Scale of disaster may warrant overhaul for resources sector of force majeure clauses

australia-storm_gree_20110202050902_320_240.jpegThe cyclone fuelled batterings this year of key Australian energy and mining operations should trigger a complete rethink on force majeure provisions, according to a senior resources lawyer. The caution comes as many of the country’s largest and mid-tier oil, gas and minerals producers, and owners of related export infrastructure, count the emerging full cost, liability and contractual exposure from operations shut down temporarily or permanently amid the massive floods, rain and storm damage that have swept Australia since New Year’s Day.

Minter Ellison Lawyers Senior Associate, Ms Stephanie Rowland, said the resources sector had already witnessed this year a number of operators seeking shelter from further financial impact by enacting force majeure provisions – and more were possible as northern Australia continues to face a challenging wet season buffeting. However, Ms Rowland said, the latest enactments, seemingly more geographically and commodity style widespread than historically the case because of the sheer scope and intensity of Australia’s natural disasters this year, had catapulted force majeure issues to a “top of mind” consideration.

Force majeure clauses in contracts relieve a participant from liability under a joint operating agreement where their failure to perform is caused by a ‘force majeure’ event, such as natural causes beyond a participant’s control.

Addressing the Excellence in Oil and Gas’ forum in Sydney recently, Perth-based Ms Rowland said it was fair to conclude that the sheer scale this time around of Mother Nature’s damage to mine sites, offshore installations, deliverability and even to the morale of personnel and regional communities, had caught risk management personnel by surprise. “What we have now is an environment where potentially, force majeure clauses in force for some years, have been rendered outdated almost overnight simply because their scope and detail either fails or insufficiently addresses the liabilities on both sides of a contract, of such large-scale and in some cases, unpredictable and unexpected impacts,” she said. “The result is that force majeure provisions have reclaimed the spotlight as a serious ‘re-risk’ to project, product supply and corporate confidence.

“Those re-risks may be exacerbated if overseas parties – and therefore jurisdictions – are involved. Australia’s resources sector is left facing a question – was it adequately prepared and were its interests adequately safeguarded, regardless of natural weather circumstances?”

Rowland told the forum that energy players needed to use the lessons learnt from managing such massive weather impacts to re-assess, revise or perhaps totally re-negotiate their force majeure provisions in key contracts. “It may also be useful if any such revision, at least at the broader industry level, invites input from external but related stakeholders. We saw in the Brisbane floods, how quickly issues of insurance liability – often a secondary casualty of disputed force majeure claims – comes down to the absolute finite details and interpretation of a contract.

“In the wake of such disasters and potential long-term dispute resolution, there is no better time for Australia’s resources sector – whether oil, gas or hard rock mining – to sit down and rejuvenate with crystal clear clarity and intent, its force majeure protocols.”

Rowland said the scope of such a review or negotiation – which should apply to any party within a force majeure contractual environment – could include more detailed and additional extra conditions recorded into key agreements. “While any number of non-weather incidents can trigger force majeure, the extraordinary climatic start to 2011 has exposed force majeure as potentially a whole new legal and corporate ball game – and there should be no expectation by risk analysts in the resources sector that the need for revision will subside any time soon,” she said.