negligence action. Whether a tort or contract remedy applies to a
plaintiff’s loss from a defective product depends on the nature of the defect, the type of risk, the manner in
which the loss occurred, and the specific loss for which compensation is sought. A tort remedy is generally
available when harm results from “a sudden or dangerous occurrence, frequently involving some violence or
collision with external objects, resulting from a genuine hazard in the nature of the product defect.” A contract
remedy, on
other
hand, “protects
a purchaser’s
expectation
2. the All
monetary
damage
claims must
show: interest that the product received will be fit for
its intended use.” Determan could not recover under a tort theory. Although the defects in her house
presented a genuine safety hazard, that risk had not yet come to pass. Rather, Determan’s claim was based
on her unfulfilled expectations regarding the quality 73
of the house she had purchased. Accordingly, Determan’s
remedy lay in contract law.
a.
causation, i.e., that the damages claimed were caused by the breach, Woods v.
Schmitt, 439 N.W.2d 855 (Iowa 1989) (attorney's lack of diligence, rather than
another attorney's fraudulent warranty of title, was the proximate cause of
client's losses when client failed to obtain good title);
f.
certainty, i.e., that the existence and amount of damages claimed
are not speculative, contingent, conjectural, or remote. Rest. 2d § 352.
Lost profits often cannot be shown with sufficient certainty to be
awarded. However, mere difficulty in ascertaining the amount of
damages does not itself show uncertainty. Shinrone, Inc. v. Tasco, Inc.,
283 N.W.2d 280 (Iowa 1979) (lack of available market for breeding
exotic cattle did not make lost profits speculative); Netteland v. Farm
Bureau Life Insurance Co., 510 N.W.2d 162 (Iowa 1993) (plaintiff need
only present such evidence as might be reasonably expected to be
available under the circumstances; damages will be available as long as
there is a factual basis for calculating lost profits). Where damages
cannot be determined accurately, courts will award nominal damages,
e.g., $1.
g.
foreseeability, i.e., that the damages arose from the breach of
contract itself (general damages) or can reasonably be supposed to have
been contemplated by the parties at the time of contracting as the
probable result of breach.
h.
(1)
Typically, the problem is loss of profits from defective or
nonsupplied component because it may not be clear that seller could
have contemplated this use or damages.
(2)
Emotional distress damages are not viewed as foreseeable from a
breach of contract unless the breach caused bodily harm or the
contract involves services with a highly personal nonpecuniary value,
i.e., mortuary service. Rest. 2d § 353. See also Woods v. Schmitt,
139 N.W.2d 855 (Iowa 1989) (foreseeable damages arising out of
breached contract to examine abstract for merchantable title included
the payment of rent on the land which was never legally owned,
expense of improvements on the land, expenses defending the title to
the real estate); Shinrone, Inc. v. Tasco, Inc., 283 N.W.2d 280 (Iowa
1979)(manufacturer of livestock confinement buildings knew or
should have been able to foresee from the course of its dealings with
the buyer that the buyer intended to use the houses for breeding
calves); and
mitigation, i.e., that avoidable damages will not be awarded.
(1)
Thus, losses which could have been reduced by stopping work (cost
avoided) will be reduced by that amount. Thus, a builder who
74
continues work after the owner has repudiated the contract cannot
recover expenditures made after the repudiation when further costs
could have been avoided by stopping her own performance.
(2)
Similarly, gains which could have been obtained by replacement,
repair or a substitute job (loss avoided), will be used to set off losses.
A wrongly fired employee who turns down an identical replacement
job will have the salary they would have earned deducted from their
total losses.
Landlord, which had relet store premises to his wife’s corporation after
original lessees had defaulted on lease failed to properly mitigate damages.
Finish Line, Inc. v. Jakobitz, 557 N.W.2d 914, (Iowa App. 1996). The
damaged party must take reasonable steps to limits their damages. Where
a landlord rents restaurant to wife’s corporation with $1 million annual
revenues but collects no rent. “The tenant just didn’t pay us!” Burden is
on the landlord to prove MITIGATION OF DAMAGES. Landlord
failed to show reasonable efforts to relet premises.
(3)
2.
3.
However, the injured party need take only reasonable steps to
mitigate damages and will not be required to take steps which impose
undue risk, burden, or humiliation. Stauter v. Walnut Grove
Products, 188 N.W.2d 305 (Iowa 1971) (terminated employee's
failure to search for job during winter was not failure to mitigate
where employment skills were farming and fertilizer sales, neither of
which is in demand in the winter).
Restitution damages provide the smallest amount of recovery, as they simply
compensate one party for the fair market value replacement services or the
resulting increased value of the breacher’s property. Rest. 2d § 370-71.
a.
Restitutionary damages are usually only sought where the contract turns
out to be a losing contract for the nonbreaching party and consequently,
the fair market value of services is more than the contract price. Of
course, it is unusual for the other party to breach in that situation.
b.
Furthermore, restitution is not available to the nonbreaching party when
they have fully performed and the breach involves only a failure to pay a
definite sum of money.
You should also note that restitution is available to compensate the breaching
party for an uncompensated benefit provided to the non-breaching party to the
extent such restitution is in excess of the loss caused by the breach.
a.
However, for the breacher, the measure of restitution is less generous than
it is for the nonbreacher, being the lesser of either the fair market value of
75
replacement services or the benefit provided, but in no case greater than
the contract price prorated to cover the work done.
b.
Thus, where the builder of a house quits after framing it (a performance
with a fair market value of $6000, but less than substantial performance),
and the owner pays the breaching builder nothing, recontracts for the
remaining work saving $5000 on the new contract because the house is
already framed, but overall paying $3000 more to complete the same
contract, the breaching party’s restitution will be $5000-$3000 = $2000.
