Iowa Supreme Court Finds That At-Will Contract Was Unilaterally Modified

October 14, 2016 | Kristine A. Tidgren

This morning, the Iowa Supreme Court issued an opinion clarifying that an at-will contract with an independent contractor can be unilaterally modified prospectively, upon reasonable notice. A proposal for modification effectively terminates the original contract and offers new terms for acceptance. The modification can be accepted by performance or the contract terminates. This is the same rule that has applied in Iowa for at-will employment contracts. Last year, however, the Iowa Court of Appeals had reached a different conclusion.

The facts of the case were simple. A milk cooperative entered into an oral contract with a trucker, under which the trucker was to transport milk from Iowa dairy farms to cooperative facilities. Under the agreement, the cooperative was to pay the trucker a fixed “hauling rate” per one hundred pounds of milk, plus an additional “trip fee” for deliveries to certain locales. The trucker hauled milk for the cooperative for 12 years, but the oral agreement had no durational term. In July of 2013, a representative from the cooperative notified the trucker in writing that the $100 trip fee he had been receiving for deliveries to Arlington, Iowa, would be reduced and then phased out completely during the next five months.

The trucker continued to drive for the cooperative, and bill the cooperative for the full “trip fee.” The cooperative, however, paid the trucker according to its reduced fee schedule. In January of 2014, the trucker filed a breach of contract action against the cooperative, seeking to collect the higher trip fee. Nonetheless, he continued driving for the cooperative, continuing to bill for the full amount. The cooperative refused to pay the requested fee. Finally, in December of 2014, the cooperative formally terminated its arrangement with the trucker.

Meanwhile, the district court had granted summary judgment to the cooperative, finding that the trucker had, as a matter of law, accepted the terms proposed by the July 2013 letter by performance when he continued to drive for the cooperative.

On appeal, however, the Iowa Court of Appeals reached an interesting conclusion. The court found that modification of the existing contract between the cooperative and the trucker required mutual assent and consideration. Thus, the court ruled that because the cooperative did not formally terminate the agreement (which it could have done at any time), but instead merely proposed new terms, the contract continued under the original terms absent the trucker’s express agreement.

Today, the Iowa Supreme Court held that the appeals court got it wrong. The Court vacated the Iowa Court of Appeals decision and reinstated the district court’s judgment in favor of the cooperative.

The court ruled that a party that unilaterally modifies an at-will contract effectively terminates the old agreement and offers new terms for acceptance. This rule, the Court found, applies as equally to independent contractor relationships as it does to employee-employer relationships. When one party modifies an at-will contract, the other party may choose to accept the new terms or discontinue the relationship. No formalistic language terminating an at-will contract is required before the change of terms is effective moving forward.

In this case, the Court ruled that the trucker accepted the cooperative’s new terms proposed in the July 2013 letter by performance when he continued to deliver its milk. His protests to the modification were ineffective in light of his continued performance.

It is important to note that a different rule would have applied if the contract had been for a term of months or years. Where a contract is not an at-will contract, a modification continues to require mutual assent and consideration.

The case is Johnson v. Associated Milk Producers, Inc., No. 15-0105 (Iowa Sup. Ct. October 14, 2016).