QUEEN’S BENCH DIVISION
COMMERCIAL COURT
Strand, London, WC2A 2LL | ||
B e f o r e :
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(1) KENECOTT UTAH COPPER CORPORATION (2) KENNECOTT CORPORATION (3) THREE CROWN INSURANCE COMPANY LIMITED (4) THE RTZ CORPORATION PLC | Claimants | |
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(1) CORNHILL INSURANCE PLC (trading as ALLIANZ CORNHILL INTERNATIONAL) (2) SWISS REINSURANCE COMPANY (3) SAMPO INDUSTRIAL INSURANCE NV (formerly HANSA INDUSTRIAL INSURANCE NV) (4) NEW HAMPSHIRE INSURANCE COMPANY (5) CIGNA INSURANCE COMPANY OF EUROPE SA-NV (6) COMPAGNIE TRANSCONTINENTALE DE REASSURANCE SA (7) ABEILLE REASSURANCES (8) MUTUELLE CENTRALE DE REASSURANCE (9) COMPANHIA DE SEGUROS IMPERIO SA (trading as IMPERIO INSURANCE GROUP) (10) SCOR REINSURANCE COMPANY (11) THE MERCANTILE AND GENERAL INSURANCE COMPANY LIMITED (12) GJENSIDIGE SKADEFROSIKRING (13) MINET LIMITED | Defendants |
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Mr R. Ter Haar QC and Miss D. Taylor (instructed by Messrs Beachcroft Wansbroughs for the 1st to 12th Defendants)
Mr C. Edelman QC and Miss H. Davies (instructed by Messrs Barlow Lyde & Gilbert for the 13th Defendants)
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Crown Copyright ©
The Hon. Mr Justice Langley
INDEX Pages
Introduction 1
The Parties 1
The Issues 3
Dramatis Personae 6
The Bingham Canyon Mine 7
The Smelter 7
The Smelter Modernisation Project 9
The Insurance
The CAR Policy/Reinsurance 13
The Operational Policy/Reinsurance Contract 14
Chronology
1994 and the August Meeting 20
Early 1995 25
The Frisco Fax 34
April 28, 1995 37
The May Schedule and the London Market 48
The Overseas Market 52
Subsequent Events (May to September 1995) 55
Plant Performance 63
16th September to 25th October 66
The October Endorsement 67
25th October to 10th December 68
Events after 10th December 72
The Technical Experts 79
Minets Authority 85
Objects 87
The Wording Construction Issues
Property Exclusion 15 88
Clause 9 (b) 92
Perils Exclusion 12 93
The April 28 Oral Agreement Issues 94
The October Endorsement 98
The Issues 101
ANNEXE A The Reinsurers
ANNEXE B List of Issues
ANNEXE C Dramatis Personae
ANNEXE D Testing Provisions in the Smelter Modernisation Project Contracts
ANNEXE E the Frisco Fax
ANNEXE F the Information Note and the Baines Subjectivity
ANNEXE G The May Schedule
ANNEXE H The 22 June Endorsement
ANNEXE I The October Endorsement
ANNEXE J Monthly Reports of Plant Operations
Mr Justice Langley:
The issues to which this judgment relate concern the reinsurance of the First Claimant (KUCC) company’s copper mine and smelting and refining plant situated at Bingham Canyon, Magna, in the State of Utah in the United States of America. On 16th September 1995 the Flash Converter Furnace at the plant suffered an explosion or series of explosions. On 10th December 1995 the Acid Plant suffered major damage. Both the furnace (“the FCF”) and the Acid Plant were newly built as part of a Smelter Modernisation Project at Magna. The present estimated insurance claim, including a business interruption claim, arising from the two incidents exceeds US$ 200 million.
The Fourth Claimant (“RTZ”) is the holding company of the other three Claimants. The second Claimant (“Kennecott”) provides management services to KUCC. The Third Claimant (“TCI”) is a company incorporated in Bermuda. It is a “captive” insurance company insuring risks related to the business of companies within the RTZ group. KUCC and Kennecott made claims against TCI under the direct insurance in respect of the FCF and Acid Plant. It has been agreed between all the Claimants and the First to Twelfth Defendants (the Reinsurers) that the Claimants may act in concert in bringing the present claims under the reinsurance of TCI.
The First to Twelfth Defendants are insurance companies which for the year from May 1, 1995 provided reinsurance to TCI for the “operational” or “property” risks of RTZ which TCI insured world-wide. The expressions “operational” and “property” risks or policies are used in contrast to contractors or engineers all-risks policies (CAR or EAR). The Claimants had CAR cover for the Smelter Modernisation Project, but the period of cover had ended at the time of the two incidents.
The participations of the Defendant reinsurance companies in the reinsurance and the abbreviated names by which I shall refer to them in this judgment are set out in Annexe A. Allianz Cornhill were the leading reinsurers of the operational cover, but had no participation in the CAR cover. Swiss Re had the second largest line on the operational cover and also had a major participation on the CAR cover.
The Thirteenth Defendant company (“Minets”) were TCI’s reinsurance brokers in respect of the 1995/6 operational reinsurance. Minets were and had since 1992 been responsible also for placing TCI’s CAR reinsurance. Minets were appointed in July 1994 in succession to Alexander & Alexander (“A&A”) in America and Alexander Howden (“Howdens”) in Europe for the placing of the operational cover and the 1995/6 cover was the first operational cover broked by Minets for TCI.
On 3rd July 1998 Tuckey J ordered the trial of preliminary issues stated to be
all issues as to:
(1) the nature of the Reinsurance Contract and its terms;
(2) the attachment of the FCF and the Acid Plant to the Reinsurance Contract and the Operational Policy or cover in respect of those components, prior to and at the date of the incident relative to each (including any estoppel issues in relation to such attachment and/or cover);
(3) whether the reinsurers are entitled to avoid certain endorsements to the Reinsurance Contract for the reasons pleaded in (what is now) paragraph 43 of Re-Amended Points of Defence and Counterclaim and if so, the effect of such avoidance on the claimants’ claim in the action.
The effect of this Order is to exclude from this trial only causation and damage issues, together with direct consideration of the Claimants' alternative claim against Minets.
By an Order dated 28th April 1999 Rix J gave directions for the conduct of the trial of these issues. He directed that the reinsurers should open the hearing and call their witnesses first and that the “insurance” evidence be heard before the “technical” evidence about the FCF and Acid Plant. That was how the trial, which began on June 14 and ended on July 29, was conducted. On March 2 1999 Rix J had also ordered that a List of Issues be agreed by the parties. When the trial began that had not proved to be possible. By the time of closing submissions, albeit with some reservations on the part of Reinsurers that they were over-analytical, a List had been agreed for the purpose of the submissions. It is annexed to this judgment at Annexe B. By way of a general summary of the issues (which are more readily understood in the context of the history of events which follows) essentially the Reinsurers resist the claims under the reinsurance on the grounds that:
(1) the FCF and the Acid Plant had not at the time of the incidents “attached” to the operational policy by reason of the express terms of clause 9(b) and/or Property Exclusion 15 of the agreed wording; nor had they done so by any endorsements and/or because of an express oral agreement reached between Allianz Cornhill and Minet on April 28, 1995 as to the condition of the plant required before attachment, alternatively by reason of a “scratch” (the Baines subjectivity) put down by Allianz Cornhill on that day which it is said excluded cover until the FCF and Acid Plant had been "tested and commissioned".
(2) insofar as reinsurers did agree to accept the FCF and Acid Plant onto the reinsurance that agreement was induced by misrepresentation and/or non-disclosure.
(3) even if the FCF and Acid Plant did attach to the reinsurance contract the claims made are in any event excluded by reason of Perils Exclusion 12. Whilst this exclusion (unlike Property exclusion 15 which is agreed to be an "attachment" exclusion) raises only causation issues which are not for this trial its wording is material to an understanding of the issues with which the court is concerned.
The Claimants response is that:
(1) attachment was effected by reason of clause 9(b) and/or Property Exclusion 15 in the wording or by express agreement in an endorsement agreed in October 1995;
(2) there was no misrepresentation or non-disclosure or none that was material or which induced insurers to accept the risks, alternatively reinsurers affirmed the reinsurance with knowledge of the non-disclosure and misrepresentation alleged.
(3) the express oral agreement is denied but even if found to have been made or the Baines subjectivity had the effect alleged by Reinsurers then Minets acted outside the scope of their authority from TCI in making such an agreement;
(4) Perils Exclusion 12 does not apply.
The Claimants claim against Minets is contingent on failure of their claim against the Reinsurers. It is alleged that any such failure will be the consequence of Minets acting in excess of their authority and/or in breach of duty in failing to disclose to reinsurers the contents of a fax dated April 26th 1995 which has come to be known as “The Frisco Fax”. Minets deny these allegations.
It follows of course that the evidence has been concentrated in the two areas identified in the Order of Rix J, namely the history of the placing of the operational policy and the reinsurance and the history of the Smelter Modernisation Project with particular emphasis on the status of the FCF and the Acid Plant at the time of the incidents in the context of the proper construction of the wording and any oral agreements the court may find to have been made.
A dramatis personae is at Annexe C to this judgment. Those who play the more significant parts in the events concerned with the insurance and reinsurance are as follows.
TCI’s administrator was Mrs Margaret Turner. TCI also retained Mr Blaine Trunnell as a representative of the company. Mr Trunnell had been a senior broker at A&A and responsible for placing part of RTZ’s property programme in 1994. He left A&A in January 1995 to join Jardine. Allianz Cornhill’s property or operational underwriters were Mr Martin Baines assisted by Mr Graham Stewart. Swiss Re’s principal property or operational underwriter for 1995/6 was Mr Yvan Pignat (in succession to Mr Hans Zimmerman whom Mr Pignat had assisted on the previous year’s account). Swiss Re’s underwriter on the CAR policy was Mr Max Bommeli.
At Minet, the broker responsible for placing the property reinsurance was Mr Nick Murrell. Mr Murrell 's "boss" was Mr Webster. Mr Powell and Mr Warwick worked in Minets construction division, and dealt with the CAR policy. Mr Alford-Smith was the Minets Director in charge of the RTZ/TCI account.
The mine is situated about 20 miles west of Salt Lake City, Utah. The copper ore itself contains copper only in minute quantities. After mining the copper bearing minerals are separated from waste in a concentrator which by a process of crushing, the addition of water and chemicals, and air-blowing produces a concentrate containing about 30% copper and similar amounts of sulphur and iron which is then filtered to remove water and stockpiled.
The smelter refines the concentrate in a series of furnaces. The end product of the smelter is anode copper. The anode copper is itself further refined at a refinery to produce commercially marketable cathode copper.
The scale of the operation is vast. KUCC’s land holding is about 100,000 acres of which about 10,000 acres is actively mined. The concentrator is some miles from the smelter as is the mine itself. The refinery is about half a mile from the smelter.
Copper smelting involves two primary process steps, smelting to produce a copper sulphide known as “matte” and the production of copper metal from the matte by a process also called converting. Although there is some dispute about the degree to which the smelter complex built at Magna involved new and revolutionary rather than only new but evolutionary technology, in simple terms the process involved a Flash Smelting Furnace (FSF), the FCF, an Anode Plant and the Acid Plant, intended to operate as follows.
The FSF burns the filtered concentrate and oxidises most of the iron and about 60% of the sulphur contained in it. The furnace heats to about 13000 C during the process. The molten concentrate separates into two liquid phases, a slag containing most of the iron and other impurities, and matte which contains about 70% copper, 22% sulphur and 5% iron. The rest of the sulphur is oxidised to sulphur dioxide gas which must not be emitted to the atmosphere and is contained within the furnace. The slag is skimmed from the furnace and sent to a processing plant to recover any residual copper.
The matte is tapped from the FSF and quenched in high-pressure water sprays. The granulated matte is then separated from the water and stockpiled. It forms the feedstock to the FCF. Previous technology had required the molten matte to be transferred immediately as such between smelting and converting furnaces.
The granulated matte is dried and ground to a powder. The powdered matte, oxygen and a limestone flux are blown into the FCF. The FCF also operates at a temperature of about 13000 C. The iron and sulphur burn and what is called blister copper settles to the bottom of the furnace with the slag above it. Blister copper is typically about 98% copper. Again the sulphur dioxide produced is contained within the furnace. The blister copper is tapped into drains or launders which run to the anode plant. The slag is tapped into launders for recycling.
The Anode Plant removes residual sulphur by injecting air into the molten copper in furnaces. The molten copper is then de-oxidised and cast into anodes (720 pound plates) which are cooled and shipped to the refinery where they are further refined to produce commercially marketable cathode copper.
The primary purpose of the Acid Plant is to control sulphur dioxide emissions from the FSF and FCF to comply with State regulations, but it was also designed to produce high purity concentrated sulphuric acid as a valuable marketable by-product and to produce steam. Waste Heat boilers connected to the FSF and FCF cool the gases produced in the furnaces, which are dusted and scrubbed, combined and sent to the Acid Plant. The Acid Plant converts the sulphur dioxide to sulphur trioxide and sulphur trioxide to sulphuric acid. The heat engendered can be used to produce steam for electric power generation, together with the steam from the Waste Heat Boilers. The cleaned gas is sent to the Main Stack. The sulphuric acid is pumped to tanks to await shipment to customers.
The impetus for the development of the new plant came from a need to increase capacity and to reduce emissions from the existing plant. The process for the new plant was developed jointly by KUCC and a Finnish company Outokumpu Engineering Contractors Oy (“OEC”). In 1985 a joint development and licensing agreement was made between KUCC and OEC. Beginning in 1989 various engineering evaluations were carried out and in late 1991 the boards of both KUCC and RTZ authorised the modernisation project to proceed.
The project itself was the subject of a number of contracts. A Licence Agreement dated 24th March 1992 was made between KUCC and OEC under which KUCC was granted the right to exploit OEC’s design and know-how for use with the proposed FCF. In June 1992 KUCC entered into a contract with Fluor Daniel Inc representing a consortium of Fluor Daniel and Davy International (“FDD”) for the Engineering, Procurement and Construction Management of the project. In August 1992 KUCC entered into a contract with Monsanto Enviro-Chem Systems Inc (“Monsanto” or "Enviro-Chem") for the supply and erection of the Acid Plant. In September 1992 KUCC also entered into a Supply Agreement with OEC under which OEC agreed to supply the materials, furnace feeders and burners for the FCF. In June 1993 KUCC entered into a Supervision Services Agreement with a subsidiary of OEC (Kumpu Engineering) under which Kumpu was to supply a team of engineers and metallurgists to provide expertise and assistance to support pre-operational testing, start-up and initial operation of the FSF and FCF.
Rather than set them out in the body of this judgment, the material provisions of these contracts dealing with testing and acceptance of the plant are set out in Annexe D. The emphases are mine.
In summary, and as one would expect, the relevant items of plant were the subject of substantial contracts which set out testing, commissioning, acceptance and performance parameters and conditions in considerable detail. The Acid Plant differed from the FCF in that it was, to use Mr Ter Haar’s expression, closer to a turnkey contract under which Monsanto was responsible not only for construction but also had considerable responsibility for initial operation and performance tests. The Monsanto Contract envisaged that the system would be "commissioned" before it was started up but that performance tests would be carried out as soon as possible after initial operation had begun. In contrast, under the FCF contracts, FDD’s responsibility ended with what may loosely be called mechanical or construction completion and "commissioning" prior to start-up of the furnaces. Thereafter, the introduction of feed, operation and testing was the responsibility of KUCC and OEC and the contracts refer to "commissioning" and "performance tests during the commissioning period" following start-up. The contrast reflected the design responsibility for the Acid Plant and the FCF. The “green tag” procedure was the mark, as regards the FCF, for when responsibility moved from FDD to KUCC/OEC.
Although in the case of both the FCF and the Acid Plant the various performance tests provided for differ in their language and to some extent their substance they do have in common the requirement for tests over a sustained time period (72 hours) and generally to 100% of design capacity.
Construction of the project began in late 1993 and was completed by about April 1995. In the summer of 1994 pre-operational testing began. The engineering experts are agreed that mechanical and pre-operational testing of the Acid Plant had been completed by May 31 1995 and that it had been handed over by Monsanto to KUCC and start-up had commenced by that date. It is also agreed that mechanical and pre-operational testing of the FCF had been carried out by July 2, 1995 when start-up of the FCF commenced, and that at least by September 16, 1995 the FCF had been handed over to KUCC by both FDD and OEC.
Neither the Acid Plant nor the FCF had undergone the contractual performance tests at the dates they suffered the damage which is the subject of the insurance claim. As I have said, at the heart of the issues is whether either plant had achieved a status at those dates which satisfied the attachment provisions of the insurance wording or any oral agreement the court may find proved.
(A) THE CAR POLICY/REINSURANCE
The Builders All Risks (CAR) cover for the Smelter Modernisation Project was the subject of a Policy dated 5th October 1993 agreed between Kennecott and TCI. The sum insured was some US $ 880 million. The provisional premium was $ 2.25 million. Cover was for a period of 34 months from 1st November 1992 to 1st September 1995 or completion of the Project including testing and commissioning (to be known as the Construction Period) and a further 12 months warranty period thereafter. The testing and commissioning period was stated to be 4 months but it was also provided that extensions of both periods would be held covered:
i) In respect of the Construction up to 6 additional months at 0.075% per month on relevant contract value.
ii) In respect of Testing/Commissioning up to 3 additional months at 0.2% per month on relevant contract value.
Cover was for physical loss of or damage to works or materials used in the Project. There was no cover for business interruption losses (“BI”) or advance loss of profits (AOP). As is apparent from the premium rates for extensions of the cover the risks arising from testing and commissioning were perceived to be greater and so more highly rated than those arising in respect of construction itself. There was an exception to the cover (Exception 6) which provided that :
The Insurer shall not provide indemnity ... for
(6) Any part or Section of the project when taken over or put into operational use other than any operational testing or commissioning insured hereon.
