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Business Law and Litigation
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Contractual Terms that Impact Future Litigation: Issues pertaining to their validity
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by Gary K. August |
As
litigation costs rise and stories of runaway juries become more truth
then legend, parties are including in their contracts terms that seek
to control future litigation—arbitration clauses, jury waivers,
and forum selection clauses. Still other clauses are used to limit or
eliminate a party’s right to pursue litigation and potential damages—statute
of limitations clauses and waiver of damages clauses. Parties should be
aware of the viability of these terms at the outset of contract formation.
Jury Waivers and Arbitration Agreements Jury waivers forego a jury trial but do not remove the dispute from the court system. Utilization of a jury waiver may best balance the exposure associated with the runaway verdict potential of a jury trial with the risk associated with a non-appealable arbitration. The
right to a jury trial is woven through the fabric of the Common Law. The
Seventh Amendment of the United States Constitution preserves the right
to jury trial for common law claims exceeding 20 dollars. For matters
brought in federal court, the question of right to a jury is governed
by federal and not state law.1
The U.S. Sixth Circuit Court of Appeals in KMC Co v Irving Trust Co,
held that ‘‘parties to a contract may by prior written agreement
waive the right to a jury trial.’’2
However, the contractual waiver must be made knowingly and voluntarily.3
If the language of the express jury waiver is clear, the party objecting
to a jury waiver carries the burden of demonstrating that its consent
was not knowing and voluntary.4
The Seventh Amendment’s right to a civil jury trial has not been applied to the states by the Fourteenth Amendment.5 Michigan courts are governed by the jury trial provision of the Michigan Constitution of 1963, Article 1, Section 14. There is very little
case law in Michigan on the issue of whether jury waivers are valid.
The Michigan Supreme Court in McKinstry v Valley Obstetrics-Gynecology
Clinic, PC,6
upheld a medical malpractice jury waiver by determining that a right
to jury trial in a civil action is permissive, not absolute. McKinstry,
however, focused on the now repealed provisions of the Medical Malpractice
Arbitration Act (MMAA),7
which specifically allowed for the type of medical arbitration agreement
at issue in that case. Because of the MMAA, the Michigan Supreme Court
held that the defendant did not have the burden to prove that plaintiff
knowingly, intelligently, and voluntarily waived this right. Outside
of the context of the repealed MMAA, Michigan courts have not addressed
whether a ‘‘knowingly, intelligently and voluntarily’’
standard applies to jury waivers, and, if so, which party has the burden
to prove or disprove the standard.8
The Michigan Court of Appeals, however, has stated there does not appear
to be any basis to treat jury waivers under Michigan law differently
then jury waivers under federal law.9 Why are courts more willing to impose standards such as ‘‘knowing, intelligent, and voluntary’’ to jury waivers but not apply these standards to arbitration clauses that by their nature waive a trial by jury? The cynic may argue this is because an arbitration removes the matter from court, while a mere jury waiver keeps the matter in the court system for a bench trial—thereby not reducing in any way congestion on the court docket. In fact, the answer may lie in the statutory pronouncements of legislative public policy for arbitration not found with mere jury waivers. At both the state
and federal level, arbitrations are typically governed by the provisions
of the applicable arbitration acts. The Federal Arbitration Act (FAA)12
governs actions in both federal and state courts involving ‘‘a
contract evidencing a transaction involving commerce.’’13
The United States Supreme Court has held that the FAA Section 2’s
phrase ‘‘involving commerce’’ is the functional
equivalent of the phrase ‘‘affecting commerce,’’
which normally signals Congress’ intent to exercise the commerce
power to its fullest extent.14
Thus, as a result of the Supremacy Clause,15
the FAA preempts any state laws or policies that would otherwise invalidate
an arbitration provision so long as the transaction merely involves
commerce.16
This is significant due to Section 2 of the FAA, which states that an
arbitration clause ‘‘shall be valid, irrevocable, and enforceable,
save upon such grounds as exist at law or in equity for the revocation
of any contract.’’17 The
significance of the broad reading of the FAA and its preemption of state
law is that the FAA is the mechanism used by courts to enforce contractual
arbitration provisions otherwise invalid under state law. This is illustrated
in recent consumer law decisions.
