Hutchison v. Sunbeam Coal Corp.

• Decision Date: 16 December 1986
• Parties: Glenn C. HUTCHISON and Virginia Hutchison, his wife, Appellees, v. SUNBEAM COAL CORPORATION, Appellant.
• Court: Pennsylvania Supreme Court

Page 385

519 A.2d 385

513 Pa. 192

Glenn C. HUTCHISON and Virginia Hutchison, his wife, Appellees, v. SUNBEAM COAL CORPORATION, Appellant.

Supreme Court of Pennsylvania.

Argued Sept. 17, 1986.

Decided Dec. 16, 1986.

Leo M. Stepanian, Stepanian & Muscatello, Thomas W. King, III, Dillon, McCandless & King, Butler, for appellant.

Charles E. Gutshall, Baskin Flaherty Elliott & Mannino, P.C., Philadelphia, for amicus curiae Pennsylvania Coal Mining Ass'n.

Henry Ingram, Thomas C. Reed, Rose, Schmidt, Chapman, Duff & Hasley, Pittsburgh, for amicus curiae Keystone Bituminous Coal.

Peter H. Shaffer, Butler, for appellees.

Before NIX, C.J., and LARSEN, FLAHERTY, HUTCHINSON, ZAPPALA and PAPADAKOS, JJ.

OPINION OF THE COURT

HUTCHINSON, Justice.

Appellant, Sunbeam Coal Corporation, appeals by allowance Superior Court's order reversing Butler County Common Pleas. 349 Pa.Super. 625, 503 A.2d 54. Common Pleas had denied appellees relief in their suit for a declaratory judgment. The court construed a coal "lease" they had granted appellant to continue as long as appellant paid minimum advance royalties to appellees, Glenn and Virginia Hutchison. ¹ As stated, Superior Court reversed Common Pleas, holding the lease had expired. The court reasoned that such leases contain an implied duty to mine diligently which appellant Sunbeam breached. Superior Court erred in implying a general covenant to mine into coal leases which provide for minimum advance royalties. Nevertheless, Superior Court correctly held that the term of this particular lease had expired. Therefore, we affirm.

Appellees, Glenn and Virginia Hutchison, are the owners of 85 acres of land in Oakland Township, Butler County. On December 14, 1976, they executed an "Option and Lease Agreement" with appellant Sunbeam Coal Corporation. The agreement provided, inter alia, for the payment of minimum advance royalties for at least three years should Sunbeam choose not to actively engage in the extraction of coal from the demised property. The parties differ over whether the three year term is a minimum term during which appellant coal company cannot terminate without payment of royalties or a maximum term during which the lease will continue in the absence of mining. In the event mining operations should commence, the agreement provides that Sunbeam is to pay to the landowner royalties in the amount of one ($1.00) dollar per net ton (2,000 pounds) of coal removed. The agreement gave the coal company an option to enter into a lease for the purpose of extracting the coal in place under appellees' land pursuant to terms and conditions also set forth in the December 14, 1976 agreement. Appellant made a timely exercise of its option on June 1, 1977 and began paying minimum royalties on September 1, 1977. The Hutchisons received and cashed minimum advance royalty checks covering royalties due through December, 1979, three years after the signing of the document. ² Contending the lease had then expired, the landowners refused minimum advance royalty checks tendered after January of 1980 because no mining had begun.

Appellees then sought declaratory relief, pursuant to the Declaratory Judgments Act, 42 Pa.C.S. §§ 7531-7541, and asked Butler County Common Pleas to declare that the lease had terminated three years after the execution of the document. Appellee Glenn Hutchison, Homer Rodgers, leasing agent for the Sunbeam Coal Corporation, and Attorney Leo Stepanian, drafter of the lease for Sunbeam, all testified before Common Pleas as to the meaning of the document and the circumstances attendant to its execution. The court examined the lease and stated that appellee Hutchison had simply misinterpreted the express provisions of the lease. It held that as long as Sunbeam tendered minimum advance royalty payments the lease would continue. Superior Court reversed. We granted a petition for allowance of appeal to resolve the debate surrounding the terms of the lease and to examine the Superior Court decision in Frenchak v. Sunbeam Coal Corp., 344 Pa.Superior Ct. 37, 495 A.2d 1385 (1985), implying a covenant to mine despite the payment of minimum advance royalties.

