The enemy of one’s enemy may be “ipso facto” a friend

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The enemy of one’s enemy may be “ipso facto” a friend

By Ivana Hayman and Alyce Kliese

What is an “ipso facto” clause

“Ipso facto” translates directly to “by that very fact or act”. Ipso facto clauses are clauses whereby one party is given the right to terminate or modify the operation of the contract upon a “trigger event” occurring. That trigger event is usually an insolvency-related event.

Typically, ipso facto clauses appear in commercial contracts, such as construction contracts, leases, or contracts of sale. An example could include a clause whereby a tenant is able to terminate the tenancy if the landlord enters administration.

Legislation and ipso facto clauses

In Australian law, there are restrictions on when a party can terminate pursuant to an ipso facto clause. This legislation prevents a party (such as a tenant) from enforcing their right to terminate a contract, and provides the defaulting party (such as the landlord who has entered into administration) some room to breathe and continue trading. This legislation provides an opportunity for a defaulting party to “trade” their way out of their position (and therefore prevent the other party from terminating the contract).

The Treasury Laws Amendment Act (2017 Enterprise Incentives No. 2) 2017 enacted this legislative regime in 2017. It introduced changes to the Corporations Act 2001 as of 1 July 2018. In this regard, the legislative regime can apply to contracts entered into after 1 July 2018.

A pause in one party’s ability to enforce its contractual rights can be triggered by:

  1. a creditors’ scheme of arrangement;
  2. voluntary administration;
  3. a receivership; or
  4. other situations as per the legislation.

How does the regime apply

It is important to note that the intention of the regime is not to restrict a party from enforcing a right, like a breach involving non-payment or non-performance. The legislation is specifically in relation to ipso facto clauses only.

In circumstances where a party wishes to enforce an ipso facto clause, it is best to seek legal advice given the complex legislative regime that applies.