Trustees of Iowa Laborers District Council Health & Welfare Trust v. Ankeny Community School District

Oldcastle APG West, Inc. (“Oldcastle”) appeals from the district court’s denial of its erossclaim for an amount owed under an open account with Grove Masonry, Inc. (“Grove Masonry”). It also appeals the district court’s award of direct and consequential damages to Grove Masonry on its counterclaim against Oldcastle for defective product. We affirm in part, reverse in part, and remand for further proceedings.

I. Factual and Procedural Background

Oldcastle is the parent company of Rhino Materials, which manufactures concrete masonry units (CMUs) used by masonry contractors like Grove Masonry in construction projects. In 2009, Ankeny Community School District began two building projects, a high school and a middle school. Grove Masonry won the bid to be mason on the two projects. It contracted with Oldcastle to provide the CMUs it would need to complete the work. The CMUs were to comply with the industry standard ASTM C90 guideline.1

After work began, Grove Masonry started to notice some of the blocks were defective. There were two types of defects it noticed. First, some of the blocks were pitted and chipped on their surfaces. This was a patent defect. These blocks are known as “shotgun blocks.” Second, some of the blocks had a slight outward protrusion on their surfaces. This was a latent defect and was not noticeable until the blocks had been installed. These blocks are known as “bubble blocks.”

Sometime between January and May of 2010, Grove Masonry first noticed the defects. Shortly thereafter, it notified Old-castle. Oldcastle came to the construction site to look at the product and troubleshoot with Grove Masonry. Some amount of both the shotgun block and the bubble block had been installed prior to Oldcas-tle’s arrival on the scene.

Testimony at trial was inconsistent as to when precisely Grove Masonry noticed the defects. It was equally unclear as to when Grove Masonry notified Oldcastle of the defects. One of Grove Masonry’s witnesses thought they first noticed the problem “probably around the first of the year, January, February....” Another of its *273witnesses said that Oldcastle was on site within a few days of Grove Masonry noticing the defects, which “had to be in April, May, sometime in there.” The problems with the defective blocks required very costly corrective measures, a cost which Grove Masonry bore. During this time it continued to receive and install multiple deliveries of additional CMUs from Old-castle but stopped paying for the product.

The Ankeny schools project had been a pivotal one for Grove Masonry. After the trouble with the CMUs on the Ankeny projects, Grove Masonry fell into serious economic hardships, became unable to obtain bonding on its projects, struggled to win contracts, and has been left out of calls for bids in its area.

Oldcastle and Grove Masonry were co-defendants in an action initiated as a result of the expensive and troubled construction projects. Oldcastle filed a crossclaim for payment from Grove Masonry for the deliveries of CMUs for which Grove Masonry still refused to pay. It filed two counts, the first of which was disposed of by summary judgment in Grove Masonry’s favor. The second crossclaim alleged that Oldcas-tle held an open account in which Grove Masonry owed the agreed-upon amount for the CMUs it accepted, which amounted to $155,572.74. Before trial, Oldcastle moved to amend this second crossclaim to broaden its theories of recovery, but the district court denied the motion. Grove Masonry filed counterclaims against Old-castle, alleging the CMUs delivered violated an implied warranty of merchantability and an implied warranty of fitness for a particular purpose.

The district court heard the case in equity in a bench trial. It found Oldcastle’s relationship with Grove Masonry was not an open account and denied Oldcastle’s claim for payment for the accepted CMUs. It also entered judgment in favor of Grove Masonry on the count of violation of the implied warranty of merchantability. The district court awarded Grove Masonry $783,096.68 in direct economic damages and $1,005,961.00 in consequential lost-profits damages. Oldcastle appeals.

ÍI. Standard and Scope of Review

We review the district court’s rulings on contract matters for errors at law. Iowa R.App. P. 6.907. When we review for errors at law, “[w]e are bound by the trial court’s findings of fact if they are supported by substantial evidence.” Harrington v. Univ. of N. Iowa, 726 N.W.2d 363, 365 (Iowa 2007).

“ ‘Substantial evidence’ means the quantity and quality of evidence that would be deemed sufficient by a neutral, detached, and reasonable person, to establish the fact at issue when the consequences resulting from the establishment of that fact are understood to be serious and of great importance.” Iowa Code § 17A.19(10)(f)(l) (2013).

