State v. Northwest Magnesite Co.
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Opinions
Steinert, J.
Plaintiff, the state of Washington, commenced this action originally against Northwest Magnesite Company, a Washington corporation, defendant, to recover from it additional royalties, and interest thereon, alleged to be due the plaintiff from the sale of minerals mined from public land leased to the defendant. In an amended complaint, the state joined as additional defendants HarbisonWalker Refractories Company and General Refractories Company, foreign corporations, alleging that those concerns in years past had acquired ownership of Northwest Magnesite Company pursuant to a combination and con *6 spiracy to corner the magnesite market in the United States and elsewhere; that since then Harbison-Walker Refractories Company and General Refractories Company had conducted all sales of Northwest Magnesite Company’s output; and that those two foreign corporations had fixed the amount of receipts of the domestic company for its magnesite production.
By its action, the state sought to have the court determine that it was entitled to royalties computed on the basis of the amounts received by the dominant corporations from their customers for the products of their subsidiary, Northwest Magnesite Company, and also to determine that Northwest Magnesite Company had taken certain improper allowances in calculating royalties due the state. The state’s calculation of the amount due it was $133,817.25 as of April 30,1943.
For convenience, we shall hereinafter refer to the respective defendants as Northwest, Harbison-Walker, and General.
The defendant Northwest answered, admitting that it had deducted from gross receipts all costs of mining and treatment, and other expenses, before calculating royalties, so that its remittances to the state were, in effect, royalties on its own net profits from sales of magnesite quarried from the state’s property; but denying that it was then indebted to the state in any amount. It also asserted four affirmative defenses: (1) accord and satisfaction; (2) conduct of the parties constituting a binding practical construction of the terms of the mining contract existing between Northwest and the state; (3) estoppel; and (4) laches.
Northwest also moved that the court quash and set aside the service of summons and amended complaint which had been made upon the other defendants, Harbison-Walker and General, by delivery of process and the accompanying pleading to an officer of Northwest only. Subsequently, Harbison-Walker and General entered their special appearances for the purpose of a similar motion, and, when a ruling on that question was reserved by the court, adopted the answer of Northwest, at the same time preserving their special appearances.
*7 At the conclusion of an extensive trial, without a jury, in July, 1943, and after an inspection of the premises, the trial judge rendered a memorandum opinion and decision on March 1, 1944, in which he declared, as findings, that the mining contract between the state and Northwest was inappropriate to the operation in question; that the venture was not a strictly mining operation, but rather a manufacturing enterprise; that the statute under which the contract was made, as well as the contract itself, was ambiguous with respect to the formula for royalties, “four per cent of moneys received from the sale of minerals from said lands, after deducting therefrom the cost of transportation and treatment”; that the statute and contract were therefore open to construction by the parties and by the court; and that the manager of Northwest and the commissioner of public lands had orally agreed to a deduction, from gross receipts, of all costs of production, including removal of overburden from the ore site, quarrying, and ore reduction, before calculation of royalties. From these findings, the trial judge concluded, in his memorandum opinion and decision, that Northwest’s defense of practical construction was good, and that the state was estopped to deny that construction.
The trial judge further found that, during the period of the negotiations here involved, the land commissioner had full knowledge of the corporate relations between Northwest and its parent corporations, and of the differential between the price received by Northwest for magnesite and the market price received therefor by Harbison-Walker and General. From these latter findings, the trial judge concluded that these transactions between the' dominant corporations and their subsidiary were lawful, and that, since the three corporations were wholly distinct entities, and since Northwest had valuable assets in this state, there was no practical reason why Harbison-Walker and General should be joined in the action.
The trial court therefore held (1) that the motions to quash and set aside the service of summons and amended complaint upon defendants Harbison-Walker and General *8 should be granted, “for the reason that the evidence discloses that no cause of action exists as to them,” and (2) that Northwest was entitled, under its contract with the state, to deduct all costs of exploration, development, extraction, transportation, and processing of ore, and overhead expense generally, but was not entitled to deduct items of depletion, Federal income and capital stock taxes, state corporation tax, and certain insurance expense. The court thereupon ordered an accounting in accordance with the above terms.
Upon a second hearing, in September, 1944, further evidence was taken relative to the accounting. At that hearing, the trial judge denied motions for reconsideration of the memorandum decision, for entry of judgment in favor of the plaintiff as prayed for in the amended complaint, and for a new trial; directed entry of an order quashing service of summons upon Harbison-Walker and General, for the reason that those defendants were not proper parties to the proceeding and had not been properly served with process; and entered judgment against Northwest in the sum of $10,940.88, that being the amount due under the findings of the memorandum decision, after certain adjustments, as of December 31, 1943. The court also decreed in its judgment that, from and after that date, Northwest should compute and make payments of royalty in accordance with the terms and conditions set forth in the memorandum decision, “until otherwise provided by law.” The court allowed no interest prior to the date of judgment and denied all parties any recovery of costs. Conceiving the amount of the judgment to be insufficient, the state appealed.
Before considering the assignments of error presented by the state upon the appeal, we deem it beneficial to set forth in some detail certain facts relevant to this litigation. For a clearer understanding of the facts, it becomes necessary to explain the nature of magnesite and its production in the United States; the corporate and business relations of Northwest to Harbison-Walker and General; and the development of what is herein referred to as the Moss claim, which comprises the land leased by the state to Northwest, *9 and the subsequent dispute as to royalties arising therefrom.
Magnesite is a mineral consisting of magnesium carbonate. It is a product of alteration of magnesium silicates and occurs, so far as is pertinent to our inquiry, as a replacement product, in dolomite rock, in varying degrees of purity.
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Steinert, J.
Plaintiff, the state of Washington, commenced this action originally against Northwest Magnesite Company, a Washington corporation, defendant, to recover from it additional royalties, and interest thereon, alleged to be due the plaintiff from the sale of minerals mined from public land leased to the defendant. In an amended complaint, the state joined as additional defendants HarbisonWalker Refractories Company and General Refractories Company, foreign corporations, alleging that those concerns in years past had acquired ownership of Northwest Magnesite Company pursuant to a combination and con *6 spiracy to corner the magnesite market in the United States and elsewhere; that since then Harbison-Walker Refractories Company and General Refractories Company had conducted all sales of Northwest Magnesite Company’s output; and that those two foreign corporations had fixed the amount of receipts of the domestic company for its magnesite production.
By its action, the state sought to have the court determine that it was entitled to royalties computed on the basis of the amounts received by the dominant corporations from their customers for the products of their subsidiary, Northwest Magnesite Company, and also to determine that Northwest Magnesite Company had taken certain improper allowances in calculating royalties due the state. The state’s calculation of the amount due it was $133,817.25 as of April 30,1943.
For convenience, we shall hereinafter refer to the respective defendants as Northwest, Harbison-Walker, and General.
The defendant Northwest answered, admitting that it had deducted from gross receipts all costs of mining and treatment, and other expenses, before calculating royalties, so that its remittances to the state were, in effect, royalties on its own net profits from sales of magnesite quarried from the state’s property; but denying that it was then indebted to the state in any amount. It also asserted four affirmative defenses: (1) accord and satisfaction; (2) conduct of the parties constituting a binding practical construction of the terms of the mining contract existing between Northwest and the state; (3) estoppel; and (4) laches.
Northwest also moved that the court quash and set aside the service of summons and amended complaint which had been made upon the other defendants, Harbison-Walker and General, by delivery of process and the accompanying pleading to an officer of Northwest only. Subsequently, Harbison-Walker and General entered their special appearances for the purpose of a similar motion, and, when a ruling on that question was reserved by the court, adopted the answer of Northwest, at the same time preserving their special appearances.
*7 At the conclusion of an extensive trial, without a jury, in July, 1943, and after an inspection of the premises, the trial judge rendered a memorandum opinion and decision on March 1, 1944, in which he declared, as findings, that the mining contract between the state and Northwest was inappropriate to the operation in question; that the venture was not a strictly mining operation, but rather a manufacturing enterprise; that the statute under which the contract was made, as well as the contract itself, was ambiguous with respect to the formula for royalties, “four per cent of moneys received from the sale of minerals from said lands, after deducting therefrom the cost of transportation and treatment”; that the statute and contract were therefore open to construction by the parties and by the court; and that the manager of Northwest and the commissioner of public lands had orally agreed to a deduction, from gross receipts, of all costs of production, including removal of overburden from the ore site, quarrying, and ore reduction, before calculation of royalties. From these findings, the trial judge concluded, in his memorandum opinion and decision, that Northwest’s defense of practical construction was good, and that the state was estopped to deny that construction.
The trial judge further found that, during the period of the negotiations here involved, the land commissioner had full knowledge of the corporate relations between Northwest and its parent corporations, and of the differential between the price received by Northwest for magnesite and the market price received therefor by Harbison-Walker and General. From these latter findings, the trial judge concluded that these transactions between the' dominant corporations and their subsidiary were lawful, and that, since the three corporations were wholly distinct entities, and since Northwest had valuable assets in this state, there was no practical reason why Harbison-Walker and General should be joined in the action.
