Stay of Contract Termination Rights on Insolvency

It has long been common practice to include in construction contracts (and indeed in many other types of contract) a clause which allows one party to terminate the contract immediately if the other party (which is a company) enters into administration or receivership or has a scheme of arrangement proposed. Sometimes these clauses will even allow a contract to terminate automatically in such circumstances. These clauses are referred to in legal parlance as “ipso facto” clauses.

ipso facto” a Latin term meaning “by the fact itself”. No you didn’t need to know that but what would a lawyer’s article be without some Latin to annoy you. I’d hate to disappoint.

Applies to contracts entered from 1 July 2018

For all contracts entered from 1 July 2018, as part of the Federal Government’s “Safe Harbour” insolvency law reforms, the Corporations Act 2001 (“the Corps. Act”) has been amended to stay the effect of these ipso facto clauses in certain situations and for specific periods.

So what does that mean to you?

If you are contracting with a company and that company is placed into voluntary administration or a receiver is appointed, or a scheme of arrangement is proposed, you cannot rely on one of those clauses to terminate the contract. The effect of the ipso facto clause is stayed by these amendments to the Corps. Act until:

  • in the case of an administration, the administration ends, or the company is wound up;
  • in the case of a receivership, the managing controller or receiver’s control of the company comes to an end; and
  • in the case where a scheme of arrangement it is proposed (that is where application for the scheme of arrangement has been made and there has been a public announcement), three months after the announcement, or when the application is unsuccessful or dismissed, or when the company is wound up.

That also means you must continue to perform your obligations under the contract during this time. It is this consequence which can be alarming particularly if you are already owed money by the company or if delays caused by the company’s insolvency is affecting the progress on your project.

You can’t contract out of the stay

Before you think you may be able to make some crafty amendments to your contract or by including a termination for convenience clause, there are anti-avoidance provisions as well which will capture any provisions of the contract which allow a right of termination for a reason that is contrary “in substance” to this provision in the Corps Act. That can include contractual provisions that allow termination for convenience, or provisions that allow work to be taken out of the hands of the company (depending on the circumstances in which they are used).

There are 2 key takeaways from this article:

  1. Seek expert legal advice to review and amend your contracts if necessary. It is pointless having those ipso facto clauses in the contract and indeed it could be helpful to more carefully craft provisions that make it easier to terminate a contract for reasons that are not “in substance” contrary to that provision in the Corps Act.
  2. If you find yourself a party to a contract with a company which you believe may be or could become insolvent, seek urgent expert legal advice at the earliest opportunity so you may fully understand the options available and find a strategy to protect your interests.

If you don’t know…ask. We are only a phone call away

Active Law’s construction team are very experienced in all aspects of construction law including:

  • advising on, drafting and negotiation of contracts;
  • all manner of dispute resolution including litigation, arbitration, expert determination, mediation and adjudication under security of payment Legislation;
  • assistance and representation in respect to statutory compliance and decisions or action by regulatory bodies including the Queensland Building and Construction Commission.

Active Law’s Paul J Hick is an experienced construction lawyer with years of construction experience in the construction industry gained prior to becoming a lawyer. He is also a senior adjudicator under security of payment legislation in numerous States around Australia.

Active Law services all stakeholders in the construction industry but particularly caters to subcontractors of all trades and sizes as well as small to mid-tier construction firms.