The Frenchak v. Sunbeam Coal Corp. decision, upon which Superior Court relied in the instant case, interpreted a lease document with the same language as the one here to give rise to a forfeiture favoring the landowner. Citing the landowner's inability to develop the demised property when burdened with a mineral lease, and the "stop-gap" nature of minimum advance royalties, the court held that "the law will imply a duty to mine, even in the face of minimum advance royalties." 344 Pa.Superior Ct. at 42, 495 A.2d at 1388. In this respect, Superior Court erred. In letting land for the extraction of minerals, an obligation to pay minimum advance royalties does not create an implied duty to mine under Pennsylvania law. We have never implied such a duty and decline to do so now.

In coal mining leases, where the consideration for the privilege of removing the mineral is a royalty on the amount extracted, it is common for the parties to stipulate that a minimum advance royalty will be paid to the landowner if no mining is done. See generally Lacoe v. Lehigh Valley Coal Co., 290 Pa. 495, 139 A. 140 (1927). In Hummel v. McFadden, 395 Pa. 543, 150 A.2d 856 (1956), this Court implied a duty to mine in a lease agreement which did not provide for minimum royalties in the absence of mining. There, the implied covenant imposed upon the mining company a duty to commence operations in order to provide the landowner some return on his agreement. Our holding in Hummel leaves the contracting parties free to bargain for a provision addressing the amount and type of consideration to be paid in lieu of forfeiture should the mining company fail to commence mining operations. Pennsylvania courts have reasoned that minimum advance royalties are in the nature of liquidated damages for the lessee's failure to mine. Pittsburgh National Bank v. Allison Engineering Co., 279 Pa.Superior Ct. 442, 447, 421 A.2d 281, 284 (1980); Muir v. Thompson Coal Co., 209 Pa.Superior Ct. 432, 435, 229 A.2d 480, 481 (1967); Greenough v. Colonial Colliery Co., 132 Pa.Superior Ct. 270, 275, 1 A.2d 174, 176 (1938) (citing cases). Such reasoning recognizes minimum advance royalties as the consideration flowing from the coal company to the landowner in lieu of the tonnage royalties which would be paid if mining operations were undertaken. Implying a duty to mine in the face of a minimum advance royalty clause ignores the terms agreed to by the contracting parties. ³

The law will not imply a different contract than that which the parties have expressly adopted. To imply covenants on matters specifically addressed in the contract itself would violate this doctrine. Greek v. Wylie, 266 Pa. 18, 23, 109 A. 529, 530 (1920); Reading Terminal Merchants Ass'n. v. Samuel Rappaport Assoc., 310 Pa.Superior Ct. 165, 176, 456 A.2d 552, 557 (1983). See also 11 Williston on Contracts § 1295 (3d ed. 1968) (implied term justifiable only when not inconsistent with express terms of contract and absolutely necessary to effectuate intent of parties). In Hummel v. McFadden, supra, the consideration flowing to the lessor was the expected receipt of tonnage royalties. Under that lease, the absence of a covenant to mine would have left the landowner without any consideration for his grant of the right to mine. In the present case, the parties have expressly agreed that minimum advance royalty payments of $420.00 per year shall be paid to the lessor if the lessee fails to work the mine. Therefore, during the lease term, whatever that term may be, there is no failure of consideration in the absence of mining and it is not necessary to imply a covenant to mine. The contracting parties themselves have dealt expressly with the possibility of a failure to mine by providing for minimum advance royalties. ⁴

Alternately, Superior Court's opinion seems to imply that this particular lease is properly interpreted as a lease for a maximum term of three years in the absence of mining. Therefore, our rejection of that court's rationale based on an implied covenant to mine does not relieve us of our obligation to examine the terms of this particular agreement to determine whether the three year period limits only the coal company's obligation to pay minimum advance royalties, or, conversely, the term of the lease, in the absence of mining operations. The lease provides that the coal operator shall have 180 days after the execution of the document to exercise his option to lease the land. The coal operator also covenants it will commence mining within 90 days after the exercise of the option to lease and, in the event mining does not begin, the coal company agrees to pay the landowner $420.00 per year in minimum advance royalties. Paragraph five, the controverted provision, states:

5. This lease shall continue for a period of 3 years from the effective date hereof or until all the coal which the Coal Operator determines can be mined, removed and sold with economy and profit has been removed or so long as minimum advance royalties are being tendered by the Coal Operator. Coal Operator may remove all equipment, buildings and machinery from the premises at the end of the term provided no royalty is then due, or Coal Operator may leave the same on the premises for a period of six months at its option.

The lease is a standard typewritten form drafted by the coal company and apparently utilized by it in all similar dealings. In this particular paragraph the only term negotiated by the parties is the provision for three years which was inserted in a blank left vacant on the form.

Paragraph five raises difficult problems of construction for a court attempting to discern the parties' intent as to the lease's term when no mining operations have occurred. Appellant Sunbeam's interpretation of the express...