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Commercial Law Reporter
A Publication Devoted to Commercial Law and Intellectual Property Issues
June 2011
Managing Editor: Karen Libertiny Ludden
Co-Editors: Robert D. Goldstein and Mark Shreve

• Even Unambiguous Contracts Must Satisfy the Law
• Our Practical Advice Column: What You Need to Know About… Arbitration Clauses
• Commercial law update:  Court of Appeals Vacates Judgment Ordering a Golf Course to Be Sold to Satisfy Construction Liens

 

Even unambiguous contracts must satisfy the law
by:  James R. Lilly

A court’s primary goal in interpreting a contract is to honor the intent of the parties. But even when the intent is expressed clearly and unambiguously, it still must not conflict with the law, or courts will not enforce it.

A contract and a related statute are construed together; as though the statute were a part of the contract. When a conflicts arises, the court will attempt to interpret the contract in a way that renders it legally enforceable and consistent with the presumed intent of the parties. This is not always possible, however, and such conflicts can dramatically influence enforcement of the contract, as the following two decisions demonstrate.

Employees Only, Inc., v. Provenzano, 2011 WL 1687 627 (Mich App)(unpublished), addressed a Client Services Agreement between Employees Only, Inc. (EOI) and CCS, LLC., under which EOI agreed to handle administrative tasks for CCS, including the issuance of wage and benefit payments to CCS employees. In an effort to insulate EOI from the repercussions of CCS’s failure, the Agreement provided that CCS’s officers would remain liable should CCS be unable to meet its financial obligations, and that CCS “agrees that as co-employer, its officers shall be personally liable for amounts not paid under this Agreement….” CCS stopped making payments to EOI and ultimately went out of business. EOI filed suit against Mark Provenzano, the officer that executed the contract on behalf of CCS.

The Michigan Court of Appeals did find that the contract unambiguously established an intent to hold Provenzano personally liable for CCS’s obligations, and further observed that Provenzano was deemed to have read and understood the contract terms. Provenzano, however, argued that he had signed the Agreement solely in his representative capacity – as an officer of CSC – and, therefore, could not be held personally liable. The Court concurred, finding that Provenzano’s agreement to be responsible for CCS’s liability was a “special promise,” governed by the Statute of Frauds, and a “special promise” is null and void unless it is “in writing and signed with an authorized signature” by the party assuming the obligation. MCL § 566.132(1)(b).

Because the Agreement did not provide for a second signature block confirming Provenzano’s acceptance of personal liability, the Court refused to enforce it. The Court concluded that, where a contract provides for personal liability of a corporation’s officer, but the officer signs in a representative capacity and does not acknowledge personal liability through a separate signature, liability will exist only where a fact finder determines such intent when the contact was executed.

The plaintiff in Lofts on the Nine, LLC v. Akey, 2011 WL 475458 (Mich. Ct. App. Feb. 10, 2011) (unpublished), had hired a licensed residential builder to construct 36 residential condominium units. The defendants each entered into “Residential Construction Contract and Purchase Agreements” with Plaintiff, identified as the “Builder/Developer,” for the purchase of condominium units once construction was completed. The condominiums were completed the following year, at which time both defendants had a change of heart, refusing to close on their respective condominiums. Plaintiff thereupon commenced two separate actions for breach, requesting specific performance of the purchase obligations.

The term “residential builder” is defined by statute as a person engaged in construction and, for compensation, undertakes or purports to have the capacity to undertake the construction. MCL § 339.2401(a). Further, an unlicensed builder “shall not bring or maintain an action . . . for the collection of compensation for the performance of an act or contract for which a license is required by this article ….” MCL § 339.2412(1).

Plaintiff argued that it was in substantial compliance with the law because a licensed residential builder had been retained to perform the construction. The Michigan Court of Appeals found that this was insufficient and the purchase agreement was unenforceable because Plaintiff was identified as the “Builder/Developer” but was not, in fact, a licensed residential builder. The court so held despite acknowledging that, where the contract had been complied with in all other respects, such enforcement bestowed a substantial windfall to the party claiming the defense.

