Alumet v. Bear Lake Grazing Co. , 119 Idaho 946 ( 1991 )

BOYLE, Justice.

This petition for review arises out of the second appeal from a declaratory judgment action in the district court concerning the duty of a lessee to actively mine under an implied covenant of reasonable development on a written mining lease.

In the first appeal, Alumet v. Bear Lake Grazing Co., 112 Idaho 441, 732 P.2d 679 (Ct.App.1986) (hereafter Alumet I), the Court of Appeals held that the lease agreement contained an implied covenant to actively mine the premises and the case was remanded to the district court to determine the level of mining required under the implied covenant. The district court was also instructed by the Court of Appeals to set a time for cure if Alumet had defaulted by failing to comply with the terms of the implied covenant.

Upon remand no additional evidence was presented by the parties and the trial court relied upon the existing record in quantifying the production required under the implied covenant at one million tons annually and set a time period for cure of the breach. All parties appealed and the case was once again assigned to the Court of Appeals. In the second appeal, Alumet v. Bear Lake Grazing, 119 Idaho 979, 812 P.2d 286 (1989) (hereafter Alumet II), the Court of Appeals affirmed the judgment of the district court and we granted review.

I.

Facts and Prior Proceedings

The facts are well stated in the first two appeals and will not be repeated to any great extent in this opinion except as necessary to address the issues presented. For a complete recitation of the history and facts of this litigation see Alumet I and Alumet II.

In 1964, the predecessors in interest of Alumet and Bear Lake Grazing Company entered into a lease agreement under which the lessee, Alumet, would explore and develop a phosphate mine in Caribou County near Soda Springs, Idaho. Alumet and its predecessor, Archer, extensively explored the phosphate deposits, but did not begin removing ore until 1978. The extended primary term of the lease was to expire in May, 1979. Alumet continued to mine the property from 1978 to 1983, removing enough ore to produce royalty payments of approximately $9000.00 for that period of time. In 1984 the lessor, Bear Lake Grazing, notified Alumet that the lease was terminated due to Alumet’s “failure to properly conduct good faith mining operations upon the leased premises, thereby causing an abandonment and forfeiture of said Lease.” Alumet filed an action for a declaratory judgment action in district court seeking a ruling that the lease was still in effect and had not been breached.

Following a bench trial, the district court ruled that the lease contained an express covenant to develop the mine, and that the language in the lease which required the lessee to “pay royalties” for ore removed in the secondary term meant payment of “substantial royalties.” The district court found that the mining levels and royalties paid to Bear Lake Grazing during the secondary term had not been substantial, and held the lease was in default. Based on calculations made in Archer v. Mountain Fuel Supply, 102 Idaho 852, 642 P.2d 943 (1982), the district court determined that the lessee owed $31,650.00 in royalties which were to be paid within the lease agreement’s thirty-day cure period or the lease would be terminated.

Alumet and Archer appealed. The Court of Appeals reversed the trial court’s determination that the lease contained an express covenant and held that the lease contained an implied covenant to actively mine. The case was remanded for a determination by the trial court of what level of mining would be required under the implied covenant and to fix a reasonable time for cure if it was found that Alumet had defaulted. Considering evidence already in the record, the district court quantified the implied covenant at one million tons production annually with a royalty payment of $250,-000.00 and allowed a one-year period to cure. Following this determination by the trial court, all parties once again appealed. The Court of Appeals affirmed and we granted review.

II.

