CRAIG A. KLAPP, Plaintiff-Appellant, v. UNITED INSURANCE GROUP AGENCY, INC, Defendant-Appellee.
Nos. 119175, 119176
Michigan Supreme Court
FILED JUNE 18, 2003
Maura D. Corrigan, Chief Justice; Michael F. Cavanagh, Elizabeth A. Weaver, Marilyn Kelly, Clifford W. Taylor, Robert P. Young, Jr., Stephen J. Markman, Justices.
Lansing, Michigan 48909
BEFORE THE ENTIRE BENCH
MARKMAN, J.
We granted leave to appeal in this case to consider whether defendant breached the parties’ written contract by refusing to pay plaintiff retirement renewal commissions on insurance policies that plaintiff sold on behalf of defendant while plaintiff was working for defendant. The trial court denied defendant‘s motion for summary disposition. It concluded that the contract was ambiguous and, thus, that its
I. FACTS AND PROCEDURAL HISTORY
When plaintiff began working as an insurance agent for defendant in 1990, they entered into a contract, titled the “Agent‘s Agreement.” Plaintiff permanently stopped working
We review de novo a trial court‘s ruling on a motion for summary disposition. Stanton v Battle Creek, 466 Mich 611, 614; 647 NW2d 508 (2002). Similarly, whether contract language is ambiguous is a question of law that we review de novo. Farm Bureau Mut Ins Co v Nikkel, 460 Mich 558, 563; 596 NW2d 915 (1999). Finally, the proper interpretation of a contract is also a question of law that we review de novo. Henderson v State Farm Fire & Cas Co, 460 Mich 348, 353; 596 NW2d 190 (1999).
III. ANALYSIS
The Agent‘s Agreement at issue here provides in relevant part:
5. Vested Commissions. Commissions shall be vested in the following manner:
(A) Death, disability, or retirement during term hereof. Upon the death, disability, or retirement (as those terms shall be then defined in the Agent‘s Manual) of Agent at any time prior to the termination of this Agreement, Agent (or Agent‘s designated death beneficiary who shall be designated by Agent in writing; or in the absence of such written designation, Agent‘s estate) shall thereafter be entitled to receive one hundred percent (100%) of such renewal commissions then payable from premiums on Agent‘s policies in place, in such amounts as would otherwise have been payable to Agent, until the aggregate renewals
payable to Agent thereon shall equal less than Forty-One Dollars and Sixty-Seven Cents ($41.67) per month. If upon the date of death, disability, or retirement, Agent shall have aggregated eight (8) or more years of service under this Agreement, his then vesting shall be determined in accordance with the normal vesting schedule. (B) Vesting Schedule. In the event of a termination of this Agreement for reasons of death, disability and retirement (as defined in the Agent‘s Manual), Agent as set forth below on the date of execution hereof shall be entitled to receive a percentage of renewal commissions then payable from premiums on Agent‘s policies in place, applicable to such amounts as would otherwise have been payable to Agent in accordance with the following vesting schedule:
Agent‘s Years of Service % of Renewals Vested Less than 2 years 0% 2 years 10% 3 years 30% 4 years 50% 5 years 70% 6 years 90% 7 years 100% 8 years 110% 9 years 120% 10 years 130% 11 years 140% 12 years 150%
With regard to retirement, the Agent‘s Manual provides:
Retirement is understood to be disengagement from the insurance industry. Vestment for retirement is age 65 or 10 years of service whichever is later.