Measure twice, cut once. The law presumes that a party has read a contract he or she signs, understands the terms, and had the intention manifested by its terms. So take the time to ensure that your agreement sufficiently memorializes your actual intent and does not contravene the law, or be prepared to have your meaning disregarded. And don’t overlook the “obvious” provisions, such as the identity of the contracting parties.

Mr. Lilly is an attorney in the Troy office of Garan Lucow Miller who handles commercial litigation cases and contract disputes. You can reach him by telephone, at(248)6417600/(800)875-7600, or jlilly@garanlucow.com

What you need to know about… arbitration clauses
by: Karen Libertiny Ludden

Companies are increasingly including mandatory arbitration clauses in their pre-printed contracts. What does it mean? Should you include one in your own contract? Should you sign someone else’s contract if it contains one?

Arbitration is a dispute resolution method that circumvents normal court proceedings but still results in a binding, and usually non-appealable, result. Instead of a judge and/or jury resolving your case, a single arbitrator, or a panel of three arbitrators, hears all the evidence and decides the case in a single hearing that, at least in theory, takes less time and money than a full-blown trial. Likewise, instead of taking the depositions of anyone who might possibly have information on the case, depositions often do not occur at all, or are much more limited in number, duration and scope.

Arbitration is useful when it serves its original purpose of limiting the litigation costs associated with depositions, document reviews, court appearances, and motion practice. Particularly with sophisticated parties, or those with knowledgeable attorneys, arbitration is a good tool for streamlining and resolving a dispute.

One of the shortcomings of arbitration these days, however, is that it has become increasingly expensive and, with a complex matter, can be nearly as expensive as full-blown litigation. More importantly, arbitration lacks the traditional tools of discovery that come in handy, particularly when a party is playing a shell game with discovery. The arbitrator has sole authority to decide what evidence and testimony is crucial to the case and, if you fail to persuade why such evidence must be produced, can deny your request, with little recourse.

Moreover, giving up the right to a jury requires a good deal of thought. Jury trials can be lengthy and expensive affairs, but they often result in good verdicts, particularly when you are David, and the other party is Goliath. Arbitrations are more likely to lead to a “middle of the road” result that averages out the positions of the parties, whereas jury trials are much more likely to lead to a home run, in either direction.

So, in deciding whether you want to include an arbitration clause, consider what types of disputes you might face in the future, where they might occur, and whether you want to waive your right to a jury in favor of a less expensive, but likely more compromised result. Consider the level of arbitration experience in your attorney, and the sophistication level of both yourself and any potential adversary. In the end, an arbitration clause can be the best decision you ever made, or the worst.

Ms. Ludden is an attorney in the Troy office of Garan Lucow Miller who handles complex commercial litigation cases and arbitrations. You can reach her by telephone, at (248)6417600/(800)875-7600, or kludden@garanlucow.com

Commercial Law Update
COURT OF APPEALS VACATES JUDGMENT ORDERING A GOLF COURSE TO BE SOLD TO SATISFY CONSTRUCTION LIENS

On April 19, 2011, the Michigan Court of Appeals ruled that the trial court’s order that a Washington Township golf course be sold to satisfy a construction lien be vacated.

The dispute arose in the context of a March 14, 2005 land contract for the purchase of a golf course. The land contract was set to mature in September 2008. In April 2006, various contractors and subcontractors performed infrastructure and asphalt improvements, including water, sanitary sewer, storm sewer, and paved golf cart paths. There was no dispute that these entities were not fully compensated for their services. They filed liens. On November 2, 2009 the circuit court found that three particular contractors maintained superior liens and that the golf course be sold to satisfy those liens.

The Court of Appeals reversed on the ground that, after the judgment of possession was entered, the liens attached only to the improvements of the property only, not the whole golf course. Two of the contractors argued that, since the improvements made were to infrastructure, for example, the golf cart paths, they could not be removed to satisfy the lien. The Court responded that, since the foreclosure on the improvement to the land is not the only legal remedy available, it would not change its holding. Amongst other remedies, the Court commented that the contractors could pursue a claim for unjust enrichment, or could have contracted for other remedies when it entered into the contract.

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