Force Majeure and Other Coronavirus-Era Legal Challenges: Lessons for Resource-Dependent Countries from the Glencore-Zambia Dispute

Like the rest of the global economy, the coronavirus pandemic has hit the extractive sector hard. Oil prices have free fallen. Most metals prices have plummeted in the first quarter of 2020, with low prices projected throughout the rest of the year. Operations at 265 mines across 34 countries have been disrupted, as operators struggle with depressed demand, hampered transport and logistics, and disrupted supply chains.
 
In the face of these grim realities, extractive companies may attempt to excuse, delay or otherwise revise their contractual or legal obligations.
 

One route companies may seek is to invoke “force majeure”. Force majeure clauses excuse a party from contractual obligations due to unforeseen circumstances beyond the party’s control that hinder or prevent the party from performing those obligations. Depending on the legal tradition, force majeure provisions may be included in law, contract, or both. Contractual clauses will usually list events that constitute force majeure and often include a “catch-all” provision for other events beyond a party’s reasonable control. Notably, under English law, a drop in prices affecting profitability of a contract likely does not by itself constitute force majeure. Experts have provided various guidance for governments and companies on how to address force majeure issues during the coronavirus pandemic.
 
Companies may also seek to negotiate “alternatives” to force majeure that involve other claims under law or contract, or requests for exemptions from law.
 
Governments in resource-dependent countries should not be caught off guard by these claims, particularly at a time when they urgently need funds to respond to the present health and economic crises. Glencore’s recent stand-off with Zambia over plans to shut mines provides some useful lessons to help governments get prepared.
 
Zambia’s stand-off with Glencore
 
In early April, Glencore’s Zambia subsidiary, Mopani Copper Mines, announced plans to place its mines on “care and maintenance” (i.e., a cessation of production) citing “the impacts of a rapid decline in the copper price […] further impacted by the critical disruptions to international mobility, transportation and supply chains arising from COVID-19.” The announcement did not specifically cite force majeure and Zambian legislation allows companies to suspend production, with 90 days’ notice and the mines minister’s approval, for reasons other than force majeure.
 
Nevertheless, Zambia’s mines minister said the company had earlier declared force majeure and protested the move, which he said would put 11,000 jobs at risk. He stated that there were no grounds for a force majeure claim because events did not make continued mining impossible, nor did Mopani comply with the notice requirements.
 
The conflict escalated with Zambian authorities threatening to revoke Mopani’s licenses. The company subsequently backed down, agreed to restart mining and provided 90 days’ notice of its intent to place the mines on care and maintenance.
 
For now, talks appear to be moving in a positive direction. Mopani has indicated it would continue to discuss potential solutions with the government during the notice period.
 
But governments faced with similar challenges should take note and consider the following actions.
 
1. Proactively review extractive sector contracts and laws
 
This will enable officials to understand the scope and requirements of both force majeure and other provisions under which companies might seek to adjust their contractual or legal obligations.
 
In reviewing force majeure clauses, authorities should scrutinize:

• the bases for claiming force majeure
• any mitigation and notice requirements
• the consequences of force majeure (including whether a party is excused from performance altogether or the time frame for performance is extended for the duration of the force majeure event)

Force majeure clauses may not explicitly include epidemics as a listed event. Of the approximately 2,000 company-state extractive sector contracts available on the database ResourceContracts.org, just over 300 explicitly mention epidemics (none include pandemics). However, clauses may mention other applicable events such as quarantines, or include a “catch-all” provision. The force majeure clause in Mopani’s Mufulira-Nkana contract specifically lists “epidemics” as well as “unavailability of materials or equipment.” Nevertheless, it is the force majeure event that must prevent the party from being able to perform its obligations. The fact that Mopani cited other factors, such as the drop in commodity prices, casts doubt on whether the pandemic itself could be considered the effective cause in a force majeure claim.
 
Further, the Mufulira-Nkana force majeure clause also requires the party making the claim to take “all reasonable precautions, due care and reasonable alternative measures with the objective of avoiding such failure and of carrying out its obligations under [the] [a]greement.”  Glencore’s subsequent submission of a proposal to the government suggests that the company had not yet thoroughly explored alternative measures when it made its initial statement.
 