4.
Where restitutionary damages are awarded as a result of rescission of a contract,
the rescinding buyer generally must account for the value of the buyer’s use of
the seller’s property. Hyler v. Garner, 548 N.W. 2d 864 (Iowa 1996)(seller
would have been entitled to set off the value of buyer’s use of defective
motorhome against the purchase price to be retumed had seller offered any
evidence of this value).
5.
Generally expectation damages are calculated by subtracting gains from losses.
The formula is expressed as follows:
Loss in value + other losses—cost avoided—loss avoided
a.
party;
Loss in value is the direct monetary value of the contract to the injured
b.
other losses are the extra losses because of breach, such as consequential
and incidental damages:
6.
(1)
Incidental damages are out-of-pocket expenses, such as costs of
shipping, storing, and inspecting as well as mitigation costs, such as
advertising, reselling, or repurchasing,
(2)
Consequential damages are losses which do not flow directly from
the breach but which were reasonably contemplated to occur if there
were a breach, such as property damage or personal injury;
c.
cost avoided is the money not spent because of the breach on both the
injured party’s return performance and other anticipated expenses to the
injured party of producing the loss in value;
d.
Loss avoided is any gain which was only realizable because the contract
was breached, i.e., the benefits of mitigation.
Examples of expectation damage calculations where the injured party is the
supplier of services. Here the breach is always nonpayment.
76
7.
8.
a.
Expectation damages in a construction contract = unpaid price + telephone
bills—cost of full performance not incurred because of breach—value of
replacement job (unless volume seller/worker) or material used elsewhere.
b.
Expectation damages in a real estate contract = unpaid price + extra taxes,
cost of heat & readvertising—contract repairs not made—market price at
breach (could be resale price).
Examples of expectation damages where the injured party is the
buyer/recipient. Here the breach is a failure to provide the purchased item or
services. In order to calculate loss in value in these cases we must ask whether
the value of the contract to the buyer is for the production of profit or whether
buyer is an end user?
a.
Expectation damages in a for-profit construction contract, such as a
shopping mall, where the builder doesn't finish the job, a replacement is
found for more money, and the opening is delayed = expected profits +
cost of completion - money not paid to original builder—actual profits
after completion.
b.
Speculative real estate contract by real estate investor, seller breaches by
not selling = market value of house at breach + any other losses—contract
price not paid (no loss avoided since a volume buyer).
c.
Expectation damages to homeowner for a defective performance in a home
construction contract that produces a leaking roof which is repaired after
causing damage to furniture and wall = cost of repairs + cost of property
damage—price not paid to builder.
d.
But the cost of replacing the defective performance cannot be recovered if
the defective performance is like the wrong brand of pipe in and the cost of
repair is disproportionate to value of repair because it requires substantial
destruction of completed work. In such a case you can only get damages
measured by the diminution in value of the property, rather than the cost of
replacing the defective performance, unless the defective performance was
intentional, i.e., = value of building as expected—value of building as is.
Reliance damages will provide a greater monetary award than mere restitution
where available because it compensates the nonbreaching party for all losses
suffered in reliance on the contract.
a.
Reliance includes both the cost of benefits conferred on the other
(restitution) plus costs of preparation for performance which conferred no
specific benefit on the other party, other reliance on the contract such as
secondary contracts entered into, and, arguably, may also include lost
opportunities, i.e., contracts not pursued due to this contract.
77
b.
Reliance damages are most useful where expectation damages are too
uncertain because they rest on something like lost profits under
circumstances in which the likelihood of profit and amount of profit are
speculative. For example, A contracts to sell her store to B. After B has
spent $50,000 purchasing inventory, A repudiates the contract; B sells the
inventory for $40,000. If neither party proves with reasonable certainty
what profit or loss B would have made if the contract had been performed,
B can recover as damages the $10,000 loss that she sustained on the sale of
inventory.
9.
Expectation damages provide the largest monetary awards as they both return the
injured party to the position they were in before the contract, and then go on to move
the injured party to the monetary position they would have been had the contract been
performed. Expectation damages are always preferable when available.
10.
Miscellaneous rules about expectation damages:
a.
Liquidated damages are estimates of expectation damages made by the
parties at the time of contracting and included in the contract terms as the
consequence of breach.
(1)
Liquidated damages are only permitted where it reasonably appeared
at the time of contracting that actual damages would be difficult or
impossible to prove. Aurora Business Park Associates v. Michael
Albert, Inc., 548 N.W.2d 153 (Iowa 1996) (finding as a matter of law
that there is considerable uncertainty about the actual amount of
damages resulting from a breach of a lease of real property); City of
Davenport v. Shewry Co., 674 N.W.2d 79 (Iowa 2004) (finding
repayment provision in an economic grant contract between city and
business, which required business to repay all grant money in the
event 250 people are not employed by business, to be an enforceable
liquidated damages clause because loss of jobs is not easy to
calculate).
(2)
They may not be unreasonably large relative to the anticipated and
actual loss or they will be unenforceable as punitive rather than
compensatory. Rest. 2d § 356. Whenever there is a liquidated
damage provision, ask whether the amount is excessive. Aurora
Business Park Associates v. Michael Albert, Inc., 548 N.W.2d 153
(Iowa 1996) (holding that acceleration clause requiring breaching
tenant to pay full amount of rent on remaining term is not a penalty
but an enforceable liquidated damage clause, although subject to a
duty to mitigate by reletting the premises.
78
b.
c.
B.