The trial court therefore held (1) that the motions to quash and set aside the service of summons and amended complaint upon defendants Harbison-Walker and General *8 should be granted, “for the reason that the evidence discloses that no cause of action exists as to them,” and (2) that Northwest was entitled, under its contract with the state, to deduct all costs of exploration, development, extraction, transportation, and processing of ore, and overhead expense generally, but was not entitled to deduct items of depletion, Federal income and capital stock taxes, state corporation tax, and certain insurance expense. The court thereupon ordered an accounting in accordance with the above terms.
Upon a second hearing, in September, 1944, further evidence was taken relative to the accounting. At that hearing, the trial judge denied motions for reconsideration of the memorandum decision, for entry of judgment in favor of the plaintiff as prayed for in the amended complaint, and for a new trial; directed entry of an order quashing service of summons upon Harbison-Walker and General, for the reason that those defendants were not proper parties to the proceeding and had not been properly served with process; and entered judgment against Northwest in the sum of $10,940.88, that being the amount due under the findings of the memorandum decision, after certain adjustments, as of December 31, 1943. The court also decreed in its judgment that, from and after that date, Northwest should compute and make payments of royalty in accordance with the terms and conditions set forth in the memorandum decision, “until otherwise provided by law.” The court allowed no interest prior to the date of judgment and denied all parties any recovery of costs. Conceiving the amount of the judgment to be insufficient, the state appealed.
Before considering the assignments of error presented by the state upon the appeal, we deem it beneficial to set forth in some detail certain facts relevant to this litigation. For a clearer understanding of the facts, it becomes necessary to explain the nature of magnesite and its production in the United States; the corporate and business relations of Northwest to Harbison-Walker and General; and the development of what is herein referred to as the Moss claim, which comprises the land leased by the state to Northwest, *9 and the subsequent dispute as to royalties arising therefrom.
Magnesite is a mineral consisting of magnesium carbonate. It is a product of alteration of magnesium silicates and occurs, so far as is pertinent to our inquiry, as a replacement product, in dolomite rock, in varying degrees of purity. Its principal use is in the manufacture of highly refractory firebricks for lining steel and electric furnaces, although magnesite is but one of numerous types of such bricks, each having a special value.
Crude magnesite ore contains much moisture, and freight rates on such ore are prohibitive. It is thus an economic necessity that the ore be calcined at or near the place where it is mined or quarried from the earth. Calcining is a process by which the water and carbonic acid are driven off. If the ore is then “clinkered,” it becomes deadburned magnesite, a product usable by industry.
Prior to the First World War, no magnesite was mined in this country. Manufacturers of refractory brick got some magnesite derived as a by-product of the manufacture of carbonic acid, but for the most part they imported it from Europe, particularly Austria. With the advent of that war and the necessity for increased steel production, deposits of magnesite ore in the United States, particularly in California and in Stevens county, Washington, were developed, and Northwest’s plant at Chewelah became the first highly developed magnesite property in this country.
After the war, Pacific coast producers could not compete with cheap imports, which drove the market price of magnesite downward from $37.50 per ton in 1918 to $23 per ton in 1921. The principal economic burden to these producers was freight costs, ranging from $12.50 to $16.50 per ton between Chewelah, Washington, and Chester, Pennsylvania, as contrasted with a range of from $4.50 to $5 per ton between the European port of Trieste and Chester, Pennsylvania.
In 1922, a tariff of about $11.50 per ton was imposed on magnesite imports, a differential apparently sufficient to enable Northwest to operate profitably, since it made sales of magnesite as early as March, 1923, and has continued *10 production to the time of the judgment and decree here in question.
We shall now explain briefly the corporate history of Northwest. That company was one of several firms which became active in seeking to produce magnesite in Stevens county, Washington, during the First World War. It was incorporated in 1917, at Spokane, with an authorized capital of one million dollars, divided into ten thousand shares of common stock. The most exact purpose stated in its articles of incorporation was:
“2. To engage in refining, calcining and reducing minerals taken and removed from its deposits of magnesite, dolomite and lime, and in connection therewith to construct, own, maintain and operate such plants and mills as may be requisite and necessary to carry on such operation of refining, calcining and reducing said minerals, or any of the kindred products of any such minerals.”
The four trustees designated in the original articles were B. L. Thane and R. D. Adams, of San Francisco, and R. S. Talbot and Seabury Merritt, of Spokane.
As organized, the company was prepared only to sell crude ore. To produce the finished article, deadburned magnesite, required a substantial investment in new plant, and for this purpose Talbot and Thane solicited William Crocker and Roy Bishop, of San Francisco, for financial assistance; and these two last-named individuals subsequently became owners of a substantial amount of Northwest’s capital stock.
In 1918, Crocker and Bishop'went to Pittsburgh and represented to Harbison-Walker, which manufactured refractory brick of various types and maintained a large sales organization, that Northwest was in a position to produce deadburned magnesite, but not to market it, and that Northwest desired to sell its production to Harbison-Walker. In April of that year, a marketing contract was signed, whereby Harbison-Walker agreed to buy all of its requirements of deadburned magnesite from Northwest, and Northwest agreed to sell substantially all of its production to HarbisonWalker, and not to sell such product to any other person *11 for refractory purposes except with the consent of HarbisonWalker. A price scale was arrived at whereby Northwest would receive for its magnesite, f.o.b. Chewelah, Washington, approximately one half of the average selling price per ton, f.o.b. Chester, Pennsylvania, received by HarbisonWalker from its customers. Hence, if Harbison-Walker sold deadburned magnesite to steel manufacturers during a month for an average price of $37 per ton, f.o.b. Chester, then Northwest was to receive $18.50 per ton, f.o.b. Chewelah, for its shipments to Harbison-Walker during the same period. Either party was free to withdraw from the marketing contract on sixty days’ notice. Testimony is to the effect that this agreement was mutually beneficial.
However, the end of the war and the resumption of trade with Austria ended the artificial scarcity of magnesite, and in consequence thereof Northwest ceased operations. Apparently, the' marketing agreement then lapsed.
At about this time, many of the investors in Northwest’s stock desired to dispose of their holdings, and, according to some testimony in the case, Mr. Bishop requested HarbisonWalker to buy this stock as an accommodation to those stockholders. In any event, Harbison-Walker purchased an initial forty-one hundred shares in April, 1921, and by additional purchases early in 1923 acquired a majority interest in Northwest. At this time, Northwest commenced operations again. Thereafter, the remaining shareholders sold their stock to Harbison-Walker, so that by November, 1925, it was in full ownership. The incumbent directors and manager were, however, retained.
In 1927, General, which was a competitor of HarbisonWalker and had been purchasing magnesite from Northwest, acquired four thousand shares of Northwest’s stock from Harbison-Walker. It was stated at the trial that a purpose of this was to share the risk of investment, because of the dependence of Northwest upon a protective tariff rate.
Since that year, the formal relationship between the three corporations has remained static. It appears that both Harbison-Walker and General customarily contract to sell *12 deadburned magnesite, f.o.b. Chewelah, to steel manufacturing concerns, and then send the shipping orders to Northwest. In addition, the two eastern corporations order shipments for their own use in manufacturing refractory brick. Northwest, in turn, loads and ships the magnesite it has quarried and processed, and sends invoices therefor direct to Harbison-Walker and General, charging them a set price per ton, which price has been seventeen dollars per ton of standard deadburned grain magnesite, f.o.b. Chewelah, since 1928. It also appears that Northwest maintains only a work office at Chewelah, its bookkeeping and financing being carried on from an office adjacent to that of HarbisonWalker, in Pittsburgh. Harbison-Walker charges Northwest a monthly management fee, although the nature of the services rendered is not apparent from the record.
In 1942, Northwest’s articles of incorporation were amended. The amended articles avowed the purpose of developing mineral resources within the state of Washington, “or elsewhere.” In all probability, this was to reflect Northwest’s activity at Cape May, New Jersey, where it processes dolomite rock with sea water to obtain magnesite. The number of trustees was increased to seven, including E. A. Garber, Chewelah; Raymond Willey, J. E. MacCloskey, Jr., and P. R. Hilleman, of Pittsburgh, Pennsylvania; and Floyd L. Greene, M. G. Myrelius and R. P. Heuer, of Philadelphia, Pennsylvania. From the evidence, it appears that Garber was also vice-president and general manager of Northwest, but that, although he had been employed by Harbison-Walker prior to 1933, he had no formal connection subsequent to that year with either that firm or General; Willey was president of Northwest and also president of Harbison-Walker; MacCloskey was chairman of the board, and Hilleman was secretary, of Harbison-Walker; Greene was president, and Myrelius was secretary-treasurer, of General. Heuer’s connection also appears to have been with General.
