Contracts II, Pages 715–723

Klapp v. United Insurance Group Agency

Michigan Supreme Court, 2003

Facts:

Plaintiff worked for defendant for seven years. Plaintiff claimed that defendant failed to pay him commissions due when his former clients renewed their insurance policies, as he interpreted the contract to require such payments after one worked as an agent there for seven years. Defendant interpreted the contract to require that an agent work for at least ten years and to reach sixty-five years old to be eligible for renewal commissions.

Procedural History:

  • Trial court denied defendant's motion for summary disposition, finding the contract to be ambiguous. The jury then found for plaintiff.

  • The court of appeals reversed, concluding that the contract unambiguously requires that an agent be at least sixty-five and have worked for the company for ten years to qualify for commissions.

Issues:

  • Was the contract ambiguous?

  • What is the proper interpretation of the contract?

Plaintiff's Argument:

The contract was ambiguous because it conflicted with the agent manual.

Defendant's Argument:

The contract was not ambiguous because extrinsic evidence may not be considered in interpreting the contract.

Rules:

  • LexisNexis IconWestLaw LogoGoogle Scholar LogoPage 717, Bottom

    Where a written contract is ambiguous, a factual question is presented as to the meaning of its provisions, requiring a factual determination as to the intent of the parties in entering the contract. Thus, the fact finder must interpret the contract's terms, in light of the apparent purpose of the contract as a whole, the rules of contract construction, and extrinsic evidence of intent and meaning.

  • LexisNexis IconWestLaw LogoGoogle Scholar LogoPage 718, Top

    In interpreting a contract whose language is ambiguous, the jury should also consider that ambiguities are to be construed against the drafter of the contract. . . . This is known as the rule of contra proferentem.

  • LexisNexis IconWestLaw LogoGoogle Scholar LogoPage 718, Paragraph 2

    [T]he rule of contra proferentem should be viewed essentially as a "tie-breaker," to be utilized only after all conventional means of contract interpretation, including the consideration of relevant extrinsic evidence, have been applied and found wanting.

Reasoning:

  • The way that the Court of Appeals interpreted the contract is not a reasonable way to read the provisions of the contract.

  • While extrinsic evidence is not the best way to determine the parties' intent in a contract—the words of the contract itself are—it is the next best way when it is not possible to determine such from the contract alone.

  • Plaintiff's evidence of defendant prior paying commissions to those who had not reached ten years or sixty-five years of age should have been considered, as it is relevant in determining the parties' intent, here that commission would be paid after seven years..

  • While the trial court should have instructed the jury that contra proferentem only applies if the parties' intent cannot be determined with extrinsic evidence, it does not affect the outcome here, as the jury would have found for plaintiff either way.

Holding:

The contract was not ambiguous. With extrinsic evidence, it should be interpreted to require commissions after only seven years. Reversed and remanded.

Concurring Opinion:

Weaver:

LexisNexis IconWestLaw LogoGoogle Scholar LogoPage 721, Middle

[W]hen a contract is drafted entirely by one party, without any bilateral negotiations, the rule that a contract is to be strictly construed against its drafter should be applied as the primary rule of construction, not as a last resort, and extrinsic evidence is not admissible to clarify ambiguity in the contract.

LexisNexis IconWestLaw LogoGoogle Scholar LogoPage 722, Paragraph 2

There are sound public-policy reasons behind a black letter rule that when contractual provision are drafted entirely by one party, any ambiguity in the contract is to be construed against the drafter. First, the rule of contra proferentem provides a strong incentive for a party drafting a contract to use clear and unambiguous language. Second, the use of extrinsic evidence in circumstances involving ambiguity could be destabilizing to contractual relations and require more involved litigation by allowing parties to use assertions of oral understandings and examples of past behavior rather than relying on a written contract with the understanding that any ambiguity should be construed against its drafter.

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