Attorney fees for legal services related to trying the lawsuit to recover the
costs of breach are not consequential or incidental damages and may not
be included in the calculation of expectation damages, unless agreed to in
contract. ICA § 625.22 (allowing the award of attorney fees where
contract provided for them). Exceptions to this rule include:
(1)
where the attorney is suing the client for fees,
(2)
where the client is suing the attorney for nonperformance and has
mitigated by hiring a new attorney,
(3)
where fees are for defense of secondary breach caused by breach
now being litigated or where the legal services were prelitigation
mitigation expenses. Berryhill v. Hatt, 428 N.W.2d 647 (Iowa 1988)
(consequential damages properly included attorney fees charged
trying to get breacher to perform the contract after the breach but
before filing suit),
(4)
However, under the Iowa Wage Payment Collection Law, employer
who fails to pay wages is liable for employee’s attorney’s fees. ICA
§ 91A.8. Audas v. Sabra Communications Corp., 554 N.W. 2d 868
(Iowa 1996) (employer which failed to pay commissions liable for
attomey's fees).
Where a purchaser breaches a contract to buy real estate, the seller must
elect between remedies based either on affirmance of the contract, such as
specific performance or damages for breach of contract, or remedies
based on disaffirmance of the contract, such as rescission of contract, or
forfeiture. Gray v. Bowers, 332 N.W.2d 323 (Iowa 1983) (election of
remedies prohibits contract damages on associated promissory note when
real estate contract was defaulted and forfeited).
Specific Performance
1.
Specific performance is an equitable remedy in which the court orders the
breaching party to provide the promised performance, rather than merely
compensate the injured party for the financial costs of breach.
a.
Specific performance is an alternative to monetary damages only where
monetary damages are not adequate to put the injured party in as good a
position as they would have occupied had the breaching party performed.
Rest. 2d § 359.
b.
This is most typically the case in land contracts, where each piece of land
is assumed unique and irreplaceable. Berghill v. Hatt, 428 N.W.2d 647
(Iowa 1988).
79
c.
2.
C.
It may also be true where expectation damages will be so uncertain that no
monetary damage may be possible or there is a likelihood that damages
could not be collected, or monetary damages are otherwise inappropriate.
Rest. 2d § 360; Becker v. Central States Health and Life Co. of Omaha,
431 N.W.2d 354 (Iowa 1988) (ordering health insurer to pay hospital
bills).
Courts will not order specific performance on contracts requiring considerable
court supervision. Rest. 2d § 366.
a.
Partly because of the problems of enforcement and partly because of the
Thirteenth Amendment’s prohibition of involuntary servitude, specific
performance will not be provided to enforce personal service contracts.
Rest. 2d § 367.
b.
However, courts will provide negative injunctions prohibiting performance
elsewhere where that will not totally deprive the breaching party of their
livelihood or where the result would be to compel a party's performance.
3.
Specific performance can only be available where the terms of the contract are
fair and where the nonbreaching party has behaved equitably, i.e., has clean
hands. Youngblut v. Wilson, 294 N.W.2d 813 (Iowa 1980) (no evidence of
inequitable conduct or unclean hands, such as default or conflict of interest).
4.
Equitable defenses such as waiver, laches, estoppel may also prevent a plaintiff
from obtaining specific performance.
5.
Similarly, mistake, surprise or uncertainty in contract terms may cause the court
to deny specific performance.
6.
Negative covenants restricting competition are enforceable to the extent such
noncompete clauses satisfy overriding requirements of reasonableness, as to
time and geographic area. Restrictive covenants will also be enforced to the
extent necessary to prevent disclosure or use of trade secrets or confidential
information.
Remedies for Breach of Employment Cases.
1.
Most employees are considered to be employed at the will of the employer.
a.
It is not a breach of contract to fire an employee at will for any reason or
no reason, i.e., without cause. Iowa has decisively rejected availability of
a cause of action for breach of an implied covenant of good faith and fair
dealing or negligent discharge in employment-at-will cases. Huegerich v.
IBP, Inc., 547 N.W.2d 216 (Iowa 1996)(employee-at-will had no claim for
80
breach when he was fired for violaton of look-alike drug policy for which
he had not received any training).
2.
b.
However, a unilateral contract of employment may be created if there is an
employment handbook which states definitely enough to be an offer that
discharge will be only for cause or under certain conditions, offer is
communicated to and accepted by employee, and the employee continues
working, so as to provide consideration for the promises made in the
manual. Under such a contract, the handbook provisions limiting the
employer’s power to fire without cause can form the basis of a breach of
contract claim. McBride v. City of Sioux City, 444 N.W.2d 85 (Iowa 1989)
(no clear reference to grounds of termination in employee manual and
manual not distributed to employee); Fogel v. Trustees of lowa College,
446 N.W.2d 451 (Iowa 1989) (manual did not limit power to terminate for
any reason).
c.
An employee handbook can also set out implied terms of an employment
for a term contract, if the McBride requirements, supra, are met. Taggart
v. Drake University, 549 N.W. 2d 796 (Iowa 1996) (faculty manual set out
terms of employment for untenured faculty member on a series of one-year
contracts).
However, retaliatory firing for engaging in conduct supported by public policy
or for refusing to engage in conduct which is contrary to public policy, such a
filing a workers’ compensation claim, refusing to withdraw a workers’
compensation claim, refusing to take illegal polygraph test, or refusing to
perjury oneself can be the basis of a tortious interference with contract claim,
also called retaliatory discharge. Springer v. Weeks & Leo Co., 429 N.W.2d 558
(Iowa 1988) (discharge for filing workers’ compensation claim violates public
policy and is actionable); Abrisz v. Pulley Freight Lines, Inc., 270 N.W.2d 454
(Iowa 1978) (firing employee at will for filing a factually inaccurate letter in
support of a sister employee’s application for unemployment benefits was not
violative of public policy).
a.
