“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). “An implied contract must also satisfy the elements of mutual assent and consideration.” Id.
“[W]here a party endeavors to prove only that some express condition contained in a written contract actually occurred [or did not occur],” the burden of proof is preponderance of the evidence. Stein v Home-Owners Ins Co, 303 Mich App 382, 390-391 (2013). Clear and convincing evidence is required in the following situations:
•to demonstrate a waiver or modification of an existing contract;
•to establish an oral contract when one party has acted in reliance on the contract and the statute of frauds would normally serve to bar the contract;
•to establish a basis for reforming a contract; or
•to establish the contents of a lost contract. Stein, 303 Mich App at 390 (citations omitted).
“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.” DeVries v Brydges, 57 Mich App 36, 41 (1974).1
“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.” Gortney v Norfolk & Western R Co, 216 Mich App 535, 540-541 (1996) (internal citations omitted).
“Where a contract is to be construed by its terms alone, it is the duty of the court to interpret it; but where its meaning is obscure and its construction depends upon other and extrinsic facts in connection with what is written, the question of interpretation should be submitted to the jury, under proper instructions.” Klapp v United Ins Group Agency, Inc, 468 Mich 459, 469 (2003) (quotation marks and citation omitted).
Generally, the language of a contract is to be construed against its drafter. Petovello v Murray, 139 Mich App 639, 642 (1984). 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. Klapp, 468 Mich at 472.
“[W]here there are definite indications in the law of some contrary public policy, the contract provision must yield to public policy.” Bronner v Detroit, 507 Mich 158, 166 (2021) (quotation marks and citations omitted).
1.Generally
“Parol evidence of contract negotiations, or of prior or contemporaneous agreements that contradict or vary the written contract, is not admissible to vary the terms of a contract which is clear and unambiguous.”Hamade v Sunoco, Inc (R&M), 271 Mich App 145, 166 (2006) (alteration, quotation marks, and citation omitted).
2.Exceptions to the Parol Evidence Rule
The parol evidence rule has four exceptions. UAW-GM Human Resource Ctr v KSL Recreation Corp, 228 Mich App 486, 493 (1998). “[E]xtrinsic evidence is admissible to show (1) that the writing was a sham, not intended to create legal relations, (2) that the contract has no efficacy or effect because of fraud, illegality, or mistake, (3) that the parties did not integrate their agreement or assent to it as the final embodiment of their understanding, or (4) that the agreement was only partially integrated because essential elements were not reduced to writing.” Id.
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. UAW-GM Human Resource Ctr, 228 Mich App at 502.
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. Culver v Castro, 126 Mich App 824, 827 (1983).
A court may consider parol evidence where there is evidence that a latent ambiguity2 exists in the language of a contract. Shay v Aldrich, 487 Mich 648, 676 (2010). “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.” Id. at 668.
Certain types of agreements are required to be in writing. See MCL 566.132 (general statute of frauds). See also MCL 566.106, 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 contract to be in writing; “a note or memorandum of the . . . contract” is sufficient if “signed with an authorized signature by the party to be charged with the . . . contract[.]” 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 Indus Prod, 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.’” Id., 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 pursuant to MCL 566.132(2), which provides:
“A person shall not bring an action 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” than the protection generally afforded under MCL 566.132(1). Huntington Nat’l Bank v Daniel J Aronoff Living Trust, 305 Mich App 496, 509 (2014). “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 to present a series of documents—some signed and others 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.” Id. at 511.
A loan modification agreement was unenforceable under MCL 566.132(2) where the plaintiffs attempted to enforce the written agreement by “relying on many documents, including the letters defendant sent to plaintiffs that detail[ed] the modification process and the loan-modification agreement itself,” because none of the writings were “‘signed with an authorized signature.’” Rodgers v JPMorgan Chase Bank NA, 315 Mich App 301, 308 (2016), quoting MCL 566.132(2). Accordingly, “the statute of frauds bar[red] any claim, regardless of its label, by plaintiffs to enforce any purported agreement,” including the plaintiffs’ claims of breach of contract, breach of the implied covenant of good faith and fair dealing, and estoppel. Rodgers, 315 Mich App at 309.
Additionally, a note or memorandum of an agreement “to pay a commission for or upon the sale of an interest in real estate” is not sufficient to satisfy the statute of frauds in an action brought “against the owner or purchaser of the real estate[.]” MCL 566.132(3).
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 rescission absent fraud, artifice, or deception, Moffit v Sederlund, 145 Mich App 1, 8 (1985), nor is it a defense to enforcement, 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.” Gortney v Norfolk & Western R Co, 216 Mich App 535, 540 (1996). Just because the parties disagree about the meaning of the release does not mean it is ambiguous. Id.
Where there is evidence that a latent ambiguity3 exists with respect to the intended scope of a release, a court may consider parol evidence regarding that scope. Shay v Aldrich, 487 Mich 648, 676 (2010).4
Third-party beneficiary rights are governed by MCL 600.1405. “Any person for whose benefit a promise is made by way of contract . . . 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.” Id.
Whether a party is a third-party beneficiary under the terms of a release agreement is determined objectively. Shay v Aldrich, 487 Mich 648, 675 (2010).5 However, where there is a latent ambiguity6 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. Id. (Emphasis added.)
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.” Shay, 487 Mich at 666. 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.” Id.7
“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.” Schmalfeldt v North Pointe Ins Co, 469 Mich 422, 428 (2003). See also MCL 600.1405. Only intended beneficiaries, not incidental, “may sue for a breach of a contractual promise in their favor. Schmalfeldt, 469 Mich at 427. 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. Schmalfeldt, 469 Mich at 428. Further, a third-party beneficiary must plead facts demonstrating his or her status as a named beneficiary of a contract in order to recover under the contract. Maki Estate v Coen, 318 Mich App 532, 544 (2017) (rejecting the plaintiff’s argument that the defendants knew that their services were for the plaintiff’s benefit because “mere knowledge of a benefit to a third party is not enough”).
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. Kisiel v Holz, 272 Mich App 168, 171 (2006). “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.” Id. As a result, a property owner generally cannot sue for breach of contract a subcontractor who performed work on the property owner’s property. Id. at 172.
However, 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 bargain—to place him in a position equivalent to that which he 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 could have avoided by reasonable effort or expenditure. He has a duty to do whatever may reasonably be done to minimize his 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, and the defendant has the burden of proving that the plaintiff failed to do so. Lawrence v Will Darrah & Assoc, Inc, 445 Mich 1, 15, 15 n 18 (1994).
J.Equitable Remedies in Contract Actions
The equitable remedies of rescission, promissory estoppel, specific performance, and quantum meruit are discussed in Section 9.6 of this benchbook.
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. Triple E Produce Corp v Mastronardi Produce, Ltd, 209 Mich App 165, 177 (1995).
1 See Section 9.4(D) for information on parol evidence.
2 “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) (quotation marks and citations omitted).
3 “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) (quotation marks and citations omitted).
4 See Section 9.4(D)(2) for information on parol evidence and further discussion of the Shay case.
5 See Section 9.4(G) for information on release agreements.
6 “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) (quotation marks and citations omitted).
7 See Section 9.4(C) for information on contract construction.