Minet placed the reinsurance of TCI for the above cover. Swiss Re had the largest line signed as 25.47%. Other companies which had lines on the CAR reinsurance and which are also Defendants with lines on the operational reinsurance are Scor (18.52%) Cigna (9.26%) CTR (1.85%) and Abeille (1.39%).
(B) THE OPERATIONAL POLICY/REINSURANCE CONTRACT
The TCI Policy is dated 28th September 1995. It covered both property damage and business interruption. The Sum Insured was some $4.468 billion. The term was 12 months from 1st May 1995. The annual premium was $4,452,985. It covered RTZ’s property world-wide.
The wording provided (so far as material) that :
SECTION 1 - MATERIAL LOSS OR DAMAGE.
1. THE INDEMNITY.
In the event of any loss, destruction or damage ... not otherwise excluded happening ... to the Property Insured ... the Insurer will, subject to the provisions of this policy ... indemnify the Insured ....
THE PROPERTY INSURED
All Real and Personal Property except as hereinafter excluded, above and below ground belonging to the Insured or for which the Insured is responsible or has assumed responsibility to insure prior to the occurrence of any damage, all as per the schedule of values agreed by the Insurer....
2. BOILER AND MACHINERY EXTENSION
INSURED EVENT
Subject to all terms stated herein and in the Policy, Boiler and Machinery coverage is provided for an Accident to an Object (as defined hereafter) whilst the said Object is in use or is ready for use.
ACCIDENT
For the purposes of this Policy, Accident shall be defined as the sudden and accidental occurrence to the Object, or part thereof, which results in damage to the Object and necessitates repair or replacement of the Object or part thereof.
OBJECT
For the purposes of this Policy, Object shall be defined as any boiler, fired or unfired pressure vessel, refrigerating or air conditioning system, piping and accessory equipment, furnace, or any electrical or mechanical machine or apparatus used for the generation, transmission or utilisation of mechanical or electrical power at any specified location.
The “Memoranda to Section 1” included as Clause 9(b) under the general title “New Acquisitions/Divestments” :
(b) Automatic Inclusions
Subject otherwise to the terms and conditions of the policy, this insurance automatically extends to include the interests and property of acquisition or addition (including newly constructed and/or erected property and the like, which has been completed and handed over to the Insured as Owner and/or Principal under any capital, maintenance and/or similar project) determined by the Insured to be included under this policy without additional premium subject to the Total Asset and Interruption values of each such acquisition not exceeding US $ 100,000,000. In the event of such values exceeding the amount set forth above, or the nature of the acquisition falling outside the scope of normal activities of the Insured, details of such acquisition are to be provided to the Insurer as soon as reasonably practicable after such inclusion for the determination of reasonable additional premiums, to be agreed with the Insured, payable for the balance of the Period of Insurance and the Insured hereby undertake to pay such premium to the Insurer on demand.
Coverage hereunder automatically commences when the Insured first acquires an insurable interest therein .... Any additional premium will be calculated on a pro-rata basis for the period (but not pro-rata rates) unless otherwise agreed.
SECTION 2 - CONSEQUENTIAL LOSS
DEFINITIONS
....
THE INDEMNITY
In the event of any loss, destruction or damage to property insured under Section 1 of the Policy ... by any peril not otherwise excluded hereunder . ... and the Business carried on by the Insured being in consequence thereof interrupted or interfered with, the Insurer will subject to the terms ... of the Policy ... pay to the Insured the amount of loss resulting from such interruption or interference....
EXCLUSIONS - ALL SECTIONS
PROPERTY EXCLUSIONS
ITEMS 1-14 INCLUSIVE ARE APPLICABLE TO SECTION 1-1 ONLY.
Notwithstanding that the property may be listed in the schedule of values this Policy does not cover loss, destruction of, or damage to the following property or loss under Section 2 resulting therefrom:-
1 ....
15 Boiler and Machinery Property (Applicable to Section 1.2 only).
....
any Object before it has been installed and completely tested at a specified location (“completely tested shall mean that the Object has operated at the said location in the capacity for which it was designed as part of the normal process);
....
PERILS EXCLUSIONS
ITEMS 1-11 INCLUSIVE ARE APPLICABLE TO SECTION 1-1 ONLY.
The Insurer shall not be liable ... in respect of :
12 Boiler and Machinery Perils (applicable to Section 1.2 only)
....
breakdown or loss caused by testing or commissioning of new plant or equipment not officially handed over to a specified location;
....
CONDITIONS APPLICABLE TO ALL SECTIONS
1. ALTERATIONS, MISDESCRIPTIONS AND MISREPRESENTATION.
Misrepresentation, misdescription or non-disclosure in any material particular shall render voidable the particular item or section of the policy, as the case may be, affected by such misrepresentation, misdescription or non-disclosure ... but this insurance shall not be invalidated by
(a) inadvertent misdescription or non-disclosure in any material particular.
....
It is the Operational Policy under which the Claimants seek an Indemnity. They do so under both Section 1.1 and 1.2 as well as Section 2.
The clauses which underlie the issues are:
Clause 9(b). The Automatic Inclusions Clause, which provides for the automatic inclusion in the cover of newly constructed and erected property which “has been completed and handed over”.
Property Exclusion 15 (applicable only to Section 1.2) providing that any Object is excluded from the cover under Section 1.2 “before it has been installed and completely tested” and defining “completely tested” as “the object has operated at the said location in the capacity for which it was designed as part of the normal process”.
Perils Exclusion 12 (also applicable only to Section 1.2) which excludes from the cover under Section 1.2 “loss caused by testing or commissioning of new plant or equipment not officially handed over to a specified location”.
It is obvious from a short summary of these provisions that the relationship between Section 1.1 and Section 1.2 and the varying expressions used such as “completed and handed over” “operated in the capacity for which it was designed as part of the normal process” and “testing or commissioning of new plant not officially handed over” are capable of giving rise to uncertainty as to whether new plant or a loss is covered or excluded from cover. Hence these proceedings and the issues to which they give rise.
Notwithstanding the pleadings and some submissions to the contrary during the course of the hearing, at the conclusion of the hearing there was some measure of agreement about the operation of the key clauses and there are, I think, some points which should be set out here.
(1) Clause 9(b), by its terms ("after such inclusion") provides for the automatic inclusion in the cover of newly constructed property (if the insured so determines) even where the value of the property exceeds $100m, subject only to determination of a reasonable additional premium. Property covered from inception would of course be subject to the agreed policy rates.
(2) Despite the fact that the cover provided by Section 1.1 does not contain an express exclusion for "Objects" which are the subject of the cover provided by Section 1.2, both Miss Dohmann and Mr Edelman accept (entirely rightly in my judgment) that if an item is an Object within Section 1.2 to attach to the cover it must satisfy the provisions applicable to that Section, in particular Property Exclusion 15, or it will not be covered at all even if, as might be argued, it could attach to Section 1.1 by the operation of Clause 9(b) alone. The effect is therefore the same as if "Objects" were excluded from Section 1.1. The practical consequence of this concession is that the FCF and important parts of the Acid Plant which it is accepted are "Objects" must, if they were to attach under the wording, have been installed and completely tested (as defined) by September 16, 1995 and December 10, 1995 respectively. That indeed, as all parties accept, is very much the most important issue before the court.
(3) It did appear at the time the parties opened their cases that Miss Dohmann was in any event prepared to concede "for practical purposes" that the essential meaning of Clause 9(b) and Property Exclusion 15 was the same and therefore that it did not matter whether Section 1.1 or Section 1.2 provided cover as the qualifying provisions were to the same effect. However in her closing speech Miss Dohmann made it clear that the "concession" only applied if the court agreed with the Claimants' submissions on the construction and application of Property Exclusion 15. If not, it remains the Claimants' case that those parts of the Acid Plant said not to be "Objects" attached under Clause 9(b) regardless of whether or not the remainder of the Plant attached by reason of the operation of Property Exclusion 15. I would only comment at this stage that it would be a surprising conclusion that a different substantive test of attachment applied to different parts of what was designed and built as a single plant.
(4) Perils Exclusion 12, whilst not an attachment exclusion but a causation exclusion, also applies only to Section 1.2 and not Section 1.1. There is therefore no attachment exclusion which uses the language of testing or commissioning, nor any exclusion in those terms applicable to the cover provided for by Section 1.1
The Reinsurance of TCI was the subject of a Slip stamped by Mr Stewart for Allianz Cornhill on 4th April 1995 and by the other Defendants between that date and 5th May. The reinsurance and insurance were intended to be “back to back”. The slip provided that the reinsurance was “subject to all terms, clauses and conditions as original”.
In seeking to summarise the material events I also propose to set out the material facts as I find them to be. It is necessary to do so at some length not only because it is important to consider the alleged oral agreement in the context of events both prior and subsequent to April 28 1995, the day on which it is said to have been made, and to consider the status of the plant at the time the damage occurred, but also because all the parties rely to some extent on the background as material to the construction of the policy wording.
1994 AND THE AUGUST MEETING
In May 1994 RTZ and Minets were discussing how Minets could replace Howdens as brokers and one of the perceived advantages was that Minets could “review the interface” between the operational insurance programme (placed by Howdens) and the existing (and future) CAR programme (already placed by Minets ). By June 1994 RTZ had decided that Minets would take over the placing of the operational cover. Minets were delighted.
In August Minets (Messrs Alford-Smith and Webster) visited Salt Lake City to meet representatives of RTZ and KUCC. The purpose of the meeting was “to review such matters as transfer of completed works relative to the new smelter and refinery from the [CAR] policy to the operational policy.” The meeting was held on August 18 and Mr Webster prepared a typed note of the discussions. That note records that Minets were told that “the official handover date for all of the major components of the project” had been brought forward from June 15 to April 7, 1995. Minets were also told that the work had been broken down into 186 individual “turnover packages” of which 13 were described as "Commissioning Packages and as such have the characteristic of requiring the introduction of feedstock before true commissioning can be deemed to be concluded”.
The note continues:
It has to be noted further that the Kennecott commissioning philosophy is somewhat different from that to be expected on other Construction Projects, in as much that their defined commissioning period begins with handing over of the facilities from the contractor to Kennecott Project Management, and ends with these same facilities being ready for operations, i.e. with the introduction of the designed feedstock. It could be that alternative feedstocks are fed through the facilities for the purposes of commissioning, but it was clearly stated that this would not include the actual design feedstock. In other words whilst the plant may have been commissioned in terms of the Project, it has not been commissioned in the normal defined manner of a CAR policy. A great deal of discussion and questioning took place during this explanation and the Project Manager (Mr Adcock) agreed to provide Minets with a copy of the written project commissioning procedure in order that our understanding is absolutely accurate, and in order to allow us to explain this to the CAR Underwriters.
This meeting and note is an early illustration of the problems both of definition and of understanding the contractual and factual position in relation to the Project. Minets were alive to the difficulties and sought the necessary information to address them. In a fax to Kennecott dated August 25 Mr Alford-Smith referred to Kennecott’s decision that “the final overall plant commissioning” starting on 7th April 1995 “was not to be covered under the CAR policy" and said it was necessary to ask the question whether “the operational insurance coverage will be expected to pick up the business interruption risk relating to the final testing and commissioning work (bearing in mind that this would normally have been protected as part of the construction policy coverage and the mine had specifically declined to purchase advance loss of profits insurance protection)?"
The fax continued:
If the answer is affirmative and the operational policy is expected to provide loss of profits insurance protection then I do believe that would be a material fact for the operational insurers consideration and on receipt of your instructions I will advise TCI and the catastrophe insurers and will negotiate the most competitive terms possible.
This fax was copied to Mr Webster. It is hard to imagine how the issues in these proceedings could have arisen had Mr Alford-Smith’s question and answer been pursued rigorously. The fax also flags another significant factor which underlies these proceedings. The sooner the project was covered under the operational policy the sooner KUCC would have business interruption cover. But it is usual for such cover during testing and commissioning to be provided as part of a CAR or EAR cover (albeit KUCC had expressly decided not to buy it) and most unusual for it to be provided under an operational policy. The reason is obvious and substantially unchallenged. The risk of damage to plant and thus of a business interruption claim is perceived to be much greater during a testing and commissioning period than during normal and established operations. Rates for testing and commissioning cover are significantly higher than for operational or property cover. Hence, no doubt, Mr Alford-Smith’s reference to the need to disclose to operational underwriters that they were (if they were) being asked to underwrite the business interruption risk in respect of “the final testing and commissioning work” so that rates could be agreed.
Neither Mr Alford-Smith nor Mr Webster gave evidence.
By a fax to Kennecott copied to Minets dated August 26, RTZ’s Risk Management Adviser (Mr Saunders) stated that it was “not worth taking the chance” of trying a “testing/commissioning claim” on operational underwriters and therefore “Kennecott should stand by their decision and accept the business interruption risk until the facility is in a regular operating mode.” It is in a real sense the case of the reinsurers that the present claims represent an attempt by the Claimants to do just what Mr Saunders said was not worth chancing. Mr Saunders fax also demonstrates that he was aware that there was a different market for such risks.
On October 11, Kennecott by Mr Batchelor, in a letter copied to Mr Young and Mr Done, informed Mr Alford-Smith that there had been “a misunderstanding” about the issue of testing and commissioning and that he would “need to ensure the underwriters concerned are aware that this exposure is to be covered under the construction program as originally envisaged”.
Minets and Kennecott's concerns to ensure continuity of cover led them in December 1994 to approach Mr Bommeli of Swiss Re to “investigate extending the smelter and refinery CAR placement to cover the whole of the works up to the point where the last item is completed and the project in its entirety is handed over, i.e. giving completed works cover within the existing CAR cover”. The reason given for this approach was that “with a contract of this size and complexity, where the work is split into a large number of packages, it is not always possible for the insured to monitor exactly when items are taken into use, and thus transferable to the operational policy.” Mr Bommeli was prepared to consider and quoted for this cover but Minets on instructions did not pursue it.
In about December 1994 the existing operational insurance cover was extended from expiry on December 31, 1994 to expiry on May 1, 1995.
During 1995 the question arose of transferring the copper refinery (where anodes were refined to produce cathode copper) from the CAR policy to the operational policy. It seems to have been in this context that a meeting was held between Kennecott and Minets (Messrs Powell and Warwick of Minets Construction Division) on January 20. A note of the meeting was copied to Mr Alford-Smith and Mr Webster.
The note records Kennecott wanting a “completely fresh approach" to their insurance and that they did not wish to cover “ the operational exposures of this project, when items are taken into use, under the builders risks policy. Instead when items are taken into use they will be transferred over to the operational policy.” The main reason for this decision was said to be that Kennecott would then have automatic business interruption cover on the items which they did not have under the CAR cover. Mr Powell was asked for and gave an explanation of the existing cover for commissioning saying (rightly) that it was covered under the CAR cover. The note then records:
Following the ... explanation Ken (Done) advised that Kennecott had misunderstood the basis of when an item of plant is transferred onto the operational cover. Under their contract as soon as an item is mechanically complete it is handed over by the contractor to Kennecott for 'operations', i.e. commissioning/hot testing. It is this point that has confused Kennecott as they understood this to be when an item is transferred onto the operational cover. [Mr Powell] explained that the commissioning/hot testing was covered under the builders risk policy. Also the operational policy would not normally accept items until they had been tested up to 100% of their design capacity.
Again, this note demonstrates that the problem which underlies these proceedings was recognised both within Minets and Kennecott. It also demonstrates an understanding within Minets (and in particular by Mr Powell) communicated to Kennecott that "an operational policy would not normally accept items until they had been tested up to 100% of their design capacity". Mr Webster's understanding to the same effect is illustrated by a fax he sent to Mrs Turner of TCI on January 24.
Mr Webster informed Mrs Turner in the fax that Minets had been proceeding with their London/European markets to place an endorsement which was intended to agree the inclusion of the copper refinery in the operational cover at an estimated value of $ 150 million but which had stated as information for underwriters that the works were "fully commissioned to Design Specification, and no outstanding material 'Punch List items' remain."
He continued that Minets
are now led to believe that the Refinery should initially be valued at US $ 130m, that in fact it became operational during the last quarter of 1994, and has not in fact been commissioned and hot tested to full design specification but only to approximately 85% since 100% commissioning can only be achieved when the new Smelter comes on stream.
From the attached endorsement you will see that there is a substantial conflict with the information previously provided.
Mr Webster explained that the existing operational policy leader (Kemper) wanted details of the commissioning/hot testing carried out and almost certainly an explanation as to the 85% and not 100%, adding that the question would be whether the shortfall of 15% would go to the "integrity of the facility as a whole or is only a routine capacity issue" and that he could imagine such a difference "could be highly material" if it related to the new Smelter but he was optimistic it might not be so with the refinery.
The attachment of the copper refinery to the existing operational policy was the subject of a revised endorsement signed by Mr Zimmerman and Mr Pignat for Swiss Re on February 21. Mr Zimmerman wrote on the endorsement (which simply stated the revised value of $ 130m) the words "testing and commissioning to be excluded". On January 27 Mr Baines' deputy at Allianz Cornhill had stamped the previous endorsement which had stated that the works were fully commissioned to Design Specifications and no material "Punch List Items" remained.
On February 15, Minets (Mr Webster) had met Mr Done, Mr Young and Mr Trunnell in San Francisco. Mr Webster's note of the meeting records "much discussion" of "the perceived problems relating to the 'commissioning' of the new Smelter" which in Mr Done's view "would be phased commissioning over many months and might never reach 100% of design capacity" as described by Mr Webster and Mr Young. The note records eventual agreement that "the best we could do" was for Minet to obtain a copy of the commissioning procedures "and attempt to have these approved by operational insurers despite their apparent shortcomings".
What the documents at this time do suggest, however, is that there remained a possibility of misunderstanding as to what the "commissioning procedures" were and in particular the extent to which and nature of any "performance tests" they might involve. There is a note from Mr Trunnell to Mr Done dated February 22 with handwritten comments on it which flags up the difference between "KUCC performance tests" and "contractual performance tests". The latter of course required exactly what Minets were saying that operational underwriters would require. A note from Mr Webster to Mr Powell dated March 7 shows that he was expecting handovers to the operational cover to be dependant upon underwriters approving information which would include a "summary of hot testing procedures" and "final performance testing".
