Unlike many states, Arizona has long provided for the recovery of attorney fees, albeit on a discretionary basis, in contested contract disputes. See A.R.S. § 12-341.01(A). The Arizona legislature made clear, however, that the discretionary fee statute was not intended to displace contractual fee provisions of the sort commonly found in consumer and commercial contracts. Thus, § 12-341.01 states: “This section shall not be construed as altering, prohibiting or restricting present or future contracts or statutes that may provide for attorney fees.” 

The Arizona Court of Appeals, in interpreting the statue, has consistently upheld the sanctity of the parties’ contract, repeatedly finding that a mandatory fee-shifting provision supersedes the general statutory provision which might otherwise apply. See Sweis v. Chatwin, 120 Ariz. 249, 252, 585 P.2d 269, 272 (App. 1978) (applying A.R.S. § 12-341.01 instead of the contract “would in effect cancel the unqualified contractual right to recover attorney’s fees given to the successful party by their agreement” and “would clearly be an alteration of the agreement of the parties”); see also Geller v. Lesk, 230 Ariz. 624, 627, ¶ 9, 285 P.3d 972, 975 (App. 2012) (the parties’ contractual provision, “not the statute,” governs an award of fees); Lisa v. Strom, 183 Ariz. 415, 418 n.2, 904 P.2d 1239, 1242 n.2 (App. 1995) (“when a contract has an attorney’s fee provision it controls to the exclusion of the statute”); Connor v. Cal-Az Properties, Inc., 137 Ariz. 53, 55, 668 P.2d 896, 898 (App. 1983) (the statute “is not to be considered” when the parties’ contract provides conditions under which attorney fees may be recovered). 

Offer of Judgment

There now appears to be a gaping hole in that principle, resulting in somewhat of a “gotcha” to the litigants in Am. Power Prod., Inc. v. CSK Auto, Inc., 241 Ariz. 564, 390 P.3d 804 (filed March 23, 2017). In American Power, the defendant served a $1,000,001.00 pre-trial Rule 68 offer of judgment, which the plaintiff rejected.  241 Ariz. at 564, ¶ 4, 390 P.3d at 806.  At trial, the plaintiff asked for more than $10.8 million, but the jury awarded only $10,733.00 and gave the defendant nothing on its counterclaims.  Id., ¶¶ 5-6.  The trial court nevertheless deemed the plaintiff to be the prevailing party, declined to award Rule 68 sanctions, and awarded the plaintiff a substantial portion of its attorney fees as the parties’ contract had required. Id., ¶ 6. The Court of Appeals affirmed the trial court’s award of fees, but the Supreme Court reversed the award based on the $1,000,001.00 Rule 68 offer of judgment and what the Court called “the interplay between § 12–341.01 and contractual fee provisions” – in other words, the application of the statute to define (or perhaps re-define) who the prevailing party was at the conclusion of the case. Id., ¶ 7, 390 P.3d at 806-07.

The Exception

While purporting to cite at least some of the prior cases with approval, a majority of the Supreme Court discovered an exception to the principle of contractual autonomy and proceeded to read part of the statute into a private, mandatory fee provision:  

To the extent prior case law broadly precludes application of § 12–341.01 whenever the parties’ contract contains an attorney fee provision, regardless of its content, scope, and other provisions in the contract, we disagree. Rather, § 12–341.01 “is inapplicable by its terms if it effectively conflicts with an express contractual provision governing recovery of attorney’s fees.”

241 Ariz. at 568, ¶ 13, 390 P.3d at 808, citing Jordan v. Burgbacher, 180 Ariz. 221, 229, 883 P.2d 458, 466 (App. 1994) (disagreeing with Connor’s broad statement and observing that Sweis “did not hold that any express contractual provision for attorney’s fees, however worded, ‘preempts’ A.R.S. section 12–341.01”).  “Thus,” it held, “rather than being completely supplanted by any attorney fee provision in the parties’ contract, the statute, consistent with its plain language, applies to ‘any contested action arising out of contract” to the extent it does not conflict with the contract.”  241 Ariz. at 568, ¶ 14, 390 P.3d at 808.

