Independence Lead Mines v. Hecla Mining Co.

• Decision Date: 24 April 2006
• Docket Number: No. 31042.,31042.
• Citation: 143 Idaho 22,137 P.3d 409
• Court: Idaho Supreme Court
• Parties: INDEPENDENCE LEAD MINES COMPANY, an Arizona corporation, Plaintiff-Appellant, v. HECLA MINING COMPANY, a Delaware corporation, Defendant-Respondent.

137 P.3d 409

143 Idaho 22

INDEPENDENCE LEAD MINES COMPANY, an Arizona corporation, Plaintiff-Appellant, v. HECLA MINING COMPANY, a Delaware corporation, Defendant-Respondent.

No. 31042.

Supreme Court of Idaho, Boise, February 2006 Term.

April 24, 2006.

Rehearing Denied June 29, 2006.

COPYRIGHT MATERIAL OMITTED

Marcus, Christian & Hardee, LLP, Boise, for appellant. Michael R. Christian argued.

Hawley, Troxell, Ennis & Hawley, LLP, Boise, for respondent. John F. Kurtz Jr. argued.

TROUT, Justice.

This case involves a contract dispute between appellant Independence Lead Mines Company (Independence) and respondent Hecla Mining Company (Hecla) relating to Hecla's operations on mining claims it leased from Independence. Independence appeals the district court's determinations that Hecla did not materially breach any express provisions of the contract and that Hecla did not commit waste. Because we agree with the district court's reasoning in its entirety, we affirm the district court's decision.

I. FACTUAL AND PROCEDURAL BACKGROUND The Contract

In 1968, a lease agreement was entered into between Independence and two other parties, the claim owners, and Hecla, a mine operator. Hecla subsequently acquired the contract interest of the two other parties. Under the contract, Independence leased land containing the Gold Hunter deposit, which was situated one mile north of Hecla's Lucky Friday mine in northern Idaho, to Hecla for the purposes of exploration, development and mining of Gold Hunter. The individuals involved in negotiating the lengthy contract were experienced lawyers and business people familiar with mining contracts and very knowledgeable in the mining industry.

According to the contract, Hecla is to explore, develop and mine Gold Hunter at its sole cost and expense, utilizing Hecla's existing Lucky Friday facilities — the only mine that could practically develop any potential ore deposit associated with Gold Hunter. Hecla is entitled to recoup all of its expenses incurred in exploring, developing and mining, and only after those expenditures are recovered from the profits derived from the sale of the minerals is the balance to be distributed among the parties. Because Hecla has obtained the interest of the two other claim owners, Hecla is now entitled to a total of 81.48% of the net profits after recoupment and Independence is entitled to 18.52%. The contract contains no language conditioning exploration and development by Hecla on the actual production of net profits, nor is there any guarantee that net profits will be generated under the contract.

As far as mining operations are concerned, the contract vests Hecla with the exclusive right to manage the mining operation: "IT IS UNDERSTOOD AND EXPRESSLY AGREED THAT Hecla's decisions with respect to the character of work to be performed by Hecla under the term of this Agreement shall be final, and Hecla shall have the exclusive right to manage, control and operate the [properties] covered by this Agreement." Article IV requires Hecla to engage in an initial work program at the 4050-foot level of Gold Hunter. In Article IV, the parties agreed Independence "shall be consulted and expected to offer suggestions and advice." The contract also requires Hecla provide Independence with monthly progress reports showing the character and amount of work performed by Hecla during the preceding calendar month.

Mining Gold Hunter

After some exploratory drilling in the 1970's, little occurred in the way of serious development of Gold Hunter until the 1990's, at which time interest in developing Gold Hunter was rekindled. In May 1997, Hecla's managers presented a feasibility study summary report to Hecla's board of directors in support of a request for development of Gold Hunter. The report was based on proven and probable "reserve" (reliable quantity and quality of minerals) and anticipated "resource" (less reliable, possibly speculative, quantity and quality of minerals) estimates over the twelve-year life of the mine. The report identified 3.5 million tons of ore in Gold Hunter, 668,770 of which were deemed "reserves" and 2.68 million tons of which were the less reliable "resources." The anticipated 36% return on the investment was calculated using projected metal prices of $5.46 per ounce for silver, $0.33 per pound for lead, and $0.61 per pound for zinc throughout the life of the mine. Based on management's projections of mineral prices and the extent of the deposit, the board of directors decided to proceed with the project and approved $16 million to put Gold Hunter into production. By June 1998, Hecla was engaged in full production at the 4900-foot level of Gold Hunter.

