Innovation Ventures v. Liquid Manufacturing
Docket No. 150591
Trial-Lawyers’ Bottom Line: A party can't claim failure of consideration when it seeks to void the contract on the basis of an event explicitly contemplated by the contract. In addition, restrictive covenants between businesses are governed by federal interpretation of the rule of reason as directed by MARA.
The Court reviewed three agreements: an Equipment Manufacturing and Installation (EMI) agreement; a Termination Agreement; and a Nondisclosure Agreement. And two jurisprudentially significant questions were before the Court (among other case-specific questions): first, whether the EMI and Nondisclosure Agreement failed for failure of consideration; and second, what standard should be used when assessing the enforceability of a noncompete agreement between businesses.
For the first question, Justice McCormack (writing for a unanimous Court) distinguished between lack of consideration, which relates to adequacy of consideration at the time of contract, and failure of consideration, which relates to deficient contractual performance. Failure of consideration is an affirmative defense; thus the party asserting it bears the burden of proof.
The Court pointed out that it has not spoken on failure of consideration often. In fact, the Court cited cases from the first half of the 20th century as most of its authority. The Court explained that a failure of consideration happens only “when one party has committed a first, substantial breach of a contract,” and then tries to sue the other party for a later failure to perform. The defendant would assert failure of consideration as an affirmative defense. As a remedy, the Court would allow the parties to rescind the contract. Importantly though—and dispositive in this case—“failure of consideration does not void a contract when the party seeks to void the contract based on an event explicitly anticipated in the contract.”
Here, the Court held that because both parties had exercised their rights as contemplated by the contract (which allowed for termination at any time with 14 days’ notice) the plaintiff could not claim a “failure of consideration.” Once one party performs a significant portion of the contract, any claim made by the other party should be brought as a breach-of-contract claim, not for failure of consideration—an affirmative defense, generally not a claim itself.
The second question was what standard a court should apply to determine enforceability of a non-compete provision between two businesses. The Court made clear that the standard set forth in MCL 445.774(a), which the Court of Appeals used, is only for assessing non-compete agreements between employees and employers. Instead, the Michigan Antitrust Reform Act (MARA) in MCL 445.771 et seq. sets out a different test for general agreements, including agreements between businesses. The Court points out that MCL 445.784(2) instructs courts to look to federal interpretation of comparable statutes to define the rule of reason.
The Court quoted a Supreme Court decision articulating the rule of reason. The analysis depends on “whether the restraint imposed is such as merely regulates and perhaps thereby promotes competition or whether it is such as may suppress or even destroy competition.” As the Michigan Supreme Court has said, the reasonability of a restriction depends on “the relevant business, the condition before and after the restraint was imposed, and the restraint’s history, nature, and effect.”
The big takeaway is that failure of consideration is not typically a claim. Instead, it’s an affirmative defense in response to a breach-of-contract claim. Also, there are different standards for restrictive covenants between employers and employees and restrictive covenants between businesses. The latter are governed by MARA, which directs courts to look to federal interpretation of the rule of reason.