The opening seized upon by the Court in American Power was that, while the parties’ contract provided for a mandatory award of attorney fees to the prevailing party, stating:  

In the event either party shall commence or be required to defend any action or proceeding against the other party arising out of this [contract], the prevailing party shall be entitled to recover from the other party its reasonable attorneys’ fees and costs through all levels of proceedings as determined by the court. 

241 Ariz. at 567, ¶ 8, 390 P.3d at 807, it did not define the term “prevailing party.”  Given that omission, the Court might have looked to the parties’ intent, or to the ordinary meaning of the words used, or to analogous case law under the Arizona taxable costs statute, A.R.S. § 12-332.  See, e.g., Ahwatukee Custom Estates Mgmt. Ass’n, Inc. v. Bach, 193 Ariz. 401, 402-03, ¶ 7, 973 P.2d 106, 107-08 (1999) (Court essentially read the limitations on taxable costs found in A.R.S. § 12-332 into the parties’ attorney fees contract provision). Instead, relying on a boiler-plate provision incorporating Arizona law as governing “the rights and remedies of the parties,” id., the Court discovered a hitherto unknown link between the statue and private fee provisions.

The Court determined that, absent a definition of the term “prevailing party” in the contract, and despite the statute’s express disclaimer that it “shall not be construed as altering, prohibiting or restricting present or future contracts …,” it would look to A.R.S. § 12-341.01(A) to fill that gap.  241 Ariz. at 568, ¶ 14, 390 P.3d at 808.1  Specifically, the Court, equating “prevailing party” with the statutory term “successful party,” held that the contractual provision was to be interpreted in light of the second sentence of the statute, which states:  

If a written settlement offer is rejected and the judgment finally obtained is equal to or more favorable to the offeror than an offer made in writing to settle any contested action arising out of a contract, the offeror is deemed to be the successful party from the date of the offer and the court may award the successful party reasonable attorney fees.

A.R.S. § 12–341.01(A).

This ruling, according to the Court, is nothing out of the ordinary.  The law is well settled, for example, that the statute fills the gap created by a unilateral attorney fee provision by allowing for an award of fees to the prevailing party omitted from the provision. 241 Ariz. at 568, ¶ 14, 390 P.3d at 808, citing, e.g., Tucson Estates Prop. Owners Ass’n, Inc. v. McGovern, 239 Ariz. 52, 54-56 ¶¶ 7-14, 366 P.3d 111, 113-15 (App. 2016); Pioneer Roofing Co. v. Mardian Constr. Co., 152 Ariz. 455, 470-72, 733 P.2d 652, 667-69 (App. 1986). “Thus, rather than being completely supplanted by any attorney fee provision in the parties’ contract, the statute – consistent with its plain language – applies to ‘any contested action arising out of contract’ to the extent it does not conflict with the contract.”  Id.

Besides, the Court explained, the general rule in Arizona is that “contracts are read to incorporate applicable statutes.”  241 Ariz. at 568, ¶ 15, 390 P.3d at 808, citing Banner Health v. Med. Sav. Ins. Co., 216 Ariz. 146, 150, ¶ 15, 163 P.3d 1096, 1100 (App. 2007). It therefore held:  

Because the [contract] here did not define ‘prevailing party’ and expressly provided that Arizona law shall apply and govern ‘the rights and remedies of the parties,’ and because the second sentence of § 12–341.01(A) does not directly conflict with the [contract’s] attorney fee provision, that statutory provision is ‘incorporated by operation of law’ into the [contract] for the limited purpose of defining ‘successful party’ under the circumstances presented here.  

241 Ariz. at 568-69, ¶ 15, 390 P.3d at 808-09, again citing Banner.That seems to make sense, particularly given the specific procedural posture of the case.