In this action alleging breach of contract, plaintiff, McCoig Materials, LLC, appeals by leave granted the trial court’s order denying its second motion for summary disposition. The trial court denied this motion for summary disposition and plaintiffs motion for reconsideration, holding that defendant,
I. basic facts and procedural history
Plaintiff filed this litigation to recover for defendant’s alleged breach of contract and to collect on the performance bond (provided by Ohio Casualty Insurance Company) for defendant’s purported failure to pay for concrete ordered and delivered pursuant to an open-account contract. Plaintiff operates a business manufacturing and selling concrete materials for use in construction projects. Plaintiff receives orders from specific customers for an exact amount of concrete material to be delivered to a particular job site. Plaintiffs employees deliver the concrete to the job site in accordance with the purchaser’s instructions. After the material is delivered to the job site, the employee gives a delivery ticket to the purchaser and provides a carbon copy of the delivery ticket to plaintiffs accounting department. After obtaining the delivery ticket, the accounting department creates an invoice for all materials delivered that day and mails the purchaser the invoice. At the end of each month, a statement of account is created that delineates all charges for materials, payments by the purchaser, and any credits issued.
This is a contract to obtain materials on open account from .. . McCoig Materials, LLC (“McCoig”). Buyer understands and expressly acknowledges that it is executing this Agreement with McCoig for the purchase of concrete materials on open account (McCoig shall be referred to as a Seller throughout this Agreement). ...
7. Defects/Limitation of Liability: Notice of any defect in materials or nonconformity to specifications shall be made in writing within 15 days from receipt of such materials, after which any such claim for such defect or nonconformity shall be deemed waived, except that yield complaints must be made in writing no later than 48 hours after receipt of materials. Seller’s liability for such defective or nonconforming materials shall be limited, under any theory of law, to their replacement or refund of the purchase price. Seller shall have the right to inspect and satisfy itself as to the validity of any such claims. Seller shall have no responsibility for damage or shortage of any materials unless such damage or shortage is noted on the delivery ticket and materials claimed to be damaged are held and made available for Seller’s inspection. IN THE CASE OF ALL CLAIMS MADE AGAINST SELLER, INCLUDING BUT NOT LIMITED TO CLAIMS FOR FAILURE OR DELAY IN DELIVERY, SELLER SHALL IN NO EVENT BE LIABLE FOR ANY LOSS [SIC] PROFITS, SPECIAL OR CONSEQUENTIAL DAMAGES. NO ACTION, REGARDLESS OF FORM, ARISING OUT OF THE*689 TRANSACTIONS UNDER THIS AGREEMENT MAY BE BROUGHT BY BUYER MORE THAN ONE YEAR AFTER THE MATERIALS SUPPLIED PURSUANT TO ANY ORDER UNDER THIS AGREEMENT HAVE BEEN DELIVERED.
SELLER DISCLAIMS ANY AND ALL WARRANTIES, WHETHER EXPRESSED OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, ANY IMPLIED WARRANTY OF MECHANTABILIYT [SIC] OR FITNESS FOR A PARTICULAR PURPOSE, EXCEPT AS OTHERWISE PROVIDED HEREIN UNLESS MADE SPECIFICALLY IN WRITING, SIGNED BY AN OFFICER OF SELLER, AND ATTACHED TO AND MADE PART OF THIS CONTRACT.
Between August 5, 2008, and September 18, 2008, plaintiff furnished concrete to defendant for work performed on a project in the city of Center Line. Pursuant to the terms of the contract, defendant was required to notify plaintiff of any defects within 15 days from receipt. Defendant did not timely notify plaintiff of any defects regarding the concrete used in the Center Line project, and it did not file a lawsuit within one year after the materials were supplied. Between November 1, 2008, and December 3, 2008, plaintiff delivered concrete to defendant for repair work in the city of Warren. Defendant allegedly failed to pay for the goods supplied for the city of Warren project. On April 1, 2010, plaintiff filed this litigation to compel payment, asserting that a balance of $51,837.93 was due and owing for the deliveries for defendant’s Warren project.
On April 30, 2010, defendant filed an answer, affirmative defenses, and a counterclaim in response to plaintiffs complaint. In its affirmative defenses, defendant asserted that it was entitled to offsets, back-charges, and costs incurred by defendant to correct defective concrete provided by plaintiff. Defendant’s
On July 23, 2010, plaintiff moved for summary disposition of defendant’s counterclaim pursuant to MCR 2.116(C)(7), relying on the one-year limitations period set forth in the February 7, 2007 contract between the parties. Plaintiff also moved for summary disposition of its complaint under MCR 2.116(0(10), contending that there was no genuine issue of material fact regarding the terms of the agreement, the concrete was delivered as promised, and defendant failed to pay the money owed without justification. On August 24, 2010, defendant filed a brief in opposition to the motion under MCR 2.116(0(10), alleging that there were disputed issues of material fact regarding the quality of the concrete supplied by plaintiff and the amount due and owing in light of plaintiffs misapplication of payments. On September 8, 2010, the trial court entered an order dismissing defendant’s counterclaim and denying plaintiffs motion for summary disposition of its complaint without prejudice.
