Introduction

On 2 February 2011 Cyclone Yasi crossed the east coast of Australia near Cairns in North Queensland. Described by the Australian Bureau of Meteorology as ‘more life threatening than any Cyclone experienced in recent generations’, the category 5 system, with wind speeds of approximately 300 km/hr and a diameter of around 500km, was considered to be the worst Cyclone to cross the coast of Australia in nearly 100 years.

The impact of Cyclone Yasi has compounded the social, economic and environmental devastation experienced by Queensland, following the recent flood events. Cyclone Yasi raises further concerns for individuals, businesses, and regulatory authorities as they look to recover and return to operation.

This Briefing supplements and expands on the series of legal updates released by Norton Rose Australia earlier this month that considered the legal implications arising from the recent flood events.

Cyclone - First Steps to Recovery

Cyclone Yasi has resulted in the partial or complete destruction of a number of businesses and assets. If your business has been affected you should consider taking the following steps when planning for your business’s return to operation:

  • review and follow your emergency response plans to ensure the ongoing safety of personnel;
  • comply with federal, state and local emergency response authorities including evacuation or other safety orders;
  • if you are able to access your premises, undertake risk hazard assessments;
  • notify authorities if you have reason to believe that damage to your premises or equipment creates a risk of injury or property damages to third parties;
  • subject to ensuring the safety of personnel and equipment, attempt to secure books and records or activate any plans to recover such information through redundancy systems; and
  •  consider what notices to third parties should be issued immediately, including notices to employees, force majeure declarations to counterparties, notices of any material change in the business to the ASX, banks or other financial institutions, and notices to regulatory authorities should you identify non-compliance with any regulatory conditions or approvals for the operation of your business.

Cyclone Related Safety and Environmental Issues

The damage caused by the Cyclone may result in unexpected risks to your employees or third parties. Safety precautions are therefore fundamental to consider before any recovery and clean up may commence. If toxic, flammable or other significant hazards have been caused by the Cyclone, directors and officers must ensure that no hazardous activity proceeds until adequate planning and mitigation has been undertaken.

Directors and officers must also ascertain whether damage caused by the Cyclone has resulted in (or is likely to result in) applicable development permits, environmental approvals or other regulatory conditions being breached. If this is the case, companies will in many cases have an immediate duty to notify regulatory authorities so that mitigation and remediation may be undertaken. Directors and officers will also have a duty to notify serious or material environmental harm to owners or occupiers of land affected by accidents connected with the business or assets of such companies. Timely and regular communication with environmental and planning regulatory authorities will be critical. Corporations will also need to preserve evidence that all reasonable and practicable measures had been undertaken in preparing for and responding to the Cyclone, including the extent to which any environmental harm has been mitigated after the event. Companies should ensure that records of actions are adequately kept, and, when time permits, systems should be reviewed in light of the extreme weather events. Once a company determines that clean up operations may be safely conducted, risk assessments must be undertaken before and during each specific clean-up activity and ensure that records of these assessments are kept.

Insurance Coverage Issues for Cyclones

In view of the damage caused by Cyclone Yasi, home owners and business operators will once again need to closely review their insurance policies and consider the level of cover. Insurance policies commonly distinguish between damage caused by Cyclones and damage caused by "storm surges". Although damage caused directly by Cyclones (such as by rain and wind) is covered, damage caused by tidal inundations or actions of the sea such as a tidal surge is often excluded by insurers. The Bureau of Meteorology estimated that storm surges of up to 7 metres were created during the Cyclone and accordingly many policy holders are likely to be affected by subtle variations in policy definitions and exclusions. Businesses will also need to review the extent to which a policy covers purely economic or consequential losses and the application of "Loss of Market Exclusions". In a similar context to the insurance issues outlined in our earlier flood briefings, the issue of insurance cover for Cyclone damage and the attitude of insurers to what is expected to be a high volume of claims will no doubt be closely monitored by the ACCC, politicians, the Insurance Council of Australia and the Insurance Ombudsman.

Where companies intend to seek insurance compensation appropriate evidence (including photographs, where procurable) of any flood, storm surge or Cyclone damage will need to be assembled, and consideration should be given to how quickly insurance assessors can be taken on site. In certain circumstances, owners or operators may also benefit from engaging expert witnesses to provide evidence of the reasonable conduct of the claimant.

 Force Majeure and Other Contractual Considerations

Businesses are very likely to have ongoing obligations to vendors, suppliers and customers during the period in which operations are interrupted. Directors and officers must consider whether their organization will be able to meet its contractual obligations to others in light of the events of the Cyclone. If a company is unable to perform its obligations then it should promptly consider any force majeure (FM) provisions. Where a contract includes FM provisions, such clause may provide for either delay of performance or termination of the contracted obligation. The distinction between these two consequences may have significant financial implications for an organisation and in the case of a stock exchange listed company may require prompt market disclosure where the results are material to the business’s prospects. Commercial contracts typically also provide for specific FM notification procedures with which the affected party will need to comply. Causes justifying the declaration of FM must also be closely considered for adequacy, and prompt notice must be provided to counterparties once the FM causes have passed.