By a fax dated March 22 Mr Webster pressed Kennecott, via Mr Trunnell, to provide the agreed information "in order to simplify and agree in advance with underwriters the addition of the new Smelter, thus minimising the problems experienced with the addition of the new Copper Refinery". It was, of course, becoming urgent as the existing operational cover was to expire on 1st May.
On March 23, distributed internally within Kennecott and KUCC and to Mr Young and Mr Trunnell, Mr Done wrote a Memorandum on the subject of the Smelter Insurance Handover. It is significant because its contents are to a large extent later reflected in the "Frisco Fax". It included the following :
(1) Based upon guidance received from our insurance brokers, underwriters generally will accept a component of a large construction project as being in operation upon completion of a performance test (which terminates the suppliers responsibility for the component) and the obtainment of production rates which approximate design or planned production levels.
(2) A list of the "twelve main components" of the smelter with an estimated value and "Estimated Operational/Handover Date" for each of them and the comment that if approved this information would be provided to underwriters "with the commitment to keep underwriters informed of actual values and operating dates upon completion and acceptance by the project team of a satisfactory performance test at a reasonable production rate."
Mr Webster continued to press for information. By fax dated March 28 to Mrs Turner he told her under the heading "Kennecott Commissioning" that reinsurers requirements included a "narrative" showing "details of actual testing and commissioning to be carried out" and "a brief description and date of the Performance Testing i.e. what was done and when." He added, presciently :
Margaret, whilst we agree that these facilities should be added to the operational policy after completion of a successful Performance Test this is only the last step in the total procedures and underwriters are more interested in the testing/commissioning than the Performance Testing which has the effect of releasing the Contractors! I quickly discussed this with [Mr Young] and we are both in agreement, and also that this was what we believed was agreed last night with [Mr Trunnell]. It does also occur to me that we may not all be using terms with the same meaning. Both [Mr Young] and I envisage that the testing and commissioning is the penultimate stage before final Performance Testing. In many ways the Performance Testing is more important to the release of the contractors."
However in the course of a telephone conversation on March 28, reflected in a second fax that day from Mr Webster to Mrs Turner, Mr Webster agreed with Mr Trunnell and Mr Young that whilst desirable it was not essential to have details of actual testing and commissioning procedures and performance testing and the priority was to have a summary of the commissioning of any items already handed over and operating. "An alternative solution" could be found thereafter for what was described as "the major items".
Mr Done's March 23 Memorandum was amended in one significant respect in another form bearing the same date. The passage which I have set out and numbered (1) above had a further sentence added to it which read :
Due to the ramp up of production rates during 1995 we will seek to transfer the components upon completion of the performance test and not wait until production rates approximate design production level."
Although a number of the witness statements from underwriters stated that they were not aware that the Smelter Modernisation Project involved new technology or that the items of plant were to operate in an integrated manner it was at the end of March that, on the evidence, Minets provided them with "a book of underwriting information" in respect of the renewal of the operational policy. Whilst it is no great surprise that they did not read or focus upon all the information contained in what was indeed "a book" the fact is that the information did contain both these matters. It also included a draft of the core or TCI policy wording.
On April 4 Mr Stewart of Allianz Cornhill stamped the operational reinsurance slip. It was presented to him by Mr Murrell. The wording had not then been agreed. Mr Murrell, both on his evidence and the documents, had played no significant part in the matter for Minets before this time. Allianz Cornhill were delighted to be leaders of what was seen to be a prestigious insurance. They had had a line on the 1994/5 policy behind Kemper as leader and Mr Baines had been asked to lead the 1995/6 policy in about February 1995.
Also on April 4, Mr Trunnell informed Mrs Turner that "Kennecott continues to work on the description of the performance test".
Dated April 7 there is a further version of Mr Done's Memorandum which contained a further change to the quoted passage so that the last sentence read :
Due to the ramp up of production rates during 1995, underwriters have indicated that they will accept the transfer of the components upon completion of the performance test and will not require us to wait until production rates approximate design production levels.
There is no evidence nor is it contended that any relevant underwriters had agreed as stated. The reference to "the performance test" remained as "a satisfactory performance test at a reasonable production rate".
On April 7 Mr Webster and Mr Murrell visited Mr Zimmerman and Mr Pignat in Zurich to discuss the renewal. Mr Zimmerman wrote to Minets on April 11 to confirm that Swiss Re would write a line of 20%, stated that Swiss Re wanted to inspect the key locations, made some comments on the wording and that (as was usual for Swiss Re) it would be a condition that :
Swiss Re to be treated equally as leader and to be offered most preferential terms /conditions.
On the same day Mr Zimmerman and Mr Pignat signed the slip subject to this condition or "subjectivity".
On April 13 Mr Trunnell sent a fax to Mrs Turner, copied to Mr Webster, stating that "project management had sent numerous performance test procedures" but they were not identical to the components previously discussed and so he and Mr Done had decided that rather than presenting "an incomplete or confusing picture" it might be best to have the project management discuss the matter with Mr Powell who was due to visit Magna on April 25 and Mr Powell could carry the documentation back to London and "assist [Mr Webster] as needed."
Mr Webster sent a copy of this fax to Mr Powell and sought a discussion with him before he left for America. Mr Webster's expressed concern in a note to Mr Powell was again that there was a "language problem" as regards "performance test procedures" and "commissioning".
It had also been arranged, at Swiss Re's request, that Mr Bommeli should participate in the visit by Minets to Magna. Mr Zimmerman and Mr Pignat were aware of the visit and although Mr Bommeli was immediately concerned with the CAR cover his role on the visit was to "clarify issues with regard to the transition of part of [the Smelter Modernisation] project to the property programme."
The visit to the plant took place on April 25. KUCC was represented by Mr George (amongst others), Mr Young was present for RTZ, Mr Trunnell was also present as were Mr Powell and Mr Rastall of Minets. Mr Bommeli was the only underwriter present.
Mr Powell was staying at The Pan Pacific Hotel in San Francisco and he used the hotel's fax facilities on April 26 to send a number of handwritten faxes. Because of its importance the "Frisco fax" is copied as Annexe E to this judgment. It was sent to Mr Trunnell at Jardine's offices in San Francisco and to Mr Bommeli at a Hotel in New York. It was also sent to Messrs Warwick and Webster at Minets in London, where it arrived in the early hours of the morning of Thursday April 27. A note shows that a copy of it was passed to Mr Webster at 9.45 that morning. Mr Powell also sent to London for typing a draft letter to Mr George assuring him that Mr Young, Mr Trunnell, Kennecott's Insurance Department and Minets would ensure a "smooth/seamless transfer of the completed works from the Construction policy to the Operational policy." Attached to the draft was a schedule setting out a list of "components" of the plant, their estimated value, date "hot testing commenced" date "green-tagged" and a "comments" column. This schedule was the first draft of what came to be called the May Schedule. (See Annexe G). The Schedule was both more accurate and more detailed than the Frisco Fax. It was sent by Minets with the (by then) typed letter to Mr George on April 28 (see below).
The Frisco Fax was sent to Messrs Warwick and Webster "for action". It included the following :
(1) Mr Powell had obtained a "full understanding on the hand-over issue" and "needless to say" it had changed from the last "advizes" .
(2) The proposed action had been agreed with Mr Young, Mr Trunnell and Mr Bommeli.
(3) The sum insured on the CAR policy was to be reduced in stages effective at January 1, May 1 and June 30 with the CAR policy scheduled to lapse on the last date.
(4) In the only typed part of the fax (the last page) a schedule of 12 "components" with an "estimated value" and "estimated Operational/Handover Date." This was in fact the last page of Mr Done's March 23 Memorandum without either of the amendments subsequently made to it, thus it referred to "the obtainment of production rates which approximate design or planned production levels" and to "acceptance by the project team of a satisfactory performance test at a reasonable production rate," but not to ramp up or any indication from underwriters;
(5) The items numbered 1, 3, 7, 9, 10 and 11 on the schedule together with the Precious Metals Plant were to come off the CAR policy on May 1 despite the fact that they would "be taken into operational use" before then because that would "make life easier" on the property damage policy and Mr Bommeli had agreed to accept the operational exposures under the CAR policy.
(6) The FCF and Acid Plant were included in the items not to be handed over to the property policy until June 30 being items numbered 4 and 6.
(7) Items 1, 3, 7, 9, 10 and 11 and the Precious Metals Plant were to be included in the property policy sum insured with effect from May 1.
(8) Items 2, 4, 5, 6,8 and 12 were to be included in the property policy sum insured with effect from June 30 or date to be advised.
(9) "All items to be added at 1/5 (and 30/6 in due course) have been/will be successfully commissioned by Kennecott and put into operational use. We have samples of commissioning procedure/criteria and will pass to you next week" adding that Mr Powell suggested that Mr Webster should "proceed with broking this information and wait and see if Allianz, etc require the samples".
(10) "Please note that whilst individual items (where possible) have been tested to 100% performance the overall plant at 30/6/95 will be working at approx. 30% output and will not reach 100% output for a further 9 months. We have requested the build up output graph for Business Interruption purposes."
There also exists a Discussion Note prepared by Mr Bommeli of the meeting on April 25. The Note itself is dated May 17 and was copied to Mr Pignat. Mr Bommeli recorded that the project was ahead of schedule, various items were already in operation and the remainder under hot commissioning/testing and that the expectation was that all items would be transferred to the property programme by the end of June. Mr Bommeli attached to his Note a schedule of the 12 components of the smelter installation in similar terms to Mr Powell's schedule (Mr Bommeli said he checked its accuracy on the telephone with Mr Powell) showing dates "Hot Testing Commenced" and dates of actual or estimated "Green-Tagged". The expression "green-tagged" was recorded by Mr Bommeli to mean "each machine/component ... has been successfully tested and is cleaned and ready for commercial operation". That, it is agreed, was in fact an inaccurate understanding of the meaning.
Five days prior to his Note, on May 12, Mr Bommeli had spoken to Mr Pignat about Kennecott "to ensure that a clean transfer from the [CAR policy] to the property market is guaranteed" and to discuss briefly Mr Bommeli's risk inspection of the site. Mr Pignat's note of their discussion includes a note that:
Bommeli agrees that we take the various parts of the Kennecott risk into the property policy. He actually believes that Minet did a good job here. The client apparently wanted to transfer everything to the property insurer on 1/5/95 and not in various stages as proposed. In this way it is ensured that the client has no insurance 'gaps' because testing and commissioning is excluded from the property policy".
APRIL 28, 1995
There are significant and acute conflicts of evidence about the events of April 28, 1995. The documents show that:
(1) Mr Baines of Allianz Cornhill had a diary entry for a meeting with Mr Webster at 11 am that morning. The evidence is not in dispute that they did meet in the morning and Mr Baines stamped the wording. Mr Webster did not raise any of the matters in the Frisco Fax. Why not remains unexplained.
(2) Mr Webster drafted a number of letters dated April 28 to various of the London-based reinsurance underwriters, Swiss Re, Mr Trunnell, Mrs Turner and Mr Saunders enclosing the wording, "two endorsements and an advisory letter" which he said in the letter had been agreed with "the Contract Leader, the Allianz." On the evidence, these letters were all sent save the one addressed to Mrs Turner.
(3) Mr Webster wrote a hand-written note to Mr Murrell thanking him for all his help and saying:
Can you now do what needs to be done to tidy things up.
....
1. Copy wording attached.
2. Copy letters attached.
3. Original endorsements attached - to be agreed by balance of the market.
4. Advisory note attached - to be included in going - in values.
(4) It seems clear that the "copy wording" which was attached was the wording which had been agreed by Allianz Cornhill that morning. The "copy letters" referred to were probably those to which I have referred in (2). The "original endorsements" were an endorsement increasing certain indemnity periods for business interruption claims and an endorsement relating to some underground property neither of which is of any substantive importance to the issues. The "advisory note" or letter was what has come to be referred to as the Information Note a copy of which is at Annexe F to this judgment. The Information Note set out "the values to be increased as part of going in values to be agreed with Allianz" under two dates, May 1 and June 30 in the case of each date simply stating a lump sum "being" various items referred to by numbers running from 1-12. The Information Note was initialled by Mr Webster and dated April 28. It is, I think, of some significance that the Frisco Fax was neither referred to nor "attached" to this note from Mr Webster to Mr Murrell, nor was it an enclosure to the letters he drafted. Whether the note itself was sent before or after Mr Murrell's visit to Allianz Cornhill in the afternoon remains uncertain.
(5) Both the endorsements and the Information Note bear Allianz Cornhill's stamp, Mr Baines' initials and the date April 28. The Information Note also contains in Mr Baines' handwriting next to the stamp the words "Agreed subject to exclusion of testing and commissioning." I refer to these words as written as "the Baines subjectivity."
(6) Mrs Turner sent a TCI cover effective May 1 to Mr Done of Kennecott for the renewal of the property cover expressed to be subject to the terms of a new wording "to be issued".
(7) Mr Powell and Mr Rastall sent to Mr George (with copies to Mr Trunnell and Mr Bommeli) a fax enclosing what became the May Schedule (Annexe G) described as a "summary of the information relayed at" their meeting and asking Mr George to let them know if it was incorrect adding that its purpose was to provide "construction and property insurers with an overview/best estimate" and assuring him of "a smooth/seamless transfer of the completed works" from the CAR policy to the Operational policy. This was the final version of the draft sent to London by Mr Powell for typing with the Frisco Fax.
The other "fact" which is of some possible relevance and indisputable is that April 28 1995 was a Friday and Monday May 1 was a bank holiday in England. It was therefore important that the renewal of the property cover was agreed on April 28.
The circumstances in which Mr Baines came to stamp, initial and write the Baines subjectivity on the Information Note on April 28 are, as I have said, the subject of an acute conflict of evidence.
Mr Baines' account is to the effect that Mr Murrell brought the Information Note to him in the afternoon and he wrote the Baines subjectivity on it at his desk in the presence of both Mr Murrell and Mr Stewart, intending by doing so to ensure that the operational policy would not provide cover until all the property to attach was fully completed and operational. In answer to a question from Mr Murrell, Mr Baines says he explained this to him and said that what he meant was that the plant would have to have been performance tested to and working at 100% of its design capacity for a continuous period of a minimum of 72 hours referring in terms to forms used in the petrochemical industry to that effect. Mr Baines' evidence is also that he was not shown the Frisco Fax.
Mr Stewart's account is to much the same effect, namely that he was present at a meeting between Mr Baines and Mr Murrell in the afternoon at Mr Baines' desk. Mr Baines made it clear that he was not prepared to cover any testing and commissioning risk and that he expected the plant to have been operational at or near 100% for 72 hours before it would attach to the policy. He did not recall a reference to the petrochemical standard as such. Mr Stewart also says he was not shown the Frisco Fax.
Mr Murrell's account is to the effect that he went to Allianz Cornhill's offices in the afternoon with the Information Note, the two endorsements and the Frisco Fax. On arrival he saw Mr Stewart at Mr Stewart's desk. He showed Mr Stewart page 5 of the Frisco Fax (Annexe E: page marked 69 and G4/239) and thus the statement that at June 30 the plant would only be working at approximately 30% and would not reach 100% output for a further nine months. Mr Stewart had said that he did not have authority to sign off on the Information Note and had left Mr Murrell at his desk and gone to talk to Mr Baines. Mr Murrell had not seen Mr Baines write the Baines subjectivity but had discussed testing and commissioning with Mr Stewart on his return with it when he had referred him again to page 5 of the Frisco Fax and to the definition in Property Exclusion 15 of the policy wording. Apart from the possibility that he exchanged greetings with Mr Baines, Mr Murrell was certain that the only conversations of substance he had were with Mr Stewart.
In his evidence Mr Murrell (who had 13 years experience at the time) said that he had been "out of the loop" as regards the meetings and debates about the hand-over from the CAR policy to the operational policy and that he had never dealt with such a hand-over before. He readily accepted, however, that he knew operational and construction underwriters worked separately and that the former would not as a rule write testing and commissioning risks. He said that he did not realise the importance of the Frisco Fax at the time, but agreed that if it had been the intention to carry out performance tests after attachment underwriters should have been told and that he would not have made a fair presentation of the risk if he had not shown the Frisco Fax. He also said that from a conversation with Mr Webster prior to visiting Allianz Cornhill he believed that the plant was (or would be) fully tested and commissioned and the only reason for the reduced production of 30% of output was a lack of demand, and that, as must be probable and I accept, after his return to Minets he would have told Mr Webster about the Baines subjectivity.
Whilst I found each of the three witnesses to be both honest and genuinely seeking to give evidence in accordance with their recollection as they now perceived it to be I also found none of them wholly reliable or compelling and not just because they were seeking to remember the events of a few minutes (on the evidence about 10 minutes) which occurred over 4 years earlier but also because the relevance of those events to very considerable exposures had itself become more prominent and been subjected to considerable legal analysis only as time passed, such that the chances of persuading oneself first that something must have occurred and second that it in fact did so are high.
In particular, I found Mr Baines not only (as Mr Ter Haar described him) "somewhat taciturn" but a witness who on occasions expressed a confidence in what he was saying which I do not think he really felt. He was quite unable to explain how it was that his precise version of events had taken so long to emerge after the claim had arisen and in contexts (including discussions with Mr Quigley) in which it could have been expected to be referred to if indeed it was or could amount to a binding agreement not just about the need for testing and commissioning but as to how that was to be defined. The same specific criticism applies to Mr Stewart but I found him an impressive and straightforward witness, and of the three, the one who most sought to separate in his mind true recollection from reconstruction. He left the employment of Allianz in June 1997 and was first asked to make a statement only in the summer of 1998. Mr Murrell was, I think, rightly conscious of the fact that on his account he came to broking the matter ill-instructed and ill-prepared and that his recollection of events was not anywhere near as certain as the lawyers had come to present it to be.
