Awarding of Attorneys' Fees
An April 2007 ruling by the
Arizona Court of Appeals provides a useful primer on the
circumstances under which attorneys’ fees may be awarded …
and a word of caution about the misuse of third-party
Fulton Homes Corporation,
et al., v. BBP Concrete and Trojan Concrete, Inc.
In October 2003,
a group of homeowners in a Fulton Homes subdivision sued Fulton because,
they claimed, their homes were improperly “designed and/or constructed.”
They further claimed that the problems with their homes were due, in
part, to Fulton’s decision to build the homes on unreinforced slabs
instead of on heavily reinforced slabs as recommended by a civil
of having to defend against claims of poor concrete work, Fulton Homes
filed a third-party complaint against the two concrete subcontractors,
BPP Concrete and Trojan Concrete, that had poured the slabs. The legal
action against the subs was based on what Fulton considered the subs’
contractual duty to indemnify Fulton in case the court awarded damages
arising from BBP’s or Trojan’s work.
In January 2005,
in their response to interrogatories from BPP, the homeowners stated
that they were seeking damages resulting from design defects, not from
poor workmanship. As this appeared to relieve BPP and Trojan of
liability, the subcontractors sought to be dismissed from the suit, and
Fulton Homes ultimately agreed.
By that time, the
subcontractors had incurred legal expenses, and they asked the trial
court to order Fulton Homes to pay their attorneys’ fees (about $6,000
for each subcontractor), pursuant to A.R.S. § 12-341.01. Fulton objected
to the request, arguing that BPP and Trojan were proper third-party
defendants (under Rule 14 of the Arizona Rules of Civil Procedure). The
trial court rejected Fulton’s argument and awarded the requested
attorneys’ fees to the two subcontractors. Fulton appealed the awarding
of attorneys’ fees.
Fulton Homes’ arguments on appeal, and the court’s responses to them,
offer a useful refresher course on the circumstances under attorneys’
fees may be awarded in Arizona.
First, A.R.S. §
12-341.01(A) provides for the awarding of attorneys’ fees, at the trial
court’s discretion, to the “successful party” in a “contested action
arising out of a contract” (emphasis added).
justify such an award, the parties must actually be “adverse,” and it is
up to the trial court to determine which party is successful.
exercising its discretion, the trial court should consider certain
factors set forth in a 1985 ruling, Associated Indem. Corp. v.
Warner. These factors include the following:
the merits of
the unsuccessful party’s claim;
claim could have been avoided or settled (this factor proved to be
significant in the Fulton Homes decision);
successful party’s efforts were completely superfluous in achieving
assessing attorneys’ fees against the unsuccessful party would cause
an extreme hardship;
successful party did not prevail with respect to all of the relief
award to the successful party would discourage other parties with
valid claims from litigating a contract dispute for fear of having
to pay the other parties’ attorneys’ fees.
On the question of whether the subcontractors were
“successful” parties, Fulton Homes had contended in its appeal that they
were not, since the court never ruled in their favor. Fulton further
argued that the subs were successful in avoiding indemnity only because
the homeowners chose not to seek damages for faulty workmanship, not
because Fulton’s claim against the subs lacked merit.
The Court of
Appeals rejected both arguments, ruling that, first, “adjudication on
the merits is not a prerequisite to recovering attorneys’ fees”; second,
a party may be deemed “successful” when a plaintiff (in this case, the
group of homeowners) decides not to sue that party; and, finally,
calling a party “successful” is within the trial court’s discretion.
As part of its argument against the awarding of attorneys’
fees, Fulton Homes contended that the subcontractors and Fulton were not
adverse parties in this case. (You read that correctly.) Fulton based
its contention on the fact that it had “asserted only contingent
claims” (emphasis added) – that is, the subcontractors would have
been liable to Fulton only if the homeowners had shown that the subs had
performed faulty workmanship. Predictably, the Court of Appeals did not
buy into Fulton’s position. The Court noted its 1986 ruling in
Pioneer Roofing Co. v. Mardian Constr. Co., in which it determined
that “adversity is not determined solely from the parties’ alignment in
pleadings, but rather must be ascertained from the opposing positions or
interests of the parties.” In short, Fulton and the subs became adverse
parties the moment Fulton filed its third-party complaint against them.
Regarding the merits of Fulton Homes’ claim against the subs and whether
it could have been avoided or settled, the Court of Appeals stood by the
trial court’s finding that, since the homeowners did not allege faulty
workmanship, Fulton should not have taken legal action against the subs.
The Court of Appeals acknowledged that “the homeowners’ initial
complaint might reasonably have supported Fulton’s filing” of the
complaint against the subcontractors but deferred to the trial court’s
conclusion that “Fulton should have known very quickly that the
homeowners were not asserting faulty concrete workmanship claims.” Thus,
Fulton bore responsibility for the legal costs that the subcontractors
incurred from that point forward.
Fulton challenged the awarding of attorneys’ fees on a variety of other
grounds, none of which proved persuasive to the Court of Appeals. In its
ruling, the Court found as follows:
could have protected its rights against BBP and Trojan by methods
other than, to use the Court’s term, “dragging” them into a lawsuit;
not have filed the third-party complaint against the subs;
have dismissed the complaint much sooner than it did;
subcontractors’ legal efforts to defend themselves against Fulton’s
complaint were appropriate;
provided no evidence that paying a little more than $12,000 to the
subcontractors would create a financial hardship; and
Fulton to pay the $12,000 would not have a chilling effect on future
potential third-party plaintiffs.
The bottom line for companies that may find themselves in Fulton
Homes’ position: If you don’t want to be on the hook for another
company’s legal fees, don’t drag them into a lawsuit unless you are on
solid legal ground and you have no alternative remedies.