Rancho Pescado, Inc. v. Northwestern Mut. Life Ins. Co., 1

• Decision Date: 17 January 1984
• Docket Number: CA-CIV,No. 1,1
• Citation: 680 P.2d 1235,140 Ariz. 174
• Parties: RANCHO PESCADO, INC., Plaintiff-Appellant, Cross-Appellee, v. The NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY, a corporation, Defendant-Appellee, Cross-Appellant. 5327.
• Court: Arizona Court of Appeals

Page 1235

680 P.2d 1235

140 Ariz. 174

RANCHO PESCADO, INC., Plaintiff-Appellant, Cross-Appellee, v. The NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY, a corporation, Defendant-Appellee, Cross-Appellant.

No. 1 CA-CIV 5327.

Court of Appeals of Arizona Division 1, Department B.

Jan. 17, 1984.

Review Denied April 10, 1984.

Hofmann, Salcito & Stevens, P.A. by Leroy W. Hofmann, Phoenix, for plaintiff-appellant, cross-appellee.

Snell & Wilmer by Loren W. Counce, Jr., Douglas W. Seitz, and James P. Muehlberger, Phoenix, for defendant-appellee, cross-appellant.

OPINION

GREER, Judge.

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 appellee 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 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 Pescado 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 Pescado'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 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 Northwestern 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...