Thus in my judgment:
(i) Mr Baines has persuaded himself that he actually agreed with Mr Murrell a definition of what he meant by his subjectivity and was driven to say that his scratch had to be different from the wording or he would not have written it. I do not think he did or that (as he really accepted) he was thinking in terms of the wording;
(ii) Mr Murrell has persuaded himself that the Baines subjectivity could only have been intended to "endorse" the existing wording which Mr Baines had agreed that morning and did not add to it or affect it in any way or otherwise he would have questioned it, and that he must have referred both to the terms of the wording and the Frisco Fax.
Nonetheless I am satisfied that the account given by Mr Baines and, in particular, Mr Stewart is more accurate than that given by Mr Murrell. My reasons are that:
(1) I do not think either Mr Baines or Mr Murrell (or Mr Stewart) had focused on the wording at the time of the meeting in any real detail, and certainly not in the context of attachment of the Smelter Modernisation Project.
(2) I do think that both Mr Baines and Mr Murrell expected that a property policy would not provide cover for testing and commissioning risks but only for fully "completed" and "operational" plants, and that Mr Baines was concerned to emphasise it.
(3) There can of course be no dispute that Mr Baines did write the Baines subjectivity on the Information Note. Mr Baines said he was surprised that it drew no reaction from Mr Murrell as brokers did not like underwriters adding conditions. Mr Murrell said that as it was not adding anything there was no need for comment. I think and find that in fact neither of them saw the subjectivity as a problem or concern because both believed it did no more than emphasise and reflect what was normal and, in Mr Murrell's case, what he had understood from Mr Webster was in any event the, or to be the, case. Of course it also means that neither of them saw the words as ones incapable of being given a sensible meaning.
(4) As to Mr Baines referring in terms to a criterion for "testing and commissioning" I do think it is probable that there was a conversation between Mr Baines and Mr Murrell and that some exchange took place about how the subjectivity was intended to operate. Plainly if it was to be discussed, as one would expect, Mr Baines would be the one with whom such discussion would be likely to occur. I also think and find that Mr Baines made reference to a test over 72 hours at 100% of design but that he did so in a manner which was not expressed in terms of defining, let alone expressly agreeing, the meaning of his subjectivity but as an illustration of the sort of thing he had in mind. Again I think both he and Mr Murrell were talking under the basic belief that there would be such provisions in both the contracts for the Smelter Modernisation Project and in the wording. I am satisfied neither of them referred to the wording as such and no mention was made of the Frisco Fax to Mr Baines at the time.
(5) I cannot accept Mr Murrell's evidence that he showed the Frisco Fax to Mr Stewart, let alone that he specifically drew page 5 of it to his attention, nor that he drew Mr Stewart's attention to the wording. I do not think Mr Stewart would have felt himself competent or authorised to discuss or deal with such matters without reference to Mr Baines and if the Fax had been shown I would have expected it to have been copied and retained by Allianz Cornhill at the time which, on the evidence, I find it was not. Nor can it be said that the contents of the Fax would have been seen as insignificant by Mr Stewart who, on any view of the evidence, was aware of the Baines subjectivity. The endorsements and the Information Note were both stamped and copied. It is true that the Information Note makes limited sense without the Frisco Fax as the "item nos" can only be identified to particular parts of the plant with the help of the last (typed) page of the Fax but I do not think either Mr Baines or Mr Stewart (or indeed Mr Murrell ) paid that degree of attention to the Note and the omission was made good when the May Schedule (which was more accurate than the Frisco Fax and being checked for presentation to underwriters at the time) was produced. Further had Mr Murrell referred to the Frisco Fax as he said he did I think he would have ensured that it too was stamped and initialled, and Mr Stewart said, and I accept, that he would in any event have stamped and copied it if it had been shown to him.
I would add that the terms of the Information Note ("values to be agreed with Allianz") and of the Baines subjectivity ("Agreed subject to ....") are wholly consistent with the evidence both of Mr Baines and Mr Murrell that what was being sought by Minets and agreed by Allianz Cornhill was the attachment or contingent attachment to the cover of the various items of the Smelter Modernisation Project. Mr Murrell believed agreement was necessary and that he got it subject to the Baines subjectivity. He did not think he was operating Clause 9(b) of the wording. By its terms the Baines subjectivity was expressed and understood to be an attachment condition and one which applied to all items regardless of whether they fell within Section 1.1 or Section 1.2 of the wording. Indeed it is a necessary concomitant of the Claimants' case that all that Mr Baines was doing was emphasising the wording, together with the fact that his subjectivity must have been intended to apply to Objects and non-objects alike, that Clause 9(b) and Property Exclusion 15 were to the same substantive effect. Hence, I suspect, the original inclination of Miss Dohmann to concede as much.
I find that:
(1) The substantive discussions took place between Mr Baines and Mr Murrell in the presence of Mr Stewart .
(2) Mr Baines wrote the subjectivity and explained to Mr Murrell that the sort of thing he had in mind was a test over 72 hours at 100% of design.
(3) Attachment of the items of plant was agreed but only once they had been "tested and commissioned".
(4) No reference was made either to the wording or to the Frisco Fax.
On May 2 Mrs Turner sent to Minets "the May Schedule" (Annexe G), which she had received from Mr Trunnell, saying that she needed confirmation from reinsurers that they had accepted and agreed the attachments to the operational policy as set out before she could confirm cover to Kennecott on behalf of TCI. That reflected the reality of the structure of the cover in that TCI would not commit itself as insurer before it was assured that cover was agreed by the Reinsurers. The Schedule itself gave dates for 12 "components" and the Precious Metals plant to "attach to operational policy" as either May 1 or June 30. It also contained a completed "comments" column which for certain items recorded "100% performance tested" by dates either past or yet to come (May 14) but for the FSF, FCF and Acid Plant recorded:
Agreed (at meeting April 25th) to cover under Builders Risk policy until June 30th - by which time should be an acceptable 'operational' risk to property insurers.
On May 3 the May Schedule was stamped on behalf of Allianz Cornhill by Mr Rothwell. He had had no previous dealings with the cover. He said he treated the Schedule simply as a piece of information to be read with the Information Note and he stamped it as an indication it had been seen and because neither Mr Baines nor Mr Stewart were in the office. He left a copy on Mr Stewart's desk and possibly also on Mr Baines' desk. He was told it was a housekeeping matter. Mr Murrell had brought it to Allianz Cornhill. Mr Murrell then sent a fax to Mrs Turner confirming that Allianz Cornhill as leading underwriter had agreed "the attachments" as had the following market in London and that he was awaiting confirmation from overseas but did not see any problems in their agreement.
As for the London market, on May 3, Sampo/Hansa had stamped (by Mr Johnson's colleague, Mr Carl Salt) "per leader" the Information Note and the May Schedule. Mr Johnson's evidence was that he did not see the Frisco Fax prior to the litigation and that he would not have been prepared to insure testing and commissioning risks, but only plant that was fully operational. Mr Carl Salt did not give evidence. Mr Bottomley's evidence was that he had met Mr Murrell some time in April 1995 to discuss participation by New Hampshire in the operational cover. He said Mr Murrell had told him that the plant was undergoing a testing period but that this would not be covered and Mr Bottomley had told Mr Murrell that, in accordance with New Hampshire's standard approach, he was not prepared to cover a testing and commissioning risk. Mr Murrell has no recollection of this conversation but I accept that it took place substantially as Mr Bottomley said. Mr Bottomley also believed that he did not receive the Frisco Fax until after the explosion at the FCF in September. It is right to record that in the course of cross-examination by Mr Edelman based upon the contents of the underwriting file, Mr Bottomley's confidence in his belief that he was not shown the Frisco Fax on May 3 when Mr Murrell visited him again was considerably shaken. Nonetheless on all his evidence I am satisfied that his original evidence and instincts confirmed in re-examination was right and it was not shown to him then by Mr Murrell or seen by him before he met Reinsurers' solicitors about a year before the trial began.
As set out above, Mr Webster had written to Mr Bottomley (and to Cigna) on April 28 attaching the "core wording", two endorsements and "an advisory letter" (the Information Note : Annexe F) stating that they had been agreed with Allianz Cornhill. He did not enclose the Frisco Fax. Mr Salt (of Cigna) also said that at no stage during the underwriting process was he shown the Frisco Fax. If he had he would have stamped it and asked questions about it. He signed the Slip on April 28 and the May Schedule on May 3. I accept his evidence.
Mr Murrell visited Mr Knowles of M&G on May 5 when Mr Knowles signed the slip for a 2% line. Mr Knowles' evidence was that he was shown the Information Note, with the Baines subjectivity, the two endorsements and the May Schedule and that he told Mr Murrell that M&G's participation was subject to the Baines subjectivity, which they discussed. He was left with the understanding that Allianz Cornhill were handling the matter and would only accept the items on to the policy if they were acceptable operational risks at June 30. Mr Knowles also said he was not shown the Frisco Fax. Indeed he said he had not seen it before it was shown to him by Reinsurers' solicitors. M&G, in contrast to the other London companies, was not provided with a copy of the wording. Mr Knowles was a thoughtful and impressive witness and I accept his evidence. All the underwriters (including those from overseas) expressed an understanding of testing in similar terms to that I have found Mr Baines expressed namely a test at or near 100% for a reasonably continuous period of time.
These events and findings are I think strongly supportive of my findings about the April 28 meeting and in particular my finding that the Frisco Fax was not shown to either Mr Baines or Mr Stewart. The key document and information was the May Schedule. It was that which Minets had sought to confirm with Kennecott and which, when confirmed, was presented to Allianz Cornhill for stamping. The information was not identical to that contained in the Frisco Fax and Minets had been concerned both to obtain correct information and to present it to underwriters. The terms of the May Schedule itself (Annexe G) are also consistent with the Baines subjectivity and recognition both that what was under consideration was attachment (not a perils exclusion) and that "100%" performance testing would be carried out on certain items and others would have to be "acceptable operational risks" to property insurers prior to attachment. Even if, which as a matter of language and context I think it does, the latter expression implies something less than "100%" testing might be acceptable it also plainly recognises that the criterion for attachment is that of property insurers (not, say the copper smelting industry, if that was different). It also, on the other hand, plainly establishes that various parts of the whole plant were to attach before others and thus that they were not all to be tested or run in an integrated manner.
On May 4 Mr Piper of Minets sent faxes to Mr Pignat of Swiss Re, to Mr Knights of MCR, and to Imperio, Abeille, Scor, CTR, and GS attaching the two endorsements, the Information Note with the Baines subjectivity, the May Schedule and the Frisco Fax seeking their agreement and "confirmation by return".
The fact that Mr Piper undoubtedly sent the Frisco Fax to the overseas market as an enclosure to these letters and did so, on his evidence, on the instructions of Mr Murrell, was understandably relied upon by Mr Edelman to support Mr Murrell's evidence that he would and did also show it to the London market and in particular Mr Stewart. Nonetheless it does not affect my findings. Mr Piper's role was administrative and by this stage the May Schedule had been stamped by Allianz Cornhill and was also enclosed. The evidence of the overseas underwriters was that they thought the contents of the fax were sufficiently covered by the Baines subjectivity (which was copied to them) or that the Fax did not affect the current cover because a further endorsement would be required when the items were actually to attach.
On May 4 Mr Warwick of Minets, who had obtained some papers from Mr Murrell, sent them to Mr Powell with a handwritten note. He was concerned that two of the items (the Anode Plant and Power Plant) which TCI had indicated would be covered by the operational policy from May 1 differed from the Frisco Fax. He continued : In view of the fact that the date for 'green tagging' these items according to (the May Schedule) is 14/5 plus Allianz' agreement to include under Ops Policy excludes T&C I have left our endorsement as drafted just in case there is any testing going on between now and the 14th and whilst we obtain confirmation that these two items are operational. This note also serves to demonstrate that the terms of the Baines subjectivity were well known within Minets and that it was seen to be an attachment exclusion.
On May 4, Mr Warwick also sent Mr Bommeli of Swiss Re (and other reinsurers of the CAR policy) an endorsement recording the reduction in values under the CAR policy for items handed over on May 1 or to be handed over on June 30 "after which they will be transferred on to the Insured's Operational Policy". Mr Bommeli stamped and signed as accepted this endorsement on May 12.
Minet issued their cover note to TCI for the operational reinsurance on May 5.
It was also on May 12 that Mr Pignat stamped and signed for Swiss Re the two endorsements, the Information Note and the May Schedule. He did so after a discussion with Mr Bommeli on the same day in which Mr Bommeli had agreed that Swiss Re should take "the various parts of the Kennecott risk into the property policy" because "in this way it is ensured that the client has no insurance 'gaps' because testing and commissioning is excluded from the property policy". Mr Pignat did not stamp, sign or return the Frisco Fax. It was sent to him without any stamp on it (unlike the other documents) and he said for that reason and because it was in manuscript he did not think it was a particularly important document. Apart from Swiss Re none of the overseas market were sent a copy of the wording.
Mr Pignat sent the wording to Mr Murrell and Mr Webster on May 12 approved by Swiss Re subject to a number of points of no relevance to the issues. Sampo/Hansa also made comments on the wording. The need to deal with these comments and to get wording confirmations from other reinsurers was flagged as one of the "outstanding issues" by Mr Webster in an internal Minets memorandum dated May 19.
It is common ground that mechanical and pre-operational testing of the Acid Plant had been completed and the Plant handed over by Monsanto to Kennecott by May 31, when hot gas was first introduced from feed fed into the FSF for the first time. On June 2 there was a "foamover" at the FSF when the slag became too viscous and spilt out of the furnace. This occurred very shortly after the first sustained (8 hour) attempt at smelting had been completed. The cause was said to be "instability in the slag chemistry ... caused by excess oxygen in the slag."
On June 8 Mr Stewart scratched an endorsement prepared by Minets in the same form (save for the values of the items and the amount of additional premium) as an endorsement which later replaced it and was scratched on June 23 and which is Annexe H to this judgment. The endorsement records the agreement of Allianz Cornhill that "the completed assets forming part" of the Smelter Modernisation Project "are included in the schedule of values" to the operational policy and the calculation and agreement of additional premium accordingly. The "handover" dates of May 1 and June 30 were stated, the FCF and the Acid Plant falling within the values given for the later date. By its terms, the endorsement was "further to" the Information Note (Annexe F) containing the Baines subjectivity and the May Schedule. It also provided that "all other terms, conditions and limitations" were to remain unaltered.
On June 12 Mr George wrote what he called an "Operating Plan" for the Smelter for the period June to September. Mr George said in evidence that he was asked for the best possible scenario and that what he wrote was an "aggressive ramp up". I do not think, however, that at the time it was seen to be more than as he described it, namely that the production goals were "quite ambitious" and presumed "issues such as training of operating personnel, rapid response by maintenance and resolution of any design problems " would be resolved quickly. The Plan included the following "milestones":
June 13. Re-start FSF.
June 15. Demonstrate dual casting of anodes at the Anode Plant to achieve 70% availability of the casting system.
June 16. Demonstrate smelting rate of 150 tph (90+% of capacity).
June 19. Begin startup sequence for FCF
June 26. Startup FCF.
July Achieve 50% of design capacity copper production.
August. Achieve 70% and September achieve 85% of design production.
The significance of this plan is that it envisages the continuous operation of the whole plant and the demonstration or at least achievement of stated quantitative capacity goals by reference to design.
On June 28 Mr Trunnell sent a fax to Mr Powell. He referred to the foamover at the FSF which had "delayed the scheduled startup" and referred to a KUCC internal memorandum (also faxed) of the same date and written by Mr George in order to explain why "the remaining equipment" would not be operating as expected on June 30. Mr Trunnell sought from Minets an extension of the CAR policy from June 30 to July 14 and asked Mr Powell to review the KUCC memorandum with his colleagues working on the operational policy "and advise if anyone forecasts difficulty in picking up these final items on July 14".
The KUCC memorandum included the following:
Flash smelter.
The flash smelting furnace and associated equipment is in operation at reduced rates with demonstration at full capacity expected in early July.
Flash converter.
The flash converting system has not yet been commissioned but initial operation is expected in late June.
Fire Refining and Anode Casting
This system has been operational at a reduced capacity since early in 1995 with demonstration at full capacity expected in July.
Sulfuric Acid Plant.
The acid plant is in operation at reduced rates with demonstration at full capacity expected in July.
Mr Powell copied the fax and Memorandum to Mr Webster on June 29 the date when he received it.
Minets duly notified both Mr Bommeli (and Swiss Re's co-reinsurers on the CAR policy) and Mr Baines (and other reinsurers on the operational policy) of the need to extend the June 30 date in each case enclosing the fax from Mr Trunnell and the KUCC memorandum. There is no dispute albeit it is not documented that it was in early July that both TCI and reinsurers agreed that attachment of the FCF and Acid Plant and the other plant referred to in the policy should be effective from July 15 instead of June 30 on payment of an additional premium. Those agreements were subsequently confirmed by TCI in an endorsement dated September 28, 1995 and by Allianz Cornhill on behalf of Reinsurers in the October Endorsement.
There are two significant features of the KUCC Memorandum. It plainly contemplates "demonstration at full capacity" in a context where the word is used in a quantitative sense and it envisages such demonstrations in July 1995. Mr George's attempts in cross-examination to suggest otherwise did him no credit. Both features are consistent with the Baines subjectivity and the understanding of what would or at least might be acceptable to property underwriters. None of the intended demonstrations in fact took place in 1995.
There is a version of the KUCC Memorandum on which someone unidentified in evidence wrote some "notes as at July 10" 1995. Those notes consist of the word "operational" against the FSF, Fire Refining and Anode Casting, and Sulfuric Acid Plant, and "Initial Operations - OK" against the FCF. The evidence is that it was on July 2 that feedstock was first introduced to the FCF. The material, however, remained unsmelted. On July 5, the FCF was run for some hours at a feed rate of about 48 tons per hour and some blister copper was produced, tapped and run to the Anode Plant. The design rate was 59.5 per hour. Mr George was satisfied with the blister copper from a visual inspection (from which a man of his experience could make a judgment). Mr Arana (the start-up consultant) said the blister copper had also been analysed albeit no records of any analysis now exist. Mr Arana said the analysis showed a high level of sulphur and low level of copper in the blister but that was not unexpected because the plant had deliberately been started at a low oxidation level.
