A couple of recent Michigan Supreme Court cases again apply the Court's favored rule of textualism, this time in the context of disputes over contractual language. Each case has made a major modification to one of the common-law rules that apply to the interpretation of contracts, and each again highlights the difficulty of determining what is and what is not ambiguous.
In Klapp v. United Group Agency, Inc., the plaintiff sued for unpaid "retirement renewal commissions" on policies he had sold for the defendant. The language in question required that the employee reach age 65 and have worked for the agency for 10 years before such commissions would be paid, but also provided for partial vesting of entitlements after two years of service and 100% vesting after seven years. The rulings of the Courts at all levels were:
- The trial court ruled that the contract was ambiguous and that the jury could use extrinsic evidence to resolve the ambiguity.
- The Court of Appeals found that there was no ambiguity.
- The Supreme Court agreed with the trial court that the language was ambiguous.
The contract had a vesting schedule which provided that renewal commissions would be 100% vested after seven years, and a separate provision which provided that "vesting for retirement" would be age 65 with ten years of service. The Supreme Court found that these two provisions were irreconcilably in conflict, and reversed the Court of Appeals' determination that the provision was unambiguous.
For the guidance of the trial court on retrial, the Court then made additional rulings. It noted that the standard that is to be applied is that the court will interpret contract language which is unambiguous, but that the jury must resolve ambiguities of the contract language. The jury was to consider extrinsic evidence, such as (quoting from an earlier case), the conduct of the parties, their statements, and "past practice".
The Court then addressed the common-law rule of contra proferentem, the rule under which any ambiguities are to be resolved against the party drafting the contract. The Court ruled, for the first time in this state, that the rule of contra proferentem is to be used only as a last resort, if the jury cannot resolve the conflict by the use of extrinsic evidence. It stated,
In other words, the rule of contra proferentem should be viewed essentially as a "tie-breaker," to be utilized only after all conventional means of contract interpretation, including the consideration of relevant extrinsic evidence, have been applied and found wanting.
The Court noted that the Reporter's Note to the Restatement of Contracts, section 206, states that the rule of contra proferentem "is the last one to be resorted to, and never to be applied except when other rules of interpretation fail." Respected texts on contracts state likewise.
The Court commented:
"The rule of contra proferentem is a rule of last resort because, 'The primary goal in the construction or interpretation of any contract is to honor the intent of the parties,' Rasheed v Chrysler Corp, 445 Mich 109, 127 n 28; 517 NW2d 19 (1994), and the rule of contra proferentem does not aid in determining the parties’ intent. Instead, the comments after the restatement refer to the rule of contra proferentem, not as a rule of interpretation, but as 'a rule of legal effect.' 2 Restatement, supra at 105. It is a rule of legal effect, rather than a rule of legal interpretation, because its purpose is not to render more accurate or more perfect a jury’s understanding of the meaning of the contract, but is merely to ascertain the winner and the loser in connection with a contract whose meaning has eluded the jury despite all efforts to apply conventional rules of interpretation."
Justice Weaver, concurring, would find that the rule of contra proferentem should be the primary rule of construction in those cases in which the contract was not negotiated between the parties but was rather drafted in its entirety by one party.
In Wilkie v. Auto-Owners Insurance Company, the plaintiff sought benefits under the defendant's underinsured motorist coverage. The motor vehicle accident in question had involved a negligent driver who had $50,000 in coverage. The Auto-Owners policy provided underinsured protection to its insured up to $100,000, thus in this case providing an additional $50,000 in coverage. The estate of the negligent driver, however, had paid its limits by paying $25,000 each to another driver, Frank, and to the estate of Wilkie, the named insured of Auto-Owners. The Wilkie estate then claimed entitlement to $75,000, the difference between the $25,000 it received from the estate of the tortfeasor and the coverage limit. Frank, who was also an insured, sought the same amount.
The Court of Appeals found that the contract was ambiguous because it failed to specify how the setoff was to be applied. It also found that the result was compelled by the "reasonable expectations" of the insureds.
In the present legal environment in this state, using a phrase like "reasonable expectations" is like waving a red flag before a bull. When it hears such phrases, the Supreme Court starts snorting and pawing the ground, getting ready to skewer someone on its horns.
The underinsured endorsement contained an agreement to pay damages to the insured which the insured would be entitled to recover if not for the insufficiency of liability insurance covering the negligent driver. This coverage, which is complementary to uninsured coverage, provides that the amount it must be responsible for is the amount by which the $100,000 per person limit "exceeds the total limits available to the owner or operator of the underinsured vehicle". Another paragraph states that the amount of coverage will not be increased on account of the number of persons involved or the number of claims made.
The Supreme Court found that there was no ambiguity in the language used. The negligent driver had a total of $50,000 "available to him" for liability coverage, and that is the figure which it held should be used. The amount which is paid to the claimant is not relevant, it ruled, because the contract does not say that the amount "available to" him is in any way involved. Even if that language were considered ambiguous, the Court ruled that the additional language precluding any increase by virtue of the number of claims or the number of claimants would "settle any perceived ambiguity".
