25 June 2018
On 21 June 2018, Commonwealth regulations have been made providing for a range of contracts to be excluded from the stay on the exercise of 'ipso facto' provisions.
A number of these exceptions are important to public private partnerships, infrastructure projects over $1 billion, infrastructure financed using project finance and projects in the public health, national defence and critical government ICT sectors.
From 1 July 2018, amendments to the Corporations Act 2001 (Cth) will come into effect which stay the enforcement of ipso facto clauses in a contract.
What are ipso facto clauses?
The term ‘ipso facto’ is generally used to describe a clause in a contract which allows one party to terminate a contract on the basis of a proscribed insolvency event occurring, such as the company entering into voluntary administration or receivership.
Numerous types of contracts contain clauses of this nature, but construction, supply, operation and maintenance contracts are among the most common examples.
The amendments impose a stay on the exercise of a right to terminate a contract merely as a consequence of:
Other termination rights which may exist are not disrupted and parties will continue to be able to terminate contracts on other grounds, such as default in payment or non-performance. The insolvent counterparty must be able to continue to perform the contract regardless of the insolvency event.
The period covered by the stay will vary depending on the type of insolvency process, but will generally commence on the date the company comes under external administration and end on the date when the administration or receivership ends, in accordance with a court order or when the company is wound up.
The types of contracts which have been excluded from the ipso facto stay provisions are set out in full in Schedule 1 to the Regulations. Most of the exceptions are targeted at finance arrangements. However, there are important exceptions which are relevant to infrastructure projects. These include a contract, agreement or arrangement:
The exclusion for building contracts with total payments over $1 billion provides important comfort for some of Australia’s large scale and complex construction contracts and preserves important protections for the parties involved in managing counter-party credit risk. Query why government does not see as necessary an exclusion for construction contracts which come in below the $1 billion threshold but are still large, complex and negotiated between sophisticated parties. Note that because of the way building work is defined, the exception does not extend to contracts for drilling for oil or natural gas or the extraction of minerals.
The exclusions for public-private partnerships and project finance are also important given the critical role party credit risk plays in structuring these arrangements. Parties will need to review the wording of the particular regulations closely to ensure their transactions are structured so as to fall within the exclusions.
The sector specific exclusions for public health, national defence and critical ITC will be important for contracts involving those sectors.
There remain, however, a wide range of infrastructure projects and significant construction, supply, operations and maintenance arrangements which do not benefit from the exceptions and will be fully impacted by the ipso facto stay provisions.
We recommend you should review your contracts and agreements and consider whether they are captured by the ipso facto stay provisions or whether they fall within an exception. This applies to governments, principals and financiers with exposure to the credit risk of contractors and suppliers as much as it does to contractors exposed to the credit risk of subcontractors or principals.
If relying on an exception, careful consideration will be needed of the detailed wording of each exception to make sure you fall within its ambit. The language of the exceptions is open to interpretation and, as they are new, we do not yet have the benefit of any judicial guidance on the meaning of these regulations - nor should any be expected for some time.
This publication is introductory in nature. Its content is current at the date of publication. It does not constitute legal advice and should not be relied upon as such. You should always obtain legal advice based on your specific circumstances before taking any action relating to matters covered by this publication. Some information may have been obtained from external sources, and we cannot guarantee the accuracy or currency of any such information.