Ipso Facto is the sort of phrase people throw around when they're trying to sound more lawyery, but it's also the name of a regime that operates and affects your contractual rights when one of your contracting parties becomes insolvent.

Traditionally, Ipso Facto clauses allow a party to terminate when the other party becomes insolvent. The problem is that early termination of a company's contracts will only fast-track the deterioration of its financial position, irreparably affect its future contractual goodwill, and may leave everyone's business more disrupted than it needs to be.

This concern will be (sadly) particularly relevant for the growing number of companies experiencing financial distress in the aftermath of our nation-wide lockdown – and for the companies they contract with.

So, before we rely too heavily on our termination or force majeure rights, here are some things to think about:

  1. Australia modernised its Ipso Facto regime in mid-2018 to provide more protections to struggling companies that could otherwise be able to restructure or refinance.
  2. Termination or other Ipso Facto contractual rights in a contract entered into post-June 2018 will not be enforceable against companies that are in:
    1. voluntary administration;
    2. schemes of arrangement (to avoid insolvent liquidation); or
    3. substantial receiverships (those applying to the whole or substantially the whole of a corporation's property).
  1. There are heaps of exceptions to this regime. For example, it won't apply to building or construction work with total value of at least $1billion until 1 July 2023. So it's important to double check the exceptions to fully understand your company's position.
  2. In response to COVID, temporary protections have been introduced for companies that continue to trade while insolvent, including "safe harbours" for directors who may otherwise be personally liable for insolvent trading. Companies will still be liable for the debt, but relaxation of these insolvency rules may mean companies are more likely to take on work they can't guarantee they'll deliver on.

What does this mean for you?

Your Ipso Facto rights and risks will depend on your particular business and the drafting of your contracts.

We do not disclaim anything about this article. We're quite proud of it really.