Damages for retaliatory discharge can include mental distress
damages as well as lost earnings. Niblo v. Parr Manufacturing, Inc., 445
N.W.2d 351 (lowa 1989) (mental distress damages should be available
for intentional torts).
XXII.
WHAT REMEDIES ARE AVAILABLE FOR BREACH IN UCC SALE OF GOODS
CASES?
The key policy behind both buyer's and seller's remedies under the Code is to salvage
as much of the deal as possible so as to provide the nonbreaching party with their
expectation interest.
81
A.
Seller’s Remedies Prior to Acceptance
1.
The following courses of action are available to the seller where the contract
was repudiated, goods were rejected, or acceptance was revoked (and the breach
went to the whole contract if an installment contract, ICA § 554.2612);
a.
withhold delivery of the goods, ICA § 554.2702(1), or stop
delivery of goods that are in transit, ICA § 554.2705;
b.
resell completed goods; ICA § 554.2706;
c.
where the goods are unfinished at the time of breach, stop
manufacture or finish production and resell goods, which ever is
commercially reasonable to avoid loss. ICA § 554.2704.
2.
In addition, damages can be recovered under the following measures:
a.
Market damages where goods wrongfully not accepted or the
contract was repudiated = [contract price - market price] + incidental
damages of storage, transportation, stopping delivery—costs avoided
because of breach, ICA § 554.2708;
b.
Resale damages where goods wrongfully not accepted or
contract repudiated = [contract price—good faith and commercially
reasonable resale price] + incidental damages—costs avoided because of
breach. ICA § 554.2706;
c.
Seller can elect between market and resale, but there is a question
as to whether seller can get market damages if actual resale damages are
less or whether the seller can get market damages if they could have
resold for more than market price but failed to do so;
d.
Contract price where goods not accepted but cannot be resold at
a reasonable price or at all = contract price + incidental damages—costs
avoided;
e.
Where the seller can show that the buyer’s breach amounted to a
loss in sales volume for the seller, the seller will be permitted to recover
lost profits from the sale. ICA § 554.2708(2).
B.
Seller’s Remedies after Acceptance
1.
Acceptance of goods occurs:
a.
if the buyer informs the seller that the goods are accepted after
the buyer has been afforded a reasonable opportunity to inspect the
82
goods (the buyer may accept nonconforming goods despite the
nonconformity);
b.
when the buyer fails to reject the goods after reasonable time to
inspect or fails to seasonably notify seller of rejection; or
c.
when the buyer does any act inconsistent with the seller’s
ownership. ICA § 554.2606.
C.
2.
Seller can cancel any remaining deliveries after any level of post-acceptance
breach or demand assurances and cancel if none are received. ICA §
554.27039(a)(b)(c), & (f).
3.
In addition, where goods were accepted or lost after title passed to buyer, a seller
can sue for the price, which after acceptance is essentially the seller’s action for
specific performance = contract price + incidental damages. ICA § 554.2709.
4.
Seller may also reclaim the goods where payment had been a condition of
delivery but failed to occur. ICA § 554.2517(2); Burk v. Emmick, 637 F.2d
1172 (8th Cir. 1980) (dishonor of sight draft which was condition of delivery
gave seller right to reclaim and also to recover damages; court refused to apply
the election of remedies between reclamation and damages in ICA § 554.2702 to
a cash seller’s right to reclamation). Damages after reclamation would be
measured under the market damages or resale damages formulas set out above,
as the seller would have the goods to resell. Reclamation of goods sold on credit
is also available under ICA § 554.2702, but reclamation under this section
precludes all other remedies, including damages.
Buyer’s remedies prior to acceptance.
1.
If seller repudiates before delivery or fails to deliver, buyer can:
a.
recover any price paid and/or cancel, ICA § 554.2711(1); and
b.
seek damages = [market price at time of breach—contract price]
+ incidental and consequential damages—costs avoided, ICA §
554.2713; Kanzmeier v. McCoppin, 398 N.W.2d 826 (Iowa 1987)
(purchase of lighter cattle was not cover for unobtainable heavier cattle);
or
c.
cover and also seek damages = [cost of substitute goods
purchased in good faith and without unreasonable delay—contract price]
+ incidental and consequential damages—costs avoided, ICA §
554.2712; or
d.
recover identified and paid for goods, ICA § 554.2501 & 2502; or
83
e.
replevy goods identified which cannot be covered, ICA § 554.2716(3);
or
f.
if the goods are unique or the seller is insolvent and damage
would be inadequate, obtain specific performance. ICA § 554.2716(1).
2.
If the Seller delivers a not perfect tender, buyer can:
a.
reject within a reasonable time and with seasonable notification; or
b.
revoke acceptance with seasonable notification, but only if
(1)
(2)
(3)
(4)
D.
the goods are not yet substantially changed,
the value of the goods is substantially impaired by the defect,
it was assumed the defect would be cured or the defect was
nondiscoverable; and
revocation occurs within a reasonable time, ICA § 554.2608; and
c.
cancel if, after giving seasonable notice of intent to cure, the seller either
does not cure within contract time, or does not cure within a reasonable
time if the tender was reasonably believed by seller to be acceptable with
or without money allowance. ICA § 554.2508; and
d.
recover price paid; and
e.
get market damages as above; or
f.
cover and get cover damages as above; and
g.
resell rejected goods to set off payments made and reasonable inspection,
storage, care, transportation expenses incurred. ICA § 554.2711(3).
Buyer’s Remedies after Acceptance.
If Seller delivers a not perfect tender, buyer can revoke acceptance (see above) or
accept, pay price, notify of seller of breach of warranty and recover damages. ICA §
554.2607.
1.
