Opinion ID: 2633548
Heading Depth: 2
Heading Rank: 1

Heading: Breach of Implied Term

Text: 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, if 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 provision in the contract. See Clement v. Farmers Ins. Exchange, 115 Idaho 298, 300, 766 P.2d 768, 770 (1988); First Security Bank of Idaho v. Gaige, 115 Idaho 172, 176, 765 P.2d 683, 687 (1988) (There is no basis for claiming implied terms contrary to express rights contained in the parties' agreement.). In fact, [n]o covenant will be implied which is contrary to the terms of the contract negotiated and executed by the parties. Idaho Power Co. v. Cogeneration, Inc., 134 Idaho 738, 750, 9 P.3d 1204, 1216 (2000). To the extent the covenant of good faith and fair dealing does apply, this Court has rejected the amorphous concept of bad faith as the standard for determining whether the covenant has been breached. Metcalf v. Intermountain Gas Co., 116 Idaho 622, 627, 778 P.2d 744, 749 (1989). Instead, the covenant is an objective determination of whether the parties have acted in good faith in terms of enforcing the contractual provisions. Jenkins v. Boise Cascade Corp., 141 Idaho 233, 243, 108 P.3d 380, 390 (2005). An objective determination can only be made by considering a party's reasonableness in carrying out the contract provisions. Independence claims that, under the Alumet line of cases, Hecla was under a duty to not mine at times when it was not reasonable and prudent to mine. See Alumet v. Bear Lake Grazing Co., 112 Idaho 441, 732 P.2d 679 (Ct.App. 1987) ( Alumet I ); Alumet v. Bear Lake Grazing Co., 119 Idaho 979, 812 P.2d 286 (Ct.App. 1989) ( Alumet II ); Alumet v. Bear Lake Grazing Co., 119 Idaho 946, 812 P.2d 253, 257 (1991) ( Alumet III ). In Alumet I, the Idaho Court of Appeals was confronted with a lessor mine owner claiming the lessee mine operator had inadequately developed a phosphate mine. The Court of Appeals discussed the duty to mine in situations where the lessee failed to do so and concluded the lease contained an implied covenant to develop and actively mine. 112 Idaho at 446, 732 P.2d at 684. On the second appeal in Alumet II, the Court of Appeals discussed the lessee's duty in general terms, such as to conduct operations as a reasonably prudent operator, but at all times it was referring to the implied covenant to actively mine. See 119 Idaho at 983, 812 P.2d at 290. Finally, in Alumet III, this Court observed the Alumet I court's finding that the lease agreement between the parties contained an implied covenant to actively mine was binding, as [t]he 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.  119 Idaho at 950, 812 P.2d at 257 (emphasis added). In the portion of its opinion entitled Duty of Lessee Under an Implied Covenant to Develop and Mine, the Alumet III Court discussed the duty in very general terms. See id. at 950-51, 812 P.2d at 257-58. The Alumet cases do not support Independence's assertion that Hecla had a duty to stop mining, where the entire contract is drafted to leave with Hecla the control over when and how to mine. Aside from the obvious fact that Alumet is not on point because this is not a duty to mine case  indeed, this is a duty not to mine case  a fair reading of Alumet III shows this Court was not actually announcing a new duty but was instead simply applying the well-established implied duty of good faith and fair dealing that this Court has articulated in numerous cases over the years. This implied duty of good faith and fair dealing that may require a party to act reasonably in operating a mine should be analyzed like any other implied duty. That is, it may not be applied to override an express provision of the contract. See First Security Bank of Idaho, 115 Idaho at 176, 765 P.2d at 683. In this case, Independence's interpretation of what constitutes good faith and fair dealing is that Hecla must cease mining when metal prices drop below that which is necessary to guarantee Independence a profit. Nevertheless, the contract expressly provides Hecla has the exclusive right to manage, control and operate Gold Hunter, and that all decisions made by Hecla shall be final. To imply a provision requiring Hecla to place Gold Hunter on care and maintenance status because the mine is not profitable to Independence when Hecla determines this should not be done is to contradict the exclusive authority vested in Hecla. Thus, the implied provision that Hecla must stop mining should not be applied because it contradicts an express term of the contract. But even if the implied the covenant of good faith and fair dealing did not contradict an express term of the contract, the district court's determination Hecla did not breach that covenant was supported by substantial and competent evidence, as shown below.
Hecla's decision to undertake production at the 4900-foot level of Gold Hunter was based on the 1997 report presented to Hecla's board of directors. Independence claims that decision breached Hecla's implied duty because the report on which it was based was flawed. Specifically, Independence takes issue with Hecla management's price projections and determinations as to the size and quality of the Gold Hunter deposit. The district court found that though a retrospective analysis of the feasibility study revealed certain deficiencies in geological and financial data, when taken as a whole, the study was prepared in accordance with customary industry practice and standards. As to the price projections, Hecla's expert testified the projections made by Hecla were similar to the price projections made by Merrill Lynch, Salomon Brothers, Smith Barney, the Silver Institute, Lehman Brothers, and Coeur d'Alene Mines for the same time period. With regard to the geological data, Hecla's expert testified it was very common in the mining industry to make decisions based on materials other than proven and probable reserves because it is simply too expensive to do all the underground work necessary to prove estimated resources actually exist, especially in the vein type deposits found in Gold Hunter. Given a reviewing court's deference to a district court's findings related to the credibility of witnesses and weight of the evidence, we conclude the district court's finding Hecla acted reasonably was supported by substantial and competent evidence.
Despite the low metals prices during the first five years of the Gold Hunter project, Hecla continued to mine the 4900-foot level. At the time of trial, the 4900-foot level was mined out and Hecla began pursuing plans to undertake production at the 5900-foot level. Hecla defends its decision to continue mining because (1) while the project was not generating profits, it was generating cash flow; (2) shutting down the mine would negatively impact the community and make it difficult to find employees when the decision to reopen was made; and (3) the process involved with reopening the mine could take up to 18 months, at which time volatile metal prices might drop again. Hecla's strategy was to continue mining Gold Hunter so long as any cash loss was less than the estimated holding, or care and maintenance, costs. There was testimony at trial that the care and maintenance costs could reach $1.8 million annually. Based on this evidence, the district court correctly determined Independence failed to carry its burden of showing Hecla did not act fairly and in good faith.