Rancho Pescado, Inc. v. Northwestern Mutual Life Insurance

OPINION

The main issues we determine in this appeal are whether the trial court erred by: 1) denying appellee’s application to compel arbitration and, 2) reducing the jury’s award of damages to appellant from $2,500,000 to $101,510, by denying the damages awarded for loss of future profits. The facts necessary to a resolution of this matter are as follows.

In 1971, James Jones (Jones) the president of appellant Rancho Pescado, Inc. (Rancho Pescado), became interested in and began studying the business of commercial catfish farming. He and his wife soon decided to enter the business for themselves. 1 Jones read a great deal of literature on the subject and visited many experts in the field throughout the country. He eventually decided that the Gila Bend Canal in Gila Bend, Arizona, would be an ideal location to raise catfish. Jones contemplated using the existing water in the canals in which to raise the catfish, using an intricate system of screens to separate the fish and control algae problems.

The Gila Bend Canal was owned by ap-pellee Northwestern Mutual'Life Insurance Company (Northwestern) and used to deliver underground water to a large ranch operated by a wholly owned subsidiary of Northwestern, Painted Rock Development *178 Company (Painted Rock). Jones explained his idea to Painted Rock in December, 1979, and made a proposal to conduct a pilot program to determine the feasibility of raising catfish in the canal. After conducting a brief experimental program with mixed results, Jones submitted a license agreement to Painted Rock for approval. That proposal, as well as subsequent ones, was rejected by Painted Rock for various reasons. Negotiations broke off between the parties in 1972, but began again in July, 1973. Finally, in December, 1973, a license agreement, granting Rancho Pesca-do the exclusive right to raise fish in a five mile portion of the canal for a period of five years, was entered into between Northwestern and Rancho Pescado.

Jones spent much of the first half of 1974 raising money to finance his operation and solving an algae problem in the canal. Jones stocked the first delivery of catfish fingerlings in the canal in August, 1974. On the day before Thanksgiving, 1974, Jones was notified by Painted Rock’s water development supervisor that the water flow in the canal would be shut off, as usual, for the holidays. Jones complained and the water was eventually turned back on. Northwestern concluded that continued flow of water through the canal when not needed for Painted Rock’s ranch operations, such as during the Thanksgiving and Christmas holidays, constituted a serious interference with Painted Rock’s ranching operation. As such, on December 10, 1974, Northwestern notified Rancho Pescado by letter that it was terminating the license agreement for cause because Rancho Pes-cado’s demand for continuous flow of water interfered with the ranching operations in violation of paragraph two of the license agreement. Northwestern concluded the letter by advising Rancho Pescado that it had until April 1,1975 to remove its property.

On January 6, 1975, Rancho Pescado filed a complaint for damages, including loss of future profits, against Northwestern, alleging that Northwestern had breached the license agreement. Northwestern responded by filing a motion to compel arbitration as provided for in the license agreement, which the court denied. A separate individual complaint was also filed by Jones and subsequently consolidated with the one filed by Rancho Pescado. Trial by jury began on March 7, 1979. On April 24, 1979, Northwestern filed a motion for a directed verdict as to the personal claim of Jones and as to the claim by Rancho Pescado for lost profits. The court directed a verdict as to Jones but denied the motion against Rancho Pescado. Northwestern renewed its motion after both sides rested on May 8, 1979. The court again denied the motion. On May 10, 1979, the jury returned its verdict against Northwestern in the amount of $2,500,000. Northwestern subsequently filed a motion for new trial and a motion for judgment N.O.V. The court granted Northwestern’s motion for judgment notwithstanding the verdict and reduced the amount of damages to $101,510, plus attorney’s fees. The reduction in damage award represents the amount of damages awarded for loss of future profits. Rancho Pescado appealed the court’s judgment notwithstanding the verdict and Northwestern cross-appealed on various issues, including the court’s denial of its application for arbitration.

I.

ARBITRATION

Northwestern’s main contention in its cross-appeal is that the trial court erred by denying its application for arbitration. In response, Rancho Pescado argues that arbitration was not mandatory but, assuming it was, Northwestern waived its right to arbitration by repudiating the contract. We decide this issue first, for if we reverse the court’s ruling, we need not reach the other issues of this appeal.

