The Covenant Of Good Faith And Fair Dealing Can Turn A Small Case Into A Big One.

Most non-lawyers understand the basics of a breach of contract claim. The two sides make a deal, and if one side does not honor his obligations, the other side can sue for damages.

The problem with a contract claim, from a practical point of view, is that the damages are limited. Basically, you can get what you lost based on the contemplation of the parties at the time the contract was formed. For instance, if you contract to provide a service, you provide it, and the other side does not pay, you can sue for the value of those services. Depending on the contract, you might get interest on that money, and you might get back some or all of your attorney’s fees.

But that’s it. If the contract provides for future exchanges of services for money, which are now lost to you, you might or might not get something for that. You don’t get money for pain and suffering. You don’t get damages for the ripple effect that runs through your business. You can’t get punitive damages, even if the other side’s conduct was particularly egregious. Sometimes, the result of all this is that, from a cost-benefit point of view, it doesn’t make sense to file your lawsuit. The attorney’s fees and costs may even exceed what you stand to win.

However, most non-lawyers do not know about another legal concept that arises in a contract setting. Every contract includes an implied term – in other words, not an express term of the contract – requiring compliance with the covenant of good faith and fair dealing. The covenant says that neither side can do anything, whether expressly prohibited in the contract or not, which destroys the other side’s fundamental reason for entering the contract.

For instance, we are doing a case right now regarding an employment-type contract gone bad. A ran a series of stores offering a service. A wanted to open a new store. So A entered a 2-year contract with B under which, if B made the new store successful, B would get a 49% interest after two years. The store was successful. But after one year, A terminated the contract with B. The termination was arguably permitted by the express terms of the contract, which required no reason for termination. But the effect of the termination was to deprive B of his main reason for entering the contract, namely, getting the vested ownership interest after two years. This amounts, potentially, to a breach of the covenant of good faith and fair dealing, even though permitted by the express terms of the contract.

The real significance of the resulting claim for breach of the covenant is that, increasingly under Arizona law, B can now claim not just contract damages, but what are called tort damages. In other words, he can claim future lost profits, pain and suffering, and even punitive damages. Suddenly, a lawsuit that might not have been worth bringing becomes more than worth it.

This is not something that laymen would know about. But both A and B would have benefitted by going to see an attorney specializing in fraud or business litigation at the very outset. There, they would have learned about the covenant, which may end up determining the outcome of this case.

WHAT DO YOU DO WHEN THE OTHER GUY BREACHES YOUR CONTRACT

WHAT DO YOU DO WHEN THE OTHER GUY BREACHES YOUR CONTRACT

When the other side breaches its contract with you, what are your legal remedies? There are three. Breach of contract, rescission and specific performance. Which one or ones are available to you depend on circumstances and the value of the subject of the contract.
Breach of Contract
The contract you signed to buy the car said the car had 30,000 miles. It turns out the car has 45,000. This is not enough of a discrepancy to want to unload the car, but it does mean the car has less value than you paid for. Or your company buys 1000 widgets. 90 of them are defective and unusable. There is no point in sending back all 1000, but you want to be compensated for the 90 bad ones. In short, situations where you don’t want to repudiate the whole contract, but you want to be compensated to the extent the other side fell short on some portion of its promised performance.
Your remedy is breach of contract. What can you recover? The value of the defective items, interest if it applies, consequential damages (like the costs of shipping back the 90 bad widgets and possibly lost profits), reasonable attorney’s fees and court costs. You cannot recover for any emotional distress or inconvenience caused by the whole incident.
Rescission
Let’s say the car you bought which you thought had 30,000 miles actually has 100,000 miles. Now the discrepancy is so great that you effectively received an entirely different car than you thought you were buying. You don’t want money for the difference: you want the car returned to the seller and all your money returned. Or let’s say there are 600 faulty widgets, you were buying them to resell to a regular buyer, but that buyer refuses to receive lots of less than 500. Effectively, the 1000 widgets are useless to you. You want them all sent back and all your money returned.
This total repudiation of the contract is called rescission. Because the remedy is more extreme than breach of contract, you will have to show the court that the value of the deal has been completely or almost completely destroyed for you. If you win, you get back all your money, minus any damage you may have done to the car or widgets, plus interest if it has been a while, consequential damages, reasonable attorney’s fees and court costs.
Specific Performance
Let’s say you ordered 1000 widgets, but the seller, citing some excuse, only provides you with 400. You still need 500 at least to satisfy your buyer. You don’t want to just rescind because that would not enable you to satisfy your buyer. Rather, you want to force your seller to provide you with the other 600 widgets.
What you want is specific performance. Essentially, you are asking the court to issue an order forcing the other side to fully perform. In addition, you can get your consequential damages (which may or may not include costs incurred with your buyer) along with reasonable attorney’s fees and costs.
Understand that this is a very elementary explanation. Do not try to pursue any of these claims without a lawyer. The short term savings of doing it yourself will undoubtedly result in a much larger loss in the long term when you lose.

