ATTORNEYSFEESARTICLE
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AUTHOR: Jason Kasting
EMAIL: [email protected] BIO: jshfirm.com/jasonpkasting
Evaluating risk before mediation or trial often requires an
assessment of whether the prevailing party will be awarded
its attorneys’ fees. Pursuant to A.R.S. § 12-341.01, attorney fees
are only awarded when the action “arises out of a contract.”
However, it can be very difficult to determine whether the action
arises out of contract, as opposed to a tort claim, for example.
The distinction between contract and tort-based claims is often
very murky and requires a factual analysis of the foundation of
the dispute.
Courts have also seemingly gone the other way on this issue,
illustrating the lack of a bright line rule. In Ramsey Air Meds,
L.L.C. v. Cutter Aviation, Inc., 198 Ariz. 10, 6 P.3d 315 (App.
2000), the owner of an airplane sued an aviation company for
negligence and breach of contract after the company allegedly
damaged the plane’s engine while preparing for a flight. Id. at 12.
The owner had a contract with the aviation company for various
services, including pilot services, providing hangar space, and
advising on necessary maintenance and repairs. Id.
A.R.S. § 12-341.01(A) states that: “[i]n any contested action
arising out of a contract, express or implied, the court may
award the successful party reasonable attorney fees.”
Subsection (B) of the statute describes the purpose of
subsection (A) by saying that an award of fees “should be made
to mitigate the burden of the expense of litigation to establish
a just claim or a just defense,” and the amount of fees awarded
“need not equal or relate to the attorney fees actually paid or
contracted.”
The Ramsey plaintiff prevailed on the negligence claim but
not on the contract claim. Id. at 12. The trial court nevertheless
awarded attorneys’ fees, concluding that the negligence claim
arose out of the parties’ services contract. Id. The Arizona Court
of Appeals disagreed and held that the mere existence of a
contract underlying the parties’ relationship is not enough to
support a fee award. Id. at 14. It determined that because the
aviation company’s alleged negligence in handling the plane
caused the dispute, the case arose out of tort, not contract,
making the fee award improper. Id. The Court of Appeals further
clarified that where a contract does no more than place the
parties into a relationship for which tort law imposes certain
duties, the gravamen of any subsequent action for breach
of that duty is tort, not contract, law, for which a fee award is
unavailable Id.
This statute is relatively straightforward, but the “arising out of
a contract” determination can be difficult, especially when the
case involves both contract and tort-based claims. For example,
a professional malpractice case might have interwoven
allegations that the professional breached a retainer agreement
(a contract-based claim), and also acted in bad faith (a tort
claim). So, how can you determine before mediation or trial
whether a fee award is likely?
Arizona case law on this topic is varied and not entirely
consistent but, in general, Arizona courts evaluate and analyze
“the essence of the action” to ensure it has an appropriate
contract-based foundation. ASH, Inc. v. Mesa Unified School
Dist. No. 4, 138 Ariz. 190, 193, 673 P.2d 934, 937 (App. 1983). As
used in A.R.S. § 12-341.01(A), the words “arising out of a contract”
describe an action in which a contract was a primary factor
in causing or defining the dispute, as opposed to a contract
ancillary to the heart of the dispute. Id. From the defense
perspective, an action can still arise out of contract, for purposes
of an award of attorney fees, where the defendant proves the
absence of an alleged contract between the parties. Rudinsky v.
Harris, 231 Ariz. 95, 101, ¶ 27, 290 P.3d 1218, 1224 (App. 2012).
Where a case contains both contract and tort claims, the test to
determine whether the action arises out of contract under A.R.S.
§ 12-341.01(A) is whether “the cause of action in tort could not
exist but for the breach of the contract.” Sparks v. Republic Nat’l
Life Ins. Co., 132 Ariz. 529, 543, 647 P.2d 1127, 1141 (1982).
In Sparks, plaintiffs alleged breach of an insurance contract
and bad faith tort claims against an insurance carrier. Plaintiffs
prevailed, and the trial court awarded reasonable attorney fees
pursuant to A.R.S. § 12-341.01(A). The insurer appealed the fee
award, arguing that because the bad faith tort claims dominated
the case and the insurance contract itself was ancillary to the
parties’ dispute, the case arose out of tort rather than contract,
making an award of fees improper. Sparks, 132 Ariz. at 54243. The Arizona Supreme Court ultimately determined that
bad faith cannot occur without the existence of an insurance
contract, making this tort intrinsically related to the insurance
contract. Id. at 544. Thus, it held, the tort of bad faith is one
“arising out of a contract” under A.R.S. § 12-341.01(A). Id.
Sparks and Ramsey teach us that Arizona courts will look to the
fundamental essence of a case, rather than simply assuming
that because a contract is involved, a fee award is appropriate.
A more in-depth factual analysis is necessary to determine
whether the foundation of the dispute truly arises out of
contract.
Assuming a judge determines that a particular case arises out
of contract, he or she has wide latitude regarding the amount of
fees to award to the prevailing party, and a partial award of fees
is permissible. Berry v. 352 E. Virginia, L.L.C., 228 Ariz. 9, 14, ¶ 24,
261 P.3d 784, 789 (2011). Further, A.R.S. § 12-341.01(A) has been
interpreted to authorize an award of fees to the successful party
on appeal. Wenk v. Horizon Moving & Storage Co., 131 Ariz. 131,
133, 639 P.2d 321, 323 (1982).
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