Litigating a Contract Dispute
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Chapter 12: Litigating a Contract Dispute
John R. Trentacosta, Foley & Lardner LLP; Vanessa L. Miller, Foley & Lardner LLP

Prefiling Issues
Alternative Dispute Resolution
The Complaint
Response to the Complaint
Discovery Strategy
Contract Interpretation
The Parol Evidence Rule
Motions for Summary Judgment or Disposition
Special Trial Considerations Unique to Contract Cases

I.   Introduction

§12.1   Having read chapters 1–4, you have mastered the principles of contract formation and validity. Having read chapter 5, you are now drafting contracts that capture the very essence of your client’s commercial transactions. But something has gone wrong. Your client has had a falling out with a troubled supplier of a critical component part. Perhaps there is a dispute over the quality of that part or an unwarranted demand for a price increase. The range of topics for commercial disputes is endless. It’s time to head to court.

Although a single chapter cannot address every issue that a practitioner could face in a particular contract dispute, this chapter highlights the major issues that will likely arise in this type of case. In light of the complexity of the subject matter and the volume of documents, litigating contract disputes can test the skills of even the most seasoned litigator. Although there is no formula to follow in litigating a particular contract, this type of action requires meticulous attention to detail and a thorough understanding of the factual background. In addition, a comprehensive understanding of the legal issues, including anticipating your opponent’s claims and defenses, must be undertaken.

II.   Prefiling Investigation

A. Factual Investigation

§12.2   Commercial litigation tends to be more factually intense than other types of litigation. This is particularly true in breach of contract cases. Beyond the general pleading requirement that the allegations of the complaint be well grounded in fact and warranted by law, contract cases require an intense prefiling factual investigation by counsel.

At the outset, the factual investigation must focus on the parties’ dealings and negotiations before entering into the contract. Facts uncovered concerning the parties’ precontractual dealings and negotiations may be admissible despite the parol evidence rule (see §§12.78–12.92). Courts will often “bend” the parol evidence rule and look beyond the four corners of the agreement to discern the parties’ intent. See Hamade v Sunoco, Inc (R&M), 271 Mich App 145, 167, 721 NW2d 233 (2006) (parol evidence rule does not apply if contract is not integrated and, generally, parol evidence may be considered to determine whether contract is integrated); Farm Credit Servs, PCA v Weldon, 232 Mich App 662, 669, 591 NW2d 438 (1998) (“A finding that the parties intended a written instrument to be a complete expression of their agreement concerning the matters covered is a prerequisite to the application of the parol evidence rule.”).

Moreover, a determination of whether the parol evidence rule may even be invoked in a particular circumstance often requires a close look at extrinsic evidence. For example, if a contract is found to be ambiguous and the court deems it necessary to ascertain the parties’ intent in entering into the contract, the court will conduct a factual inquiry into the contract’s terms and the purpose of the contract as a whole by looking to extrinsic evidence of the parties’ intent and the contract’s meaning. Klapp v United Ins Grp Agency, Inc, 468 Mich 459, 469, 663 NW2d 447 (2003); see also Goodwin, Inc v Orson E Coe Pontiac, Inc, 392 Mich 195, 220 NW2d 664 (1974) (extrinsic evidence admissible to prove existence of ambiguity).

The factual investigation also must focus on the dealings between the parties after the contract was executed. The course of dealing or course of performance between the parties may be particularly relevant to a decision concerning the relative rights of the parties under a contract. Terry Barr Sales Agency v All-Lock Co, 96 F3d 174 (6th Cir 1996). In addition to the contract at issue in the case, the parties may have had other dealings involving separate, but similar, contracts. Culver v Castro, 126 Mich App 824, 338 NW2d 232 (1983). For a detailed discussion concerning the rules of contract interpretation, see chapter 1.

Accordingly, how the contract is characterized, the circumstances of its negotiation, and the nature of the extrinsic evidence may make a difference about whether parol evidence will be admitted. A court will be more easily persuaded to admit parol evidence if the evidence is characterized as anything but an alleged prior understanding that is being substituted for the unambiguous meaning of the terms of the written agreement. Instead, the contract should be depicted as an informal agreement, a side agreement, or an ambiguous agreement to the extent the evidence will support such a theory. Courts are more likely to admit parol evidence and course of dealing or performance, even if the contract is formal, if the contract can be characterized as an ambiguous agreement or if the parol evidence or course of dealing or performance can be characterized as a side agreement as opposed to a substitution of new terms into a clear, written agreement.

Practice Tip

Do not assume that the parol evidence rule will bar the parties’ precontract interaction. Fully explore what occurred precontract. Similarly, the parties’ postcontract dealings may be important in a commercial context. Look for a course of dealing or performance that supports your version of the case.