Standard of Review

It is well established that this Court’s review of a lower court’s decision is limited to ascertaining whether the evidence supports the findings of fact, and whether the findings of fact support the conclusions of law. I.R.C.P. 52(a); Johnson v. Edwards, 113 Idaho 660, 747 P.2d 69 (1987); Dalton v. South Fork of Coeur d'Alene River Sewer Dish, 101 Idaho 833, 623 P.2d 141 (1980); Morris v. Fandsen, 101 Idaho 778, 621 P.2d 394 (1980). The Idaho Rules of Civil Procedure provide: “In all actions tried upon the facts without a jury ... [findings of fact shall not be set aside unless clearly erroneous.” I.R.C.P. 52(a). The task of weighing evidence and finding facts is within the province of the trial court and we will not set aside findings made by the trial court unless they are clearly erroneous. Further, we will give due regard to the opportunity of the trial judge to weigh conflicting testimony and to judge the credibility of witnesses. Rueth v. State, 103 Idaho 74, 644 P.2d 1333 (1982); Javernick v. Smith, 101 Idaho 104, 609 P.2d 171 (1980); Roemer v. Green Pastures Farms, Inc., 97 Idaho 591, 548 P.2d 857 (1976). We must accept the trial court’s findings of fact if they are supported by substantial, competent though conflicting evidence, however meager. Rueth v. State, 103 Idaho 74, 644 P.2d 1333 (1982); Watkins v. Watkins, 76 Idaho 316, 281 P.2d 1057 (1955). In Rueth we stated: “This standard of appellate review is salutary in effect, and reflects the view that deference must be afforded to the trial court’s special opportunity to assess and weigh the credibility of the witnesses who appear before it personally.” Rueth v. State, 103 Idaho at 77, 644 P.2d at 1336; see also Jensen v. Bledsoe, 100 Idaho 84, 593 P.2d 988 (1979). It follows that the conclusions of the trial court which are supported by the findings of fact will not be disturbed on appeal. Pichon v. L.J. Broekemeier, Inc., 108 Idaho 846, 702 P.2d 884 (Ct.App.1985).

In Alumet I, the Court of Appeals found that the lease agreement between the parties contained an implied covenant to actively mine the leased property. Alumet v. Bear Lake Grazing Co., 112 Idaho 441, 732 P.2d 679 (Ct.App.1986). The time for appeal on this issue has long passed and it is, therefore, res judicata as to the implied covenant to mine in this particular case. See Boundary County, Idaho v. Woldson, 144 F.2d 17 (9th Cir.1944), cert. den., 324 U.S. 843, 65 S.Ct. 678, 89 L.Ed. 1405 (1945). As we stated in Insurance Assocs. Corp. v. Hansen, 116 Idaho 948, 782 P.2d 1230 (1989):

Accordingly, the facts having been decided, they are final, they have become the law of the case, and the Court of Appeals’ pronouncement must be adhered to, both in the trial court and on subsequent appeal.

Id. at 116 Idaho 950-51, 782 P.2d at 1232-33; see also Airstream, Inc. v. CIT Fin. Servs., Inc., 115 Idaho 569, 768 P.2d 1302 (1988); Barker v. Fischbach & Moore, Inc., 110 Idaho 871, 719 P.2d 1131 (1986); Suitts v. First Security Bank of Idaho, 110 Idaho 15, 713 P.2d 1374 (1985). We therefore hold as the law in this case, that the lease agreement between the parties contains an implied covenant to actively mine the leased premises.

In light of the standard of review set forth above, it is our task to review the record before us to determine whether the trial court applied the correct burden of proof and whether the evidence presented supports the trial court’s determination.

III.