We now turn our attention to the interest which the state of Washington had in this activity during the periods referred to above. In 1916, one Raymond Allen applied to the *13 state commissioner of public lands for a lease of a certain forty-acre tract of school grant land in Stevens county, stating in his application that he had found thereon “highly magnesiam limestone suitable for refractory and other purposes.” A month later, he amended this description to read “magnesite.”
In 1917, the commissioner entered into a contract with Allen, whereby the forty-acre tract known and herein referred to as the Moss claim, was leased to Allen for thirty years, for the purpose of “exploring for and mining and taking out and removing therefrom the ore therein contained, containing copper, silver, lead, gold, and other valuable minerals (except coal).” The lessee obligated himself to pay, monthly, four per cent of “all moneys received from the sale of all minerals from said land covered by this contract, and lease, after deducting therefrom the cost of transportation and treatment.” In these respects, the contract followed the language of chapter 148, p. 599, Laws of 1917, which authorized the commissioner to lease public lands for such a purpose (§1, appearing as Rem. Rev. Stat., § 8018), in substantially a prescribed form of contract (§3, appearing as Rem. Rev. Stat., § 8024), and to fix the terms and conditions thereof, except that the lessee must obligate himself to pay a royalty of between one and four per cent of moneys received, after deducting costs of transportation and treatment (§ 4, appearing as Rem. Rev. Stat., § 8025).
Several assignments of Allen’s interest in this contract followed, and in 1924 Northwest became the owner thereof. It will be recalled that in that year Harbison-Walker held a majority interest in Northwest, and, as already related, it shortly thereafter acquired the full interest, although in the year 1927 it sold to General a two-fifths interest in Northwest.
In addition to the Moss claim, Northwest had, or has since acquired, interests in the following deposits of magnesite in a mass of dolomite rock, southwest of Chewelah: the Finch property, about seven times the size of the Moss claim, and just south of which is a substantial mill connected by tramway with Northwest’s reduction plant located about *14 four miles east; the Allen property, about one-half mile south of the Finch plant and adjacent to the Moss claim; the Keystone property, which is about the same size as the Moss claim and is five miles, or more, southwest of the Finch plant and over mountainous terrain; and the Red Marble property, which is more than eight miles southwest of the Finch plant and is connected with the reduction plant by railroad.
Northwest did not immediately commence taking ore from the Moss claim after acquiring that right by its assumption of the 1917 Allen contract. Small operations were started in 1930. Typical of the royalty reports then submitted is the one for January, 1932. Northwest at that time remitted $13.35 and reported 359 net tons of magnesite ore extracted from the Moss claim during the previous month, together with the following figures in explanation, attested by the then general manager:
“Ore extracted in tons....................... 359.00
Net Profits per Ton......................... .93
Total Net Profit............................$ 333.87
Costs
Total Raw Mixed Burned................... 4,354.00 tons
Total Cost (Mining and Treating)...........$ 30,862.68
Cost per Ton..............................$ 7.09
Sale price per Ton..........................$ 8.02
Net Profit per Ton..........................$ .93”
Subsequent reports were submitted in substantially the same form.
It will be noted that royalties were submitted on the basis of total net profit, not on the basis of moneys received from the sale of Moss magnesite after deducting therefrom the cost of its transportation and treatment. Specifically, it will be noted that the cost of “mining” was deducted before arriving at the proceeds upon which the four per cent royalty was calculated. The evidence further disclosed that’ Northwest made no attempt to separate the cost of transporting and treating Moss ore; rather, the average cost and profit were assumed to be accurate as applied to the Moss *15 operation, or, in any event, were assumed to satisfy the requirements of the state contract.
Receipts of such remittances were acknowledged without protest by the state land commissioner until July, 1940, when he informed Northwest that, pending further information, he would not accept the June, 1940, remittance as final payment. In January, following, he wrote to Northwest, stating that he would not send a regular royalty receipt “until you have remitted on the basis of the contract.”
One other matter requires comment before turning to the present demand made by the state. In 1934, certain letters were exchanged, and conversations had, between Mr. Garber, as manager of Northwest’s operations at Chewelah, and Mr. A. C. Martin, then commissioner of public lands for the state of Washington. The import of these communications is crucial in the present dispute.
On March 28, 1934, Mr. Garber wrote to Commissioner Martin, requesting the latter’s advice as to the procedure Northwest might employ to secure reduction of the royalty on Moss production, from four per cent to one per cent. Commissioner Martin replied on April 3rd that he thought it quite necessary that they “go into this matter some time in the near future and see what can be worked out.”
Subsequently, apparently on April 19th, they did confer, and Mr. Martin suggested that they delay detailed consideration until such time as he could send a qualified mining man to Chewelah to go over the property.
On May 1,1934, Mr. Garber wrote again to Commissioner Martin referring to the above conversation, and particularly to a statement therein by Mr. Martin that he intended, before any further discussion, to seek from the attorney general a clarification of certain legal questions pertaining to the matter. Garber pressed for a final decision by the commissioner, as affecting certain decisions which Northwest would have to make during the coming summer.
Sometime prior to May 14, 1934, Mr. W. L. Bell, who appears to have been a mining expert employed by the commissioner to make an investigation, sent the commis *16 sioner his report, consisting of a letter and memorandum. Attorneys for both appellant and the respondents joined in offering these combined documents as an exhibit in the case. The letter, so far as is relevant here, read:
“I . . . enclose a memorandum giving my impressions of the Moss property. If within your power to redraw the contract, I think that would be advisable, so that the basis would be clear cut. The Company [Northwest] is clearly incorrect in deducting mining costs at present, as I told Mr. Garber. . . . My personal reaction is that their desire to increase Moss production should be helped along by some adjustment of their contract.”
The memorandum which accompanied the letter was, in substance, as follows: Northwest was confronted with the problem of deciding whether to spend a substantial amount to develop the Moss claim and operate it in conjunction with the Finch property. It desired to work the state’s property, that is, the Moss claim, on a large scale, in order to blend the ore therefrom, which had an excessive lime content, with Finch ore, so that the two ore bodies could be depleted together. The development contemplated surface stripping and trimming (removal of the overburden of trees, earth, and rock covering the ore lens), extension of tunnel and ore passes, and extension of tram facilities, on the state’s property, to cost about $134,000. Certain disadvantages presented themselves: mining conditions were less favorable, in several respects, at the Moss claim than at other properties, and waste was higher, running forty-three per cent of gross tonnage as against thirty-three per cent at Finch. In the alternative, Northwest
“. . . could open up the Keystone property [owned by Northwest]—6 miles distant-—but this would require a large initial expense which is unnecessary in the case of the Moss property.”
Mr. Bell reported that he thought it to the interest of the state that Commissioner Martin encourage this contemplated development of the Moss claim. As to royalties, he made the following comments:
*17 “The present contract is loosely drawn as to terms of royalty, the basis being more suited to a mine shipping bullion, ore or concentrates to a third party whose settlement sheet would be evidence of the gross returns. . . . From the recent settlement [by the present lessee], it would appear that the strict terms of the contract have not been followed, inasmuch as the cost of mining has been deducted, thereby reducing the net profit on which the royalty is paid.
“The market value of the crude ore is a debatable subject and is complicated by the fact that the ultimate sale of the manufactured product is made in many forms and by another corporation of the family to which the Northwest Magnesite Co. belongs.
“For the above reasons a basis of settlement better suited to the conditions is desirable—one which would be definite and subject to only one interpretation during the life of the property. If the Land Commissioner is limited as to alteration of the terms of a contract by the maximum and minimum royalty percentages, then the present basis of calculation must be continued.
“The present royalty of 4% . . . amounts to 12 cents per ton, which does not appear to be excessive. Eliminating the mining cost in the deductions from gross value the royalty would be increased to perhaps 16 cents per ton.
“The application for a decrease in royalty rate is only a part of the endeavor to reduce costs generally, which has embraced also the cost of power, taxes, and freight rates.”
Mr. Bell concluded his report with this recommendation:
“A reduction of royalty on account of the large non-productive expense involved and general industrial conditions might well be made, not on the ground that the present rate is excessive but as measure of assistance to the lessee for the future benefit of the State. This might take the form of a credit or rebate against development and equipment, on account of royalty, in the discretion of the Land Commissioner.”
On May 19, 1934, Commissioner Martin wrote to Mr. Garber, stating that he was in receipt of the Bell report and that he agreed with Mr. Bell’s conclusion that the present contract did not fit the situation, especially as the ore being mined from the Moss claim was not similar to others which had a standard value, such as lead and zinc; that “the present *18 law does not apply to some of the valuable materials,—such is the case in the Moss claim.” The commissioner also said in his letter that he contemplated fixing a value on the ore at the mine, and letting the percentage of royalty remain as before. In conclusion, he suggested a conference to determine a mutually acceptable plan “that would not be in conflict with the law.”
