Our Feed

From purchasing office supplies to selecting a contractor to renovate the Township Hall, townships enter into contracts in some shape or form multiple times per year. Most of these transactions go smoothly. However, what happens when things do not go as planned? With appropriate review and thoroughness when entering into a contract, any issues or mishaps can be better managed and solved.

This month’s E-letter guides townships through important considerations when reviewing and approving contracts. Not only will this E-Letter explore important contract terms, but certain provisions must be carefully considered to ensure they do not prevent townships from the benefit of their bargains.

What is a Contract?

Contracts can vary in length and form depending on the substantive matter, vendor, and sophistication of the party offering the contract. Contracts include one-to-two-page purchase orders to 30-page sales agreements with exhibits. Regardless of the length and form, they all constitute contracts if they satisfy five essential elements under Michigan law.

Under Michigan law, a valid contract must have (1) parties competent to contract; (2) a proper subject matter; (3) legal consideration; (4) mutuality of agreement; and (5) mutuality of obligation. Bank of Am NA v First Am Title Ins Co, 499 Mich 74, 101 (2016). Generally, contracts must be in writing and signed by the parties to be enforceable. See e.g. MCL 566.132. However, that is not always necessary and, thus townships should be careful with oral promises—instead favoring written contracts that control the parties’ expectations. For example, some townships only require a purchase order for purchases up to $5,000. In that case, the purchase order and its terms (including any on the back) become the contract and therefore, could be enforced by either party. However, in other cases, a written, negotiated contract will be required.

How to Approach a Contract

If your township requires or chooses to enter into a written, negotiated contract, certain considerations must be paid. Some terms are intuitive (i.e. term, price, scope of work). However, others may just seem like legalese. Townships should always consider having their township attorney assist in drafting or reviewing a proposed contract. This will ensure that regardless of whether it is a form contract or a fully-negotiated contract for a unique situation, the Township has an additional set of eyes to explain the legal consequences of various provisions within the contract that may not otherwise appear problematic. Some provisions, however, are regularly found in various contracts and should be fully understood to avoid confusion.

(1) What Type of Contract is the Township Entering Into?

Some contracts contain different types of requirements than others. For example, contracts for public works projects in excess of $50,000.00 require that a contractor obtain and present to the township a payment and performance bond prior to the contract’s execution. MCL 129.201. In considering a contract for such work, make sure to ensure that the bonding requirement is set forth with specificity (using language such as, Contractor must provide and present to the Township before execution a performance and payment bond.) Lack of specificity on issues like this may weaken the Township’s position in the event of a dispute, and an attempt to collect on the guarantee/bond.

On the other hand, some contracts must comply with statutory standards in order to even be effective. For example, an urban cooperation agreement must contain the provisions relating to (1) the duration of the agreement; (2) the way the agreement can be rescinded or terminated in advance of the end date; (3) a description of the property subject to the agreement (including parcel number, if any); (4) how taxes will be shared; (5) schedule and method for the distribution of taxes; and (6) acknowledgement that the agreement can be terminated via referendum within 45 days from the agreement’s approval. MCL 124.505a(2). Absent these terms, it fails to comply with the Urban Cooperation Act and may be deemed ineffective.

Furthermore, if the contract constitutes an agreement for multiple parties to work together towards a common purpose, make sure that your township designates a method for withdrawal. As nice as it is entering into an agreement, disputes do arise. Therefore, make sure that your township and the other parties discuss how the withdrawal will work and when it will be effective. Additional considerations include how assets will be allocated and whether property will be returned to those who provided it as initial capital to start a joint venture or for the purpose set forth in a mutli-municipality agreement. Make a plan for the worst to alleviate the stress and (hopefully) avoid litigation.

(2) How Does the Township Want Disputes to be Resolved?

Often, contracts will contain provisions that set forth the method for resolving disputes. Typically, there are three methods for attempting to resolve disputes: litigation, mediation, or arbitration. Each method has its advantages and disadvantages. Therefore, the Township should analyze each to determine which would work best for it.

• Litigation is the formal court process, in which the plaintiff asks a judge or jury to decide an issue. It is lengthy, sometimes spanning years, and can be quite costly. However, litigation allows for the case to be assessed by a local judge or local members of the community. The costs for the local judge and processing of the case are far less expensive than the neutral arbiters involved in the other two methods, however legal fees, experts, and costs can be significant. Overall, litigation is a very typical process to resolve contract disputes as it provides for some flexibility in terms of dispute resolution, and if the parties cannot reach an amicable result, the court will decide the issue.

