The BUSKLAW January Newsletter: Recent Court Decisions Prove It: Every Word in a Contract Has Meaning!

In contracts, words are weapons. A lawyer who effectively drafts contracts will make careful word choices because the client's fate often depends on it. And every word in a contract has meaning: two recent cases support that truth. 

First, we have Heimer v. Companion Life Insurance Co., a 6th Circuit Court of Appeals decision issued just a few days ago. One Beau Heimer got drunk with his friends, but they all decided to take their motorbikes off-road for even more fun. Unfortunately, Beau collided with one of his pals and suffered major injuries; the medical expenses to put Beau back into some semblance of order exceeded $200,000.00. Beau filed a claim with Companion Insurance, but they declined to pay. Why? Because the vehicle insurance policy that they issued to Beau contained an exclusion for the illegal use of alcohol

Beau's attorney was crafty. He argued that Beau didn't illegally use alcohol. Beau was not a minor and didn't drink in defiance of a court order. Beau was intoxicated for sure (twice the legal limit!), but this exclusion shouldn't apply to illegal post-consumption conduct, such as the illegal use of a motor vehicle. And the Court agreed, scolding Companion for not using specific policy language excluding coverage for claims where the insured is found to be legally intoxicated. 

The distinction between an insurance coverage exclusion for the illegal use of alcohol as opposed to being legally intoxicated may be splitting hairs, but it was enough to cost the insurance company big bucks for the failure to word the exclusion to match their intent. I bet that Companion's lawyer who drafted their policy will be more careful with his word choices in the future. 

The second case involving the impact of a few words was a 7th Circuit Appeals Court case: ADM Alliance Nutrition Inc. v. SGA Pharm Lab Inc. The parties were sophisticated businesses. SGA supplied ADM with a product used to make medicated animal feed. The parties ended their relationship by signing a termination agreement under which ADM agreed to release SGA and its officers from any and all claims, whether known or unknown. Here's the rub: after the termination agreement containing this release language was signed, ADM came to believe that SGA had misrepresented the potency of the product that SGA had supplied to ADM, so ADM sued SGA for breach of contract and fraud. SGA asked the court to dismiss the suit on the basis that the release was for claims both known or unknown.The Court agreed, finding that as between two businesses, this release language was effective to cover the unknown claims for fraud and breach of contract. 

Just because the phrase, known or unknown claims, is commonly used in a release agreement doesn't mean that ADM had to agree to it. They could have insisted on a specific description of the claims being released or simply refused to agree to the release of unknown claims. But they didn't, and they lost!

These two cases prove that every word in a contract means something. That's why contract-drafters must ponder every word and how it might relate to every eventuality. This is easier said than done, but who said that drafting effective contracts - especially using plain language instead of legal jargon - is a cinch?
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The BUSKLAW September Newsletter: No Judicial Sympathy for "Unreasonable" Contracts in Michigan


If you work with contracts, it's just a matter of time before a contract with an "unreasonable" provision is sitting on your desk. Perhaps this happened because your company didn't have enough bargaining leverage to get the other party to change the unreasonable provision, but your senior management directed you to proceed anyway. Or maybe the unreasonable provision snuck in during the heat of contract negotiation and wasn't noticed until months later. In any event, you're thinking about going to court and arguing that the unreasonable provision should be disregarded (or even invalidate the contract). What are your chances? 

In Michigan, you'll have an uphill battle, as the plaintiffs found out in the case of Rory v Continental Insurance Company CNA that was decided by the Michigan Supreme Court in 2005 and, to my knowledge, is still good law. The contract at issue was an auto insurance policy issued by Continental to Rory. (Yes, an insurance policy is a contract.) The contract contained a provision that all claims must be filed within one year after an auto accident. Rory filed his claim after one year, and Continental denied it for that reason. Rory sued to have the court throw out the one-year limitation as "totally and patently unfair."

The trial court judge agreed with Rory, and so did the Michigan Court of Appeals. But the Michigan Supreme Court reversed, and so ensued a lengthy discussion of the reasonableness contract doctrine. I'm pleased to pull that apart for you.

The Court found that there is no such thing as an "unreasonable" contract or on the flip side, that a contract must be "reasonable" to be enforceable. The Court affirmed the bedrock principle that the parties are free to contract as they see fit. And courts must enforce their agreement as written absent some highly unusual circumstance such as a contract in violation of law or public policy.  

But what about the argument that Rory had no bargaining leverage with Continental? Continental wouldn't have changed the one-year contractual limitation on filing a claim in their standard-form auto policy even if Rory had asked for it. So because the insurance policy was presented to Rory on a "take it or leave it" basis, isn't it an unenforceable "adhesion" contract?  This sounds like a plausible argument, but the Court balked at rejecting the insurance contract on that basis, holding that an adhesion contract "is simply a type of contract and is to be enforced according to its plain terms just as any other contract."  

So if unreasonable and adhesion contracts are enforceable in Michigan, what legal grounds can be used to negate a contract? According to the Court, a contract will be unenforceable under the following typical grounds:
If a party was fraudulently induced to sign the contract.
(Example: Seller, an art dealer, represents that he has the original de Grebber “King David in Prayer” oil painting, so you sign a purchase agreement for that painting. Unknown to you, it’s hanging in the London Gallery and not for sale.)
If a party entered into the contract under duress.
(Example: You're persuaded to sign a contract with a gun pointed at you.)
If the contract is against public policy or illegal.
(Example: You sign a contract for the sale of an illegal drug.)
OR
If a party to a contract is a minor (under 18).

The Court noted that Rory didn't assert any of these reasons for invalidating the insurance contract. Supporting the Court's decision (but not determinative of the result) was the Court's finding that the one-year limitation on filing a claim was acceptable because the Michigan Insurance Commissioner, who is charged with approving all form insurance contracts used in Michigan, approved the Continental policy containing that provision.

Lesson: You are probably stuck with your "unreasonable" contract if it's governed by Michigan law. If you need to get out of it, seek legal counsel to excavate for loopholes discuss your options. 
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If you find this post worthwhile, please consider sharing it with your colleagues. The link to this blog is www.busklaw.blogspot.com and my website is www.busklaw.com. Thanks!