From 1 July 2018, your ability to terminate a contract due to an “insolvency event” will become significantly restricted. As part of the innovation reform agenda of the Federal Government, legislation was passed in September 2017 to enforce a stay on what are known as “ipso facto” clauses. Ipso facto is Latin for “by the fact itself” and it is often used to describe terms in contracts that prescribe rights to one (or multiple) parties simply because an event has occurred.

The majority of contracts, including our domestic and commercial suite of contracts, include a clause that allows a party to terminate the contract if an insolvency event occurs. The definitions of insolvency event vary between contracts, but usually include the appointment of an administrator or liquidator, receiver or manager, and in some cases having a winding up application outstanding for more than fourteen days.

As at 1 July 2018, parts of these clauses will no longer be enforceable. Parties will no longer have the right to terminate contracts if a company enters administration or a scheme of arrangement.

This applies only to contracts that have been signed on or after 1 July 2018, meaning you will now be governed by two sets of rules, depending on when your contract was entered into. If a company is placed into liquidation (or goes into liquidation after being in administration), then the stay does not apply and you may terminate the contract as you ordinarily would have done so. So far, there is nothing in the legislation that prevents a party from terminating if a winding up application is on foot, but it is more important than ever that you obtain legal advice before terminating a contract.

We have a number of concerns about the affect this legislation will have on our industry, including:

  • As members are no longer able to terminate a contract when a company is placed into administration, they will need to deal with the administrator (rather than the previous owner). There is likely to be a review of all the work carried out to date and this will take time. The time taken by the administrators (especially those who are not familiar with the building and construction industry) is likely to cause significant delays to projects.
  • The lack of public engagement or awareness about the amendments is of real concern. We expect that a number of contracts will continue to be terminated under the old ‘insolvency event’ definitions, leaving parties open to damages and claims in the future.

Master Builders Victoria, together with Master Builders Australia and our counterparts from other states and territories have been lobbying Treasury for the building and construction industry, and the contracts used to be exempted from this new legislation.

If you have any questions about the ipso facto clauses, or our commercial or domestic contracts generally, please contact our Legal Department on (03) 9411 4555.