Damages = value as warranted—actual value + incidental and consequential
damages like lost profits and costs of repair—cost avoided and losses avoided.
ICA § 554.2714.
2.
Warranty damages may be measured differently where necessary to conform to
actual damages, whether higher or lower. Vorthman v. Keith E. Meyers
Enterprises, 296 N.W.2d 772 (Iowa 1980) (where sick pigs nursed back to
84
health and eventually sold at profit, damages cannot include difference between
value as warranted and as delivered, but only the extra costs of raising the pigs).
3.
Also, lost profits are not available to nonprivity buyers on breach of express or
implied warranty claims, only the difference between the value of the product as
warranted and as provided, along with damages for personal and property
injuries. Beyond the Garden Gate, Inc. v. Northstar Freeze-Dry Mfg., Inc., 526
N.W.2d 305 (Iowa 1995) (express warranty); Tomka v. Hoechst Celanese Corp.,
528 N.W.2d 103 (lowa 1995) (implied warranties).
E.
Miscellaneous Damage Issues.
1.
UCC damages are subject to the general common-law requirements of causation,
certainty, foreseeability, and mitigation. Limited Flying Club, Inc. v. Wood, 632 F.2d
51 (8th Cir. 1980)(court must consider whether original seller who breached warranty
offered to repurchase airplane and if that could have mitigated damages incurred to
repair plane).
2.
Consequential damages included lost profit, but lost profits only available if they
could not have been avoided by cover. Cargill, Inc. v. Fickbohm, 252 N.W.2d 739
(Iowa 1977) (grain elevator could not recover lost profits on undelivered corn where
no showing that cover was impossible).
3.
UCC damages can be limited or excluded by agreement of the parties, however:
a.
limitation of buyer’s remedies to repair or replacement is permissible except
where it fails its essential purpose because no successful repair or replacement
occurs and the injured party is deprived of the substantial value of bargain as a
result. In that case, the buyer can have breach of warranty or other damages as
appropriate. ICA § 554.2719(1) & (2).
b.
Exclusion of consequential and incidental damages is also permitted, except no
limitation of personal injury damages is usually permitted in consumer goods
transactions or where otherwise unconscionable. ICA § 554.2719(3); Select
Pork, Inc. v. Babcock Swine, Inc., 640 F.2d 147 (8th Cir. 1981) (finding
exclusion of consequential damages unconscionable where sellers knew at time
of contract that they might not be able to deliver special breed of pig warranted
and, in fact, merely delivered ordinary pigs).
c.
Whether an exclusion of incidental and consequential damages will be upheld
even where a limited remedy of repair or replace failed of its essential purpose is
an open question in Iowa, although the Eighth Circuit has predicted that Iowa
would uphold such an exclusion even where the limited remedy failed.
85
4.
XXIII.
Liquidated damages may be provided in a sales contract. As under common law, the
liquidated damage provision must be reasonable in light of the actual harm anticipated
with a breach. ICA § 554.2718.
ENFORCEMENT OF REAL ESTATE CONTRACTS.
Real Estate Contracts may be enforced in Iowa by one of several methods. Although
general contracts apply to real estate contracts, it is helpful to review these principles in this
particular area. A contract vendor may enforce a contract by specific performance of the
contract or by bringing an action to foreclose on the contract pursuant to lowa Code section
654 or 655A. However, in Iowa the most common remedy available to a contract vendor to
enforce the terms and conditions of a contract, provided the contract contains a specific
provision under Iowa Code section 656, is to forfeit the contract.
A. Statute of Frauds.
1. Section 622.32 of the Iowa Code provides that, to be enforceable, any agreement for
the creation or transfer of any interest in lands (except for leases of a term of less
than 1 year) must be in writing and signed by the party to be charged or his
authorized agent.
2. It is not necessary that all the provisions necessary to meet the statute of frauds be in
one writing; they may be gathered from a series of writings.
3. Even though the requirements of the statute of frauds are met, it may be that some
provision of the contract of sale is ambiguous. If so, the parol evidence rule may
allow in evidence to explain the ambiguity.
4. Section 622.32 is a statutory rule of evidence. An agreement not in compliance with
this statute of frauds is not void, but merely unenforceable. Such agreement may
become enforceable either by non-denial in the pleadings by the person who "made"
the contract, (Section 622.34), by payment of any portion of the purchase price to
vendor, (Section 622.33), or by vendee taking possession of any part of the realty
with actual or implied consent of the vendor under terms of contract, or by any other
circumstance which, under prior law, would estop a party from setting up the
statute; see Miller v. Lawler, 245 lowa 1144, 66 N.W.2d 267 (1954). Section
622.33. See also Severson v Elberon Elevator Inc., 250 N.W.2d 417 (Iowa 1977).
B.
Caveat Emptor.
1. Literally translated the phrase means "let the buyer beware." It is the traditional
maxim
86
meaning that the buyer, absent a warranty or representation to the contrary
purchases the premises in whatever condition they exist and if a defect should be
discovered, the seller is not obliged to correct it or respond in damages. In the case
of a purchase of an existing home or commercial building from an individual seller,
the doctrine of caveat emptor remains more or less intact.
2. In recent years there have been considerable inroads into the doctrine throughout the
country. In general, these cases have given relief where the plaintiff purchaser is
suing a builder or developer of residential housing from whom plaintiff purchased
either directly or indirectly. These inroads have been made under the following
theories: Misrepresentation, negligence, intentional infliction of emotional distress,
violation of express warranty and violation of implied warranty.
a. Misrepresentation. Perhaps the earliest inroads into the doctrine were made
by proof of misrepresentation. The elements of a misrepresentation action
are: representation, falsity, materiality, scienter, intent to deceive, reliance,
and damage. A number of courts have said that when the normal purchaser
of residential housing purchases from a builder, the latter is under a duty to
disclose any latent defects of which he has knowledge and which affect the
structural soundness of the house. Failure to disclose constitutes a false
representation. See Smith v. Peterson, 282 N.W.2d 761 (lowa App. 1979).
b. Very common among the misrepresentation cases are the "filled-dirt" cases.
