How to Navigate Fee Liability in Tort-Based Construction Cases

In many construction defect cases, fee liability is often the tail wagging the dog. Whether such liability arises from A.R.S. § 12-341.01, an express fee-shifting provision in a contract or an indemnity agreement, protecting your client from a fee award is generally a top priority in contract-based, construction cases. There is a subset of construction defect cases, though, that only advance tort claims. Usually, this occurs in subrogation actions where the plaintiff-insurer only claims negligence, often as a means to avoid fee liability. While not expressly decided under Arizona law, these types of cases can give rise to a fee award. This article thus explains the scope of § 12-341.01, and how it may impact litigation of tort-based construction cases.

As we are well aware, courts have discretion to award the successful party reasonable attorneys’ fees in contract actions under § 12-341.01. In Ramsey Air Meds, L.L.C. v. Cutter Aviation, Inc., 198 Ariz. 10, 13 (App. 2000), the court of appeals expanded the scope of the statute, holding that the absence of an express contract claim does not remove a tort action from the ambit of § 12-341.01. To determine whether a claim arises out of contract, the “fundamental nature of the action” controls. Id. at 15-16. “When the duty breached is one implied by law based on the relationship of the parties, that claim sounds fundamentally in tort.” Id. Under this analysis, a negligence claim against a contractor for breaching its common law duty of care in the scope of its work would probably sound in tort, and not be subject to § 12-341.01. But according to the Ramsey court, “the test is whether the defendant would have a duty of care under the circumstances even in the absence of a contract.” Id.

Of course, the law imposes a common law duty of care on contractors. See Woodward v. Chirco Const. Co., 141 Ariz. 514, 516 (1984). In tort cases alleging a mere breach of that duty, without any contract claim, Ramsey removes those cases from the ambit of the fee-shifting statute, and parties can proceed without the dark cloud of fee liability hanging above their heads. Sunny skies, though, are not guaranteed.

By merely styling a case as one for negligence, a plaintiff cannot escape § 12-341.01. Ramsey’s test – “whether the defendant would have a duty of care even in the absence of a contract” – might cut in favor of a fee award. For example, a homeowner engages a contractor to install a new electrical box. During the installation, the contractor asks the homeowner if she would like to have a voltage test of the home’s wiring performed for an additional fee. The homeowner declines, and a pre-existing wiring defect – unrelated to the installation of the electrical box – later causes a fire. In a subrogation action to recover for damages to the house, the homeowner’s insurer sues the contractor, alleging that the contractor breached its duty of care because a reasonable contractor in the same situation would have performed the wiring test in conjunction with the installation of the electrical box for safety purposes, regardless of whether the homeowner agreed to pay.

The Ramsey analysis will hinge on whether the Court finds that the contractor owed a common law duty. If the Court finds there is a duty, the case will sound in tort. Absent any common law duty to perform, though, the “fundamental nature of the action” will be a dispute about the type of work the contractor agreed to perform for the homeowner. And, as Ramsey instructs, such a dispute arises out of contract.

There is no Arizona appellate case finding that the absence of a common law duty in a tort case against a contractor requires the imposition of a fee award. However, plaintiffs should nonetheless exercise caution when determining to bring suit against a contractor for work extraneous to the contract. Simply styling a case as one sounding in tort might not be enough to escape liability under § 12-341.01.

Indeed, the public policy underlying the statute could give courts further grounds to award fees in a tort case. “The legislature intended that the risk of paying the opposing party’s attorneys’ fees would encourage more careful analysis prior to filing suit.” Chaurasia v. Gen. Motors Corp., 212 Ariz. 18, 29 (App. 2006). In the example above, the insurer should have been aware that the parties had a pre-existing agreement, and had to weigh the pros and cons of advancing a claim that contradicted that agreement. Similarly, contractors must also be aware of their potential remedies when they are sued for their workmanship. Construction cases can be complex endeavors, but parties should at least be cognizant that fee liability cannot be avoided merely by styling a claim purely in tort. See, e.g., Keystone Floor & More, LLC v. Arizona Registrar of Contractors, 223 Ariz. 27, 30, 219 P.3d 237, 240 (App. 2009), as amended (July 15, 2009) (citations and quotations omitted) (“Fees may be recovered when a contract is the cause or origin of the dispute. Generally, the words arising out of contract describe an action in which a contract was the main factor causing the dispute.”).