CONTRACTSWhat are they and how can they be enforced?A contract is agreement between two parties. Those parties may be individuals or business entities. In Arizona, a contract may be in writing 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. In the case of an oral agreement, it is harder to prove the terms of a contract. Each party would have to provide testimony regarding what that party believed the terms of the agreement to be. In addition, in the case of a written contract, 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 their negotiations prior and resulting in the written agreement are admissible in a court proceeding unless there was fraud by one of the parties to the agreement. 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. It essentially says that in certain circumstances contracts must be in writing. Some of the contracts that must be in writing are those that will not be performed within one year of the time the contract was entered into. In addition, contracts that are for the sale of goods in excess of $500 and also contracts regarding real property must be in writing. Also, any contract that is for the guarantee of a debt by a third party must be written. If an oral agreement is made in a situation as the ones listed above, 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 or her attorney's fees. The award of attorney's fees is at the discretion of the court, but normally the court does allow for some amount of attorney's fees for the prevailing party. The prevailing party is also awarded the party's actual costs in filing the lawsuit. 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 contract will be responsible for payment of attorney's fees. Written contracts allow for ease in collection through lawsuit. If a contract is clear, parties will not incur as many attorney's fees as 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. 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 a contract. The purchase order or estimate should contain standard language that states that should there be any collection efforts for breach of payment then the attorney's fees will be assessed, 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 unpaid sums, so that it is clear. If there is no interest rate listed in the contract, the court will award 10% per annum which is not com-pounded and is assessed annually. Parties may delineate interest any way they choose, but they need to be clear as to whether or not it is compounded and at what rate. Any rate up to 30% is considered legal. If the interest rate is in excess of 30% in Arizona, there may be an argument that the interest rate is usurious or illegal. 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, be sure that you agree with the terms of a contract prior to signing the contract. You may not challenge a contract after it is signed because it was not financially smart. For example, if you purchase a vehicle for 28% compounded interest and decide later that 28% interest is too high, you may not challenge the validity of the contract because of the interest rate. The only way to challenge that contract would be if you did not know the interest would be 28% because the seller of the vehicle lied to you. If there is something that you have been promised that is not written in the contract, do not sign it. 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, do not sign the contract. All terms must be listed within the to be enforceable. Written contracts may only be modified through written agreement by the parties. 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 agreement. 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 Purchaser. A party may also sue for rescission of a contract. If there is a breach of contract, a party may in certain 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. DisclaimerThis fact sheet is meant only as a general description of the current laws as of the date of the writing. They are not exhaustive and are intended to be only an overview. Many issues may appear simpler than they are, and one should always contact an attorney to obtain a complete, accurate interpretation of the law given the individual circumstances. Nicholson & Thompson, 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 information. Lisa C. Thompson, Esq. |