Severe weather, forecasting could prompt force majeure rethink

Fri Feb 25, 2011 3:36am EST

* Better weather forecasting could change force majeure provisions

* Directors could face more pressure to manage climate risks

By David Fogarty, Climate Change Correspondent, Asia

SINGAPORE, Feb 25 (Reuters) - 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 contract 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 contracts. 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.

FORESEEABLE RISKS

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 tonnes 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 are not 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)

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