Queensland Floods Crisis: Legal Considerations as Companies Recover and Return to Operation

Sydney, Jan 24, 2011 AEST (ABN Newswire) - The Queensland floods have been described as unprecedented and their impact on the energy and resources industry, among other industries, will indeed be extraordinary. Early estimates place the cost of direct damages to the Queensland economy in the vicinity of billions of dollars (including an estimated cost of AUD$2.3 billion to resource companies according to the Queensland Resources Council), and some commentators are projecting this to become the most expensive disaster in Queensland and Australian history. Issues abound for companies with Queensland flood affected operations to plan for their recovery and return to business. Additionally, some meteorological commentators have suggested that these weather patterns are likely to be repeated in the near future, as a result of the La Nina phenomenon currently impacting on the country. Queensland based companies therefore need to incorporate lessons learnt from recent flood events into business planning moving forward and consider the numerous legal issues associated with their business' recovery and return to operations.

Last week, Norton Rose Australia prepared a Client Briefing on the "top ten" legal issues for energy and resources companies in light of the central Queensland Floods. This update is intended to complement that initial briefing. As the impacts of these events continue to unfold, Norton Rose Australia will provide further updates as appropriate. Norton Rose had also scheduled a Seminar on the impacts of the Floods, which was postponed in light of the evacuation of Brisbane city due to the inundation. This Seminar has now been rescheduled for Tuesday 1 February, 2011 from 7:30-10:00 am. A separate invitation will be distributed.

Post Flood Related Safety Issues

Given the severity of the floods, all Queensland based operations should now 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 of boards and safety management teams should include the impact of flash flooding and riverine flooding in contingency plans and evaluate the safe working conditions for staff not only at remote sites such as mines, railways and ports, 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. Among the risks that regulators and safety experts have identified are: (i) increased likelihood of pit wall instability; (ii) ramp and road instability; (iii) stability of tailings dams, stockpiling and waste dumps; (iv) new water risks need to be properly cordoned off or identified and proper protective gear provided; and (v) water corrosion to electrical equipment and mobile equipment (such as braking) must be identified and corrected.

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 (Coal Mining Safety and Health Act 1999 (Qld) or Mining and Quarrying Safety and Health Act 1999 (Qld), Petroleum and Gas (Production and Safety) Act 2004 (Qld) and associated regulations). Some of the steps that should be considered include following the change management procedure in your Safety and Health Management System, involving Open Cut Examiners in risk assessments in and around the excavation and following the statutory process for developing or changing SOPs as a result of flooding.

Post Flood Crisis Management Systems Review

One of the key issues with respect to emergency response plans is foreseeability of risks. The risk of a flood event is now a known risk to all Queensland businesses. Meteorological warning capabilities were available that provided advance notice of flash flooding and riverine floods. Companies may examine whether to incorporate real-time alerts and business communication protocols in response to urgent meteorological developments. Safety systems, if initially focused on remote site operations, should incorporate all locations of risk (including the CBD) and should include corporate plans which provide access to information, locations where staff can meet if the office is closed for a period of time and provisions for off-site weather secure access to archived original documents. A practical emergency response plan or crisis management system is essential to protect staff and visitors and ensure business continuity. An internal review or audit of procedures to ensure compliance with statutory obligations and industry best practice may therefore be timely.

In addition, the recent floods, drought and cyclones have highlighted the importance of maintaining a Crisis Management System that covers the risk of severe weather events. Directors and officers responsible for crisis management should have regard to, among other matters, site-specific emergency response plans, structured emergency response team/s, training of wardens and other staff by qualified trainers, detailed evacuation maps and signage, evacuation and/or lockdown drills, on-line warden training and drill register and procedures to ensure continual improvement.

Post Flood Impact on Energy and Resources Firms - Force Majeure and Commodity Sales Disputes

Industry analysts such as Wood McKenzie estimate that coking coal, now far more scarce in the seaborne market than it was one month ago, could effectively triple in value and reach up to US$500 a tonne in the spot market. In our experience, 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, 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-takers 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. Such parties may seek judicial recourse to enforce rights to allocation. The law of allocation in the event of force majeure is evolving and there is little clarity from the courts with respect to the rights of the producer or off-taker in such circumstances. One line of authority provides that, where parties do not expressly set out the basis of allocating limited supply, the obligations of a supplier to other customers are irrelevant when considering a particular contract. In such circumstances, the court may disregard the fact that, if the supplier meets its obligations under the particular contract in full, it would not be able to meet its supply obligations to other customers. Another line of authority suggests that the courts may be willing to look to a supplier's contractual commitments to other customers. In such cases, the courts may accept appropriate apportionment as a solution, whether pro-rata, chronological order of contracts or some other basis. The available supply would need to be allocated in a manner which is proper and reasonable in the relevant trade. In one particular case, the court found that, where a supplier has obligations to many different customers but has only enough supply to fulfil one contract, the supplier may fulfil the one contract and rely on force majeure as to the others (note that whether it is possible to rely on force majeure will obviously depend on the specific terms of the force majeure clause). The appropriate apportionment may also depend on the commercial circumstances. In other words, if a supplier supplies some customers and not others, it may be necessary to demonstrate that such an allocation was commercially reasonable. What may be a proper approach in one case may be unreasonable in another. Accordingly, parties affected should seek early counsel as to their potential rights.

