"Acts of god" don't excuse mining companies profiting from disaster
Lawyer urges rethink in wake of Australian storms
Last December massive storms hit the world's largest single coking coal mining zone, in Queensland, Australia, caused billions of dollar's worth of damage and disruption.
All the region's major coal mining companies rushed to invoke the "force majeure" clauses in their supply contracts, so as to justify postponing coal deliveries.
As London Calling commented at the time, the immediate losses didn't mean the companies wouldn' t stand to gain in future:
"In the medium-term the economic future for Rio and fellow Australian coking coal miners looks bright. Thanks to the major squeeze on coking coal supply, its market price has risen - as has that of lower-quality, lower-cost thermal coal used to generate electricity, and which the major companies also mine and deliver".
Addressing the critical question of whether these climactic events could justifiably be classified as force majeure, London Calling went on:
"The term ... is colloquially translated as an "act of god" (even in secular states) and legally entitles a supplier to default if it can't fulfill its commitments because of unforeseen extra-human events.
"However, the December 2010 catastrophe was arguably neither natural nor unpredicted". See: As storm clouds break, London Calling gets biblical
Lending strong weight to this argument last week was an Australian mining lawyer who formerly worked for Vale of Brazil.
Robert Milbourne pointed out that: "[I]f extreme weather events become more foreseeable, that could drive changes to the way contracts define responsibility under force majeure provisions of suspension, termination as well as allocation of goods and services for partial disruption.
"If you had a termination event, once you get your mines back up and running, you are going to sell it (the commodity) at the higher price.
"But if you simply have a suspension you have to deliver at that pre-event price".
In other words, it's the producers which would have to foot the bill for at least part of the social and environmental losses - rather than profit from the disaster.
Mr Milbourne concluded: "If severe weather is more foreseeable, then [company] directors are going to be charged with more obligation to prepare accordingly. These should not automatically be viewed as acts of god. These are things that people need to understand can happen, are happening and almost certainly are going to happen again."
[Comment by Nostromo Research, 5 March 2011]
Severe Weather, Forecasting Could Prompt Force Majeure Rethink
By David Fogarty
28 February 2011
Worsening weather and better forecasting methods could push the mining sector to change force majeure provisions in supply contracts and sharpen how blame is allotted when storms or floods disrupt regular business.
Climate scientists predict global warming will trigger greater extremes of weather such as more intense droughts, cyclones and bushfires. For miners and other resource firms that means more disruption to coal, iron, bauxite and gold operations, but many weather events are foreseeable.
Recent deadly floods and cyclones in Australia occurred during the monsoon season that meteorologists said months in advance would be above average because of the strong La Nina weather pattern that usually brings heavy rains and storms to he country's north and east.
"If it is true that some of these floods were foreseeable, there is going to be an argument whether that was in fact a force beyond the expectation of either party," said Robert Milbourne, a mining and resources lawyer for global law firm Norton Rose.
That meant a rethink of provisions under force majeure, which is defined as a force greater than the parties had contemplated and allows for suspension or termination of obligations during an unforeseen event.
"Going forward it is critical that people rethink the terms of force majeure provisions. In my view, it needs to be considered, at least for commodity contracts, a commercial term," Milbourne, a former senior counsel for Brazilian miner Vale, told an industry seminar in Singapore on Friday.
Milbourne, based in flood-hit Queensland state in Australia, pointed to the abundance of private weather forecasters as well as services from the government bureau of meteorology that companies can use to better predict bad weather and impacts on their operations and staff.
Yet not all companies were using these services, placing them at greater risk of disruption and loss of revenue, he said.
He said if extreme weather events become more foreseeable, that could drive changes to the way contracts define responsibility under force majeure provisions of suspension, termination as well as allocation of goods and services for partial disruption.
"If you had a termination event, once you get your mines back up and running, you are going to sell it (commodity) at the higher price.
"But if you simply have a suspension you have to deliver at that pre-event price.
"To me that is a $1-billion question for the Queensland economy and it hasn't really been adequately discussed," he said. The recent floods led to 16 coal mines in Queensland covering total annual capacity of 94.3 million tons to declare full or partial force majeure.
"This is really a commercial term, that everybody should be more aware of, the variations in how force majeure can be implemented."
Allocation was another and a disaster could mean a company being able to deliver only some of its goods or services.
"You get to choose if you're the service provider who gets that good or service. And that is an incredible financial power, who gets it, who doesn't.
"Most contracts never address that issue and it really has not been thought about by most commercial parties.
"Rather than allowing the mining or service provider to have that discretion, it is a simple thing you can do putting in a contract to allow for priority allocation."
More extreme weather events also had implications for directors and regulators, such as legal consequences of foreseeable bad weather.
"If severe weather is more foreseeable, then directors are going to be charged with more obligation to prepare accordingly. These should not automatically be viewed as acts of god. These are things that people need to understand can happen, are happening and almost certainly are going to happen again."
(Editing by Clarence Fernandez)