Triangle Min. Co., Inc. v. Stauffer Chemical Co.

• Decision Date: 08 February 1985
• Docket Number: No. 84-3516,84-3516
• Citation: 753 F.2d 734
• Parties: TRIANGLE MINING CO., INC., and Terteling Land Company, Plaintiffs-Appellants, v. STAUFFER CHEMICAL COMPANY, Defendant-Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 734

753 F.2d 734

TRIANGLE MINING CO., INC., and Terteling Land Company, Plaintiffs-Appellants, v. STAUFFER CHEMICAL COMPANY, Defendant-Appellee.

No. 84-3516.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted Nov. 9, 1984.

Decided Jan. 15, 1985.

As Amended on Denial of Rehearing Feb. 8, 1985.

Jeffrey A. Strother, Moffatt, Thomas, Barrett & Blanton, Boise, Idaho, for plaintiffs-appellants.

Carl P. Burke, Elam, Burke, Evans, Boyd & Koontz, Boise, Idaho, for defendant-appellee.

Appeal from the United States District Court for the District of Idaho.

Before WRIGHT, SNEED, and ALARCON, Circuit Judges.

SNEED, Circuit Judge:

Triangle Mining Co. (Triangle) appeals from the district court's award of summary judgment against it and in favor of Stauffer Chemical Co. (Stauffer) and from the district court's denial of a motion in limine. The district court had jurisdiction under 28 U.S.C. Sec. 1332. This court has jurisdiction over Triangle's timely appeal under 28 U.S.C. Sec. 1291. We affirm.

I. FACTS

This case arises from two interrelated written contracts, both dated June 30, 1967, between Triangle's predecessor in interest, J.A. Terteling and Sons (Terteling), ¹ and Stauffer. Under the first contract, Terteling transferred its interest in various phosphate mineral leases in southeastern Idaho to Stauffer, in exchange for $8,000,000, which Stauffer paid. Under the second, Terteling undertook to mine four of the leases it had sold to Stauffer and to supply Stauffer's requirements for phosphates. The mining contract also limited the amount of phosphate that Terteling was obliged to deliver and that Stauffer was obliged to accept in each contract year. By its terms, the contract was to remain in force until Terteling had extracted 10,000,000 tons of ore. To obtain certain tax benefits, however, the parties agreed that either could terminate the mining contract at any time upon ninety days notice. It is Stauffer's efforts to terminate its obligations under the mining agreement that are the focus of this litigation.

The mining contract contained two liquidated damages provisions. The first, set forth in section 16(c), required Stauffer to pay a penalty based on the number of unmined tons remaining at the time of termination. ² The second, appearing in section 16(b)(2), was premised on the parties' initial understanding that Terteling would operate the mines only during those "seasons of the year in which weather conditions favor such mining operations." Recognizing that seasonal mining entails making preparatory expenditures, the parties sought to protect themselves against the risk that one party would terminate after the other had incurred costs in anticipation of that year's mining season, but before their recoupment was possible. To that end, section 16(b)(2) required payment of liquidated damages "equal to the amount of ... funds expended by and the At the outset of operations in 1967, Terteling operated the mines on a seasonal basis, as contemplated by the contract. On November 3, 1971, however, Terteling informed Stauffer of its intent to operate the mines on a year-round basis. Terteling, and then Triangle, continued to work the mines year round until Stauffer terminated the contract in 1978.

amount of ... irrevocable commitments to expend funds made by such other party to the extent they cannot, because of the time of year at which termination of this agreement occurs ..., be recouped by such other party." ³

Stauffer notified Triangle of its intent to terminate the agreement on January 15, 1978. The termination became effective on April 1, 1978, the first day of the new mining year. Stauffer acknowledged its liability under section 16(c) of the contract and paid Triangle $1,333,586 in full satisfaction of its obligation.

II. THIS LITIGATION

Triangle filed suit in September 1980, alleging (1) that Stauffer had breached an oral commitment to refrain from exercising the termination clause; (2) that Stauffer acted in bad faith when it terminated the contract; (3) that section 16(b)(2) of the contract, by its express terms, allowed Triangle to recover all of its advance expenditures upon termination; (4) that the change to year-round mining impliedly modified section 16(b)(2) to allow Triangle to recover all of its advance expenditures incurred in anticipation of mining the full 10,000,000 tons of ore; and (5) that Triangle was entitled to recover its advance expenditures in quantum meruit, because Stauffer was unjustly enriched by Triangle's advance work. Triangle sought to recover $1,480,487 as advance expenditures under the last three theories. Triangle moved for partial summary judgment, and Stauffer, in return, also moved for summary judgment.