When defendant moved for summary disposition, it argued that plaintiff was not entitled to renewal commissions because, although plaintiff had disengaged from the insurance
Plaintiff, on the other hand, argued that the contract was ambiguous because the vesting schedule in § 5(B) of the Agent‘s Agreement conflicts with the sixty-five years of age and ten years of service requirements in the Agent‘s Manual. That is, under the vesting schedule, a percentage of renewal commissions were vested after two years of service, while, under the Agent‘s Manual‘s definition of retirement, which the Agent‘s Agreement incorporated, renewal commissions were not vested at all until an agent reached sixty-five years of age and had served as an agent with defendant for ten years. Plaintiff further argued that, because this contract was ambiguous, its interpretation was a question of fact that must be decided by the jury in light of relevant extrinsic evidence. As already noted, the trial court agreed with plaintiff that the contract was ambiguous and, thus, must be interpreted by the jury in light of relevant extrinsic
On appeal to the Court of Appeals, plaintiff argued that the early years of the vesting schedule (years two through nine) directly conflicted with the sixty-five years of age and ten years of service requirements, creating an ambiguity that the jury properly resolved against defendant. Defendant, on the other hand, argued that years two through nine of the vesting schedule should be ignored. The Court of Appeals, correctly recognizing that years two through nine of the vesting schedule had to be given some meaning, but disagreeing with plaintiff that they applied to agents who had retired, concluded that these years of the vesting schedule only applied to agents who died or had become disabled. Plaintiff filed a motion for rehearing, arguing that the Court of Appeals had overlooked § 5(A) of the Agent‘s Agreement, which provided that, regardless of age or years of service, an agent who died or became disabled while still employed was entitled
A. THE CONTRACT LANGUAGE IS AMBIGUOUS
“An insurance contract is ambiguous when its provisions are capable of conflicting interpretations.” Nikkel, supra at 566. Accordingly, if two provisions of the same contract irreconcilably conflict with each other, the language of the contract is ambiguous. Further, courts cannot simply ignore portions of a contract in order to avoid a finding of ambiguity or in order to declare an ambiguity. Instead, contracts must be “‘construed so as to give effect to every word or phrase as far as practicable.‘” Hunter v Pearl Assurance Co, Ltd, 292 Mich 543, 545; 291 NW 58 (1940), quoting Mondou v Lincoln Mut Cas Co, 283 Mich 353, 358-359; 278 NW 94 (1938).
In our judgment, the vesting schedule found in § 5(B) of the Agent‘s Agreement irreconcilably conflicts with the Agent‘s Manual‘s definition of retirement, which the Agent‘s Agreement incorporates. Under the vesting schedule, an agent who has served two or more years with defendant is entitled to
The Court of Appeals attempted to avoid a finding of ambiguity by concluding that, if an agent has less than ten years of service with defendant, he cannot be considered retired and, thus, years two through nine of the vesting schedule would not apply to him; however, these years would apply to an agent who died or became disabled without reaching the age of sixty-five and without having ten years of service with defendant. Although the Court of Appeals is correct in recognizing that it must give some meaning to years two through nine of the vesting schedule, in its attempt to give these years some meaning, it has ignored another portion of the contract, that is, § 5(A) of the Agent‘s Agreement. Just as “[c]ourts must give effect to every word, phrase, and clause in a statute and avoid an interpretation that would render any part of the statute surplusage or nugatory,” State Farm & Cas Co v Old Republic Ins Co, 466 Mich 142, 146; 644 NW2d 715 (2002), courts must also give effect to every word, phrase, and clause in a contract and avoid an interpretation that would render any part of the contract surplusage or nugatory.
Section 5(A) of the Agent‘s Agreement provides that an agent who dies or becomes disabled is automatically one hundred percent vested. Therefore, contrary to the contention of the Court of Appeals, years two through nine of the vesting schedule, which provide for less than one hundred percent vesting, would have no application to an agent who dies or becomes disabled. If the contract is read, as the Court of Appeals read it, to require an agent to be at least sixty-five years old and to have served as an agent for defendant for at least ten years to be considered retired, years two through nine of the vesting scheduled are rendered meaningless. Because there is no way to read the provisions of this contract in reasonable harmony, the language of the contract is ambiguous.
B. INTERPRETATION OF AMBIGUOUS CONTRACT
It is well settled that the meaning of an ambiguous contract is a question of fact that must be decided by the jury. Hewett Grocery Co v Biddle Purchasing Co, 289 Mich 225, 236; 286 NW 221 (1939). “‘Where a contract is to be construed
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. [11 Williston, Contracts (4th ed), § 30:7, pp 87-91.]