The Michigan Court
of Appeals in Abela v General Motors Corp,18
not only found that arbitration provisions were allowable for claims
brought under the federal Magnuson-Moss Warranty Act,19
but also that the ‘‘FAA surmounts any state law that invalidates
agreements to submit claims to binding arbitration.’’20
Once this principle was established, the Abela court enforced the arbitration
provision at issue and dismissed the plaintiff’s claim brought
under the Michigan Lemon Law, MCL 257.1401, et seq.21 The
reasoning of Abela is certain to be applied to other state consumer statutes
that could be read to preclude arbitration agreements. Just six months
after the decision in Abela, the Michigan Court of Appeals in an unpublished
opinion in Gere v New Millennium Homes, Inc22
enforced a binding arbitration clause for claims brought under the Michigan
Consumer Protection Act,23
the Retail Installment Act,24
and the Michigan Mobile Home Warranty Act.25
Michigan courts are already enforcing arbitration clauses in the employment
and civil rights context.26
The Michigan Court of Appeals has even enforced an arbitration clause
in an attorney retainer agreement despite the agreement’s noncompliance
with informal ethics opinions interpreting the Michigan Rules of Professional
Conduct.27 It
appears that as long as an arbitration clause does not limit the remedies
otherwise available to plaintiffs, it will be enforced absent a contractual
basis for revocation.
Another common clause creeping up in contracts impacting future litigation is the forum selection clause. There are some basic principles to forum selection clauses that impact their validity. First and foremost,
the parties to the contract cannot empower a court to hear a matter
over which the court lacks jurisdiction.28
Second, if the matter is brought in federal court, federal, not state,
law determines the enforceability of the forum selection clause.29
Third, federal courts will consider a forum selection clause as a ‘‘significant’’
but ‘‘not dispositive’’ factor to be balanced
under 28 USC 1404(a).30
Finally, a plaintiff that files in a federal forum different than that
agreed to in the contract has the burden to demonstrate that the forum
selection clause should not be enforced.31 In
Michigan, parties to a contract may agree that the State of Michigan,
or another state, has jurisdiction over a matter if certain circumstances
are met. Pursuant to MCL 600.745(2), Michigan courts will entertain
actions brought in Michigan pursuant to an agreement so long as the court
has power to hear the case; Michigan is convenient; the agreement was
not obtained by misrepresentation, duress, the abuse of economic power,
or other unconscionable means; and the defendant is served with process
as provided in the court rules. Likewise, pursuant to MCL 600.745(3),
Michigan courts will dismiss or stay any action brought in Michigan courts
when a clause requires it to be brought in another state unless Michigan
courts are statutorily required to hear the matter; relief cannot be obtained
in another jurisdiction; the other state would be substantially less convenient;
the agreement was obtained by misrepresentation, duress, the abuse of
economic power, or other unconscionable means; or it would be unfair or
unreasonable to enforce the agreement.