The notes on the KUCC Memorandum suggest, unsurprisingly, that this was not seen as equivalent to "operational". Yet it is the case of the Claimants and the opinion of their technical expert that commissioning was complete by July 5.
On July 13 Mrs Turner for TCI sent a Memorandum to Mr Done, copied to Mr Trunnell, in which she confirmed binding cover for the additions to the policy effective May 1 and July 15, the latter date including the FSF (value $134m), the FCF ($69m) the Anode Plant ($50m) and Acid Plant ($68m).
On July 15 Mr Storey (KUCC's Hot Metals Superintendent) wrote an internal memorandum relating to OEC's assistance on site "in order to accommodate the on-going commissioning process." (My emphasis). An attachment prepared by Mr Saarinen (of OEC) showed a proposal for a "72 hour demonstration test" to take place on both the FSF and FCF in early October. The choice of language is interesting. The ability and expectation of being able to carry out such performance tests before completion of "ramp up" to full production levels is also plainly stated.
On July 17 KUCC released the Monsanto team from the Acid Plant site with the exception of Mr Rooke who remained in an advisory capacity until September 1.
On July 20 it was agreed between engineers representing Reinsurers and Minets that the Magna site would be surveyed from September 5 to 6.
On August 9, Mr George wrote some "Confidential Notes" on the subject of "Failures to achieve startup goals". The notes included the following:
Currently the main smelting system is operating but at very reduced on-line times and, for the most part, at reduced and convenient rates. The anode plant is a disappointment. After 8 months the facility cannot reliably cast anodes from the shaft furnace and the main anode furnace operation cannot operate with any consistency. Mechanical and operational problems, often related to frozen launders, failed equipment, plugged shaft furnace outlets and a myriad of other 'easy' problems are the norm.
Still, the system works well when it is operated. The majority of problems are avoidable but rectification work continues. The project was too unyielding in many areas where design deficiencies were identified.
These notes as a whole suggest some despair on the part of Mr George. He said the references to "startup goals" and the failure to achieve them were an unwise choice of words. Despite his evidence that this was all part of a normal ramp up and that the plant was operational I do not think that he would have expressed such an opinion at the time had he been asked to do so and I think his choice of language at the time was natural and appropriate. Whilst it is invidious to select from the vast mass of documents a few extracts from a few samples in my judgment they do give a fair overall picture of what the position was at the time and one indeed which the other documents only serve to emphasise. The plant was not operating either as hoped or expected let alone designed nor to any reasonable standard expressed quantitatively or qualitatively of consistency, regularity, reliability or productivity.
The "turnover package" for the FCF was dated August 18 (see Annexe D page 7). It recorded that the FCF was mechanically complete, pre-operationally tested and handed over to KUCC for operation at June 26.
On August 23 KUCC wrote to Monsanto concerning the extension of a letter of credit due to expire on August 31 issued by Monsanto as security for the Acid Plant to meet its design capacity. The reason given for seeking the extension was that
as the Smelter has yet to reach design capacity, the Acid Plant has not yet been fully tested to assure it meets the guarantees described in the Contract
Mr George said this was not a genuine concern. Nonetheless it demonstrates that testing the Acid Plant to meet its guaranteed performance level was considered possible but only if both FCF and FSF were operating at their design capacity. It also shows that Mr George's expressed expectations in his June 28 memorandum had not been met. Nor were they met before the incidents which gave rise to the claims. Moreover there are contemporary handwritten notes which record that the Acid Plant had never been run at capacity, that the emission limits remained to be tested, "don't know if it will meet Specs", and that the number of gas leaks was an embarrassment to Monsanto.
It was on September 16 that the explosion occurred in the FCF. From September 5 to 7 Paul Smith, a surveyor from Allianz Cornhill (who was not, in the event, called to give evidence) and Mr Monse, a surveyor from Swiss Re (who did give evidence) had visited the plant at Magna. Both later made written reports on their visits. They were shown round the plant by Mr Young of RTZ and Mr Despain and Mr Newman amongst others of KUCC. Mr Monse's evidence was that whilst he received different information about the plant from different sources he was told that the FCF was still not running, both that more than 50% and almost 100% of the production was currently being sold as concentrate (he made notes to that effect) because the plant could not convert it into high grade copper, that he saw for himself that the FCF was undergoing testing and was told that it was still in its commissioning phase. He also saw contractors working on the Acid Plant and was told it was not operating. He said his overall impression was that KUCC had major problems in running the plant, several areas were not operational and it "was not working" and was still undergoing commissioning. Despite some of the Claimants' witnesses seeking to challenge this impression, I unhesitatingly accept Mr Monse's evidence, which is fully supported by the documents.
Mr Smith's report is dated simply "September 1995." It runs to 60 pages. It seems to have been available to Allianz Cornhill at about the end of September. The conclusions on the final page included the statement :
"After such investment it is important that the new smelter is operational as soon as possible. As yet the new smelter is at the commissioning stage and is not 100% efficient".
The performance of the plant in the period from July until September 16 is recorded in a considerable volume of technical documentation. For my part, I think the detail far less important than the overall impression created both by it and the evidence of those who were present at the time and the evidence of the experts. Some extracts from the monthly reports on plant operations are set out in Annexe J.
It is the Claimant's case that, in effect, once it had been shown that the FCF could produce some blister copper and that the product was saleable, then it had been proven that the FCF worked as intended, start-up and commissioning were at an end, the plant was operational and thereafter what was happening was an entirely normal process with any new smelter commonly called "ramp up" whereby production from the plant would gradually be increased to or towards design levels. It is also their case that once the Acid Plant had treated the gas from both the FSF and FCF and produced sulphuric acid it was commissioned and operational.
The technical records show that during the period of 78 days from July 2 to September 16 the FCF was on-line for about 24% of the available time during which an average matte feed rate of 45 tons/hour was achieved, that on a few occasions for limited periods the design feed rate of 59.5 tph of matte was achieved, and that a total of 9800 tons of blister copper was produced. The FCF did not operate at all on 18 of the days. The "best day" was July 31 when it operated for 80% of the available time and converted 754 dry tons of matte (42% of rated capacity). The longest period of sustained operation was July 30-31 when it operated for 17.35 hours at 50% of rated capacity. The major bottlenecks in this period were the Anode Plant where the problems were such that frequently no copper could be allowed to leave the FCF to feed that plant because it was not working, and the inadequacies of the delivery system for the limestone flux. Mr Arana made no bones of the fact that such furnaces do not take kindly to frequent stops and starts, the aim being for constant operation.
A report made by Mr Newman on the failure of the FCF dated October 30, records that the FCF had been operated from 12.45 to 5.45 pm on September 16 and the furnace contained 21 inches of blister copper and 8 inches of slag when a taphole was lanced open and molten copper flowed through the launders to the anode furnace. After 30 minutes the taphole started "spitting" copper, the operators tried but failed to close the taphole, the area was evacuated and "several minutes later there was a major explosion inside the furnace ... Molten metal and slag then ran down to the ground floor of the building." The FCF was shut down as a result for 79 days. It was re-started on December 1.
The Acid Plant was also affected by these problems in the sense that the frequent shut downs of the FCF and FSF prevented or interrupted the flow of gas to the Acid Plant. The Acid Plant itself suffered from the inability of the two compressors to work together and a number of leaks. The effects can be summarised from the technical records. On 41 occasions during July and August there was no gas flow. The average gas feed was 25% of design in July and 22% in August. Monthly acid production was 20% of design in July, 21% in August and 24% in September. The acid produced was not to specification in that it consistently exceeded SO2 and NOx levels. Although in dispute and no part of the present trial one of the theories of the cause of the failure of the Acid Plant in December is that the number of shut downs and start ups caused thermal cycling and stress in the plant which led to the failure. Indeed, Kennecott prepared a report dated July 1996 on the reasons for the failure of the Acid Plant. That report recorded that the evidence to date indicated that the major damage was due to the formation of highly corrosive, hot, dilute sulphuric acid circulating in the plant (dilute acid is more corrosive than pure acid) and that this "acid was formed as a result of a failure of the steam superheater tubes, which were unable to withstand the thermal fluctuations imposed by the operation" of the plant. The report indicated that the thermal cycling itself was the result of shut downs and start ups of the plant when the thermal changes would be the greater. Mr Fries (of Monsanto) said the design expectation of the Acid Plant was for a relatively constant flow.
For all of this period the FCF was undergoing repairs. The Acid Plant operated on gas from the FSF. But it remained at low levels of operation. The average gas feed for October was 18% of design and for November 16%. Monthly acid production was 27% of design in October and 24% in November. The acid specification problems also persisted.
It was also of course during this period that investigations began into the explosions at the FCF. TCI were notified of the claim by KUCC on September 18. TCI appointed THG to investigate the claim. THG produced a preliminary report dated September 29. That report refers to the "modernisation efforts" at the plant being presently "in the final stages with various components or sections undergoing final testing and/or commissioning". Mr George said that was not accurate at least by his definition of testing and commissioning as the plant was "in commercial operation". In common parlance, on the evidence before the court, I think it was accurate and indeed if anything overstated in the use of the word "final". That is further reflected in the terms of Mr Beals' report dated November 5 on his visit to the project between October 31 and November 2 (see below).
THE OCTOBER ENDORSEMENT
On October 25 Mr Stewart signed and stamped another endorsement (Annexe I being the final version of Annexe H) recording agreement to the "completed assets forming part" of the Smelter Modernisation Project being included in the schedule of values as at various dates and agreement to the "pro rata additional premium" recorded. I shall refer to this as "the October Endorsement." Mr Stewart added the mark "DNS" to the stamp and initials. That records agreement that there was no need to send or show the endorsement ("Do Not Send/Show") to the following market. Mr Stewart said without challenge that this mark would have been added at Mr Murrell's request. It is at least some measure of the significance the endorsement was perceived to have by both Mr Stewart and Minets. The premium shown was paid and accepted in January 1996. Although this endorsement was also sent to Mr Pignat on November 14 he did not sign it. He had signed Annexe H on July 12. All the underwriters who gave evidence about these endorsements said they believed they recorded only that the calculations which were required for accounting purposes were acceptable. The endorsements also, of course, described the "assets" as "completed" and purported to record the agreement of underwriters to their inclusion in the policy, referring again to the Information Note with the Baines subjectivity and the May Schedule, and repeating that "all other terms conditions and limitations remain unaltered".
Mr Baines did say in his evidence that by October 25 he had concluded on the basis of Mr Paul Smith's report that the FCF had not attached to the Policy and somewhat begrudgingly agreed that in those circumstances the endorsement should not have been signed or the premium accepted. The report did contain the substance of what was said in the Frisco Fax.
25th OCTOBER to 10th DECEMBER
There was a meeting on October 31 between THG and Minets (Messrs Bolton, Alford-Smith, Powell and Webster) and Mr Trunnell, TCI and Kennecott. The notes of the meeting, prepared by Mr Bolton, record that "the furnace was not in full production at the time of loss, approximately 70% and ramping up continually to full production level." Further, under the heading "Policy Cover," the following was recorded:
With regard to testing, only cold testing was carried out. Jeff Powell understood that property insurers advised of ramp up on production being part of risk exposure .... Jeff Powell stated that the Allianz and co-insurers were aware of the hand over date and had been shown a schedule of the concept going on? David Webster stated that he thought that testing should be 100% production test before hand over - i.e. full testing and commissioning and performance test at maximum capacity. Jeff Powell said no, this was not the case and Allianz and property insurers advised of the position re schedule of hand over dates etc.
I find this revealing. If Mr Webster did believe as is recorded then it would have been a matter of no moment or surprise to him (or Mr Murrell whom he instructed) that the Baines subjectivity had been put down or that reference had been made to an understanding of what that required on the lines of Mr Baines' and Mr Stewart's evidence. Indeed his belief is, as one would expect to have happened, wholly consistent with Mr Murrell having alerted Mr Webster to the Baines subjectivity and the circumstances in which, as I have found, it was written. It is also wholly consistent with the understanding both Mr Webster and Mr Murrell had of the limits to the cover normally provided by property or operational underwriters. No one is recorded as having referred at the meeting to the wording as such.
Mr Beals sent the report on his visit to Magna with a letter to the President of Kennecott dated November 7. Mr Beals was described by Mr George as a "technical man who sat on the Board" of RTZ and as someone with considerable experience in copper smelting. He referred in his letter to the " status of start-up activity at the smelter" being "more advanced than I had anticipated" and to fewer problems than he had expected "considering the complexity and new engineering features of the installation." The report itself said that the foamover of the FSF and the "failure of the FCF taphole should be considered normal start-up difficulties .... Both of the happenings are, probably, related to the intermittent operations and long holding times associated to the start-up activities." Reference was also made to the fact that "only last week" had the Anode Plant attained a reasonable tonnage. That was at a time when the FCF was shut down. Indeed the evidence of any commercial production of copper prior to the incidents is very limited and uncertain as to quantity, quality, cost, price and the extent to which it may have been derived from sources or materials obtained otherwise than from operation of the plant itself as designed.
On November 22 a meeting was held between Allianz Cornhill (Messrs Baines, Stewart and Gurney), THG and Minets (Messrs Bolton, Murrell and Alford-Smith). The notes of the discussion were stamped by a number of underwriters including Mr Baines. The subject of the meeting was "to review the application of the policy wording relative to testing and commissioning perils" for the furnace rebuilding or repair works consequent upon the explosion. The notes refer to Kennecott's belief that "the original furnace had been tested, commissioned and handed over for attachment under the operational policy" but that Mr Baines would not provide cover for testing and commissioning exposures on the rebuilding works.
Again I think it is of some significance that the language used is the language of testing and commissioning and Mr Baines would not provide cover for it even in the context of the rebuilding work.
On December 4 Mr Newman of KUCC wrote a memorandum on the subject "Operating data" for the FCF and in a Summary stated:
Equipment associated with the FCF had gone through mechanical completion, had been fully tested and commissioned and had been demonstrated and accepted by operations prior to starting feed to the furnace .... The first slag was tapped ... on July 5 and the first blister copper tapped ... on July 5. At this point startup was complete. All required equipment to produce copper had been tested and operated. Operating rates and on-line time were largely dictated by restrictions associated with upstream and downstream equipment. In early August, the furnace was frequently operated at rates above the nominal design rate of 59.5 tph of matte. Restrictions in upstream and downstream equipment continued to limit the time that the furnace could operate but it was established that the furnace could operate at the nominal design feed rate.
Mr Newman's "conclusion" was that in his professional judgment the FCF was in a startup mode from the time of starting feed on July 2 to the time that it had been demonstrated that slag and blister copper could be produced and tapped from the furnace on July 5. From this time on, the furnace was in operating mode for the next 73 days until the failure of the furnace on September 16.
This in effect represented at the time and at the trial the Claimants' basic case on the status of the FCF.
It was on December 10 that the Acid Plant failed. It had to be shut down until January 2, 1996 and for a further subsequent period as a result.
It is the Claimants' own case that in the period June 10 to December 10 the regulatory requirement for sulphur dioxide emissions (250 ppmv on a 6 hour average) was exceeded on "only" 0.7% of the total number of data points taken by their expert, Mr Smith. What that means however is that there were 875 occasions when the requirement was exceeded in a period of 6 months. Moreover of those occasions virtually all of them were associated with a start-up or shut-down. Although some (often planned) start-ups and shut-downs would be expected in normal operation, Mr Beyersdorf readily accepted that the number of them in this period was far in excess of normal. The Monsanto contract in fact required a stricter emission limit of 100 ppmv.
The failure of the Acid Plant was notified on December 26. Prior to this it is apparent that both Allianz Cornhill and Swiss Re were questioning whether the FCF was still "within the testing and commissioning period" at the time of the explosion and they had asked THG to instruct engineers (DDI) to investigate the FCF claim (Meeting of Reinsurers and THG on December 12).
Mr Stewart was present at this meeting as one of the representatives of Allianz Cornhill. Mr Gurney's notes record that there was discussion of the testing and commissioning carried out by Kennecott. DDI were to be asked "whether they consider the described testing and commissioning by Kennecott was sufficient and in line with what is procedure throughout the copper market". Had Mr Stewart then remembered an express agreement as to the meaning of the words such as suggested he should and I think would have raised it. On the other hand, Swiss Re's notes of the same meeting do record that "Allianz believed that the plant had to operate at 100% capacity before testing and commissioning were complete and the project was accepted into the operations insurance programme". M&G's notes also lend support to Mr Stewart expressing such a belief at the meeting.
On December 20 KUCC provided THG with a package of documentation in support of their claim which included a copy of the Frisco Fax. The fax was annexed to a report by THG dated December 22 which subsequently found its way to the Allianz Cornhill Claims Department.
On January 8 Mr Chambers of Allianz Cornhill wrote to Mr Bolton asking if performance testing had been carried out prior to handover and for documentation to confirm it. He also requested relevant extracts from the contract with FDD "relating to the testing and handover requirements/acceptance criteria." At a meeting between them on the next day (also attended by Mr Webster ) Minets were told of the instructions to DDI and the reasons for them. A Minets note dated January 11 records that THG "had been in touch with the leading underwriter who advised that they would accept liability providing they could have a report from DDI stating in engineering terms that the plant had been commissioned prior to the date of loss." Both Mr Baines and Mr Stewart denied that they had said this. I accept their evidence. The notes of the December 12 meeting suggest the strong possibility of a misunderstanding.
Reinsurers also instructed Irisc to act for them. They did so because of understandable concerns that they needed fully independent advice as THG were instructed by TCI.
On January 22 Irisc (Mr Cresswell) reported to Mr Chambers. In considering Property Exclusion 15 they expressed the opinion that the market would look towards "the industry standard for processing plants definition as a guide" to what was intended, and referred to a "paraphrase" which required four procedures to be satisfactorily completed:
1. Mechanical testing.
2. Testing and Commissioning.
3. Performance Testing conforming to 100% Contract Design Criteria and continuous operation of a minimum 72 hours duration.