In resolving such a question of fact, i.e., the interpretation of a contract whose language is ambiguous, the jury is to consider relevant extrinsic evidence. As this Court explained in Penzien v Dielectric Products Engineering Co, Inc, 374 Mich 444, 449; 132 NW2d 130 (1965):
“If the contract in question were ambiguous or ‘doubtful,’ extrinsic evidence, particularly evidence which would indicate the contemporaneous understanding of the parties, would be admissible as an aid in construction of the disputed terms.”
“The law is clear that where the language of the contract is ambiguous, the court can look to such extrinsic evidence as the parties’ conduct, the statements of its representatives, and past practice to aid in interpretation.” [Citations omitted.]
“The parol evidence rule does not preclude the admission of parol or extrinsic evidence for the purpose of aiding in the interpretation or construction of a written instrument, where the language of the instrument itself taken alone is such that it does not clearly express the intention of the parties or the subject of the agreement. Such evidence is admitted not to add to or detract from the writing, but merely to ascertain what the meaning of the parties is. Thus a written instrument is open to explanation by parol or extrinsic evidence when it is expressed in short and incomplete terms, or is fairly susceptible of two constructions, or where the language employed is vague, uncertain, obscure, or ambiguous, and where the words of the contract must be applied to facts ascertainable only by extrinsic evidence, a resort to such evidence is necessarily permitted.” [Edoff v Hecht, 270 Mich 689, 695-696; 260 NW 93 (1935) (citation omitted).]
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.11 Herweyer v Clark Hwy Services, Inc, 455 Mich 14, 22; 564 NW2d 857 (1997).12 This is known as the rule of contra proferentem. However, this rule is only to be applied if all conventional means of contract interpretation, including the consideration of relevant extrinsic evidence, have left the jury unable to determine what the parties intended their contract to mean.13 Accordingly, if the extrinsic evidence indicates that the parties intended their contract to have a particular meaning, this is the meaning that should be given to the contract, regardless of whether this meaning is in accord with the drafter‘s or the nondrafter‘s view of the contract. In other words, if a contract is ambiguous regarding whether a term
However, if the language of a contract is ambiguous, and the jury remains unable to determine what the parties intended after considering all relevant extrinsic evidence, the jury should only then find in favor of the nondrafter of the contract pursuant to the rule of contra proferentem. In other words, the 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.
This view of the rule of construing against the drafter of the contract is in accordance with the 2 Restatement Contracts, 2d, § 206, p 105, which provides:
In choosing among the reasonable meanings of a promise or agreement or a term thereof, that meaning is generally preferred which operates against the party who supplies the words or from whom a writing otherwise proceeds.
The comments following this rule state that “[i]n cases of doubt, therefore, so long as other factors are not decisive,
The “contra proferentem” rule has been described as being applicable only as a last resort, when other techniques of interpretation and construction have not resolved the question of which of two or more possible reasonable meanings the court should choose. One court wrote that it is “a tie breaker when there is no other sound basis for choosing one contract interpretation over another.” . . . Another federal court expressed a similar reservation concerning use of the rule: “[T]his rule of construction should not be enlarged to [clarify] perfunctorily . . . an ambiguous meaning; the trier of fact should still consider the drafting party‘s evidence.” The “contra proferentem” rule thus yields to other techniques of interpretation, including the attempt to give a valid, legal, and reasonable meaning to as many of the contract terms as possible. [Citations omitted.]
In addition, Williston, supra, § 32:12, pp 480-482, provides:
The rule of contra proferentem is generally said to be a rule of last resort and is applied only where other secondary rules of interpretation have failed to elucidate the contract‘s meaning. . . . Finally, the rule does not justify a court in adopting an interpretation contrary to that asserted by the drafter, simply because of his or her status as the drafter. Rather, it is only when consistent with the rules of contract interpretation, the meaning proposed by the nondrafter (or an altogether different meaning determined by the court) is reasonable—when there
is a true ambiguity and the court must choose between two or more reasonable meanings—that the rule of contra proferentem is properly invoked.
