The January 2019 Supreme Court of Canada’s Redwater decision caught headlines for how it dealt with the “E” in ESG. Specifically, it dealt with the priority to be provided to abandonment, remediation and reclamation liabilities for wells in Alberta in the event of an insolvency.
The Court concluded in Redwater that the Alberta Energy Regulator’s transfer and abandonment regulatory provisions – designed to ensure environmental liabilities are addressed – were not in conflict with the federal Bankruptcy and Insolvency Act. The Court ruled that compliance with transfer and abandonment provisions should be addressed using the funds in the estate that would have otherwise gone to secured creditors.
There are material differences between mining operations and the oil and gas operations considered in Redwater, and the application of its principles to mining projects should ultimately be quite fact-specific. However, there are also similarities and likely impacts on the mining industry, including:
- increased lender scrutiny over reclamation liability and environmental practices;
- greater hesitance on the part of lenders to fund projects without an understanding of practiced and planned environmental compliance;
- the imposition of more stringent covenants associated with credit facilities;
- a greater focus on the adequacy of bonds and security placed with regulators; and
- increased public scrutiny of the environmental impacts of mining projects.
Mining companies will need to consider how to navigate these increased pressures, particularly when entering into new working arrangements with third parties. This is particularly true in contexts such as joint ventures where one of the parties will have control as the operator, while other parties will have to consider how to manage their exposure from a distance.
When negotiating and drafting agreements for entry into a new or updated working arrangement with a counterparty, the following points should be considered.
Timing: Set a reasonable timeframe to negotiate the term sheet and definitive documents to ensure that specific environmental and reclamation issues are properly considered and addressed.
Due diligence: Undertake thorough and comprehensive diligence on the project and the counterparty to ensure a full understanding of potential environmental and reclamation issues, and the scope and value of indemnities on offer.
Representations and warranties: Seek to obtain robust representations and warranties from the counterparty, coupled with detailed schedules to promote a high level of disclosure. Do all reasonably possible to avoid later surprises, while considering the true value of the representations.
Contracting parties: Carefully consider which corporate entity will be entering into the working arrangement having regard to the potential of risk to other corporate assets. The creditworthiness of your counterparties is of rising importance. Consider assignment rights and the expanding interests you may have in the nature of assignees and trailing rights of parties.
Parental guarantees/security: Consider the appropriateness of parent guarantees or specific security if there is any concern about the financial wherewithal of the counterparty.
Operator standards: Define comprehensive project provisions to be employed by the operator knowing that these terms may be closely scrutinized by counterparties, including project lenders. Ensure that the operator has prompt and fulsome reporting obligations. Clearly delineate what the consequences will be for any non-compliance on the part of the operator. Be prepared to exercise rights to address non-compliance.
Oversight: Include provisions guaranteeing meaningful representation and involvement at the management committee level. Include robust rights of audit and inspection. Have a plan to ensure these rights are exercised with meaningful review of operations and understanding of conduct at the project.
Contractual allocation of risk: Ensure that the assumption of any liability or risk for environmental or reclamation matters is proportionate to the percentage of ownership being acquired.
Sufficiency of reclamation/remediation funds: If a working fund is to be established for future environmental liability and reclamation, ensure that it is sufficient to fund all required remediation, reclamation including any post-reclamation monitoring.
Ripples from the Redwater decision are likely to reach mining projects in Canada. Miners and their advisors should embrace this opportunity to give fresh consideration to their working arrangements – as it is entirely foreseeable that a heightened focus on understanding and funding environmental and reclamation liabilities is headed their direction.
Simon Foxcroft is a partner at Bennett Jones, Edmonton, and Keely Cameron is an associate at Bennett Jones, Calgary.