Recoverability of Lost Profits in Arizona

Arizona unequivocally permits harmed plaintiffs to claim and recover lost profits in breach of contract actions. See, e.g., Harris Cattle Co. v. Paradise Motors, Inc., 104 Ariz. 66, 67 (1968).

Furthermore, unlike several states, Arizona also permits recovery of lost profits for newly established businesses. See Earle M. Jorgensen Co. v. Tesmer Mfg. Co., 10 Ariz. App. 445, 449–50 (1969) (“While it has been stated that one engaged in a new business cannot recover damages for lost profits, we are of the opinion that where evidence is available to furnish a reasonably certain factual basis for computation of probable losses, recovery of lost profits cannot be denied even though a new business venture is involved.” (citations omitted)); Short v. Riley, 150 Ariz. 583, 585–86 (Ct. App. 1986) (“The rule now is that, when evidence is available to furnish a reasonably certain factual basis for computation of probable losses, recovery cannot be denied even though a new business venture is involved.” (citing Rancho Pescado, Inc. v. Northwestern Mut. Life Ins. Co., 140 Ariz. 174 (Ct. App. 1984)); Earle M. Jorgensen Co., 10 Ariz. App. 445)). Though, as a rule of thumb, it is more difficult to recover lost profits for a new business than it is for an established business. See Rhue v. Dawson, 173 Ariz. 220, 224–25 (Ct. App. 1992); Gilmore v. Cohen, 95 Ariz. 34, 36–37 (1963).

Arizona’s Pattern Jury Instructions provides the following recommended jury instruction with respect to a claim for lost profits in a contract action:

Arizona Pattern Jury Instructions-Civil, Contract 19; see Great W. Bank v. LJC Dev., LLC, 238 Ariz. 470, 480–81 (Ct. App. 2015) (“Both the existence and amount of lost profits present questions of fact which must be proven with reasonable certainty.” (citations omitted)).

Thus, there are a few critical components needed to successfully plead and establish a claim for lost profits in contract actions under Arizona law: (1) the fact of damages, (2) causation, and (3) the amount of damages. And while separating these elements into distinct categories on paper is straightforward, establishing each element can present unique challenges. See Felder v. Physiotherapy Assocs., 215 Ariz. 154, 164 (Ct. App. 2007) (noting “the line between the fact of damage and the amount of damage may be blurred when lost profits are at issue”).

The Fact of Damages. Initially, “[p]roof of the fact of damages must be of a higher order than proof of the amount of damages.” Coury Bros. Ranches v. Ellsworth, 103 Ariz. 515, 521 (1968) (citations omitted).

To that end, mere speculation or conjecture that damages were incurred is not enough to meet this evidentiary burden. See, e.g., Rancho Pescado, Inc., 140 Ariz. at 184–86 (no reasonable basis for award of lost profits where there was no conclusive evidence that plaintiff could have successfully raised and marketed large quantities of catfish, and the evidence as a whole amounted to nothing more than conjecture and speculation); Farr v. Transamerica Occidental Life Ins. Co. of Cal., 145 Ariz. 1, 6 (Ct. App. 1984) (holding that plaintiff could not recover damages for loss of credit reputation where nothing in the evidence, except speculation, suggested that they actually suffered any damage to their credit).

Rather, a plaintiff must prove that he has “in fact” been damaged by the defendant’s actions. Earle M. Jorgensen Co., 10 Ariz. App. at 450; see Isenberg v. Lemon, 84 Ariz. 340, 345–46 (1958), modified on other grounds, 84 Ariz. 364 (1958) (reversing trial court’s award to plaintiff for lost profits where the plaintiff produced no definitive evidence as to actual anticipated profits).

Causation. To recover lost profits, the plaintiff must establish that such profits were caused by, i.e., were the direct and proximate consequence of, the defendant’s actions. Thus, recoverable are “those damages which arise naturally from the breach itself or which may reasonably be supposed to have been within the contemplation of the parties at the time they entered the contract.” Short, 150 Ariz. at 585 (citing All Am. Sch. Supply Co. v. Slavens, 125 Ariz. 231, 233 (1980)); see Higgins v. Ariz. Sav. & Loan Ass’n, 90 Ariz. 55, 63–64 (1961) (noting where one party has broken a contract, damages may amount to what “may reasonably be supposed to have been in the contemplation of both parties at the time they made the contract” (citations omitted)); Drew v. United Producers & Consumers Coop., 161 Ariz. 331, 333 (1989) (observing that lost profits are usually the “direct and natural result” of the defendant’s breach (citation omitted)).

