Articles Fundamentals of Contract Law
Fundamentals of Contract Law

Basics of Contracts

The essential elements of a contract are parties competent to contract, a proper subject matter, legal consideration, mutuality of agreement, and mutuality of obligation. Mallory v Detroit, 181 Mich App 121, 127 (1989). The only contract cases involving the burden of proving some element by clear and convincing evidence are those dealing with oral contracts, avoiding contracts, modifying existing contracts, waiving an existing contractual term, and reforming contracts. Stein v Home‐Owners Ins Co, 303 Mich App 382, 390 (2013) In cases “where a party endeavors only to prove that some express condition contained in a written contract actually occurred” the burden of proof is preponderance of the evidence. Id. at 390‐391.

In determining contractual rights and obligations, a court must look to the intention of the parties, and a contract should always be construed so that it carries that intention into effect. When the words of a written contract are clear and unambiguous and have a definite meaning, the court has no right to look to extrinsic evidence to determine their intent. Indeed, if the language of the entire contract is clear and unambiguous, there is no room for construction by the courts, and in such case, the language must be held to express the intention of the parties and the court need not search for meanings nor indulge in inferences as to the intention of the parties.

Where a contract’s language “is subject to two or more reasonable interpretations or is inconsistent on its face, the contract is ambiguous, and a factual development is necessary to determine the intent of the parties.” Petovello v Murray, 139 Mich App 639, 642 (1984). Generally, the language of a contract is to be construed against its drafter. However, construing a contract against the drafter to resolve ambiguous contract language (called the rule of contra proferentem) is applicable only if the intent of the parties cannot be discerned through the use of all conventional rules of interpretation, including an examination of relevant extrinsic evidence.

The statute of frauds requires that certain types of agreements be in writing. MCL 566.132. See also Kloian v Domino’s Pizza, LLC, 273 Mich App 449, 465‐458 n 3 (2006). The parol evidence rule precludes the introduction of evidence which would change an unambiguous written agreement. Oral (parol) evidence is not admissible to contradict or change an unambiguous written agreement. The parol evidence rule has four exceptions.  Extrinsic evidence is admissible to show:

  • that the writing was a sham, not intended to create legal relations,
  • that the contract has no efficacy or effect because of fraud, illegality, or mistake,
  • that the parties did not integrate their agreement or assent to it as the final embodiment of their understanding, or  that the agreement was only partially integrated because essential elements were not reduced to writing.

Parol evidence is inadmissible to show that an agreement is not integrated when the parties have included an integration clause in the contract, unless the case involves fraud or the agreement is obviously incomplete on its face, making parol evidence necessary as a gap filler. Where the writing is not ambiguous on its face, the circumstances under which the parties contract may be looked at to establish an ambiguity, as well as to indicate the proper choice of possible meanings; and the common knowledge and the understanding of the parties themselves as shown by their previous negotiations is sometimes such a circumstance. The parol evidence rule does not preclude the introduction of evidence to establish that there was a condition precedent to the contract that was not included within the contract.

Where there is evidence that a latent ambiguity exists with respect to the intended scope of a release, a court may consider parol evidence regarding that scope “when an unnamed party seeks to enforce third‐party‐beneficiary rights based on the broad release language. Shay v Aldrich, 487 Mich 648, 676 (2010). In Shay, the plaintiff claimed that he had been assaulted by several police officers. Shay, supra at 651. After accepting case evaluation awards with respect to two of the officers, the plaintiff executed two separate releases in each officer’s name. Id. at 652‐653. A latent ambiguity exists when the language in a contract appears to be clear and intelligible and suggests a single meaning, but other facts create the ‘“necessity for interpretation or a choice among two or more possible meanings. Shay v Aldrich, 487 Mich 648, 668 (2010), quoting McCarty v Mercury Metalcraft Co, 372 Mich 567, 575 (1964), quoting Black’s Law Dictionary, 4th Ed.

