Arizona Court of Appeals Division One Holds That Comparing the “Judgment Finally Obtained” Under A.R.S. § 12-341.01(A) to a Settlement Offer Should Involve Only Those Reasonable Fees and Costs Incurred as of the Date the Offer Was Made

In 1999, Jane Hall and her now-deceased husband purchased a previously-owned home, originally constructed by Read Development, Inc. (“RDI”).  In 2004, Hall filed suit against RDI, alleging breach of the implied warranty of habitability and requesting rescission of the purchase, or alternatively, damages for the costs of repair.  The trial court subsequently granted summary judgment to RDI on the claim for rescission, holding that rescission was unavailable because Hall was not in privity with RDI.  At trial, the jury found in favor of Hall on her breach of implied warranty of habitability claim and awarded $30,000 in damages.  Both parties then requested attorneys’ fees and costs pursuant to A.R.S. § 12-341.01(A).  The trial court concluded that Hall was the successful party and awarded Hall attorneys’ fees in the amount of $227,500.  It then reduced this figure by $2,500, the amount awarded to RDI for successfully defending against Hall’s request for rescission.  Both parties appealed. 

The Arizona Court of Appeals first held that the trial court did not abuse its discretion in awarding Hall her attorneys’ fees.  A.R.S. § 12-341.01 authorizes courts to award attorneys’ fees in actions arising out of contract to “the successful party.”  A.R.S. § 12-341.01(A).  “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 contract,” the statute designates the offeror as the successful party from the date of the offer.  Id.  The phrase “judgment finally obtained” means the “sum ultimately obtained in a particular case” including attorneys’ fees. 

Although the statute does not specify what fees and costs should be utilized in the comparison to the settlement offer, the Court concluded that comparing the judgment finally obtained to a settlement offer “should involve only those reasonable fees and costs incurred as of the date the offer was made.”  In this case, at the time RDI offered to settle the case for $40,000, Hall had incurred $69,396.50 in attorneys’ fees.  Because the judgment Hall finally obtained – the $30,000 verdict plus the $69,396.50 in fees she had incurred at the time of the offer – exceeded the $40,000 settlement offer, the trial court did not abuse its discretion in awarding Hall her fees.

The Court of Appeals also upheld summary judgment on Hall’s rescission claim.  In Arizona, it is a general rule of contract law that “only the parties and privies to a contract may enforce it.”  Lofts at Fillmore Condo. Ass’n v. Reliance Commercial Constr., Inc., 218 Ariz. 574, 575, ¶ 5, 190 P.3d 733, 734 (2008).  However, the Arizona Supreme Court has recognized an exception to the privity requirement, allowing subsequent purchasers of a house to bring a claim for breach of the implied warranty of habitability against the builder.  Richards v. Powercraft Homes, Inc., 139 Ariz. 242, 245, 678 P.2d 427, 430 (1984).  The Supreme Court reasoned that latent defects are “just as catastrophic on a subsequent owner as on an original buyer as the builder will be just as unable to justify improper or substandard work.”  Id. Because the policy for allowing subsequent purchases to bring a claim for breach of the implied warranty of habitability against the builder can be satisfied by awarding compensatory damages to the injured party, the Court of Appeals declined extend the holding in Richards to allow Hall to assert a claim for rescission against RDI.   

Judge Irvine authored the opinion; Judges Kessler and Hall concurred