Governments should therefore note that inclusion of epidemics or other relevant events in force majeure clauses does not end the inquiry. Causation and mitigation requirements included in the contract are key. Recent English precedent is instructive in this regard. In Seadrill Ghana Operations Ltd v Tullow Ghana Ltd, the court found that Tullow could not rely on force majeure under its drilling services contract with Seadrill. This was because the event Tullow cited was not the sole reason for Tullow’s inability to perform (i.e. there were also reasons other than the claimed force majeure event) and, further, Tullow had not used “reasonable endeavours” to circumvent the force majeure event (e.g., drilling in other available, albeit less profitable, fields). 
 
Moreover, governments’ scrutiny of contracts and law should go beyond force majeure clauses. As noted above, Mopani’s statement did not explicitly invoke force majeure, and the contract includes another clause providing for suspension of production pursuant to Zambia’s Mines and Minerals Act. The company’s discussions with the government may have centered around these provisions.
 
Government officials can therefore expect that companies may seek to exercise other rights or raise other legal issues under their contracts, beyond force majeure. Officials should review, for example, clauses that provide for time extensions or renegotiation on the basis of material adverse changes in circumstances.
 
In a recent New Producers Group Project discussion on force majeure a national oil company executive shared that they were preparing a thorough analysis of active extractive contracts to identify risks and prepare the government responses.
 
2. Beware of requests for deviations from legal requirements
 
Officials should be aware that in seeking alternatives to non-performance, extractive companies are likely to press for different kinds of deviations from or exceptions to the law. Governments should approach such requests with caution.
 
Zambia’s mines ministry indicated that Mopani had sought tax relief from the government, specifically with respect to value added tax. Zambia’s chamber of mines has also urged the government to provide tax relief, citing the dispute with Mopani as an indication of how “desperate” the industry’s financial circumstances have become.
 
In Colombia, some 25 business leaders, including the president of the Colombia Mining Association, wrote to the president calling on the government to simplify procedures with respect to royalties, prior consultations with Afro and indigenous communities, and obtaining environmental licenses. Critics of the proposals fear that industry is using the pandemic as a pretext to further dilute environmental standards that have already been weakened since 2014. They further questioned the economic benefit, pointing out that some of the executives represent companies with pending license applications and whose projects will not begin operations for several years.
 
When considering how to respond to such requests, government officials may want to consider current goals for the sector, based on:

• its overall importance to the economy
• the economic importance of particular projects at the national or local level
• what phase various projects are in (i.e., exploration, development or production)
• what the government most needs from the sector, whether revenues, employment or both

 Governments should also consider whether measures requested by industry will in fact provide immediate benefits – and whether they might have long-term negative impacts beyond the end of the coronavirus crisis. Particularly with respect to tax relief, various experts have provided a number of cautions.
 
3. Take policy decisions transparently
 
It is crucial that government officials take any decisions to grant legal deviations transparently. This will both reassure the public that concessions are in the country’s best interest and avoid any risks of corruption. Governments should publish details of relief granted to extractive sector companies, including:

• full text of amended contracts, laws, orders or other documents providing relief terms
• names of companies or projects claiming and receiving relief if relief is not sector-wide
• basis for the decision to provide such relief
• expected duration of such relief (even if the end date may not be certain; governments should keep the public informed as the situation evolves)

 In the wake of the pandemic’s economic impact on the extractive sector, governments will face various company claims and requests for relief. Resource-dependent governments cannot afford to be reactive. By preparing their strategy in advance and implementing it transparently, governments can avoid legal disputes with companies, as well as unwise concessions that ultimately harm the country’s interests.


Nicola Woodroffe is a senior legal analyst with the Natural Resource Governance Institute (NRGI).


Photo credit: Zambia copper mine by Flickr user mwmbwls via Attribution-NonCommercial-ShareAlike 2.0 Generic (CC BY-NC-SA 2.0) license