Don’t Sign Away Unrelated Rights on Release Agreements

In all aspects of business and contracting, but especially after a lawsuit has been filed or threatened, one party may approach the other party with a comprehensive release agreement as part of a settlement of the dispute.     A release agreement is a form of contract wherein the party who has allegedly committed the wrong requests a written release of the claim from the aggrieved party in exchange for a settlement payment.    The release may be specific to the claims involved in the dispute, or it may be a “general release” of all claims of all types between the parties.  Once the claim is released, the agreement is binding on both parties, and the claim is rendered inactionable.   The terms of the release are negotiable.  Just because you didn’t author the document does it mean you do not have a say in what claims you are releasing.

Here is a scenario where a general release was used, which demonstrates the importance of reviewing the specific language used.   The example comes from the recent case of Levy v Ford Motor Company (Click here for a PDF of this decision).   Party A had a history of contracting with Party B for delivery of construction materials and services. In October 1998, an incident occurred involving a truck owned by Party A and a train owned by Party B. Each party maintained that the other was responsible. Party B issued a debit memorandum in 2001, and thereafter stopped paying invoices to offset its alleged losses from damage to its train.   In connection with other contracts, Party A sued Party B for payment for ready-mix concrete shipped after May 2004. The parties settled that case, and their agreement included a release that comprehensively waived any further claims Party A might have against Party B “from the beginning of time,” but “with the sole exception of any claim arising out of damage to the train equipment.

In 2007, Party A filed an action as a claim for payments due under invoices dating from “2001 and before” in connection with deliveries of materials to Party B.  Party A sought monetary contract damages plus an accounting.   However, the Court held that Party A had already released any and all claims it might have otherwise had against Party B arising from events prior to 2004, despite the fact that the claims were not related to the train accident. Because of the comprehensive language and nature of the release it had signed in the first settlement, Party A wound up releasing any and all claims it could have had against Party B, despite the fact the causes of action were completely different.

Always have an attorney review your settlement and release documents to ensure you are preserving valuable rights and not being taken advantage of in the settlement.

This article was written by Michael R. Dorfman, Senior Associate at Demorest Law Firm.

Statute of Limitations Set by Contract

Unless the parties agree otherwise, the Statute of Limitations for a breach of contract claim in Michigan is six years.   However, the parties may agree by contract to a shorter limitations period.   A court would not enforce a one day or one week limitations period, but a contractual limitations period as short as one year has been regularly enforced by the Michigan courts.

The Michigan Court of Appeals continued this trend on September 29, 2009, when it issued its decision in Siuda v Tobin. The contract for purchase of a modular home stated that any claim had to be filed no more than one year from the date of sale of the home, rather than the normal six years.  The purchasers claimed that the home was damaged during construction, but failed to bring suit until three years after construction began.  The Court of Appeals rejected all of the purchasers’ arguments against the enforcement of the shortened Statute of Limitations.

You should review the forms and contracts that your company uses, and decide whether to shorten the time period that your customers or suppliers have to bring a lawsuit.  On the flip side, if you have a potential lawsuit, you need to review the contracts to make sure how long you have to bring a claim.   Don’t simply assume that the Statute of Limitations has not been modified.

Click to Download Case from Michigan Court of Appeals in PDF Format

This article was written by Mark S. Demorest, Managing Member of Demorest Law Firm

Beware the “Choice of Law” Provision

Do you realize that many of the contracts, equipment leases and loan documents that you have signed would require a Michigan judge to use other States’ laws in deciding lawsuits rather than Michigan’s?

This is because many contracts contain a “choice of law” or “governing law” provision, by which the parties choose to apply the law of one particular state to govern their contract.  A choice of law provision may affect the outcome of a lawsuit if the law of the chosen state differs from Michigan law on a key issue.

When reviewing a proposed contract before signing it, it is essential to read and understand the entire contract.  This is not just the price or the interest rate.  It also includes the general provisions at the end or on the back of the page—otherwise known as the “fine print” or “boilerplate”.

Many companies do business in multiple states.  For them, it is important to have certainty about what their contracts mean.  As a result, their standard contracts will contain a choice of law provision.  In addition, they may choose the law of a state that is most favorable to them — such as the law of a state that allows lenders to charge higher interest rates without violating usury laws.

If the law of Michigan doesn’t differ from the law of the chosen state on any important issue for the contract, then the choice of law provision is moot.  If, however, there is an important difference, then the party being asked to accept the choice of law provision has three options:  (1) Negotiate to change the contract; (2) Refuse to sign the contract containing the choice of law provision; or (3) Sign the contract knowing that it contains that provision and its implications.  If you are dealing with a much bigger company, they may not be willing to alter their standard contract.  You need to go into the transaction with a full understanding of its terms, so you are not surprised when a dispute arises.

The Michigan courts will normally enforce a choice of law provision, with two major exceptions:

1. The chosen state must have some relationship to the transaction, such as one of the states being based there, or part of the transaction being performed there.  A choice of law provision may not be enforced if two Michigan companies, with a transaction to be performed in Michigan, try to choose the law of some other state for the purpose of avoiding the application of a Michigan law.
2. A Michigan court may also refuse to enforce a choice of law provision if that would violate Michigan public policy.  In other words, if the result would be contrary to an important Michigan law, and Michigan has a greater interest in the outcome than the state whose law was chosen by the parties, the Court may disregard the choice of law provision.  This does not occur very often, particularly where there is no irregularity in the making of the contract containing the choice of law provision.

Many contracts also contain a “choice of venue”  provision, by which the parties agree to litigate their disputes in the courts of a particular state.  Choice of venue provisions will be discussed in a future article.

This article was written by Mark S. Demorest, Managing Member of Demorest Law Firm. Click here to view his professional resume.

Be Careful When You Sign That Contract on Behalf of Your Company

A lot of us are called upon to sign contracts or other documents on behalf of our employer or our own company.    Because companies are fictional entities, a company cannot sign a contract. The company must act through an officer or employee with authority to enter into any type of contract, promissory note or lease.     Typically, an officer or employee would not be held personally liable for the company’s debt should there be a breach of such an agreement is the contract has been properly signed and executed on behalf of the company.    However, we have recently had a few cases where officers signed their names without titles and not conveying their intent to sign the document on behalf of a company in an official capacity.    This has lead to lawsuits wherein the officer or employee who signed an agreement, with the full intention of doing so on behalf of the company, was personally sued, and sometimes was held personally liable when their company is in breach.

That is why it’s imperative that an officer or employee who is executing an agreement in an official capacity on behalf of his or her company, make sure that the other party knows that they are entering into the agreement with your company– and not you personally.    Simple language in the agreement can easily alleviate the worry of being held personally liable when one’s company does not honor an agreement.   First, make sure in the beginning of the agreement, where the parties are listed, that your company is listed as one of the parties and not you personally.    Second, when signing the agreement, make sure that you write your company’s name above your signature, and your company title under your signature so it is evident that you are signing the agreement in your official capacity a a representative of the company.  You can also write in language under your signature that states “on behalf of Company X.”   That way there is will confusion and the other party to the agreement knows your intentions.

While adding a few words to an agreement may seem insignificant, it can they may save you being held personally liable for the debts of your company.

This article was written by Michael R. Dorfman, Senior Associate at Demorest Law Firm. Click here to view his professional resume.