The rule of contra proferentem is a rule of last resort because, “The primary goal in the construction or interpretation of any contract is to honor the intent of the parties,” Rasheed v Chrysler Corp, 445 Mich 109, 127 n 28; 517 NW2d 19 (1994), and the rule of contra proferentem does not aid in determining the parties’ intent. Instead, the comments after the restatement refer to the rule of contra proferentem, not as a rule of interpretation, but as “a rule of legal effect.” 2 Restatement, supra at 105. It is a rule of legal effect, rather than a rule of legal interpretation, because its purpose is not to render more accurate or more perfect a jury‘s understanding of the meaning of the contract, but is merely to ascertain the winner and the loser in connection with a contract whose meaning has eluded the jury despite all efforts to apply conventional rules of interpretation. As stated in Corbin, supra, p 306:
The rule is not actually one of interpretation, because its application does not assist in determining the meaning that the two parties gave to the words, or even the meaning that a reasonable person would have assigned to the language used. It is chiefly a rule of policy, generally favoring the underdog. It directs the court to choose between two or more possible reasonable meanings on the basis of their legal operation, i.e., whether they favor the drafter or the other party.
The concurring opinion asserts that, “when a contract is drafted entirely by one party, without any bilateral negotiations,” the rule of contra proferentem “should be applied as the primary rule of construction, not as a last resort . . . .” Post at 1-2. That is, when a contract whose language is ambiguous is drafted without bilateral negotiations, a jury should not be allowed to look at relevant extrinsic evidence in order to discern the parties’ intent. Instead, the ambiguous language is simply to be construed against the drafter.
We respectfully disagree with the concurring opinion‘s reference to the rule of contra proferentem as a “rule of construction.” In our judgment, the rule of contra
Further, as the concurring opinion correctly states, “[t]he ultimate objective in interpreting an ambiguous contract is to ascertain the intent of the parties . . . .” Post at 3. Therefore, in our judgment, it is only obvious that a method of construing a contract that helps ascertain the intent of the parties should be preferred over one that does not.14 We agree with the concurring opinion that extrinsic evidence “‘provides an incomplete guide with which to interpret contractual language.‘” Post at 4. That is,
Finally, we disagree with the concurring opinion‘s contention that “this Court has consistently applied the rule of construing against the drafter as the primary tool of construction . . . .” Id. at 6. Not one of the cases cited in the concurring opinion, in fact, concludes that relevant extrinsic evidence is inadmissible to help a jury determine the parties’ intent where the language of a contract is ambiguous. In other words, not a single one of these cases concludes that the rule of contra proferentem is somehow a “primary rule of construction.” Instead, in each of these
In this case, plaintiff introduced as extrinsic evidence an older version of the Agent‘s Agreement and deposition testimony from defendant‘s executives showing that defendant‘s past practice had been to pay former agents the renewal
Plaintiff argues that the definition of retirement under the contract is simply “disengagement from the insurance industry” and that the second sentence under the section defining retirement in the Agent‘s Manual was unintentionally left over from a time before defendant‘s Agent‘s Agreement contained a vesting schedule. Not only does this construction of the contract accord meaning to the entire vesting schedule, but it is also the construction that defendant itself has applied for the past eight years, that is, since it adopted the new Agent‘s Agreement containing the vesting schedule.18 In other words, defendant had been paying the specified percentages of renewal commissions to agents, who were not sixty-five years of age and had not worked for defendant for at least ten years, as long as they had disengaged from the insurance industry.19
Defendant argues that the jury should not have considered
Where parties by such a uniform course of conduct for a long time have given a contract a particular construction, that construction will be adopted by the courts.
“The practical interpretation given to contracts by the parties to them, while engaged in their performance and before any controversy has arisen concerning them, is one of the best indication of their true intent.” [People v Michigan Central R Co, 145 Mich 140, 166; 108 NW 772 (1906) (citation omitted) (portion of dissent by GRANT, J., assented to by the majority at 150).]
Because the language of the contract here is ambiguous, and because defendant had, in the past, construed this contract to require the payment of retirement renewal commissions
Although the trial court correctly instructed the jury that it could consider relevant extrinsic evidence and that any ambiguities should be construed against the drafter pursuant to the rule of contra proferentem, the trial court failed to inform the jury that it could only apply the rule of contra proferentem if it was unable to discern the parties’ intent from the extrinsic evidence. However, in this case, this error was harmless. The jury did one of two things here. The jury either construed the language of the contract in favor of plaintiff pursuant to the rule of contra proferentem, or it construed the language of the contract in favor of plaintiff because the extrinsic evidence pointed to a construction of the contract in plaintiff‘s favor.20
Accordingly, regardless of which approach the jury used, it reached the (same) right result and, thus, failure to reverse is not inconsistent with substantial justice.
