Business contracts are vital to our economy. Understanding and drafting a wide panoply of agreements — including those establishing new businesses or involving acquisitions of property, sales and supply terms, and myriad other transactions — are foundational skills for business attorneys.

Contracts come in all sizes and shapes. Indeed, the figurative napkin agreement is not a fictional creation, but persists in real life. The authors of this article have seen agreements drafted on college-ruled notebook paper and even scraps of stray paper.

Statutes and case law are important in advising parties about their duties and rights, of course, but agreements may often override statutory and judicially created default rules.¹ Contracts are the cornerstones of parties’ business relationships; as the Michigan Supreme Court has stated, it is a “bedrock principle of American contract law that parties are free to contract as they see fit, and the courts are to enforce the agreement as written absent some highly unusual circumstance, such as a contract in violation of law or public policy.”²

Here, we survey some important court decisions in business contract law that have been issued over the past few years.

CONTRACT ISSUES RELATIVE TO VALUATION

“With great power comes great responsibility.”³

Uncle Ben’s sage words to his nephew, Peter Parker (and his alter ego, Spider-Man), apply in equal force where a contractual provision confers discretionary authority on one party.

In its 2023 published opinion in Kircher v. Boyne USA, Inc.,⁴ the Michigan Court of Appeals held that a shareholder stated a valid claim when she pled that the CEO acted in bad faith by refusing to value her shares using a methodology different from that specified in their agreement where the original methodology yielded an unfairly low value. In Kircher, the plaintiff and CEO were siblings who jointly ran a ski resort for many years. After the plaintiff’s employment was terminated, the parties entered into a settlement agreement in 2014 allowing the plaintiff to redeem her shares of stock in the company by a value “as determined in accordance with Paragraph 2c, unless otherwise agreed by the Parties[.]”⁵ The redemption formula was tied to the company’s earnings before interest, taxes, depreciation, and amortization (EBITDA) and was affected by factors such as its debt. In 2014, the plaintiff’s stock was worth several million dollars, yet after the company took on significant debt in 2018 by purchasing real estate and assets it had been leasing, the stock had negative value.

The plaintiff filed suit, arguing that the defendants breached the agreement by consummating the real estate transaction that added debt to the company. She claimed the new debt effectively eliminated her right to redeem her shares and made them worthless under the redemption formula. She argued that in good faith, the defendants should have agreed to an alternate method to calculate the redemption price as permitted by the 2014 settlement. The trial court found there were questions of fact regarding whether the plaintiff could succeed premised on a theory that the agreement carried an implied duty of good faith that required the defendants to use an alternative valuation formula.

On appeal, the court agreed that the plaintiff stated a claim for breach of contract by alleging the defendants acted in bad faith by not agreeing to use a different formula to calculate her redemption price. It noted that the 2014 settlement expressly allowed the defendants to agree to an alternate valuation methodology, and a good faith/breach of contract action may be based on this type of discretionary authority. The court held that the trial court did not err by denying the defendants’ motion for summary disposition, showing that the duty of good faith has continuing vitality in Michigan contract law.

DISGORGEMENT UNAVAILABLE AS A BREACH-OF-CONTRACT REMEDY

“And so we go back to the remedy”⁶

In Ford Motor Co v. Intermotive, Inc⁷, a U.S. District Court Eastern District of Michigan judge emphasized that disgorgement is not an available remedy for a claim of breach of contract. On a motion for reconsideration, defendant/counter-plaintiff Intermotive argued that its damages should reach the profits earned by Ford for its breach of the parties’ contract rather than just the lost profits of which Intermotive was deprived. The judge was unpersuaded, upheld his prior opinion, and reiterated that disgorgement is a remedy for unjust enrichment but not contract damages.

GET IT IN WRITING AND DON’T LOSE THE WRITING!

“Contracts are like hearts; they’re made to be broken.”⁸

The movie “The Founder” highlighted Roy Kroc’s brazen breaches of contract with the McDonald brothers, whose business ideas, corporate opportunities, profits, and name Kroc shamelessly usurped. In Fowler v. Keiper,⁹ a common scenario played out in the Michigan Court of Appeals: friends and alleged business partners dealt with each other informally for many years and reduced their arrangement to writing in an informal way on a sheet of paper.

Two friends grew an HVAC and plumbing business together over a period of nearly 20 years. When one friend purported to terminate the employment of the plaintiff and locked the doors, the plaintiff sued, alleging shareholder oppression and breach of fiduciary duty, breach of partnership agreement, and breach of contract related to:

1. the alleged agreement that plaintiff was a shareholder of a company,

2. the alleged agreement to split the proceeds from the eventual sale of a property, and

3. the alleged agreement that plaintiff was an owner of another company.