On October 7, 2010, plaintiff filed its second motion for summary disposition pursuant to MCR 2.116(C)(10), asserting that there was no genuine issue of material fact regarding defendant’s obligation to pay plaintiff for materials sold in connection with the Warren project. Plaintiff also alleged that defendant was obligated to pay the contract price because it accepted
On November 9, 2010, the trial court issued an opinion and order denying plaintiffs second motion for summary disposition. The trial court rejected defendant’s challenge to the balance due and the argument that plaintiff misapplied payments. Nonetheless, the trial court denied plaintiffs motion, holding that defendant could recoup potential costs it suffered as a result of defective concrete plaintiff supplied for the Center Line project:
Significantly, the dismissal of defendant Galui Construction’s counterclaim does not preclude it from asserting its potential costs to replace the defective concrete on the Center Line project as a defense to plaintiffs claim for breach of contract on the Warren project. See Mudge v Macomb County,458 Mich 87 , 106-107;580 NW2d 845 (1998) (“plaintiff will not be permitted to insist upon the statute of limitations as a bar to such a defense when he is seeking to enforce payment of that which is due him under the contract out of which the defendant’s claim for recoupment arises”).
Defendant Galui Construction’s ability to assert recoupment as a defense necessarily creates a question of fact as to any balance due plaintiff.
On November 29, 2010, plaintiff moved for reconsideration of the summary disposition ruling, challenging the trial court’s decision to raise sua sponte the defense of recoupment, an issue not raised or briefed by defendant. In light of the trial court’s dismissal of defendant’s counterclaim, the only remaining issue in the
On December 9, 2010, the trial court issued an opinion and order denying plaintiffs motion for reconsideration. The trial court held, in relevant part:
Plaintiffs argument regarding the misapplication of recoupment in avoidance of the statute of limitations under Mudge v Macomb County,458 Mich 87 , 106-107;580 NW2d 845 (1998) lacks merit.
Significantly, plaintiffs motions for summary disposition evidence but a single Contract for Materials on Open Account with defendant Galui Construction. Indeed, as explained by Julie Moran’s [McCoig Materials’ credit manager] affidavit submitted in support of plaintiffs second motion for summary disposition, defendant Galui Construction “ordered concrete materials on account in connection with various projects”, including the Warren and Center Line projects, “[i]n accordance with that agreement”. Consequently, as defendant Galui Construction ordered materials for both projects under a single contract, recoupment does apply.
The mere fact that Galui Construction had separate contracts with Warren and Center Line for the projects does not transform plaintiffs delivery of materials under one contract to defendant Galui Construction into separate contracts with defendant Galui Construction. Indeed, the separate deliveries of materials are but a continuing transaction under the one contract. Hence, plaintiffs reliance on the Contractor’s Bond for Public Buildings or Works Act, MCL 129.201 et seq., and Construction Lien Act, MCL 570.1101 et seq., is distinguishable.
*693 Finally, any failure to plead recoupment as an affirmative defense can be cured by amendment. MCR 2.111(F)(3). Defendants Galui Construction and Ohio Casualty Insurance are deemed to have so amended their affirmative defenses.
We granted plaintiffs application for leave to appeal.
II. STANDARD OF REVIEW
A trial court’s ruling on a motion for summary disposition presents a question of law subject to review de novo. Shepherd Montessori Ctr Milan v Ann Arbor Charter Twp,
Plaintiff alleges that the trial court erred by applying recoupment to an open-account contract when the projects at issue constituted discrete transactions. We agree.
A. APPLICABLE LAW
“The essential elements of a contract are parties competent to contract, a proper subject matter, legal consideration, mutuality of agreement, and mutuality of obligation.” Mallory v Detroit,
“Recoupment is, in effect, a counterclaim or cross action for damages.” Smith v Erla,
In Mudge v Macomb Co,
The defense of recoupment refers to a defendant’s right, in the same action, “to cut down the plaintiffs demand, either because the plaintiff has not complied with some cross obligation of the contract on which he or she sues or because the plaintiff has violated some legal duty in the making or performance of that contract.” 20 Am Jur 2d, Counterclaim, Recoupment, etc., § 5, p 231. Recoupment is “a doctrine of an intrinsically defensive nature founded upon an equitable reason, inhering in the same transaction, why the plaintiffs claim in equity and good conscience should be reduced.” Pennsylvania R Co v Miller, 124 F2d 160, 162 (CA 5, 1941).
