In 2005, the Michigan Supreme Court issued a decision marking a significant point in Michigan jurisprudence. Rory v Cont’l Ins Co held that freedom of contract principles preclude courts from conducting their “own independent assessment of ‘reasonableness.’”¹ Unless contractual provisions explicitly violated public policy or the law, Rory held that contract provisions were to be upheld.²

In Rory, an insured brought an action for uninsured motorist benefits under an automobile insurance policy.³ However, the policy required that claims “must be brought within 1 year from the date of the accident.”⁴ While the court of appeals agreed with the trial court that a one-year period of limitations was unreasonable and that the statutory three year period should apply, the Michigan Supreme Court reversed. In emphatic language, the Court held that “an unambiguous contractual provision providing for a shortened period of limitations is to be enforced as written unless the provision would violate law or public policy.”⁵ The Court also held “[t]o the degree that Tom Thomas, Camelot, and their progeny abrogate unambiguous contractual terms on the basis of reasonableness determinations, they are overruled.”⁶

The Court then turned to the trial court’s conclusion that the policy was an adhesion contract, and therefore unenforceable. Here, too, the Rory Court was emphatic, holding, “[a] party may avoid enforcement of an ‘adhesive’ contract only by establishing one of the traditional contract defenses, such as fraud, duress, unconscionability, or waiver.”⁷

Finally, the Court in Rory held:

[I]t is of no legal relevance that a contract is or is not described as ‘adhesive.’ In either case, the contract is to be enforced according to its plain language. Regardless of whether a contract is adhesive, a court may not revise or void the unambiguous language of the agreement to achieve a result that it views as fairer or more reasonable.⁸

This case ushered in an era that sometimes became known as textualism, where unambiguous contracts were to be enforced as written. Rory indicated that “formalist concepts still have a place in modern contract law and jurisprudence” rejecting a “judge-made reasonableness limitation on notice of claims in the face of an unambiguous term.”⁹

This case was followed one day later with Devillers v Auto Club Insurance Association, in which the Michigan Supreme Court held that statutes are likewise to be enforced as written, absent a constitutional infirmity in the statute.¹⁰ There, the plaintiff had argued that the statutory provision that claims for certain benefits could not be pursued unless suit was filed within one year was subject to tolling, if the facts of a case demonstrated that fairness required such.¹¹ Yet the Michigan Supreme Court held, “[t]he one-year-back rule of MCL 500.3145(1) must be enforced by the courts of this state as our Legislature has written it, not as the judiciary would have had it written.”¹²

THE HOLDING IN RAYFORD: A NEW ERA

Twenty years later, the tide has seemingly turned. In Rayford v American House Roseville, I, LLC, the plaintiff, after beginning employment, was asked to sign a handbook including a clause that said that employment claims must be filed within 180 days.¹³ The plaintiff was dismissed from her position for various reasons and just under three years later, brought a claim alleging civil rights violations under MCL 37.2101.¹⁴ In the Michigan Supreme Court, the plaintiff argued that this clause was an adhesion contract (a take-it-or-leave-it contract that gave no realistic alternative) and was unconscionable.¹⁵ On both laims, the Court held that these were potentially viable defenses to enforcement of the limitation provision and remanded.¹⁶

Before ruling in favor of the plaintiff, the Court acknowledged Rory’s teaching that, “[w]hen a court abrogates unambiguous contractual provisions based on its own independent assessment of ‘reasonableness,’ the court undermines the parties’ freedom of contract.”¹⁷ However, the Court went on to hold the language in Rory to be nonbinding dicta because that Court was not purporting to adjudicate the enforceability of shortened limitations periods in employment agreements.¹⁸ Michigan Supreme Court Chief Justice Megan Cavanagh's concurring opinion took issue with the majority’s nonbinding dicta holding, explaining persuasively that the language in Rory was not dicta but rather applicable to all agreements.¹⁹ In all other respects, Justice Cavanagh agreed with the majority.

