Arizona Supreme Court recently ruled that contractual time limits on lawsuits do not apply to a third party just because the third party is “closely related” to the contracting party. A link to the opinion is found below.

By way of background, a corporation hired an accounting firm.  The fee agreement contained a limitations provision, requiring that any claim against the accounting firm for its work be filed within two years after the audit. This is despite a six-year Statute of Limitations (SOL) in Arizona. In Arizona, you can contract away your SOL rights.

Three years after the audit, the corporation (closely held) sued the accounting firm for its work.  The accounting firm defended that the suit was barred by the limitations provision in the fee agreement.  The president and sole shareholder was not a party to the fee agreement, nor was he a signatory since the corporation’s CFO had signed for the corporation.

The trial Judge applied the fee agreement limitations because the president and sole shareholder was “closely related” to the corporation.  The court of appeals affirmed.

The Arizona Supreme Court reversed.  Stating that some courts in other States have applied contract provisions to third parties who are “closely related” to contracting parties, the Court rejected the doctrine in this case, for several reasons:

1)  Arizona law distinguishes between corporations and individuals who act on their behalf.  Applying contract provisions to “closely related” third parties would tend to void this distinction.

2)  Applying the contract provision to a third party would have a particularly harsh result: barring a lawsuit entirely.

3)  Arizona law already recognizes other ways to apply contract provisions to third parties, such as incorporation by reference, assumption, agency, piercing the corporate veil, equitable estoppel, and third-party beneficiary theories.

Over the last 33 years, we have filed scores of claims for common law fraud, RICO, AZRAC, and fraudulent schemes. We have defended and prosecuted cases involving contract breaches too.

In a case like JTF Holdings, there was no fraud alleged. It was just two folks fighting over money. Common law fraud involves a dispute between two people or business entities. It almost always comes from a contractual relationship that went bad or an investment scheme. Unlike criminal fraud cases in which the defendant can go to prison if convicted, in a civil fraud case, the judgment will only be for money. There is strict liability for many types of investment frauds. Lawyers often threaten jail in a civil fraud case, but it never happens. These types of threats border on extortion. The AG, Police or FBI will seldom get involved in a civil dispute where individuals are alleging fraud.

There are thousands of small closely held limited liability companies in Arizona. If you need help sorting out your rights and what the current law is, feel free to give Bill Miller, a call at 602-319-6899.

We also handle, Breach of contract, Non-compete agreements, Non-disclosure agreements, Employee theft and embezzlement, Insurance purchases and enforcement of policy coverage, Negotiation and/or enforcement of commercial leases, Negligence and gross negligence resulting in losses, Intentional acts causing a company to suffer damages, Tortious interference with contractual relationships, Unjust enrichment, Real Estate fraud, Consumer fraud, Conversion/Theft, Intentional and/or negligent misrepresentation, Business torts and Real estate title and escrow.

 

JTF Aviation Holdings Inc. v. CliftonLarsonAllen LLP

 

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