A corporation hired an accounting firm to do an audit. The engagement agreement contained a limitations provision, requiring that any lawsuit against the accounting firm for its work be brought within two years after the audit.
More than two years after the audit, the president and sole shareholder of the corporation sued the accounting firm for its work. The accounting firm argued the suit was barred by the limitations provision in the engagement agreement. But the president and sole shareholder was not a party to the engagement agreement. Nor was he a signatory, since the corporation’s CFO had signed for the corporation instead.
The trial court applied the limitations provision anyway, because the president and sole shareholder was “closely related” to the corporation. The court of appeals affirmed on that ground.
The Arizona Supreme Court reversed. Acknowledging that some courts in other jurisdictions 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 generally distinguishes between corporations and individuals who act on their behalf. Applying contract provisions to “closely related” third parties would tend to blur this distinction.
2) In this case, 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.
4) If contracting parties wish to ensure their contract will bind certain individuals, they are free to negotiate, draft, and sign accordingly.
Having rejected the “closely related” doctrine, the Court remanded for further proceedings. The Court expressed no view on whether the limitations provision could apply to the president and sole shareholder on some other theory.
Justice Montgomery authored the unanimous opinion.
Posted by: Josh Whitaker