IV. CONCLUSION
If two provisions of the same contract irreconcilably conflict with each other, the language of the contract is ambiguous. In this case, the contract‘s definition of retirement irreconcilably conflicts with the contract‘s vesting schedule. Under the contract‘s definition of retirement, plaintiff is not entitled to renewal commissions; while, under the vesting schedule, plaintiff is entitled to renewal commissions. Accordingly, the contract language at issue here is ambiguous.
The interpretation of a contract whose language is ambiguous is a question of fact for the jury to decide. When interpreting a contract whose language is ambiguous, the jury is to consider relevant extrinsic evidence. That the drafting party interpreted the ambiguous contractual language in a certain way for many years is relevant extrinsic evidence.
In interpreting a contract whose language is ambiguous and in which the parties’ intent cannot otherwise be determined through resort to relevant extrinsic evidence, the jury should construe any ambiguities against the drafter of
Therefore, we conclude that the trial court here did not err in instructing the jury that it should consider relevant extrinsic evidence in order to discern the parties’ intent, and that it should also construe any ambiguities against the drafter. Although the trial court did err in failing to inform the jury that it should only construe ambiguities against the drafter if it cannot discern the parties’ intent from the relevant extrinsic evidence, this error was harmless. Accordingly, we reverse the judgment of the Court of Appeals and remand this case to the Court of Appeals for consideration of defendant‘s other appellate issue and plaintiff‘s cross-appeal.
Stephen J. Markman
Maura D. Corrigan
Clifford W. Taylor
Robert P. Young, Jr.
CAVANAGH, J.
I concur in the result only.
Michael F. Cavanagh
CRAIG A. KLAPP, Plaintiff-Appellant, v. UNITED INSURANCE GROUP AGENCY, INC., Defendant-Appellee.
Nos. 119175, 119176
STATE OF MICHIGAN SUPREME COURT
WEAVER, J. (concurring).
I concur in the decision to reverse the judgment of the Court of Appeals and remand the case to that Court for consideration of issues raised, but not addressed, below. I write separately because I disagree with the majority‘s holding that “the rule of contra proferentem is only to be applied if the intent of the parties cannot be discerned through the use of all conventional rules of interpretation, including an examination of relevant extrinsic evidence.” Ante at 18. Although I agree that this is the general rule, I would hold that when 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
The doctrine of contra proferentem, under which a contract that is ambiguous will be construed against the party preparing it, is a well-established rule. See, e.g., Universal Underwriters Ins Co v Kneeland, 464 Mich 491, 498; 628 NW2d 491 (2001) (discussing the “rule requiring that contractual ambiguities be construed against the drafter“); Herweyer v Clark Hwy Services, Inc, 455 Mich 14, 22; 564 NW2d 857 (1997) (“As the contract period under consideration is ambiguous, it must be construed against the drafter.“). In general, it is a rule of last resort, to be applied only if the intent of the parties cannot be discerned by the use of other rules of interpretation. See 2 Farnsworth, Contracts (2nd ed), ch 7 §7.11, and 5 Corbin, Contracts (rev ed, 1998), § 24.27, pp 297-300.
The questions we asked the parties to address1 are
The ultimate objective in interpreting an ambiguous contract is to ascertain the intent of the parties so the agreement can be carried out according to that intent. Loyal Order of Moose, Adrian 1034 v Faulhaber, 327 Mich 244, 250; 41 NW2d 535 (1950); Stine v Continental Casualty Co, 419 Mich 89, 112; 349 NW2d 127 (1984). When there are bilateral negotiations between the parties, a court can assume that there is a relation between the contract terms that were agreed upon and the parties’ expectations as revealed by extrinsic evidence. However, “unless extrinsic evidence can speak to the intent of all parties to a contract, it provides an incomplete guide with which to interpret contractual language.” SI Mgt LP v Wininger, 707 A2d 37, 43 (Del, 1998) (emphasis in original).