4. Official acceptance by the Insured following handover certificate procedure ....
Irisc pointed out that "in broad terms" 1 and 2 may well have been satisfied but "the question of performance and acceptance testing is less clear".
Of course if Mr Baines was right that there was an express agreement on such procedures no "guide" would have been required.
On February 8 Irisc sent a Preliminary report to Allianz Cornhill. This referred to the four stage procedure and expressed the (corrected) opinion that items 1 and 4 "had probably been satisfied at the time of loss" however "we believe that the commissioning element of 2 has not been satisfied neither has item 3 ...." The report stressed that this "standard market definition" "does not appear in the policy in question" but that Irisc believed it was "a useful guide". That too, of course, is wholly inconsistent with the express agreement Reinsurers allege. The expression of opinion on the status of the plant does accord with Reinsurers' case.
THG saw a copy of this Report and informed Mr Bolton by fax dated February 9 of their disagreement with it and in particular with underwriters attempt now to "import language into the contract which is inconsistent with" what THG said was Kennecott's intention namely "to provide insurance against risk of loss during the ramp up". They continued:
The requirement, therefore, for some type of performance testing exclusionary language under the operational policy was avoided since this was contrary to Kennecott's intent, and we believe this was explained through yourselves to reinsurers in detail at the time these issues arose during early part of 1995.
That has echoes of the Powell/Webster difference of view recorded in the notes of the October 31 meeting. Nor does it lie well with the various "demonstrations" anticipated in Mr George's memorandum dated June 28.
On February 16 a meeting was held at Allianz Cornhill's offices between Allianz Cornhill (Messrs Baines, Stewart and Chambers) and Minets (Murrell and Bolton). Mr Bolton made notes of the meeting which was called by Minets. These notes record Mr Murrell stating that
when he spoke to Graham Stewart on the 27th April 1995 (agreed to be an error for 28) advising of inclusion of the new FCF, Allianz agreed subject to exclusion of testing and commissioning and were shown a fax dated 26/4/95 from Jeff Powell advising of the handover of the furnace on the operational risk cover. Included within that fax was advice that performance of the plant would not be to 100% but would be working at approximately 30% and will reach 100% over a further 9 months.
This was a reference to the Frisco Fax although there is no evidence to suggest that the Fax was produced to the meeting. The notes also record "an implication that Minet should have been aware of Allianz's interpretation of testing and commissioning" but there can be no doubt that had Mr Baines or Mr Stewart recalled the conversation on April 28 as they claimed to do when giving evidence then they should have taken issue with this and the reference to the Fax. In fact, following the meeting, Mr Baines wrote to Mr Murrell stating only that:
As the plant was still undergoing testing and commissioning the plant should not have attached to the operational policy because testing and commissioning had not been completed.
This letter must have crossed with Mr Bolton's letter to Mr Chambers enclosing his notes of the meeting. The notes themselves drew no comment from anyone at Allianz Cornhill. .
Mr Edelman rightly cross-examined both Mr Baines and Mr Stewart on this and neither could offer any satisfying explanation for their lack of response.
Mr Baines' letter of February 16 was replied to by Mr Karpin of Minets on February 21 who set out "all the reasoning" which it was said should enable Allianz to accept the claim. The essence of the reasoning was that by the Information Note, described as "an endorsement in another guise", Allianz had agreed to increase the limits on the reinsurance "by reference to specific items of property identified by reference numbers;" an additional premium was paid, and as for the Baines subjectivity on the Information Note "if these words" were a reference to either Perils Exclusion 12 or Property Exclusion 15 then the terms of those exclusions were not on the facts applicable. There was no reference to the Frisco Fax.
Mr Karpin's appearance on the scene led to Mr Quigley's appearance on behalf of Allianz Cornhill.
On March 14, having consulted their solicitors, Mr Chambers wrote on behalf of Allianz Cornhill to Mr Alford-Smith to let him have a summary of Allianz Cornhill's lawyers' views on the issues.
Essentially the letter reserved Allianz Cornhill's position on the basis that more information was required on the cause of the FCF failure before a definitive view could be formed as the cause was relevant not only to exclusions 12 and 15 but also to "the reinsurance endorsement dated 28 April 1995" meaning the Information Note and the Baines subjectivity. The letter referred to Mr Baines explaining clearly on April 28 when the "endorsement" was presented to him that he was not prepared to accept any operational cover for the equipment until it had been fully tested and commissioned, and to the lawyers belief on Mr Baines' evidence that the words had a wider meaning than the definition in the wording and their "feeling" that the meaning was "either something which was agreed (as Mr Baines feels was the case) or which must be implied".
That is the first documented reference to a discussion between Mr Baines and Minets on April 28, 1995 which is at least similar to the account given at the trial but it still falls short of the alleged express agreement on testing to 100% of design for 72 hours. Indeed a letter of advice from the solicitors to Mr Chambers dated March 12 is expressed in language that when interviewed Mr Baines had said that testing to 100% of design for 72 hours was "the sort of continuous performance that he had in mind" when writing the Baines subjectivity, not that he agreed it or even in terms that he expressed it, although I am satisfied that he did express it as I have set out above.
The debate continued. It was not until a letter dated November 4 that Allianz Cornhill first wrote in terms stating that Mr Baines had told "the broker" on April 28 that "the plant would have to be 100% operational for a minimum of 72 hours before he would regard it as fully operational and capable of attaching to the reinsurance Policy." It was also in November 1996 that proceedings were issued. Points of Claim were served in December and the Reinsurers served their points of defence and counterclaim in January 1997. In May 1998 Minets were joined in the proceedings.
The hearing began on June 14 and concluded on July 29 when I reserved my judgment.
THE TECHNICAL EXPERTS
The experts who gave evidence and prepared reports were as follows:
Mr Tim Smith a chartered engineer instructed by the Claimants, whose evidence related to both the FCF and the Acid Plant.
Dr R. Hawkins instructed by Minets.
Mr J. Daley a Metallurgical Engineer instructed by Reinsurers in respect of the FCF.
Dr Adrian Wright instructed by Reinsurers in respect of the Acid Plant.
The experts (with the exception of Dr Hawkins) prepared a Joint Memorandum following meetings between them which provides a useful summary of their views and in particular the different opinions they hold and expressed in evidence.
Mr Smith's essential thesis was that, whatever the position in other engineering plants, in copper smelting at the conclusion of start-up or "the start-up phase" the smelter is brought into "operational use" and "ramp up comprises the first period of operational use". "Start up" would only begin following "pre-operational tests" on major components and process systems. Start up itself involves introducing process materials for the first time "and ensuring that the equipment can do the job that it is supposed to do" or "designed to do" and when that has been shown start up has been successfully completed and the equipment has been brought into operational use. Mr Smith said start up "generally lasts for no more than a few days."
On this basis a successful start up of an FCF required only that feed was successfully introduced, that it was 'flashed' to produce molten material, that the molten materials were successfully tapped and the gases produced were extracted. That, Mr Smith said, occurred on or by July 5, 1995.
A successful start up of an Acid Plant required only the introduction of hot sulphur dioxide bearing gas from the FSF and FCF, treatment of it at the Plant so as to discharge cleaned gas to the atmosphere within regulatory limits and the conversion of the sulphur dioxide to sulphuric acid.
For Mr Smith, everything thereafter falls within the description "ramp up" including any performance tests which would normally be carried out when the plant has been ramped up to design capacity and "achieved stable operations at a rate and performance close to that required to be demonstrated." Indeed Mr Smith said that frequently such tests would not be carried out because it would be obvious the plant would satisfy them. Moreover Mr Smith said that in copper smelting projects to an operator such as KUCC "commissioning" included only the stages up to and including start up as he defined it.
Mr Daley and Dr Wright considered ramp up and the achievement of performance guarantees were part of the commissioning process, which, whilst acknowledging the word "commissioning" can and does have several different meanings attached to it, would not be complete until the plant is "fit for its purpose" which itself may and usually would be defined in the contract. On that basis in Mr Daley's view start up of the FCF had not been completed by September 16 because it had not by then been shown to do the job it was supposed to do and none of the performance tests provided for in the FCF contracts had been attempted let alone carried out. Similarly in Dr Wright's opinion start-up of the Acid Plant had not been completed by December 10 because it had not by then been shown to do the job it was supposed to do and none of the performance tests required by the Monsanto contract had been carried out or attempted.
Despite Mr Smith's undoubted experience, I regret to say that I found his opinions wholly unconvincing and I think they were readily exposed as such both by Mr Ter Haar in cross-examination and by the evidence of Mr Daley and Dr Wright both of whom were impressive and objective witnesses whose opinions plainly commanded respect, albeit both readily conceded that they had less experience than Mr Smith in a number of relevant areas. To describe a plant as "operational" or "in operational use" or "commissioned" simply when it has first managed to produce some quantity of some quality of (in the case of the FCF) tapped blister copper seems to me to fly in the face both of reality and the normal use of language. Nor do I find the emphasis on 'ramp up' convincing. I have no doubt Mr Smith is right that the expression is commonly used as he used it, and that such plants frequently take many months before they are operated regularly at full design capacity, but I do not think it is to be contrasted with or excludes a plant from nor still being subject to and requiring commissioning and testing. There are no such absolutes; indeed much of what Mr Smith called ramp up is, I accept from Mr Daley and Dr Wright, exactly what would usually be called commissioning and testing, and was so called in the project contracts and by those on the site at the time as is apparent from the documents.
Whilst I do not doubt Mr Smith's sincerity I do think that he was advancing and in my judgment unsuccessfully seeking to defend a thesis or construct, also put forward by Mr George, which was created to meet the needs of the Claimants' case faced with the overwhelming nature of the evidence as to the state of the FCF and the Acid Plant at the time of the two incidents.
In summary:
(1) The contracts themselves provided for performance tests to establish design criteria which, on the evidence, are comparable to those found in other engineering projects and expected by operational underwriters. Indeed it would be remarkable if they did not. The Supply Agreement for the FCF talks of performance test runs during the commissioning period (See Annexe D pages 3-4). I reject the Claimants' case that smelting or copper smelting projects are in some way different or exceptional in practice or in the use of language.
(2) The documents are replete with references to the plant still being in start up or under commissioning after July 5 and until near the time of the incidents. I have already commented on them. I have in mind in particular Mr George's Notes of August 9, Mr Storey's memorandum of July 15, Mr Monse's report on his visit in September, THG's report of September 29 and Mr Beals' letter and report in November.
(3) The technical records of the performance of the plant which I have sought to summarise are to the same effect.
(4) There is little dispute that no tests involving any degree of formality were carried out or even attempted to prove the quantitative or qualitative performance of the plant and certainly there are no records of them. That, on the evidence, was not because the plant had proved itself in operation or indeed that it was being ramped up to full production but because it was not in a condition and not operating in a manner which would have justified any test. Not even the tests or "demonstrations" proposed by Mr George on July 12 and 28 were carried out.
(5) The Claimants have made no positive case of the production or sale of product in any quantity or of any quality from the new plant in 1995.
(6) Mr Daley concluded that during the summer of 1995 the main smelter components and much of the support infrastructure were plagued by numerous delays and failed to function as designed, that as a result the FCF was not able to stay on line for more than a few hours at a time, product quality was very erratic, and the FSF and FCF combined had some 300 start-ups in the 78 day period from July 1 to September 16. Indeed there was more down time in September than in July or August. At the time of failure he said the FCF had not operated normally as intended in terms either of production capacity or product quality, and was in the process of being commissioned. That opinion was overwhelmingly supported by the documents and the oral evidence and I accept it without qualification. The FCF was designed to operate on the basis of 330 days a year, in effect a downtime of 10%.
(7) Dr Wright's evidence was that the Acid Plant had never been tested to or near design, that by December the level of operation was fairly low and the number of times it was coming on and off-line was "most concerning" as it was always going to cause process upsets, excursions of SO2 and the risk of mechanical damage due to thermal fluctuations. The plant was designed on the assumption that there would be a reasonably steady gas feed. That also was amply borne out by the documents, the contents of his report and the evidence and I also accept it without qualification.
(8) Whilst it would not be right to conclude that the FSF foamover, the FCF explosion and the failure of the Acid Plant establish that the Smelter was not tested and commissioned or operational at the time they occurred they are events which do support the other evidence that that was in fact the position.
MINETS AUTHORITY
Before I turn to my conclusions on the Issues there are two further and discrete matters of evidence on which I should briefly comment. The first relates to Minets' authority (or lack of authority as the Claimants and Minets would say) to agree to any change in the wording agreed by Mr Baines on behalf of Allianz Cornhill with Mr Webster on the morning of April 28. The point arises in the context of the alleged oral agreement between Mr Baines and Mr Murrell in the afternoon of the same day. It is submitted that once the wording had been agreed including as of course it did, Clause 9(b) and Property Exclusion 15, Minets and Mr Murrell in particular, had no authority to agree any different attachment provisions. Part, at least, of the basis of the submission, was that TCI was committed to the wording as the terms of the direct insurance and Minets were not authorised to produce terms of the reinsurance which were in any respect narrower or less favourable than those by which TCI were bound.
I find this submission unrealistic and wrong. There is no evidence that TCI was itself committed to the wording at April 28 and the reality is (as Mrs Turner really acknowledged) she would not commit TCI to anything until assured that Reinsurers were committed to TCI in the same terms. As she said, Minets were entitled and expected to act on instructions from RTZ and Kennecott. In effect Minets were left to get on with it. Minets thought and acted on the basis that they needed Reinsurers' consent to the attachment of the Smelter to the cover. They had explained that to RTZ/Kennecott. In my judgment that is sufficient to establish Minets' authority to agree the terms of attachment on behalf of the Claimants. No one either from Minets or RTZ/Kennecott was called to give evidence of any limits on Minets' authority, and once agreed with Reinsurers it was for Minets to report to TCI so TCI could issue the appropriate cover.
OBJECTS
The second discrete evidential (and construction) point relates to the extent to which the Acid Plant was or included "Objects" as defined in Section 1.2 of the wording, the Boiler and Machinery Extension. There is no dispute that the FCF is an Object. Mr Smith's opinion (on which he was not cross-examined) was that the Acid Plant was not an Object but comprised a number of different pieces of equipment, some only of which were Objects. Of the items which were damaged in the Acid Plant the waste heat boiler, two HRS boilers and the Superheater were Objects (as boilers and an unfired pressure vessel) but towers, pumps and sumps and mist eliminators (accessory equipment to the towers) were not.
It is notable that the definition of Object in the wording is very wide. It includes "piping and accessory equipment" and "any electrical or mechanical machine or apparatus used for the ... transmission or utilisation of mechanical or electrical power ...." The purpose of the separate and exclusive cover for Boilers and Machinery is not a mystery. It recognises the greater risks attached to "plant" compared to what might be termed static property. Mr Smith fairly and rightly recognised in his report that his views depended on the proper construction of the definition, and that on a possible construction another conclusion could be reached. In my judgment, in the context of the wording and its purpose it is artificial and wrong to construe it in as limited a way as Mr Smith's views would require. Indeed I think Mr Ter Haar is right in his submission that it is artificial to look at the Acid Plant in parts or as different pieces of equipment. It was designed as a whole. It was the subject of a single turnkey contract. The Superheater is at the heart of its operation; that operation is dependant on the boilers. Just as I see no justification for limiting the wide words of the definition I have quoted to items "immediately linked to" a specific boiler or pressure vessel as Mr Smith suggests, so also I think the Acid Plant viewed as a whole falls within the definition. Either way, therefore, the Acid Plant in my judgment, was an "Object" or consisted of "Objects" within the definition of the wording.
THE WORDING CONSTRUCTION ISSUE
PROPERTY EXCLUSION 15 The Policy did not cover damage to or consequential loss resulting from damage to :
any Object before it has been installed and completely tested at a specified location (completely tested shall mean that the Object has operated at the said location in the capacity for which it was designed as part of the normal process).
Each party has sought to pray in aid a number of background matters to support a narrow or broad approach to the construction of these words to benefit their case. I have been referred to the speech of Lord Hoffmann in I.C.S. Ltd v West Bromwich B.S. [1998] 1 WLR 896 at pages 912-4, which is a helpful re-statement of the basic principles of construction. In particular the first stated principle is worth repeating :
Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.
This, however, is a case in which I think the same conclusion is reached even if one concentrates on the fifth and last stated principle expressed by Lord Hoffmann namely that words should be given their natural and ordinary meaning without application of the qualification that such meaning must give way if it is concluded from the background that something must have gone wrong with the language.
The only linguistic point which has arisen is that the Claimants submit that the words "in the capacity" are to be contrasted with "at the capacity" and thus support their construction that the Exclusion is directed only to the object "performing the job it was designed to do" rather than proof that it can reach any particular quantitative or qualitative condition. I reject this submission. The words appear in a definition of "completely tested". They are followed by the words "for which it was designed". It is not a natural or ordinary use of language to refer to such plant as "designed" to do something without reference to quality and quantity design criteria, and in the very limited sense in which the Claimants seek to define the words "capacity" means anything more than de minimis and "testing" has been defined to non-existence. Indeed in the course of argument, the use of language such as "performing the job it was designed to do" (the Claimants' case) itself only served to beg the question "what was that?"
Beyond that I see no purpose in considering the precise words further. The concept is in my judgment clear. The Object must operate as designed and do so as part of a "normal" or established and stable "process". That is in fact exactly what would be (and was) expected in an operational policy; but the words themselves in my judgment convey that of themselves. They also look to the "normal process" of which the Object may form a part. Thus the FCF required a regular feed, the operation of the launders to remove the slag and blister copper and of the Anode Plant to receive the blister and of the Acid Plant to take and clean the gases, if it was to perform its own normal process as well as to perform its own part in the normal process of the smelter.