JUST WHAT IS FRAUD?

JUST WHAT IS FRAUD?

“Fraud” is one of those words that gets thrown around a lot. When something goes wrong in dealings with another person, and you feel like you weren’t treated fairly by the other person, you’re likely to assume what happened was fraud.
But in the law, fraud is a little more than you probably think it is. In fact, it is probably one of the hardest cases to prove. Why? Because it involves deciding what was going on in the other person’s mind when they said or did what they did. A person who does wrong is not likely to admit it out of his own mouth. So you have to find other ways to prove what he was thinking at the critical time.
So in the law, what constitutes fraud?
First, the person (or company through its agents or, maybe, its advertising) has to say something untrue. Second, and this is where it gets difficult, you have to prove that that person knew, when he made the statement, that it was untrue.
And sometimes it gets even harder because the statement in question is actually a non-statement. This is when the circumstances required that the person say something, and he doesn’t say it. This is called material omission, and it is also fraud. It’s just hard to prove. For instance, the owner of the used car had been told by his mechanic that the car only has a few hundred miles to go before it dies, and then the buyer asks if the car is drivable. If the owner responds that the car is just fine, this might be a material omission and, therefore, fraud.
Third, the person making the statement must know that the other person is relying on him for the truth. The car owner above knew that the buyer was relying on him, as the only person who knew the condition of the car, to tell the truth.
And there is another aspect to this reliance which also makes fraud hard to prove, namely, the person who relies on the statement must be justified in that reliance. For instance, if that buyer is a certified mechanic and would have been able to tell just by driving the car a few miles that something was not right, but he didn’t take the test drive, the reliance might not be justified.
Fourth, the misrepresentation, or the problem that was the subject of the misrepresentation, must be the proximate cause of the damage to the buyer. For instance, if the buyer takes the car and it is badly damaged in an accident before dying, the misrepresentation may not be the cause of the damage, or not all of it anyway. The accident would.
And finally, there must be damage to the buyer. There is no lawsuit if there is a misrepresentation but no damage is done. If the car ends up lasting for a good while, it may be that there was no damage from the misrepresentation.
One more thing . . . in Arizona, there is also a consumer fraud statute. It is a powerful weapon because it removes the reliance requirement. If someone lies, and that lie or the problem becomes the proximate cause of damage, there is a claim whether your reliance was reasonable or not.
The only problem is that the consumer fraud statute requires you to bring your action within one year from the time you discover or should have discovered that you’ve been lied to, as opposed to the three years you would have with non-statutory fraud.
Finally, because fraud is so complicated, do not try and litigate it without the help of a lawyer.

BUSINESS CONTRACTS: GIVING YOUR CLIENT LEEWAY COULD COST YOU BIG TIME

The Businessperson’s Dilemma In A Recession

Especially in a tough economy, it is understandable for a businessperson to give a client who is under contract a little leeway on his obligations, for fear we might lose him otherwise.  Conversely, it is also understandable to provide a little extra service when that client insists on it, for the same reason, namely, keeping the client.

But be careful.  That little bit of leniency could cost you the protections you thought you had by virtue of your contract.

An Example Of The Problem

Let me illustrate by telling you the story of one of my clients.  (The names have been changed, but the facts have not.)

Client was a landscaper/gardener.  After years of work, he had broken into the world of maintenance for large developments, a far more lucrative line of work than residential gardening.  He wrote his own contracts (his first and biggest mistake), which provided for a set fee for basic maintenance work but called for additional payment as to work not specifically designated as maintenance.

