When negligence costs

Every month, hundreds of claims come to this desk. Some of them are phonies. And I know which ones. How do I know? Because my little man tells me . . . the little man in here [points to abdomen]. Every time one of these phonies comes along, it ties knots in my stomach. I can’t eat.

— Edward G. Robinson as the skeptical insurance investigator Barton Keyes in Double Indemnity.

Liability insurers with little men in their stomachs, not to mention mining consultants, may have found their appetites waning after a Nevada court delivered a US$157-million judgment against consultants Kvaerner U.S. But there are useful lessons to be drawn from the case. One of them is “do your job well.” Another is “tell the truth, no matter how much it hurts.”

The basics of the case go like this: an Australian company, Equatorial Mining, had taken an option on the Tonopah copper project from property owner Cyprus Amax. Equatorial’s option depended on its being presented with a positive, bankable feasibility study. Kvaerner produced a positive feasibility study, and Equatorial acquired the project from Cyprus Amax. Kvaerner was engaged under an engineering, procurement and construction contract to build the mine, leach pads, and a solvent-extraction and electrowinning plant.

After that, very little went right. The plant produced at only a fraction of its design capacity. Recoveries, predicted at eighty to eighty-five per cent by the feasibility study, were sometimes as low as thirty-seven per cent. Equatorial closed the mine in 2001.

The courts found Kvaerner liable for professional negligence in the construction of the operation, and for negligent misrepresentation and fraudulent concealment in the feasibility study. Equatorial got a judgment for US$136.9 million, all it had asked for. (A further US$20 million covers costs and interest.)

Judging by an award of US$24 million to Kinross Gold and Bema Gold over the Refugio gold mill in Chile and one of A$42 million to Anaconda Nickel over the Murrin Murrin nickel plant in Western Australia (both of which were made in arbitration actions against units of Fluor Corporation), consulting engineering would appear to be a dangerous game.

People put up capital for projects and have a right to expect that if they hire someone to give them advice, the advice will be adequate. Balanced against that, professional advice on matters of observational science and technical design can’t hope to be perfect.

The courts have generally seen that the line to tread is that of “reasonable and prudent practice.” The trial judgment in this case said Kvaerner had strayed a long way from that line, even so far as misrepresentation and concealment. Kvaerner, which says it will appeal the decision, has defended its work as “professional and proper,” which certainly amounts to a denial of any misrepresentation.

To put a charitable interpretation on the judgment, Kvaerner should have been much more thorough, particularly in its testing of the Tonopah mineralization. The most negative interpretation is that Kvaerner wanted the work badly enough that it was ready to fudge on the feasibility of the project. If that’s true, then Kvaerner has much to answer for.

The court agreed with Equatorial’s evidence that it had relied on Kvaerner’s feasibility projections when locking in sales of its production. Juniors like Equatorial usually enter into hedge contracts at the behest of their lenders. It appears that Equatorial was genuinely stuck with locking in prices, but then the assumptions on which both the company and its lenders would have concluded it was prudent to hedge weren’t for real. Technical failures don’t just waste construction budgets: they can have ramifications for how a company handles its finances too.

That underscores the importance of getting these things right, and especially for consulting firms to stiffen their spines when they have to tell clients bad news. (Of course that’s not going to help if a consultant wants a job so badly he’s prepared to misrepresent something to get it.)

It remained for Mineweb’s Tim Wood, who has an eye for these things, to observe that anyone financing a project like Tonopah could afford some high-priced engineering help of its own to do a thorough pre-financing investigation — and should have. Lenders can’t escape the duty to look before they leap.

Still, piling review upon study in a game of quis custodiet ipsos custodes? is only going to make the consultants rich, not the shareholders. In the end, it’s the designer, not the reviewer, that has to stick by his work.

Considering the size of the jury award in comparison to the two arbitration awards, it would seem prudent for consultants to put a compulsory arbitration clause into any contract proposal. Plenty has been said about the willingness of juries, particularly U.S. juries, to deliver monster settlements in civil cases. If it begins to look as if the courts are a dangerous place to settle issues of technical or professional liability, the smartest thing to do is to keep those issues out of the courts.

That said, it is hard to argue with the judgment, which hews pretty closely to the kind of money Equatorial lost in building and operating the Tonopah mine.

Few came well out of Equatorial vs. Kvaerner, but twelve ordinary people look as if they did a good job.