The trial court did not explain its reason for denying Northwestern’s application for arbitration. However, we will affirm the trial court’s decision if it is correct for any reason. See Gary Outdoor Advertising Co. v. Sun Lodge, Inc., 133 Ariz. *179 240, 650 P.2d 1222 (1982); Matter of Estate of Torstenson, 125 Ariz. 373, 609 P.2d 1073 (App.1980).

Rancho Pescado contends that Northwestern was not entitled to invoke the arbitration clause because it repudiated the licensing agreement. A number of American jurisdictions have held that repudiation of a contract deprives the repudiating party of what would normally be his right to enforce the arbitration provisions of the contract. Bertero v. Superior Court, 216 Cal.App.2d 213, 30 Cal.Rptr. 719 (1963); see also, Pisciotta v. Newspaper Enterprises, 15 Misc.2d 354, 181 N.Y.S.2d 113 (1958); see generally 32 A.L.R.3d 377. 2 The cases are generally based upon the theory that repudiation of an entire contract acts as a waiver of the right to arbitrate. Bertero v. Superior Court.

Bertero v. Superior Court is a good example of a case where a party’s repudiation of an entire contract was found to be a waiver of the right to arbitrate. In that case the president of National General Corporation terminated an employee by way of a letter stating, in part:

The circumstances under which it [the employment agreement] was entered into render it invalid and unenforceable____

Moreover, the company has determined that in any event the agreement is invalid, unenforceable and an imposition upon the company and its shareholders.

You are further notified thereby that in any event the company hereby terminates and cancels such agreement.

Id. 216 Cal.App.2d 213, 30 Cal.Rptr. at 721.

In holding that the company had repudiated the entire agreement and thereby waived its right to arbitrate, the court reasoned that, “to say in such a letter that the contract ‘is invalid and unenforceable’ could mean only that it created no rights or duties which either party could stand upon.” Id. 216 Cal.App.2d 213, 30 Cal. Rptr. at 724. Thus, the court’s decision to deny arbitration was based upon the premise that it would be unfair for National General Corporation to benefit from one provision of the contract while simultaneously arguing that the entire contract was void ab initio.

As pointed out by the Ninth Circuit Court of Appeals in Riess v. Murchison, 384 F.2d 727 (9th Cir.1967), it is very important to distinguish between a repudiation of the entire contract, such as in Bertero v. Superior Court, and a repudiation or breach of one or more of the terms of the contract:

For ‘repudiation’ is an elusive concept, and, as the researcher will find, can have various meanings, often confusing and seldom spelled out. Here, appellants do not contend that appellees have at any time waived or specifically repudiated the arbitration clause itself; indeed, the evidence suggests that appellees have consistently urged compliance with that clause. Rather, the ‘repudiation’ here charged relates to other contractual duties. More, specifically, the allegations spell out a refusal to perform contractual obligations. It is claimed that appellees (1) breached the contract in certain respects, and, (2) refused to render any future performance-conduct which, in combination, is asserted to constitute a ‘repudiation of the contract.’

Id. 216 Cal.App.2d 213, 30 Cal.Rptr. at 733, (emphasis in original).

Rancho Pescado claims that the December 10, 1974, letter 3 from North *180 western, terminating the licensing agreement, constituted a repudiation of the licensing agreement and therefore amounted to a waiver of the right to arbitrate. Whether the letter should be so construed is a question of law to be determined by this court. See, e.g., LeBaron v. Crismon, 100 Ariz. 206, 412 P.2d 705 (1966). In answering this question we are aided by our decision in EFC Development Corp. v. F.F. Baugh Plumbing & Heating, 24 Ariz. App. 566, 540 P.2d 185 (1975). In the instant case, the following issue was considered by the court: “May a party to a contract demand the arbitration rights thereunder when that party itself has breached, abandoned, or repudiated the contract without first asking for arbitration of its grievances?” Id. at 567, 540 P.2d at 186. In answering the inquiry in the affirmative, we reasoned:

