LAW Fees and negligence

Most agreements that contemplate a party acting as an operator to carry out exploration or other mining work financed by several parties permit the operator to charge against the project some of the operator’s indirect costs. These costs include overhead and administration expenses. This is a realistic acknowledgement that the operator will have some staff and facilities that are part of its general operations, which will not be charged directly to, but will be used for the benefit of, the project. Within the industry such a charge is often referred to as a “management fee.” Technically this is wrong. A management fee is a fee paid to an operator to recompense the operator for services rendered and expertise or special abilities. As such, it will include an element of profit to the operator. On the other hand, the permitted overhead charge does not include a profit element and is intended merely as a realistic charge so that the operator will not suffer a loss by acting as such.

In light of the foregoing, when, if ever, would it be appropriate for an operator to receive a management fee? It seems fair to say that a management fee is rarely charged during exploration or evaluation of a project, but it is becoming more common once post-feasibility report work is undertaken. Presumably this is an acknowledgement that development work will take more of the operator’s time and resources, and at this stage an operator should have some special qualifications for which the other venturers are prepared to pay.

Obviously the charging of a management fee is a matter to be settled when the joint venture or operating agreement is negotiated. That is the easy part. The hard part comes when it is decided to permit a management fee on all sorts of things, including the size and grade of the orebody and the proposed operations, the actual involvement of the operator (why pay a management fee if a mining construction company is given a “turn- key” contract?), the anticipated roi and so on. In most cases where I have seen a management fee permitted, this tacky problem is met by setting a maximum fee ( as a percentage of moneys spent) and leaving the actual quantum to be settled, whenever appropriate, by the parties or if they cannot agree by arbitration. Negligence

So much for management fees, but how are they related to negligence? Quite simply, if you do something for nothing to help someone out and happen not to do the best possible job, do you expect to be held accountable for your imperfections? Probably not, or, in other, words, the standard of care expected from you should be less than if you were paid to do the same. The same holds true for an operator. If the operator is carrying its pro rata portion of the costs of work (both direct and indirect, such as overhead allowance) with no managment fee, then why should the operator have to be accountable to the other venturers unless it does something on purpose and without regard for the consequences and that something causes damages to the venturers or the project? Accordingly, the agreement may provide that the operator has a low standard of care to meet and is liable only for “gross negligence,” i.e. the wanton disregard for the consequences of its actions. (There is a school of thought that suggests that, at law, there may not be such a thing as “gross negligence” with respect to an operator of a mining venture. If this gives you concern, then do not use the term but, rather, set forth in the agreement the idea of proceeding with wanton disregard.) From this it is easy to see that the converse should be applicable — namely, if an operator is receiving a management fee (and realizing a profit therefrom), then that operator should be required to meet a high standard of care and to act with reasonable care and skill. In other words, that operator should be liable for its negligent acts. This is usually the case, but of course everything is open to negotiation.

If negotiations result in an operator having the right to charge a management fee after a certain period of time, there is nothing wrong with having two separate standards of care imposed upon the operator — liability for gross negligence until the fee becomes applicable and thereafter for negligence. It must, however, be remembered that a project is an ongoing, continuous operation, so the agreement must be clear when the standard changes. In most instances a management fee will arise with the delivery and approval of a feasibility report. This is certainly a clearly identifiable event, but is it the right one? On the basis discussed above, the operator will only have to meet the standard of gross negligence with respect to the basic proposal for bringing a project into production — the feasibility report. The venturers may wish to pay and impose the higher standard of care earlier.

As with most things involving agreements, management fees and standards of care for an operator should be carefully considered before they are dropped in or accepted as “boilerplate. Karl Harries is a partner with the Toronto law firm Fasken & Calvin. The information in this article is summary and general in nature and is not intended to be taken or acted upon as legal advice.