“In assessing the evidence, we view the record in the light most favorable to the prevailing party, indulging in all legitimate inferences that may fairly and reasonably be deduced from the evidence.” Pollmann v. Belle Blaine Livestock Auction, Inc., 567 N.W.2d 405, 409 (Iowa 1997).

The issues raised by Oldcastle on appeal concern Iowa’s adoption of the Uniform Commercial Code (UCC), effective at the time of the transactions between Old-castle and Grove Masonry. Iowa Code ch. 554 (2009). “[W]hen interpreting any provision of the Uniform. Commercial Code, we bear in mind its overriding purposes and objectives,” which include “the uniform application of commercial law among the states and the presumption in favor of predictability and finality of commercial transactions.” Husker News Co. v. Ma-*274haska State Bank, 460 N.W.2d 476, 477 (Iowa 1990). To achieve that goal, we may “look to the interpretation given by other jurisdictions.” Van Ness v. First State Bank of Ida Grove, 430 N.W.2d 109, 110 (Iowa 1988).

III. Notice of Breach in a Reasonable Time

“Where a tender has been aceepted[,] the buyer must within a reasonable time after the buyer discovers or should have discovered any breach notify the seller of breach or be barred from any remedy[.]” Iowa Code § 554.2607(3)(a). Based on the statutory language, Oldcastle asserts Grove Masonry is barred from any remedy related to the defective CMUs. First, it argues Grove Masonry failed to plead in its cross-complaint that it provided Oldcas-tle notice of the defective CMUs. Second, it argues insofar as Grove Masonry did factually provide notice, it was not provided within a reasonable time after it discovered or should have discovered the defects.

A. Failure to Plead Notice

Oldcastle asserts a complainant must explicitly plead its notification of nonconforming product to the opposing party because the notification is a condition precedent to its basis for recovery. Grove Masonry claims Oldcastle’s cited law has been outmoded by a 1976 amendment to the Iowa Rules of Civil Procedure.

It is true that our supreme court has held in the past that “the giving of a notice must be pleaded as a condition precedent to recovery.” Winter v. Honeggers’ & Co., Inc., 215 N.W.2d 316, 327 (Iowa 1974); see Henschel v. Hawkeye-Security Ins. Co., 178 N.W.2d 409, 417 (Iowa 1970) (“For pleading purposes, at least, a condition precedent is one whose performance or occurrence plaintiff must prove in order to recover.”).

However, in 1976, the Iowa Rules of Civil Procedure were amended to substantially lower the burden on plaintiffs to manage arcane technical requirements in pleading.

Under [the new] rule, the principal function of pleadings is to give the adverse party fair notice of the claim asserted in the form of a generalized summary sufficient to allow that party to make an adequate response.... It will no longer be necessary to determine whether the rigid requirements of a “cause of action” have been pleaded. Distinctions under the former rule between “ultimate facts” which were required to be pleaded and “evidence” and “conclusions of law” which were prohibited in pleadings are abolished.

Iowa R. Civ. P. 69 cmt. (1976).2 Since the amendment, our supreme court has noted when necessary that former pleading rules no longer apply. See Am. Nat. Bank v. Sivers, 387 N.W.2d 138, 139-40 n. 1 (Iowa 1986) (holding relevant portion of 1931 Iowa Supreme Court case “has no applicability under our present rules of notice pleading”). Our supreme court regularly considers factual satisfaction of conditions precedent, but has not revisited its requirement to plead conditions precedent since the amendment of the rule.

In the absence of such a ruling from our supreme court, Oldcastle relies upon two cases from this court and one from the federal district court in Iowa’s northern district.3 We agree with the district *275court’s analyses of these cases. In Mose-bach v. Blythe, 282 N.W.2d 755, 759 (Iowa Ct.App.1979), this court denied relief when a plaintiff failed to address a condition precedent in his pleadings. In Mosebach, we relied on Henschel, a pre-amendment ease. Henschel, 178 N.W.2d at 420. Additionally, we did not address the effect or lack of effect of the amendment and held alternatively the plaintiff could not recover due to factual non-satisfaction of the condition. Mosebach, 282 N.W.2d at 759. This case alone is not sufficient to establish the pleading requirement remains in effect.

In Randa v. U.S. Homes, Inc., 325 N.W.2d 905, 909-10 (Iowa CtApp.1982), this court suggested in dicta — but did not hold — that Winters pre-amendment pleading requirement may still be in effect. We went on, however, to decide the case on other grounds, and our language addressing the pleading requirement4 was not conclusive and is not now controlling.

