If you happened to miss our earlier update, as of 1 July 2018, the amendments to the Corporations Act 2001 (Cth) which affect construction contracts entered into on or after 1 July 2018, will prevent contracting parties from enforcing ‘ipso facto’ clauses (the Ipso Facto Stay). What this means is that contractual clauses which entitle a party to terminate or amend a contract upon the insolvency event of a counterparty, will no longer be enforceable, unless:
- the kinds of rights created by the relevant contractual clause are exempt under the Corporations (Stay on Enforcing Certain Rights) Declaration 2018 (Cth) (the Declaration); or
- the contract is exempt under the Corporations Amendment (Stay on Enforcing Certain Rights) Regulations 2018 (Cth) (the Regulations).
As set out in the Declaration, the Ipso Facto Stay will not apply to:
- step-in rights: rights which allow for a party to ‘step-in’ the shoes of a counterparty that has become insolvent and enforce certain rights or perform obligations of that counterparty;
- rights of set-off: rights which allow the parties to set-off their financial obligations against each other;
- rights of assignment or novation: rights to assign, novate or otherwise transfer rights or obligations.
As set out in the Regulations, the exceptions to the ‘ipso facto’ regime includes contracts, agreements or arrangements:
- entered into or renewed between 1 July 2018 and 1 July 2023, as a result of the novation, assignment or variation of a contract that was entered into before 1 July 2018;
- for defined building or construction work entered into between 1 July 2018 and 1 July 2023, where the total payments for all of the contracts in relation to the project is over $1 billion, as well as all subcontracts under that project;
- involving a special purpose vehicle that provides for a project finance arrangement, securitisation or a public-private partnership;
- for the supply of goods or services to, or on behalf of, a public hospital or public health service;
- relating to Australia’s national security, border protection or defence capability;
- which are derivative arrangements;
- which are netting arrangements pursuant to the Payment Systems and Netting Act 1998 (Cth).
What should you do?
We recommend that principals and contractors consider whether their contracts are affected by the Ipso Facto Stay, and if so, ensure that all future contracts entered into have been appropriately amended to provide adequate protection under the new ‘ipso facto’ regime.
At a bare minimum, principals and head contractors should ensure that any contracts entered into include a right to ‘step-in’ upon the occurrence of an insolvency event, which includes:
- the right to take possession of design documents;
- the right to take possession of, and use, existing materials, equipment, plant and other things on site for the completion of the works; and
the right to suspend payment until any works which have been taken over have been completed, and a proper reconciliation has been carried out of any additional cost incurred.
This publication does not deal with every important topic or change in law and is not intended to be relied upon as a substitute for legal or other advice that may be relevant to the reader’s specific circumstances. If you have found this publication of interest and would like to know more or wish to obtain legal advice relevant to your circumstances please contact one of the named individuals listed.
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