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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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