Duty of Lessee Under an Implied’ Covenant to Develop and Mine

A fundamental reason for an implied covenant is to assure that the lessor’s expectations of royalties are met. Alumet v. Bear Lake Grazing Co., 112 Idaho 441, 732 P.2d 679 (Ct.App.1986). Where the principal consideration to the lessor is his expectation of receiving royalties, there is an implied obligation on the part of the lessee to diligently explore, develop, and work [mine] the premises so that the lessor may obtain the expected income that induced him to grant the lease.” Annot., Mineral Rights—Duty to Develop, 76 A.L.R.2d 721, 725 (1961); see also Adams, The Implied-In-Law Covenant to Develop and Mine in Hard Mineral Leases, 19 Idaho L.Rev. 633, 635 (1983) (noting that “[i]t is the lessor’s expectation interest which is being protected by the implied-in-law covenant to develop”). However, this does not mean that a lessee must mine solely for the benefit of the lessor, and to the detriment of the lessee. Covenants to develop should assure that both parties receive the benefit of the bargain and must be carefully applied to a lessee. Archer v. Mountain Fuel Supply, 102 Idaho 852, 642 P.2d 943 (1982); see also Smith v. Long, 40 Colo.App. 531, 578 P.2d 232 (1978). Under the prudent operator test, a lessee must continue reasonable development of leased premises to secure profits for the common advantage of both lessor and lessee. The lessee may be expected and required to do that which a prudent operator would do to develop and protect interests of both parties. However, the lessee is under no duty to undertake development which is unprofitable to him merely because its development might result in some profit to the lessor. Rush v. King Oil Co., 220 Kan. 616, 556 P.2d 431 (1976). The implied obligation of a lessee to exercise reasonable diligence in development and mining may be suspended or totally terminated if the market conditions are such that development would result in a net loss to the lessee. See 4 American Law of Mining, § 131.09(5)(b) (2d ed. 1989); Hummel v. McFadden, 395 Pa. 543, 150 A.2d 856 (1959) (an implied covenant does not mean continuous mining). What due diligence in the mining context means will depend upon the circumstances, the quantity and quality of the mineral, the fluctuating market demand, the labor market, the accessibility of the mineral and many other factors. Reed v. Consolidated Feldspar Corp., 71 S.D. 189, 23 N.W.2d 154 (1946) (a lessee who has agreed to pay lessor royalties is not required to extract ore at a loss. Unless ore can be produced at a reasonable profit, the implied obligation to work the mine is suspended). Taylor v. Kingman Feldspar Co., 41 Ariz. 376, 18 P.2d 649 (1933) (while the implied covenant to develop rule requires every reasonable effort to produce and sell as much ore as possible, when there is a temporary depression in the value of the ore, such lessee is not required to extract ore at a loss merely so that the lessor may have royalties thereon). Even without an excusing clause a lessee who has agreed to pay lessor minimum royalties is not required to extract ore at a loss. Allen v. Ruby Co., 87 Idaho 1, 389 P.2d 581 (1964); Taylor v. Kingman Feldspar Co., 41 Ariz. 376, 18 P.2d 649 (1933); 58 C.J.S., Mines and Minerals § 189(b) p. 406 (1948). To determine whether a lessee has met this standard, economic, competitive and environmental factors are relevant and may be considered by the trier of fact. Alumet v. Bear Lake Grazing Co., 112 Idaho at 441, 732 P.2d at 679.

In judging the reasonably prudent standard the courts should examine: 1) method of operation to determine if efficient planning and modern equipment were employed; 2) sales efforts conducted by the company to see if it was competing effectively with nearby mines; 3) market conditions; and 4) productivity of comparable nearby mines. See Mendota Coal & Coke Co. v. Eastern Ry. & Lumber, 53 F.2d 77 (9th Cir.1931). With regard to implied covenants to actively mine, the Court of Appeals, in Alumet v. Bear Lake Grazing Co., 112 Idaho 441, 446, 732 P.2d 679, 684 (Ct.App.1986), accurately and correctly set forth the law as follows:

All authorities we have found agree that when implied covenants to develop or to mine are imposed, the lessee’s actions will be judged under a good faith standard — often described in terms such as reasonable diligence, due diligence, ordinary diligence or ordinary prudence. In other words, the court will compare the lessee’s actions with those of a reasonably prudent, similarly situated businessman. The sufficiency of the work under the lease is determined by looking at the specific facts and circumstances of each case. The quantity of ore removed is simply one of the factors to be considered in deciding whether the lessee’s actions have been reasonable.