The HOAs always have a professional property manager, and that person deals with contractors on behalf of the HOA of the development.  Property managers are notoriously disreputable, and the property manager which Client had to work with with respect to most of his developments was no exception.

One of the major categories of work needed by all Arizona developments but specifically placed outside the scope of maintenance in Client’s contract was fire clearance.  The property manager began insisting that Client do this work for free, despite the language of the contract.  She threatened to take away all of his development jobs if he did not comply.  Hoping not to lose most of his business during a recession, Client did that work for free, though he made it clear that he expected to be paid at some point.

Eventually, Client realized he could no longer survive under this arrangement and billed the HOAs for the fire clearance.  He was promptly fired by the property manager from all his developments.  That move destroyed Client’s company, which had become dependent on the work that was taken away.

Client sued the HOAs and the property manager, but he ran into a number of arguments stemming from what he thought was his wise business decision to give the property manager and the HOAs leeway.  The other side’s main argument was that Client had waived his right to bill for the fire maintenance by doing the work without insisting on payment.  Client is no longer my client, but the case continues.  But he probably has no better than a 50% chance of getting by the waiver argument.

How Do I Prevent This From Happening To Me?

Two answers . . . My personal experience in my business is that, during this recession that the press would like us to believe is over, even good people are reneging more and more often, and the other not-so-good people are coming out of the woodwork.  As a  result, I stopped allowing accounts receivable, and I stopped allowing clients little dispensations.  In my experience, once it starts going bad, it’s only going to get worse.  So stop with the special favors.  They will come back to bite you.

But for those of you who insist that your business cannot work that way, then you need to insert language into your contracts that, if you allow the other side to get away with not honoring its obligation on one occasion, you have not thereby waived your right to enforce that obligation in the future.

That is one of the many provisions that seems to appear in very few contracts but which a good contract drafter will put in your contracts.

TRYING TO EVICT THE DISORDERLY RESIDENTIAL TENANT

Here are some of the important points to know if you are either a landlord trying to evict a tenant whom you consider to be a threat or a disruption to the neighbors, or you are a tenant who is accused of those things by a landlord trying to evict you.

The extreme case

The most extreme case is that where the tenant is alleged to be engaging in conduct involving actual or imminent danger of serious damage to persons or property.  In ARS 33-1368, the Residentail Landlord-Tenant Act identifies several specific acts: illegal use of a weapon, homicide, prostitution, gang activity, drug making/selling/possessing, threatening or intimidating, assault, and nuisance.  But the protection is not limited to these specific activities.

In one of these instances, the landlord can give notice for immediate termination of the lease (as opposed to 5 or 10 days).  He does that by filing a complaint and having it served on the tenant.  The court will set the hearing for three business days from the filing of the complaint.  If the landlord prevails, the tenant will be ousted in 12-24 hours.  The landlord willl get his attorney’s fees and costs as well.  Even though the landlord does not have to give notice before filing the complaint, he must attach to the complaint a notice informing the tenant just which of the acts stated above he is accused of committing.

The less extreme case

The lower level involves violations of ARS 33-1341, which states the general requirements for tenants under any lease.  It covers such things as keeping the premises safe and clean, not destroying or defacing any of the property, and refraining (and preventing the tenant’s guests) from disturbing the neighbors’ peaceful enjoyment of the premises.

Unlike in the extreme case, the landlord who claims a violation of ARS 33-1341 must give five days written notice to the tenant before filing a complaint.  If the tenant remedies the problem within those five days, the 5-day notice is voided, and no complaint may be filed.  However, if that tenant survives the first 5-day notice but thereafter commits the “same or similar” act, the landlord may give a 10-day notice of the filing of a complaint.  The statute does not provide for the tenant to escape this second notice by attempting to correct the situation.

What issues are likely to arise at the trial?

More often than not, the matter is decided by the tenant’s failure to show up in court, either because the landlord’s charges are accurate or because the tenant cannot afford a lawyer.  The tenant who tries to represent himself will invariably lose, even when he has facts on his side.

Recently, I had a case involving many of the issues discussed above.  In this case, I represented the tenant.

The complaint against my client claimed she had engaged in assault, disturbing the neighbors, intimidating the neighbors and the manager, and driving recklessly in the parking lot with a child.

