In Construction Dispute, Iowa Court Determines No Breach of Contract Occurred

In this case, the Iowa Court of Appeals reminds us that “contracts mean what they say.” On October 6, 2021, the Court of Appeals reversed an order from the district court finding that a hotel owner breached a contract with a construction company. Because the contractor failed to follow the required steps to change the scope of the project, the Court of Appeals reversed the district court’s order, finding that the hotel owner did not breach the contract.

Background

A hotel owner entered into two agreements with a contractor to build a hotel. The contracts set guaranteed maximum prices (GMP) of $22,626,869 and $2,501,864 respectively. All terms relevant to the case were identical. Because the hotel owner’s architectural design did not match the assumptions in the contracts, the contractor submitted “change orders” to increase the GMP consistent with the additional work. The contracts defined change order as “a written instrument prepared by the Architect and signed by the Owner, Contractor, and Architect.” The hotel owner did not sign these Change Orders, but the contractor completed the additional work after the hotel developer gave verbal approval or specifically asked for the work to be completed.

Financial issues eventually arose and the contractor petitioned to foreclose on its mechanic’s liens. It also brought breach-of-contracts claims. The hotel owner likewise brought a breach-of-contract claim. The district court found in favor of the contractor for both the breach-of-contracts and mechanic’s liens claims, and awarded damages to the contractor. The hotel owner appealed.

Breach of Contract

To prove a breach of contract the moving party must show “(1) the existence of a contract; (2) the terms and conditions of the contract; (3) that [the moving party] has performed all the terms and conditions required under the contract; (4) [the opposing party] breach of the contract in some particular way; and (5) that [the moving party] has suffered damages as a result of the breach.” Iowa Mortg. Ctr., L.L.C. v. Baccam, 841 N.W.2d 107, 111 (Iowa 2013).

Under the terms of the contracts, the only way to alter the GMP was to submit change orders. Otherwise, “[c]osts which would cause the Guaranteed Maximum Price to be exceeded shall be paid by the Contractor without reimbursement by the Owner.”

To reach its decision, the district court held that language in a subsequent section of the contract allowed an alternative method to increase the GMP.

If no specific provision is made in Article 5 for adjustment of the Contractor’s Fee in the case of changes in the Work, or if the extent of such changes is such, in the aggregate, that application of the adjustment provisions of Article 5 will cause substantial inequity to the Owner or Contractor, the Contractor’s Fee shall be equitably adjusted on the same basis that was used to establish the Fee for the original Work, and the Guaranteed Maximum Price shall be adjusted accordingly.

The Court of Appeals disagreed, finding that the plain language of this section allowed an adjustment to the Contractor’s Fee, which was set at 5 percent of the total project cost. It did not allow an adjustment to the GMP without the required change order. The court held that accepting the contractor’s and district court’s interpretation would be contrary to the contract provisions in which the contractor assumes the risks of costs for exceeding the GMP.

The contractor also claimed that the contract was not complete because “the designs and construction documents were not complete when the contracts were executed.” However, the contract unambiguously required a written change order to increase the GMP. Because of this, the Court of Appeals reversed the lower court’s finding that the hotel owner breached the contracts. Additionally, because the hotel owner did not breach the contracts, the Court of Appeals also reversed the foreclosure of the mechanic’s liens.

Implied Contracts

Lastly, the court addressed whether the parties had an implied contract to complete the additional work. “[A]n express contract and an implied contract cannot coexist with respect to the same subject matter.” Legg v. W. Bank, 873 N.W.2d 763, 771 (Iowa 2016). The contractor argued that the additional work was outside the scope of the agreement and, therefore, not covered by the contracts. The court rejected this argument, finding that the contracts contained specific language requiring change orders for additional work and affirmed the district court’s ruling that an implied contract did not exist.