In instances where a commercial contract does not contain FM provisions, businesses will need to review the contract to determine who bears the risks associated with a party’s inability to perform its obligations. The non-performing party should also consider whether it is required to give notice under a contract to other parties in relation to its inability to perform contractual obligations. Where a contract includes covenants or warranties in relation to maintaining the condition of plant, materials or other assets, businesses should also consider whether they may be at risk of breaching such covenants or warranties due to the Cyclone. Where a business is not protected from performing its obligations, urgent consideration for the mitigation of any consequential loss to third parties should be immediately considered.

As a practical matter, businesses affected by the Cyclone that declare FM may also encounter difficulties in allocating limited goods and services across multiple existing FM affectedcontractual obligations. Parties entitled to off-take could be adversely affected by allocation decisions. As discussed in our previous client briefings in relation to the Queensland floods, the law of allocation in the event of FM is evolving and parties should seek the early guidance of advisors to determine their rights as to apportionment.

Director and Officer Obligations Following the Cyclone

Extreme weather events may impact on a company’s business and operations directly and indirectly. Directors and officers must consider the range of consequences arising from the recent floods and Cyclone. In addition to ensuring safey of employees and third parties and ensuring against any environmental harm, directors will also be required to evaluate the financial condition of the businesses assets and prospects and if there are material changes, promptly report such changes to relevant third parties such as the Australian Stock Exchange (ASX), government regulatory authorities, and where appropriate, contractual conterparts. Companies should also immediately review the financial impact of the Cyclone of their businesses, including taking steps to review bank covenants, finance contracts and other obligations that may have Material Adverse Change (MAC) provisions, and if so, providing timely notices.

A major obstacle to business recovery after a natural disaster is often a lack of access to important commercial documents. Companies that have offices located in affected areas may discover important commercial documents have been damaged, misplaced or lost during the Cyclone event, inhibiting recovery efforts and business continuity. Given the high likelihood of Cyclones in Queensland, companies operating in these Cyclone and storm surge prone regions should adopt internal risk management systems that ensure the security and protection of important commercial documents. Practical solutions may include implementing protocols to create digital electronic backups of important commercial documents and storing additional hard copies of documents at secure external storage sites. Recovery of documentation after the Cyclone may be an arduous task and the assistance of external support may be required. Documentation may be made available upon request by policy issuers, banks and financial institutions, government agencies and contractual counterparties.

Post Cyclone Insolvency Risks and Creditor Concerns

The suspension of business operations during Cyclone Yasi is likely to have placed pressure on tightly managed cash flow budgets and raise liquidity issues for business operators. For many, incoming revenue will have decreased while fixed costs such as bank loan and mortgage interest repayments will have largely remained unchanged. Companies should therefore take steps to evaluate the liquidity and financial standing of the business to ensure it has the ability to meet short and long term obligations and debts as and when they fall due. If you are concerned that your business cannot meet such obligations, there may be a likelihood that your business may be deemed insolvent. Significantly, company directors who continue to trade whilst the company is deemed insolvent may also incur personal liability for the debts incurred during this period. You should seek professional advice in relation to restructuring payments to creditors and seeking additional funding should you be concerned about the ability of your business to meet its short and long term financial obligations.

Conversely, when contracting and conducting dealings with third parties, you should take appropriate steps to ensure you are aware of the third party’s financial standing and ability to repay loans or fulfil contractual obligations following the Cyclone. Directors should consider adopting cash-on-delivery (COD) terms, bank guarantees, letters of credit, and early termination rights in future contracts, if concerned about the risk involved in contracting with a third party. Additionally, if your business relies upon security or other collateral with respect to counterparties, it may also be important to review whether there are any risks to such collateral. You may need to take steps to replace or top-up the security, to satisfy your commercial needs.

You may be in the unfortunate position of having suffered such catastrophic damage that your business is effectively destroyed, either temporarily or permanently. While it is important to undertake analysis and long term business planning, preferably with the assistance of an insolvency practitioner, your first step should be to contact creditors, especially those to whom you owe fixed term obligations, such as landlords and financiers. You may find that creditors will understand your position, and may extend the time for payment until such time as you are able to meet your obligations.

Conclusion

Businesses must recognise that while the recent floods and Cyclone Yasi have been extraordinary events, the Bureau of Meteorology forecasts that the remainder of the month of February is likely to continue with severe weather conditions. Businesses should, where possible, consider any lessons learned from the floods and Cyclone Yasi in order to prepare for any future severe weather event.