While pre-dispute agreements determining jurisdiction are recognized by statute in Michigan, venue agreements are not. In Omne Financial, Inc v Shacks, Inc,32 the three-justice opinion of the Michigan Supreme Court stated that ‘‘contractual provisions establishing venue for potential causes of action that may arise after the contract is executed are unenforceable.’’ Three other justices concurred in the result in Omne Financial, but would have limited the holding by simply striking the venue selection term at issue under the improper venue statute, MCL 600.1651.33 Thus, the two opinions of the Michigan Supreme Court in Omne Financial illustrate that contractual determinations of venue will not be accorded the statutory deference of agreements involving jurisdiction. Under Michigan law,
the parties to a contract can agree to a limitations period shorter
than that proscribed by statute so long as the period of time is ‘‘reasonable.’’34
‘‘Reasonableness’’ is defined by the Michigan
Supreme Court as enough so ‘‘the claimants have sufficient
opportunity to investigate and file an action, that the time not be
so short as to work a practical abrogation of the right of action, and
that the action not be barred before the loss or damage can be ascertained.’’35
Where one party has less bargaining power than another, such as employment
contracts, the Michigan Supreme Court will apply ‘‘close
judicial scrutiny.’’36 In
Myers v Western-Southern Life Ins Co,37
the United States Sixth Circuit Court of Appeals held a contractually
agreed upon six-month limitation period for claims brought under Michigan’s
Elliott-Larsen Civil Rights Act and the Michigan Handicappers’ Civil
Rights Act to be reasonable. The Michigan Court of Appeals also upheld
a six-month limitation period for these statutes.38
The Michigan Supreme Court chose not to address this issue.39
In Lewis v Harper Hospital,40 the
United States District Court for the Eastern District of Michigan allowed
a six-month statute of limitations for the state law claims while holding
that a six-month statute of limitations for claims brought under Title
VII of the federal Civil Rights Act of 1964 (Title VII) and the federal
Family Medical Leave Act (FMLA) were not reasonable due to the EEOC procedure
under Title VII and the specific regulations under FMLA.
There
are many ways parties can seek to contractually limit damages arising
from breach. The most common one is a pre-injury release or limitation
on the amount of damages. For such a term to be valid it cannot be substantively
unreasonable, such as where the releasee has a monopoly on the services
at issue in the contract.41
Also, Michigan courts will allow a party to be released from its own negligence,
but the release will not be enforced if ‘‘(1) the releasor
was dazed, in shock, or under the influence of drugs, (2) the nature of
the instrument was misrepresented, or (3) there was other fraudulent or
overreaching conduct.’’42
Finally, a party cannot limit its liability for harm caused by its gross
negligence.43
There
are other specialized circumstances where waivers may or may not be allowed.
One such circumstance is a liquidated damages provision. This type of
provision seeks to fix the damages for breach at the outset of contract
formation. Liquidated damage provisions are allowed in situations where
actual damages are uncertain and difficult to ascertain or are of a purely
speculative nature.44
Another instance is ‘‘no damages for delay clauses’’
in construction contracts, which will be upheld unless certain specified
circumstances exist.45
While
courts and the legislature strive to make the judicial system more efficient,
private parties can effectively utilize these types of contract terms
to control future exposure from litigation.
1.
KMC Co, Inc v Irving Trust Co, 757 F2d 752 (CA 6, 1985).
2. Id. at 755. 3.
Id. at 756. The circuit court noted the distinction between a contractual
waiver entered into before any cause of action arose and a procedural
waiver under Fed R Civ P 38(d) which could result from mere oversight
or inadvertence. Id. at 756–57 n 4, 6; See Sewell v Jefferson
County Fiscal Court, 863 F2d 461, 464 (CA 6, 1988) (not applying
the voluntary and knowing standard to a procedural jury waiver).
4. Id. at 758. 5.
Knubbe v Sparrow, 808 F Supp 1295, 1302 (ED Mich, 1992).
6. 428 Mich 167, 183; 405 NW2d 88, 95 (1987). 7.
MCL 600.5041 et seq., repealed by 1993 PA 78, § 2.
8. The Michigan Supreme Court in Morris v Metriyakool, 418 Mich 423; 344 NW2d 736 (1984), also a case under the MMAA, implied in dicta that the burden of avoiding the jury waiver in all contexts would be on the party seeking to avoid it. 9.
See Feinberg v Straith Clinic, 151 Mich App 204, 214–16;
390 NW2d 697 (1986) (‘‘Although we are not bound by the Seventh
Amendment, we are aware of no reason why we should construe Const 1963,
art 1, Section 14 differently from its federal counterpart.’’).
10. Madison Dist Public Schools v Myers, 247 Mich App 583, 595; 637 NW2d 526 (2001); DeCaminada v Coopers & Lybrand, 232 Mich App 492, 496, 591 NW2d 364, 366 (1999). 11.
