Craig a Klapp v. United Insur Group Agency Inc

Michigan Supreme Court
Lansing, Michigan 48909
____________________________________________________________________________________________
C h i e f J u s ti c e J u s t ic e s
Maura D. Corrigan Michael F. Cavanagh
Opinion
Elizabeth A. Weaver
Marilyn Kelly
Clifford W. Taylor
Robert P. Young, Jr.
Stephen J. Markman
____________________________________________________________________________________________________________________________
FILED JUNE 18, 2003
CRAIG A. KLAPP,
Plaintiff-Appellant,
v Nos. 119175, 119176
UNITED INSURANCE GROUP AGENCY, INC,
Defendant-Appellee.
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
interpretation raised a question of fact that must be decided
by the jury, which could consider relevant extrinsic evidence.
The jury found in favor of plaintiff. The Court of Appeals
reversed, concluding that the contract unambiguously stated
that an agent must be at least sixty-five years old and have
worked at least ten years for defendant in order to qualify
for retirement renewal commissions and, therefore, that the
trial court erred in not granting defendant’s motion for
summary disposition. Because we agree with the trial court
that the language of this contract is ambiguous and, thus,
that its interpretation raises a question of fact for the jury
to determine in light of relevant extrinsic evidence, 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.1
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
1
Specifically, on remand, the Court of Appeals shall
consider defendant’s alternative argument that the damages
award was based on improper speculation about policy renewals,
and plaintiff’s cross-appeal, which challenged the trial
court’s dismissal of his claim for double damages and actual
attorney fees under the sales representative commissions act.
MCL 600.2961.
2
for defendant in 1997.2 Plaintiff brought this action,
alleging that defendant failed to pay renewal commissions to
which plaintiff was entitled pursuant to the vesting schedule
in their contract that provided that an agent with seven years
of service is entitled to the vesting of one hundred percent
of his renewals.3 After discovery, defendant brought a motion
for summary disposition pursuant to MCR 2.116(C)(10),
contending that, in order for renewal commissions to be vested
on the basis of retirement, one must be at least sixty-five
years old and have worked for defendant for at least ten
years.4 The trial court denied defendant’s motion for summary
disposition,5 finding the contract to be ambiguous,6 and the
2
In 1994, plaintiff stopped working for defendant for
about six months. When plaintiff returned to work for
defendant, he was given credit for his prior work for
defendant pursuant to the vesting schedule in their contract.
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.
3
That defendant had accrued seven years of service as an
agent with defendant is undisputed.
4
That defendant was in his mid-forties when he stopped
working for defendant is undisputed.
5
However, the trial court did grant defendant’s motion
for summary disposition with regard to plaintiff’s second
(continued...)
3
jury subsequently found in favor of plaintiff.7 The Court of
Appeals then reversed, concluding that the contract
unambiguously requires that an agent must be at least sixty­
five years old and have worked at least ten years for
defendant in order to qualify for retirement renewal
commissions.8 We granted plaintiff’s application for leave to
appeal.9
5
(...continued)
count seeking double damages and attorney fees under the sales
representative commissions act, MCL 600.2961, concluding that
the SRCA does not apply to insurance sales agents.
6
Although the trial court stated, in a written opinion,
“it is an issue for the trier of fact to determine whether or
not the language of the contract and actions by the parties
render an ambiguous or unambiguous contract,” the court’s
final instructions to the jurors told them to consider both
the contract and the relevant extrinsic evidence, and then
decide what the contract meant. The court did not instruct
the jurors to determine whether the contract was ambiguous.
7
The jury awarded plaintiff $45,882 in renewal
commissions for the period from August 1997 through the
January 1999 trial, and one hundred percent of all future
renewal commissions as they accrue.
8
Unpublished opinion per curiam, issued February 9, 2001
(Docket Nos. 219299, 219330). The Court of Appeals did not
address defendant’s alternative argument that the damages
award was based on improper speculation about policy renewals
or plaintiff’s cross-appeal, which challenged the trial
court’s dismissal of his SRCA claim for double damages and
attorney fees.
9
We directed the parties to include among the issues to
be briefed: “Where, as in the present case, a contract is
drafted entirely by one party, without any bilateral
negotiations, is extrinsic evidence admissible to clarify
(continued...)
4
II. STANDARD OF REVIEW
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
9
(...continued)
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 867 (2002).
5
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
of Service 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
6
industry, he was not at least sixty-five years old and had not
worked for defendant for at least ten years, whereas the
contract unambiguously required an agent to satisfy all three
of these requirements in order to be eligible for retirement
renewal commissions. Defendant further argued that, because
the contract was unambiguous, extrinsic evidence may not be
considered in interpreting the contract.