On May 22nd, Mr. Garber replied by letter, concurring with the commissioner that there was legal difficulty and expressing his intention to visit Mr. Martin and seek the agreement suggested. Our only knowledge of the ensuing conference comes from the testimony of Mr. Garber at the trial of the case:
“Mr. Raftis: Now, Mr. Garber, upon receipt of that letter [May 19th] from Mr. A. C. Martin, Land Commissioner, I will ask you to state if thereafter you had occasion to again visit the office of Mr. Martin in Olympia? A. I did, yes sir. [Several weeks after receipt of the letter] . . . Q. . . . will you please state to the Court the discussion you had with him at that time. ... A. I explained to Mr: Martin we wanted to make some immediate moves on developing either the Moss quarry or the Keystone or Red Marble quarry, and wondered what decision he had arrived at in regard to the matter of reduction of royalty. . . . And he explained to me that he was still of the opinion that it would not be policy for the State to make any reduction in amount—or percentage of royalty, but that he had had occasion to study very carefully Mr. Bell’s report, and that he was in full accord with it . . . and that it should be put on a tonnage basis at so much per ton, and that he was then communicating with the Attorney General’s office to draw a statute that would put it on this basis, and until such time as that was done he would allow the present method to stand as it had in the past. The Court: That’s the present method of computing royalties? A. Yes sir, as we had always in the past. . . . Mr. Raftis: Did that include salary and overhead at your plant, and taxes and all other general expense? A. Yes, sir, he understood that. Q. Did you discuss that in detail with him? A. Yes sir, I did. . . . Q. Did you discuss with him the treatment, what constituted treatment, what the problems were in treating? A. Very thoroughly. He had some question about that. Q. Now then, did you also discuss with *19 Mr. Martin at that visit, the question of your sale price of Northwest Magnesite Company? ... A. I explained to him that the sale price f.o.b. Chewelah for refractories was $22.00, and we received $17.00 net ton f.o.b. cars for that material, and that if we had to set up sales organizations in all the leading steel cities and centers in the United States, maintain a credit department and be responsible for all collections, together with the extraordinary large amount of expense involved in the laboratory in developing magnesite for various applications in this country [sic]. Q.' And at that time, Mr. Garber, did Mr. Martin, Land Commissioner, and you reach a definite agreement as to the method of calculating these royalties? A. He assured me that the present method of computation would stand until such time as he had the proper bill introduced into the Legislature which would put the product on a tonnage basis of so much a ton.”
The only other evidence at hand as to the 1934 negotiations is a copy of a letter, dated September 17th, written by Mr. Garber to Commissioner Martin, the pertinent part of which read:
“Referring to past correspondence and previous verbal discussion relative to changes in our present lease covering the State Moss Claim—it is my intention to be in Olympia within the next 10 days or two weeks and at that time I would very much like to discuss this matter further with you.”
It needs only to be added that Northwest did subsequently develop the state’s property. The cost was even greater than the estimate, being about $220,000. Since then, the Moss claim has been worked on a large scale, yielding many thousands of tons of crude magnesite ore used in the production of standard deadburned grain magnesite.
We now turn to the claim made by the state and the procedure by which it was computed. In November, 1940, Mr. C. L. Stickney, a certified public accountant who was then auditor and cashier for the department of public lands, went to Pittsburgh at the direction of Commissioner Martin for the purpose of inspecting Northwest’s books. He was given access to the records and was assisted in his investigation by Mr. J. C. Stivers, secretary of that company. Mr. *20 Stickney accepted the records of Northwest as accurate, but rejected its formula for computing royalties. At this point, it is necessary only to state that he determined (1) that certain disbursements were improperly allocated to costs of transportation and treatment, and (2) that receipts upon which royalties were properly due were twenty-two dollars per ton, the amount received by Harbison-Walker and General from their customers, rather than seventeen dollars per ton, the amount received by Northwest from those parent corporations.
Accordingly, Mr. Stickney prepared a detailed report and claim against Northwest, indicating deficiencies in royalty payments in each of eleven years, and interest upon individual deficiencies due, in a total amount of $62,487.94 as of October 31, 1940. Northwest refused payment, and in course of time this suit was brought, the cause tried, and the judgment entered from which this appeal was taken.
Under its several assignments of error, the state contends that the trial court erred (1) in refusing to grant it a judgment on the basis of the Allen contract of 1917; (2) in denying interest on amounts found to be due the state; (3) in denying the appellant state its costs; (4) in quashing service upon the respondents Harbison-Walker and General; (5) in dismissing with prejudice the appellant’s cause of action against those two respondents; (6) in refusing to grant the state’s motion for reconsideration or for a new trial; and (7) in refusing to admit certain testimony and papers offered by the state at the second hearing, in September, 1944.
It is the first of these assignments which presents for our consideration almost the entire subject matter of this litigation.
As has been noted, the trial court predicated its judgment on what it held to be an agreement concluded in 1934. In its memorandum opinion and decision, the court said:
. “According to the testimony of witness, Garber, the Land Commissioner agreed to a deduction as treatment and transportation of all costs of production including quarrying and reduction, and including removal of over-burden. . . .
*21 “. . . the accounting must be based upon the agreement and arrangement made in 1934 between the State Land Commissioner and the defendant Northwest Magnesite Company.
“Under that agreement the defendant [Northwest] is entitled to deduct all quarry costs including so called mining, stripping over-burden, mucking, cobbing and crushing and milling and transportation costs, including administration and management costs, social security costs, and insurance and taxes paid on account of operation of the States’ property . . . and depreciation.” (Italics ours.)
At the outset, we note that the only evidence of any agreement between Commissioner Martin and Mr. Garber is that summarized in our statement of the case. We shall accept the trial court’s conclusion that this was sufficient proof of an oral promise by the commissioner, but we cannot accept the trial court’s view that this promise amounted to an agreement between the parties, or that it was in effect a determination that “costs of transportation and treatment” meant costs of production. Mr. Garber said only that Mr. Martin assured him that the present method of computation would stand until a certain bill was presented to the legislature. That method of computation was, as is conceded by Northwest, four per cent of net profits after taxes and royalties.
The question we shall consider, therefore, is whether the state is bound by an oral promise of the commissioner of public lands that he would allow Northwest to remit mining royalties on the basis of net profits, in substitution for the provision of the written contract of 1917 obligating Northwest to pay such royalties on the basis of gross receipts less the costs of transportation and treatment.
The trial court deemed the state to be bound, for two principal reasons:
(1) It believed, as apparently did Commissioner Martin, that the 1917 contract and the statutes under which it was drafted were inappropriate to the Moss operation. The memorandum opinion comments:
“There is no mining here, in the sense that term is used in the Statute; this operation is an open quarry, an excava *22 tion, more like the operation of a clay pit than a mining enterprise.”
The memorandum'opinion further states that the statute was intended to deal with metallic ores and minerals, and, by implication, that magnesite ore is not properly classified as a “valuable mineral.” It also points out that “treatment” is not defined either in the statute or in the written contract. Hence, the court concluded that it was left to the discretion of the commissioner to determine the appropriate deductions to be made, as costs of transportation and treatment, from the gross receipts of Northwest.
(2) The trial court concluded that “the State is in Court in its proprietary, as distinguished from its sovereign, capacity and will receive the same consideration its most humble citizen would receive”; that in 1934 Northwest was ready to abandon the 1917 contract unless an agreement were reached as to its liability thereunder; that an agreement was reached; that Northwest, in reliance thereon, expended great sums of money to make the property commercially operative; and that the state, having received more than seventy thousand dollars in royalties, could not accept the benefit of its bargain and then come into court and repudiate the contract. In short, the court held that the state was estopped to claim any sums except in accordance with the oral promise of 1934.
We shall examine these conclusions separately. The first, numbered (1) above, has to do with the nature of the operation and the extent of the commissioner’s discretion with reference thereto.
While, as the court concluded, the formula used for computing royalties, as provided in the 1917 contract, may not have been expedient as applied to Northwest’s operation of the Moss claim, we do not agree that the commissioner had the broad powers conceded to him by the trial court.
Our point of departure from the view of the trial court on this issue is in the determination of the nature of the operations conducted by Northwest on the Moss claim, and the character of the product derived therefrom. In our *23 opinion, the operation was a mining enterprise, and the ore extracted thereby was a valuable mineral within the intendment of the legislature.
The only mining expert to testify at the trial, Mr. C. A. Sargent, mining superintendent for Northwest, stated that, generally, “separation of mineral from the earth is mining”; “the removal of a mineral from its place of rest where nature put it, is termed mining”; “mining is a very broad term, and it takes in dredging, placer mining, any means by which you extract the mineral from its natural resting place. . . As such it includes quarrying.” His definition is supported by the authorities we have examined.
