Arizona Court of Appeals Division One Holds That (1) a Party Claiming Entitlement to Fees and Costs Under a Contractual Provision Must Plead and Prove Its Claim in the Trial Court; (2) Prejudgment Interest Is Appropriate as of the Date the Amount of the Claim Can Be Readily Calculated; (3) the Trial Court Does Not Abuse Its Discretion in Awarding Fees to a Party under A.R.S. § 12-341.01 When That Party Received a Monetary Judgment and the Court Reduced the Amount of Requested Fees to Reflect the Unsuccessful Counterclaim; (4) the Amount of the “Judgment Finally Obtained” for Purposes of Awarding Attorneys’ Fees and Costs under § 12-341.01 Includes the Amount of a Verdict Plus Any Additional Amounts Included in the Final Judgment, Such as Taxable Costs and Prejudgment Interest; and (5) for Purposes of Rule 68 Sanctions, a Trial Court Must Determine Whether Taxable Costs and Attorneys’ Fees Forming Part of a Judgment Were Reasonably Incurred as of the Date the Rule 68 Offer.

Berry and 352 E. Virginia, L.L.C. (“352”) entered into a contract under which Berry agreed to sell an office building to 352 for $1 million.  The contract contained a warranty that all mechanical systems would be in working condition and that this warranty survived the closing of the transaction.  Otherwise, the building was being sold “as is.”  The contract also provided that the prevailing party in litigation over the contract would be able to recover attorneys’ fees and costs.

After a property inspection, the parties agreed to replace a staircase and revised the purchase agreement to provide that Berry would pay for half the cost of the staircase up to $10,000.  If the work was completed after the close of escrow, the amount owed by Berry would be held back from the amount due to him from the sale.  The contractor gave a replacement cost of $17,250, and 352 asked Berry for $8,625 to cover his half.  Berry suspected, however, that 352 was attempting to recoup the costs for other repairs to the building, and Berry eventually filed suit for breach of contract, seeking attorneys’ fees under A.R.S. § 12-341.01.  352 answered and also sought attorneys’ fees under § 12-341.01, asserting a claim for $8,625 from the escrow account for the staircase and a counterclaim for $42,000 for Berry’s breach of warranty on the building’s HVAC system.

After litigation had commenced, the parties agreed to allow the escrow company to release $6,225 to 352.  The case then proceeded to arbitration.  After an award in 352’s favor, Berry appealed and requested a jury trial.  Before trial, Berry made a Rule 68 offer to 352 under which Berry would pay an additional $2,400, for a total of $8,625.  352 also made a Rule 68 offer under which Berry would pay $25,000 to settle the case.  Neither party accepted the other’s offer.  At trial, the jury found that 352 was entitled to $8,625 from the escrow account, but rejected 352’s HVAC counterclaim.

On cross-motions by the parties for attorneys’ fees, costs, and Rule 68 sanctions, the trial court awarded 352 $50,0000 of its requested $98,359 in attorneys’ fees and all of its requested taxable costs ($3,617.70) under § 12-341.01, reasoning that 352 was the successful party because it received an additional $2,400 from the escrow account.  The court also awarded 352 $1,854.84 in Rule 68 sanctions and $1,290.12 in prejudgment interest.

Berry appealed the trial court’s award of fees, costs, sanctions, and prejudgment interest, and the Court of Appeals addressed each issue in turn.  First, the Court rejected Berry’s argument that the parties’ contract, rather than § 12-341.01, should govern the award of attorneys’ fees even though neither party had cited the contract as the basis of fees until appeal.  The Court said that an award of fees under “a contractual provision requires pleading and proof.”  Berry’s failure to cite the contract as the basis for fees until appeal defeated his argument.

The Court also rejected Berry’s argument that 352 was not entitled to prejudgment interest on the award of $8,625 because 352’s claim was not liquidated.  352 had provided sufficient information at the time it first demanded half of the $17,250 cost of the replacement staircase to allow for an objective calculation of the amount owed, and thus the claim was liquidated as of that time.

Berry also argued that the superior court erred when it concluded that 352 was the prevailing party for purposes of § 12-341.01 because Berry had prevailed on 352’s HVAC counterclaim.  First noting the deference accorded to the superior court in such determinations, the Court of Appeals found no abuse of discretion because 352 received a monetary judgment and because the superior court “significantly reduced the fees awarded, perhaps in light of 352’s failure to prevail on the breach of warranty counterclaim.”

The Court also rejected Berry’s argument that he was entitled to a portion of his fees under the second sentence of § 12-341.01(A), which reads:  “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.”  Berry argued that the jury’s verdict was equal to his pre-trial offer of $8,625, entitling him to fees as of the date of the offer.  Reviewing the authorities defining “judgment,” however, the Court of Appeals concluded that the jury’s verdict was less than the judgment finally obtained by 352, which included the amount of the verdict plus the taxable costs and prejudgment interest awarded by the court.

Finally, the Court addressed Berry’s argument that 352 was not entitled to Rule 68 sanctions.  Under that rule, if Berry did not obtain a judgment more favorable than 352’s pre-trial settlement offer to accept $25,000 from Berry, 352 is entitled to sanctions in the amount of its reasonable expert witness fees and double its taxable costs from the date of the offer.  Rule 68 requires the trial court when considering whether the judgment was more favorable, to include only taxable costs and attorneys’ fees that were reasonably incurred as of date of the offer.  Because the trial court failed to consider what amount of the awarded $50,000 in fees and $3,617.70 in taxable costs was reasonably incurred as of the date of the offer, the Court of Appeals remanded for reconsideration of this issue.

Judge Weisberg authored the opinion; Judges Hall and Swann concurred.