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
7
evidence.10
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
10
As also noted above, n 6, the trial court did not
clearly express this conclusion. In fact, when the trial
court denied defendant’s motion for summary disposition, the
trial court actually stated that it was up to the jury to
determine whether the contract was ambiguous. However, when
it came time to instruct the jury, the trial court told the
jury to consider the contract and the relevant extrinsic
evidence and to decide what the contract meant. These
instructions make reasonably clear that the trial court itself
must have determined that the contract was ambiguous and,
thus, that it was up to the jury to determine the meaning of
the contract, with the use of relevant extrinsic evidence
being permissible.
8
to receive one hundred percent of his renewal commissions.
Therefore, plaintiff argued, the Court of Appeals erred in
concluding that years two through nine of the vesting schedule
applied to agents who died or became disabled. The Court of
Appeals denied plaintiff’s motion for rehearing without
explanation.
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
9
a percentage of renewal commissions; while, under the Agent’s
Manual’s definition of retirement, an agent is only entitled
to a percentage of renewal commissions if that agent is at
least sixty-five years old and has served ten or more years
with defendant. Accordingly, while plaintiff is entitled to
renewal commissions under the vesting schedule, he is not
entitled to renewal commissions under the Agent’s Manual’s
definition of retirement. Therefore, the language of the
contract is ambiguous.
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
10
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
11
by its terms alone, it is the duty of the court to interpret
it; but where its meaning is obscure and its construction
depends upon other and extrinsic facts in connection with what
is written, the question of interpretation should be submitted
to the jury, under proper instructions.’” O’Connor v March
Automatic Irrigation Co, 242 Mich 204, 210; 242 NW 784(1928)(citation omitted).
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.]
12
Looking at relevant extrinsic evidence to aid in the
interpretation of a contract whose language is ambiguous does
not violate the parol evidence rule.
“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
11
In this case, the trial court instructed the jury that
it should consider relevant extrinsic evidence and that any
ambiguities should be construed against the drafter of the
contract. Specifically, the trial court instructed the jury
to
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
(continued...)
13
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
11
(...continued)
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.
12
“This rule is frequently described under the Latin term
of contra proferentem, literally, against the offeror, he who
puts forth, or proffers or offers the language.” Williston,
supra, § 32:12, pp 472-475.
13
Although extrinsic evidence cannot resolve an ambiguity
in the sense that it can transform ambiguous contract language
into unambiguous contract language, extrinsic evidence may
help the jury determine what the parties to a contract
intended the ambiguous contract language to mean.
14
means “a” or “b,” but relevant extrinsic evidence leads the
jury to conclude that the parties intended the term to mean
“b,” then the term should be interpreted to mean “b,” even
though construing the document in the nondrafter’s favor
pursuant to an application of the rule of contra proferentem
would produce an interpretation of the term as “a.”
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,
15
there is substantial reason for preferring the meaning of the
other party. . . .” Id. “[T]he rule is ‘the last one to be
resorted to, and never to be applied except when other rules
of interpretation fail.’” Id., Reporter’s Note, p 106,
citation omitted. Treatises also indicate that this is a so­
called “rule of last resort.” For example, 5 Corbin,
Contracts (Rev ed, 1998), § 24.27, pp 297-300, provides:
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
16
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.
17
In sum, the jury can consider relevant extrinsic evidence as
an aid in interpreting a contract whose language is ambiguous.
However, if, after the jury has applied all other conventional
means of contract interpretation and considered the relevant
extrinsic evidence, the jury is still unable to determine what
the parties intended, the jury should then construe the
ambiguity against the drafter. That is, 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.
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
18
proferentem is not a rule of construction, rather, as
explained above, it is a rule of legal effect. See pp 17-18.
While rules of construction are designed to help determine the
parties’ intent, the rule of contra proferentem is designed to
resolve a dispute where the parties’ intent cannot be
determined.
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,
14
Although the concurring opinion recognizes that “[t]he
ultimate objective in interpreting an ambiguous contract is to
ascertain the intent of the parties,” post at 3, it ultimately
concludes that the “public-policy” interests in “provid[ing]
a strong incentive for a party drafting a contract to use
clear and unambiguous language” and to avoid “more involved
litigation,” somehow overrides this “ultimate objective.”