In 36 Am. Jur. 281, Mines and Minerals, § 2, it is said:
“While the word ‘mine’ was originally employed to designate an underground working for the excavation of minerals, consisting of pits, shafts, levels, tunnels, etc., it has latterly received an enlarged meaning and is now commonly regarded as including open cuts, quarries, etc., by which such substances as beds of clay, ironstone, and limestone are extracted.”
The usage of the term “mining” in Rem. Rev. Stat., § 8018 et seq., and the absence of any other statutory provision for leasing mineral rights to public lands (except coal, petroleum, and natural gas), indicate to us that the legislature intended that the act under which the 1917 contract for mining was authorized should embrace all forms of mining activity. In extracting mineral ore “in, on or under the land,” Northwest is engaged in mining, within the meaning of its contract and the statutes above mentioned.
We likewise conclude that magnesite is a valuable mineral. The word “valuable,” as thus used, has a modified meaning not normally associated with that word; it connotes only mineral matter worth exploiting. That no special importance was attached to the word “valuable” by the legislature, appears from the interchangeable references, in Rem. Rev. Stat., §§ 8018, 8020, 8021, 8024, 8025, and 8027, to “valuable minerals,” “precious minerals,” and “minerals.”
The following authoritative definition of “valuable min *24 eral deposit” lends support to our interpretation of the statutes in question:
“Whatever is recognized as a mineral, by the standard authorities on the subject, whether metallic or other substance, and is found in such quantity and quality as to render the land more valuable on that account than for agricultural purposes is a valuable mineral deposit within the purview of the mining act.” A. H. Ricketts, American Mining Law (1943) 64, § 8.
The above authority cites, as examples, granite and rock quarries. In accord is 44 Words & Phrases (Perm, ed.) 31, citing, among other examples, marble, slate, limestone, and building stone.
A relevant question was before this court in State ex rel. Atkinson v. Evans, 46 Wash. 219, 89 Pac. 565, 10 L. R. A. (N.S.) 1163, in which case it was held that deposits of limestone, silica, silicated rock, and clay were “valuable deposits of minerals,” as that term was used in Art. II, § 33, of our state constitution (the same descriptive language appearing in Rem. Rev. Stat. (Sup.), § 10581 [P.P.C. § 257-1] (b) )•
That magnesite is a “valuable mineral” in the broad sense in which the legislature used that phrase in the statute, appears from A. F. Taggart, Handbook of Mineral Dressing (1945) 3-61, Art. 25, as well as from the evidence in this case.
We consider next that portion of the trial court’s first conclusion having reference to the discretion of the land commissioner to determine the proper deductions to be made.
It is, of course, unfortunate that the commissioner should have expressed his opinion to Mr. Garber that the statutes in force were not applicable to the Moss operation. However, such expression of opinion as to the law, the facts being equally well known to both parties, cannot preclude the .state from asserting the true effect of the statutes and the contract of 1917. Turner v. Spokane County, 150 Wash. 524, 273 Pac. 959.
*25 This being the situation, the commissioner was bound to act in compliance with the 1917 contract and the statutes relevant to the Moss claim.
Proceeding further with reference to that same conclusion of the trial court, we are of the considered view that the commissioner had no authority to release or discharge Northwest from liability for royalty deficiencies accruing between 1930 and June, 1934, or to enter into the oral “agreement.” The 1917 contract provided for written notice as a condition to its termination by either party. The only statute in force in 1934 empowering the commissioner to make any modification of mining contracts was Rem. Rev. Stat., § 7797-195 [P.P.C. § 940-75], which authorized him to recall any lease, contract, or deed “for the purpose of correcting mistakes or errors, or supplying omissions.” Other statutes then in force provided that a new mining contract with the lessee could be made by the land commissioner only by means of a writing, in substantially a prescribed form; and, particularly, that he must provide therein for the payment to the state
“ . . . of a royalty of not less than one per cent, nor more than four per cent of all moneys received from the sale of minerals from the lands covered by the contract, after deducting therefrom the cost of transporting the ore or minerals from the mine or mines to market, or to any smelter, concentrating plant or other place of treatment, and the cost of treatment. . . . ” Rem. Rev. Stat., §§ 7797-161, 7797-162 [P.P.C. §§ 940-291, 940-293].
While the commissioner did have the implied authority to make a reasonable administrative determination of the meaning of “transportation and treatment,” as applied to the Moss operation, there is nothing in the record to show that the commissioner did so; and there is, on the other hand, strong circumstantial evidence that no such determination was ever made by the department of public lands.
The second conclusion by the trial court, numbered (2) above, was that the state was appearing in its proprietary, as distinguished from its governmental, capacity; and that, *26 for reasons of equitable estoppel, the state cannot now deny the oral promise of the commissioner. Respondents now make the same contention.
We consider it incorrect to say that, for purposes of applying the doctrine of equitable estoppel, the state will, in this case, “receive the same consideration its most humble citizen would receive.” The state of Washington, in its ownership of granted school lands, holds and disposes of them in its governmental, as distinguished from its proprietary, capacity. Soundview Pulp Co. v. Taylor, 21 Wn. (2d) 261, 150 P. (2d) 839 (overruled on another point in Case v. Bowles, 327 U. S. 92, 90 L. Ed. (Adv. Op.) 398, 66 S. Ct. 438). See state constitution, Art. IX, §§ 1, 3; Art. XVI, §§ 2, 3; amendment 1 (Art. XVI, § 5).
Proceeding upon this principle, we may nevertheless concede, arguendo, that estoppel may, in exceptional cases, be asserted against the state even when it has acted in other than a “proprietary” capacity.
We will further concede that the doctrine of estoppel may properly extend to an assurance or promise relating to the future. See I Restatement of the Law, Contracts, § 90; Fried v. Fisher, 328 Pa. 497, 196 Atl. 39, 115 A. L. R. 147, and extensive annotation at p. 152; 31 C. J. S. 289 et seq., Estoppel, § 80.
However, despite these concessions, three reasons induce us to hold against the trial court’s second conclusion: (1) estoppel may not be asserted to enforce a promise which is contrary to statute and to the policy thereof; (2) estoppel may not be asserted to enforce the promise of one who had no authority to enter into that undertaking on behalf of the state; and (3) the evidence does not present such a case of injustice as requires application of the doctrine of estoppel.
We shall consider each of these three propositions in turn.
First, as to proposition (1), it is the general rule that a contract which is contrary to the terms and policy of an express legislative enactment is illegal and unenforcible. 6 Williston on Contracts 5021, § 1768; see 2 Restatement of the Law, Contracts, § 580.
*27 . We can draw no other inference from Rem. Rev. Stat., § 8025, or its successor, § 7797-162, than that the commissioner of public lands must, in every contract for mining, require for the state a royalty of a fixed percentage, between one and four per cent, of the lessee’s gross receipts from the sale of minerals from state land, after deduction of costs of transportation and treatment.
Furthermore, we can draw no other inference from Rem. Rev. Stat., § 8024, or its successor, § 7797-161, and from § 7797-195, than that neither the commissioner nor the lessee can lawfully modify the terms of a contract for mining, once entered into, except in accordance with the terms of that contract, unless it be to correct errors therein.
We think it was the policy of the legislature to withdraw from any discretion on the part of the commissioner these important particulars of the statutory contract for mining.
It follows, from what we have said, that the promise or “agreement” of 1934 was not authorized by our statutes then in force, and was indeed contrary to the policy of those legislative enactments, and, hence, was illegal.
The contract being illegal, the respondents may not invoke the doctrine of estoppel to enforce it. As this court said in Reed v. Johnson, 27 Wash. 42, 67 Pac. 381, 57 L. R. A. 404:
“The nonenforcement of illegal contracts is a matter of common public interest, and a party to such contract cannot waive his right to set up the defense of illegality in an action thereon by the other party. ... it becomes the duty of the court to refuse to entertain the action. . . . The appellants are not estopped to raise the illegality of the contract because of their course of dealing with respondents under the contract. Validity cannot he given to an illegal contract through any principle of estoppel.” (Italics ours.)
Accord: McCutcheon v. Merz Capsule Co., (C.C.A. 6th) 71 Fed. 787, 31 L. R. A. 415; Red Rover Copper Co. v. Industrial Comm., 58 Ariz. 203, 118 P. (2d) 1102; Commissioner of Banks v. Cosmopolitan Trust Co., 253 Mass. 205, *28 148 N. E. 609, 41 A. L. R. 658; Southern R. Co. v. Lewis & Adcock Co., 139 Tenn. 37, 201 S. W. 131, L. R. A. 1918C, 976.
“And, of course, a party cannot be estopped to deny the formation of a contract which would be invalid as against public policy or in violation of statute.” 1 Williston on Contracts 314, § 98.
“Accordingly, one cannot ordinarily be estopped to assert the direct violation of a decisive prohibition of statute or the unenforceability of a contract contrary to law.” 19 Am. Jur. 638, Estoppel, § 39.
“Where the contract is void as against public policy or against an express mandate of the law, a person who has accepted a benefit thereunder will not be estopped to defend against the contract when it is sought to be enforced against him.” 31 C. J. S. 352, Estoppel, § 110a.