To verify the existence of a latent ambiguity, a court must examine the extrinsic evidence presented and determine if in fact that evidence supports an argument that the contract language at issue, under the circumstances of its formation, is susceptible to more than one interpretation. Then, if a latent ambiguity is found to exist, a court must examine the extrinsic evidence again to ascertain the meaning of the contract language at issue. The Court concluded that the extrinsic evidence presented by the plaintiff clearly showed that the broad release language was not intended to release the defendants from liability.  Parties to a written agreement may, by parol evidence, extend the time for performance, especially where the contract does not make time of the essence. Frazer v Hovey, 195 Mich 160, 168 (1917).

As it relates to oral modification of a written agreement, there is a higher burden of proof. Quality Products & Concepts Co v Nagel Precision, Inc, 469 Mich 362, 373‐375 (2003). Clear and convincing evidence of a mutual agreement to modify the contract is required. Id. at 373. A departure from the written contract can be predicated on the parties’ conduct, as well as on the express language of an agreement. Fitzgerald v Hubert Herman, Inc, 23 Mich App 716, 718‐719 (1970).

Certain types of agreements are required to be in writing. See MCL 566.132 (general statute of frauds). See also MCL 566.106 et seq., which states that no interest in real estate can be created or transferred, other than a lease not exceeding one year, unless by operation of law or unless it is in writing and signed by the person creating or transferring the interest.

The statute of frauds does not require the entire agreement to be in writing; “a note or memorandum of the agreement” is sufficient. MCL 566.132(1). Examples of sufficient notes or memoranda include letters, account statements, a draft or note, or a check. Kelly‐Stehney & Assoc, Inc v MacDonald’s Industrial Products, Inc (On Remand), 265 Mich App 105, 113 (2005). This requirement may be fulfilled by presenting “‘several separate papers and documents, not all of which are signed by the party to be charged, and none of which is a sufficient memorandum in itself.’” Kelly‐Stehney, supra at 113, quoting 4 Corbin, Contracts, (rev ed), § 23.3, p 771. However, a note or memorandum of the agreement is not sufficient to satisfy the statute of frauds in certain actions brought against a financial institution. The Huntington Nat’l Bank v Daniel J Aronoff Living Trust, 305 Mich App 496, 510‐511 (2014); MCL 566.132(2).

MCL 566.132(2) provides:

An action shall not be brought against a financial institution to enforce any of the following promises or commitments of the financial institution unless the promise or commitment is in writing and signed with an authorized signature by the financial institution:

(a) A promise or commitment to lend money, grant or extend credit, or make any other financial accommodation.

(b) A promise or commitment to renew, extend, modify, or permit a delay in repayment or performance of a loan, extension of credit, or other financial accommodation.

(c) A promise or commitment to waive a provision of a loan, extension of credit, or other financial accommodation.”

The Michigan Court of Appeals explained that MCL 566.132(2) was enacted to “provide greater protection to financial institutions from potentially fraudulent or spurious claims by disgruntled borrowers.” The Huntington Nat’l Bank, 305 Mich App at 509. Specifically, the Court noted that the protection afforded to financial institutions under MCL 566.132(2) is greater than the protection afforded generally under MCL 566.132(1).

Accordingly, the party seeking to enforce the promise of commitment must present evidence that the promise or commitment itself was reduced to writing and properly signed. It is not, therefore, sufficient to show that the financial institution memorialized a portion of the agreement or reduced a preliminary understanding to writing and then later orally agreed to proceed under that framework, nor is it sufficient o present a series of documents—some signed and other not signed—that together purport to be the agreement; rather, the proponent must present evidence that the financial institution actually agreed to the essential terms of the promise or commitment and each of those essential terms must be accompanied by the required signature.

Judicially created exceptions to the statute of frauds include equitable estoppel, ratification, and part performance. It is presumed that one who signs a contract has read and understands it. McKinstry v Valley OB‐GYN Clinic, PC, 428 Mich 167, 184 (1987). Generally, failure to read a contract is not grounds for relief absent fraud, artifice, or deception. Moffit v Sederlund, 145 Mich App 1, 8 (1985). It is not a defense that the party did not read the contract. Montgomery v Fidelity & Guaranty Life Ins Co, 269 Mich App 126, 130 (2005).