Alumet contends that the trial court’s decision presently before us is contrary to the law established in Archer v. Mountain Fuel, 102 Idaho 852, 642 P.2d 943 (1982), and the majority view from other jurisdictions. Alumet cites to Archer wherein this Court stated:

An obligation to mine and develop can be an onerous burden, for example when market conditions are such that development would surely result in a net loss to the lessee. Nothing prevents parties to a contract from bargaining for such an obligation, but no reason sufficient to compel us to judicially impose the obligation in the absence of an agreement has been shown.

Id. at 102 Idaho 856, 642 P.2d at 947.

Forfeitures are abhorrent to the law, and all intendments are against them. Heisel v. Cunningham, 94 Idaho 461, 491 P.2d 178 (1971). Where the forfeiture provision in a contract would provide an unjust and unconscionable recovery, it will not be enforced and the recovery will be assessed according to the amount of actual damage. Blinzler v. Andrews, 94 Idaho 215, 485 P.2d 957 (1971), appeal after remand, 95 Idaho 769, 519 P.2d 438 (1973).

Alumet contends that the trial court ignored the foregoing standards when it determined that a prudent operator would have invested capital for the construction of a refining operation in spite of the depressed economic conditions and uncertain market. Alumet argues that it acted prudently by not investing a great amount of capital during that time for the construction of a refining plant because the market was so uncertain and to do as ordered by the trial court would require operating at a loss. Furthermore, Alumet asserts it had invested $3.8 million on drilling, surveying, permits, environmental studies and marketing and argues that an obligation to actively mine during a period of unfavorable market and economic conditions would require it to operate at a great loss, and will result in forfeiture of the mining lease and a subsequent windfall to Bear Lake Grazing which it argues is contrary to well established law. In light of our holding in part IV that the trial court misallocated the burden of proof, we agree with Alumet that the facts of the case must be considered and weighed by the trial court considering the economic market, competition and other factors required by the cited authorities.

IV.

Burden of Proof

Alumet argues that the district court erred by placing the burden of proof upon Alumet to come forward with evidence showing that it did not breach the implied covenant of reasonable development. To illustrate its contention, Alumet directs our attention to the district court’s Finding of Fact # 14 where it stated:

The record of this case contains no substantial competent evidence, considering economic, environmental and competitive factors, that indicates that a prudent operator in good faith would not be able to mine 1 million tons of ore from the Alumet-Bear Lake leases in a mining season. (Emphasis added.)

The general rule is that the lessor has the burden of proof to show that the lessee did not act in good faith and as a reasonably prudent, similarly situated businessmen. See Sanders v. Birmingham, 214 Kan. 769, 522 P.2d 959 (1974); Durkee v. Hazan, 452 P.2d 803 (Okla.1969). A lessor who alleges a breach of the implied covenant of further development must generally prove that the lessee has not acted with reasonable diligence under the facts and circumstances as they exist at the particular time. See Stewart v. Amerada Hess Corp., 604 P.2d 854 (Okla.1979); Sanders v. Birmingham, 214 Kan. 769, 522 P.2d 959 (1974). The burden is likewise generally on a lessor claiming cancellation or termination of a lease to show the failure of prudent mining practices and that increased development would result in a profit to the lessee. Archer v. Mountain Fuel Supply, 102 Idaho 852, 642 P.2d 943 (1982); Atlantic Richfield Co. v. Gruy, 720 S.W.2d 121 (Tex.1986); Anderson v. Meuer, 50 Cal.App.2d 841, 123 P.2d 903 (1942). “A lessor who alleges breach of an implied covenant to develop has the burden of showing by substantial evidence that the covenant has been breached.” Robbins v. Chevron U.S.A., Inc., 246 Kan. 125, 785 P.2d 1010, 1015 (1990); Sanders v. Birmingham, 214 Kan. 769, 522 P.2d 959 (1974). It has been held that such a claim, by its very nature, must be supported by expert testimony. Robbins v. Chevron U.S.A., Inc., 246 Kan. 125, 785 P.2d 1010, 1015 (1990).