DeCaminada, supra at 500; 591 NW2d at 368 (‘‘an arbitration
clause is enforceable, regardless of whether a plaintiff is specifically
aware of its scope, unless the plaintiff can show grounds for revocation’’).
12. 9 USC 1-15. 13.
9 USC 2.
14. Allied-Bruce Terminex Cos v Dobson, 513 US 265 (1995). ‘‘Interstate commerce’’ is defined broadly. See Dempsey v Metropolitan Life Ins Co, unpublished opinion per curiam of the Michigan Court of Appeals, decided May 4, 1999 (Docket No. 208050); 1999 WL 33445202. 15.
US Const, art VI, cl 2.
16. DeCaminada, supra at 501; 591 NW2d at 368. 17.
9 USC 2. See Michigan Arbitration Act, MCL 600.5001(2).
18. 257 Mich App 513; 669 NW2d 271(2003). 19.
15 USC 2301, et seq
20. Abela, supra at 525. 21.
Id.
22. Unpublished opinion per curiam of the Michigan Court of Appeals, decided December 23, 2003 (Docket No. 242473); 2003 WL 23018774. 23.
MCL 445.903(1)(t).
24. MCL 445.864(1)(d) and (f). 25.
MCL 125.995.
26. See Rembert v Ryan’s Family Steak House, Inc, 235 Mich App 118, 156; 596 NW2d 208, 226 (1999). 27.
Watts v Polaczyk, 242 Mich App 600; 619 NW2d 714 (2000).
28. People v McKinnon, 139 Mich App 362; 362 NW2d 809 (1984); Magaloti v Ford Motor Co, 418 F Supp 430 (D Mich, 1976). 29.
Stewart v Ricoh Corp, 487 US 22 (1988); Viron Int’l
Corp v David Boland, Inc, 237 F Supp 2d 812, 818 (WD Mich, 2002).
30. Viron, supra at 816. 31.
Id. at 815.
32. 460 Mich 305, 319; 596 NW2d 591, 597 (1999) (emphasis in original). 33.
Justice Taylor did not participate in the decision since he participated
in the decision in the court of appeals.
34. Camelot Excavating Co, Inc v St Paul Fire & Marine Ins Co, 410 Mich 118, 127; 301 NW2d 275 (1981). 35.
Id.
36. Herweyer v Clark Highway Services, Inc, 455 Mich 14, 21; 564 NW2d 857, 860 (1997). 37.
849 F2d 259 (CA 6, 1988).
38. Timko v Oakwood Custom Coating, Inc, 244 Mich App 234; 625 NW2d 101 (2001). 39.
Bobo v Thorn Apple Valley, 587 NW2d 501 (Table) (Mich, October
27, 1998) (denying application for leave to appeal).
40. 241 F Supp 2d 769 (ED Mich, 2002). 41.
Allen v Michigan Bell Telephone Co, 18 Mich App 632, 640; 171
NW2d 689 (1969).
42. Xu v Gay, 257 Mich App 263, 273; 668 NW2d 166, 170 (2003). 43.
Universal Gym Equip, Inc v Vic Tanny Int’l, 207 Mich App
364, 369 (1995); Lamp v Reynolds, 249 Mich App 591; 645 NW2d
311 (2002).
44. Papo v Algo Restaurants, 149 Mich App 285, 294; 386 NW2d 177 (1986). 45. Most notably, these include situations where the delay (1) was of a kind not contemplated by the parties; (2) amounted to an abandonment of the contract; (3) was caused by bad faith on the part of the contracting authority; or (4) was caused by the act of interference of the other contracting party. Phoenix Contractors v General Motors Corporation, 135 Mich App 787, 792; 355 NW2d 673 (1984).
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 Gary K. August is a shareholder in the law firm of Zausmer, Kaufman, August & Caldwell, P.C. with offices in Farmington Hills and Lansing. Mr. August focuses his practice on construction law, commercial litigation, securities law, and insurance coverage issues. |
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