However, the very purpose of arbitration provisions would be defeated and their effectiveness severely limited if a party were held to have abandoned his arbitration rights merely because his actions might be construed to constitute a breach of the contract prior to the time he seeks a clarification of those rights through arbitration____

By its very nature the arbitration clause in the contract is distinct from other clauses. It is not to be considered as a clause in favor of one party or the other, the performance of which might be excused by the breach of other provisions of the contract. Rather, the arbitration clause constitutes consent of the parties to establishment of extra-legal machinery for the settlement of their disputes. Even if we assume that appel-lees’ action in reducing its work force constituted a breach of its obligations under the contracts, we find no merit in appellant’s contention that such breach constituted an abandonment or repudiation so as to render the arbitration provisions of the contract unavailable to the appellee.

Id. Northwestern’s letter is an attempt to terminate the license agreement for cause. This position may or may not be supported by the evidence. If not, Northwestern’s action would be considered a breach of the agreement. However, as we stated in EFC Development Corp, such a breach does not constitute an abandonment or repudiation of the arbitration clause of the agreement. Thus, we cannot uphold the court’s decision on this basis.

(1) Failure to take interlocutory appeal.

After hearing oral argument in this matter, we asked the parties to submit further briefs on the following two related issues:

1. Did Northwestern have the right under A.R.S. § 12-1201.01 to file an interlocutory appeal from the trial court's order denying its motion to arbitrate?

2. If so, has Northwestern waived its right to compel arbitration by failing to *181 file an interlocutory appeal from such order?

A.R.S. § 12-2101.01(A)(1) provides that an appeal may be taken from an order denying an application to compel arbitration. In the instant case, the orders denying Northwestern’s application to arbitrate were unsigned minute entry orders and were therefore not appealable without being formally entered by a signed written order. See Johnson v. Nelson, 128 Ariz. 587, 627 P.2d 1085 (App. 1981). See Rule 58(a), Arizona Rules of Civil Procedure (judgment not effective until filed with clerk of court). However, either party could have placed the record in an appealable status by requesting the court to formalize its order denying Northwestern’s application to arbitrate. Howard P. Foley Co. v. Harris, 4 Ariz.App. 294, 419 P.2d 735 (1966). Thus, the issue is whether Northwestern has waived its right to arbitrate by failing to take the necessary action to place the court’s order in an appealable form and thereafter appealing.

Waiver of an arbitration agreement is generally not favored and the facts of each case must be viewed in light of the strong policy favoring arbitration. See, e.g., Midwest Window Systems, Inc. v. Amcor Industries, Inc., 630 F.2d 535 (7th Cir.1980); Mitsui & Co., (U.S.A.) v. C & H Refinery, Inc., 492 F.Supp. 115 (D.C.N.D. Cal.1980); China Union Lines v. American Marine Underwriters, 458 F.Supp. 132 (D.C.S.D.N.Y.1978). Once a party has given notice insisting on arbitration, the burden is heavy on the party seeking to prove waiver. See General Guaranty Insurance Co. v. New Orleans General Agency Inc., 427 F.2d 924 (5th Cir.1970); accord Martin Marietta Aluminum, Inc. v. General Electric Co., 586 F.2d 143 (9th Cir. 1978); Hilti, Inc. v. Oldach, 392 F.2d 368 (1st Cir.1968). This court has stated that the “basis of the finding of waiver of an arbitration provision is the showing of conduct inconsistent with utilization of the arbitration remedy — conduct showing an intent not to arbitrate.” EFC Development Corp. v. FF Baugh Plumbing & Heating, 24 Ariz.App. at 569, 540 P.2d at 188.

The case before us is a difficult one to decide. On the one hand, Northwestern actively and aggressively pursued its attempt to arbitrate. In January, 1975, prior to filing an answer to Rancho Pescado’s complaint, Northwestern filed an application to compel arbitration and stay the proceedings. In September, 1977, Northwestern filed a motion for leave to file a counterclaim to recover damages resulting from Rancho Pescado’s refusal to arbitrate. On March 5, 1979, two days before trial, Northwestern renewed its motion to compel arbitration. Finally, Northwestern raised the arbitration clause in support of its post-trial motions. Thus, it appears Northwestern’s actions were taken with a view toward preserving its right to arbitrate. However, it admittedly failed to take two important steps, that is, formalizing the court’s order and filing an appeal therefrom.

