The floods that devastated Queensland, Australia 6 months ago have been described as unprecedented, and their impact on the energy and resources industry be extraordinary. Early estimates placed the cost of direct damages to resource companies at A$2.3 billion (US$2.2 billion), with some commentators projecting this to become the most expensive disaster in Australian history.
Academics and meteorologists pointed towards the La Niña phenomenon as a key factor in the floods. If La Niña cycles repeat, then extreme weather may become predictable, or at least foreseeable, which will have legal consequences that will need to be addressed in the negotiation and management of contractual relations and business management generally.
For example, transactions may need to incorporate the comparative economic value of mine sites that are less likely to be impacted by catastrophic flood events. In the chaos that the floods leave in their wake, the sector will need to answer some questions that it has rarely had to face previously. Finding the right answers to them early could be the difference between a successful recovery and a stuttering one.
We look at some of the challenges that companies operating mines in flood affected areas need to overcome when planning for recovery and a return to business.
Post flood safety
Operators should consider weather-related impacts on safe-operating procedures, including those involved in the recovery and return to operations. This may require updating emergency operating procedures, evacuation procedures and remote operations safety procedures.
Risk-management committees and safety management teams should include the impact of flash flooding and riverine (slow-onset) flooding in contingency plans and evaluate the safe working conditions for staff not only at remote sites, but also corporate head offices.
For resources-developers, as mine management is able to return to site, owners and/or operators will need to further consider whether additional hazards exist as a result of the unusual circumstances. In addition to the practical and financial challenges involved in managing these hazards, owners and/or operators need to ensure compliance with the requirements of the safety legislation governing operations.
Force majeure and sales disputes
Coal contracts are currently managed under a mix of long-term, annual, quarterly and spot contracts. Where contracts have been negotiated under long-term arrangements and provide for force majeure (a clause that frees both parties from liability when an extraordinary event beyond the control of the parties occurs) the potential for a dispute between the buyer and seller may be increased when the spread between spot and contract prices reaches the extreme variation now being seen.
If commodities contracts are not clear about the consequences of force majeure (some allow for excused late delivery, others allow for the production and delivery requirement to be forgiven entirely), a dispute may emerge as off-take partners will seek to ensure delivery of coal at the pre-flood pricing, while producers will seek to enjoy the increased prices in the spot market where possible.
As a practical matter, resource companies will face the problem of allocating limited mine production across multiple contracts affected by force majeure. Parties entitled to off-take could be adversely affected by the allocation decisions, and may seek judicial recourse to enforce rights to allocation.
The law of allocation in the event of force majeure is still evolving and there is little clarity from the courts with respect to the rights of the producer or off-take partner in such circumstances. In particular, the extent to which a producer’s obligations to other customers should be taken into account can vary widely depending on circumstance. Accordingly, parties affected should seek early counsel as to their potential rights.
Directors’ duties and obligations
Directors and boards of publicly listed companies need to continue to closely monitor business developments in light of flood events, and turn their attention to duties associated with post flood recovery.
There may be stock exchange requirements that include disclosure of a company’s flood recovery plans in addition to financial guidance. If a reasonable person would expect the disaster or disaster recovery plans to have a material effect on the value of a company’s securities, this will need to be immediately disclosed in accordance with continuous disclosure obligations.
In addition, if it is likely that the flood has impacted the operations, financial position, business strategies and prospects for future financial years, disclosures will need to be included in the directors’ report as part of the annual report and in any prospectus or other disclosure document. It would also be timely for the boards of companies materially affected by the disaster to review the company’s policies on risk oversight and management, and satisfy itself that management has developed and implemented a sound system of risk management and internal control.
Insurance policies commonly distinguish between riverine flooding and flash flooding, with many policies excluding insurance cover for damage caused by riverine flooding. Policy wording and exclusions are often different among major insurers, and many policies simply do not protect against riverine damage (though storm and flash flooding damage might be covered). It is important that companies take the time to ensure that they understand the type and extent of cover provided by their insurance policies.
The Insurance Council of Australia (ICA) has encouraged a “universal definition for flooding” to assist consumers. This is yet to happen. However, the recently established Commission of Inquiry has been asked to consider insurance policies and practices in light of the floods, and the Commission and Australian Competition and Consumer Commission (ACCC) are likely to review current practices.
A version of this article first appeared in Mining Journal in February 2011