County of La Paz v. Yakima Compost Co – 6/22/2010

July 1, 2010

Arizona Court of Appeals Division One Holds that a Public Entity Waives a Defense Based on an Insufficient Notice of Claim if the Public Entity Fails to Raise the Defense in a Responsive Pleading or Rule 12(b) Motion, and that the Implied Covenant of Good Faith and Fair Dealing is Violated When a Party Exercises Contractual Discretion in Such a Way so as to Force Termination of an Agreement.

Yakima Compost Co. (“Yakima”) and the County of La Paz (“the County”) executed an agreement which allowed Yakima to receive sewage sludge and process it on county land for an initial 25-year period (“the Agreement”).  Shortly after execution of the Agreement, disputes arose, and the County filed suit against Yakima for breach of contract.  Yakima filed a counterclaim for breach of contract.  The case proceeded to trial, after which the jury returned a $9.2 million verdict in Yakima’s favor.  This appeal followed.

Among other arguments, the County claimed that the trial court should have granted judgment in its favor because Yakima did not comply with the notice of claim statute, but the Arizona Appeals Court rejected that argument.  The Court, instead, held that the County had waived the notice of claim defense by failing to assert it in a responsive pleading or Rule 12(b) motion.

The County also argued that it was entitled to absolute immunity.  The Court of Appeals held that absolute immunity did not apply because the County’s decision whether to perform its obligations under the Agreement was not a legislative or protected administrative function.

Next, the County argued that Yakima failed to prove that the County violated the implied covenant of good faith and fair dealing.  The Court also rejected this argument, reasoning that the jury could have found that the County exercised its discretion under the Agreement merely to force a termination of the Agreement due to a change of heart regarding the wisdom of the Agreement.

Finally, the Court concluded that the Agreement was not a lease entered into in violation of the bidding requirements of A.R.S. § 11-256.  The Court concluded that the Agreement was more akin to a license than a lease because the Agreement did not give Yakima a right of exclusive possession of the land.

Judge Timmer authored the opinion; Judges Swann and Brown concurred.