According to my client, there were two incidents.  In the first one, my client, returning from taking out the garbage, was confronted by a neighbor who apparently had never liked my client.  There were only words exchanged.

The second incident, however, was more involved.  My client had had a male friend staying with her for a few days.  At the end of the stay, the two got into some sort of argument.  The man became enraged, grabbed my client’s 3-year-old daughter, got into my client’s truck, and threatend to go to the airport, leaving the child there as he flew away.  My client went to the truck and managed to wrestle the child away.  She and the child locked themselves in the apartment while the man yelled and banged on the door.  At this point, the manager walked up, and she and the man exchanged words, though my client could not tell what they were saying.  Once the manager left, my client calmed the man down, got the two of them and the child into the truck, and drove the man to the airport.

The case settled before trial, which is almost always the best result for everyone.  But had we gone to trial, I would have made the following argbuments, which might or might not be relevant to other tenant-landlord litigation, depending on the particular facts.  First, the requirement that tenants are responsible for controlling their guests must be read reasonably.  In this case, just how much can a woman with a small child do to contol an enraged man? I think she handled the situation, by getting him off the premises, about as well as any woman could.  Second, for the landlord’s action to succeed, the violation of 33-1341 must actually endanger someone’s health and safety.  Where is the evidence of that here?  Third, under the language of the statute authorizing the eviction, the landlord only prevails if the tenant should reasonably have expected the incident and, despite that knowledgte, did nothing to prevent it. Where is the evidence that she knew the man’s tantrum was coming?

LITIGATION: If I Hire A Lawyer and Bring a Lawsuit, What Will Happen?

Most people have never hired an attorney or gone to court for anything more serious than a traffic ticket. The process of litigation looks as mysterious to most people as fixing a car or coaching a chess team looks to me. Maybe this will help a little.

 

A civil case usually has six main stages: (1) pre-litigation negotiation; (2) the filing of initial pleadings; (3) disclosure and discovery; (4) dispositive motions; (5) trial; and (6) appeal. This process can be stopped if the parties settle which, statistically, happens more often than not.
Pre-litigation Negotiation
Because litigation is burdensome, not only financially but in other ways as well, most lawyers will attempt to negotiate a settlement before filing the lawsuit. In my experience, these attempts succeed well under 50% of the time, generally because both parties are still emotionally upset about what was “done to them”. I will sometimes forego this step in those instances where the other side seems to be a bully or a conman: those parties generally have to be punched with a lawsuit before they will take my client seriously.
Initial Pleadings
The plaintiff (the party which initiates the lawsuit) files a Complaint stating why the court has jurisdiction, alleging the key facts underlying the dispute, and the legal claims those facts give rise to.
The defendant (the other party) must then file an Answer which answers the statements made in plaintiff’s Complaint. The defendant may, at the same time, allege any claims he has against the plaintiff. Because you know the facts, you will have to work with your lawyer during the pleading period.
Disclosure and Discovery
A little over a month after the pleadings are completed, both sides have to file their mandatory disclosure. This is a process pretty much unique to Arizona. Both sides are required to state their legal claims, describe their factual position, state their position with respect to damages, identify their witnesses (lay and expert) and any witness statements, and produce all relevant documents. Again, you will have to work closely with your lawyer with respect to the disclosure.
Then, the parties enter the discovery period during which both sides use various discovery tools – interrogatories, requests for admission, requests for documents, request to inspect, depositions – to gain evidence for their own case and to force the other side to expose its case before trial. This period can be lengthy as the two sides fight over what they have to produce. This period can also get expensive if there are numerous depositions, especially if those depositions involve expert witnesses.
Dispositive Motions
In most cases that have gone this far, one or both sides will file a motion – usually a motion for summary judgment – which basically asks that Court to hold that the evidence so favors the moving party’s case that there is no point in letting the case go to the jury. This might be because the evidence is overwhelmingly one-sided or because some point of law prohibits the other side from winning under the facts that have surfaced during discovery. Many times, these motions end the case (except for appeal), even though most judges are reluctant to take a case away from the jury.
Trial
This is when you get to see the samurai in your lawyer. I have done trials as short as a few hours and as long as two months. By the time you get out of discovery, your lawyer will have a good idea how long trial will go, but it is impossible to tell now with any certainty. The keys to that trial will probably be your lawyer’s preparation (I find I spend 3-5 hours on preparation for every hour in trial) and the relationship you establish with the jury (do they like, trust, and believe you?).
Appeal
If you lose at trial or in summary judgment, your attorney will discuss with you your prospects on appeal. There are many bases for appeal, so we cannot generalize now. Depending on the case and the complexity of the issues, it could take quite a while before you get a ruling on your appeal.

