Over 40 mines in Queensland have been shut down due to the recent floods, and more may be affected soon. These extraordinary conditions may give rise to a range of legal issues which impact on the operation of resources projects. We set out below the top ten legal issues for resources companies facing flood conditions.
Queensland's mining safety legislation requires those operating mines to ensure that risk is at an acceptable level. Risk is to be kept at an acceptable level by developing and implementing a Safety and Health Management System (SHMS) for the mine. The SHMS for the mine must include a Principal Hazard Management Plan (PHMP). A PHMP must be developed for any hazard that has the potential to cause multiple fatalities. Where mines are close to watercourses or in other flood prone areas, you should address flooding as a part of their PHMPs. PHMPs should provide for adequate mechanisms to warn of potential flooding and guidance on the appropriate actions to take depending on the likelihood and severity of such flooding, which may include a system of evacuation or moving people to a place of safety and ensuring the site and equipment is properly prepared to minimise risk.
As the floodwaters subside and you begin to return to operational mining, you will need to conduct an appropriate Occupational Health and Safety (OHS) assessment of the changed operational conditions and have appropriate resources and procedures in place to ensure that you continue to comply with your OHS obligations.
Environmental risks and remediation obligations
Intense rain events, flood and inundation will of course create environmental risk. Flooding may cause sumps, environmental traps, tailing dams and mine water ponds to overflow or fail. Mismanagement of contaminated wastewater or unauthorised release of floodwaters may contravene environmental authorities and could lead to penalties and prosecutions. The Department of Environment and Resource Management (DERM) has been notified of 13 coal mines and 4 coal seam gas operations that have released water outside of their environmental authority conditions over the last two months. Even though there is an extraordinary cause from the flooding, the DERM will investigate the cause of these breaches and prosecutions may result. You should consider whether it is necessary to carry out additional water testing, and you may also need to consider the extent to which you are capable of complying with your remediation obligations under the mining/petroleum tenement given the impact of the floodwaters.
Development or review of Targeted Action Response Plan
In addition to ensuring compliance with mining safety and health obligations, Queensland Mines and Energy has specifically advised operators to consider developing and activating a Targeted Action Response Plan (TARP) on the basis of warnings and observations to assess and communicate the onset of severe weather events to anyone potentially affected and ensure the safety of workers and mine sites. Take this opportunity to ensure you have a TARP in place and review that it reflects the most recent weather warnings.
ASX continuous disclosure obligations
The ASX listing rules require listed entities to inform ASX of information that a reasonable person would expect to have a material effect on the price or value of the entity's securities. Such an obligation arises once an entity is or becomes aware of any information concerning it. You should consider your disclosure obligations in light of recent flood events and continue to update the market as you assess the impact of the floods on your previous financial disclosures and operations and as you return to operational mining.
Force Majeure provisions
Most mining-related contracts will include a Force Majeure (FM) provision which should be carefully considered in light of the recent floods. For example, in relation to your commodity sales contracts you should consider whether you will be able to meet contracted deliveries to clients following the floods. FM provisions may allow you to miss contracted deliveries for reasons beyond your control. It has been reported that many companies in Queensland have already made FM declarations as a result of the floods. You should ensure compliance with the relevant contract when making such declarations and the implications for contracted deliveries and mining operations moving forward as floodwaters subside. You should also consider whether your delivery obligations have been simply postponed, or whether they may be excused as a result of the FM events under the terms of your agreements. Early notification may also assist in avoiding disputes concerning demurrage or associated transport and logistics expenditure. As the floodwaters subside and you begin to return to operational mining, you will need to ensure that you give appropriate and prompt notification of the end of the FM event.
