Unilateral Termination of Contract for Cause

Author: LegalEase Solutions 

Introduction

Our client appears on behalf of Gretchen Automotive Trim, a company which entered into a multimillion dollar contract with an entity called Solve It Group, LLC, for the performance of solvent reclamation. Since lawyers were not involved in drafting or reviewing, the contract lacked many of the standard terms to be found in multi million dollar contracts. Moreover, Solve It Group has failed to comply with applicable federal/state environmental laws. The General Manager (employee) of Gretchen Automotive Trim entered into said contract without the company’s permission and his actions were ultimately detrimental to the company, and not in its best interest. Therefore, Gretchen Automotive Trim would like to terminate the contract at issue.

Questions presented

  1. Whether a contract can be terminated for cause, i.e. non-compliance with applicable state/federal law; and

Short Answers

  1. A contract can be terminated for cause, particularly a breach by the other party which goes to the very essence of the contract, such as non-compliance with laws applicable to the activities governed by the contract.

Discussion

The first issue can be dealt with in two steps. The first step is to analyze if contracts can be terminated for good/sufficient cause, and the second step would be to analyze whether non-compliance with the applicable laws constitutes good cause, thereby permitting termination.

(A) TERMINATION FOR GOOD/SUFFICIENT CAUSE:

It is well settled in Michigan that a material breach by a party to a contract entitles the non-breaching party seek rescission of that contract.  PAL Investment Group, Inc. v Staff Builders, Inc. 118 F.2d 781, 786 (E.D. Mich 2000); McAlpine v Aamco Automatic Transmissions, Inc. 461 F Supp 1232 (E.D. Mich 1978). The relevant maxim of Michigan contract law treating the issue of termination of contracts is explained succinctly as follows:

Rescission by One Party in General

Generally, one party to a contract may rescind the contract without the consent of the other if legal grounds exist.

Michigan Law and Practice 2d, Contracts  §272.

Though rescission of a contract is not a matter of right, where specific performance would be refused, rescission will be ordered. Generally, one party to a contract may rescind the contract without the consent of the other if legal grounds exist.

There are various grounds for rescission of contracts recognized by Michigan courts. Broadly speaking, where an agreement is entered on the basis of a mistake, the appropriate remedy may be rescission. A contract may be rescinded by one party for a material unilateral mistake known to the other party. Further, a mistake of one party of such a character that the minds cannot be said to have met, if clearly established, is a ground for rescission. A mutual mistake as to the subject matter of a contract is also a ground for a rescission of the contract, unless the injured party can be adequately compensated for the mistake. Fraud will also constitute a proper ground for rescission of a contract. A misrepresentation material enough to justify damages need not be sufficient to afford a basis for the rescission of a contract. As a general rule, a material alteration in the recited consideration of a contract affords proper grounds for its rescission.

(B) NONPERFORMANCE OR BREACH

Generally, when one party to an executory contract has failed to perform it and the other is not in default, the latter may rescind the contract.   However, not every partial failure to comply with the terms of a contract by one party will entitle the other party to rescind the contract.  Rescission is permissible only upon the failure to perform a substantial or essential part of the contract.  Rosenthal v Triangle Development Co. 261 Mich. 462; 246 NW 182 (1933).  Indeed, rescission will be permitted when there is a failure to perform an essential element of the contract, or where the contract would never have been made if default in the particular area of alleged breach had been expected or contemplated.  Rosenthal, supra, citing 1 Black on Rescission and Cancellation (2nd ed.), p. 553.   A breach will be held “substantial” where it goes to the essential purpose of the contract.  Chrysler International Corporation v Cherokee Export Co., 134 F.3d 738 (6th Cir. 1998).

In determining whether a breach is material, the court should consider whether the non-breaching party obtained the benefit it reasonably expected to receive. Omnicom of Michigan v Giannetti Investment. Co., 221 Mich. App. 341, 347; 561 NW2d 138 (1997).  Other considerations include the extent to which the injured party may be adequately compensated for damages for lack of complete performance, the extent to which the breaching party has partly performed, the comparative hardship on the breaching party in terminating the contract, the willfulness of the breaching party’s conduct, and the greater or lesser uncertainty that the party failing to perform will perform the remainder of the contract. Id.

The above cases demonstrate that an injured party may rightfully seek rescission of a written contract provided there has been a material breach by the other party. Under Michigan law, the materiality of a breach of contract is determined by considering:

(a) the extent to which the injured party will obtain the substantial benefit which he could have reasonable anticipated;

(b) the extent to which the injured party may be adequately compensated in damages for lack of complete performance;

(c) the extent to which the party failing to perform has already partly performed or made preparations for performance;

(d) the greater or less hardship on the party failing to perform in terminating the contract;

(e) the willful, negligent or innocent behavior on the party failing to perform;

(f) the greater or less uncertainty that the party failing to perform will perform the remainder of the contract.

(C) NONCOMPLIANCE WITH APPLICABLE LAWS SUFFICIENT CAUSE TO PERMIT RESCISSION?

What is to be considered next is whether one party’s failure to comply with laws applicable to the activities governed by the contract (even when the contract is silent on the matter of legal compliance) will constitute sufficient, material breach which would permit rescission by the non-breaching party.