The fact that Alumet initiated this legal action in the form of a declaratory judgment action does not alter the procedural and evidentiary burden. The burden of proof in a declaratory relief action is governed by the same rules and considerations as are applicable to the same problem when it arises in legal proceedings of other types. Annot. 23 A.L.R.2d at 1250; Hall v. Eversole’s Adm., 251 Ky. 296, 64 S.W.2d 891 (1933) (in suit under Declaratory Judgment Act where defendants ’ asserted right to partial cancellation of oral lease, burden of proof was upon them).

The Court of Appeals in Alumet II correctly stated the burden of proof applicable to a mining lease.

In an action where a mining lessee’s failure to develop the property is raised as claim or defense, and the lessee’s performance under the lease is tested according to the standard of reasonable diligence, the lessor must allege and prove that the lessee has failed to meet that standard.

119 Idaho at p. 985, 812 P.2d at p. 292.

Although the Court of Appeals correctly stated the law in this regard, proper application would require the lessors to prove that Alumet has failed to comply with the implied covenant to develop and mine the leased premises.

The trial court’s findings regarding the burden of proof and the use of the words “would not” have been the subject of significant debate between the parties in this appeal. Alumet argues that the trial court clearly misapplied the burden of proof and placed upon it, as the lessee, the burden to prove that it did not breach the implied covenant of reasonable development. On the other hand, Bear Lake argues that the choice of the words “would not” is merely semantics and a reading of the trial court’s entire decision clearly reveals that the proper burden of proof was applied.

The Court of Appeals described the use of the phrase “would not” in Finding 14 as “unfortunate lapses into double negative phraseology,” 119 Idaho at p. 985, 812 P.2d at p. 292, but concluded that a reading of the trial court’s decision in its entirety left them unpersuaded that the trial court misunderstood the burden of proof. Further, the Court of Appeals noted that “[Sjtatements substantially similar to those quoted here, but expressed in positive terms free of double negatives, can be found in the judge’s decision.” At p. 986, 812 P.2d at p. 293.

Our review of the record does not reveal any evidence of what a similarly situated reasonably prudent operator would do under the circumstances.¹ There is no evidence to support a one million ton annual production requirement other than inferences drawn from projections of what Alumet had anticipated producing at a time predating the economic problems experienced in the phosphate industry. Although misapplication of the burden of proof does not invariably result in prejudice, Alumet II, at p. 986, 812 P.2d at p. 293, the use of the words “would not” appears to place the burden of proof of an annual production requirement on Alumet. This is contrary to well-established law in this jurisdiction, Alumet II; Archer v. Mountain Fuel Supply, 102 Idaho 852, 642 P.2d 943 (1982), and to the majority view held by other jurisdictions.

In Archer v. Mountain Fuel Supply, a unanimous Court observed:

An obligation to mine and develop can be an onerous burden, for example when market conditions are such that development would surely result in a net loss to the lessee. Nothing prevents parties to a contract from bargaining for such an obligation, but no reason sufficient to compel us to judicially impose the obligation in the absence of an agreement has been shown.

102 Idaho at 856, 642 P.2d at 947. By way of footnote, the Supreme Court added:

We note that imposing such an obligation in this case might result in a forfeiture of the leases by Beker and Mountain Fuel and consequent windfall to the Archers, who have received $183,000 without having any of the ore available under the leases depleted.

Id. at 102 Idaho 856, n. 5, 642 P.2d at 947, n. 5.

The onerous burden to mine and develop when market and economic conditions are not favorable resulting in a windfall or forfeiture as noted by the Court in Archer v. Mountain Fuel Supply, is the precise result reached in this case if the trial court’s decision is affirmed. Likewise, the Court of Appeals’ decision in Alumet II which requires a lessee to mine at a loss unless the lease provisions or a contract relieve that duty is contrary to the direction provided by this Court in Archer v. Mountain Fuel Supply, 102 Idaho 852, 642 P.2d 943 (1982).