The Supreme Court of Delaware has held that where ambiguity arises in a contract drafted solely by one side and
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
This Court has not previously addressed whether the rule of construing against the drafter should be used as a primary rule of construction in ambiguous contracts or only used after considering any extrinsic evidence available.2 However, in interpreting ambiguous contracts, this Court has consistently applied the rule of construing against the drafter as its primary, indeed sole, aid to construction. See Herweyer v Clark Hwy Services, Inc, 455 Mich 14, 22; 564 NW2d 857 (1997) (“As the contract period under consideration is ambiguous, it must
Similarly, this Court has consistently applied the rule of construing against the drafter as the primary tool of construction in insurance contracts. In insurance contracts, one party decides the terms of the contract, drafts the contract, and presents it to the other party in a take-it-or-leave-it fashion, all with no bilateral negotiation. Michigan Millers Mut Ins Co v Bronson Plating Co, 445 Mich 558, 567; 519 NW2d 864 (1994) (in interpreting insurance cases, a well-established principle of construction is, “Where ambiguity is found, the court must construe the term in the manner most favorable to the insured.“). See also State Farm Mut Automobile Ins Co v Enterprise Leasing Co, 452 Mich 25, 38; 549 NW2d 345 (1996) (“[b]ecause State Farm prepared the form insurance contracts, any ambiguity must be strictly construed against it.“), Raska v Farm Bureau Mut Ins Co of Michigan, 412 Mich 355, 362; 314 NW2d 440 (1982) (“If a fair reading of the entire contract of insurance leads one to understand that there is coverage under particular circumstances and another fair reading of it leads one to understand that there is no coverage under the same circumstances the contract is ambiguous and should be construed against its drafter and in favor of coverage.“), and Bonney v Citizens’ Mut Automobile Ins Co, 333 Mich 435, 438; 53 NW2d 321 (1952) (“An ambiguous contract must be construed against the party who prepared it.“).3
I would hold that this principle should be extended beyond insurance contracts and applied to other contracts in which there is a similar disparity of control in the creation of the terms of the contract. Here defendant was the entity
In this case, the trial judge allowed the plaintiff to introduce a variety of extrinsic evidence, including references to the older version of the Agent‘s Agreement4 and deposition testimony by the defendant‘s executives.5 I would hold that the trial court erred in admitting the extrinsic evidence to resolve the contract‘s ambiguity. However, that error was harmless, because the same result was achieved as would have been if the contract had been construed against its drafter, defendant.
Elizabeth A. Weaver
Marilyn Kelly
Notes
Where, as in the present case, a contract is drafted entirely by one party, without any bilateral negotiations, is extrinsic evidence admissible to clarify ambiguity in the contract or is any ambiguity in the contract simply to be construed against the drafter (without considering any extrinsic evidence)? [467 Mich 687 (2002).]
Plaintiff permanently stopped working for defendant in April of 1997. However, defendant did not become aware of this until August of 1997. Apparently, plaintiff did not inform defendant that he was not going to work for defendant any longer. Once defendant noticed that plaintiff was not generating any new business, it sent plaintiff a letter declaring their contract terminated and stopped paying plaintiff renewal commissions.
The majority asserts that none of the cases I cite “concludes that the rule of contra proferentem is somehow a ‘primary rule of construction.‘” Ante at 20. It is noteworthy that similarly none of the Michigan cases cited by the majority state that the rule of contra proferentem is a rule of last resort. It is precisely because this Court had not previously addressed the question whether the rule of contra proferentem should be applied without first examining any relevant extrinsic evidence that our order granting leave to appeal in this case asked the parties to discuss it in their briefs.consider the words of the contract as well as the parties’ actions.
In determining whether renewal commissions are due to Mr. Klapp, you should consider the interpretation that the parties themselves had given to the Agent‘s Agreement used by United Insurance for Mr. Klapp and other agents.
* * *
Provisions in the Agent‘s Agreement or Agent Manual which are ambiguous or unclear should be interpreted against the party that drafted the document, in this case, United Insurance. This means that you should resolve any doubt or ambiguity in the document itself against United Insurance and in favor of Mr. Klapp.