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It is generally assumed that attacking non-combatants would be illegal in a formal Agni Kai, even more so considering the fact that Katara wasn't a firebender. Furthermore, Katara did not formally challenge Azula, meaning that there would have been no reason to initiate a battle with her, apart from the fact that Katara was in the vicinity of the arena. With that being said, Azula was not in the mindset to follow the rules in that particular circumstance.

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