In Bolo Corp. v. Homes and Sons Construction Co., supra, our supreme court held that when the plaintiff filed suit in superior court, in lieu of the arbitration tribunal, it waived the right to thereafter arbitrate the same issue. The court reasoned that by “bringing an action in contract and attaching thereto a proceeding in garnishment, the plaintiff made a tactical election of remedy.” 105 Ariz. at 347, 464 P.2d 792.

It is our view that Northwestern made a similar tactical election of remedy in the case at bar. It is apparent from the superi- or court and appellate briefs that the attorneys for each side spent a considerable amount of effort on this litigation. And, judging from the high quality of work, we must assume Northwestern was aware of its right to formalize the court’s order and to appeal therefrom. Thus, it had a decision to make; either formalize the order and appeal, or maintain the status quo and proceed with trial. Had Northwestern truly intended to arbitrate, it was within its power to pursue an interlocutory appeal. Although Northwestern appeared to pre *182 serve its right to arbitrate, once it decided not to take the necessary steps to appeal, it similarly made a tactical decision not to arbitrate. None of the subsequent pleadings which were filed can disguise that signal of its intent.

In Wells v. Tanner Brothers Contracting Co., 103 Ariz. 217, 220, 439 P.2d 489, 492 (1968), our supreme court held that if no appeal is perfected from an order granting a new trial, the right to appeal would be deemed abandoned and could not be raised at the end of the second trial. To hold otherwise, the court continued, “would allow a party to have his cake and eat it too. One might then decide to retry every case envisioning the possibility of a larger verdict in the second trial.” Id. This reasoning is equally applicable to the instant case. Were we to rule otherwise, there would never be a reason for a party desiring arbitration to make certain that the order denying its request was formalized by the trial judge. Instead, the party would simply take his chances at trial and, if not satisfied, thereafter appeal the order denying arbitration. This would allow the party an unfair second bite at the apple. This has never been one of the purposes behind arbitration or our Rules of Appellate Procedure and we will not now condone such action.

Our research of this issue has uncovered two Fifth Circuit Court of Appeals cases which reach a contrary holding. In Sibley v. Tandy, 543 F.2d 540, 542 (5th Cir.1976), the court, without discussion, cited to General Guaranty Insurance Co. v. New Orleans General Agency Inc., supra, in holding that the defendant did not waive its right to arbitrate “by failing to press an interlocutory appeal by the district judge’s denial of its motion to stay arbitration.”

In General Guaranty, General Guaranty Insurance Co. (GIC) sought an accounting and damages for breach of contract against New Orleans General Agency (NOGA). NOGA filed a motion seeking summary judgment, dismissal of the complaint for failure to state a claim, and, in the alternative, a stay pending arbitration. In support of its motion for summary judgment, NOGA asserted that the contract sued on had been abandoned by mutual consent of the parties and superseded by another contract which had substituted another firm in the place and stead of NOGA. The alleged suprseding agreement did not contain an arbitration clause. The trial court denied NOGA’s request for a stay because it found there was a possibility that the contract being sued on had been superseded by a contract not containing an arbitration clause, as NOGA alleged. If so, arbitration would not have been proper. A separate trial on the issue of abandonment was held, after which the court held there had not been an abandonment of the first contract. As to arbitration, the court found that NOGA had waived its right to arbitrate because it failed to request arbitration before suit was filed and allowed GIC to begin taking depositions before requesting arbitration. On appeal, the fifth circuit reversed, holding: “GIC’s argument that failure to appeal was a waiver is a facet of its implicit theory of election. It misapprehends the usefulness of determining in court if there is an arbitration contract before sending the parties to arbitration.” Id. at 930. In the instant case, however, the trial court did not propose to consider Rancho Pescado’s contention that Northwestern had repudiated the arbitration clause and that therefore there was not a valid arbitration provision in existence. Instead, the court simply denied Northwestern’s motion without stating a reason. Thus, unlike the General Guaranty case, as far as the parties to the case were concerned, there were no further arbitration issues to be decided at trial. In other words, the issue of Northwestern’s right to arbitrate was ripe for appeal, whereas in General Guaranty the court had not yet determined whether the contract containing the arbitration provision was any longer in existence. Our holding should not be viewed as being in disfavor of arbitration. To the contrary, an opposite decision would abrogate the strong policy behind arbitration. The primary attraction of arbitration is an expeditious and *183 inexpensive method of dispute resolution. Aerojet-General Corp. v. American Arbitration Association, 478 F.2d 248 (9th Cir. 1973); New Pueblo Constructors, Inc. v. Lake Patagonia Recreation Association, Inc., 12 Ariz.App. 13, 467 P.2d 88 (1970). Here, the two main incentives for arbitration are lost. It has been over eight years since suit was originally filed in this matter. Since that time a great deal of expense has been incurred by both parties and the state judicial system. It would make little sense to send this case back for arbitration at this late date.