The Iowa Supreme Court has found a defendant builder committed a
misrepresentation in not disclosing that the house was built on filled-dirt.
Loghry v. Capel, 257 Iowa 285, 132 N.W.2d 417 (1965). Purchaser
apparently did not know, at the time of the purchase, that defendant had built
the house and the court's language is broad enough to apply the
misrepresentation doctrine to any seller of realty, not only to builders.
Knowledge of the defect must be more probably than not.
c. In Phoenix v. Stevens, 256 lowa 432, 127 N.W.2d 640 (1964), which was a
suit by a purchaser against an individual seller for misrepresentation in
failing to disclose termites, the plaintiff apparently lost only because he had
failed to prove scienter on the part of the defendant.
Thus, the
misrepresentation doctrine may be a possible method of obtaining a recovery
from the seller of used housing.
d. A builder may be liable under tort theories, such as negligence and
intentional infliction of emotional distress. Randa v. U.S. Homes, Inc., 325
N.W.2d 905 (lowa App. 1982).
e. Another theory of recovery may be an express warranty made by the builder.
For example, where the contractor agreed to build a “first class house” on a
lot the contractor owned and the house was not built in a reasonably good
and workmanlike manner, there is a breach of express warranty and a breach
87
of an oral construction contract. Further, there is no merger of such
warranty with the delivery of the deed, i.e., the express warranty need not be
reasserted in the deed to survive the delivery of the deed. In Iowa merged
warranties have tended to be limited to warranties regarding title. Cf. RET
Corp. v. Frank Paxton Co., Inc., 329 N.W.2d 416 (Iowa 1983).
f. Another vehicle for imposing liability upon the builder of new housing has
been the doctrine of implied warranty.
(1)
Where there is no conveyance of real estate, and a builder contracts to
construct a house or building on premises already owned by purchaser:
(a) The normal contract rules apply and, in the absence of an express
agreement to the contrary, there is an implied warranty that the
house will be built in a reasonably good and workmanlike manner.
See Markman v. Hoefer, 252 lowa 118, 106 N.W.2d 59 (1960).
(b) There may now also be an implied warranty of fitness for a
particular purpose. If a contractor agrees to construct a sewer line
with an existing building and the sewer backs up, there is a breach
of such implied warranty. This is true even if the manner of
construction appears workmanlike. It is not up to the plaintiff to
show why the sewer did not work. Semler v Knowling, 325
N.W.2d 395 (lowa 1982).
(2) Where there is a conveyance of real estate from a builder of new
residential housing to a good faith purchaser:
C.
(a)
Some jurisdictions have found an implied warranty of habitability
or an implied warranty that the construction would be in a good
and workmanlike manner.
(b)
Although the concept has been increasing in acceptance in other
jurisdictions. The lowa Supreme Court has not yet recognized an
implied warranty of habitability in the sale of new home, only in
construction contracts and residential leaseholds. Where an
implied warranty was proved but not pled, however, the court has
remanded for an amendment to conform the pleadings to the
proof. Gosha v. Waller, 288 N.W.2d 329 (Iowa 1980).
Equitable Conversion.
1.
Upon the execution of the contract of sale, the buyer becomes the equitable
owner of the realty, and the seller continues to hold the bare legal title
merely as security for the payment of the purchase price. The theory
behind the rule is that since the purchaser or the seller would be entitled to
88
an order of specific performance, equity will view that which should be
done as done. Beaver v. Ross, 140 lowa 154, 118 N.W. 287 (1980).
D.
2.
As a result of the doctrine of equitable conversion, it is the purchaser who,
absent an agreement to the contrary, bears the risk of loss to any
improvements on the land. Thus, if seller agrees to convey land to
purchaser and during the period between the execution of the contract of
sale and the delivery of the deed, the premises are destroyed by fire,
tornado, etc., the burden of such loss falls upon the purchaser, who will be
required to complete the purchase. O’Brien v. Paulsen, 192 Iowa 1351, 186
N.W. 440 (1922). However, any insurance proceeds which seller may
obtain as a result of the casualty are held in trust for the buyer, even if the
insurance proceeds exceed the value of the property destroyed. Fellmer v.
Gruber, 261 N.W.2d 173 (Iowa 1978).
3.
The burden of such loss may be redistributed in the contract of sale and
this may be done in several ways. Seller and purchaser may agree that the
burden of any loss is to fall on seller and in the event of any such loss,
purchaser may terminate the contract of sale. Contract obligating seller to
deliver building as "now existing, and in its present condition'' places risk
of loss on seller prior to possession. See Rector v. Alcorn, 241 N.W.2d
196 (lowa 1976). Seller and purchaser may agree that the seller shall
maintain casualty insurance payable to seller and purchaser as their
interests may appear.
4.
Because of equitable conversion. upon the execution of the contract, no
liens or encumbrances against seller affect the title to the real estate. See
Title Standard 9.10.
Forfeitures. A land sale contract with a forfeiture provision is a viable
alternative to a mortgage. Forfeiture presents a swift and inexpensive remedy
in the event of a default. A buyer can live with such remedy to obtain the
advantages of an installment contract and the usual low down payments when
other financing could not be obtained. The legislature placed some limits upon a
vendor’s use of it Chapter 656. The statute protects the buyer. When it was
enacted in 1897 it had the effect of limiting an otherwise valid contractual right;
it did not create or expand the rights of forfeiture. The chapter is construed
strictly as against the forfeiture, and with liberality towards those opposing it.