“The doctrine of estoppel will not be applied ... to frustrate the purpose of [laws of the Federal or a state government] or thwart its public policy.” 31 C. J. S. 412, Estoppel, § 140b.
This rule is particularly applicable to public contracts. State v. Pullman, 23 Wash. 583, 63 Pac. 265, 83 Am. St. 836; Brougham v. Seattle, 194 Wash. 1, 76 P. (2d) 1013.
Second, as to proposition (2), relating to the promise of one who had no legal authority to enter into the particular undertaking: The doctrine of estoppel cannot be invoked to enforce the promise of an officer or agent against a corporation or government, if such representative person had no legal capacity or power to enter into such an obligation. State ex rel. Nat. Bank of Tacoma v. Tacoma, 97 Wash. 190, 166 Pac. 66; State ex rel. Hubbard v. Seattle, 135 Wash. 505, 238 Pac. 1; State ex rel. Department of Finance, Budget & Business v. Thurston County, 6 Wn. (2d) 633, 108 P. (2d) 828; Strand v. State, 16 Wn. (2d) 107, 119, 132 P. (2d) 1011, 1017; 19 Am. Jur. 644, Estoppel, § 45.
“A state cannot be estopped by the unauthorized acts or representations of its officers.” 19 Am. Jur. 818, Estoppel, § 166.
In a case similar to the one before us, this court aptly remarked:
*29 “Nor are the acts of the former commissioner in any sense an estoppel. An officer of the state can, under certain circumstances, condone past offenses against the law, but he cannot grant indulgences to commit new or continuing offenses.” State ex rel. Fishback v. Globe Casket & Undertaking Co., 82 Wash. 124, 143 Pac. 878, 1915B, L. R. A. 976.
This rule may sometimes work harshly, but we do not think that such is the case here. Not only did Garber, manager for Northwest, have constructive notice of the statutory limitations upon the authority of the public officer with whom he dealt, but also there is every indication from the evidence that he had actual knowledge of the legal impediments to a change in the terms of the 1917 contract.
Third, as to proposition (3), relating to proof of the elements of estoppel: We are satisfied, from the record in this case, that respondents have not established grounds of estoppel, in any event not to the extent that it is clearly necessary to invoke the doctrine in order to prevent manifest injustice.
It is not essential, for this purpose, to distinguish between the requirements of promissory estoppel, as defined by 1 Restatement of the Law, Contracts, § 90, referred to above, and the requirements of equitable estoppel as defined in Carruthers v. Whitney, 56 Wash. 327, 105 Pac. 831, 134 Am. St. 1114, as follows:
“The well-understood idea of equitable estoppel is that, where a person wrongfully or negligently by his acts or representations causes another who has a right to rely upon such acts or representations to change his condition for the worse, the party making such representations shall not be allowed to plead their falsity for his own advantage.”
In either case, the representation or promise must be relied upon by the party asserting estoppel, and that reliance must have induced action or forbearance of a definite and substantial nature, or, as was stated in the Carruthers case, supra, he must “change his condition for the worse,” so that it would be unjust for the other party to repudiate the representation or promise.
The questions of fact which we shall consider, upon this issue, are (a) whether Northwest did rely upon the 1934 *30 promise, and (b) whether Northwest was unconscionably injured by the action it took thereafter.
Upon the first question, designated as (a), it will be recalled that, according to Mr. Bell’s report, offered as evidence by the respondents, royalties in 1934 amounted to about twelve cents per ton, or only about .007 of the price received by Northwest for its magnesite, and that Bell estimated that Northwest would have to pay four cents more per ton if royalties were computed without deducting mining costs. The alleged concession in 1934 was, in short, a negligible economic factor in Northwest’s determination to develop the Moss claim rather than the Keystone property. This is borne out by Mr. Sargent’s testimony that he understood that the operation of the Moss claim was preferred to that of Keystone because of the geographical convenience of Moss; and, while Mr. Garber testified that he would have recommended development of the Keystone property if the oral promise of Commissioner Martin had not been made, he also testified that “we received permission to go ahead and develop the Moss property instead of the Keystone, due to geographical location.” It is significant that this suppositional recommendation was the only “action” taken by any officer of respondents having knowledge of the promise.
We find no evidence that Northwest intended to abandon the Moss claim. Mr. Garber never communicated the fact of an agreement to the Pittsburgh office, where royalty returns were prepared, and no material change was ever made in the method of calculating royalties. Our doubt that Northwest at any time relied upon the commissioner’s promise in 1934 is fortified by the fact that this so-called agreement was not pleaded by the respondents in answer to the state’s complaint.
Upon the second question of fact, designated above as (b), we will say that, quite apart from the question of reliance, there is no evidence that Northwest was injured by developing the Moss property. The substantial development work which Northwest contemplated in 1934 was necessary if the Moss claim was to be operated. Admittedly, *31 the admixture of Moss and Finch ores was beneficial to the state, but, according to the Bell report, it was also a favorable arrangement for Northwest. Mining costs and waste may have been higher than at other properties, but it appears, indirectly, from the evidence that during the 1930-1943 period Northwest made a profit from operation of the Moss claim in excess of $2,100,000. There is no “unconscionable injury.”
Lastly, and contrary to the trial court’s implication, mere payment of moneys as royalties cannot work an estoppel against the lessor. See Bellingham Securities Syndicate v. Bellingham Coal Mines, 13 Wn. (2d) 370, 125 P. (2d) 668.
Enough has been said to indicate our view that respondents have not proved any “clear necessity” or “manifest injustice” in this case. For the several reasons herein-before stated, we hold that the state is not estopped to deny the authority of the land commissioner to make the verbal assurance given to Mr. Garber in 1934, and that the trial court erred in giving judgment on the basis of the oral “agreement” of that year.
As a result of this conclusion, we are now required to ascertain the true measure of respondents’ liability under the 1917 contract for mining, of which Northwest is the assignee, and under which it assumes the right to extract magnesite ore from the Moss claim. More exactly, the immediate problem for judicial decision is the meaning of the formula
“. . . four per cent of all moneys received from the sale of all minerals from said lands covered by this contract, and lease, after deducting therefrom the cost of transportation and treatment.”
as applied to Northwest’s operation of the Moss quarry. The two phrases in dispute are italicized above. As the arguments concerning them are unrelated, we may conveniently separate them in the discussion.
The appellant state asserts that “moneys received” means, in this case, the twenty-two dollars per ton, f.o.b. Chewelah, received by the parent corporations, Harbison-Walker and *32 General, from the sale of magnesite to other consumers, rather than the seventeen dollars per ton, f.o.b. Chewelah, received by the domestic subsidiary, Northwest, from those two concerns.
One contention is that “moneys received,” as used in the statute and contract, is equivalent to “ultimate market price.” With that argument we may at once say we disagree. It is the lessee who undertakes to pay a percentage of moneys received from the sale of the mineral, and, in the absence of any qualifying words, it seems plain that the statute and contract refer to the lessee’s sale and the moneys received by it.' The evidence in this case corroborates our conclusion, for it indicates that the normal sale of ore is to a smelter, and that royalties are customarily paid on the basis of smelter returns, or “moneys received” by the mine operator. The state did not offer evidence at the trial, nor did it adduce authority in argument, for its proposition that the legislature intended, by the language “moneys received,” to mean moneys received by the ultimate marketer.
The more difficult question is whether the corporate relations of respondents render the actual price received by Northwest a paper figure which the state need not accept for' purposes of royalties.
It has heretofore been shown that all sales by Northwest are made to, or through, Harbison-Walker and General, and that those corporations own and actively control Northwest; further, that, between 1928 and the time of trial, including the period when Moss ore was quarried, the price allowed by those corporations to Northwest was seventeen dollars a ton, a price which remained static during depression and war boom. These circumstances alone would ordinarily excite suspicion.
Other evidence, however, points away from abuse of Northwest’s corporate identity, so far as price received is concerned. The exhibits show that the market price of magnesite likewise remained comparatively static, at first, presumably, because the protective tariff provided an assured market at a price just below the cost of importation, *33 and, later, because of a price ceiling imposed by the Federal office of price administration.
The state failed to prove any combination between Harbison-Walker and General, or that they enjoyed a United States monopoly from which it might appear that they were responsible for the static market price.
Furthermore, the state did not allege that the price allowed to Northwest was unreasonable, and two facts in evidence tend to prove it was not unreasonable: First, it appears that Northwest pays all of its own expenses and has managed to earn a substantial profit; and, second, the terms of the 1918 marketing agreement between Northwest and Harbison-Walker, then independent concerns, indicate that the percentage of ultimate market price now returned to Northwest is not disproportionate to that which it received while it was independent.