In conclusion, we wish to emphasize that our holding is limited to the arbitration process. Arbitration is such an important element of dispute resolution that our legislature has deemed the formal denial of an application for arbitration to justify an interlocutory appeal. In light of the importance properly afforded to arbitration in our judicial system, and under the circumstances of this case, we find Northwestern’s failure to perfect an interlocutory appeal to constitute a waiver of its right to arbitrate.

II.

DAMAGES FOR LOSS OF FUTURE PROFITS

The thrust of Rancho Pescado’s argument on appeal is that the court erred by eliminating the jury’s award of damages for loss of future profits and thereby reducing the overall damage award from $2,500,000 to $101,510. Rancho Pescado contends the jury’s award of damages for anticipated future profits was soundly supported by the evidence. Northwestern contends that Arizona has adopted a per se rule which prohibits an award of damages for loss of future profits to a new business. Northwestern further contends that even if a per se rule is not used, Rancho Pescado failed to sustain its burden of proving loss of future profits with reasonable certainty.

The trial court reduced the jury’s damage award by granting Northwestern’s motion for judgment notwithstanding the verdict. The test to be used in determining whether to affirm a judgment notwithstanding the verdict is whether the evidence, if treated in the most favorable light to the verdict, is substantial enough that reasonable men could discern facts to support the verdict. Kavanaugh v. Kava-naugh, 131 Ariz. 344, 641 P.2d 258 (App. 1981); Times Mirror Co. v. Sisk, 122 Ariz. 174, 593 P.2d 924 (App.1978); Bond v. Cartwright Little League, Inc., 112 Ariz. 9, 536 P.2d 697 (1975).

Until recently, the majority rule in this country prohibited a jury’s verdict of damages for lost profits of a new business. See, e.g., Fredonia Broadcasting Corp. v. RCA Corp., 569 F.2d 251 (5th Cir.1978), cert. denied, 439 U.S. 859, 99 S.Ct. 177, 58 L.Ed.2d 167 (1978); Mullen v. Brantley, 213 Va. 765, 195 S.E.2d 696 (1973); St. Paul at Chase Corp. v. The Manufacturer Life Insurance Co., 262 Md. 192, 278 A.2d 12 (1971); Dieffenbach v. McIntyre, 208 Okla. 163, 254 P.2d 346 (1952); Taylor v. Shoemaker, 34 Ala.App. 168, 38 So.2d 895 (1948); see generally Dunn, Recovery of Damages for Lost Profits 2nd § 4.1 (1981). These cases were generally decided on the basis that loss of profits from a new business was merely speculative and incapable of being ascertained with the requisite degree of certainty. See Evergreen Amusement Corp. v. Milstead, 206 Md. 610, 112 A.2d 901 (1955). Such reasoning is supported by the generally accepted rule of contract law that damages are not recoverable unless they are reasonably certain. 5 Corbin on Contracts §§ 1021-1022 (1964); Restatement of Contracts § 331 (1932).