The question is whether or not the FCF and/or the Acid Plant were by September 16 and December 10 respectively completely tested as defined. It must be apparent from what I have already said and held that I do not think they were. Neither had operated "in the capacity for which it was designed" in any ordinary sense of those words, nor had either done so "as part of the normal process". Performance was not as designed either qualitatively or quantitatively; and the process was not operating normally nor were the FCF and Acid Plant as "part" of it. In my judgment that was so whether the items were viewed independently or as part of the smelting process involving the FSF, FCF, Acid Plant and Anode Plant. Indeed in the ordinary sense of the word on the evidence I do not think there was a "normal process" in operation at either date. Nor had any operational testing at all been done on either plant in any meaningful or recorded sense.
Thus Reinsurers succeed on what is acknowledged to be the major issue before the Court. In my judgment neither the FCF nor the Acid Plant attached to the reinsurance contract because of the effect of Property Exclusion 15.
I would add that I think the background factors which in my judgment could properly be taken into account fully support the above conclusion. In particular:
(1) The knowledge and understanding, shown by the evidence I have quoted, of all parties that operational underwriters in contrast to CAR underwriters would not underwrite construction or testing and commissioning risks but only established operational plant, and that the former commanded higher rates because they were perceived to involve greater risk.
(2) The fact that the operational policy was to assume the risk (and in addition the risk of business interruption losses) from a CAR policy which offered cover for and until the conclusion of testing and commissioning risks.
(3) The fact that this was a new plant on a massive scale involving at least an evolutionary application of technology to a process involving very high temperatures and toxic gases. It is of course true that the wording was potentially to apply to any number of situations which might range from such a plant to a single new central heating boiler but that does not mean that in asking the question did the plant in question meet the words of the Exclusion the nature of the plant itself is an irrelevant consideration, rather the reverse.
CLAUSE 9 (b)
Clause 9(b) is only material if I am wrong in my judgment that the Acid Plant was an "Object" or consisted of "Objects" and thus those parts of the Plant which were damaged and which Mr Smith considered were not "Objects" were capable of attaching to the policy under Clause 9(b) alone on the basis that they were "newly constructed and/or erected property ... which has been completed and handed over to the Insured as Owner and/or Principal under any capital ... project...."
The words "completed and handed over" are I think ordinarily to be understood in terms of physical completion of construction and contractual handover by the contractor. That had occurred with the Acid Plant. Handover preceded testing under the Monsanto contract. I think this serves further to illustrate the unreality of seeking to separate the Acid Plant into component parts. It is not in my judgment a natural use of words to describe, say, piping or the towers forming part of the Acid Plant, as "property which has been completed and handed over".
Nonetheless I think it is both legitimate and right in this context to have in mind Lord Hoffmann's first stated principle and the background matters to which I have referred in considering Property Exclusion 15.
If the words of Clause 9(b) have to be applied to plant such as the Acid Plant, and particularly so if they are to be applied only to parts of such a plant, then in my judgment the words "completed and handed over" are to be construed, as Mr Ter Haar contends, to mean that the plant is not completed until it has been shown by those who built or designed it to work as designed. Thus, I think, it was or would have been right for the Claimants to accept that for all practical purposes Clause 9(b) produced substantially the same result as Property Exclusion 15.
PERILS EXCLUSION 12
It was the submission of Miss Dohmann that if the court were to decide that the FCF and Acid Plant did not attach to the cover because of the operation of Property Exclusion 15 it would render Perils Exclusion 12 (of which I have quoted only one small part) of very little effect. I do not agree. Perils Exclusion 12 has a wholly different target. It excludes from cover loss caused to plant which has attached and so is insured arising from the testing or commissioning of new plant. The same applies to the other perils exclusions in the sense that they exclude cover for losses caused to insured property by what may generally be described as maintenance or design failures in "Objects". In a sense they serve to emphasise the nature of the cover provided as one which covers the risks arising from the normal operation of an established and properly maintained plant.
THE APRIL 28 ORAL AGREEMENT ISSUES
I have already stated my findings that:
(1) Mr Baines and Mr Murrell did agree that the attachment of the FCF and Acid Plant was, or would be, subject to the condition that each had been "tested and commissioned" but that while Mr Baines gave an indication of what he expected by those words there was no agreement as to a definition; and equally it is not open to the Claimants (or Minets) to rely on anything in the Frisco Fax to qualify the words because it was not shown to either Mr Baines or Mr Stewart.
(2) Mr Murrell and Minets were authorised by the Claimants to make such an agreement if they saw fit to do so.
I would add that whilst it was also submitted that if any agreement was made it was made for no consideration and without any intention to create legal relations, I reject those submissions. In my judgment had Mr Murrell sought to "attach" the plant by the operation of Clause 9(b) (which he did not and which it is now accepted he could not at least without also satisfying Property Exclusion 15) he would have been met with various objections not the least of which would have been Property Exclusion 15 itself and Mr Baines undoubted insistence that he was not going to cover any testing or commissioning risks. It was in everyone's interests to obtain and Minets and Mr Murrell set out to obtain agreement. That in my judgment is sufficient consideration in law and sufficient evidence of legal intent.
The questions which remain are that, granted an agreement that the plant would only attach if it had been "tested and commissioned", whether those words are too uncertain to be binding contractually and if not whether the FCF and Acid Plant met the condition at the times of the incidents.
The case of reinsurers, as pleaded in paragraph 20 of the Re- Re- Re- Amended Points of Defence is that the effect of the Baines subjectivity and conversation is that it was agreed that the risk in the plant would not attach until it had been fully tested and commissioned "namely operational at 100% capacity for which the machinery was designed for a continuous period of 72 hours".
Whilst I have found that there was a conversation to this effect I have also found that there was no agreement on any further definition of the words of the subjectivity.
The case for both the Claimants and Minets is that the Baines subjectivity was no more than a reference to either or both of Property Exclusion 15 or Perils Exclusion 12, and so had no contractual effect. As Mr Edelman put it, his primary case was that it meant no more than "I am not giving up my policy rights". In support of that he relied on the evidence of his insurance expert (which was admitted in writing) and some of the reinsurance underwriters that the Exclusions were common types of "testing and commissioning" exclusions in a boiler extension.
The difficulties with this case in the light of my findings of fact about April 28 are that Property Exclusion 15 does not use the word "commissioning" at all, and, on the Claimants' case, "completely tested" as defined meant no more than first producing blister copper. Perils Exclusion 12 does of course refer to "testing and commissioning" but it is not an attachment provision. Moreover if the Claimants were right that parts of the Acid Plant were not "Objects" the only attachment test they would have to pass would be Clause 9(b) which refers to neither testing nor commissioning in terms. As Mr Edelman recognised, taken at its lowest, the submission must acknowledge that the Baines subjectivity provides a further indication of the true meaning of Property Exclusion 15 which I think is wholly consistent with the meaning I have determined it to have.
There can be little doubt that the words of the Baines subjectivity are both imprecise and capable of a number of meanings. There is no stated criterion against which to judge them, be it the contract for the construction of the plant or the standards of the particular industry under consideration, which could differ in a given case. Nonetheless, I think a court should and can seek to give effect to words which were undoubtedly used at the time and, as I find, accepted as such and as having substance as exemplified by the exchanges in August 1994, January 1995 and March 1995 and by the subsequent references to them within Minets both by Mr Warwick on May 4 and Mr Webster on October 31, to which I have referred in the Chronology. The words also appear in Perils Exclusion 12 without further definition; and just as a court would seek to give substance to them there so I see no reason why it should not do so where they appear in the Baines subjectivity. That is particularly so where it was always open to Minets to ensure that underwriters were happy that the subjectivity was met at the time of attachment as Minets themselves recognised.
It was also the Claimants' and Minets submission that if some meaning was to be given to the words then it must be presumed against underwriters that they knew of the special meaning of "testing and commissioning" in the copper smelting industry advanced by Mr Smith. I reject that. The documents to which I have referred (and the May Schedule) demonstrate that it was underwriters understanding of the words that was recognised to be material and in any event I have held that in substance there was no difference between that understanding and the practices of the copper smelting industry or at least the practices applicable to the Smelter Modernisation Project.
Whilst I think if there had been any real doubts about whether the status of the FCF and Acid Plant could sensibly and reasonably be described as "tested and commissioned" those doubts would rightly be resolved in favour of the Claimants, on my findings in no meaningful sense of the words had either the FCF or Acid Plant been "tested" and both were in the process of commissioning but had not been "commissioned" at the time of the incidents. Moreover, as I find, that was so by any possible criterion, be it the project contracts, the conversation on April 28 as I have held it to have been, the views of underwriters as explained by Minets to the Claimants or indeed the expectations of the Claimants themselves as set out by Mr George in June 1995.
It follows that I find that neither the FCF nor the Acid Plant attached to the reinsurance contract by reason also of the April 28 agreement contained in the Baines subjectivity. The subjectivity did not of course differentiate between "Objects" and non-objects but applied to both the FCF and the Acid Plant as such.
THE OCTOBER ENDORSEMENT (ANNEXE I)
In the event that I were to find (as I have) that the plant did not attach by reason of the wording and/or the April 28 agreement the Claimants and Minets further contend that attachment was expressly agreed by the October endorsement, or that Reinsurers are estopped from contending otherwise having accepted the premium stated.
In my judgment those contentions are misconceived. The October endorsement was on the evidence only part of an accounting exercise to enable the premiums to be processed. It was also no more than a final version of what had been the subject of the June 8 and June 23 (Annexe H) endorsements and the discussion at about July 15. They, in turn, were a follow-up to the Information Note (on which the Baines subjectivity was written) and the May Schedule, to both of which the October endorsement made express reference. Either the FCF and Acid Plant attached to the reinsurance contract by application of the wording or agreement on April 28 (which I have held they did not) or not at all. The October endorsement cannot be read as and was not an independent agreement for attachment, nor is it (or could it be in view of its terms) suggested that it overrode or qualified the wording, which on my findings precluded attachment. Moreover the purpose it served, the unimportance attached to it, the references in it to the Information Note and to all other terms and conditions remaining unaltered are sufficient in my judgment to preserve as effective any agreement derived from the Baines subjectivity and the circumstances in which it was written.
It was in the context of this alternative case of the Claimants that the allegations of non-disclosure and misrepresentation came to be made by Reinsurers. In short terms it was alleged that if it was to be said that attachment was agreed by the October or earlier endorsements then Minets and the Claimants had failed to disclose that neither the FCF nor the Acid Plant had been commissioned or tested in a sense which would reflect the normal understanding of underwriters. That allegation was made whether or not it was found that the Frisco Fax had been shown to Allianz Cornhill. These allegations by Reinsurers were themselves countered by pleas of estoppel and affirmation based on the knowledge of Allianz Cornhill at the time of the October endorsement.
As the parties accept, these issues only arise, so far as reinsurers are concerned, in the event that I were to decide that the FCF and Acid Plant did attach under the wording of the reinsurance contract (which I have not) or that there was a separate agreement for attachment made on April 28 (which again I have not) or, so far as the Claimants are concerned, if they are entitled to rely on the October endorsement as itself an attachment agreement which had the effect of overriding the wording and/or any agreement to the contrary made on April 28 (which I have held it was not). Whilst certain of the findings I have made are material to these issues and I am conscious that the sums involved are such that, if leave to do so were thought to be appropriate, my judgment is likely to be appealed, nonetheless I do not think it right to add to the length of this already lengthy judgment by addressing issues which arise only on a number of contingent bases and which I think in any event would much better be addressed if they ever have to be on the basis of conclusive resolution of the issues which I have decided and the findings of fact I have made.
THE ISSUES (ANNEXE B)
I do not propose to answer the questions set out in the List of Issues as they are drawn. I agree with Mr Ter Haar that they are unnecessarily precise. I shall hear the parties on the consequences of this judgment and the Orders which they consider it appropriate to be made.
The first group of Issues [1(A)] relate to the meeting on April 28 and any agreement which may have resulted from it. My conclusions are set out in the Judgment. The one further point raised in the Issues is the extent of Mr Baines' authority to agree the Baines subjectivity on behalf of Swiss Re and those underwriters who had not at the time committed themselves to the reinsurance and so to Allianz Cornhill acting as leader. In my judgment authority from Swiss Re can be found both in the letter of April 11 to which Issue 1.6 refers and in any event by scratching the Information Note "per leader" on May 12 including as it then did the Baines subjectivity Swiss Re expressly adopted it. As to the other underwriters (for Cigna, M&G and GS) not only did they subsequently agree to Allianz Cornhill's role as leading underwriter and so to follow what the leader had agreed but Mr Knowles (M&G) expressly adopted the Baines subjectivity and both Cigna and GS scratched the Information Note with the Baines subjectivity on it. That is more than sufficient as authority.
Rectification [1(B)] does not arise in view of my judgment on the other Issues.
Construction [1(C)]. It is my judgment that the claims must fall within Section 1.2 (and thus not be excluded from attachment by Property Exclusion 15) but even to the limited extent it is now contended that they fall within Section 1.1 it does not affect the outcome.
The second group of Issues:
A10 and 11. I answer No.
B.12 and 13. The effect of Property Exclusion 15 applied to the evidence of the status of both the FCF and the Acid Plant at September 16 and December 10 respectively is such that neither the FCF nor the Acid Plant had attached to the reinsurance contract at those dates.
The questions raised in Section 3 are those which I do not think it necessary to address.
1st Defendants "Allianz Cornhill" | Cornhill Insurance plc (trading as Allianz Cornhill International) | 23.74% |
2nd Defendants "Swiss Re" | Swiss Reinsurance Company | 20.00% |
3rd Defendants "Sampo/Hansa" | Sampo Industrial Insurance NV (Formerly Hansa Industrial Insurance NV) | 14.24% |
4th Defendants "New Hampshire" | New Hampshire Insurance Company | 14.25% |
5th Defendants "Cigna" | Cigna Insurance Company of Europe SA-NV | 9.50% |
6th Defendants "CTR" | Compagnie Transcontinentale de Reassurance SA | 5.70% |
7th Defendants "Abeille" | Abeille Reassurance | 3.80% |
8th Defendants "MCR" | Mutuelle Centrale de Reassurance | 1.19% |
9th Defendants "Imperio" | Companhia de Seguros Imperio SA (Trading as Imperio Insurance Group) | 1.90% |
10th Defendants "Scor" | Scor Reinsurance Company | 2.37% |
11th Defendants "M&G" | The Mercantile and General Reinsurance Company Limited | 1.90% |
12th Defendants "GS" | Gjensidige Skadeforsikring |
1.42% |
(Those who gave evidence orally are marked with an asterisk *. Those whose evidence was given under the Civil Evidence Act are marked "CE".)
1. | ALLIANZ CORNHILL | ALLIANZ CORNHILL |
* | Martin Baines: | Property Underwriting Manager. Lead underwriter for the reinsurance. |
* | Graham Stewart: | Property underwriter assisting Martin Baines with RTZ programme. |
* | Michael Rothwell: | Senior Property Underwriter. |
* | Martin Quigley: | Divisional Executive. |
John Chambers: | Claims Manager. | |
Richard Gurney: | Claims Adjuster | |
Paul Smith: | Risk Control Specialist. Surveyor who attended Smelter plant in September 1995. |
2. |
SWISS RE | SWISS RE |
* | Hans Zimmerman: | Head of Property Underwriting Group. Responsible for 1994 RTZ/Kennecott property programme, and supervisor of Yvan Pignat for 1995 year. |
* | Yvan Pignat: | Property underwriter responsible for RTZ/ Kennecott property insurance for 1995 year. Assistant to Hans Zimmerman in 1994 year. |
* | Max Bommeli: | Underwriter in the engineering division of Swiss Re responsible for the EAR policy. |
* | Leo Monse | Surveyor for Swiss Re attending the Smelter plant in September 1995. |
3 | OTHER REINSURERS | OTHER REINSURERS |
* | Paul Johnson: | Sampo/Hansa. Underwriter on 1995 reinsurance. Based in London. |
* | Christopher Bottomley: | New Hampshire. Underwriter on 1995 reinsurance. Based in London. |
* | Philip Salt: | Cigna. Underwriter for 1995 reinsurance. Based in London. |
Cornelius Van den Brink: | CTR Senior Property underwriter. (CE) | |
Erick Derotte: | Abeille. Senior Property Underwriter. (CE). | |
Jean-Francois Rossetto: | Abeille underwriter for 1995 reinsurance. | |
J Viegas-Dias | Imperio. Underwriter on 1995 reinsurance. (CE). | |
* | Philip Hancock: | Scor. Property underwriter for 1995 reinsurance. |
* | William Knowles: | M&G. Underwriter for 1995 reinsurance. Based in London. |
* | Trygve Osnes: | GS. Underwriting Manager for 1995 reinsurance. |
Jean-Michel Pinto: | MCR. Reinsurance Manager and Head of Facultative Department. (CE). | |
Alan Knights: | MCR Underwriter for 1995 reinsurance. | |
4. | MINET LIMITED | MINET LIMITED |
* | Nick Murrell: | General property business broker. Executive Director Minet Broking Services when left in mid-1996. Broker of the reinsurance risk. |
David Webster: | Deputy Managing Director, Energy Division, International Broking | |
* | David Piper: | Assistant Director, International Property Division |
* | Graham Bolton: | Executive Director of the Claims Division. |
Paul Cotterill: | Chairman of Minet International Broking. | |
John Alford-Smith: | Minet Account Director for RTZ/TCI, reporting to Paul Cotterill. | |
Jeff Powell: | Minet Construction Division. Author of the "Frisco Fax". | |
Tony Rastall: | Minet Construction Division. Present at meeting recorded in the Frisco fax. | |
Stuart Warwick: | Minet Construction Division. Jeff Powell’s assistant in London. | |
Richard Karpin | CEO of Minet Energy, Mining and Construction. | |
5. | KUCC | KUCC |
* | Christopher Newman: | Technical Manager of the smelter and refinery plant at Magna. |
* | David George: | KUCC Director of Technology. |
* | Clive Adcock: | Employee of Bowen Engineering Inc, engaged by KUCC to provide input and expertise for the Kennecott Projects Team carrying out pre-operational testing. Replaced Don Dison as Commissioning Manager in about July 1994. |
* | David Arana: | Consultant Start-up engineer, employed first by FDD (1992) and then KUCC (1994) on starting up the furnaces. |
* | Thomas Beyersdorf: | Senior Project Engineer for the Acid Plant and powerhouse, reporting to Ted Himebaugh. |
Tony Storey: | Hot Metals Superintendent. | |
Pol Guzman: | Director of Kennecott Projects team 1993. | |
Philip Despain: | From 1994 KUCC Manager of Taxes and Insurance reporting to D J Priano. (CE). | |
D J Priano: | KUCC Financial Controller. | |
Dave Myers: | Smelter Modernisation Project Controller. | |
6. | KENNECOTT | KENNECOTT |
George Deyzel: | A Vice President, and General Manager of the Smelter and Refinery. | |
Ken Done: | Director of Treasury and Financial Services. | |
7. | THREE CROWNS INSURANCE COMPANY LIMITED (“TCI”) | THREE CROWNS INSURANCE COMPANY LIMITED (“TCI”) |
* | Margaret Turner: | Administrator and Assistant Secretary of TCI. |
8. |
RTZ | RTZ |
Phil Young: | Engineer at RTZ Risk Management Services, London. | |
Geoff Saunders: | Risk Manager. | |
Tim Batchelor | Risk Manager | |
9. | JARDINE INSURANCE BROKERS “JARDINE” | JARDINE INSURANCE BROKERS “JARDINE” |
Blaine Trunnell: | Senior Vice-President from January 1995 until takeover by Alexander & Alexander at the end of 1995. Adviser to, and representative of TCI. | |
10 | FLUOR DANIEL DAVY (“FDD”) | FLUOR DANIEL DAVY (“FDD”) |
George Gombos: | Project Manager June 1993-Spring 1995 | |
John McLeavy: | Project Manager Spring 1995 - | |
Tim Watson: | FDD Commissioning Manager | |
* | Stephen Holmes: | Process Engineer with FDD pre-operational testing team. |
11 | MONSANTO ENVIRO-CHEM (“MONSANTO”) | MONSANTO ENVIRO-CHEM (“MONSANTO”) |
Mike Graves: | Construction Superintendent. (Evidence Agreed). | |
* | Mike Fries: | Monsanto Start-up engineer. |
John Rooke | Monsanto Start up enginner. | |
12 | OUTOKUMPU ENGINEERING CONTRACTORS OY ("OEC") | OUTOKUMPU ENGINEERING CONTRACTORS OY ("OEC") |
* | Risto Saarinen | Chief Consultant. |
13 | CLAIMS INVESTIGATION | CLAIMS INVESTIGATION |
Thomas Howell Group (“THG”): | Engaged by TCI to investigate claims. | |
IRISC Technical Services ("Irisc"): | Engaged by Reinsurers to investigate claims. | |
Diversified Design Inc (“DDI”): |
Engaged by KUCC to investigate engineering aspects of claim. |
Article 1 of the OEC Licence Agreement contained the following definitions of "Operable Completion" "Acceptance test" and "Startup":
"F. 'Operable Completion' shall mean sufficient completion of the physical units ... to permit demonstration of mechanical operation and readiness to receive and treat feed material.