One seeking a forfeiture as to land contracts must fully and strictly follow the
procedure required therein.
Forfeiture is a harsh remedy and is not favored in either law or equity. One may
make a contract that provides for forfeiture following a breach; however, courts of
this state will scan a contractual forfeiture provision closely before giving it effect.
Forfeitures will be enforced only when those claiming them ... show that the equities
are clearly on their side. Courts are less likely to approve a forfeiture if the purchaser
89
is current with payments. Regarding breaches other than failure to make payments, de
minimis breaches not affecting the vendor’s security will not justify forfeiting a real
estate contract. On the other hand, "flagrant" and "stubbornly deliberate" breaches,
even if minor when viewed from an economic standpoint, have been held to justify a
forfeiture. Vendees’ failure to keep in force insurance against fire on corncrib and
barn, along with vendees' removal of fence, conversion of 30 acres of pastureland to
cropland, and failure to cure two of three mechanic’s liens on property within 30-day
period, was insufficient to justify forfeiture. Sheeder v. Lemke, 564 N.W.2d 1 (Iowa
1997).
1.
Every broker must maintain a common trust account where all down
payments, earnest money deposits, or other trust funds received by the
broker must be deposited. Section 117.46. Cf. Miller v. Iowa Real Estate
Comm., 274 N.W.2d 288 (lowa 1979). Interest on broker’s trust accounts
funds the Iowa Title Guaranty program.
2.
Even in a cash sale, it is normal that the purchaser make some kind of
down payment on the purchase price. The purpose of the down payment is
variously attributed to a show of good faith, an incentive to buyer to
complete transaction, or a fund for the payment of seller’s damages in the
event of default.
3.
If the sale is not for cash, i.e., if it is what is popularly referred to as “seller
financed,” the sale may be on installment contract. An installment
contract for the sale of realty is nothing more than a contract for the sale of
realty which provides for the payment of the purchase price to be made in
installments over a period of time and for the deed to be delivered upon
payment of final installment of the sales price.
4
Whether the sale is made on installment contract or for cash, the contract
can provide for forfeiture of amounts paid at the time of default, but only
by the procedure spelled out in Chapter 656 of the lowa Code. If the
contract does not include a forfeiture clause, then the contract cannot
be forfeited. Iowa Code Section 656.1.
5.
Although courts do not favor forfeitures (Lane v. Crescent Beach Lodge &
Resort, Inc., 199 N.W.2d 78 (lowa 1972)), if the contract so provides, a
forfeiture will be enforced. If, however, prompt performance had
previously been waived by the seller, before seller may withdraw the
waiver the seller must give reasonable opportunity to the buyer to cure,
and not merely the 30-day period provided in Chapter 656. Bettis v. Bettis,
228 N.W.2d 193 (lowa 1975). Also when the default is too small to justify
a forfeiture, the court will not enforce it. Lett v. Grummer, 300 N.W.2d
147 (Iowa 1981); But See Miller v. American Wonderlands, Inc., 275
N.W.2d 399 (lowa 1979).
90
6.
The court may examine a forfeiture for unconscionability. Equity will not
allow forfeiture for defaults which were miniscule in amount. Brown v.
Nevins, 499 N.W.2d 736, 739 (Iowa App. 1993) ($18,000 equity lost for
not paying $40). If the amount of the payments received by the seller at
the time the purchase was abandoned represents but a small percentage of
the total purchase price, and if the purchaser's breach occurred soon after
the execution of the agreement (and particularly if the circumstances
indicate that a purchase is made for speculative purposes or the breach
represented an effort to escape an unfortunate turn in the market), the
courts tend to hold that the forfeiture clause was one for liquidated
damages, with the result that the purchaser cannot recover back the
payments made. See Jensen v. Schrek, 275 N.W.2d 374 (Iowa 1979).
Jensen does not say what the court would do if confronted with a forfeiture
midway through a contract with much of the purchase price paid. An
unconscionability analysis would probably only be applied in unique
circumstances.
7.
Upon election of the forfeiture remedy, any further liability of the buyer
for the unpaid purchase price is extinguished (i.e., no deficiency is
available). Where the seller had taken a note and mortgage on other
property of the buyer to secure the payment of the purchase price on a
contract sale the court held that forfeiture of the contract extinguished the
buyer’s obligations under the note and mortgage. Gray v. Bowers, 332
N.W.2d 323 (Iowa 1983). Where a forfeited buyer received insurance
proceeds for a fire that partially destroyed the premises the Court held the
seller elected to forfeit in satisfaction of the debt thereby extinguishing the
debt, making the insurance proceeds the property of the forfeited buyer.
Risken v. Clayman, 398 N.W.2d 833 (Iowa 1987).
8.
Forfeiture may be commenced by serving notice on the vendee, the person
in possession, any mortgagee or assignee for security purposes, if their
interest is recorded and on a person who asserts a claim against the
vendee’s interest if the form as set forth in lowa Code § 656.2 (1993) has
been filed of record. The notice must specify the contract involved and
identify the realty; specify the terms not complied with; and state that the
contract will be forfeited if the default is not cured within 30 days after
service of notice together with payment of the reasonable costs of serving
the notice. Section 656.2. See Brown v. Nevin, 499 N.W.2d 736 (Iowa
App. 1993), which states that the costs of serving the notice may not alone
be the basis for a Contract Forfeiture. Possession requires an act of
dominion or control over the property in question. In determining what
acts demonstrate possession of land, our cases have referred to conduct
which gives notice to the party claiming title to the property. Frequently,
that conduct has been actual entry onto the land or some objectively
observable use or care made of the land. BUT, see Jamison v. Knosby, 423
N.W.2d 2 (lowa 1988), states that all parties in possession must be served
91
to have a valid forfeiture, including a farm tenant who recorded lease but
did not take physical possession until spring planting activities. Sellers
had constructive notice from the filing of lease.
