Iowa Fuel & Minerals, Inc. v. Iowa State Bd. of Regents

• Decision Date: 19 June 1991
• Docket Number: No. 89-1352,89-1352
• Citation: 471 N.W.2d 859
• Parties: 69 Ed. Law Rep. 536 IOWA FUEL & MINERALS, INC., Appellant, v. IOWA STATE BOARD OF REGENTS, and Iowa State University of Science and Technology and State of Iowa, Appellees.
• Court: Iowa Supreme Court

Page 859

471 N.W.2d 859

69 Ed. Law Rep. 536

IOWA FUEL & MINERALS, INC., Appellant, v. IOWA STATE BOARD OF REGENTS, and Iowa State University of Science and Technology and State of Iowa, Appellees.

No. 89-1352.

Supreme Court of Iowa.

June 19, 1991.

John R. Sandre and Pamela D. Griebel of Scalise, Scism, Sandre & Uhl, Des Moines, and Vincent S. Klyn of Gaass, Klyn & Boehlje, Pella, for appellant.

Bonnie J. Campbell, Atty. Gen., and Gordon E. Allen, Deputy Atty. Gen., for appellees.

Considered by McGIVERIN, C.J., and LARSON, SCHULTZ, NEUMAN and SNELL, JJ.

SNELL, Justice.

This appeal and cross-appeal arose out of a district court judgment awarding plaintiff $218,048.28 for defendants' improper withholding of payments on a coal supply contract, but dismissing plaintiff's remaining claims for breach of contract, negligence, and bad faith. We transferred the case to the court of appeals which, by majority vote, affirmed in part and reversed in part the judgment of the district court. We granted further review and now vacate the decision of the court of appeals and affirm the judgment of the district court.

In 1980 Iowa State University (ISU) solicited bids on a ten-year contract to supply the university with low-sulphur, washed coal. Bidders responded on university drafted proposal forms which contained the terms of the contract ultimately forged.

ISU granted the contract to Iowa Fuel & Minerals, Inc. (Iowa Fuel) on its bid of 100,000 tons per year of washed industrial stoker coal for $32.28 per ton delivered free on board ($1.68 per million btu's). The ISU contract comprised approximately ninety-five to ninety-seven percent of Iowa Fuel's business, totaling approximately $4,000,000 per year.

The coal price under the terms of the contract was not intended by either party to remain static over the ten-year period. At least two price increases were agreed upon. By June 1983 ISU was paying Iowa Fuel $39.54 per ton ($1.88 per million btu's).

In May 1983 the University of Iowa and the University of Northern Iowa entered into new one-year contracts for their coal needs. Both of those universities paid substantially less for their coal than ISU. In June 1983, the Board of Regents directed ISU to renegotiate its contract with Iowa Fuel. Echoing language in the contract, ISU's purchasing agent sent a letter dated June 2, 1983, to Iowa Fuel stating: "This is to advise you that Iowa State University cannot economically utilize the coal supplied under the [September 19, 1980,] contract and to provide the required thirty (30) days written notification of our intent to renegotiate this contract."

Discussions between the parties ensued in mid-June 1983, resulting in a contract amendment lowering the price to $35.07 per ton ($1.67 per million btu's). The trial court later found the parties had negotiated this price reduction. The trial court further stated that "although [Iowa Fuel] was not happy, the parties did reach an agreement," and held that ISU had not negotiated in bad faith.

At about the same time that ISU sought a price reduction, it noticed that the coal supplied by Iowa Fuel did not meet the btu specifications in the contract. It appears that Iowa Fuel was adjusting its washing process which resulted in cost savings to it, less efficient washing, and lower btu content.

ISU satisfied itself with its own testing methods that the contract btu specifications were not being met and demanded price adjustments as allowed in the contract. The district court, however, found ISU's "method of testing did not follow the requirements of the contract" and held the price adjustments were unjustified. The court of appeals affirmed the district court on this issue.

The relationship finally collapsed in 1986. A July 21, 1986, letter by the director of business affairs at ISU to Iowa Fuel stated: "[Y]ou have failed to meet the quantity levels specified in your coal contract again this year.... [T]hirty (30) days after your receipt of this letter, your contract for the purchase of coal will be cancelled." The letter went into detail on Iowa Fuel's failure to deliver the contractually required quantity of coal in fiscal years 1983-84, 84-85, and 85-86 by approximately twenty-two percent, nineteen percent, and ten percent for those years. Based on Iowa Fuel's failure to deliver the quality and quantity required, ISU terminated the contract in August 1986.

