JSH Reporter Fall 2014 - Page 23

ATTORNEYSFEESARTICLE 023 AUTHOR: Jason Kasting EMAIL: jkasting@jshfirm.com 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). All of t