Key Points: The MRRT could mean the renegotiation of long-term supply contracts, or an automatic increase in price.
Much has been written lately concerning the potential form that the proposed Mineral Resources Rent Tax (MRRT) may take, if it is passed. Significant focus has also been given to potential transitional arrangements for introducing the MRRT and how it may affect differing resource companies' financials.
However, an issue that has received little, if any, publicity is how the MRRT may trigger "change in law" provisions in existing contracts, especially long-term supply contracts.
Long-term supply contracts common to the energy and resources industry, will generally have clauses that cater for a change in law. The very nature and duration of long-term supply contracts inflate the risk of certain matters, such as the possible introduction of a new tax. As a consequence, clauses such as change in law provisions are often inserted to cater for or mitigate these increased risks.
Change in law provisions will generally operate in one of two ways:
- to pass-through the increased costs resulting (whether directly or indirectly) from the "change in law"; or
- to allow for the amendment of the agreement (effectively requiring the parties to re-negotiate the terms, including price).
Definitions of "change in law" will generally be drafted to be as wide as possible to include "any law, regulation, rules, code, or sub-code being introduced, amended or repealed in whole or in part" and "the imposition of any Impost (meaning any royalty, tax, excise, levy, fee, rate, charge or cost levied or charged or imposed) which was not in force as at the date of the agreement". The use of such broad definitions is intended to capture as many unforeseen circumstances as possible.
Resource companies need to be aware that the introduction of the MRRT (including the possible establishment of a Carbon Pollution Reduction Scheme) may bring about requests for a re-negotiation of contractual terms or an automatic increase in price (depending on the terms of the change in law provision). Companies need to be aware of whether and if so, to what extent, their contracts may change and should review their contracts accordingly.