Iowa Fuel steadfastly maintains that no problems with the quantity or quality of its coal would have been encountered had ISU not demanded the price reduction in 1983. Each problem, Iowa Fuel contends, resulted from its being backed into an economic corner by ISU. However, ISU and its codefendants are equally adamant in arguing that the economic corner Iowa Fuel was in was of its own making and that they should not be held accountable for Iowa Fuel's "gossamer" financial condition and myopic business decisions.

Iowa Fuel filed its petition at law on August 15, 1986, alleging breach of contract, negligence, and bad faith against ISU, the State Board of Regents, and the State of Iowa.

Following a trial to the court in September 1988, the trial court, on May 18, 1989, awarded Iowa Fuel $218,048.28 plus interest at the legal rate from August 15, 1986 for the contract claims involving improper price adjustments. The trial court denied the balance of Iowa Fuel's claims.

Iowa Fuel appealed the adverse portions of the trial court's ruling on August 31, 1989, and defendants cross-appealed the amount of Iowa Fuel's award on September 5, 1989.

On December 27, 1990, the court of appeals affirmed the trial court's award of $218,048.28 to Iowa Fuel and denied defendants' cross-appeal. Separately, Iowa Fuel sought and failed to recover additional damages for a price reduction defendants imposed because of an alleged inability to "economically utilize" the coal supplied. However, this decision was reversed by the court of appeals which awarded Iowa Fuel an additional $807,830 for ISU's breach of contract. Finally, the district court denied all of Iowa Fuel's remaining claims and the court of appeals affirmed. Both parties filed applications for further review which were granted.

Our scope of review is determined by the nature of the trial proceedings. Bates v. Allied Mut. Ins. Co., 467 N.W.2d 255, 257 (Iowa 1991). This action was filed and tried at law. It is an ordinary action for breach of contract, negligence, and bad faith. Consequently, the court's review is for correction of errors at law. Iowa R.App.P. 4. Where there is substantial evidence in the record to support the trial court's decision, an appellate court is bound by those findings of fact. See Iowa R.App.P. 14(f)(1); Midwest Recovery Serv. v. Wolfe, 463 N.W.2d 73, 74 (Iowa 1990). An appellate court is not bound, however, by the trial court's application of legal principles or its conclusions of law. State ex rel. Miller v. Internal Energy Management Corp., 324 N.W.2d 707, 710 (Iowa 1982).

I. The contract language in dispute states as follows:

TERMINATION:

In the event that the coal being supplied becomes unsuitable for combustion either by changes in operation, in equipment or changes in Federal or State regulations, the University shall have the option to terminate the contract or reduce the quantity of coal purchased under the contract on thirty (30) days written notice to the Bidder. If the University cannot economically utilize the coal supplied under this contract or in the event that the Bidders proven escalation results in a total price that is unreasonable in view of the price of other comparable coals being offered under contract for periods of time equal to the period remaining under this contract, then this agreement may be renegotiated on thirty (30) days written notice from either party and, failing mutual agreement within a reasonable period of time, the contract shall be terminated upon thirty (30) days written notice following the end of negotiation. Every effort will be made by the University and Bidder to negotiate in good faith a mutually acceptable price for the coal supplied under this contract before giving notice of termination.

(Emphasis added.)

ISU and Iowa Fuel disagree on the meaning of the phrase "cannot economically utilize" but agree that the contract could be canceled upon thirty days notice if negotiations failed. ISU feels that the phrase was included to protect the taxpayers who support this public institution so that ISU could obtain fuel economically. It argues that a plain ordinary meaning is demanded that is unambiguous by which the phrase means given to "frugality" or "thrifty." Iowa Fuel says that the ISU interpretation is tantamount to turning the contract into an "evergreen" contract, where the price is renegotiated every year. This interpretation would not be reasonable, it argues, since it would override the more specific price adjustment provisions in other sections of the contract. Further, Iowa Fuel argues that it would be put at the economic mercy of ISU by such a construction.

It is the cardinal principle of contract construction that the parties' intent controls; and except in cases of ambiguity, this is determined by what the contract itself says. See generally Iowa R.App.P. 14(f)(14); Berryhill v. Hatt, 428 N.W.2d 647, 654 (Iowa 1988). When a contract is not ambiguous, it will be enforced as written, Spilman v. Board of Directors, 253 N.W.2d 593, 596 (Iowa 1977), but when there are ambiguities in a contract, they are strictly construed against the drafter. Village Supply Co. v. Iowa Fund, Inc., 312 N.W.2d 551, 555 (Iowa 1981); Fashion...