Construction Law Update: New Iowa Supreme Court Case Has Implications for Subcontracts
In Johnson v. Associated Milk Producers, Inc., 886 N.W.2d 384 (Iowa 2016), the Iowa Supreme Court addressed the requirements for a party to terminate or modify an at-will contract with an independent contractor. Although the case is set in the context of a dispute between a milk cooperative and a transportation carrier, the case has application to contractors who enter into at-will subcontracts with subcontractors.
The Court explained that “[a]n at-will contractual ‘relationship is terminable by either party at any time, for any reason, or for no reason at all,’” that “[c]ontracts at will can be terminated by either party upon reasonable notice,” and that “[c]ontracts terminable at will are modifiable at will.” 886 N.W.2d at 390 & 391. Under these at-will-contract rules, a “party that unilaterally modifies an at-will contract effectively terminates the old agreement and offers new terms for acceptance,” and “the other party may choose to accept the new terms or discontinue the relationship.” Id. at 391. Importantly, if the other party “continue[s] to work, knowing the newly proposed terms, [then it] results in th[at] party’s] acceptance [of the new terms] as a matter of law.” Id. Continued performance constitutes acceptance of the proposed terms even if the other party continually objects to the new terms while continuing performance. Id. at 394. The Court noted that these rules have had long-standing application to at-will employees, but the issue in the case was whether they also applied to at-will independent contractors. Id. at 391-92.
After analyzing the existing law, the Court concluded that these at-will-contract rules also applied to independent contractors: “We hold that the principle of contract law allowing unilateral changes to at-will contracts upon reasonable notice applies to independent contractors as well as employees.” 886 N.W.2d at 393. The Court explained that there was no justification in treating at-will independent contractors differently than at-will independent contractors with respect to these rules, and that other courts around the country were in agreement. Id. at 392-93.
After Johnson, it is very important for contractors and subcontractors who have entered into at-will subcontracts to understand the above rules governing the modification and termination of at-will subcontracts. If either party proposes new subcontract terms during the work, the continued performance of the work after the proposal of the new terms could constitute acceptance of the new proposed terms even if objections to them are made. If a party receiving proposed new terms has any objections to them, the best course of action may be to temporarily suspend work and meet with the other party in an attempt to come to an agreed-upon written contract that will govern the parties’ work going forward.