Our review and scrutiny of the record leaves us concerned that the trial court required Alumet to carry the burden to prove that it, as a reasonable prudent mine operator, would not be able to mine one million tons of ore from the leased premises during a mining season. Considering that the law abhors a forfeiture and that all intendments are against a forfeiture, Heisel v. Cunningham, 94 Idaho 461, 491 P.2d 178 (1971), and that due diligence under an implied covenant to develop and mine leased property requires a reasonable application so that economic and market conditions are considered to prevent substantial financial loss to the lessee, 4 American Law of Mining, § 131.09(5)(b) (2d ed.1989), and particularly considering that the lessor is required to prove a breach, we hereby reverse the decision of the trial court and hold that an implied obligation of a lessee to exercise reasonable diligence in development and mining may be suspended, or totally terminated, if the market and economic conditions are such that development would result in a net loss to the lessee. Obviously, the suspension of mining activities would be temporary and the implied covenant to mine and develop would require good faith, prompt reasonable compliance once the economic and market conditions changed and were such that mining would not be operated at a financial loss or economic hardship to the lessee. Once the market conditions or temporary economic conditions beyond the control of the lessee change, then the lessee would have the duty and responsibility to immediately resume mining and development operations under the implied covenant to mine. All of these factors may be considered by the trial court in determining whether Alumet is in breach of its covenant to mine.

Following remand in Alumet I, it is unfortunate that the parties did not accept the trial court’s invitation to submit additional evidence. If additional evidence had been submitted it is likely that the trial court would not have been required to phrase Finding # 14 in the “would not” language that the Court of Appeals referred to as "... unfortunate lapses into double negative phraseology.” At 119 Idaho at 986, 812 P.2d at p. 293. Regardless of how we categorize these two words it is obvious that any one of several interpretations can be applied with varying results. In a case that could eventually require the forfeiture of millions of dollars of investment, and a potential windfall to the lessor, we conclude that it is necessary for the case to be remanded for a determination by the trial court of the level of mining required to satisfy the implied covenant based on the evidence with the burden of proof allocated to the lessor.

V.

Time for Cure

Bear Lake asserts that the one year time for cure of default allowed by the trial court was excessive. We disagree. Considering that the record demonstrates one million tons of ore is nearly one-sixth or sixteen percent of the total production of phosphate in the western United States, we cannot find error in the trial court allowing a one-year period to produce such a substantial amount. Accordingly, based upon the record as it presently exists, we find no error in the one-year time for cure and affirm the trial court in this regard.

In light of our holding that the trial court erred in misallocating the burden of proof and remanding for further proceedings, it is not necessary that we address the other issues raised and argued on appeal.

Therefore, the judgment of the district court is reversed and remanded for further proceedings and to enter findings based on the evidence in the record, or upon request of any of the parties to submit further testimony or evidence, with the burden of proof properly allocated upon the lessor Bear Lake Grazing to prove that the lessee Alumet breached its implied covenant to develop and mine the leased property.

The judgment of the district court as to the time for cure being one year is affirmed as being reasonable under all the circumstances presented.

Costs to appellant Alumet. No attorney fees allowed.

BAKES, C.J., concurs.

1 . The district court’s Finding of Fact # 13 states: "Other companies in southeastern Idaho and the western United States have invested substantial capital as they mined phosphate ore on a commercial basis from 1974 to 1984.” However, 1974 to 1984 is not the relevant period. The relevant period does not date clear back to 1974. Rather, the relevant period is from 1980, when Alumet acquired the land upon which to build a processing plant, and 1984 when Bear Lake sought to terminate the lease. Furthermore, the evidence cited by the trial court as support for this finding of fact does not demonstrate that other companies had invested large amounts of capital during the relevant period. The evidence cited by the trial court only demonstrates that there were several pre-existing mines and processing plants operating during this period. In our review of the record we found no substantial competent evidence to support a finding that these companies were investing large amounts of capital during this period.