Settlement
Increasingly, courts are ordering mandatory settlement conferences after a certain number of days have passed since the pleading stage. This is not bad: you are not forced to settle, and the settlement judges are often very experienced and qualified. Sometimes, the parties will on their own, especially early in the case, seek out mediation before an experienced lawyer or retired judge at which the mediator will take turns talking to the parties and their lawyers in an effort to settle the case. We have had a lot of good experience with mediation.

LITIGATION: What Court Do I Bring My Lawsuit In?

By Jesse Cook


Sometimes, where you bring your lawsuit can affect the outcome more than any other  factor.  You may not have a choice where you can file your suit, but sometimes you do.
Generally speaking, you can bring a civil lawsuit in Small Claims Court, Justice Court, or Superior Court.  Each of these venues is set up to handle different types of cases.

 

Small Claims Court
If the amount in controversy is $2,500 or less, you can go to Small Claims Court.  The good things about this?  Because procedures are simple, it is not hard to represent yourself, and lawyers are not allowed.  This is often a good thing because it would be very difficult for a lawyer to keep her fees much below $2500.

 

For a small claim, you do not have to stay in Small Claims Court.  For instance, if you want a lawyer, you can have the case transferred to Justice Court.  (If you win, you might get your attorney’s fees reimbursed to you.)  Remember that the other side has the same right to transfer to Justice Court.

 

Justice Court
Generally, Justice Courts have exclusive jurisdiction over all civil cases involving amounts of $2,500 to 5,000.  Also, if your matter is worth between $5,000 and $10,000 (not including attorney’s fees and costs), you have a choice whether to bring the matter in Justice Court or Superior Court.
The good thing about bringing such a case in Justice Court is that the procedures are simpler and, therefore, less expensive than those in Superior court. You will also get to trial faster in Justice Court.  Also, the filing fees are lower in Justice Court ($93) than in Superior Court ($301).  The bad thing is that, because Justices of the Peace are not required to be trained in the law, most are not.  This can be a problem if your case involves any relatively complex legal issues.

 

Superior Court
This is where all claims of $10,000 or more must be filed.  There is no ceiling on what you can claim.  Because you will have to strictly adhere to all of the rules of civil procedure, few try to go it alone without a lawyer.  You are permitted to do so, but keep in mind that you will get no special breaks because you are a layman.

 

Note that there are a few other factors affecting jurisdiction.  For those, you should contact an attorney.

CONTRACT DISPUTES/REAL ESTATE: Buying a House? Don’t Believe What They Tell You

The SPDS is a major component of every house sale.  It is a multi-page document in which the seller is required to answer a number of questions about his knowledge of problems with the house.  Is there a history of bugs?  Has there ever been flooding?  Who maintains the streets?  The SPDS covers most of the areas that a buyer might be concerned about.

But there are some things that seem so obvious that they don’t need to be included in the SPDS.  One of those is the square footage of the house.  That information is put on the Multiple Listing Service (MLS) by the selling agent.  No one questions that number.  It comes directly from the seller and his broker, the two people who would know.

 

But thanks to a recent Court of Appeals decision, you can no longer rely on that number in Arizona.

 

In that case, the buyer bought in reliance on the square footage listed in the MLS.  But it turns out that the square footage was actually 600 square feet less than the MLS represented, which reduced the value of the house by $65-70,000 dollars.

 

Of course, the buyer sued.  But the Court held for the seller.  Why?  Because the boiler plate language included a provision saying that the buyer is responsible for checking the square footage himself and that the seller was not responsible.

 

As business litigation attorneys, we believe this is a horrible decision, threatening to return house buying to the caveat emptor (buyer beware) of the 19th century.  But the parties settled before taking the case to the Supreme Court, so for the moment at least, that is the law.