The Court waxed eloquent in rejecting the Court of Appeals' reliance on "reasonable expectations". It said,
This approach, where judges divine the parties’ reasonable expectations and then rewrite the contract accordingly, is contrary to the bedrock principle of American contract law that parties are free to contract as they see fit, and the courts are to enforce the agreement as written absent some highly unusual circumstance, such as a contract in violation of law or public policy. This Court has recently discussed, and reinforced, its fidelity to this understanding of contract law in Terrien v Zwit, 467 Mich 56, 71; 648 NW2d 602 (2002). The notion, that free men and women may reach agreements regarding their affairs without government interference and that courts will enforce those agreements, is ancient and irrefutable. It draws strength from common-law roots and can be seen in our fundamental charter, the United States Constitution, where government is forbidden from impairing the contracts of citizens, art I, § 10, cl 1.13 Our own state constitutions over the years of statehood have similarly echoed this limitation on government power. It is, in short, an unmistakable and ineradicable part of the legal fabric of our society. Few have expressed the force of this venerable axiom better than the late Professor Arthur Corbin, of Yale Law School, who wrote on this topic in his definitive study of contract law, Corbin on Contracts, as follows:
One does not have "liberty of contract" unless organized society both forbears and enforces, forbears to penalize him for making his bargain and enforces it for him after it is made. [15 Corbin, Contracts (Interim ed), ch 79, § 1376, p 17.]
In contrast to this legal pedigree extending over the centuries, the rule of reasonable expectations is of recent origin. Moreover, it is antagonistic to this understanding of the rule of law, and is, accordingly, in our view, invalid as an approach to contract interpretation.
After an extensive review of other Michigan cases involving the rule, including one which came close to mimicking Calfornia by suggesting that it could be applied even without an ambiguity in the contract language, the Court concluded:
Viewing the puzzling thirty-three-year history of the rule of reasonable expectations in Michigan, we are confronted with a confused jumble of ignored precedent, silently acquiesced to plurality opinions, and dicta, all of which, with little scrutiny, have been piled on each other to establish authority. At no point has an effort been made to establish priorities among the competing holdings. To bring order to this area of the law, it falls on us today to clearly articulate the status of the rule of reasonable expectations in this jurisdiction.
The rule of reasonable expectations clearly has no application to unambiguous contracts. That is, one’s alleged "reasonable expectations" cannot supersede the clear language of a contract. Therefore, if this rule has any meaning, it can only be that, if there is more than one way to reasonably interpret a contract, i.e., the contract is ambiguous, and one of these interpretations is in accord with the reasonable expectations of the insured, this interpretation should prevail. However, this is saying no more than that, if a contract is ambiguous and the parties’ intent cannot be discerned from extrinsic evidence, the contract should be interpreted against the insurer. In other words, when its application is limited to ambiguous contracts, the rule of reasonable expectations is just a surrogate for the rule of construing against the drafter.
* * *
In sum, the rule of reasonable expectations clearly has no application when interpreting an unambiguous contract because a policyholder cannot be said to have reasonably expected something different from the clear language of the contract. Further, it is already well established that ambiguous language should be construed against the drafter, i.e., the insurer. Therefore, stating that ambiguous language should be interpreted in favor of the policyholder’s reasonable expectations adds nothing to the way in which Michigan courts construe contracts, and thus the rule of reasonable expectations should be abolished.
The rights and duties of parties to a contract are derived from the terms of the agreement. As this Court has previously stated, "The general rule [of contracts] is that competent persons shall have the utmost liberty of contracting and that their agreements voluntarily and fairly made shall be held valid and enforced in the courts." Under this legal principle, the parties are generally free to agree to whatever they like, and, in most circumstances, it is beyond the authority of the courts26 to interfere with the parties’ agreement. Respect for the freedom to contract entails that we enforce only those obligations actually assented to by the parties. We believe that the rule of reasonable expectations markedly fails in this respect. . . Accordingly, we hold that the rule of reasonable expectations has no application in Michigan, and those cases that recognized this doctrine are to that extent overruled. [all cites omitted]
Thus, with these two new cases, the Court has consigned the rule of "reasonable expectations" to the dustbin, and has sent the rule of contra proferentem to the back of the line.
Commentary -- I am amused when I hear high-sounding rhetoric extolling "the right to contract" as one of our basic freedoms in a case involving an insurance policy. In my view, a contract is an agreement between two or more people, threshed out between them and constituting their private law -- their agreement as to the governing rules which should apply to their relationship and their financial arrangements. The security and integrity of such a contract is, I agree, a "bedrock principle" of our laws.
An insurance policy, a shrinkwrap software agreement, an EULA, a residential lease, or the provisions that accompany the purchase of a consumer product, the rental of a car, and the like, do not in my opinion deserve to be called "contracts". I would characterize such provisions instead as the "terms and conditions" which accompany the transaction. The buyer is free to buy or not buy, but he is typically not free to negotiate the provisions or even in most cases to offer more money for better terms.
A set of rules and requirements that are submitted by one party to another, "take it or leave it", constitutes a set of "terms and conditions", nothing more. It should not by any means be given the dignity of the word "contract". It should be enforced, yes, but in certain respects the rules of enforcement will be somewhat different.
5:25:42 PM 
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