While it is always advisable to specifically articulate the rights and obligations of both parties to any contract within the document itself, it may indeed still be possible to seek appropriate equitable remedies for breach, even if the written contract is silent on a particular matter of importance.  In the instant matter, the contract between Gretchen Automotive Trim and Solve It Group LLC did not contain a customary “compliance with laws” provision, and was silent as to what would constitute cause for termination.

A search of Michigan law on the matter reveals no cases directly on point which articulate a concrete maxim that any and every contract carries with it an implied covenant or obligation that the obligations and duties set forth in its written terms be fulfilled in accordance with applicable law.  However, Michigan case law does suggest that a party may by justified in rescinding a contract when the other party has violated applicable law, especially in instances where the applicable law specifically states that violation of the law would void the contract.

In Maurer v. Greening Nursery Co., 199 Mich. 522 (1918), Plaintiff contractors appealed a judgment from the trial court (Michigan) holding that their failure to comply with 1913 Mich. Pub. Acts 164 was a bar to recovery from defendant company under the contract at issue. The contractors brought this action against the company seeking to recover money allegedly due under the contract at issue. The company contended that the contractors’ failure to comply with 1913 Mich. Pub. Acts 164 barred their recovery. While Plaintiff admitted that it had not filed the certificates as provided under the statute, it argued that such a oversight should not bar them from recovery under the contract.  Moreover Plaintiff argued that the statute at issue was not malum in se, and thus a contract made in violation of the statute should not be declared void. Id. at 524.  The Supreme Court affirmed the trial court’s judgment that Plaintiff’s failure to comply with the applicable statutory provision was a bar to their recovery from the company under the contract at issue, the Supreme Court of Michigan held that

Where a statute expressly declares that certain kinds of contracts shall be void, there is then no doubt of the legislative intention, and an agreement of the kind voided by statute is unlawful.  The same is true where the contract is in violation of a statute, although not therein expressly declared to be void. It is immaterial whether the thing forbidden is malum in se or merely malum prohibitum.

Id. at 524 (Emphasis Added, Internal Citations Omitted).   Thus for the reason of non-compliance with the applicable statutory provision, recovery under the contract was barred.

In Martino v. Cottman Transmission Sys., 218 Mich. App. 54 (1996), a Pennsylvania franchisor entered into agreements with Michigan franchisees of a failing company and failed to comply with the Michigan Franchise Investment Law (MFIL), when entering into the agreements. When the Plaintiff franchisee was alleged to be in default of payment obligations, the Defendant franchisor obtained a default judgment in Pennsylvania, as allowed by the agreements.  Subsequently the Plaintiff franchisee filed an action for rescission of the contract in Michigan citing Defendant’s failure to follow certain provisions of the MFIL.

Defendants argued, on appeal, that Plaintiff’s action for rescission was barred by res judicata and that the Michigan court was obligated to give the Pennsylvania judgment full faith and credit.  The Michigan Court of Appeals disagreed with Defendant stating:

Were the issue before us the enforcement of the Pennsylvania judgment, we would conclude that the judgment must be enforced.  Int’l Recovery Systems, Inc v Gabler (On Rehearing), 210 Mich. App. 422, 424, 527 N.W.2d 20 (1995). However, the issue before us today, notwithstanding the Pennsylvania judgment, is whether plaintiffs are nevertheless entitled to rescission.

Id. at 58.  The court reasoned that Plaintiff’s rescission claim was grounded in Michigan’s franchise statute.  Id.  Moreover, the MFIL specifically provided certain contractual provisions are void and unenforceable as between franchisors and franchisees. Id. at 59-60. Ultimately the court affirmed the rescission of the franchise contracts, but remanded the matter to the trial court with the direction that it return the franchisor to the status quo ante. Id. at 64.

Moreover, based upon the facts of the case at hand, a strong argument could be made that Solve It Group, LLC’s failure to comply with state and federal environmental laws goes to the very essence of the contract with Gretchen, and that such breach would constitute a material one, sufficient to permit rescission by Gretchen.

Gretchen Automotive Trim engaged the services of Solve It Group, LLC for the performance of solvent reclamation tasks.  Presumably, Solve It was chosen to perform this work for Gretchen because of its unique expertise and training in undertaking that type of technical work.  It would seem likely that Solve It held itself out as an authority on solvent reclamation/disposal/remediation techniques, and that it was able to perform work that Gretchen was not equipped or trained to perform on its own.  The very nature of the activities themselves (handling and removal of potentially dangerous chemicals) strongly suggest the existence of (at the very least) stringent and detailed safety protocols (and even more likely, formal regulations promulgated by government agencies) for proper performance of this type of work.  Arguably, it was Solve It’s training in and understanding of the regulations governing this type of solvent reclamation work that prompted Gretchen to enter into the instant contract in the first place.

As previously stated, where one party’s breach goes to the very essence of a written contract, to the point where such a breach, if contemplated by the non-breaching party, would have precluded the agreement in the first place, rescission is permitted.  It seems very likely that Gretchen contracted with Solve It for the sole purpose of ensuring its own corporate compliance with safe reclamation/disposal/remediation regulations.  Gretchen’s subsequent discovery that Solve It was undertaking activities pursuant to the contract in a manner contrary to state and federal environmental law renders its continued adherence to the terms of the contract wholly inequitable.  If Gretchen had contemplated that Solve It would act in utter disregard of environmental regulations in performing its solvent reclamation work, it is highly unlikely that the contract in question would have ever been made.  Gretchen is wholly within its rights, therefore, to seek rescission of its agreement with Solve It.