2014 Basic Skills Course Presented by the Iowa Bar Review School and The Iowa State Bar Association. Monday September 22, 2014 Iowa Contracts Law 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 bargained- for 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 as- applied (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.