A Dismal Future for Contract Law in Michigan: Rory v Continental Insurance

A Dismal Future for Contract Law in Michigan: Rory v Continental Insurance

By Larissa Werhnyak, MPLP Law Clerk

A July decision by the Michigan Supreme Court, Rory v Continental Insurance Co, 473 Mich. 457 (2005) promises to profoundly impact the future of contract law in the state of Michigan.

In Rory, the Plaintiffs were involved in an automobile accident. It took approximately a year and a half to discover that the driver of the other vehicle was uninsured. Almost two years after the accident, Plaintiffs submitted a claim for uninsured motorist benefits. Plaintiffs had an insurance policy with the Defendant insurance company which included optional coverage for uninsured motorist benefits. Defendant denied the claim because it was not filed within one year of the accident, as required by the insurance policy. Plaintiffs sued the insurance company challenging Defendant's denial of benefits. Defendant filed a motion for summary disposition based on the one-year limitations provision in the contract.The trial court denied the motion, holding that the one-year limitations provision was unreasonable. Subsequently, the Court of Appeals affirmed, agreeing that the provision was unreasonable.

The Supreme Court, in an opinion by Justice Young, held that unambiguous contracts are to be enforced as written unless a provision violates the law or is subject to a traditional defense to enforcement. In reaching this decision, the Court virtually eliminated the ability of the courts to reformulate or void contractual provisions through the doctrines of reasonableness or based on the finding that the contract in question was one of adhesion.

The Supreme Court first considered the reasonableness doctrine in Michigan, and held that, absent violations of law or traditional contract defenses, a court must construe and apply unambiguous contract provisions as written, without consideration of whether they are "reasonable." The Court stressed that enforcing the plain language of agreements is the only way to preserve the freedom of contract. The Court also emphasized that "[a] mere judicial assessment of "reasonableness" is an invalid basis upon which to refuse to enforce contractual provisions. Only recognized traditional contract defenses may be used to avoid the enforcement of the contract provision." With this decision, the Supreme Court overruled all previous decisions which indicated a trend towards abrogation of contractual terms on the basis of reasonableness.

The Court next considered whether the contractually shortened limitations period violated the law or public policy of Michigan. Emphasizing that the Court had previously held that Michigan had no policy or statute prohibiting private parties from contracting for shorter limitations periods (Camelot Excavating Co, Inc v St Paul Fire & Marine Ins, 410 Mich. 118 (1981)) and that the legislature has provided a mechanism to ensure the reasonableness of Michigan insurance policies (namely, the requirement that Insurance Commissioner approve all policies), the Court held that the "explicit 'public policy' of Michigan is that the reasonableness of insurance contracts is a matter for the executive, not the judicial, branch of government." Therefore, it was improper for the lower courts to discard as "unreasonable" a policy provision deemed acceptable by the Commissioner.

Finally, the Court addressed the trial court's conclusion that the policy was an unenforceable adhesion contract. The Court noted that both the trial court and the Court of Appeals assumed that adhesion contracts are subject to a heightened level of judicial scrutiny. The Court disagreed with this view, holding that adhesion contracts are no different than any other contracts and should be enforced according to their plain meaning unless a traditional contract defense applies. In reviewing the case law surrounding the interpretation of adhesion contracts in Michigan, the Court found that any doctrine of interpreting adhesion contracts under heightened scrutiny was mere dicta until 1997, when the Court in Herweyer v Clark Hwy Services, Inc, 455 Mich 14, "implicitly adopted" the adhesion contract doctrine "without substantive analysis." The adoption of this doctrine, the Rory Court now found, was "without reference to and in contravention of more than one hundred years of contrary case law from this Court." The Court held that overruling Herweyer and holding that an adhesion contract is no different than any other contract was "most consonant with traditional contract principles our state has historically honored." Regardless of whether a contract is adhesive, a court cannot revise the language of the agreement to result in a fairer or more equitable provision.

While Rory involved an insurance contract, the Michigan Court of Appeals has begun to apply Rory in employment contract cases. A September Court of Appeals opinion, Clark v. Daimler Chrysler Corp., 2005 WL 2217106, held that the decision in Rory applied to employment contracts as well as insurance contracts. In Clark, a plaintiff alleging age discrimination had, in his employment application, agreed to a provision limiting the time for any claim or suit regarding his employment with the defendant to six months after the employment action was taken. Following Rory, the Court of Appeals enforced the six-month limitations provision. In October, the Court of Appeals in Mayes v. Daimler Chrysler, 2005 WL 2562780 cited to both Rory and Clark for the proposition that a limitations provision in an employment application must be upheld without judicial consideration of reasonableness or of the adhesion doctrine. In light of Clark and Mayes, it seems likely that Rory will not be limited in its application and will be binding law for consideration of contracts of every sort.