21 January 2011 – The floods affecting Queensland, Victoria and NSW have been described as unprecedented and their impact on the economy will indeed be extraordinary. Early estimates place the cost of direct damages to the Queensland economy alone in the vicinity of billions of dollars.
Although perhaps not yet fully understood, consequential damages resulting from the floods have the potential to be equally severe. The series of floods that have affected and continue to affect Queensland, New South Wales and Victoria are likely to become collectively the most expensive disaster in Australian history.
Following is a series of briefings in relation to the impact of the floods on various sectors of the economy. Whether you are a developer, owner, landlord or tenant of real estate in the affected regions the floods and inclement weather create not only usually dangerous on site conditions but also raises various legal issues that require urgent evaluation.
Site assessment – Intense rain events, flood and inundation create safety, environmental and other risks.
In areas where flood waters have receded and access is available site assessment will already have been undertaken, but, if you have not already done so you should think about the following steps:
- Generally – You should urgently evaluate your sites for actual and potential flooding events and risks associated with such events.
Safety – For development and industrial sites, you should immediately evaluate your safety and health management systems to ensure those systems remain effective in ensuring the safety of employees and the public in unsafe areas. Importantly, you should ensure such plans provide adequate means of identifying and warning people of the onset of severe weather events, a system of evacuation or moving people to a place of safety and ensuring the site and equipment is properly secured to minimise risk of injury or loss. For commercial and retail sites, you are also encouraged to undertake this review. For instance, to determine if any site areas subject to flooding need to be made off limits (such as basement car parks) or any steps taken to minimise the risk of “slip and falls” accidents.
- Environmental – Flooding may cause environmental issues on sites (for example, if sumps, sewerage systems or environmental traps overflow or fail). While diligently monitoring and taking action to minimise such environmental risks eventuating on site is important, where such an environmental event does arise, you need to ensure it is appropriately managed as any environmental breaches will still be investigated and may result in prosecution.
Major contract review
Site contracts to be reviewed include construction contracts, sale contracts, agreements for lease, leases, development agreements, insurance contracts, supply and procurement contracts (such as plant and equipment maintenance contracts) and employment contracts.
Where actual site flooding has occurred on your site, you should review all relevant site contracts to determine your obligations in respect of that event and your liability for loss or damage to the site and property on the site. For example, with flooded premises that are leased, the lease will need to be reviewed to determine:
- if the landlord or the tenant is responsible for site “clean-up” repairs and maintenance
- who is liable for loss or damage caused not only to the site but the landlord’s property and the tenant’s property
- if a claim should be made against a party’s insurance policy, and
- if the tenant has any rent abatement rights.
Additionally you should assess all material site contracts to determine if the floods impact on any party performing its obligations under that contract (whether actual site flooding has occurred or not). If performance of such obligations is affected, you then need to determine from the contract the following:
- If the non-performance is excusable under a force-majeure provision or capable of postponement under an extension of time provision in the contract? If not, whether the contract may be terminated by frustration?
- Which party bears the risk associated with that non-performance?
- What contractual notice requirements and other obligations arise for each party in such circumstances? For example, an obligation to mitigate loss or damage incurred.
- For example, the review of a construction contract will determine whether the contractor bears the risk of inclement weather or has the right to extend the date for practical completion of the works.
Claim against insurance policy
Australia frequently experiences flooding, predominantly caused by prolonged or heavy rainfall. Riverine (slow-onset) flooding and flash flooding are therefore common risks. Insurance policies distinguish between the two, and many policy holders may not be covered for riverine flooding. Policy wording and exclusions differ between major insurers leading to complexity. Further, many policies simply do not protect again riverine damage (though storm and flash flooding damages might be covered).
Whether a claim can be made will therefore depend on the precise wording of the insurance policy and the source of the water which caused the damage. Practically, to make a claim you will need to document your losses and provide evidence of expenses to quantify your claim.
You will also need to consider whether a claim needs to be made for loss of rent, business interruption or property damage, what your obligations are in terms of early notification of the claim and mitigating the loss and whether you need approval of the insurer before clean up and before incurring restoration costs.
Stand-down of employees
For development and industrial sites the floods are likely to result in site closures or impeded work environments which have the potential to leave workers unsure about whether they will be paid and the future of their employment. You should be aware of the possibility of employees being forced to stand down for periods and the consequential liability should you not take action to re-open such sites in a timely manner.
The right to “stand down” employees without pay requires that an employee cannot be usefully employed because flooding has resulted in a breakdown of machinery or equipment. The right is subject to any express rights that employees may have in their contracts or enterprise agreements, which might impose additional requirements on the employer.
“Stand down” should not be used by employers indefinitely or for long periods of time. If it appears that employees will be stood down for a long period, employers may need to start looking at their obligations in relation to redundancy and redeployment. Of course, employers should explore alternatives to stand-down such as paid leave or working from other locations.
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.
These 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 (among other matters) the operations, financial position, business strategies or 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.
Of course, in the rush to make access available to flood affected properties so that businesses can commence operations again as soon as possible, directors will need to make sure the company (whether a property owner or tenant) is complying with its strict obligations under Workplace Health and Safety legislation to provide a safe place of work.