Arizona Court of Appeals Division One Holds Failure to Use the Specified Method of Canceling a Contract Permits the Breaching Party an Opportunity to Cure and That an Agent’s Inequitable Actions Will Only Defeat Specific Performance If the Principal Had Knowledge of or Participated in That Conduct

In December 2004, Ivo Queiroz (“Buyer”) and Daniel Harvey (“Seller”) entered into a contract for the sale of land.  The contract stated that Buyer was to give his real estate agent $1,000 earnest money, which was to be placed immediately into escrow.  The contract provided space for the agent to sign to indicate that the earnest money had been received; he printed his name but did not sign. The contract further provided that if either party wished to cancel the contract for material breach, they must deliver written cancellation to either the escrow company or the breaching party.  Escrow was opened on December 13.  By Friday, December 17, when the earnest money had not been deposited and Buyer’s agent had not returned Seller’s agent’s phone calls, Seller’s agent called both the escrow agent and Buyer’s agent to state that the deal was canceled.  The following Monday, Buyer’s agent used $1,000 of his personal money to deposit in escrow.  Hours later, the escrow company received written notice of the cancellation.

Buyer filed suit for breach of contract, seeking specific performance.  The trial court found that the failure to deposit the earnest money into the escrow account constituted a material breach, permitting Seller to cancel.  The trial court further found that the actions of Buyer’s agent were sufficiently inequitable to defeat specific performance.  Buyer appealed.

The Arizona Appeals Court vacated the judgment and remanded for further proceedings.  The Court explained that when a breach of contract occurs and the contract provides a specific procedure for cancellation if the non-breaching party fails to follow that procedure, the breaching party may attempt to cure.  The verbal notice of cancellation given on Friday, December 17 by Seller’s agent was ineffective.  Because Seller’s agent did not provide written notice of cancellation until after the earnest money was deposited into escrow, Buyer cured the breach. 

Turning to whether the actions of Buyer’s agent defeated specific performance, the Court further explained that equitable relief can be denied under the doctrine of unclean hands only if the party participated in or had knowledge of the alleged inequitable acts.  The Court reasoned that because it could not determine whether Buyer had knowledge of his agent’s inequitable acts, remand was necessary.     

 Judge Johnsen authored the opinion, Judges Irving and Davis concurred.