While the grade and quality of the Gold Hunter deposit was good, during the first five years of the project the price of silver averaged $5.00 per ounce and lead $0.22 per pound, rather than the projected metals prices of $5.46 and $0.33, respectively. Realizing the price projections set forth in the study were wrong, Hecla began occasionally reducing production but did not shut down the mine for various reasons. By October 2003, the unrecouped costs of the project were over $33 million. Eventually, Hecla had mined out the 4900-foot level of the deposit and was pursuing plans to develop Gold Hunter at the 5900-foot level.

The District Court

Independence, concerned its assets were being depleted, filed a complaint in June 2002. Independence claimed Hecla should not have commenced mining operations until metal prices had increased to the point that net profits could be generated. Independence argued the 1997 feasibility study was inadequate and Hecla breached its implied prudent mining operator covenant by (1) undertaking the project even though it should have known the project would not be profitable and (2) continuing to pursue the project when it proved to be unprofitable. Independence also argued Hecla materially breached an express provision of the contract by its failure to consult with Independence before undertaking operations at the 4900-foot level. Finally, Independence asserted Hecla committed the tort of waste against Gold Hunter.

After a trial, the district court made extensive factual findings and concluded there was no basis for finding any breach of an express or implied provision of the contract. Also the court decided that in light of Independence's failure to show Hecla acted in bad faith or that Hecla did not operate the mine in a reasonably prudent manner, the claim for waste must be dismissed. The district court entered judgment for Hecla and Independence timely appealed.

II. STANDARD OF REVIEW

The review of a trial court's decision after a court trial is limited to ascertaining "whether the evidence supports the findings of fact, and whether the findings of fact support the conclusions of law." Idaho Forest Industries, Inc. v. Hayden Lake Watershed Imp. Dist., 135 Idaho 316, 319, 17 P.3d 260, 263 (2000). The trial court's findings of fact will not be set aside unless clearly erroneous. Id.; see I.R.C.P. 52(a). Thus, if the findings of fact are supported by substantial and competent evidence, even if the evidence is conflicting, this Court will not disturb those findings. Idaho Forest Industries, Inc., 135 Idaho at 319, 17 P.3d at 263. In view of the trial court's role to weigh conflicting evidence and testimony and to judge the credibility of witnesses, the trial court's findings of fact will be liberally construed in favor of the judgment entered. Sun Valley Shamrock Resources, Inc. v. Travelers Leasing Corp., 118 Idaho 116, 118, 794 P.2d 1389, 1391(1990). In reviewing a trial court's conclusions of law, however, a different standard applies: this Court is not bound by the legal conclusions of the trial court, but may draw its own conclusions from the facts presented. Idaho Forest Industries, Inc., 135 Idaho at 319, 17 P.3d at 263.

The interpretation of a contract begins with the language of the contract itself. Albee v. Judy, 136 Idaho 226, 230, 31 P.3d 248, 252 (2001). If the terms of the contract are clear and unambiguous, the meaning and legal effect of the contract are questions of law which must be determined from the plain meaning of the words used. Id. If, however, the contract is deemed to be ambiguous, the interpretation of the contract document is a question of fact which focuses on the intent of the parties. Id. "Whether the facts establish a violation of the contract is a question of law over which this Court exercises free review." Opportunity, L.L.C. v. Ossewarde, 136 Idaho 602, 606, 38 P.3d 1258, 1262 (2002).

III. DISCUSSION

The principal issue is whether there has been a breach of the contract between Independence and Hecla. To determine whether there has been a breach of an implied provision, this Court must consider whether an implied term characterized as a "duty to operate prudently" exists and, if so, whether such an implied duty would be contrary to the express terms of the contract. To determine whether there has been a breach of an express provision in the contract, we will review the contract term addressing Hecla's duty to consult. Finally, this Court will review Independence's claim for waste.

A. Breach of Implied Term

"It is well settled that a contract includes not only that which is stated expressly, but also that which is ... implied from its language." Star Phoenix Min. Co. v. Hecla Min. Co., 130 Idaho 223, 231, 939 P.2d 542, 550 (1997) (quoting Commercial Insurance Co. v. Hartwell Excavating Co., 89 Idaho 531, 541, 407 P.2d 312, 317 (1965)). The covenant of good faith and fair dealing may be implied, however, it arises only regarding terms agreed to by the parties, and requires that the parties perform, in good faith, the obligations imposed by their agreement. Lettunich v. Key Bank Nat. Ass'n, 141 Idaho 362, 368, 109 P.3d 1104, 1110 (2005). The covenant of good faith and fair dealing cannot override an express...