Summary disposition of a plaintiff’s complaint is proper where there exists a valid release of liability between the parties. A release of liability is valid if it is fairly and knowingly made. The scope of a release is governed by the intent of the parties as it is expressed in the release. Adell v Sommers, Schwartz, Silver & Schwartz, PC, 170 Mich App 196, 201 (1988) (internal citations omitted). See also MCR 2.116(C)(7), which provides that summary disposition may be appropriate where the claim is barred because of a release. Where the text of the release is unambiguous, the court must determine the parties’ intentions using the “plain, ordinary meaning of the language of the release.

Just because the parties disagree about the meaning of the release does not mean it is ambiguous. A contract is ambiguous only if its language is reasonably susceptible to more than one interpretation. If the terms of the release are unambiguous, contradictory inferences become ‘subjective, and irrelevant,’ and the legal effect of the language is a question of law to be resolved summarily.

Where there is evidence that a latent ambiguity exists with respect to the intended scope of a release, a court may consider parol evidence regarding that scope “when an unnamed party seeks to enforce third‐party‐beneficiary rights based on the broad release language.Shay v Aldrich, 487 Mich 648, 676 (2010). In Shay, the plaintiff claimed that he had been assaulted by several police officers. A latent ambiguity exists when the language in a contract appears to be clear and intelligible and suggests a single meaning, but other facts create the necessity for interpretation or a choice among two or more possible meanings. Shay v Aldrich, 487 Mich 648, 668 (2010), quoting McCarty v Mercury Metalcraft Co, 372 Mich 567, 575 (1964), quoting Black’s Law Dictionary, 4th Ed.

After accepting case evaluation awards with respect to two of the officers, the plaintiff executed two separate releases in each officer’s name. The releases also stated that “all other persons” were released from liability, and the other defendants filed for summary disposition claiming third‐partybeneficiary rights under the release’s reference to “all other persons.”

To verify the existence of a latent ambiguity, a court must examine the extrinsic evidence presented and determine if in fact that evidence supports an argument that the contract language at issue, under the circumstances of its formation, is susceptible to more than one interpretation. Then, if a latent ambiguity is found to exist, a court must examine the extrinsic evidence again to ascertain the meaning of the contract language at issue. Court concluded that the extrinsic evidence presented by the plaintiff clearly showed that the broad release language was not intended to release the defendants from liability.

Third‐party beneficiary rights are governed by MCL 600.1405. “Any person for whose benefit a promise is made by way of contract, as hereinafter defined, has the same right to enforce said promise that he would have had if the said promise had been made directly to him as the promisee.” Whether a party is a third‐party beneficiary under the terms of a release is determined objectively. Shay, 487 Mich at 675. However, where there is a latent ambiguity in the release’s language, a subjective analysis is necessary to determine the parties’ intent as to the scope of a third‐party beneficiary’s rights under the release.

A person who qualifies as a third‐party beneficiary gains the right to sue for enforcement of a contract promise, but he or she “is not automatically entitled to the sought‐after benefit merely by qualifying as a third‐party beneficiary.” Consequently, a court must adhere to the basic principles of contract interpretation when determining the extent of the third party’s rights under the contract. A person is a third‐party beneficiary of a contract only when that contract establishes that a promisor has undertaken a promise directly to or for that person. Only intended beneficiaries may sue for breach of contract when his or her benefit is affected by the breach. A court should limit its review to the “form and meaning” of the contract when it is deciding whether a party is a third‐party beneficiary under MCL  600.1405.

Turning to other case law for resolution of this issue is inappropriate.  In general, although a property owner ultimately benefits from the work performed by a subcontractor on the property owner’s property, the property owner is not an intended third‐party beneficiary of the contract between the general contractor and the subcontractor. Absent clear contractual language to the contrary, a property owner does not attain intended third‐party‐beneficiary status merely because the parties to the subcontract knew, or even intended, that the construction would ultimately benefit the property owner. As a result, a property owner generally cannot sue for breach of contract a subcontractor who performed work on the property owner’s property.

