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Business > Contracts

What Are They and How Can They Be Enforced?
A contract is an agreement between two parties. Those parties may be individuals or business entities. In Arizona, a contract may be written or oral. If one of the parties fails to perform on the contract, that party is deemed to have breached the contract and may be sued. If the breach of contract occurs on a written contract, the party that has breached the contract may be sued for a period of six years after the breach occurs. If the contract is an oral agreement, the party that has breached the contract may only be sued for a period of three years after the breach. The period of time that a party may sue for a breach of contract is called the “statute of limitations”.

It is always in the parties’ best interests to put a contract in writing and have it signed by both parties. Then, if there is a breach of contract there is no question as to what the terms of that contract were and why they have been violated. In the case of an oral agreement, it is harder to prove the terms of a contract if the parties’ are not in agreement. When there is a written contract between the parties, the contract is considered to be the full and final agreement between the parties. In short, the written contract contains all of the terms that the parties agreed to and none of the parties’ prior negotiations resulting in the written agreement are admissible in a court proceeding. If there was fraud on the parties then the court will allow evidence of the parties’ prior negotiation to be admitted in a court proceeding. This rule is called the “four corners” rule. The rule is that the only relevant evidence of a written contract is what is contained in the four corners of the paper that the document is written upon. In the pursuit of a breach of contract of an oral agreement, negotiations and statements of the parties prior to reaching an agreement are relevant and admissible in court.

Some contracts must be in writing to be enforceable or valid. This rule comes from old English law called the “Statute of Frauds”. Most jurisdictions, including Arizona, have adopted the rules of the Statute of Frauds. The rule essentially states that in certain circumstances contracts must be in writing to be enforceable. Some of the contracts that must be in writing are those that will not be completed within one year of signing the contract. In addition, contracts that are for the sale of goods in excess of $500 and contracts regarding real property must also be in writing. Any contract that is for the guarantee of a debt by a third party must be written. If an oral agreement is made in any of these situations, it is not enforceable or valid. The law pretends that it did not exist. Contracts for the sales of goods may be governed by the Uniform Commercial Code as well.

In Arizona, lawsuits for the breach of a contract may allow for the prevailing party to receive an award of his, her or its attorney’s fees. The award of attorney’s fees is at the discretion of the court, but normally the court does allow an award for some amount of attorney’s fees to the prevailing party. The prevailing party is also awarded the party’s actual costs in filing the lawsuit (filing fee and costs of service on the defendant(s)). However, a prevailing party is not awarded attorney’s fees in the case where a defendant does not answer the Complaint and there was no written contract that states that attorney’s fees will be awarded in the case of a breach. In short, it is always prudent to put all contracts in writing. Also, it is always wise to state within any contract that in the event of a breach of a contract the breaching party will be responsible for payment of reasonable attorney’s fees and costs.

Written contracts allow for ease in collection through lawsuit. If a contract is clear, parties will incur less attorney’s fees than if the contract is oral. In the case of a breach of an oral contract, all elements of the contract will be open to argument and will increase the amount of attorney’s fees to prove the case.

In the case of a contract for services or repair work, companies need to have their estimates or purchase orders signed. If the estimate or purchase order is signed by the party that will have to pay for the product or services, the estimate or purchase order will act as the written contract between the parties. The purchase order or estimate should contain standard language that states that should there be any collection efforts necessary, reasonable attorney’s fees will be assessed against the debtor in addition to the actual amount of the debt. Then, in the event that there is a lawsuit there is a greater chance that the prevailing party will be awarded attorney’s fees.

In addition, parties may want to list the amount of interest or service charges that will be assessed on any unpaid sums. If there is no interest rate listed in the contract, the court will award 10% per annum or prime rate plus 1% whichever is less on any unpaid interest and this interest will be simple and not compound. Parties may delineate interest in any way they choose, but they need to be clear as to whether or not it is compounded and at what rate.

Parties may also make contracts that are not fiscally smart or seem silly. If parties have a contract, it may be enforced and the court will not invalidate it because it does not make business sense. In short, all parties to an agreement should be sure that they agree with a contract’s terms before signing. The enforceability of a contract may not be challenged because the contract was not financially wise. For example, if a vehicle is purchased with 28% compounded interest and later a party decides that 28% interest is too high, the contract may not be challenged and the parties are bound to the terms. In such a circumstance the only way to challenge the contract would be if the Buyer did not know that the interest rate would be 28% because the Seller lied. If there is something that a party has been promised that is not written in the contract, is should not be signed. Once a contract is signed, it is enforceable as it is written. If there is a term or a promise not contained in the contract and the other party will not add it, the contract also should not be signed. All terms must be listed within the contract to be enforceable. Any party that will not list a term that has been agreed to is probably not going to honor the contract.

The parties may only modify written contracts by a subsequent written, signed agreement. Written contracts may not be modified through oral agreement. In addition, if an estimate is incorrect or the scope of work changes in a contract, the parties need to write an addendum and both parties need to sign it to modify the original contract.

Parties may also agree to rescind a contract. Rescission of a contract is when the parties agree to return to the position they were in prior to the contract. For example, if the parties to a contract for the purchase of a home agree to rescind the contract, the Seller would return any money that the Buyer paid for the home to the Buyer and the Buyer would return possession of the home to the Seller. A party may also sue for rescission of a contract in certain circumstances.

If there is a breach of contract, a party may in rare circumstances sue for specific performance. This is a fairly extraordinary remedy as the court prefers to award monetary damages instead of forcing a party to perform his or her obligations under the contract.
The information provided in this website is meant only as a general description of the current laws as of the date of the writing. It is not meant to be an exhaustive discussion of all the nuances of the law and is intended to be only an overview. Many issues may appear simpler than they are, and an individual should always contact an attorney to obtain a complete, accurate interpretation of the law given the individual's particular circumstances. Thompson Law Group, P.C. makes no representations as to how the law would affect a particular situation and intends only to illustrate areas of concern and give general information.

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