Review material contracts that may not have Force Majeure
Major contracts normally will include FM provisions, but where a material contract does not have a FM clause and a party is not able to perform its obligations under the contract, you will need to evaluate the contract to determine who bears the risks associated with such non-performance. In addition, it will be important to consider whether the non-performing party must provide notice to the other parties in relation to the non-performance and the parties' obligations to mitigate loss. Key services, dry hire, lease, infrastructure, supply or procurement contracts for example may have covenants to maintain your plant and equipment in good working condition, but they may not have provisions for FM. Where a contract includes covenants or warranties in relation to maintaining the condition of plant, materials or other assets, you should consider whether you are at risk of breaching such covenants or warranties due to flood conditions. Again, you should evaluate the contract to determine which party assumes the risk in such plant, materials and assets, notice requirements and obligations to mitigate loss or damage. It may also be the case that the contract may be terminated by frustration. It will be important to carefully consider the allocation of liability for loss resulting from such termination.
Allocation and resourcing of clean-up obligations
Most mining services contracts will include an allocation of responsibility for cleaning up the mine site. Subject to the suspension of obligations under an FM provision, you should consider who is responsible for cleaning-up the mine site after the flood event and who will bear the costs of the clean-up, for example the costs of hiring additional equipment and engaging additional labour as required.
Given the number of mines in Queensland facing similar operational issues due to the floods, it will be important for mine operators to take action promptly to secure the resources (ie. personnel, equipment, plant and parts) required for clean-up, recovery and the re-commencement of operations. Recovery efforts may be hindered by labour shortages and delays in the delivery and installation of replacement equipment. Mine operators may also need to be prepared for labour costs and the price of equipment, plant and parts to rise as demand for these resources increases.
Review finance contracts and obligations including Material Adverse Change provisions
Material Adverse Change (MAC) clauses are commonly used in acquisitions and project financing transactions as a means of allocating risk between the signing and closing of an agreement with respects to adverse business conditions or developments. MAC clauses generally provide the purchaser with a right to terminate or renegotiate if events occur that are detrimental to the target asset/company. MAC clauses may also allow your lender to foreclose or restructure your financing arrangements. You may want to revisit MAC clauses in your acquisition/sale agreements or financing arrangements in light of the flooding and consider whether early notification or negotiation may be appropriate. Lenders to all participants along the production to end-user chain will need to consider the impact on borrowers of any deferred or lost revenues during this period. For example, where the affected mines have been project financed, the cash flow available for debt service will be affected and this could potentially cause payment default or a breach of applicable cover ratios. Similar considerations apply for debt service cover ratios that might apply under a structured trade finance facility.
Consider whether the impact of the floods will cause you any issues with making repayments to financiers and whether the events and any loss suffered will cause you to breach any of your banking covenants. If this has occurred or it is likely that they will occur, you should consider early notification to your financiers and the negotiation of appropriate extensions or waivers.
Stand-down of employees
The floods are likely to result in impeded access routes and mine closures and have the potential to leave hundreds of workers unsure about the future of their employment. You should be aware of the possibility of employees being forced to stand down and consequential liability should action to reinstate access routes and re-open mine sites not be taken in a timely manner. For example, if an employee cannot be usefully employed because the floods have resulted in a breakdown of machinery or equipment, then employers may be able to stand down the employees without pay. The right to "stand down" employees without pay is subject to any express rights that employees may have in their contracts or enterprise agreements, which might impose additional requirements on the employer. "Stand down" should not be used indefinitely or for long periods of time. If it appears that employees will be stood down for a long period, employers may need to start looking at their obligations in relation to redundancy and redeployment.
Extent of insurance coverage
When considering whether to make a claim on your insurance you may find that you are not covered for flood damage. It will depend on the precise wording of the policy and the source of the water which caused the damage. You will need to consider whether a claim needs to be made for business interruption as well as property damage and whether your current level of cover is adequate to cover the loss. You will also need to consider your obligations in terms of early notification of the claim and mitigating the loss. However, you may need to obtain the approval of your insurer before incurring restoration costs in some circumstances. It will be necessary to document the losses and provide evidence of expenses when quantifying your claim. You will need to consider whether certain losses are excluded by the policy.
All stakeholders will need to review their potential exposure to loss and liability that might result from floods affecting mines and associated infrastructure. Certain actions may be required under contracts or at law to ensure exclusions or limitations of liability can be fully enjoyed, and to otherwise mitigate potential consequences. The events in Queensland are a timely reminder to all industry participants that emergency response and contingency plans should be proactive and not reactive in nature.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.