Attorneys' Fees and Appeals of Registrar of
Because a contractor’s appeal of its license
revocation by the Arizona Registrar of Contractors is a legal action based in
statute, not in contract, the prevailing party cannot receive an award of its
If you have
been involved in a lawsuit over a contract dispute, you may be aware that, under
Arizona law, the prevailing party in contract litigation may ask the court to
order the other side to pay the prevailing party’s attorneys’ fees.
may seem simple enough, whether a legal action truly “arises out of a contract”
is not always clear. In a recent Arizona Court of Appeals case,
Keystone v. Kang, a licensed contractor avoided liability for an owner’s
attorneys’ fees by successfully arguing that the action did not arise out of the
parties’ contract for tile flooring, but instead arose out of its statutory
obligation as a licensed contractor to perform its work in a workmanlike manner.
A homeowner, Mr. Kang, contracted with Keystone Floor & More to
install floor tile in his residence. Keystone completed the work and, under the
terms of their agreement, Kang paid Keystone $30,000.
of the tiles cracked, Kang alleged that the cause was “terrible workmanship” by
Keystone. Keystone countered that the cracks were the result of an “unsettled
foundation.” Kang filed a complaint against Keystone with the Arizona Registrar
of Contractors, and an ROC inspector examined the premises and issued a
corrective work order.
Keystone did not comply with the order to the ROC’s satisfaction, the ROC issued
a citation to Keystone for violations of various statutes and for its failure to
perform work, as required in Arizona
Administrative Code R4-9-108, “in a professional and workmanlike manner.”
After a hearing, the ROC ordered revocation of Keystone’s license.
filed a complaint in Superior Court against Kang and the ROC, asking for
judicial review of the ROC’s decision under the Administrative Review Act
(A.R.S. §§ 12-901 through 12-914). After oral argument, the Superior Court judge
affirmed the ROC’s revocation of Keystone’s license.
applied for an award of attorneys’ fees, stating that he met the statutory
requirements contained in
A.R.S. § 12-341.01(A) – i.e., this was a contested action, he was the
successful party, and the action arose out of the contract.
contested the awarding of attorneys’ fees, arguing that the statute does not
apply to fees related to appeals of ROC decisions to Superior Court, since ROC
appeals are based in contractor licensing statutes, not in contract.
Superior Court judge ruled for Kang and ordered Keystone to pay $8,128.50 in
attorneys’ fees. Keystone appealed.
The sole issue that the Arizona Court of Appeals considered was whether the
Superior Court judge ruled properly in awarding attorneys’ fees to Kang. At the
heart of the Court of Appeals’ ruling was whether the action for which the
attorneys’ fees were awarded – in this case, Keystone’s appeal of its license
revocation – arose out of the contract.
1983 ruling in ASH, Inc. v. Mesa Unified School Dist. No. 4, the Court
noted that fees “may be recovered when a contract is the ‘cause or origin’ of
the Court also noted that, per Hanley v. Pearson, “the fee statute does
not apply … to ‘purely statutory causes of action’ … nor does it apply ‘if the
contract is a factual predicate to the action but not the essential basis of
it.’ That is, when the action arises out of a statutory obligation and is ‘based
on a statute rather than a contract, the peripheral involvement of a contract
does not support the application of the fee statute.’”
case, Keystone’s appeal of its license revocation was a statutory cause
of action, not a contract-based cause of action.
In the end,
the Court of Appeals ruled for Keystone and reversed the Superior Court’s
awarding of attorneys’ fees to Kang. In its ruling, the Court wrote:
“We find the
superior court’s review of the ROC’s decision does not constitute an action
‘arising out of contract’ … because the basis for the action is purely
statutory. … Although the appeal to the superior court involved a contract, it
was not the ‘cause or origin’ of the appeal – rather, the contract was
peripheral to the primary cause of whether the ROC erred in finding Keystone had
violated its statutory duties as a licensed contractor.
“At issue …
was Keystone’s failure to comply with the Workmanship Rule … not Keystone’s
failure to meet its contractual obligations.”
While Keystone prevailed on the issue of attorneys’ fees, it was
in large measure a hollow victory for this contractor compared to the loss of
However, the ruling in
Keystone v. Kang does provide positive news to other licensed contractors,
since it allows them to pursue statutory remedies to unfavorable administrative
rulings, generally without fear of having to pay the other party’s attorney.