The district court granted Stauffer's motion for summary judgment. The court concluded that the parties intended their written agreement concerning termination to be integrated, and on this basis, it excluded Triangle's proffered evidence of Stauffer's oral commitments not to terminate in reliance upon the parol evidence rule. Because it also concluded that the contract clearly gave Stauffer the right to terminate, the court disposed of Triangle's claims that Stauffer had breached an oral promise not to terminate and that Stauffer had terminated in bad faith. The court then rejected Stauffer's implied contract and quasi-contract theories on the ground that the parties' express agreement governed the question of Triangle's ability to recover incurred but unrecouped advance expenditures. With regard to section 16(b)(2), the court limited Triangle's recovery to those costs incurred in the year of termination (April 1, 1977 to January 15, 1978) that Triangle could demonstrate were reasonably related to preparations for mining operations in 1978 and that Triangle could have recouped through normal operations Finally, as to the motion in limine which Triangle had requested to exclude a statement it had made in a settlement proposal, the court ruled that the statement constituted the factual basis of Triangle's claim for liquidated damages pursuant to section 16(c) of the contract, not a "negotiation regarding compromise or settlement" subject to exclusion under Fed.R.Evid. 408.

during the 1978 mining year. The ultimate effect of this was to reduce Triangle's recovery to $38,646.

Triangle's appeal addresses four issues. The first is whether, under Idaho law, Stauffer's right to terminate the contract is subject to an implied covenant of reasonableness and good faith. In addition, Triangle asserts that the district court erred in limiting its recovery under section 16(b)(2) of the contract to expenses incurred in the year of termination in anticipation of mining operations during the following year and in rejecting Triangle's implied and quasi-contract theories. Finally, Triangle contends that the district court incorrectly denied its motion in limine.

III. STANDARDS OF REVIEW

Let us repeat the appropriate standards of review. Summary judgment is appropriate if, viewing the evidence in the light most favorable to the opposing party, the trial court finds "that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c); e.g., Loehr v. Ventura County Community College District, 743 F.2d 1310, 1313 (9th Cir.1984); Shatto v. Evans Products Co., 728 F.2d 1224, 1225-26 (9th Cir.1984); Lojek v. Thomas, 716 F.2d 675, 677 (9th Cir.1983). We review the district court's decision de novo. E.g., Lane v. Goren, 743 F.2d 1337, 1339 (9th Cir.1984); Nevada v. United States, 731 F.2d 633, 635 (9th Cir.1984). Moreover, we review the district court's interpretation of state law under the same de novo standard applied to the interpretation of federal law. Loehr, 743 F.2d at 1313; In re McLinn, 739 F.2d 1395, 1397-1403 (9th Cir.1984) (en banc).

IV. IMPLIED COVENANT OF GOOD FAITH

In support of its assertion of an implied requirement that Stauffer exercise the power of termination reasonably and in good faith, Triangle argues that every contract includes an implied obligation of good faith and fair dealing. See, e.g., Rao v. Rao, 718 F.2d 219, 222 (7th Cir.1983) (applying Illinois law); Moore v. Home Insurance Co., 601 F.2d 1072, 1074 (9th Cir.1979) (applying Arizona law); Cleary v. American Air Lines, 111 Cal.App.3d 443, 453, 168 Cal.Rptr. 722, 728 (1980). Good faith, in turn, "requires that a party vested with contractual discretion must exercise his discretion reasonably and may not do so arbitrarily or capriciously." Rao, 718 F.2d at 223 (quoting Foster Enterprises v. Germania Federal Savings & Loan Association, 97 Ill.App.3d 22, 30, 52 Ill.Dec. 303, 309, 421 N.E.2d 1375, 1381 (1981)). This restriction, Triangle contends, applies with equal force to Stauffer's power to end the contract upon ninety days notice. See, e.g., Randolph v. New England Mutual Life Insurance Co., 526 F.2d 1383, 1386 (6th Cir.1975); deTreville v. Outboard Marine Corp., 439 F.2d 1099, 1100 (4th Cir.1971). We disagree.

The Idaho courts have yet to decide whether contracts generally contain an implied obligation to act in good faith or whether good faith or reasonableness conditions an otherwise unrestricted power of termination. See Scott v. Castle, 104 Idaho 719, 662 P.2d 1163, 1167 (App.1983). It is true, of course, that a recent Idaho Supreme Court case has imposed a requirement of good faith and reasonableness under quite different circumstances. In Funk v. Funk, 102 Idaho 521, 633 P.2d 586 (1981), the supreme court held that a lessor may not arbitrarily withhold his consent under a lease provision requiring the lessor's consent to a proposed sublease.

We do not believe that this case necessarily indicates a willingness to imply an obligation to act in good faith in all situations where a contracting party is vested with a discretionary power to terminate. In Funk, an arbitrary withholding of...