B. Witnesses

§12.3   Ideally, all witnesses having knowledge of any material fact or issue implicated in the dispute should be identified and interviewed before drafting the complaint or answer. Both current and, where possible, former employees should be interviewed. To the extent that key witnesses are former employees, information regarding their last known address or employer should be obtained from the company’s human resources department. These witnesses typically include

  • the individuals involved in negotiating and executing the contract;
  • the individuals involved in designing, testing, and manufacturing the product at issue in the suit;
  • the individuals who used the product that was manufactured by the seller and have knowledge of the product’s performance; and
  • third parties, such as the buyer’s customers, who can give testimony concerning the effects of the defective or noncompliant product.

In a case involving an issue of contract interpretation, the key witnesses will be the individuals who negotiated the contract for each party. Counsel must interview each witness to learn what the witness’s expectations and intent were for the contractual relationship at issue. The expectations will be (1) expressly consistent with the contract terms (should be a winner), (2) overtly inconsistent with the contract (cut your losses), or (3) not addressed or ambiguously addressed by the contract (grounds for litigation). In the third scenario, the testimony of the witnesses will be critical to prevailing in the litigation.

In a case involving a claim of breach, the testimonies of the witnesses will likewise be critical. In its simplest terms, the plaintiff must prove that the defendant failed to deliver the bargained-for consideration under the contract. The witnesses who will support or defend against this claim must be interviewed to determine whether they can credibly establish the facts necessary to prosecute or defend the action. Although support documents are also important, there is no substitute for a credible, presentable, “likeable” witness.

Finally, you must interview all witnesses having knowledge of the damages that result from the breach. These may or may not be the same people who know of the circumstances concerning the breach itself. Damages witnesses often are financial representatives of a company, such as the chief financial officer. They must know how to “explain the numbers.”

Practice Tip

Identify and interview all witnesses having knowledge of contract formation, contract breach, and contract damages. In these witness interviews, it is helpful to ask witnesses to identify (1) the other side’s best arguments and defenses and (2) current and former employees from the other side with whom the witnesses interacted. This type of ground-level information from the individuals who were involved in the contract will go a long way toward building a legal research and discovery plan.

C. Documents

§12.4   The initial focus must be on procuring all documents that could arguably constitute the contract. In some cases, this will be as simple as locating the one document that both parties signed and acknowledged as being their written agreement. In other cases, the process will not be quite as simple. For example, it is very common that goods are purchased with the seller issuing a quotation and the buyer issuing a purchase order. Under UCC 2-207, both documents, or parts of both documents, can form the parties’ contract. Challenge Mach Co v Mattison Mach Works, 138 Mich App 15, 359 NW2d 232 (1984) (quotation is offer and purchase order is acceptance); see also Plastech Engineered Prods v Grand Haven Plastics, Inc, No 252532 (Mich Ct App Mar 31, 2005) (unpublished) (quotation is offer and purchase order is acceptance). Other documents that may become part of the parties’ contract include incorporated standard terms and conditions; referenced manuals, specifications, or design documents; the request for quotation; the request for proposal; the seller’s acknowledgment; and the invoice.

After collecting all documents that may constitute the parties’ contract, the focus should turn to additional documents that are in any way relevant to the underlying dispute. By this time a litigation hold notice should already have been prepared and circulated to all current employees with any knowledge, information, or involvement in the contract dispute. Under the litigation hold notice, employees must retain all documents related to the lawsuit, including correspondence, emails, internal memoranda, etc. In addition to communications between the parties and internal communications, communications with third parties should be collected and reviewed.

In this age of electronic discovery, where the claimant is a corporate entity with a complex electronic storage system, it may be helpful to hold an initial meeting with the company’s information technology (IT) department. The purpose of this meeting should be to understand the company’s electronic footprint, shared drives where employees store documents, legacy systems, and backup systems, which will help the practitioner to locate and collect all responsive documents.

Practice Tip

Commercial cases are often won or lost based on finding a key document or two that unquestionably support your client’s view of the dispute. Time spent searching for the key documents is just as important as time spent interviewing key witnesses.

D. Initial Legal Research

§12.5   Before a complaint is filed, you should perform your initial legal research. At a minimum, you must review the elements of each possible cause of action, the applicable statute of limitations, and when each claim accrued. In addition, you should consider the anticipated defenses to a complaint and the relevant caselaw concerning each defense. The complaint may then be drafted to include factual allegations for each legal element of a claim. In this way, the complaint will more likely survive any initial procedural motion that may be filed.

Practice Tip

Preparing a complaint without an understanding of the legal elements of a cause of action is a recipe for disaster. The elements that must be established to prevail on a particular legal theory should serve as a checklist for the assembly of evidence supporting your claim. What witness, what documents, or what piece of evidence will you need to admit to meet your burden in your case in chief? If you fail to meet each element of your claim, a motion for a directed verdict may be in your future. See MCR 2.516; Auto Club Ins Ass’n v GMC, 217 Mich App 594, 601, 552 NW2d 523 (1996).


1 The authors wish to acknowledge and thank Christopher J. Falkowski for his contributions to a previous version of §§12.50–12.92 that were adapted for this edition and Jeffrey J. Mayer for his contribution to the research on the arbitration discussion.

Forms and Exhibits

Exhibit 12.01 Competency to Contract