Post at 4-5. That is, the concurring opinion concludes that
the rule of contra proferentem should be applied as “the
primary rule of construction,” post at 2, because it allegedly
furthers these latter two interests, although to apply it, as
we do, as a rule of last resort is more in accord with the
“ultimate objective in interpreting an ambiguous contract”
because, as explained above, while the rule of contra
proferentem does not help determine the parties’ intent,
actual rules of construction, such as looking at relevant
extrinsic evidence, do.
19
extrinsic evidence is not the best way to determine what the
parties intended. Rather, the language of the parties’
contract is the best way to determine what the parties
intended. However, where, as in cases such as this one, it is
not possible to determine the parties’ intent from the
language of their contract, the next best way to determine the
parties’ intent is to use relevant extrinsic evidence. Such
evidence at least affords a way by which to ascertain the
parties’ intent, unlike the rule of contra proferentem, which
focuses solely on the status of the parties to a contract.15
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
15
Regardless of whether a contract is drafted with or
without bilateral negotiations, looking at relevant extrinsic
evidence to help determine the parties’ intent where their
contractual language is ambiguous better comports with the
ultimate goal of “honor[ing] the intent of the parties,”
Rasheed, supra at 127 n 28, than does the rule of contra
proferentem.
20
cases, the rule of contra proferentem was, in all likelihood,
applied because there was no way to determine the parties’
intent. That is, the language of the contract was ambiguous,
but there was no relevant extrinsic evidence available.16
Therefore, the concurring opinion’s reliance on these cases is
misplaced.17
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
16
As the concurring opinion points out, these cases do
not address whether a jury should be allowed to examine
relevant extrinsic evidence when interpreting an ambiguous
contract or whether the rule of contra proferentem should be
applied as the “only [] tool of construction in resolving
ambiguous contracts.” Post at 7 n 3. Presumably, this issue
was not addressed because it was not in question. That is,
the parties in those cases did not attempt to introduce
relevant extrinsic evidence. However, because these cases did
apply the rule of contra proferentem, the concurring opinion
assumes that the Court in those cases applied this rule as the
“primary rule of construction.” In our judgment, a far more
likely explanation is that the Court viewed the rule of contra
proferentem, not as the only tool of construction in resolving
all ambiguous contracts, but as the only tool available to
resolve these ambiguous contracts.
17
In fact, in one of the cases cited in the concurring
opinion, this Court specifically stated that “[i]f the
language of a contract is ambiguous, the court’s duty is to
look beyond the bare language of the agreement to determine
its meaning.” Stine v Continental Casualty Co, 419 Mich 89,
112; 349 NW2d 127 (1984). In this case, this Court further
stated that “[c]ommon sense suggests that extrinsic evidence,
including parol evidence, should be admissible to clarify the
meaning of any ambiguous contract . . . .” Id. at 112 n 7.
21
commissions specified by § 5(B) of the vesting schedule,
regardless of whether those agents had ten years of service
with defendant or had reached age sixty-five.
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
18
The new Agent’s Agreement containing the vesting
schedule was adopted in 1989, and defendant applied the
vesting schedule to agents who were not at least sixty-five
years old and who had not served as agents for defendant for
at least ten years until 1997.
19
Defendant argues that its payment of such commissions
had been a mistake on its part.
22
this extrinsic evidence. However, as discussed above, the
jury is to consider relevant extrinsic evidence when
interpreting a contract whose language is ambiguous. How the
drafting party has interpreted ambiguous contractual language
in the past is certainly relevant in determining what the
parties intended such language to mean. The meaning of a
provision in a contract whose language is ambiguous “must be
ascertained in the light of all of the relevant circumstances,
. . . including, . . . the meanings accepted by the parties.”
Davis v Kramer Bros Freight Lines, Inc, 361 Mich 371, 375; 105
NW2d 29 (1960). “There is no doubt that evidence of practical
interpretation by the parties is admissible as an aid in the
determination of the meaning to be given legal effect.” Id.
at 375-376.
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
23
according to the vesting schedule, even if the agent was not
at least sixty-five years old and had not served as an agent
with defendant for at least ten years, the trial court did not
err in instructing the jury to consider this evidence.
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. MCR 2.613(A);
Cox v Flint Bd of Hospital Managers, 467 Mich 1, 8; 651 NW2d
20
All the extrinsic evidence presented at trial favors
plaintiff’s construction of the contract. Defendant did not
present any extrinsic evidence at trial that favors its
construction.
24
356 (2002).21
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
21
“Instructional error warrants reversal if the error
‘resulted in such unfair prejudice to the complaining party
that the failure to vacate the jury verdict would be
“inconsistent with substantial justice.”’” Cox, supra at 8(citations omitted).