As explained in Warner v Sullivan,249 Mich 469 , 471;229 NW 484 (1930):
“Recoupment is a creature of the common law. It presents to the court an equitable reason why the amount payable to the plaintiff should be reduced, and the plaintiff will not be permitted to insist upon the statute of limitations as a bar to such a defense when he is seeking to enforce payment of that which is due him under the contract out of which the defendant’s claim for recoupment arises.” [Emphasis added in Mudge.]
The expiration of a limitations period does not prevent the defendant from raising a recoupment defense as long as the plaintiffs action is timely. Id. at 107.
A party cannot accept a particular phase of construction without prompt objection and then raise the recoupment defense. Wallich Ice Machine Co v Hanewald,
It is a familiar rule that any damages may be recouped for which a cause of action growing out of the same transaction lies at the time of pleading. Plaintiff cannot defeat a right to recoup on a contract which he must prove in order to recover, by including other items with it in his declaration and making a general claim for balance due on the whole under an open account. [Holser v Skae,169 Mich 484 , 488;135 NW 260 (1912).]
In Wallich Ice Machine Co,
After having knowingly accepted this phase of the construction or installation and having failed to make anything like a reasonably prompt objection thereto, it is now too late for defendant to assert this particular item of recoupment. It savors too much of an afterthought.
As hereinbefore noted, defendant also attempts to assert as recoupment loss of meats placed in the refrigerating plant to the amount of approximately $200. Here again defendant is decidedly tardy in urging this claim against plaintiff. The record is devoid of testimony that he made any claim for damage of this character to plaintiff prior to framing his defense to this suit. [Id. at 615 (citations omitted).]
Additionally, in Peerless Woolen Mills v Chicago Garment Co,
[T]he claim now presented does not arise out of the subject matter of plaintiffs action, and may not properly be made the basis of a counterclaim. It amounts merely to an unliquidated claim for damages alleged to have been sustained in a wholly independent transaction. Had defendant sought to maintain an action for damages .. . based on alleged failure on plaintiffs part to fully perform the 1949 agreement, it could not have prevailed under the generally accepted rule, there being no proof or claim of fraud or mistake.
. .. “Payment in full, without reservation, of an account for goods purchased, precludes the buyer from subsequently asserting that the goods were not merchantable, or that he was entitled to a credit for a shortage in packages or for expense of cartage.” lid. at 333.]
Accordingly, Michigan caselaw holds that a claim for recoupment must be premised on the same contract or transaction. The categorization of the parties’ agreement as a single contract or an open account is not determinative.
Furthermore, not all cases in which claim and counterclaim arise from the same contract are appropriate for recoupment. Where the contract itself contemplates the business to be transacted as discrete and independent units, even claims predicated on a single contract will be ineligible for recoupment. [Malinowski v New York State Dep’t of Labor,156 F3d 131 , 135 (CA 2, 1998).]
B. RECOUPMENT DEFENSE
In the present case, we conclude that the trial court erred by denying plaintiffs second motion for summary disposition by raising sua sponte the recoupment defense. A review of the plain language of the contract at issue revealed that, although an open-account contract, the transactions were treated as discrete events or separate transactions. Defendant was required to raise yield complaints within 48 hours after receipt and defects or nonconformance issues within 15 days of receipt. According to the plain language of the contract, any litigation had to be commenced within one year after delivery. Defendant did not timely raise an objection to the materials provided in the Center Line project. Once a party accepts a particular phase of construction, it cannot utilize the defense of recoupment. Wallich Ice Machine Co,
Reversed and remanded for proceedings consistent with this opinion. We do not retain jurisdiction. Plaintiff, as the prevailing party, may tax costs. MCR 7.219.
Notes
Plaintiff also named as a defendant the provider of the performance bond, Ohio Casualty Insurance Company. However, Ohio Casualty’s liability would be as the bond provider and, accordingly, throughout this opinion, “defendant” refers to Galui Construction only In addition, plaintiffs initial motion for summary disposition sought, in part, dismissal of Galui Construction’s counterclaim. The trial court dismissed the counterclaim, and it is not an issue in this appeal. Thus, for ease of reference, we will refer to McCoig Materials only as “plaintiff” and Galui Construction only as “defendant.”
On October 20, 2009, the city of Center Line sent defendant a list of work items that needed to be corrected. Despite this notice from the city, defendant did not file its own lawsuit against plaintiff at that time. Rather, defendant only raised the issue of defects in response to plaintiffs complaint for breach of contract.
McCoig Materials LLC v Galui Constr Inc, unpublished order of the Court of Appeals, entered January 5, 2011 (Docket No. 301599).
The trial court also erred by relying on the statement by plaintiffs employee that there was only one contract. The duty to interpret and apply the law is allocated to the courts, and the statement of a witness is not dispostive. See Hottmann v Hottmann,