Lack of Written Details Leads to Tumultuous Business Transfer

On December 15, 2021, the Iowa Court of Appeals released an opinion involving a dispute over the sale of a railroad-tie-removal business. Without several key terms included in the contract, the court was left to determine the parties’ intent. Because the Seller did not provide his “best efforts” to assist the Buyer retain and expand the business, the Seller breached his consulting obligations. Therefore, the Court of Appeals affirmed that the Buyer was not obligated to pay the Seller the outstanding consulting fees. 

Background

After successfully growing a railroad-tie-removal business for more than a decade, the original owner sold his business. The contract included the sale of various equipment, the transfer of a large contract with a railroad company, and an agreement that the original owner would provide consulting services for two-years in exchange for 10 percent of the company’s monthly revenue. After the parties completed the sale, the original owner assisted the Buyer with two projects, then returned to his farm operation in Minnesota.

Soon after, the Buyer accepted two large contracts. The Buyer, short-staffed, reached out to the original owner to operate the heavy machinery on one project, but the original owner declined to come to the site. After substantial difficulties completing one of these projects, the railroad companies set a meeting to determine the future of the working relationship with the Buyer. The original owner also declined to attend this meeting. This soon led to a drop in business.

Upset with the original owner’s consulting performance, the Buyer did not pay the final monthly consulting fee. The original owner brought this lawsuit claiming that the Buyer breached the contract. The district court denied the original owner’s claim instead finding that he breached his consulting obligation and was accordingly not entitled to the consulting fee. The court also found in favor of the Buyer regarding several oral agreements made between the parties. The original owner appealed and the Buyer cross-appealed.

Breach of Contract: Consulting Obligation

When a contract contains missing or vague terms, the court must determine the intent of the parties. In this case, the terms of the contract provided that the original owner would use his “best efforts” to provide consulting services to expand and retain the business. Although the contract provided a space to list the minimum number of weekly consulting hours, the parties left it blank and did not define how these services would be provided.

On appeal, the original owner asserted that he did not breach his consulting obligation because the parties only intended for him to provide assistance by phone. He argued that there was no requirement for him to be physically present on job sites. The Court of Appeals rejected this argument noting that the Buyer intended to buy more than the physical assets of the company. Before the sale, the parties discussed how the original owner’s many years of experience and industry relationships would be a valuable intangible asset.

Several times over the two-year period, the Buyer requested that the original owner physically assist with employee training, operate machinery, or attend important business meetings. However, the original owner refused claiming he could not leave his farm at that time. Without the help, the Buyer struggled to timely complete projects and maintain relationships. Because of the original owner’s minimal and unsatisfactory consulting services, the Buyer lost business.  The Court of Appeals affirmed that under the contract, the original owner’s “best efforts” involved more than taking phone calls. Therefore, the original owner breached the contract and the Buyer was not obligated to pay the outstanding consulting fees.

Verbal Agreements for the Sale of Machinery

The two parties also made several oral agreements regarding the sale of equipment. First, the parties agreed to allow the Buyer to lease the original owner’s “service trucks” for $1 per month with the option to either purchase or return the trucks at the end of the two-years. The original owner claimed that the Buyer must return the rented trucks in “like-kind or better” condition. Because there was no defined agreement to return the trucks in a “like-kind” condition, the court affirmed there was no such requirement.

Next, the parties disagreed whether the sale of a “poclian drive unit” in the contract included a specific component, a piston pump. An invoice showed that the original owner paid for and obtained the pump before the parties entered into the agreement. Therefore, the court affirmed that the contract included the sale of the pump.

Transportation Cost

Finally, the court considered the Buyer’s cross-appeal regarding which party was responsible for the costs to move the purchased “grapple trucks” to the first project site. The Buyer purchased several grapple trucks from the original owner which were located throughout the country. The Buyer claimed he was entitled to a $12,000 credit for the cost of moving these trucks to the first project site. Because the contract did not provide the location of these vehicles, the district court concluded that the original owner was not responsible to deliver them. Without evidence to the contrary, the Court of Appeals affirmed.