"M. 'Acceptance Test' shall mean the completion of three (3) continuous calendar days of operation (test may be interrupted for a maximum of five (5) hours, in which case the same interrupted time will be added to the end of the test period) during which period of time production achieved will not average less than One Hundred Percent (100%) of the design capacity of the Plant expressed in dry metric tons of primary concentrate per year, all as defined in Appendix A hereto.
N. 'Startup' shall mean the period of time required to complete twenty-one (21) continuous calendar days of operation during which period of time production achieved will not average less than fifty percent (50%) of the design capacity of the Plant expressed in dry metric tons of primary copper concentrate per year."
Appendix B Section 3 contained detailed provisions for the carrying out of test runs. Sections 3.1 to 3.4 provided:
"3.1 Test runs shall be performed by KENNECOTT personnel under the supervision of OUTOKUMPU. The first test run shall be made within six (6) months from the Operable completion of the Plant utilizing the OUTOKUMPU Process. During the test, such parts of other process areas as affect the performance of the test run in question shall be operating properly and under normal conditions.
3.2 Any such disturbances or interruptions of the test run as are beyond the control of OUTOKUMPU shall be omitted from the time of the test run. After cessation [or] remedying of such disturbances and interruptions and after normal operating conditions have [been] achieved the test run shall be continued ....
3.3 A test run shall consist of a total of seventy-two (72) furnace operation hours. OUTOKUMPU has the right to interrupt the test for a short time (maximum total five (5) hours) during the test period of seventy-two (72) hours e.g. for maintenance purposes.
3.4 If given Guaranteed Values are not attained in the first test run, the test run will then be repeated until the Guaranteed Values are attained or until they have not been attained in two test runs following the first test run due to reasons within the control of one and the same party hereto, whichever comes first. If three (3) test runs are necessary they will be completed within twelve (12) months from the Operable Completion of the plant. If the Guaranteed Values are attained in one of the test runs then the Guaranteed Values shall be deemed to be attained. For the purposes of calculating the liquidated damages for deficiencies in attaining the guaranteed performance figures, the basis for such calculation shall be the test run which has been most successful in terms of resulting in the lowest amount of liquidated damages."
Appendix B Section 1 set out certain "Guaranteed Values" for the FCF including a Smelting Capacity expressed in terms of the tonnage of feed per hour to be processed and a provision for that capacity to be demonstrated during a 72-hour test period along with values for copper losses, sulphur content in the blister and other "quality" factors.
The Supply Agreement between OEC ("The Seller") and KUCC ("The Buyer") contained provision for commissioning and test runs in Article 11:
"11.1 .... A Certificate of Mechanical Completion shall be signed by both parties when the erection work ... is completed....[KUCC] shall not be allowed to start the commissioning of the plant and no material shall be fed into the plant before the Certificate ... has been signed.
11.2 Commissioning
Upon Mechanical Completion the commissioning of the Plant will commence. The operating personnel and labour provided by the Buyer shall perform the work for commissioning with its operating personnel and labour and with the supervision and in accordance with the instructions of the Seller.
11.3 Performance Test Runs
11.3.1 Performance test runs shall be carried out during the commissioning period.
Test runs shall be performed by the Buyer's personnel with the supervision of the Seller. The first test run shall be made within six (6) months from the Mechanical Completion of the Plant. During the test, such parts of other process areas as affect the performance of the test run in question shall be operating properly and under normal conditions. Any disturbance or interruptions of the test run that are beyond the control of the Seller shall be omitted from the time of the test run. After remedy of such disturbances and interruptions and when normal operating conditions have been achieved, the test run shall be continued....
A test run shall consist of a total of seventy-two (72) furnace operating hours. The Seller and the Buyer have the right to interrupt the test for a short time (maximum total five (5) hours during the test period of seventy-two (72) hours e.g. for maintenance purposes.
11.3.2 If given Performance Guarantee values are not attained in the first test run, the test run shall then be repeated after the Seller's corrections which he considers necessary until the guarantee values are attained or until they have not been attained in two test runs following the first test run due to reasons within the control of one and the same party hereto, whichever comes first. The test runs will be completed within twelve (12) months from the date of the Mechanical Completion of the Plant. If the performance guarantee values are attained in one of the test runs, the guarantee values shall be deemed to be attained..."
11.3.5 Buyer shall provide all necessary labour, materials, utilities, energy, and other supplies and services necessary for the performance tests runs as defined in Annex 5.
The purpose of the performance test runs is to demonstrate the attainment of the performance guarantee figures specified in Annex 5.
If the guaranteed figures specified in Annex 5 have already been achieved during operation for a period equal to the test period before start of the performance test runs, the performance test is deemed to be carried out successfully and the Seller shall prepare and the Buyer shall sign an Acceptance Certificate in regard of the performance test completed as described below. Any 72-hour period shall be sufficient to show the achievement of performance guarantees.
Article 12 of the Supply Agreement provided:
"FINAL ACCEPTANCE
Final Acceptance of the Plant shall be deemed to occur at the earliest occurrence of the following:
(i) when the performance guarantee figures for the whole Plant have been fulfilled, or
(ii) when the performance guarantee figures for the Plant are deemed to have been fulfilled in accordance with Article 11, or
(iii) when the Seller has paid the Liquidated Damages payable in accordance with Annex 5, or Seller has paid the maximum aggregate liability as per Article 15.4."
Annex 5 contained detailed provisions for the level of performance of the plant including substantially the same provision for the FCF as appeared in Appendix B Section 1 of the OEC Licence Agreement.
The Testing provisions in the KUCC ("The Owner") Contract with FDD ("The Contractor") for the Smelter Modernisation Project were in Section 2.54.1 which provided:
"PRE-OPERATIONAL TESTING
Contractor will, in conjunction with owner, conduct all necessary pre-operation activities to ensure that the materials, equipment, controls and systems have been tested, adjusted, and checked out to comply with the intent of the design and to indicate satisfactory operation to owner. Contractor will hand over materials, equipment and systems to owner after pre-operational checkout for introduction of feed by owner. Contractor will thereafter maintain adequate personnel and facilities at the site until Final Acceptance of the work to adjust, modify, repair, and otherwise service the facilities and equipment."
Section 2.55 provided for "final inspection and acceptance" :
When Contractor considers that all work under the Contract is complete, Contractor shall so inform Owner in writing. When the results of inspection and testing satisfy Owner that all work under the Contract is completed and in accordance with the requirements of this Contract, Owner will notify Contractor of final acceptance of its work under this Contract.
FDD and KUCC prepared a Commissioning Manual which set out the approach to, and extent of, testing to be carried out under the FDD Contract. The Commissioning Manual defined three phases in the testing process at Section 3.0:-
"MECHANICAL COMPLETION
Erection of the plant and support facilities in accordance with the contract, drawings, specifications and manuals.
Precommissioning - non-operating adjustments and cold alignment check includes flushing, hydro-testing, system check, rotation of equipment and cold run in under no-load conditions.
Complete final clean-up, painting, thermal insulation work, and demobilization of temporary construction facilities.
PRE-OPERATIONAL TESTING (COMMISSIONING)
Run systems on air and/or water where appropriate without introducing feed utilizing the Distributed Control System (DCS) and Programmable Logic Controllers (PLC).
Test through the DCS and PLC all interlocks and safety devices.
Prepare and log all records of tests, lubrication and alignments.
Integrate training and operation personnel into a team as available.
Prepare formal `Turnover Over Completion Documents'.
OPERATION
Running/operating the plant under load (feed) conditions is the responsibility of the Owner.
Owner makes any operational adjustments required for satisfactory operation of the plant.
Project (EPCM) Commissioning Team will assist and support the Owner for a period of time as required by the Owner"
Section 4.2 described the pre-operational testing phase:
"Pre-operational Testing will then commence and continue for a period of time necessary to prove out the system, all as determined by the Pre-operational Testing Manager. The cold and hot runs will consist of operating the equipment and systems initially with cold water or air and then hot as applicable to provide experience in equipment and controls operation, calibrate primary field elements where possible, repair leaks, identify any requirements for design changes, and identify any equipment, component or system failure or malfunction. Where possible, the initial tuning of control loops will be completed. The majority of control loop tuning will occur during start-up under actual process conditions...
Pre-operational Testing of a system is considered complete when all mechanical, piping, control system and electrical components have been operated, checked and calibrated, and are in such a state that start-up can commence with the assurance of component integrity.
Start-up and operation of the plant and facilities are the responsibility of the Owner with assistance of the Pre-operational Testing Team under the direction of the Owner."
Appendix 1 to the Commissioning Manual outlined at XVI, Section E a system of tagging with different coloured tags to indicate the stage in the construction and testing process each individual item of plant had reached, including "green tagging":
"A green tag will be attached to equipment after it has been operationally tested and operated under the orange tag. This tag indicates that the equipment had been satisfactorily tested and is accepted by the Owner for operation and maintenance."
The green tag in effect indicated the end of the pre-operational testing for which FDD were responsible, and the plant was then handed over to KUCC for start-up and operation.
Section 3.0 of the Commissioning Manual also required FDD to prepare Turnover Packages for each item of plant. The Turnover Package for the FCF was dated August 18, 1995 but referred to mechanical completion and pre-operational testing being completed as of June 26. KUCC signed its acceptance of the system on August 23.
The Testing provisions in the Monsanto Contract relating to the Acid Plant were contained in Section 5 entitled "Completion and testing". After completion of construction (Paragraph A1) paragraph A2 referred to "commissioning" followed by Start-up (A3), Initial Operation (A4) and Performance Tests (A5).
"2. Commissioning
As physical construction is completed, equipment shall be tested and checked to ensure process operability. This work shall include:
a. Pneumatic pressure tests on vessels, piping, and equipment where required or specified.
b. Hydrostatic tests on vessels, piping, and equipment where required or specified.
c. Check rotation of rotating equipment.
d. Check-out and calibration of instrumentation.
e. Check-out of electrical system.
When construction and commissioning of the System is completed in accordance with Paragraph A-1 and Paragraph A-2 of this SECTION 5, Enviro-Chem shall give notice thereof to the Owner. Within ten (10) days after delivery or mailing thereof, Owner shall accept the work by written notice to Enviro-Chem or set forth in writing its reasons for not accepting it. Upon correction of all defects indicated by Owner, or in the event Owner fails to accept the work and does not give its reasons for not accepting it within such ten (10) day period, Owner shall be deemed to have acknowledged that this System is commissioned. The parties may agree that minor work, such as painting, not affecting the operability of the System, may be deferred until after such acceptance of the work.
3. Start-up
As equipment items or portions of the System are tested, start-up and process operations shall be started. This work will include:
a. The running of pumps, compressors, and other mechanical equipment.
b. Circulation of water or other liquids in liquid handling systems, and the circulation of air or gas in gas handling systems to the extent the same may be performed before the plant is placed into operation.
c. Adjusting and calibration of control valves, placing of instruments into operation, and making final control calibrations and adjustments.
d. Inspection and adjustments ... and other similar work required for operating mechanical equipment.
e. Drying out of refractory linings in preheaters, combustion chambers, and other similar equipment and heating of the converter system.
4. Initial Operation
The Plant shall be ready for initial operation when start-up and process simulation operations are complete. Owner shall commence operation of the Plant and operate the Plant during such periods and under such conditions as Enviro-Chem shall request to enable Enviro-Chem to determine whether the performance guarantees will be demonstrated during a performance test or what adjustments, if any, may be necessary to enable the performance guarantees to be demonstrated.
5. Performance Tests
As soon as possible after initial operation of the Plant has begun and at Enviro-Chem's written request, Owner shall conduct one or more performance tests under the conditions required by the performance guarantees and in accordance with Enviro-Chem's instructions to demonstrate the performance of the Plant. Operation of the Plant for the time period specified in the Performance Guarantees Section of the Technical Specification shall satisfactorily demonstrate performance requirements. In the event that there are interruptions during the performance test, operating time for guarantee demonstration shall be accumulated by mutual agreement. In determining the ability of the Plant to meet the performance guarantee, all charge rates, production rates, and utility consumptions shall be averaged over the entire test period."
The Performance Test required to demonstrate the performance guarantees was set out in a Technical Specification dated 12.4.93. Section 6:2 provided :
"Plant shall be tested over an operating period of three (3) substantially consecutive days, during which time all quality performance guarantees will be demonstrated.
For the first operating period of two (2) days, the plant shall be operated at or as close as possible to maximum design capacity, or as mutually agreed. For the following one (1) day period the plant shall be operated at or as close as possible to minimum capacity to demonstrate the capability of the plant to operate without the use of the preheater, or as mutually agreed."
The Average and Design combined gas flow rates, and maximum and minimum capacity of the plant were set out in Section 1 of the Technical Specification.
KUCC prepared monthly reports on the plant operations. The report for July (dated August 25) contained among "the highlights" the passages:
The FCF commenced operation on July 2, 1995. As this was the first time an FCF has operated and, being aware of the foamover of the FSF, the commissioning operation was brought on carefully.
On-line time averaged 22.1% and matte feed rates were 46 tons per hour compared to design of 59 tons per hour. Operating time of the FCF was affected by the inability to convey limestone flux from the silo to the day bin without constant manual attention. Also, major difficulties were encountered in the operation of the blister copper tapholes and launders.
The acid plant operated with few interruptions and limited impact on the operation of the smelter. An expansion joint in a gas duct failed and there were a number of incidents when the booster blowers and acid plant compressors tripped out without warning.
The report for August (dated September 22) contained "highlights" including:
The FCF operated for 25% of the month and averaged 56 tph of operation or 26% of design capacity. These averages compare to the budget of 63% on-line time and feed rates of 59 tph.
The FCF operating time was limited primarily by an inadequate limestone flux delivery system which had experienced numerous line blockage problems. Off-spec product further hindered operation.
Other converter outages include time for the anode plant casting wheel modifications, matte reclaimer and grinding system electrical problems, dust storage capacity limitations, and booster blower and main compressor electrical trips.
The anode plant cast 178 tpd or 17% of design capacity compared to a budget of 718 tpd or 68% of design capacity ....
Anode production increased by 60% compared to July. Anode quality continues to be a significant problem, however ....
The acid plant and powerhouse operated well throughout the month with the exception of two major outages which were taken to repair system gas and steam leaks and to make preparations for two compressor operation.
The report for September (dated October 20) included:
Acid plant production was ... 44.9% of budget.
The acid plant was off-line 22 hours for a planned maintenance outage to repair gas and steam leaks.
The gas handling system has experienced a number of booster blower electrical trips, however the number of trips has been reduced since the converter (FCF) was shut down (following the explosion). Instrumentation personnel are investigating the cause of the blower trips which appear to be related to balance and tuning of the entire gas handling system.
The Report for October (dated November 13) was the first to record that acid quality produced by the Acid Plant was within specification. As appears from a KUCC Memorandum dated August 25 that was a result of an "action plan" to control NOx levels which until then had been typically 100-200 ppm whereas most customers for the acid had specifications of 20 ppm or less and the acid plant design was to produce 4 ppm or less. The high levels of NOx were said to be caused by a number of factors one of which was the low furnace on-line time "currently seen".
APP7.DOC