In Wright v. Brooke Group Ltd., 114 F.Supp.2d 797, 829-30 (N.D.Iowa 2000), the federal district court noted in dicta that the pre-amendment pleading requirement is still effective, relying on Randa. The court failed to address or consider the effect of the amended rule of civil procedure on the pleading requirement. Further, under the court’s interpretation of the pre-amendment law, the plaintiffs filing of a suit itself satisfies the condition by providing notice. Wñght, 114 F.Supp.2d at 830. Wñght does not support Oldcas-tle’s position on the pleading issue. Oldcastle has identified a gap in our notice pleading jurisprudence, but it has not persuaded us that a pre-amendment formalistic pleading requirement survived Iowa’s adoption of its current notice pleading system, in which “[o]nly a general statement of the claim is required.” Christensen v. Shelby Cnty., 287 N.W.2d 560, 563 (Iowa 1980). Grove Masonry’s pleadings do not preclude it from recovering even though the record shows “it is undisputed that [it] failed to plead notice.”

B. Failure to Give Timely Notice

Oldcastle’s second argument regarding the requirement to provide timely notice of the defect is that Grove Masonry’s notice was categorically not timely relative to the shotgun blocks because Grove Masonry installed the blocks before giving notice.5 Oldcastle argues the installation renders notice untimely as a matter of law. Grove Masonry argues the timeliness determination is one of fact and this court must defer to the district court’s finding of timeliness unless it is not supported by substantial evidence.

This court has previously held “sufficiency and reasonableness are fact questions” in the context of the notice provision in Iowa Code section 554.2607(3)(a). Tyrrell Cos., L.C. v. Tegeler Design Ctr., Inc., No. 03-0258, 2003 WL 23219948, at *1 (Iowa Ct.App. Nov. 26, 2003). However, Oldcas-tle notes that Tyrrell does not indicate whether timeliness is to be determined as a matter of law and cites to cases in other jurisdictions either explicitly or implicitly holding notice untimely as a matter of law when construction materials are installed.6

*276Regardless, we find the district court’s determination that the notice was provided within a reasonable time is not supported by substantial evidence. • The district court’s findings of fact and the record as a whole lack necessary specificity.

The district court wrote that Grove Masonry discovered the defects and notified Oldcastle of them “in the same time frame: in the springtime, March into April.” In reviewing the record, we note the testimony that the district court deemed credible actually reflects a fluctuating time frame in which the defects were discovered and Oldcastle was notified. Though the district court described the time frame as March and April of 2010, the testimony reflects the discovery and notification periods were in fact anywhere between January and May.

The findings of the district court also fail to account for the testimony indicating that defective CMUs were continually installed even after the defects were initially discovered or reasonably should have been discovered.7 These facts extend the reasonable-time calculus beyond simply the number of days between discovery and notification.

Between the imprecise evidence concerning the dates of discovery and notification and the continued installation of CMUs in spite of defects, we cannot say the evidence is sufficient for a neutral, detached person to conclude notification was reasonably timely, especially because the consequences are of considerable importance due to the amount of damages sought.

We reverse the district court’s finding of timely notice of defective shotgun block and remand to the district court for determination of what portion, if any, of the damages arose from Grove Masonry’s installation of shotgun block it knew or should have known was defective and remove that portion of liability from judgment entered against Oldcastle.

IV. Consequential Damages

Oldcastle next appeals the district court’s award of approximately $1 million in consequential damages to Grove Masonry for profits lost as a result of Oldcastle’s breach of the implied warranty of merchantability. A buyer may recover consequential damages from a breaching seller pursuant to Iowa Code section 554.2715.8 Recoverable consequential economic losses “inelude[] loss of profits resulting from failure of the goods to function as warranted, loss of goodwill, ... loss of business reputation, and other loss proximately resulting from a defective product beyond direct economic loss.” Beyond the Garden Gate, Inc. v. Northstar Freeze-Dry Mfg., Inc., 526 N.W.2d 305, 309 (Iowa 1995) (citation omitted).