Post Flood Recovery - Directors' Duties and Obligations

Directors and boards of publicly listed companies will need to continue to closely monitor business developments in light of the flood events, and now turn their attention to duties associated with post flood recovery. As noted in our last briefing, these external obligations include ASX continuous disclosure requirements, which may now include 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 to the ASX 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.

Directors and officers should also consider their common law and statutory duties, in particular their duty to exercise care and diligence and to act in good faith in the best interests of the corporation and for a proper purpose. Should a director be significantly affected by the disaster, he or she should reconsider whether there are any practical constraints in continuing to serve as a director. In addition, directors and officers should review and ensure that the company has adequate insurance in place (specifically, that the company's insurance policies cover the kinds of extreme weather events that have been experienced recently) and that the company has adequate disaster recovery policies in place to deal with such events. It would be timely for 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.

Understanding the distinctions in Insurance Coverage for Floods; Proposed Changes to Insurance Policies

Insurance policies commonly distinguish between riverine (slow onset) 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).

The Insurance Council of Australia (ICA) has encouraged a "a universal definition for flooding" to assist consumers. However, an early 2008 insurance industry application to the Australian Competition and Consumer Commission (ACCC) urging insurers to voluntarily adopt a common definition for flooding was thwarted by objections from consumer legal groups. Consequently, the ACCC did not authorise insurance companies to adopt a common definition. The recently established Commission of Inquiry (discussed below) has been asked to consider insurance policies and practices in light of the floods, and the Commission of Inquiry and ACCC are likely to review current practices. In the meantime, it is important that companies take the time to ensure that they understand the type and extent of cover provided by their insurance policies. Unfortunately, consumers may need to prepare themselves for the possibility of a lack of insurance coverage for the type of flood event recently experienced in Queensland.

Post Flood Insolvency Risks and Trade Creditor Concerns

The immediate impact of the disaster for many businesses is likely to include a reduction of incoming revenue. Fixed obligations, including interest on borrowings, will nevertheless normally remain payable despite the reduced cashflow. If the reduced cashflow affects the ability of a business to meet debts as and when they fall due, then there is a danger that a business may become technically insolvent. It is important to remember that the test for insolvency is based on cashflow, so that an abundance of assets does not protect a company from insolvency if there are no funds available to meet known debt obligations as they arise. While liquidation is the ultimate result of insolvency, continuing to trade whilst insolvent raises immediate and important liability issues for directors of companies to consider. If owners and/or operators are experiencing cashflow problems due to the recent floods, they should immediately analyse their organisation's ability to meet its short and long term obligations and seek professional advice to assist with, for example, restructuring payments to creditors, seeking additional funding, or securing collection with respect to debtors.

Businesses contracting with third parties for goods and services should also exercise reasonable precautions with respect to third parties that may be at risk of becoming insolvent. The safest course is not to contract with any company that you consider to be at risk, except on "cash on delivery" (COD) terms. However, where contracting on COD terms is not possible, the standard protections should be considered, for example, bank guarantees, letters of credit and parent company guarantees. Parties may also consider protecting themselves by inserting clauses into contracts granting a right to terminate on short notice without being required to show cause, and providing access to audit accounts where the contractor is unable to pay invoices on time.

Post Flood Considerations of Weather Consequences in Commercial Contracts

Professor Neville Nicholls, president of the Australian Meteorological and Oceanographic Society, has noted that recent abnormally heavy level rainfalls can be attributed to the strength of the La Nina phenomenon that we are currently experiencing in Australia. Preliminary reports suggest that intense bursts of the precipitation cycle of this weather pattern caused the flash flooding that occurred last Monday in the Queensland regional town of Toowoomba, as well as the "wall of water" that hit the cities of Ipswich and Brisbane several days later, which resulted in massive loss of life, injury and damage to homes and businesses. The latest update from the Bureau of Meteorology has predicted the current La Nina phase to persist at least into late March and perhaps later into the year. It is important that all affected parties recognise the circumstances which led to the current events are not over and are capable of continuing for the next several months.

It has only been three years since Queensland's resources economy was last deeply affected by floods and mine closures. If La Nina cycles repeat, and regular flooding does become more accurately forecast, then extreme weather may become seen as 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 begin to incorporate the comparative economic value of mine sites that are less likely to be impacted by catastrophic flood events. Such impacts must include not only direct infrastructure damage but business continuity and lost profits

- where contracts allocate responsibility to the contractual party to whom a risk is reasonably foreseeable, companies may want to revisit their contractual obligations, and where appropriate, consider whether flood related risks will need to be specifically carved out or allocated appropriately in future commercial contracting

- changes may need to be made to insurance policies available in the market, as insurance companies do not cover against certainties, and

- there is the potential that weather derivative and hedging instruments may become more important to business management in weather affected regions of Australia.