• Mediation is an informal process in which the parties work with a hired mediator to try to resolve their dispute. The mediator is generally paid by the hour and constitutes a neutral third party that goes back and forth between the parties to negotiate a settlement. Mediation is generally done as non-binding—meaning that neither party must reach a resolution and no resolution discussed is binding until approved by the Township Board. Therefore, if the parties are not able to reach a settlement, the mediator does not have the ability to “decide the issue.” Despite this, the mediator is still entitled to be paid for his or her time. Because of this, we do not recommend that a contract require the parties to engage in mediation prior to litigation. Litigation can resolve certain aspects of disputes and impact the parties’ bargaining positions, potentially making resolution more attainable.

• Arbitration is the third option commonly seen in contracts. In arbitration, the parties agree to forgo the litigation process and instead utilize either a single arbitrator or a panel of arbitrators to resolve the dispute. After an extensive claim and defense process similar to litigation, the arbitrator(s) will analyze a presented case and issue a determination on the merits. Arbitration is binding. Therefore, a party must accept the results in arbitration, except for narrow exceptions that allow for reversal of an arbitration award. Additionally, it is costly, as each arbitrator involved must be paid, in addition to any attorney’s fees expended in the process. Therefore, mandatory arbitration is not generally beneficial to Townships for most situations. There are certainly those unique situations where arbitration with a suitable framework can serve everyone well.

(3) Where is the Township Willing to Sue or Be Sued?

Where the dispute process will occur goes hand and hand with dispute resolution processes. Contracts may contain provisions that not only select the method for resolving disputes but also the venue (the place) where the dispute will be resolved. Under Michigan law, a party must bring its lawsuit in either the circuit court in the county where the defendant lives, owns a business, or conducts regular and systematic business. See MCL 600.1621. However, a party can waive this requirement via written contract and agree to have the case heard in a different county or even state. Therefore, a township should analyze any provision relating to venue and determine whether the listed venue would be convenient and affordable.

(4) Are There Any Attachments to the Contract or Should Attachments Be Included?

Some contracts are voluminous, spanning over fifty pages. Others include language that incorporates various attachments and exhibits. In assessing such contracts, it is critical to look at each and every page, including the exhibits and warranties. If the document is to be included as an exhibit or attachment, make sure that the contract itself references such document.

(5) How Much Risk is the Township Willing to Accept as a Result of this Agreement (Indemnity Clauses)?

Many contracts contain provisions that require a party to “defend, indemnify, and hold harmless” the other party upon the happening of a specific occurrence or occurrences. This means that if a listed occurrence happens and the other party gets sued as a result, a township would be responsible for paying for the defense of the lawsuit, as well as any damages charged against the other party in a judgment. Such costs could be hefty and overly unanticipated by the township.

Therefore, Townships should be cautious and skeptical of entering into any contract that contains defend, indemnification, or hold harmless provisions. However, sometimes the other party will be unwilling to waive this language. In such situations, the Township will want to consider two things: (1) whether the Township must contract with this specific party for the service sought; or (2) try to limit the indemnification and defense language to specific circumstances that the Township can budget for and that relate to the subject matter of the contract. For example, in a construction contract, the Township may agree to indemnify or defend the other party (not its subcontractors) from certain occurrences that arise out of the contractor’s performance of the contract. However, it should not agree to be responsible for damages and costs arising out of the contractor or its employees’ gross negligence or criminal acts that occur. Therefore, if an adverse party is unwilling to waive indemnification or defense language, try to negotiate to tailor the scope of the indemnification clause to something manageable.

(6) Is the Contract’s Language Clear and Does it Mean What You Want it to?

A lawsuit over a contract often arises because one party has failed to comply with its terms. To determine whether a breach of contract has occurred, a court will analyze the plain language of the contract. Kendzierski v Macomb Cty, 503 Mich 296, 311-312 (2019). If the court finds the language to be unambiguous, it will construe the contract’s meaning from the language set forth therein. Id. at 311. However, if the court finds the contract to be ambiguous, then it looks to supplemental materials, such as prior drafts, correspondence, or testimony to determine the meaning of the contract. Id. Given these notions of law, it is incredibly important for the terms of the contract to be clear and to accurately relay the scope of the agreement. The contract serves to encompass the understanding between the parties. Therefore, the parties should reap the proper benefit of their negotiations and draft a contract to reflect as such.

Conclusion

Contracts, even for the simplest of services, can be incredibly complex. Poor drafting or lack of attention to detail can end up costing a township thousands of dollars, either in litigation or as a loss due to a contractor or seller’s lack of performance. The above overview only scratches the surface of what a Township should consider when entering into a contract.

By Hannah Stocker

This publication is intended for educational purposes only. This communication highlights specific areas of law and is not legal advice. The reader should consult an attorney to determine how the information applies to any specific situation.