25
the contract. That is, if, after the jury has considered all
conventional means of contract interpretation and all relevant
extrinsic evidence, it is still unable to determine what the
parties intended, the jury should then construe the ambiguity
against the drafter.
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
26
S T A T E O F M I C H I G A N
SUPREME COURT
CRAIG A. KLAPP,
Plaintiff-Appellant,
v Nos. 119175, 119176
UNITED INSURANCE GROUP AGENCY,
INC.,
Defendant-Appellee.
________________________________
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
1
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.
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
1
In granting leave to appeal, this Court directed the
parties to include among the issues to be briefed:
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).]
2
whether extrinsic evidence should be precluded and whether the
rule of construing against the drafter should be applied
initially, instead of as a rule of last resort, when the
contract is drafted entirely by one party without bilateral
negotiation. I conclude that in such a case, the rule of
contra proferentem should be applied as the primary rule of
construction, not as a last resort, and that extrinsic
evidence is not admissible to clarify the ambiguity.
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
3
offered to others on a take-it-or-leave-it basis, the rule of
construing against the drafter is determinative. SI Mgt,
supra; followed by Intel Corp v Via Technologies, Inc, 174 F
Supp 2d 1038 (ND Cal, 2001). In SI Mgt the Delaware court
analyzed its approach to interpreting insurance contracts.
The Delaware courts had said that if an insurance contract is
ambiguous, “‘the principle of contra proferentem dictates that
the contract must be construed against the drafter.’” SI
Management, supra at 42 (citation omitted). The court found
that the policy behind that principle of construing against
the drafter is that the insurer was in complete control of
creating and drafting the policy, while the insured had little
say about those terms except to take them or leave them or to
select from limited terms offered by the insurer. Because of
that, the Delaware courts had consistently held that the
insurer had an obligation to make the terms clear and should
suffer the consequences of convoluted or confusing terms. In
SI Mgt the Delaware Supreme Court expanded this principle to
other contracts where there was not a bilaterally negotiated
agreement, and one party had signed onto an agreement that it
had no hand in drafting.
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
4
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.
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, 455 Mich 14, 22; 564 NW2d 857 (1997) (“As
the contract period under consideration is ambiguous, it must
2
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.
5
be construed against the drafter, the defendant.”),
Lichnovsky v Ziebart Int’l Corp, 414 Mich 228, 239; 324 NW2d
732 (1982) (“Any ambiguity in the expression must be construed
against Ziebart, as its predecessor drafted the agreement.”),
Ladd v Teichman, 359 Mich 587, 592; 103 NW2d 338 (1960) (“We
agree with appellees that appellant having drafted the
contract, any ambiguity contained in it must be construed
against him.”), and Veenstra v Associated Broadcasting Corp,
321 Mich 679, 691; 33 NW2d 115 (1948) (“Defendants caused the
drafting of the two contracts and any doubt or ambiguity
concerning the nature of the contracts must be resolved
against the defendants.”).
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;
6
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
3
The majority says that in all the cases cited above “the
rule of contra proferentem was, in all likelihood, applied
because there was no way to determine the parties’ intent.
That is, the language of the contract was ambiguous, but there
was no relevant extrinic evidence available.” Ante at 21. The
majority’s assertion is not supported by the opinions
themselves. None of the opinions cited states that relevant
extrinsic evidence was not available, nor that there was no
other way by which to determine the parties’ intent. Instead,
the opinions consistently apply the well-established rule of
construing against the drafter as the first—indeed the
only—tool of construction in resolving ambiguous contracts.
7
in sole control of the process of creating and setting forth
the terms of the contract. The parties did not engage in
bilateral negotiation; the plaintiff’s only choice in the
terms of the contract was to take them or leave them. In such
a situation, any ambiguity in the contract should have been
construed against the drafter, without considering the
extrinsic evidence.
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.
4
The plaintiff was attempting to show that the language
“[v]estment [sic] for retirement is age 65 or 10 years of
service whichever is later” in the Agent’s Manual was
unintentionally left in the Agent’s Manual, and was no longer
relevant given the new Agent’s Agreement.
5
This testimony showed that the defendant's past practice
had been to pay former agents the renewal commissions
specified by the § 5(B) vesting schedule, even when those
agents did not have ten years of service with the defendant or
had not reached age sixty-five.
8
Accordingly, I concur with the decision to reverse the
judgment of the Court of Appeals and remand the case to that
Court for consideration of those issues raised, but not
addressed below.
Elizabeth A. Weaver
Marilyn Kelly
9