Rio Algom Corp. v. Jimco Ltd.

618 P.2d 497, 1980 Utah LEXIS 1063
CourtUtah Supreme Court
DecidedSeptember 19, 1980
Docket16032
StatusPublished
Cited by65 cases

This text of 618 P.2d 497 (Rio Algom Corp. v. Jimco Ltd.) is published on Counsel Stack Legal Research, covering Utah Supreme Court primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

Bluebook
Rio Algom Corp. v. Jimco Ltd., 618 P.2d 497, 1980 Utah LEXIS 1063 (Utah 1980).

Opinion

STEWART, Justice:

The plaintiff, Rio Algom Corporation (“Rio”), 1 brought this action seeking a declaratory ruling as to the proper basis for computing and disbursing royalties payable by Rio as a lessee under lease agreements covering uranium producing properties in San Juan County, Utah. There are two groups of defendants: the Jimcos 2 and Au-dreys. 3 The Jimcos counterclaimed against *500 Rio and also cross-claimed against the Au-dreys. The Audreys cross-claimed against the Jimcos and counterclaimed against Rio, alleging breach of contract and seeking payment of royalties above the amount which Rio claimed to be due.

This appeal is taken by Rio from a district court order dated August 29, 1978, which ruled that a settlement agreement dated July 10, 1978, between the Audreys and the Jimcos was enforceable as to the royalty rate to be paid by Rio and that the agreement did not violate any contract duty owed to Rio by any of the defendants. The court dismissed with prejudice all additional claims by Rio against the Audrey defendants, the claims by the Audrey defendants against Rio and the Jimcos, and the claims by the Jimcos against the Audrey defendants. The court ordered Rio to pay to the Audreys that portion of the royalties to which the Audreys were entitled under the Audrey lease and the settlement stipulation.

In 1964 the Audreys leased uranium properties to the predecessors in interest of the Jimcos. This lease was later superseded by a new agreement between the Audreys and the Jimcos (the “Amended Audrey Lease,” or “headlease”) executed July 12, 1968, and back-dated to June 1, 1968. Prior to the execution of the amended Audrey lease, Rio acquired a ¼ undivided interest in the subject properties. In addition, in an agreement dated June 3, 1968, the Jimcos granted to Rio an option to acquire Jimcos’ rights and obligations as a lessee under the amended Audrey lease. Rio exercised the option June 18, 1968. In so doing Rio became not only the lessee of all the properties subject to the Audrey lease, but also one of the lessors under the headlease with a ¼ undivided royalty interest. As consideration for Jimcos’ assignment to Rio, Rio agreed to pay royalties to the Jimcos, in addition to the royalties payable under the amended Audrey lease to the Audreys.

The following diagram illustrates the various relationships among the parties:

Pursuant to the assignment of the leasehold interest from the Jimcos, Rio commenced the mining of uranium ore from the subject properties. Rio contracted to sell to Duke Power Company the beneficiated product U3Og, also referred to as uranium concentrate or “yellowcake.”

The present dispute evolved from a potential conflict between the Audrey-Jimco headlease provisions for alternative methods for computing royalties under that lease and the royalty provisions in the Jimco-Rio lease. Basically, two alternative royalty formulas for determining the royalty to be paid by the Jimcos (or its assignee) were provided under the headlease. The first formula was based on the sales price or gross value of the product sold or used by Rio: 8% of the sales price if crude ore were sold, or 4% of the gross value of yellowcake if yellowcake were sold. The second formula was based on fair market value of crude ore.

The royalty provisions of the Amended Audrey lease are found in Paragraphs 3.1 and 3.2. Paragraph 3.1 provides:

(a) In the event Lessee shall mine or extract ore from the Audrey Group which is sold in its raw or crude form Lessee shall pay Lessors a royalty equal to eight per cent (8%) of the ‘Sales Price’ (as hereinafter defined) received by Lessee from the sale of all ores mined, produced and sold in the crude form from the Audrey Group ...
(b) In the event Lessee shall mine or extract ore from the Audrey Group and *501 recover therefrom for sale or use in commercial quantities any of the minerals contained in such ore, and if the minerals so recovered shall be any uranium compound, Lessee shall pay to Lessors a royalty of four per cent (4%) of the ‘Gross Value’ of such compounds (as hereinafter defined)....

Paragraph 3.2 of the Audrey agreement provides the alternative basis for the computation of royalties. That provision allows the lessors to elect to have royalties computed on the basis of the fair market value of crude ore, regardless of whether uranium concentrate or crude ore was sold by Rio. That provision states:

Irrespective of the provisions set forth in paragraph 3.1 above, Lessors shall have the election and option to have royalties due them under the terms of this Lease calculated and paid upon the basis of eight percent (8%) of the fair market value at the mine portal of crude ore mined and produced from the Audrey Group. . . .

Paragraph 3.2, which is critical in this dispute, also provides for an election by the lessors under the Audrey lease as to which royalty formula would be binding. That paragraph states:

. . . [I]n order to exercise such election Lessors must unanimously agree and notify Lessee in writing at least ninety (90) days prior to the commencement of any calendar year of their election to require royalties to be calculated and paid in such manner. After having given such notice, the election so made shall remain in force and effect for the next ensuing calendar year, and from year to year thereafter, unless the Lessors should unanimously agree to notify Lessee in writing of their revocation of said election, which notification must be given at least ninety (90) days prior to the commencement of a calendar year and shall become effective at the commencement of, and remain in effect during the ensuing calendar year, and from year to year thereafter, unless another such notification of election is given at the time and in the manner as specified above.

However, because of the assignment by the Jimcos to Rio, Rio was placed in a conflict of interest situation with the other lessors under the Audrey headlease as a result of its contractual right to receive one-fourth of the royalties earned under the Audrey lease and, at the same time, as a lessee with the obligation to pay the full amount of the royalties. Under these provisions, Rio’s interest was to pay the smallest amount of royalties possible. To deal with that conflict of interest, Paragraph 21.3 of the amended Audrey lease excluded Rio from voting in an election for selection of a royalty formula under the headlease. Paragraph 21.3 states:

Rio Algom Corporation shall, by reason of its interest in this Lease as described in Section II hereof, be excluded from any vote or decision of the Lessors relating to royalties and requiring unanimity of the Lessors, as provided for in Section 3.2 hereof. The unanimous vote or decision of the remaining Lessors other than Rio Algom Corporation shall constitute unanimity for the purpose of the said Section 3.2. [Emphasis added.]

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Bluebook (online)
618 P.2d 497, 1980 Utah LEXIS 1063, Counsel Stack Legal Research, https://law.counselstack.com/opinion/rio-algom-corp-v-jimco-ltd-utah-1980.