The Amount of Damages. After establishing that damages were in fact caused by the defendant’s actions, Arizona courts require the amount of damages to be proven with “reasonable certainty.” See Earle M. Jorgensen Co., 10 Ariz. App. at 450 (recovery of lost profits is allowed if “evidence is available to furnish a reasonably certain factual basis for computation of probable losses” (citation omitted)).

As indicated above, this standard is a lesser evidentiary burden than establishing that damages were in fact caused. See id. at 451 (“[O]nce the Fact of damages has been established, the Amount of the damages may be established with proof of a lesser degree of certainty than is required to establish the fact of damage.” (citing Harris Cattle Co., 104 Ariz. 66; Gilmore, 95 Ariz. 34; Isenberg, 84 Ariz. 340; Jacob v. Miner, 67 Ariz. 109 (1948)); Short, 150 Ariz. at 585–86 (same).

As a result, Arizona courts have “long-recognized that absolute certainty in the amount of damages is not necessary where the fact of damage is proven, with doubts to be resolved in favor of the non-breaching party.” Great W. Bank, 238 Ariz. at 482 (citing Gilmore, 95 Ariz. at 36; Grummel v. Hollenstein, 90 Ariz. 356, 360 (1962)).

Instead, for established businesses, reasonable certainty is provided where there is “some reasonable method of computing [the] net loss.” Great W. Bank, 238 Ariz. at 482 (citation omitted); see also Rancho Pescado, Inc., 140 Ariz. at 184–86, (plaintiff must provide “some reasonable method” and a “reasonable basis in the evidence for the trier of fact to fix computation when a dollar loss is claimed”); Short, 150 Ariz. at 585–86 (noting that the law “requires a reasonable basis in the evidence for the trier of fact to fix compensation when a dollar loss is claimed.” (citation omitted)).

As long as a reasonable basis for the damages figure exists, courts will uphold a trial award in favor of the plaintiff. See, e.g., Grummel, 90 Ariz. at 359 (upholding trial court’s award of damages for breach of agreement to convey land although exact damages would be difficult, if not impossible, to calculate mathematically); Broadway Realty & Trust v. Gould, 136 Ariz. 236, 238 (Ct. App. 1983) (where trial court made specific findings of fact that were well within the range of the expert testimony presented regarding loss of profits, there was reasonable basis for damages and uncertainty as to the amount of damages would not preclude recovery); Hercules Drayage Co. v. Chanco Leasing Corp., 24 Ariz. App. 598, 601 (1975) (damages could be recovered for lost profits shown with as much mathematical precision as the nature of the claim could provide, and certainty as to the amount of damages was not essential to recovery when the fact of damages was proven); Gilmore, 95 Ariz. at 36 (“[T]he evidence must make an ‘approximately accurate estimate’ possible.” (quoting Martin v. LaFon, 55 Ariz. 196, 199–200 (1940)).

With respect to newly established businesses, “in determining whether a plaintiff has met his burden, courts have considered the profit history from a similar business operated by the plaintiff at a different location.” Short, 150 Ariz. at 586 (citations omitted).

In all cases, it is imperative that plaintiffs ensure that they accommodate for the expenses that would have been incurred. In other words, recovery of lost profits does not mean recovery of lost revenue: recovery is limited to revenue minus expenses. See Tourelle Dev., Inc. v. Proffitt, 2010 WL 1050316, at *3 (Ariz. Ct. App. Mar. 23, 2010) (rejecting a claim for lost profits in part because the evidence “failed to take into account expenses that reasonably would be expected to be incurred”). To meet this burden, litigants can use, among other things, “expert testimony, economic and financial data, market surveys and analyses, business records of similar enterprises, and the like.” Restatement (Second) of Contracts § 352 cmt. b (1981).

Furthermore, litigants should ensure the evidentiary record is clear and consistent. C.f. Gilmore, 95 Ariz. at 36–37 (concluding that damages had not been established with reasonable certainty where all evidence relating to damages was in the form of testimony by plaintiffs, without any accounts or other cost records introduced, and where testimony itself was ambiguous and confused); Coury Bros. Ranches, 103 Ariz. at 521 (where testimony was speculative and conjectural, lost profits were not established with reasonable certainty).

Finally, the evidence must reasonably coincide with the claimed damages figure. See Rancho Pescado, Inc., 140 Ariz. at 185 (rejecting a claim for lost future profits when projected production levels for the business in question were “inordinately high”).

In summary, Arizona recognizes that lost profits are often a natural consequence of harmful conduct towards a business. Thus, recovery of such profits is authorized and routinely awarded.