A plaintiff was an intended third‐party beneficiary of the contract between the contractor and the subcontractor where:

(1) the contract expressly and directly referenced the plaintiff by name,

(2) the defendant (subcontractor) promised to perform work at the plaintiff’s residence, and

(3) the plaintiff and the defendant discussed and agreed on the work to be performed. Vanerian v Charles L Pugh Co, Inc, 279 Mich App 431, 434, 436 (2008).

The goal in awarding damages for breach of contract is to give the innocent party the benefit of his [or her] bargain—to place him [or her] in a position equivalent to that which he [or she] would have attained had the contract been performed. The injured party, however, must make every reasonable effort to minimize the loss suffered, and the damages must be reduced by any benefits accruing to the plaintiff as a consequence of the breach. In other words, under the avoidable consequences doctrine, the plaintiff is not allowed to recover for losses he [or she] could have avoided by reasonable effort or expenditure. He [or she] has a duty to do whatever may reasonably be done to minimize his [or her] loss. Closely related to the avoidable consequences rule is the requirement that any benefit to the plaintiff arising from or as a result of the breach must reduce the damages otherwise payable.” Tel‐Ex Plaza, Inc v Hardees Restaurants, Inc, 76 Mich App 131, 134‐135 (1977). The plaintiff has a duty to mitigate his or her damages. Lawrence v Will Darrah & Assoc, Inc, 445 Mich 1, 15, 15 n 18 (1994). The defendant has the burden of proving that the plaintiff failed to do so.

The existence of a contract and the enforceability of its terms is a judicial question.” McKinstry, 428 Mich at 177 n 3. Such a question is reviewed de novo. Morley v Automobile Club of Michigan, 458 Mich 459, 465 (1998). Where contractual language is clear, its construction is a question of law and is therefore reviewed de novo. A trial court’s decision regarding the interpretation of a contract or the legal effect of a contractual clause is reviewed de novo. McDonald v Farm Bureau Ins Co, 480 Mich 191, 197 (2008). The trial court’s determination of the amount of damages for a breach of contract case is reviewed for clear error.  Any Michigan court of record may entertain a declaratory judgment action. MCR 2.605(A)(1). Circuit, district, and probate courts have jurisdiction in any case in which they would have jurisdiction if other relief was sought. MCR 2.605(A)(2). In other words, MCR 2.605 “neither limits nor expands the subject‐matter jurisdiction of the court.”

There must be an actual controversy that causes a party to seek a declaration of rights or legal relationships. MCR 2.605(A)(1) and MCR 2.111(B)(2); Shavers v Attorney General, 402 Mich 554, 588‐589 (1978). However, to make courts accessible to interested parties, the rule is to be liberally construed.  An ‘actual controversy’ exists for the purposes of a declaratory judgment where a plaintiff pleads and proves facts demonstrating an adverse interest necessitating a judgment to preserve the plaintiff’s legal rights.” Lash v Traverse City, 479 Mich 180, 196 (2007).

In Lash, the defendant required employees to reside within the city limits, and the plaintiff claimed that this violated state law. The Court concluded that this claim constituted an actual controversy for purposes of issuing a declaratory judgment. The trial court’s sound discretion is the controlling guide in every suit of equity. Youngs v West, 317 Mich 538, 545 (1947). It is up to the court to consider the circumstances of each particular case when deciding whether equity will be granted. When granting equitable relief, the court may fashion a remedy warranted by the circumstances. The remedy must be specific and enforceable, or it will not be granted. The court’s broad discretionary powers regarding equity are not to be used to enlarge a party’s statutory rights. The court is not deprived of jurisdiction due to the mere existence of a law, unless the law is clear, complete, and would serve justice as efficiently as the equitable remedy.

There is no right to a jury trial where the relief sought is solely equitable in nature.” Thomas v Steuernol, 185 Mich App 148, 155‐156 (1990). However, MCR 2.509(D) permits equitable claims to be decided by a jury with the consent of the parties. McPeak v McPeak, 457 Mich 311, 315 (1998). Where a party includes a jury demand with his or her complaint and pays a jury demand fee, but the complaint contains equitable counts, “the filing of the jury demand, standing by itself, certainly is not conclusive evidence that the [party] ‘consented’ to a jury trial on [the] equitable claims.