Other facts are significant in this context. It appears that .the state’s royalty is only a small part of the production cost of Moss ore; that Moss output is a comparatively minor part of Northwest’s output; and that Northwest is a small enterprise in comparison with the businesses of HarbisonWalker and General. Thus the royalty obligation has only a remote bearing upon the conduct of Northwest’s business, and particularly upon the determination by HarbisonWalker and General of the price to be allowed Northwest for its deadburned grain 'magnesite. In this connection, it is significant to us that the price of seventeen dollars was set long prior to Northwest’s decision to work the Moss claim, and that there was no change in price after that decision was made and carried out.
Hence, while we might look with some suspicion upon the artificial price provided in the circumstances, we find no evidence of abuse of Northwest’s corporate identity for the purpose of minimizing royalties. Counsel for the state must have reached the same conclusion, for in their reply brief they say:
“Let it be plainly understood that the state does not claim that there was anything wrong with the corporate arrangements or corporate structures of respondents.”
*34 We conclude that the evidence preponderates in favor of the trial court’s decision that the price which Northwest received from its parent corporations should be accepted for purposes of calculating the amount of royalties presently owing to the state.
The second phrase, “cost of transportation and treatment,” as contained in the royalty formula, is likewise attendant with some difficulty of interpretation. We can narrow our consideration to a few concrete questions, however, because of substantial concessions made by both parties to this controversy.
The items here in dispute are, roughly, those incurred at the ore site, including costs of exploratory diamond drilling, surface stripping, and extensions of tunnel, ore passes, and tram facilities, blasting, separation of usable ore, and incidental expense prorated to those operations. Our present problem is to determine, in each instance, whether the operation is treatment, within the meaning, of the statute and the contract drawn pursuant thereto.
Generally, we find that “treatment” is a very broad term. Mr. Frank Sether, an experienced official of the department of public lands, testified that employees of the department had never been able to agree upon a satisfactory definition of the term. Mr. Sargent, the expert witness for respondents, testified that:
“Treatment is that process by which a mineral or ore is placed in proper chemical and physical condition to be of marketable value.”
A bulletin of the United States bureau of mines is quoted by counsel to this effect: “Treatment” means reduction of ores by any process whereby the valuable constituent is recovered.
One other statement, taken from a reliable authority, will illustrate the generality of the usage of the term. In 15 Encyclopaedia Britannica (1946) 311, Metallurgy, subdivision “Ore Treatment,” it is said:
“Where Metallurgy Begins.—Beginning with the quarry or mine, it is difficult to determine precisely where the *35 province of mining ends, and that of metallurgy begins.
“. . . In mining operations efforts are made to separate the mineral as much as possible from the adjacent valueless rock or ‘gangue,’ but usually the separation is very incomplete until special processes are applied to the product. These separating or ‘ore dressing’ processes depend on differences of properties between the mineral and the gangue.” (p. 311)
“In ore treatment the primary object is concentration. The metal occurs in the product of the mine frequently in a widely dispersed or ‘diluted’ form and it is essential to reduce the weight and bulk of the material to the lowest possible amount.” (p. 312)
The question then arises as to what are these physical and chemical processes by which ore is concentrated or reduced. Mr. A. F. Taggart, Professor of Mineral Dressing, School of Mines, Columbia University, published in 1945 an elaborate and careful work, styled Handbook of Mineral Dressing, in which, at p. 1-01, § 1, he says:
“Mineral dressing is the art of treating the crude crust of the earth to produce therefrom the primary-consumer derivatives. The essential operation in all such processes is separation of one or more valuable desired constituents of the crude from the undesired contaminants with which it occurs associated. Mineral dressing has three principal branches, viz: Ore Dressing, which comprises the methods of separation of solid inorganic crudes by means which do not effect substantial chemical change; Extractive Metallurgy, which utilizes chemical reaction for separation of the constituents of solid inorganic crudes; and Fuel Technology. . . .
“Mineral dressing is to be looked upon primarily as a manufacturing process for which the raw material is the crude, and the finished product is that derivative thereof which best supplies the demand of the primary consumer.
“Definitions. A Crude is any mixture of minerals in the form in which it occurs as a part of the earth’s crust. An Ore is a solid crude containing a valuable constituent in such amounts as to constitute a promise of possible profit in extraction, treatment, and sale. The valuable constituent of an ore is ordinarily called Valuable Mineral, or often just Mineral; . . . The valuable product of the *36 ore-dressing treatment is called Concentrate; the discarded waste is Tailing.”
Corroborative of this statement is the following explanation of ore dressing, found in Ricketts, Mining Law, 33:
“When the miner hoists his ore to the surface, . . . the valuable mineral is always associated with minerals of no value. The province of the ore dresser is to separate the ‘values’ from the waste; . . . The province of the metallurgist is to extract the pure metal from the concentrates by chemical means with or without the aid of heat.”
It further appears that hand sorting or picking is an established procedure of ore dressing. R. H. Richardson, Ore Dressing, vol. 1, chapter 13.
We infer from these sources of information, and from the definitions previously quoted, that “treatment,” generally, is distinct from extraction of ore from the earth, but includes at least a part of the general operation of mineral dressing.
We turn now to the particular case before us. As to the initial operations of exploration and development, there is no question; they fit neither the witness Sargent’s definition nor that indicated by the authorities just cited. Mr. Sargent testified that stripping overburden from the ore lens was development. Later, however, he said it was transportation or mining, “Probably would be both, I should say,” but it is plain that, at that point, he was confused as to accounting classification. We think the trial court erred in allowing Northwest to deduct costs of development as part of “transportation and treatment.”
As to the expense of blasting, reblasting, and ore and waste handling at the quarry, we likewise have little doubt that it is not a part of the cost of transportation and treatment, but is rather a cost of mining, exploitation, or extraction. Mr. Sargent did testify that blasting was treatment, or “a type of treatment,” because it was selective; but he conceded that, generally, separation of mineral from, the earth was mining, and certainly his first statement was inconsistent with his definition of treatment.
*37 While we have arrived at these conclusions after an independent analysis of the evidence and thé reference matter cited, we may add that it is our recollection that counsel for respondents conceded at the most recent argument that, from a legal standpoint, these operations were not treatment.
The remaining item, an important one, is the cost of cobbing, or breaking chunks of commingled dolomite, quartz, and magnesite, and sorting ore suitable for further processing. This cobbing was originally done by hand, with hammers, and the sorting was likewise by hand. Later, pneumatic drills were put to use to assist in the breaking process. Still later, a froth flotation mill was constructed to accomplish the sorting mechanically. At the time of trial, a heavy media mill was being installed, so that the ore, passing through crushers and then through the heavy media, would be mechanically cobbed and sorted, and the original hand labor entirely eliminated. There is apparently no contention that the cost of these mechanical operations is not a cost of “treatment,” but the state contends that the cost of cobbing and sorting by hand is a cost of “mining.”
Whether this cobbing and sorting, as conducted at the Moss quarry, constituted parts of a mining operation where “efforts are made to separate the mineral as much as possible from the adjacent valueless rock,” as mentioned in Encyclopaedia Britannica, and as expressly distinguished from treatment in Costigan on Mining Law, 107, § 30 (c), or whether it is ore dressing, by which the values are separated from waste, as defined by Mr. Rickets, and as such should be considered a part of the general operation of treatment, is a question which we do not consider ourselves competent to answer without literal recourse to the rules of judicial procedure.
On this point, Mr. Sargent’s testimony was clear and convincing. He testified that “mucking,” as Northwest termed the operation, was “entirely treatment”; that “cobbing is not related to mining.” His statement is supported by the *38 afore-quoted Handbook of Mineral Dressing, at 3-61, Magnesite:
“Treatment. Careful cobbing and sorting are necessary at most mines. Frequently 2 tons are rejected out of 3 tons mined, yet mechanical concentration was not attempted commercially until 1940. Froth flotation is feasible for some ores . . . and sink-float for others.”
The state offered no evidence to the contrary. On the face of the record, then, the preponderance of the evidence was against the state’s contention that Northwest was liable for royalties on money expended for “mucking,” and we must therefore sustain the holding of the trial court in favor of respondents on that item.
The character of incidental expenses prorated by Mr. Stickney, the accountant, and Mr. Stivers to these several operations is determined by our decision as to the items just considered, and no separate discussion is necessary as to them.
Thus we have fully disposed of the first assignment of error. Upon this assignment, we affirm the trial court’s judgment in so far as it requires royalties to be computed on the basis of the price received by Northwest and permits Northwest to deduct the cost of cobbing and sorting as “treatment,” before computing royalties. We overrule the trial court’s judgment, however, in so far as it is predicated upon the oral promise of the commissioner of public lands and permits Northwest to deduct, as “costs of transportation and treatment,” the expense of exploration, development, and ore extraction, before computing royalties.
Other questions yet remain for consideration.
Appellant complains that the court erred in refusing it interest on sums found owing by respondents. It takes the position that the additional royalties due from Northwest are a liquidated debt. With this contention we do not agree.
