Rancho Pescado, Inc. v. Northwestern Mutual Life Insurance Co.
140 Ariz. 174, 680 P.2d 1235 (1984)
Rule of Law:
Damages for lost future profits of a new, unestablished business are not recoverable if they cannot be proven with reasonable certainty and are based on mere conjecture and speculation. Additionally, a party waives its right to compel arbitration by failing to perfect an available interlocutory appeal from an order denying arbitration and instead proceeding to trial on the merits.
Facts:
- In 1971, James Jones, president of Rancho Pescado, Inc., began researching commercial catfish farming and decided to use a canal owned by Northwestern Mutual Life Insurance Company.
- In December 1973, Northwestern granted Rancho Pescado a five-year exclusive license to raise fish in a five-mile section of the Gila Bend Canal.
- In August 1974, Rancho Pescado stocked the canal with its first catfish fingerlings.
- During Thanksgiving 1974, a dispute arose when Northwestern's subsidiary, Painted Rock, planned its usual holiday water shutoff, which Jones of Rancho Pescado argued against.
- Northwestern concluded that Rancho Pescado's demand for a continuous water flow constituted a serious interference with its own ranching operations.
- On December 10, 1974, Northwestern sent a letter terminating the license agreement for cause, effective December 31, 1974, and requiring Rancho Pescado to vacate the premises by April 1, 1975.
Procedural Posture:
- On January 6, 1975, Rancho Pescado filed a complaint for breach of contract and lost future profits against Northwestern in the trial court.
- Northwestern filed a motion to compel arbitration based on a clause in the license agreement, which the trial court denied.
- The case proceeded to a jury trial, where Northwestern's motion for a directed verdict on the lost profits claim was denied.
- The jury returned a verdict in favor of Rancho Pescado for $2,500,000.
- Northwestern filed a post-trial motion for judgment notwithstanding the verdict (JNOV).
- The trial court granted Northwestern's JNOV motion, reducing the damage award to $101,510 by striking the damages for lost future profits.
- Rancho Pescado, as appellant, appealed the trial court's granting of the JNOV to the intermediate court of appeals. Northwestern, as appellee, cross-appealed on several issues, including the denial of its application for arbitration.
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Issue:
Can a new, unestablished business recover damages for lost future profits where the evidence of profitability is speculative and fails to establish such profits with reasonable certainty?
Opinions:
Majority - Greer, Judge
No. A new business cannot recover for lost future profits when the claim is not supported by evidence of reasonable certainty. While the court rejects the old per se rule that universally prohibited new businesses from recovering lost profits, it adopts the modern trend requiring that such damages be proven with reasonable certainty. Here, Rancho Pescado's evidence was insufficient and amounted to speculation. The court noted several factors: 1) Catfish farming is an extremely risky industry with a 95% failure rate for new ventures; 2) Rancho Pescado's own pilot program and feasibility studies were inadequate to predict success; and 3) Its plan to market an exceptionally large volume of fish was based on a tentative agreement with a distributor that had limited capacity, little experience with catfish, and later went bankrupt. The court also held that Northwestern waived its right to arbitration by failing to take the necessary steps to file an interlocutory appeal of the trial court's denial and instead proceeding through a full trial, thereby making a tactical election to litigate.
Analysis:
This decision aligns Arizona with the modern legal trend of permitting new businesses to recover lost profits, moving away from the old, inflexible per se rule of prohibition. However, it establishes a high evidentiary bar, reinforcing the 'reasonable certainty' standard. The ruling clarifies that ambitious projections, inadequate feasibility studies, and speculative marketing plans are insufficient to support a claim for lost profits. The case serves as a strong precedent that, while the door is open for new ventures to claim such damages, they must present concrete and reliable evidence to succeed, significantly impacting how damages are calculated and proven in breach of contract cases involving new enterprises.
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