*277“[T]he buyer who has accepted goods and then discovers their defects must show that the seller had reason to know at the time of contracting of the buyer’s possible losses caused by a breach to recover consequential damages.” Nachazel v. Miraco Mfg., 432 N.W.2d 158, 160 (Iowa 1988). The losses must be foreseeable, and losses are foreseeable “if they follow in the ordinary course of events, but also as a result of special circumstances.” Id. Iowa courts focus on whether the type of damages was foreseeable rather than whether the specific injury itself was foreseeable. Kuehl v. Freeman Bros. Agency, Inc., 521 N.W.2d 714, 718-19 (Iowa 1994).9

At trial, Grove Masonry requested three categories of consequential damages: damages arising from a loss of goodwill, damages arising from a loss of business reputation, and damages arising from loss of profits. The district court held Grove Masonry could not recover on the first two categories because any calculation to determine the economic value of such a loss would be purely speculative. However, the court found that Grove Masonry’s loss of profits was measurable, foreseeable, and proximately caused by Oldcastle’s breach.

Oldcastle argues the district court’s award is improper because the damages are speculative in their entirety or were largely unforeseeable. We first address Oldeastle’s claim that the damages were speculative. Oldcastle claims the district court contradicted itself when it refused to award Grove Masonry consequential damages as a result of loss of goodwill or business reputation because the measure of those injuries would be speculative. At the same time, it awarded damages to account for profits lost as a result of a loss of goodwill and business reputation.

The district court’s holding was not contradictory. The district court did not hold that the injury to Grove Masonry’s goodwill or business reputation itself was speculative. It held any dollar amount assigned to those injuries would be speculative. However, the measure of lost profits was not guesswork — it was supported by trial testimony and calculations asserted by both parties. The measurable injury of lost profits resulted from the immeasurable injuries to GroVe Masonry’s goodwill and business reputation. -But it does not follow that the lost profits are therefore speculative themselves.

We next consider whether the lost profits were foreseeable. Oldcastle argues they were not foreseeable because the actual cause of the $1 million in lost profits was Grove Masonry’s inability to obtain performance bonds after falling on economic hardships.10

*278However, the district court found it was “reasonably foreseeable at the time of contracting that a breach of warranty of merchantability would result in lost profits.” In ruling on Oldcastle’s post-trial motion, it further noted, “[T]he evidence presented ... warranted the lost profits damages, notwithstanding the loss of bonding capacity.” 11 The foreseeability question on appeal, therefore, is whether there is substantial evidence to support the district court’s finding that lost profits — vis a vis lost customers — was a reasonably foreseeable consequence of Oldcastle’s breach at the time of contracting.

The record demonstrates that the Ank-eny projects were of such a size and profile that Grove Masonry’s performance on those jobs could foreseeably have affected its future business prospects. It was reasonably foreseeable at the time of contracting that Grove Masonry’s future contracts with other customers, retention of existing customers, and acquisition of new customers could depend upon the quality of its work product, i.e., the quality of the CMUs it purchased from Oldeastle. There is substantial evidence to support the district court’s finding that the type of profits ultimately lost — -future contracts with other customers — was reasonably foreseeable to the parties at the time of contracting.12

Oldeastle raises one further question: whether, if lost profits were in fact reasonably foreseeable, they were foreseeable to the extent to which they have been awarded — i.e., whether the consequential damages awarded must be of a foreseeable extent in addition to a foreseeable type. Our jurisprudence does not directly address the issue,13 but Iowa law does not require that the lost-profits damages be per se proportionate to the value of the original contract. Nor is there any indication in the record that the damages awarded in this case are disproportionate under the circumstances.

We find nothing in the record to indicate the extent of the damage shown in this case was not as foreseeable as its type given the value of Grove Masonry’s typical project. Despite Oldcastle’s assertion, the bare value of the CMUs in this case does not arbitrarily limit the extent of foreseeable lost-profit damages.

We therefore affirm the district court’s conclusion that Grove Masonry suffered $1,005,961 in foreseeable consequential damages, and it may therefore recover from Oldeastle.

V. Payment for Goods

Oldeastle lastly appeals the district court’s denial of its claim it pleaded as an amount owed on an open account between *279itself and Grove Masonry. Grove Masonry denies the existence of an open account, and the district court found there was none. The questions before this court on appeal therefore are whether the parties maintained an open account in which there currently rests a balance owed to Oldcastle and whether the court properly limited Oldcastle’s claim under our notice pleading rules discussed earlier in the context of Grove Masonry’s failure to plead notice of breach in its counterclaim.14

At trial, Oldcastle proved Grove Masonry continued to accept delivery of product, it did not pay for that product, and the amount owed for the product it accepted. The district court denied the claim for the amount owed because Oldcastle’s pleadings described that amount owed as an open account, and the district court decided those transactions fell outside the technical definition; of an open account. The district court’s reliance on a pleading technicality to deny its claim frustrated Oldcastle’s ability to recover payments to which it was entitled.