A party seeking equity must come with clean hands. Rose v Nat’l Auction Group, 466 Mich 453, 462 (2002). The purpose of this doctrine is to close the doors of a court of equity to one tainted with inequitableness or bad faith relative to the matter in which he seeks relief, however improper may have been the behavior of the defendant. Rose, supra at 463, quoting Stachnik v Winkel, 394 Mich 375, 382 (1975).

In Rose, the plaintiffs were attempting to sell a piece of property they owned using the defendant‐auction company. Rose, supra at 456. In an effort to secure a higher bid, the plaintiffs agreed to allow the defendant to use a planted bidder (who had no intention of buying the property) to drive up the bid. Id. at 457‐458. When the planted bidder failed to make a bid, and the property sold for much less than the plaintiff expected, the plaintiffs sued the defendant. Id. at 458‐460. The Court concluded that the plaintiff’s involvement in the planted bidder scheme precluded them from bringing suit against the defendant, citing the clean hands doctrine.

Estoppel by laches is the failure to do something which should be done under the circumstances or the failure to claim or enforce a right at a proper time. Wells Fargo Bank, NA v Null, 304 Mich App 508, 537 (2014), quoting Schmude Oil Co v Omar Operating Co, 184 Mich App 574, 583 (1990). The application of the doctrine of laches requires a passage of time combined with a change in condition which would make it inequitable to enforce the claim against the defendant. In determining whether a party is guilty of laches, each case must be determined on its own particular facts. To successfully assert laches as an affirmative defense, a defendant must demonstrate prejudice occasioned by the delay.

MCL 600.5815 provides that the statutes of limitations apply equally to all legal and equitable actions, but also provides that “[t]he equitable doctrine of laches shall also apply in actions where equitable relief is sought.” The application of laches can shorten but never lengthen, the analogous statute of limitations. The doctrine of promissory estoppel means that: a promise which the promisor should reasonably expect to induce action or forbearance on the part of the promisee or a third person and which does induce such action or forbearance is binding if injustice can be avoided only by enforcement of the promise. The remedy granted for breach may be limited as justice requires. State Bank of Standish v Curry, 442 Mich 76, 83 (1993), quoting 1 Restatement Contracts, 2d, § 90, p 242.

The reliance must be reasonable, and it is only reasonable if it was based on an actual promise. To determine the existence and scope of a promise, we look to the words and actions of the transaction as well as the nature of the relationship between the parties and the circumstances surrounding their actions.A contract must be both procedurally and substantively unconscionable for it to be unenforceable. Hubscher & Son, Inc v Storey, 228 Mich App 478, 481 (1998). There is a two‐pronged test for determining whether a contract is unenforceable as unconscionable:

(1) What is the relative bargaining power of the parties, their relative economic strength, the alternative sources of supply, in a word, what are their options?;

(2) Is the challenged term substantively unreasonable?

In evaluating the unconscionability of a contract, reasonableness is the primary consideration. The theory underlying quantum meruit recovery is that the law will imply a contract in order to prevent unjust enrichment when one party inequitably receives and retains a benefit from another. Morris Pumps v Centerline Piping, Inc, 273 Mich App 187, 194 (2006). In order to prevail on a quantum meruit claim, a plaintiff must establish:

  • that the defendant received a benefit from the plaintiff, and
  • the defendant retained the benefit, which resulted in an inequity to the plaintiff.

Where an express contract exists between two parties, a quantum meruit claim regarding the subject matter of the contract is not appropriate. Morris, 273 Mich App at 199. The court, in equity, may grant complete relief to a party in the form of specific performance, including an award of damages. Reinink v Van Loozenoord, 370 Mich 121, 127 (1963). Ordinarily, tender of performance by the plaintiff is necessary before bringing an action for specific performance. Frakes v Eghigian, 358 Mich 327, 333 (1960).However, tender is not required where the defendant by his words or acts has shown that it would not be accepted. In Frakes (a real property case), the Court concluded that tender of performance was unnecessary where the defendant intentionally failed to attend several scheduled meetings at which the parties were supposed to close on the property. Frakes, supra at 333.