## Facts

- La Paz County and Yakima Compost Co. entered a 2002 agreement for Yakima to operate a regional sludge solar-drying facility on County land for an initial 25-year term.
- The facility was to start at a County landfill and relocate within three years to a permanent site the County was required to “diligently” pursue.
- The agreement required Yakima to submit an approved closure plan, post a $1 million performance bond, and comply with environmental laws; Lincoln General Insurance Co. issued the bond as surety.
- Disputes arose about permitting, environmental compliance, and political opposition to importing sewage sludge.
- The County sued in 2003; Yakima counterclaimed in 2004, alleging the County obstructed performance, failed to diligently secure a permanent site, and then attempted termination based on the resulting failure to relocate.
- After trial, a jury found for Yakima and awarded about $9.2 million, largely for future lost profits over the contract term.
- The trial court denied the County’s post-trial motions, entered judgment on the verdict, granted judgment as a matter of law for Lincoln on the County’s bond claims, and terminated the agreement despite the lost-profits award.

## Issues

1. Whether the County waived certain contract-interpretation and limitation defenses by litigating for years without timely raising them.
2. Whether sufficient evidence supported findings that the County breached the agreement and the implied covenant of good faith and fair dealing by failing to diligently pursue a permanent site and obstructing performance.
3. Whether the future lost-profits award was supported by evidence with reasonable certainty or was speculative/excessive.
4. Whether the surety (Lincoln) could be liable on the performance bond absent a finding that Yakima defaulted.
5. Whether an award of future lost profits required the agreement to remain in force, or whether terminating the contract was proper to prevent double recovery.

## Decision

- Affirmed the judgment for Yakima, including the approximately $9.2 million damages award.
- Held the County waived certain defenses by failing to timely assert them after substantial participation in litigation.
- Found sufficient evidence supporting the jury’s determination that the County breached the agreement and the implied covenant of good faith and fair dealing.
- Affirmed judgment as a matter of law for Lincoln because the County’s bond claim depended on Yakima’s default, which the jury did not find.
- Rejected Yakima’s cross-appeal and upheld termination of the agreement as consistent with the award of future lost profits.

## Legal Principles

- Contract-based defenses may be waived by substantial litigation conduct when not timely raised, particularly after significant reliance and judicial investment.
- The implied covenant of good faith and fair dealing prohibits a party from impairing the other party’s expected contractual benefits, including by engineering failure of a condition and then relying on that failure to terminate.
- Future lost profits are recoverable as expectation damages if supported by evidence permitting calculation with reasonable certainty; mathematical precision is not required.
- A surety’s liability on a performance bond is generally coextensive with the principal’s default; without a principal breach, the obligee cannot recover on the bond.
- Awarding future lost profits for the unperformed contract term is typically inconsistent with continued performance; termination may be ordered to avoid double recovery.

## Conclusion

The court upheld a jury verdict that the County obstructed performance and failed to diligently pursue a required relocation site, constituting breach and bad faith, and sustained a substantial future lost-profits award supported by reasonably certain evidence; because Yakima was not found in default, the surety was not liable, and the contract was properly terminated to prevent double recovery.


Cnty. of La Paz v. Yakima Compost Co., 233 P.3d 1169 (Ariz. Ct. App. 2010)