However, even under its open account claim, Oldcastle is entitled to recover. The controversy arises in the parties’ competing interpretations of our supreme court’s decision in Roger’s Backhoe Serv., Inc. v. Nichols, 681 N.W.2d 647, 650 (Iowa 2004). In Roger’s Backhoe, the court held:

[I]n a general sense, [an account] encompasses any claim or demand based on a transaction creating a debtor-creditor relationship.... [W]hen the evidence fails to establish the elements of an account stated, the creditor may nevertheless recover by proving a contractual obligation for the individual terms in the account and the fair and reasonable value of the amounts claimed.

Id. (citations omitted). Oldcastle asserts the multiple contracts for sale between itself and Grove Masonry are transactions creating a debtor-creditor relationship in which Oldcastle credits Grove Masonry the value of the goods upon delivery for future payment bn that debt.

The district court and Grove Masonry rely upon a 1931 case in which our supreme court held, “A series of independent express contracts for services to be performed for an agreed compensation does not constitute an open continuous current account.” Sammon v. Roach, 211 Iowa 1104, 235 N.W. 78, 79 (1931). We find Sammon, to the extent it remains good law in light of our more recent jurisprudence, is distinguishable. The quoted language in context does not categorically foréclose Oldcastle’s claim. Sammon dealt with a quantum meruit claim15 in which *280the individual contracts had been paid in full as they became due. The Sammon court’s statement about open accounts related only to the quantum meruit claim before it, as the language of the decision as a whole makes clear.16

Additionally, Sammon did not outright define an open account, but relied on other cases, such as Tucker v. Quimby, 37 Iowa 17, 19 (1873), which stated, “a ‘continuous, open, current, account,’ is an account which is not interrupted or broken, not closed by settlement or otherwise, and is a running, connected series of transactions.” The Tucker language aptly describes the relationship between Oldcastle and Grove Masonry as the former continued to supply the latter with goods without receiving payment for previous deliveries.

We agree with Oldcastle that the district court’s interpretation of our supreme court’s dictates in Roger’s Backhoe is improperly constrained by its reading of Sammon. The transactions at issue in this case span multiple overlapping, unbroken contractual obligations creating an account that was never settled. The amount Oldcastle asserts it is owed is not derived from a single “contract for a lump sum.” McIntire v. Muller, 522 N.W.2d 329 (Iowa Ct.App.1994). Oldcastle proved Grove Masonry had not paid for CMUs it accepted, and should have prevailed on this claim.

We reverse the district court’s judgment against Oldcastle in its count II styled as an open account claim. Grove Masonry must pay for the $155,572.74 in goods it accepted. That amount may be used to offset damages awarded to Grove Masonry. We remand for further proceedings consistent with this opinion.

VI. Conclusion

As to Oldcastle’s claim that Grove Masonry was entirely precluded from recovery because it failed to plead the condition precedent that it gave timely notice of the defect, we affirm the district court. Grove Masonry’s pleadings gave Oldcastle fair notice of the claim sufficient to allow it to make an adequate response and were therefore sufficient to permit recovery.

As to Oldcastle’s claim that Grove Masonry was partially precluded from recovery because it failed in fact to provide timely notice of the patently defective shotgun block, we reverse the judgment entered and remand for recalculation of damages.

As to Oldcastle’s claim that the district court’s consequential damages award was improper because it was not foreseeable, we affirm the district court. Substantial evidence exists in the record that Grove Masonry’s loss of future contracting partners was reasonably foreseeable at the time of contracting.

As to Oldcastle’s claim that the district court’s consequential damages award was improper because it was spéculative, we affirm the district court. The damages were the result of evidence properly before the court and thorough calculations based on that evidence.

*281As to Oldcastle s open account claim, we reverse the district court’s entry of judgment in Grove Masonry’s favor and remand for further proceedings. AFFIRMED IN PART, REVERSED IN PART, AND REMANDED.9