LANDLORD-TENANT: Is Your Rental Property Registered?

Landlords, did you know that you are required to register your rental home with the County Assessor?

 

This is a law that gets ignored a lot.  In most cases, I suspect it’s because landlords, especially those with only one or two homes, don’t know about the rule.  But there are some, of course, who know but just don’t want to comply.

 

How wise is that?  Well, I’m here to tell you “not very”.
 

In Arizona, the law states that, if you are going to rent out your home, you must register the property with the County Assessor’s Office.  A.R.S. §33-1902.  The purpose of this statute is not to make sure you will be a good landlord, but rather so the State can tax you at a higher rate than if the house were “owner occupied”.  That, of course, is why many landlords, even if they know about the requirement, still do not register their rental property.

 

What are the consequences if you do not register your rental property with the County Assessor’s office?  The statute does provide for civil penalties although, to be honest, those penalties are rarely imposed.

 

The potential consequence that does matter is that, if your tenant finds out you have not registered the property, and if that tenant gives you proper notice, and if you do not get the property registered within 10 days, the tenant may terminate the lease agreement and move out.  This can be handy for tenants who have no other way out of the lease.  If the landlord receives the notice but registers the property within the 10 days, the breach has been cured.

 

If you do decide to register, the process is simple and inexpensive (except for the increase in taxes).  It costs $10 and takes about five minutes.

 

To learn more about the procedures, go to http://mcassessor.maricopa.gov/Assessor/ParcelApplication/ResRental.aspx

 

To find your nearest Assessor’s Office location in Maricopa County, you can follow this link:
http://mcassessor.maricopa.gov/assessor//assessor_loc.aspx

Good luck.

 

REAL ESTATE LAW: CAN YOU BEAT YOUR HOA?

 

“The darn HOA is downright Stone Age!”

HOAs are good.  Drive through a really nice neighborhood, especially one on the newer side, and there is probably an HOA on the job.  HOAs serve a valuable purpose or there would not be so many of them.  And yet many of the people living in the development are often hostile to the HOA.  Why is that?

HOAs are governed by CC&Rs (Covenants, Codes & Restrictions, usually drafted by the developer and intended to maintain the quality of the development) and Architectural Committee Rules (the Architectural Committee is named by the HOA board to interpret the CC&Rs).  Because these were written at the time of initial development, it simply was not possible to anticipate all questions that would arise.  And HOA boards and architectural committees are made up of people, with their own idiosyncracies and biases about what “their” neighborhood should look like.

And on the other side is the belief of most American homeowners that their home is their castle and that, whatever is so for their neighbors, they should be able to do what they want with their property.  So rubs between the HOA and its homeowners are inevitable.

Most of the law firms which deal with HOA-homeowner disputes represent the HOAs.  That is only natural.  The HOAs represent a source of repeat and continuous business. The aggravated homeowner is likely to go to war with the HOA only once.

So, often, the homeowner chooses to represent himself.  Occasionally, that works out.  But for the most part it is true that “the man who represents himself has a fool for a lawyer.”  The courtroom is the lawyer’s turf, and the unrepresented litigant is at a tremendous disadvantage.

But a homeowner who is represented can often prevail.

Recently, we represented a homeowner who had bought a sculpture with a desert theme and national recognition, but with a comical bent.  Seeing that neighbors all around him had various objects in their yards without ever having to get pre-approval, our client had set his sculpture in the side yard.  No neighbor ever complained.  But someone on the HOA board decided the sculpture was inappropriate for that development.  The HOA dumped numerous warnings and fines on our client, and then finally sued him when he would not pay or move the sculpture.

The homeowner tried to defend himself for several months, but he found himself in an ever-deepening hole.  So he hired us.

We were able to establish two arguments.  First, because the CC&Rs and Architectural Committee Rules did not specifically prohibit sculptures and the sculpture was not per se offensive, it fell outside the CC&R prohibitions.  Second, because of the enormous power they wield and the potential for abuse, HOAs are under a duty to avoid being unreasonable or arbitrary.

This does not mean that you can expect to prevail against your HOA.  A reasonable application of the CC&Rs by an HOA will always be upheld.  But HOA’ are not always reasonable, and when they are not, the homeowner does have recourse.  See an Arizona contract lawyer or business litigation attorney.