In a robust decision, the 5-person majority in Rayford held that, “[e]very law student is taught that an adhesion contract can be problematic.”²⁰ It defined an adhesion contract as a “standard-form contract prepared by one party, to be signed by another party in a weaker position, usu. a consumer, who must essentially either accede (adhere) to the terms or not have a contract at all.”²¹ In breathing new life to the adhesion contract defense, the Court stated, “[t]he focus of the analysis concerns the power dynamics of the two parties, with the stronger of the two using their advantage to impose their will on the weaker one. We have used our equitable powers to prevent abusive contractual practices.”²²

THE NEW REASONABLENESS TEST AND UNCONSCIONABILITY

In Camelot, the Michigan Supreme Court had earlier agreed with the court of appeals that “Michigan’s general statutory limitation provision does not prohibit shorter contractual limitations,” and that any contractually shortened limitation must be reasonable.²³ Given the reestablishing of Camelot by the Rayford Court, trial courts now must review a contractually shortened limitations period by requiring: “[1] that the claimant have sufficient opportunity to investigate and file an action, [2] that the time not be so short as to work a practical abrogation of the right of action, and [3] that the action not be barred before the loss or damage can be ascertained.”²⁴

The Court also clarified that traditional contract defenses, such as unconscionability, are also available defenses to avoid a contractual limitations provision.²⁵ One can argue that this case brings Michigan in alignment with extensive jurisprudence in other states. The Court in Rayford further held, “[i]ndeed, reviewing contractual provisions for reasonableness is the common rule in other jurisdictions–not the one-off, unworkable standard that the dissent makes it out to be.”²⁶

In turning to this second viable defense, unconscionability, the Court breathed new life into this doctrine:

Our Court’s concern with the power dynamics in contract negotiations is not a new phenomenon. More than 145 years ago, this Court explained that [p]arties may make and carry out any agreement they please which does not affect the public or the rights of third persons, but in case of dispute they must not expect the courts to enforce any unconscionable bargain they may have thought proper to make.²⁷

The Court continued,“[i]n other words, in order for a contract to be unconscionable, it must be procedurally and substantively unconscionable.”²⁸ “Procedural unconscionability exists when a weaker party has no ‘realistic alternative’ but to accept the term,” and “[s]ubstantive unconscionability requires courts to analyze the reasonableness of the challenged term. A contract provision is substantively unreasonable if the inequity shock[s] the conscience.”²⁹ The Court thus remanded the case to the trial court to determine “the reasonableness of the shortened limitations period and whether the provision is unconscionable.”³⁰

For years, Michigan employers have relied on standard employment applications, contracts, and handbook acknowledgments to impose 180-day limitations periods—well short of the statutory defaults (often three years). These provisions have been regularly upheld by the courts, until Rayford.

AUTOMATIC ENFORCEMENT NO LONGER GUARANTEED

Now, after Rayford, while employers and employees may still agree to shortened limitation periods, those provisions are no longer presumed enforceable—particularly when found in non-negotiated, boilerplate employment documents.³¹ The Court held that such contracts must undergo a fact-specific reasonableness analysis before being enforced, where unconscionability may also be used as a defense.³² This decision expressly overruled prior precedent, including Clark v DaimlerChrysler and Timko v Oakwood Custom Coating, which had upheld six-month limitation clauses without requiring a contextual or individualized review.³³

Dave Kotzian, Esq., an accomplished employment attorney, commenting on Rayford, stated that some restrictions on an employer’s ability to shorten the limitation periods for employment claims are necessary to preserve the protections established in Michigan’s employment civil rights laws.³⁴ However, he believes that both employers and employees would benefit from certainty as to what the limitation periods are, instead of litigating reasonableness on a case-by-case basis.³⁵ Indeed, he argues that in the absence of such bright lines, the Court should have ruled that shortened limitation periods for statutory employment claims are void as being contrary to the public policies expressed in such statutes.³⁶

Another accomplished employment attorney, Deborah Brouwer, Esq., weighed in and noted that while the Rayford Court emphasized that it was not holding that six-month limitation periods in employment cases were per se unreasonable, but are rather subject to a case-by-case analysis, the decision seemed to signal that in most cases, this Court would find exactly that.³⁷ She posited that this issue is no longer going to be resolved on pre-discovery motions to dismiss, as trial courts will have to sort through the analysis now required: is the agreement an adhesion contract? If so, what level of scrutiny should be applied, and is that the same as unreasonableness? Then, if it is reasonable, is it unconscionable? She concluded that, what remains unclear is how this analysis will apply to other provisions in employment contracts, such as arbitration clauses, which many courts – including the U.S. Supreme Court – seem to review as reasonable.³⁸

The Rayford decision could be the end of the road, where limitation period clauses in adhesive employment contracts are examined under stricter scrutiny. However, it is possible that Michigan could extend this analysis to other contracts, such as lease contracts, consumer contracts, arbitration agreements, or partnership contracts. Until we know for sure, one thing is clear: Rayford v American House Roseville, LLC, resets the law on how courts evaluate contractual provisions that shorten the statute of limitations for employment-related claims.