Ipso Facto Reforms

On 1 July 2018, the Australian Government’s ipso facto reforms (the Reforms) came into effect.[1] Rather than prohibiting the inclusion of ipso facto clauses, the Reforms impose statutory limitations on the enforcement of certain rights found in contracts, agreements or arrangements.

It is crucial that government and government agencies understand these Reforms and take them into consideration in both the drafting and management of all contracts, agreements and arrangements.

What rights have been impacted by the Reforms?

The Reforms impact all rights that arise because a counterparty is in voluntary administration, has appointed or may appoint a managing controller, or is subject to a scheme of arrangement (an Event). The Reforms provide that, unless an exemption applies, a clause that is triggered by an Event is unenforceable for a period of time (the Stay) following the announcement of the event. The Stay restricts a counterparty from exercising termination, enforcement or other specified rights triggered by an Event.

What rights have been excluded from the Reforms?

Certain prescribed rights have been excluded from the reforms and will still be available to the government. These include:

• rights which provide for a party to step-into the shoes of an insolvent counterparty and enforce certain contractual rights or perform contractual obligations of that counterparty;
• termination rights under a standstill or forbearance arrangement, whether or not the standstill or forbearance arrangement suspends, preserves or modifies the right under the other contract, agreement or arrangement to which it applies;
• rights which provide the parties to set-off their financial obligations against each other;
• rights to assign, novate or otherwise transfer rights or obligations; and
• rights to payment by way of indemnity in respect of any liability or loss arising as a result of, or any charges and expenses incurred by, a person preserving or enforcing rights.

Do the Reforms impact all contracts, agreements or arrangements?

Not all contacts, agreements, or arrangements are affected by the Reforms. Exempt from the Reforms include government contracts, agreements or arrangements:

• that are licences, permits or approvals issued by a government authority;
• for the supply of goods or services to, or on behalf of, a public hospital or public health service;
• relating to the supply of essential or critical goods or services to, or the carrying out of essential or critical works for government authorities;
• involving a special purpose vehicle that provides for a project finance arrangement, securitisation or a public-private partnership;
• for the keeping on escrow of code, or passwords, for computer software or material related to such code or passwords;
• under which the priority of security interests in particular property is changed or can change; and
• 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.

Do the Reforms apply extraterritorially?

The Reforms are expressed to be that rights cannot be enforced against a corporation if the Events occur. One issue is the potential effect of the Reforms on contracts with parties in foreign jurisdictions.

Contract with foreign counterparty under Australian law

If the Event occurs to a Queensland Government Owned Corporation (GOC), the Reforms apply. There may however be practical difficulties of enforcement if the rights are exercised overseas.

Although the Reforms apply to “corporations”, which includes any body corporate incorporated outside Australia (section 57A of the Corporations Act 2001 (Cth)), a scheme of arrangement or administration Event cannot occur to a foreign corporation because those Events, by their nature, relate only to the capacity of Australian registered companies. However, it is possible for a managing controller to be appointed to a foreign company because receivership is administration of assets and not the company itself; in this event, the Reforms will apply to Australian based assets.

Contract with foreign counterparty under foreign law

Legislation generally will not have extraterritorial effect unless expressly provided. The Corporations Act 2001 (Cth) (by which the Reforms have effect) does not purport to have extraterritorial effect.

It follows that if the Event occurs to the foreign corporation, the Reforms do not apply unless (potentially) it could be shown that the foreign company is carrying on business in Australia and the enforcement of the rights triggering the Event could be said to arise from that business.

The position when the Event occurs to the Australian party is less certain. The foreign law will determine the validity and enforceability of the contract and its particular provisions, including the enforceability of rights triggered by an Event, unless (were the matter to come before an Australian court) it could be said that the enforceability contravenes public policy or is illegal. There is the prospect that a court may hold that the purported unfettered enforcement of rights triggered by an Event may contravene public policy or be illegal in circumstances under which an Australian law, designed to protect a Queensland GOC the subject of the action, specifically stays their enforcement.

How should the government move forward and ensure compliance?

The Reforms do not prohibit the inclusion of ipso facto clauses in contracts, agreements or arrangements, rather they curtail the circumstances for when they can be relied upon. It is critical that these clauses are not merely deleted without having given due care and attention to alternative means of protecting the government’s rights.

One way of managing this would be to leave the current clauses, but insert an additional clause that provides that all ipso facto clauses included are to be read in accordance with Chapter 5 of the Corporation Act 2001 (Cth). Here is an example of an interpretation clause which could be included:

Enforcement rights

The rights of the Parties under this Agreement must be construed as being subject to and limited by Chapter 5 of the Corporations Act. 

Government departments and agencies should also review and understand the Reforms’ excluded rights and exempted contracts, agreements or arrangements to explore alternative pathways to the desired destination. These alternatives may maintain or even better serve the government’s risk tolerance and appetite.

Moving forward, the government will be required to employ a different approach to the management of contractual counterparties. Best practice would encourage a review of contracts, precedents, policies and procedures to ensure compliance, while at the same time ensuring contractual rights are not diminished.

Key takeaway

There is potential for the Reforms to increase the risks associated with contracts involving insolvent counterparties. In these circumstances, it imperative for government and government Agencies to:

• educate contract administrators on the scope and application of the Reforms;
• conduct a thorough review of any contractual documentation where there are ipso facto provisions;
• consider whether any exclusions apply; and
• determine whether any amendments are necessary to mitigate against contractual risks arising as a consequence of the Reforms.

[1] Enacted in September 2017 by the Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Act 2017) which varies provisions of the Corporations Act 2001 (Cth). For a brief overview of the ipso facto provisions see https://www.gadens.com/legal-insights/ipso-facto-reforms-can-enforce-contractual-rights/.

Authored by:

Scott Couper, Partner
Paul Catchlove, Solicitor