It is not uncommon for construction contracts to contain provisions which allow the principal to terminate the contract on the basis of an ‘insolvency event’. These clauses are known as ipso facto clauses. The introduction of the Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Act 2017 (Cth) (the Act) will impact the ability of a party to exercise its rights under such clauses. We have prepared a previous update on the impact of the Act.
Importantly, from 1 July 2018, the Act will impose a temporary stay on the enforcement of rights under ipso facto clauses in certain circumstances. The Act also provides that certain rights will not be the subject of a stay of enforcement, including “a right contained in a kind of contract, agreement or arrangement…prescribed by the regulations for the purposes of this subparagraph”. The introduction of the recent Corporations Amendment (Stay on Enforcing Certain Rights) Regulations 2018 (Cth) excludes a number of contracts from the ipso facto stay provisions, including (amongst others):
A contract, agreement or arrangement that involves a special purpose vehicle, and that provides for securitisation or a public-private partnership.
A contract, agreement or arrangement entered into or renewed on or after 1 July 2018, but before 1 July 2023, as a result of either of the following:
the novation of, or the assignment of one or more rights under a contract, agreement or arrangement entered into before 1 July 2018; or
a variation of a contract, agreement or arrangement entered into before 1 July 2018.
A contract, agreement or arrangement entered into on or after 1 July 2018, but before 1 July 2023, for the provision of any of the following kinds of work, goods or services for a particular project:
building work within the meaning of the Building and Construction Industry (Improving Productivity) Act 2016 (Cth);
work to be carried out anywhere in Australia that, if carried out in New South Wales, would be covered by paragraphs 5(1)(d) or (f) of the Building and Construction Industry Security of Payment Act 1999 (NSW); or
goods or services to be provided anywhere in Australia, if provided in New South Wales, would be related goods and services within the meaning of the Building and Construction Industry Security of Payment Act 1999 (NSW),
if the total payments under all contracts, agreements or arrangements for the project for work, goods or services of those kinds is at least $1 billion.
A contract, agreement or arrangement for the supply of essential or critical information technology, or communications technology, products or services to:
the Commonwealth, a State or a Territory; or
an authority of the Commonwealth or of a State or a Territory; or
a local government body established by or under a law of a State or Territory; or
the public on behalf of the Commonwealth, a State or a Territory, or an authority of the Commonwealth, a State or a Territory.
A contract, agreement or arrangement relating to Australia’s national security, border protection or defence capability.
It is important for parties to construction contracts to consider their contractual arrangements and whether they fall within any of the exceptions. The exceptions are broadly stated and there is likely to be some uncertainty as to how such provisions should operate. In such circumstances, further guidance from policymakers and/or the courts will be required to determine how the exceptions will be applied in practice.
For more information, the Regulations are available here.