Cutting through the fine print in mining contracts

In the mining industry, contracts are central to allocating risk and managing commercial relationships. Mining and exploration companies (referred to as “principals” in this context) frequently engage contractors to supply goods or perform services. Contractors are regularly asked to enter into a contract provided by the principal in relation to the provision of goods and services – sometimes based on an industry standard (for example, the Australian Standard series), using the principal’s standard terms or an entirely bespoke contract.

Whether you are a principal seeking to manage project risk or a contractor seeking to protect your commercial position, it is critical to review every contract carefully and to have clear policies in place regarding the level of legal and commercial risk you are prepared to assume.

In Part 7 of HopgoodGanim Lawyers’ Mining Project Lifecycle Series, we outline some key considerations that both principals and contractors should bear in mind when drafting, negotiating or signing contracts.

Careful review and execution of contracts

All parties should ensure that contracts are properly drafted, dated, executed (and, where required, witnessed), with all attachments and schedules included. Variations must follow the procedures set out in the contract and should be stored with the original agreement. Where a deed is used, any variation should also be by deed.

Indemnities and risk allocation

Indemnities are often contentious.

• Principals should avoid indemnifying contractors for losses caused by the contractor’s own acts, omissions or negligence.
• Contractors should resist indemnities that transfer the principal’s liability to them, unless the risk is within their control and priced appropriately.

In both cases, indemnity clauses should be carefully reviewed with insurers to ensure appropriate coverage.

Insurance

Clarity around insurance obligations is essential.

• Principals should require contractors to maintain adequate insurances (for example, workers’ compensation, public liability, professional indemnity, plant and equipment insurance) and retain the right to arrange cover at the contractor’s cost if this is not maintained. Contractors should be required to ensure insurance coverage extends to any subcontractors engaged for the relevant work.
• Contractors should be cautious of “additional insured” clauses which require the principal to be a named insured on their policies, unless agreed by their insurer and factored into pricing. If a contractor must accept such a clause, then any commitment to name the principal as an insured must be limited to the contractor’s indemnity, as agreed in the contract.

Liability caps

Contractors often seek to cap their total liability under a contract, commonly by reference to contract value or insurance cover. Principals should consider whether this cap is commercially appropriate given the risks of the project. Conversely, contractors should avoid accepting uncapped liability unless exceptional circumstances apply.

Liquidated damages

Liquidated damages (LDs) are common where timely performance or achievement of performance standards is critical.

• For principals, LDs must reflect a genuine pre-estimate of loss, otherwise they may be unenforceable as penalties.
• For contractors, LDs should be limited in duration and aggregate, and capped at a percentage of the contract value consistent with their accepted risk profile.

Consequential loss

Both parties should ensure that liability for special, indirect or consequential losses (for example, loss of profit, revenue, goodwill or increased operating costs) is expressly excluded. To remove uncertainty, “consequential loss” should be clearly defined in the contract. 

Health, safety and environmental compliance

Health and safety considerations are particularly important where work is being performed on site. Contracts should give the principal the right to enforce compliance with health, safety and environmental requirements. Contractors, however, should review such provisions carefully to ensure they are adequately protected from any costs or delays arising from changes to the principal’s policies “from time to time”.

Suspension and termination rights

Principals should have clear rights to suspend or terminate contracts; whether for convenience or for cause (for example, material breach, insolvency or unsatisfactory performance). Payments following suspension or termination should be limited to the reasonable value of completed work. Contractors should check these rights carefully and ensure they are appropriately compensated for non-default termination.

Warranties and standards of work

Contracts should set clear expectations for the standard of services and goods.

• Principals may require warranties around contractor competence, qualifications and equipment condition. Where appropriate, contracts should also require the contractor to provide the services in accordance with relevant laws, any applicable regulatory approvals or Australian Standards and any reasonable directions of policies of the principal.
• Contractors should ensure warranty obligations are reasonable, time-limited and do not extend to matters beyond their control.

Force majeure

Force majeure provisions should be drafted to reflect genuine externals risks, not contractor-specific issues such as equipment breakdowns or labour disputes.

Property and security interests

If a principal provides materials or equipment to a contractor, this may create a “PPS Lease” under the Personal Property Securities Act 2009 (Cth). Failure to register could expose the principal to losing title if the contractor becomes insolvent. Both parties should seek legal advice where goods or equipment are loaned or hired.

Proper execution and authority

Contracts should be signed by all parties in a way that binds them at law. For most Australian companies, a contract should be signed by two directors, or a director and company secretary. Parties should verify authority through ASIC searches where necessary, and confirm any agent, attorney or authorised signatory has proper power to bind the company.

Considerations

Contracts in the mining industry are often complex documents that govern high-value and high-risk projects. Principals are rightly focused on protecting project outcomes, while contractors need to avoid accepting unmanageable liability. By carefully negotiating key terms, both parties can better balance risk and avoid costly disputes.

For tailored advice on drafting, negotiating or executing contracts, please contact our Resources and Energy team.