Post Flood Investigation - Commission of Inquiry and Coronial Inquest

The Government has appointed a Commission of Inquiry to investigate the causes of the disaster. In addition, with the death toll officially now passing 20 lives lost, a Coronial Investigation is probable. Each investigation has the potential to reveal whether industry or government action or omissions contributed to the human and economic losses faced statewide. Insurance companies, government entities, water management bodies and commercial and industrial corporations all may be impacted by these investigations and will need to closely monitor the Commission and Coroner's activities and consider timely submissions.

The Commission, whose final report is due by January 2012, will have powers to summon witnesses, compel production of documents, issue search warrants with the aim of making recommendations to improve planning for and emergency response to natural disasters, as well as legislative changes to better protect life and property in such circumstances. The Commission has already been asked to inquire into the preparation and planning by Federal, State and local governments for emergency flood services; the performance of private insurers in meeting their claims responsibilities; the measures to manage the supply of essential services such as power, water and communications during the flood events; implementation of the systems operation plans for dams across the State and in particular the Wivenhoe and Somerset release strategy and an assessment of compliance with, the suitability of the operational procedures relating to flood mitigation and dam safety; and all aspects of land use planning through local and regional planning systems to minimise infrastructure and property impacts from floods. The government's terms of reference for the inquiry also mandate the group to consider any legislative changes needed to better protect life and property in natural disasters.

Separately, the State Coroner, Michael Barnes, has already commenced investigations into how the disaster occurred. The Coroner has broad investigative powers to request information about the deaths, including from witnesses and investigators, police, doctors, engineers and others. Once his investigations are complete the Coroner will decide, in consultation with families of the deceased, whether to hold an inquest. If he decides to hold an inquest, the Coroner can make recommendations as to the factors contributing to the deaths with a view of preventing similar deaths reoccurring and will issue written findings (but will not focus on liability for deaths).

With losses in the billions, residents, businesses and other organisations may join class actions to seek recovery if and where negligence is found. The Commission and any Coronial Investigation is likely to be influential for those looking to allocate liability.

The Establishment of a Queensland Reconstruction Authority

Queensland Premier Anna Bligh yesterday announced the establishment of a new Queensland Reconstruction Authority (QRA) to assist the State in its recovery and return to operation. The QRA will, amongst other things, manage the enormous task of repairing and rebuilding the State's infrastructure. The Premier has stated that the role of the QRA will be to "work closely with local governments and communities to ensure the unique characteristics of each community are factored into the rebuilding process and to also coordinate government and non government organisations to deliver the necessary services to assist individual communities in the rebuilding process" and that the QRA will be given more extensive powers than the existing rebuilding taskforce including all necessary powers to implement all board recommendations, with additional capacity to "cut through red tape" in order to speed up Queensland's recovery process.

Post Flood Federal and State Recovery and Relief Efforts

Local, state and Commonwealth governments are responding to the Queensland flood disaster through a range of disaster relief efforts. As of 19 January 2011, over $103 million had been donated to the Queensland Premier's Disaster Relief Appeal. A Distribution Committee, chaired by the Australian Red Cross, has been established to administer the donated Premier's Appeal funds. Additional financial relief will be available to those eligible through the Australian Government Disaster Recovery Payment and the Natural Disaster Relief and Recovery Arrangements (NDRRA) schemes. The NDRRA program, a jointly-funded initiative of the Commonwealth and State governments, will assist local Councils to restore infrastructure in the wake of the natural disaster. Under this arrangement, the Commonwealth will meet 75% of eligible costs for the restoration of essential public assets such as roads, bridges and schools.

NDRRA assistance includes personal hardship and distress assistance, concessional interest rate loans of up to $250,000 and freight subsidies of up to $5000, Tier 1 clean up recovery grants of up to $5000 and Tier 2 grants of up to $20,000 for primary producers and small businesses. The Federal government's overall assistance program, which Acting Attorney-General Brendan O'Connor anticipates to be "likely to run into the hundreds of millions of dollars", may take other forms as well. For example, the Government at both State and Federal levels has not ruled out the possibility of imposing a new flood levy, similar to the Medicare levy, to support the substantial rebuilding costs required by the flood.

In light of the gravity of the disaster, Norton Rose Australia has donated $50,000 to the Queensland Premier's Appeal, and has commenced an international internal fundraising effort to support those directly affected. The Firm will continue to support national and local fundraising efforts to assist the communities affected through the rebuilding process.

Contact

Robert Milbourne Norton Rose Group Tel: +61-7-3414-2617 robert.milbourne@nortonrose.com http://www.nortonrose.com