All claims were dismissed on summary disposition, which the court of appeals affirmed. In brief, the court found the plaintiff never became a shareholder or member (and could not sue for oppression or breach of fiduciary duty) and had not pled the existence of a super partnership as existed in Byker v. Mannes.¹⁰

As to the breach of contract claim, the facts alleged by the plaintiff were deemed too tenuous to establish a meeting of the minds and, in some cases, adequate consideration. The dismissal of the contract claim was upheld by the court of appeals even though the plaintiff filed affidavits or depositions of seven witnesses who testified that the two were co-owners of the business and even though the plaintiff testified that the defendant signed a writing stating that the parties were co-owners of the business — the signing was witnessed by a third party who testified as such — the plaintiff lost the agreement during a move.

THE REAL PARTY IN INTEREST IN OWNERSHIP DISPUTES

In Krstovski v. Kukes,¹¹ the Michigan Court of Appeals held that the plaintiff lacked standing and was not the real party in interest in a dispute over a limited liability company (LLC) because his claims were derivative and sued in his individual capacity. The LLC at issue, JV, was partly owned by K2 — an LLC the plaintiff owned — and partly owned by LIP, an LLC the defendant owned. The plaintiff’s complaint alleged that the defendant had sabotaged negotiations to lease certain property, diminishing JV’s assets. Based on these allegations, the plaintiff claimed that the defendant breached JV’s operating agreement, causing direct harm. Notably, the plaintiff and defendant only owned JV through their respective LLCs and not in their individual capacities.

The court invoked the direct or derivative test from Murphy v. Inman,¹² which provides that an action is derivative, and thus must be brought on behalf of the corporation or LLC at issue, unless the plaintiff alleges harm independent of that suffered by the entity and would receive the remedy instead of the corporation. Applying this framework, the court found that the plaintiff’s claims were derivative because the plaintiff alleged no harm independent of that allegedly suffered by K2, the entity through which he owned JV.¹³ For example, if the defendant had sabotaged lease negotiations to JV’s detriment, the injury would be suffered by JV’s members — which included K2 but not the plaintiff as an individual. Even if the plaintiff was injured because he owned K2, the injury would not be independent of K2 and would be derivative under Murphy. Therefore, since the plaintiff’s claims were derivative, he lacked standing to sue in his individual capacity and was not the real party in interest.

A DEFAULT DOESN’T ALLEVIATE PLAINTIFF’S BURDEN TO PROVE DAMAGES

“It’s not what you know, it’s what you can prove.”¹⁴

While obtaining a default against a defendant establishes the defendant’s liability on the plaintiff’s claims, the plaintiff must still provide sufficient evidence to establish damages.

In Jackson v. Bulk AG Innovations, LLC,¹⁵ the Michigan Court of Appeals held that “[i]n our adversarial system, even when a defendant chooses not to engage in civil litigation, the plaintiff still bears the burden of proving damages by a preponderance of the evidence”¹⁶ and ruled that the plaintiffs failed to satisfy this burden with respect to a verbal contract claim.

The plaintiffs, who sold their business to the defendant, ultimately sued the company and its CEO for failure to make earnout payments required under the parties’ asset purchase agreement and failure to repay an orally agreed-upon loan. Neither defendant answered the plaintiffs’ complaint, so the court clerk entered defaults against them.

While the plaintiffs sought damages for both claims — breach of the asset purchase agreement and breach of the verbal loan agreement — the trial court found that the plaintiffs failed to provide sufficient evidence of damages as to the verbal contract claim. It refused to award damages and denied the plaintiffs’ motion for reconsideration. The appeals court affirmed the ruling, noting that while the defendants’ default rendered them liable on all claims, the plaintiffs were still required to prove damages and found that the plaintiffs “offered neither an explanation nor a citation of any evidence in the record to support”¹⁷ their damages figure with respect to the breach, thereby precluding recovery on the claim.

ANALYZING AND ENFORCING FORUM-SELECTION CLAUSES

Specificity matters. Under Michigan law, dismissal of a breach of contract case is only required on forum selection grounds if that clause specifically excludes Michigan as a permissible forum.