There was an honest dispute between the parties to the contract as to the meaning of the terms “moneys received” and “transportation and treatment,” so that even an approximate measure of liability could not be ascertained by *39 the lessee until that dispute was adjudicated. Neither the judgment of the trial court nor the measure of delinquent royalties arrived at by this court represents a debt which might have been determined without resort to compromise or else to a lawsuit. In these circumstances, the state has no claim upon the respondents for interest accruing prior to judgment. Wright v. Tacoma, 87 Wash. 334, 151 Pac. 837; Fowler v. Gray, 141 Wash. 372, 251 Pac. 570; Ferber v. Wisen, 195 Wash. 603, 82 P. (2d) 139; Fiorito v. Goerig, 27 Wn. (2d) 615, 179 P. (2d) 316. See 40 C. J. 1027, 1028, Mines and Minerals, § 633.
Appellant also contends that the court erred in denying costs to it. The basis for this contention is found in the attorney general’s argument that this was an action on a contract, for a definite sum due, which we infer is equivalent to a contention that this is an action at law. See Rem. Rev. Stat, §476 [P.P.C. §22-3].
Thé trial court held, however, that this was an equitable action for an accounting of royalties alleged to be due and unpaid, a decision emphasized by the omission from the record of any formal findings of fact. The state did not appeal from that determination, but that fact is not material now, for we are agreed that this complex accounting was an appropriate remedy to be invoked in a court of equity. In such event, costs were within the discretion of the trial court, and we see no abuse of that discretion in its determination to deny both parties to this action any recovery of costs. Rem. Rev. Stat., § 493 [P.P.C. § 22-37]; Weiffenbach v. Puget Sound Bridge & Dredging Co., 108 Wash. 455, 184 Pac. 321; Hirsch v. Consolidated Films Corp., 134 Wash. 682, 236 Pac. 279; Spencer v. Patton, 179 Wash. 50, 35 P. (2d) 768; Sibbald v. Chehalis Sav. & Loan Ass’n, 6 Wn. (2d) 203, 107 P. (2d) 333.
It is next argued that the trial court erred in refusing to grant the state’s motion for reconsideration or for a new trial, at the supplemental hearing in September, 1944, and, closely connected with that assignment of error, that the court erred in refusing to admit certain evidence offered at that time.
*40 The only reasons proffered for a new trial were (1) a statement made by the special assistant attorney general, who appeared at the second hearing, that he was dissatisfied with the record and that he “would try this case altogether different,” and (2) the following offers of evidence: The state offered additional correspondence from the files of the department of public lands which tended to show that negotiations between Commissioner Martin and Mr. Garber extended later into 1934 than was shown at the trial, but which otherwise related to events subsequent to the Stickney investigation, and the testimony of former Commissioner Martin that he was never informed of the deductions being taken by Northwest, and only tacitly consented, in 1934, to permit that company to continue remittances on the original basis “subject to audit.”
Counsel for Northwest objected to the offer and to the motion, pointing out that the evidence offered would reopen issues before the court at the original trial in 1943 arid not relevant to the matter of an accounting in accordance with the terms of the memorandum opinion. The court sustained the objection on the ground that the offer was in effect a motion for a new trial, and that there was no showing of diligence or explanation why the evidence was not introduced at the trial in 1943. Upon consideration of these matters, we are convinced that no adequate grounds were presented to justify either the admission of the evidence or a new trial.
The remaining question is whether the trial court correctly disposed of the case against the respondents Harbison-Walker and General.
The trial court ordered that
“. . . the purported service of summons heretofore attempted to be made upon the said [respondents HarbisonWalker and General] be and the same is hereby quashed, set aside and held for naught, and that the within cause of action be, and the same is hereby dismissed with prejudice as to the said [respondents].” (Italics ours.)
The requirements for service of process upon a foreign corporation are that it be “doing business within *41 this state,” and that service be made upon its “agent, cashier or secretary.” Rem. Rev. Stat., § 226 [P.P.C. § 2-13] (9).
As a basis for jurisdiction over Harbison-Walker and General, appellant asserts that those two corporations are the actual operators under' the 1917 contract with the state, “except the actual mining which they do in Northwest’s name.” Further, it asserts that, since those two foreign corporations acquired Northwest’s capital stock in order to manage Northwest in the interests of their own businesses, they are “doing business” within this state, under the doctrine of Bankers Holding Corp. v. Maybury, 161 Wash. 681, 297 Pac. 740, 75 A. L. R. 1237.
We cannot agree with either assertion. The principle upon which we proceed is that a corporation exists as an organization distinct from the personality of its shareholders. This separate organization, with its distinctive privileges and liabilities, is a legal fact, and not a fiction to be disregarded when convenient. The concentration of its ownership in the hands of one or two principal shareholders does not, ipso jure, dispel those corporate characteristics of the organization. For these reasons, it is the general rule that a foreign corporation which holds a controlling interest in a subsidiary corporation doing business within a particular state is not thereby subject to service of process through service upon an agent of the subsidiary within that state. Cannon Mfg. Co. v. Cudahy Packing Co., 267 U. S. 333, 69 L. Ed. 634, and footnote added thereto supporting the court’s conclusion, 45 S. Ct. 250; Hazeltine Corp. v. General Electric Co., (D. C. Md.) 19 F. Supp. 898; Annotation, 75 A. L. R. 1242; Ballantine, Separate Entity of Parent and Subsidiary Corporations, 14 Cal. L. Rev. 12; Cf. case note, 30 Mich. L. Rev. 464.
The exceptions to the rule, based upon the facts in individual cases, are not easily summarized into a set formula for ready reference. A clear case for ignoring the corporate form of the subsidiary, for purposes of serving process, is set forth in State ex rel. New York Oil Co. v. Superior Court, 143 Wash. 641, 255 Pac. 1030. That case and many others discussed by the authorities mentioned *42 above, confirm the conclusion reached by Professor Ballantine, with which we agree, that whether the courts will disregard the corporate form is ultimately a question of whether there is good faith and honesty in the use of corporate privilege for legitimate ends. See Sommer v. Yakima Motor Coach Co., 174 Wash. 638, 26 P. (2d) 92; McCurdy v. Spokane Western Power & Traction Co., 174 Wash. 470, 24 P. (2d) 1075.
In the evidence before us there is no intimation of dishonesty or bad faith on the part of the two foreign corporations in relation to the management of Northwest, or in relation to the subject matter of this litigation.
As regards the Bankers Holding Corp. case, supra, we deem it not controlling, inasmuch as (1) neither of the foreign corporations appears to have been organized for the particular purpose of acquiring controlling interests in concerns such as Northwest, and (2) Rem. Rev. Stat., § 3810, on which that case was founded, and under which HarbisonWalker and General might at one time have been considered as doing business within this state because they owned the capital stock of Northwest, has been expressly repealed. Laws of 1939, chapter 143, p. 438, § 19 (Rem. Rev. Stat. (Sup.), § 3803-62a [P.P.C. §441-27]). Under chapter 185, Laws of 1933, p. 779, § 12 (Rem. Rev. Stat. (Sup.), § 3803-12 [P.P.C. § 441-21]), a corporation is permitted to acquire and hold shares of stock of any other corporation.
Under our view of the law, determined by the facts in this case, Harbison-Walker and General were not doing business in this state, and proper service of process was not made upon them.
However, we do not agree with the trial court that the order dismissing those respondents should be with prejudice to the state’s cause of action against them. The court having been without jurisdiction over those parties, by reason of lack of proper service upon them or of general appearance by them, it had no power to pass upon the merits of the state’s case as against those parties.
It now remains only for us to summarize our conclusions. The first of appellant’s assignments of error, relating to the *43 controlling effect of the original Allen contract and lease, is well taken; liability of the respondent Northwest is properly predicated upon the terms of its written contract, and Northwest is not entitled thereunder to deduct from gross revenues the costs of exploration, development, and quarrying, but is entitled to deduct costs of cobbing and sorting; nor may it deduct from such gross revenues incidental expense prorated to those activities (other than cobbing and sorting) in the Stickney report. Also, the fifth assignment of error, relating to the character of the order dismissing the two foreign corporations, is decided in favor of the appellant; the decree of the trial court dismissing the respondents Harbison-Walker and General should be. confined to quashing of service of process as against them, without prejudice to the right of the state to seek recovery from them in subsequent proceedings properly brought. ,
Accordingly, the judgment, or decree, is reversed, and the cause will be remanded with direction to the trial .court to conduct a further hearing to determine the additional sum due the state from Northwest, under the terms of this opinion, and thereupon enter a judgment or decree in accordance therewith. None of the parties will recover costs, on the appeal. . '
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Cite This Page — Counsel Stack
182 P.2d 643, 28 Wash. 2d 1, 1947 Wash. LEXIS 402, Counsel Stack Legal Research, https://law.counselstack.com/opinion/state-v-northwest-magnesite-co-wash-1947.