Recent cases have eroded the once generally accepted rule against awarding damages for lost profits to a new business. The modern trend is to allow recovery for such lost profits if they can be proven with reasonable certainty. See, e.g., Guard v. P & R Enterprises, Inc., 631 P.2d 1068 (Alaska 1981); Chung v. Kaonohi Center Co., 62 Hawaii 594, 618 P.2d 283 (1980); Cardinal Consulting Co. v. Circo Resorts, Inc., 297 N.W.2d 260 (Minn.1980); Wyoming Bancorporation v. Bonham, Wyoming, *184 563 P.2d 1382 (Wyo.1977); S. John Kreedman & Co. v. Meyers Bros. Parking— Western Corp., 58 Cal.App.3d 173, 130 Cal.Rptr. 41 (1976); Fera v. Village Plaza, Inc., 396 Mich. 639, 242 N.W.2d 372 (1976); Vickers v. Wichita State University, Wichita, 213 Kan. 614, 518 P.2d 512 (1974); Smith Development Corp. v. Bilow Enterprises, Inc., 112 R.l. 203, 308 A.2d 477 (1973); Brenneman v. Auto-Teria, Inc., 260 Or. 513, 491 P.2d 992 (1971). In Chung, the Hawaii Supreme Court reasoned that, “it would be grossly unfair to deny a plaintiff meaningful recovery for lack of a sufficient ‘track record’ where the plaintiff has been prevented from establishing such a record by defendant’s actions.” 618 P.2d at 291. And, in Vickers, the Kansas Supreme Court noted that to preclude recovery “as a matter of law merely because a business is newly established would encourage those contracting with such a business to breach their contracts.” 213 Kan. at 620, 518 P.2d at 517. The reasoning of these cases is highly persuasive.

This court has had two occasions to discuss the new business loss of profit rule. In Earle M. Jorgensen Co. v. Tesmer Manufacturing Co., 10 Ariz.App. 445, 459 P.2d 533 (1969), we approved the modern view allowing recovery “where evidence is available to furnish a reasonably certain factual basis for computation of probable losses ... even where a new business is involved.” Id. at 450, 459 P.2d at 538. The per se rule seemingly re-emerged in China Doll Restaurant, Inc. v. Schweiger, 119 Ariz. 315, 580 P.2d 776 (App.1978), in which this Court affirmed a summary judgment denying recovery for lost profits in a new business. We decline to follow China Doll, however, because the previous decision in Earle M. Jorgensen v. Tesmer Manufacturing Co., was neither cited by counsel nor considered by the court in reaching its conclusion. We believe it would be patently unfair to deny damages to a business where they have been proved with reasonable certainty merely because the business venture was newly established.

Thus, the issue becomes whether the evidence introduced by Rancho Pescado, when considered in a light most favorable to upholding the jury verdict, established a reasonably certain factual basis for computation of lost profits. With reference to the evidence concerning lost profits, the principle is well established that once the fact of damages has been shown, the amount of damages may be established with proof of a lesser degree of certainty than required to establish the fact of damages. Earle M. Jorgensen Co. v. Tesmer Manufacturing Co., supra. However, there still must be a reasonable basis in the evidence for the trier of fact to fix computation when a dollar loss is claimed. Nelson v. Cail, 120 Ariz. 64, 583 P.2d 1384 (App.1978). The evidence required to prove loss of future profits depends on the individual circumstances of each case. Chung v. Kaonohi Center Co.; Wyoming Bancorporation v. Bonham, Wyoming, supra. While absolute certainty is not required, the court or jury must be guided by some rational standard in making an award.

In determining whether a plaintiff has met its burden of proof, courts have considered the profit history from a similar business operated by the plaintiff at a different location, Guard v.P & R Enterprises, Inc.; Standard Machinery Co. v. Duncan Shaw Corp., 208 F.2d 61 (1st Cir.1953); El Fredo Pizza, Inc. v. Roto-flex Oven Co., 199 Neb. 697, 261 N.W.2d 358 (1978), and the profit history from the business in question if it was successfully operated by someone else before the plaintiff took over. General Electric Supply Co. v. Mt. Wheeler Power, Inc., 94 Nev. 766, 587 P.2d 1312 (Nev.1978). Neither method was available for use in the instant case. However, as is the case with an established business, Lininger v. Dine Out Corp., 131 Ariz. 160, 639 P.2d 350 (App.1981), reasonable certainty may b