In Barshaw v. Allegheny Performance Plastics, LLC,¹⁸ a terminated employee sued his former employer, a Pennsylvania-based company, in Macomb County Circuit Court. Prior to the suit, the parties executed a separation agreement with a provision containing choice-of-law and forum-selection clauses. Under the provision, the agreement was to be governed by Pennsylvania law and the parties agreed to confer jurisdiction on Pennsylvania courts to adjudicate any disputes.

The trial court found that the forum-selection clause was enforceable under Pennsylvania law and dismissed the plaintiff’s claim, but the Michigan Court of Appeals reversed, holding that analyzing a forum-selection clause is a “threshold, nonmerits issue”¹⁹ that should be considered under Michigan law irrespective of any choice-of-law provision in the contract. Accordingly, the trial court was required to apply Michigan law to determine whether the forum-selection clause was enforceable.

The appeals court then considered whether the forum-selection clause was mandatory (requiring any disputes to be litigated in the specified jurisdiction) or permissive (allowing, but not requiring, claims to be brought in the designated jurisdiction). If the clause was mandatory, the suit’s dismissal would be required under MCL 600.745(3) unless an exception applied.

Adopting the words of exclusivity test, the appeals court looked to the forum-selection clause and found it was permissive because the parties merely agreed to confer jurisdiction upon Pennsylvania courts without the intent to “forgo the personal jurisdiction of all forums other than those within the state of Pennsylvania.”²⁰ Accordingly, the court concluded that the trial court was not required to dismiss the plaintiff’s claim, reversed the order of dismissal, and remanded the case.

DISSOLUTION RESOLVING AN LLC DEADLOCK

“Well, if there can be no arrangement, then we are at an impasse.”²¹

In Thomas A. Robinson and The Mack Shop, LLC v. Gretchen C.

Valade Revocable Living Trust,²² Robinson in 2012 established The Mack Shop with Valade; they were 50/50 owners and co-managers of the company, which owned a commercial building in which Valade occupied 20% and Robinson occupied 80%. Each paid below-market rent of $1,000 per month and shared the building’s operating expenses.

Nearly a decade later, Valade transferred her interest in the company to the defendant trust and granted authorization to her son and business representative to manage the company on the trust’s behalf. At this time, Valade also relinquished her tenancy, leasing her portion of the building to a third party, who continued to pay $1,000 in rent.

In December 2021, the trust’s representatives called a member/ manager meeting and submitted two resolutions — one that would require the company to increase its rent for both tenants and one that would require the company to sell the building before March 2022. Robinson voted against both resolutions, prompting the trust to submit a third resolution to dissolve the company. Robinson voted against this resolution as well. The trust filed a demand for arbitration, claiming that the members were at an impasse and seeking dissolution pursuant to Michigan’s LLC Act. Robinson countered that the company had operated the same way for a decade and that as long as it maintained its historical operations, there was no deadlock. The arbitrator agreed with the trust and ordered dissolution.

Robinson and the company filed a complaint in Wayne County Business Court seeking to vacate the arbitrator’s ruling; while the trust moved to dismiss and confirm the award. Robinson argued that the arbitrator erred by applying the LLC Act dissolution provision instead of a provision in the company’s operating agreement prohibiting its members from seeking to “compel dissolution of the company, even if such power is otherwise conferred by law.”²³

Given the conflict between the provision and the statute, the court considered the question of which should prevail. After reviewing the particulars of the case, the court agreed with the arbitrator harmonizing the statute and the operating agreement, finding that where an LLC operating agreement lacks a mechanism to resolve a deadlock, MCL 450.4802 authorizes a court to order dissolution. Thus, the court upheld the arbitration award.

CONCLUSION

It is impossible to overstate the importance of comprehensive, well-drafted contracts in business transactions and relationships. They can safeguard against undesirable default rules (such as those in the UCC), guide the parties’ interactions with each other and third parties, and mitigate the risk of future litigation. Failure to reduce business dealings to a written contract can prove disastrous and lead to unintended and inequitable results. Despite the awesome power and critical role of contracts, however, they are limited by the drafter’s skill, expertise, and knowledge of the law.

As the foregoing cases illustrate, contract drafters must err on the side of specificity and adopt a litigator’s mindset when drafting: Where are the weaknesses in this provision and in the contract generally? Would a court find this language ambiguous? What are some possible disputes that could arise down the line, and does the contract address those scenarios?

Given that even the best, most experienced attorneys cannot anticipate and account for every future event, it is essential for practitioners — transactional attorneys and litigators alike — to keep abreast of recent cases and developments pertaining to contract law and thoughtfully consider their impact on future negotiations, contract drafting, and litigation strategy.