9.
Service may be made personally or by publication. This provision is like
that for original notice, except that when notice is published, no prior
affidavit of good faith attempt to find the address is required. Section
656.3. See Title Standard 4.7; See also Qualley v. State Federal Savings &
Loan Assoc., 487 N.W.2d 353 (Iowa App. 1992) as to the necessary
procedures that must be followed to have a valid forfeiture based upon a
publication notice. A lame attempt will not be tolerated -- where the
attorney looked all over Dallas and Polk Counties, but failed to find a well
known attorney (Qualley) from Sioux City. The Court of Appeals may
have taken judicial notice of the fact of the law firm’s location.
10.
If the default is cured by the party in default, or by the mortgagee or
assignee for security purposes or by a person requesting notice and the
reasonable costs of service are paid within the 30-day period, the right to
forfeit shall terminate. Section 656.4.
11.
If the default is not cured, the vendor may record a copy of the notice
together with proof of service (plus, in the event of service by publication,
an affidavit to the effect that personal service could not be made in the
state and when so recorded it is constructive notice of forfeiture. § 656.4.
The recording of the forfeiture notice and proof of service is required only
for constructive notice purposes; it is not a condition precedent to the
completion of the forfeiture. Forfeiture is complete, even without the
recording of the notice under § 656.5, and the seller cannot sue on the
contract for specific performance or damages. Seller may waive forfeiture
and take deed in lieu of forfeiture — where sellers, by act and deed,
waived their rights within the thirty days. Gottschalk v. Simpson, 422
N.W.2d 181 (Iowa 1988). However, a settlement of a forfeiture allowing
the filing of the affidavit if certain payments are made in the future will not
be considered as complying with the statute.
12.
Schumacher v. McDonald, 320 N.W.2d 640 (lowa App. 1982), the buyer
defaulted on his July 15th and August 15th payments. On August 17th, the
buyer made a tender of the past due amounts and the seller refused them.
The seller served a 30-day notice on August 24th. The buyer did not retender the payments within the next 30 days. The buyer later challenged
the forfeiture because the seller refused to accept the tendered payment.
The court held that prior to seller’s election to forfeit, the buyer had no
right to cure and the seller was under no obligation to accept the payment.
The only right to cure exists within the 30 days after service.
92
13.
The vendee is liable for reasonable attorney’s fees (not to exceed $50)
incurred by the vendor in the forfeiture. To claim the attorney’s fees a
demand therefore must be stated in the 30-day notice. Section 656.7.
However, payment of the attorney's fees is not necessary for the buyer to
comply with the notice and to prevent forfeiture. Section 656.4. The
notice of forfeiture must also state that payment of the attorney’s fees is
not necessary to prevent forfeiture. Section 656.2(d).
14.
The lowa Supreme Court has upheld the validity of the above forfeiture
provision in the face of a constitutional attack on the grounds of denial of
due process. The reasoning was that even though the sheriff serves notice
of forfeiture and notice to quit, the extent of state action involved in
forfeiture was less than that necessary to trigger due process requirements.
Skubal v. Meeker, 279 N.W.2d 23 (Iowa 1979); Jensen v. Schreck, 275
N.W.2d 374 (lowa 1979).
15. A vendor in default may not declare a forfeiture of the real estate contract.
Skubal v. Leeker, supra; Wemer v. Long, 185 N.W.2d 243 (lowa 1971).
16.
E.
A vendee’s spouse who is not a party to the contract, nor a party in
possession need not be served with notice of forfeiture. Goodale v. Bray,
546 N.W.2d 212 (Iowa 1996)
Miscellaneous.
A modification of a contract of sale creating a new promise by a party to the contract
in the absence of circumstances not anticipated by the parties is not enforceable without
additional consideration. However, if the original contract of sale is rescinded, a new
contract may be supported without additional consideration. Recker v Gustafson, 279
N.W.2d 744 (Iowa 1979). Also, one party may still waive his or her right to enforce a
provision in the contract and that waiver can be documented by a revised contract changing
the waived provisions without additional consideration. Matter of Collins, 327 N.W.2d 230
(Iowa 1982).
93
XXIV.
PAROL EVIDENCE.
If contract is integrated, only issue is what terms outside the written document can become part
of the contract. This is resolved by the parol evidence rule. Three kinds of evidence about the terms of
an integrated contract:
Contract - Whatever is within the four corners of the written contract.
Parol Evidence (PE) - Prior or contemporaneous discussions (oral or written), prior drafts,
other written agreement.
Commercial Context Evidence (CC) - course of performance, course of dealing and usage
of trade.
Permissible Uses of Parol and Commercial Context Evidence
Nonintegrated
Partlyintegrated
Fully-integrated
UCC Confirmation
Interpretation
Yes
Yes-PE/CC
Yes-PE/CC
Yes-PE/CC
Contradiction of
Existing Terms
Yes-PC
No-PE/CC
No-PE/CC
No-PE/CC
Yes-PE
Yes-PE
No-PE/CC
----------
Yes-PE/CC
Yes-PE/CC
No-PE/Yes-CC
Yes-PE/CC
Consistent
Additional
Terms
- Common
Law
- UCC
Parol Evidence may be used to prove collateral agreement, modifications, defenses (fraud in the
inducement) and reformations of mistakes in the formation of the contract. The use of evidence to
show a modification is evidence after the formation of the original contract and is not really parol
evidence.
94